Company Overview: Volpara Health Technologies Limited is a New Zealand based health sector company, providing breast imaging analytics and analysis products that offer high-quality and personalised breast cancer screening software applications. The AI imaging technologies available with Volpara aid in the premature detection of breast cancer. Volpara Health Technologies was formed in 2009 by the world’s leading breast imaging experts.  The company aims at lowering the death and cost of breast cancer via its offerings.  With vigorous and dynamic, role-specific dashboards, and powerful benchmarking analytics to support clinics handle their business more cost-effectively, VolparaEnterprise software is supported by the company’s suite of market-leading clinical products, including VolparaDensity, VolparaDose, VolparaPressure, VolparaPositioning and VolparaServer.
 

VHT Details
 
Expansion in US Market & Higher Investments in New Technology are Key Catalysts: Volpara Health Technologies Limited (ASX: VHT) is a SaaS-based company which provides health solutions pertaining to breast cancer. The company develops digital health solutions to provide personalised breast cancer screening software applications, thereby improving clinical decision-making and the early detection of breast cancer. Based in Wellington, New Zealand, VHT is involved in research, development, and manufacturing of breast imaging analytics and analysis products. Notably, VHT has more than 164 staff across New Zealand, Australia, US, UK and France.
 
The company had entered into an agreement to acquire US-based MRS Systems, Inc. (MRS) for a consideration of NZ$23 million.The move is in line with the company’s strategy to develop its product portfolio and enhance its artificial intelligence (“AI”) and machine learning (ML) imaging algorithms to provide high-quality breast care treatment via new technology development. 
 
For the half year ended 30 September 2019, the company reported revenue of NZ$6.8 million, up around 197% year over year.Annual Recurring Revenue (ARR) for the period stood at NZ$15.7Mn as compared to NZ$4.8Mn in the prior corresponding year. SaaS revenue for the period came in at NZ$2.93 million.  During 1HFY20, it successfully undertook a capital raising of NZ$58 Mn. The company made significant investments in R&D with the launch of a major new product suite at the RSNA trade show in Chicago in December.
 
Going forward, the company continues to reduce the mortality rate and cost of breast cancer by delivering clinically proven software that strengthens high-quality and personalized breast cancer screening. The company is also investing in business capabilities with the addition of 3 new officials to the company’s executive team in Operations, People and Customer Success. The move is expected to help drive the next wave of growth and improvement for the company. Moreover, VHT’s large sales team will now be selling MRS’s products on a SaaS model, allowing for improved Average Revenue Per Unit (ARPU) at new and existing customer sites. Also, the company remains on track to grow the engineering team to accelerate the core functionality of VolparaDensity and VolparaEnterprise.
 
The company witnessed a compound annual growth rate of 82.9% in revenue in the time span of HY17-HY20.The company has been investing in new technology and service enhancement. Further, the company’s focus on enhancing clinical software, quality management and personalized care systems will drive future earnings. Subscription revenues came in at NZ$5.19 million in HY20, up from NZ$110K in HY17.
 
 
Revenue, ARR, Subscription & Market History (Source: Company Reports)

1HFY20 Performance: During the period, revenue stood at ~NZ$6.8 million, increasing 197% year over year. Subscription revenue for the period increased 148% year over year. Capital revenue in 1HFY20 stood at NZ$1.7Mn, up 680% on the prior corresponding period. During the period, percentage of women having a Group product applied to their images and data came in at~25.8%, an increase from 5.6% reported in the year-ago period. Operating loss stood at NZ$8.4 million, up 56%, owing to team expansion and scaled up operations. In 1HFY20, net loss stood at ~NZ$8 million, as compared to a loss of NZ$5.2 million reported in 1HFY19. Loss after tax was up 55% year over year, which included one-off acquisition costs of ~NZ$620k and other material non-cash expenses. Diluted loss per share for the period came in at NZ 4 cents per share, as compared to a loss of NZ 3 cents per share in pcp. Operating expenses for the period increased to NZ$15.4 million from NZ$5.4 million in 1HFY17, due to higher investment in the business by increasing the sales, marketing and customer success teams’ capability, bringing in added resources into engineering for R&D as well as strengthening the executive team with new roles in operations, people and customer success. 
 
 
1HFY20 Results (Source: Company Reports)
 
Geographical performance: During the period, total revenues with respect to North America, EMEA, and APAC came in at NZ$6.5 million, NZ$71k and NZ$284K, respectively. This compared favourably with the year ago figure of NZ$1.98 million, NZ$147K and NZ$183K, respectively. Majority of the company’s revenue is derived from the sale of clinical functions and patient tracking software.
 

