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MTBC: Revenue Growth and Synergies Results in Record Adjusted EBITDA. 2019 Guidance Affirmed

By Brian Marckx, CFA



Q1 2018 Results:
MTBC, Inc (MTBC) reported financial results for their first quarter 2019 and provided a business update. This was the third quarter with inclusion of Orion, the acquisition of which closed on July 1st. As a reminder, financial performance immediately benefitted from the transaction, which included revenue setting record highs in Q3 and two of the three acquired business segments, namely Practice Management and the GPO, adding to profitability in that period.

Even better, that transaction has continued to bolster MTBC’s financial performance, significantly contributing to growth in all of the major financial metrics – including revenue, net and adjusted income, and adjusted EBITDA. Particularly noteworthy (given that this metric is used to value EHR / RCM companies) is that adjusted EBITDA came in at the third best in history in Q4’18 and at an all-time high in Q1’19.

And based on management’s 2019 guidance, which remains unchanged from its initial issuance (with the reporting of Q4’18 results in March), the benefits of that transaction are expected to continue to incrementally increase (at least as it relates to profitability and cash flow metrics). As a reminder, management expects 2019 revenue and adjusted EBITDA in the ranges of $63M - $65M and $8M - $10M, implying yoy growth of approximately 27% and 87% (based on mid-range of guidance), respectively.

Driving much of the anticipated growth in adjusted EBITDA (and operating leverage) is significant expense reduction of Orion’s operating costs. MTBC indicated that they have already made substantial progress in this regard, noting that they rapidly shed costs of Orion’s RCM business by replacing (relatively expensive) third-party subcontractors with their own (Pakistan and Sri Lanka-based) employees, shuttering some of Orion’s offices and improved efficiencies by moving clients to their own platform. To-date, MTBC has reduced Orion’s RCM-related operating expenses by 59%.

Their 2019 guidance also assumes organic growth from existing and new clients as well as potential additional ‘tuck-in’ deals (i.e. small transactions). As it relates to new clients, early in Q2 MTBC announced the signing of Houston-based The Heights Hospital (which is expected to begin operations this quarter) for their inpatient and outpatient RCM services and customized IT solutions. This is their facility billing client as MTBC begins to deliver on their recently implemented goal of expanding into the hospital segment.

MTBC is also delivering on scoring additional “tuck-in’ deals, the most recent of which closed on April 1st when they acquired the assets of Etransmedia Technology, Inc. This could contribute as much as $3.5M (annualized) in revenue and, given MTBC’s ability to very rapidly integrate operations (and leverage synergies), should quickly become accretive to earnings, adjusted EBITDA and operating cash flow.

While the 2019 guidance does not assume any meaningful acquisitions, it is clear that management remains on the look-out for another Orion or MediGain-type transaction. They exited Q1’19 with $12.5M in cash and $10M available under their untapped credit facility. Coupled with the fact that MTBC is now generating consistent positive cash flow (Q1 marked the 6th consecutive quarter of generating positive cash from operations), they have the resources to do another sizeable deal. And, as we have noted in the past, given their ability to identify undervalued assets and to quickly integrate (and cut costs) without significant disruption to their ongoing operations or to those of the acquired company, a near-term transaction could result in upside to their current guidance.

Q1 Financials
Revenue, at $15.1M was up 82% yoy and down 9% from Q4’18. Orion-related assets contributed approximately $7.7M, or about 51% of total revenue including $4.5M (30% of total) from RCM, $3.0M (20% of total) from practice management and $200k (1% of total) from the GPO.

Total revenue was a little more than 1% shy of our $15.3M estimate with almost all of the difference related to lower than anticipated RCM sales ($11.9M E vs $12.2M A). As anticipated RCM revenue fell from Q4. RCM has some seasonality, with Q1 typically lower due to patient insurance deductibles largely not yet met.

Meanwhile, we were relatively close in both the practice management ($3.0M A vs $2.9M E) and GPO ($200k A vs $163K E) segments. As a reminder, the practice management segment consists of managing three pediatric practices in five locations in Ohio and Illinois, whereby MTBC employs the medical personnel and administration and owns the assets used in the business in return for a management fee. Financial performance of the PM segment should remain fairly consistent. The low variability of revenue and earnings of that business is due to the long contract terms (i.e. 40-year contracts, with ~20 years remaining).

Both the GPO and PM business are already profitable and were immediately accretive to MTBC’s results following close of the Orion acquisition. The regular and predictable earnings of both segments are also attractive from a valuation standpoint, in our opinion. Cross-selling opportunities between the GPO and RCM customers could provide a very efficient complementary incremental revenue stream. Management has indicated that they have already had success with leveraging that opportunity, recently noting that ~100 existing RCM clients became new customers of the GPO. And, as their comfort level grows in the physician practice management space, we would expect MTBC may be looking to opportunistically add additional practices.

Adjusted EBITDA…
Adjusted EBITDA was $1.58M. This is up 62% from Q1’18 ($974k) and 12% better than the $1.4M of adjusted EBITDA generated in Q4’18. While Q1 benefitted from synergies realized from integration of Orion, we think there remains some additional related cost-savings going into Q2.

We now look for FY’19 revenue and adjusted EBITDA of $63.9M and $8.2M, updated from $64.1M and $8.0M. We note that our upwardly revised adjusted EBITDA estimate is still at the low end of management’s guidance.

Our FY’20 revenue and adjusted EBITDA are now $69.7M and $11.3M, revised from $70.2M and $11.0M. Our calculated fair value remains at $11.0/share.

View Exhibit I

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