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MTBC: Updated Orion Guidance Prompts Significant Upward Model Revisions, Moves PT to $10/share

By Brian Marckx, CFA



Q2 2018 Results: Updated Orion Guidance Prompts Significant Upward Model Revisions, PT Moves to $10/share
Medical Transcription Billing Corp (MTBC) reported financial results for their second quarter 2018 and provided a business update. The major highlight on the operational front relates to updated 2018 revenue and EBITDA guidance. Management now expects current-year revenue of $49M - $50M and adjusted EBITDA between $4M and $5M. This upwardly revised guidance is well ahead of the $42.3M in revenue and $3.6M in adjusted EBITDA that we had been modeling for 2018 following the announced-close of the Orion acquisition in early July. Updates to our model have resulted in calculated fair value of MTBC common stock moving from $7.10/share (previously) to $10.0/share (currently).

As it relates to the financials, results continue to come in very strong and, particularly as it relates to revenue, well-ahead of our estimates. In fact, excluding Q4 ’16 which benefitted from one-time sales following close of the MediGain acquisition, Q1 and Q2 2018 set new quarterly revenue records. Importantly, we continue to be encouraged by the stickiness of current customers (recently evidenced by re-signing of Pikeville, a major hospital client) which, coupled with the addition of Orion, should more than double MTBC’s annual base revenue level from the $31.8M generated in FY2017.

Revenue jumped almost 12% yoy and 5% sequentially to $8.7M (+5% vs $8.3M E). Most of the yoy revenue growth, per management’s comments on the call, is attributable to the November 2017 addition of a 950-provider physical therapy practice. That customer, which represents MTBC’s largest revenue and number of providers, was also a key contributor to the company’s Q1 top-line. Revenue through the first six months of 2018 was up 6% from 1H ’17.

MTBC exited Q2 with 950 total customers, including 730 medical practices – which compares to 970 / 750 in Q1 ’18 (970 / 750) and 990 / 750 in Q2 ’17. Despite the incremental slide in customer-count, medical billing revenue (which accounts for ~90% of total revenue) actually increased by 12% on a yoy basis and by more than 6% sequentially. This is due a 16% yoy and almost 7% sequential increase in medical billing revenue per customer, which averaged approximately $10.8k in Q2 – which, while we do not have enough historical information to know if that is a record high, is well ahead of any period in 2017. Improvement in this metric, which has now expanded for three consecutive quarters, has benefitted both topline growth as well as operating leverage. It appears that the addition of Orion, as we explain below, will significantly increase this metric, particularly as synergistic cost-cutting is completed – which could be key to accelerating profitability and EBITDA growth.

This increased revenue-generating efficiency is evidenced by growth in revenue outpacing that of operating expenses, which (excluding D&A) increased on a yoy basis by a relatively paltry 7% in Q2 (versus 12% revenue growth) and actually fell 4% through the first six months of 2018 (on top of 6% revenue growth). Operating expenses as a percentage of revenue remains at record lows and was 93% in Q2 (up slightly from 92% in Q1 ’18) and 92% through the first half of 2018, down from 97% and 103% in the year-earlier periods.

The relatively strong top-line, muted expenses and lower D&A also resulted in new (i.e. since-public) quarterly and six-month records in operating income ($73k, $112k), pre-tax income ($247k, $369k) and adjusted EBITDA ($1.6M, $2.5M). In fact, Q2 was just the second quarter (in addition to Q1 ’18) since their IPO that MTBC generated positive operating and pre-tax income. Meanwhile, adjusted EBITDA has been on a tear – hitting a new record high in Q2 and totaling $4.7M over the most recent 12 months.