Geographical Metrics (Source: Company Reports)
 
Balance Sheet & Cash Flow Detail: For Q3FY20, the company’s cash receipts stood at NZ$4.5Mn, up 138% year over year. Cash on hand at the end of the third quarter of FY20 stood at NZ$35.4Mn, compared to NZ$40.2Mn at the end of the previous quarter. Operating cash outflow was NZ$4.5Mn as compared to a cash outflow NZ$4.2Mn in the prior quarter, on the back of increased outgoings related to the Radiology Society of North America (RSNA) show in Chicago in early December. The Group continues to hold no debt. The company is expecting NZ$9.2 million cash outflow in the coming quarter.
 

Estimated Cash Flow Details (Source: Company Reports)

Q3FY20 Sneak Peak: The company’s ARR at the end of the quarter stood at NZ$16.8Mn, including NZ$15.92Mn from breast cancer software sales and NZ$840K from lung cancer software sales.The quarter was marked as the company’s second biggest quarter for net ARR growth. At the end of the quarter, ~25.94% of women were covered by at least one Volpara product who were being screened for breast cancer. This implies an increase in VolparaEnterprise sites. Notably, at the end of January, Volpara covered roughly 26.2% of US women screened.
 
Recent Updates:

(a) On 3^rd March 2020, the company issued 340,000 new fully paid ordinary shares under the Company’s Employee Share Option Plan (ESOP).

(b) On 31 January 2020, the company appointed Karin Lindgren as an independent, non-executive Director. Further, the company also stated that Professor Sir Mike Brady has retired after 10 years of service on the Board.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 35.34% of the total shareholding. Allen (Roger) is the entity holding maximum shares in the company at 8.47%. Highnam (Ralph) is the second-largest shareholder, with a holding of 7.42%.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In 1HFY20, the company had a gross margin of 88.7%, which is higher than 1HFY19 margin of 83.4% and 1HFY18 figure of 78.4%, representing decent fundamentals. Current ratio stood at 3.58x with debt-to-equity ratio of 0.06x in 1HFY20. RoE stood at -21.0% in 1HFY20 which improved from the prior corresponding period figure of -41.1%.


Key Metrics (Source: Thomson Reuters) 

Outlook: The company remains on track to expand its US sales team along with its APAC & European team with a full suite of products to accelerate the core functionality of VolparaDensity and VolparaEnterprise. Further, the company’s product suite has expanded over the last few years, allowing for increased ARPU from new and existing customers. The momentum is expected to continue, going forward. The company is also working towards restraining costs and optimizing work, with the integration of MRS Systems. The company’s effort for R&D and product improvement will continue to innovate its product suite with the expanded engineering and sciences teams. VHT continues to be on the track and now expects ARR for FY20 to be approximately NZ$17.8 million (up from the previous guidance of NZ$17.1 million). Volpara expects that 27% of the US women will apply the group’s product on their data and images. The company’s balanced approach with respect to growth coupled with expansion of its existing portfolio reflects its progress towards sustainable future growth. 
 
Artificial intelligence or AI has also been a thriving achievement in healthcare. With the support of AI, hospitals will accomplish better results, while patients will receive more effective, personalised, high quality and differentiated care. The company’s strategy to expand its product portfolio and improve its AI imaging algorithms through the latest technology advancement can additionally improve and enhance patient outcomes on a global basis.
 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology:  EV/Sales Multiple Approach

EV/Sales based relative valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of the company is currently trading below the average of its 52-week trading range of A$1.112 - A$2.170. The stock has a market cap of ~A$312.2 million. In 1HFY20, the company delivered a decent result, driven by increased investment in new technology as well as improvements in quality and personalised care systems. From the analysis standpoint, the company has recorded significant growth in revenue over the period covering 1HFY17 – 1HFY20. Moreover, the company is also making efforts to improve its ROE. Considering the above factors, we have valued the stock using EV/Sales based relative valuation method, and for that purpose, we have considered Pro Medicus Ltd (ASX: PME), Nanosonics Ltd (ASX: NAN), Telix Pharmaceuticals Ltd (ASX: TLX), AFT Pharmaceuticals Ltd (ASX: AFP) and Pacific Smiles Group Ltd (ASX: PSQ), as peer group. As a result, we have arrived at a target price of lower double-digit growth (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of A$1.34, down 6.294% on 4^th March 2020.
 
 
VHT Daily Technical Chart (Source: Thomson Reuters)

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