By Brian Marckx, CFA
NASDAQ:MTBC
READ THE FULL MTBC RESEARCH REPORT
Q4 2019 Results, Operational Update…
MTBC Inc (NASDAQ:MTBC) reported financial results for their fourth quarter 2019 and provided a business update. Importantly, management reiterated their full-year 2020 financial guidance which implies revenue and adjusted EBITDA growth of at least 55% and 48%, respectively. This follows their largest acquisition which happened in early January when MTBC closed on the purchase of CareCloud Corporation (see our full report for our CareCloud acquisition refresher). CareCloud brings a proprietary, relatively very well-known (revenue-based) EHR platform and a customer base of more than 7,000 providers.
The transaction, which closed on January 8th, is expected to add $30M or more in annualized revenue to MTBC’s topline. And while integration costs will be a short-term headwind to profitability, MTBC’s demonstrated ability to quickly absorb operations of acquired companies into their existing infrastructure (including moving a significant portion of activities from the U.S. to much lower-cost countries), eliminate redundancies and other superfluous positions and activities and minimize customer defection should bode well for CareCloud becoming accretive to MTBC’s income and adjusted EBITDA before current year-end.
As we noted in our update in January, while CareCloud marks their largest acquisition ever, it could prove a relatively simple integration process for MTBC, which has demonstrated a particular adeptness with quick and (largely) error-free corporate combinations. Commensurate with the CareCloud acquisition announcement management issued initial full-year 2020 financial guidance of revenue and adjusted EBITDA of $100M – $102M and $12M – $13M, respectively. Importantly that guidance was reiterated with release of their Q4 2019 financial results. We currently model 2020 revenue and adjusted EBITDA of $101M and $12.0M, largely inline with our prior $101M and $12.2M estimates.
Q4, FY 2019 Results….
Q4 revenue and adjusted EBITDA of $15.8M and $8.1M were mostly inline, although about 1% lower than our $15.9M and $8.2M estimates. As compared to our disaggregated revenue estimates, (what we refer to as) MTBC’s legacy business was about 4% lower ($7.5M A vs $7.8M E) and Orion’s contribution was ~5% less ($6.8M A vs $7.2M E). These were almost, although not completely, full offset by a relatively big beat (percentage-wise) by contribution from Etransmedia (ETM) – which generated ~$1.5M in revenue in Q4, or 69% more than our $860k estimate. This is the second consecutive quarter of a relatively massive beat by ETM, which contributed ~$1.7M of sales in Q3’19, which was twice our $850k estimate. ETM has already proven to be a wildly successful (relative to expectations) acquisition, which closed in April 2019. While, at the time of the purchase, management noted that they were expecting ETM to contribute around $3.5M annually to the topline, it generated more than $5.1M through just the first three quarters following the acquisition. Management has indicated that a lower rate of customer attrition has been key to ETM’s outperformance – which we think speaks to MTBC’s efforts focused on the same and could prove to similarly effective in maximizing the potential of CareCloud.
Full-year revenue of $64.4M was up 28% from $50.6M in 2018 and a new annual record. Orion, acquired July 1, 2018, accounted for $11.2M, or 69%, of the topline growth while Etransmedia contributed $5.1M, or 31%. That was partially offset by a $2.5M contraction in revenue from MTBC legacy.
Adjusted EBITDA was $2.8M in Q4 and $8.1M for the full-year 2019, both record highs and representing 98% (vs 1.4M in Q4’18) and 69% growth (vs $4.8M in FY 2018), respectively. The significant increase in adjusted EBITDA is attributable to a combination of bolt-on revenue from Orion and ETM as well as MTBC’s deftness in quickly integrating these acquisitions and shedding expenses. Total operating expenses increased by just 21% from 2018 to 2019, well below the 69% topline growth over the same period.
Management reiterated their previously issued FY2020 revenue and adjusted EBITDA guidance of $100M-$102M and $12M-$13M, respectively. This guidance assumes organic growth from existing and new clients and potential for additional tuck-in deals. It, however, does not assume contribution from any additional major acquisitions – although, given the company’s highly-acquisitive nature, we think its reasonable that another could happen before year-end.
We think MTBC remains very much on the hunt for additional acquisitions. But while additional bolt-on and tuck-in acquisitions likely continues to represent the most opportune way to significantly steepen the near-term growth curves (on both the top and bottom lines), the company has recently begun to layer on additional organic growth initiatives. As we have repeated in the past, MTBC has shown an adeptness at finding, quickly integrating and profitably leveraging synergies of attractive acquisition targets – this strategy has been responsible for virtually all of their recent growth and improved financial performance (and financial position).
As part of this organic growth initiative, the company recently added marketing personnel, began rolling out new offerings and, to further incentivize sales productivity, tweaked customer-facing personnel compensation (i.e. bonus) structures. MTBC’s new partnership offering is one of their most significant recent strategic initiatives aimed at growth via leverage of their existing capabilities.
We could also see some incremental contribution from MTBC’s new partnership offering, which launched in 2H 2019 and provides an additional revenue opportunity via (what amounts to) outsourcing the company’s technology and / or human capital to smaller (i.e. too small to be attractive acquisition candidates) RCM companies. Management noted that they signed their first ‘partnership’ (RCM) customer in October and that they are in discussions with others. We will be eager to hear updates regarding customer interest in this offering as well as the relative financial contribution from these arrangements. Telemedicine functionality is the most recent major enhancement to MTBC’s technology platform. We expect we will here status updates as the launch gets underway.
Valuation
As integration and other front-loaded expenses (eg efficiency and synergy objectives) related to CareCloud should largely be completed by mid-year, we think GAAP profitability and adjusted EBITDA growth could steepen even further into 2021. Updated comparable multiples and the addition of 2021 as our new out-year moves our calculated fair value, based on P/S and EV/EBITDA industry multiples from $11.7 to $11.0/share.
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