Volpara Health Technologies (VHT) has successfully transformed itself from a breast density capital sales company - to a cloud based Enterprise Quality Assurance company, operating with a SaaS model. VHT has captured 1% of breast screening in the US annually and this is expected to grow to 3% in the next 12 months. Key catalysts include sales updates and major UK project decision. We have adjusted our forecasts to better reflect the IFRS15 recognition of SaaS revenue, resulting in a modest downgrade to our valuation and share price target. The key risk is a slower-than-expected take-up of VolparaEnterprise™. We maintain our Add recommendation.
Adoption of conservative accounting standard sees lower revenue
VHT posted a net loss of NZ$9.6m (compared with our forecast of a net loss of NZ$9.0m) for FY17. Revenue recorded was NZ$2.0m (comprised of NZ$1.1m of annual recurring revenue (ARR), capital sales of NZ$0.7m and government grants of NZ$0.5m) which was below our forecast of NZ$2.6m. The main difference relates to NZ$0.5m higher share based expenses (non-cash), foreign exchange loss of NZ$0.3m and lower recognised revenue as the company adopts the IFRS15 accounting standard for software-as-a-service (SaaS) revenue. The standard sees revenue lag contracted sales with a number of contracts being paid upfront resulting in a healthy cash position of NZ$12.9m.
Key highlights – SaaS contracts and recurring revenue
As as 31 March 2017 the company had 14 signed VolparaEnterprise™ SaaS contracts. The total contract value (TCV) signed in FY17 was NZ$4.1m compared to NZ$2.5m in FY16. The annual recurring revenue (ARR) now stands at NZ$1.1m, with management calling out ARR growth of over 200% in FY18. Approximately 1% of women screened in the US go through Volpara's technology. Typical contracts range from US$30k to US100k (average US$50k) and contract periods average three years.
Catalysts and forecast changes
VHT recently announced the commercial launch of VolparaEnterprise™ 2.0 software which is an enhanced version of its cloud based imaging analytics platform and, in our view, will encourage greater customer adoption. The software launch is timely as the FDA has stepped up its compliance standards. Further catalysts (including a major UK project on breast density implementation) are expected to be announced over the coming quarters together with quarterly sales updates. In line with guidance we have moderated our revenue recognition assumptions and lowered growth in the cost base, resulting in changes in Operating Cash Flow (OCF) of +17% for FY18, -109% in FY19 and -7% in FY20.
Contributed by Scott Power, Senior Analyst. Sectors Covered: Healthcare, Life Science and Technology.
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