Orion Acquisition
MTBC paid $12.6M for the core operating assets of Orion HealthCorp – which, based on management’s 2H 2018 revenue guidance, implies a purchase price of just ~40% of annualized revenue. The acquisition was effective July 1st. Along with 300 U.S.-based employees with offices in 10 states, Orion brings RCM-related accounts and expands MTBC’s capabilities to include long-term practice management services and a vaccine group purchasing organization. These bolt-on capabilities not only bring immediate incremental revenue and operating margin (as both the PM and GPO businesses are already profitable) but also opportunity to add-value via cross-selling to MTBC’s current customer base. In addition, Orion accelerates MTBC’s penetration into the hospital segment.

Orion’s RCM…
In terms of the incremental customer count, Orion brings 150 hospitals and independent healthcare practices – which, assuming no significant attrition, implies MTBC’s RCM business will be servicing nearly 900 practices in total. Intriguing is that, based on management’s current 2H ’18 guidance and some educated guesswork on our part, it appears that Orion’s RCM-related revenue-per-practice (which, again, we think is a good proxy metric for revenue-generating efficiency) may be nearly 4x that of legacy MTBC. Much of the favorable delta may relate to Orion’s relatively large hospital customers.

While MTBC’s 2H ’18 revenue guidance was not itemized by Orion’s three business segments, we think a look back to Orion’s most recent publicly available SEC filings (i.e. Q3 2007) may prove to be a reasonably-accurate guide as to the current proportional segment-level revenue contribution. As we first reported in our post-Orion close update report (July 5, 2018: Moving PT to $7.10/Share on Orion Acquisition. More Model Updates Could Follow), as of Q3 2007, the RCM segment provided medical billing services to approximately 111 clients (compared to 150 practices/hospitals today). In the three and nine months ending 9/30/2007, the RCM segment generated revenue of $5.0M and $14.7M (or ~$20m annualized), accounting for 58% and 59% of Orion's total revenue in those periods, respectively.

Practice Management…
The practice management segment currently consists of managing three pediatric practices in five locations in Ohio and Illinois. These PM services are provided under 40-year management services agreements (which extend through 2039). Under these PM agreements, MTBC employs the medical personnel and administration and owns the assets used in the business in return for a management fee. Management noted on the Q2 call that the PM segment is already profitable.

Orion’s Q3 2007 10-Q offers additional background and information (including some historical financial information) about the PM business. Note that while the language is largely consistent with the information provided by MTBC in describing Orion’s PM business, it is not unlikely that it may have changed (materially, or not) in some form or fashion since the date of those filings.

Integrated Physician Solutions (IPS) was the name of the practice management segment in 2007 (as it was when MTBC acquired Orion). IPS was founded in 1996 and as of Q3 2007, it "managed six practice sites, representing three medical groups in Illinois and Ohio." Per the description of how the practice management contracts work in the Q3 2007 10-Q, "There is a standard forty-year management service agreement ("MSA") between IPS and each of the various affiliated medical groups whereby a management fee is paid to IPS. IPS owns all of the assets used in the operation of the medical groups. IPS manages the day-to-day business operations of each medical group and provides the assets for the physicians to use in their practice for a fixed fee or percentage of the net operating income of the medical group. All revenues are collected by IPS, the fixed fee or percentage payment to IPS is taken from the net operating income of the medical group and the remainder of the net operating income of the medical group is paid to the physicians and treated as an expense on IPS's financial statements as "physician group distribution." In the three and nine months ending 9/30/2007, IPS generated $3.5M and $10.0M (or ~$14M annualized), accounting for 41% and 40% of Orion's total revenue in those periods, respectively.

Meanwhile, the GPO, per MTBC’s language, “enables thousands of physicians to purchase vaccines from leading pharmaceutical companies at discounted rates.” The GPO is also currently profitable. The GPO generated just $70k in Q3 2007 (or ~$300k annualized).

If MediGain Is An Appropriate Template, Orion Should Be Long-Term Value Driver …
Management has compared Orion to MediGain - the assets of which MTBC purchased in September 2016 and which has proven to be an overwhelmingly successful acquisition. But management also indicated that Orion could even more successful than MediGain has already proven to be.

