Company Overview: Volpara Health Technologies Limited (ASX: VHT) is a software application-based company, which provides breast imaging analytics services and products. The company offers superior-quality and personalised breast cancer screening software applications to its patients. The artificial intelligence imaging technologies of VHT aid in the premature detection of breast cancer. Formed in 2009, the company focuses at lowering the death rate and cost of breast cancer via Volpara software. 

VHT Details

VHT Rides on Higher Investments & Acquisition Synergies: Volpara Health Technologies Limited (ASX: VHT) is a New Zealand based health sector company, which is engaged in providing health solutions relating to breast cancer. The company builds digital health solutions to facilitate personalised breast cancer screening software applications. The AI imaging knowhows accessible with VHT help to improve the clinical decision-making process and identifies early detection of breast cancer. The company is involved in research, development, and manufacturing of breast imaging analytics and analysis products.

In FY20, the company had more than 10 million US women, and around 300k Australian women, who availed the benefits of a safer and more relaxed breast cancer screening facility. The company’s SaaS-based platform along with higher investment aided such services. Annual Recurring Revenue (ARR) for the period came in at NZ$18 million, up 172% from the prior corresponding year, on the back of both organic & inorganic growth. The company’s non-GAAP revenues went up a whopping 226% year over year and came in at NZ$16.3 million, in FY20.

The company had entered into an agreement to buy US-based MRS Systems for a consideration of ~NZ$21 million. With MRS, the company will be able to develop its product portfolio and enhance its artificial intelligence and machine learning imaging algorithms. This, in turn, will aid VHT to provide high-quality breast care treatment via new technology development. The company made significant investments in R&D and engineering of almost NZ$11 million in FY20.

Recently, the company announced the acceleration of changes to business strategy and executive team. The company stated that its business strategy is currently accelerating its transformation to new digital approaches. This transformation is likely to generate increased demand from clinical sites and will increase the number of women that take benefit of its suite of products. The company also announced the appointment of Katherine Singson for the role of CEO of Volpara Solutions, Inc. (US subsidiary of VHT) to finish the digital transformation and drive continued growth in Annual Recurring Revenue (ARR).

The company witnessed a CAGR of 90.1% in revenue over the period covering FY17-FY20. VHT has been investing in new technology and service enhancement, with enhanced focus on clinical software, quality management and personalized care systems. Notably, cash on hand increased from NZ$12.9 million in FY17 to NZ$31.4 million in FY20.

Past Performance (Source: Company Reports)

Going forward, the company is seeking to continuously enhance its business via organic growth through higher investments and high-quality care facility. A debt-free balance sheet will help the company to attain its long-term objectives of expanding the business through acquisitions and delivering continued growth in shareholders’ returns. As the business holds the ability to carry out additional acquisitions, it is seeking to discover the next set of quality businesses that can perform as drivers for future growth.

FY20 Key Performance Highlights: Revenues for the period came in at ~NZ$12.6 million, up 153% year over year. The increase was primarily aided by higher subscription revenue, which soared 106% year over year. Notably, team expansion and scaled up operations, led to an operating loss of NZ$22.96 million in FY20. In the same time span, the company’s loss after tax increased 73% year over year. The company’s gross margin stood at ~86% in FY20, up from ~83% in FY19. Operating costs for the period increased to NZ$36 million from NZ$17.1 million in FY19, due to higher investment in the business for growing the sales, marketing and customer success teams’ capability along with costs incurred after the acquisition of MRS buyout.

Key Financial Highlights (Source: Company Reports)

Geographical Highlight: During the period, total revenues with respect to North America, EMEA, and APAC stood at NZ$11.9 million, NZ$134k and NZ$588K, respectively. In FY19, the figures stood at NZ$4.2 million, NZ$243K and NZ$535K, respectively. Majority of the company’s revenue is derived from the sale of clinical functions and patient tracking software.

Balance Sheet & Cash Flow Details: As on 31 March 2020, the company’s cash balance came in at NZ$31.4 million. The company successfully completed the share purchase program on 18 May 2020, subsequent to which VHT’s cash balance stood at NZ$69 million. This provides Volpara with substantial flexibility to gauge potential future strategic acquisitions and expand its product offering. Operating cash outflow stood at NZ$15.9 million as compared to a cash outflow of NZ$10.6 million in FY19. The Group continues to hold no debt.

1QFY21 Sneak Peak: During Q1 FY21, the company reported a growth of NZ$1.1 million in ARR to NZ$19.1 million due to new customers and upsells, customers commencing maintenance contracts for the first time, as well as movements in foreign exchange. VHT reported a growth of 112% in cash receipts from customers to NZ$5.0 million. The net cash outflow from operating activities stood at NZ$3.73 million. During Q1 FY21, the company finished a capital raising of A$34 million, comprising a Share purchase plan of A$9 million and a placement of A$28 million. Also, the company closed FY20 with a decent cash balance, which allows the company to capitalise on potential acquisition opportunities arising from COVID-19. At the end of the quarter cash on hand stood at NZ$67.5 million.

Cash Flows (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 34.27% of the total shareholding.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In FY20, the company had a gross margin of 85.9%, which is higher than FY19 and FY18 figure of 82.6% and 77%, respectively, representing decent fundamentals.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company is exposed to financial risks such as interest rate risk, foreign currency risk and liquidity risk. Liquidity risk arises from the inability of the company to pay off its obligations. VHT continuously monitors the forecast and actual cash flows to manage the liquidity risk.

Outlook: The company is focused on long-term SaaS contracts. The company seems to be well placed against its peers, supported by a robust balance sheet and access to capital. Going forward, the company expects to increase its US sales team along with its APAC & European team with a full suite of products. 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 efforts for R&D and product improvement will continue to innovate its product suite with the expanded engineering and science teams. VHT remains on track to focus on long-term SaaS contracts, which stand to benefit even with COVID-19 outbreak. The company’s cash collection continues to be strong & shows no signs of significant churn risks.

Continued investments in business capability and capacity with addition of three new executives to Volpara executive team in Operations, People and Customer Success help to aid the company’s growth and innovation, in the long run. Also, the company remains on track to grow the engineering team to accelerate the core functionality of VolparaDensity and VolparaEnterprise.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology:  EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, 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 slightly below the average of its 52-week trading range of A$0.79 - A$2.170. The stock has a market cap of ~A$332.88 million. The company gave a negative return of ~20.06% in the last six months (as at 18 August 2020). In FY20, 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 a revenue CAGR of 90.1% over the last three years (FY17 – FY20). Considering the above factors, we have valued the stock using EV/Sales multiple based illustrative relative valuation approach (illustrative), and for that purpose, we have considered peers such as Pro Medicus Ltd (ASX: PME), Nanosonics Ltd (ASX: NAN) and Telix Pharmaceuticals Ltd (ASX: TLX), to name few. As a result, we have arrived at a target price of low double-digit growth (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of A$1.38, up ~3.371% on 19 August 2020. 

VHT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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