As a refresher, MediGain, a medical billing company, was in financial distress when acquired by MTBC in September 2016 for $7M. While operating expenses increased immediately after the acquisition, the assets were quickly integrated, costs were cut and MediGain generated incremental revenue to MTBC of $13.6M in 2017. Contribution from MediGain was also a major component of MTBC’s significantly improved financial results: revenue grew 30% ($24.5M in 2016 to $31.8M in 2017), operating loss fell by $3.4M ($7.9M to $4.5M) adjusted EBITDA improved by $2.9M and ended the year in the black at $2.3M and MTBC even generated $282k of cash from operations (compared to $889k used by operations in 2016).

MTBC bought MediGain for (what would prove to be) just of 50% of forward revenue – while a significant bargain as compared to the average industry take-out multiple of ~1x revenue, Orion may prove to be even cheaper. Current revenue guidance implies MTBC bought Orion for just 40% of revenue. Much of the success of this acquisition was credited to the quick integration and ability to minimize customer and revenue attrition through providing a better customer experience (i.e. MTBC was able to quickly improve billing processes and collections which helped stem defections).

The comparison to MediGain is particularly intriguing as not only was that acquisition 'successful' in the sense that MTBC more than recovered the purchase price (in fairly short-order), but also because it appears as if it will likely prove to have permanently and significantly expanded MTBC's RCM customer base as well as their overall capabilities. So, while some of MTBC's (mostly smaller) acquisitions have been 'one-and-dones' whereby, in return for little or nothing upfront and some revenue contingencies, they were able to wring the remaining life out of quickly-fleeting assets, MediGain looks to be a true long-term value driver.

Orion Integration and Updated Model
MTBC was able to immediately shed costs of legacy-Orion as they were not required to assume certain commitments, such facility and equipment leases. MTBC has also been quick to integrate operations, noting on the Q2 call that they have already transitioned offshore back-office RCM-related work from Orion’s vendors to their own employees – and in the process shed ~70% of the related costs. In addition, all customers that had been using Orion’s software have been transferred to MTBCs. Additional integration and related cost savings are anticipated over the coming quarters – and expected to further improve upon profitability and EBITDA.

According to Orion’s Q3 2007 10-Q, in the in the three and nine months ending 9/30/2007, total revenue was $8.6M and $25.0M - or ~$34M annualized, or nearly equal to management’s implied current Orion-related incremental revenue guidance. Meanwhile, Orion circa 2007 was actually almost profitable – generating an operating loss of just $391k and $1.4M in the three and nine months through Q3 of that year.

Our updated-model following close of the Orion acquisition assumed the incremental annualized revenue would equal approximately 50% of Orion’s annualized 2007 revenue (based on their Q3 2007 10-Q) – however, current guidance indicates it should be closer to 95% (which reflects our current estimates). We further assumed the proportional contribution from each of Orion’s three businesses would also be similar to what it was back in 2007.

While we still assume proportional segment-level contribution to total revenue is RCM ~58%, PM 41% and GPO 1%, we have made significant changes to our estimated total revenue and adjusted EBITDA guidance. We also think that (what appears to be much) greater revenue generating efficiency of Orion’s RCM business (as compared to legacy MTBC), could prove to be a substantial catalyst towards accelerating growth in profitability and adjusted EBITDA – particularly as MTBC realizes greater synergistic cost savings.

We now look for FY 2018 revenue and adjusted EBITDA of $49.3M and $4.5M, revised from $42.3M and $3.6M. Our FY 2019 revenue and adjusted EBITDA estimates have moved from $53.5M and $6.1M (previously) to $68.6M and $7.5M (currently).

See the link above to our updated report on MTBC which includes our financial model and valuation methodology. Updates to our model have resulted in calculated fair value of MTBC common stock moving from $7.10/share (previously) to $10.0/share (currently).

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