Pretty much every tech company I cover at sister publication investingwhisperer.com had a great Q2. Revenue and EBITDA were up – but it didn’t always make a difference to the stock.
But it sure made a big difference for Assure Holdings (IOM-TSXv / ARHH-OTCQB). I wrote to you about Assure a few weeks ago, holding it up as the poster child for the types of non-energy companies I cover at Investing Whisperer.
Denver-based, the company has a unique business model that provides neuro (you know, like brain)-monitoring during surgeries. It’s an extra layer of insurance that tells the surgeon if the patient is having any reaction during a surgery.
Assure announced a great Q2 on Thurs Aug 29:
- Number of procedures (surgeries) monitored up 109% to 1466
- Revenue up 137% to $8.4 million YoY
- Adjusted EBITDA up 256% to $5.7 million – a HUGE jump
- Gross margin was up to 79% from 70%
Normally, growth costs money. But Assure is generating cash every month while growing this fast. They actually have net income. It’s such a strong business model, Executive Chairman John Farlinger decided to become permanent CEO and stay as Chair.
They’re expanding geographically – they started in Colorado but now expect to be in 9-10 states by year end.
They have enough critical mass now that they are cancelling all their third-party billing – for which they paid 8% of receivables and had to wait months (often over a year) to get paid. Under the new billing Joint Venture they announced, they are effectively bringing the billing in house – they are now paying themselves.
On a $30 million run-rate, that is a $2.4 million savings. Assume they actually net 50% of that (they still have to pay their in-house people) but as revenue ramps up, this becomes a greater and greater savings.
With this new JV, Assure expects to increase the gross amount of receivables and increase the speed of collections, all the while greatly increasing the number of surgeries. That’s a slingshot of revenue, if they can make it happen.
Collecting receivables have been The Big Negative here (witness the big writedown earlier this year) and even in this quarter, growth in cash actually collected is not as much as revenue growth. That’s what CFO Trent Carman and Paul Webster were specifically brought in for.
There were three very important initiatives announced on the conference call. One was the move to in-house billing as I’ve just spoken to. The second was management saying they are ready to grow via acquisition, which would mean bringing surgeons and the practice in-house. I’m not sure how that will work, but I’ll see what colour they’re willing to give on that in a call with CEO Farlinger later.
The third initiative is taking some of their procedures “in-network” – i.e. agree on a pricing schedule with a major US national insurance company for their neuro-monitoring. Right now Assure is almost all “Out-of-Network”, which means they negotiate with the insurers on each surgery. That’s why receivables are low and slow.
Going “In-Network” will mean a bit less money, but quicker and more certain payment. I expect this to result in a higher multiple for the stock over time, as the Market values a lower but longer, steady revenue stream over a big upfront payment.
Other than receivables still being a bit slow, the only negative in the whole story is that they are a Canadian listed small cap stock in a market that is shunning Canadian listed small cap stocks.
I see lots of growth here – growth in # of surgeries, growth in speed and amount of receivables, growth in # of states in which they are operating – and throughout all this, I expect them to continue generating cash (though of course, if they grow too fast, there may be a few months that doesn’t happen).
The stock was up 20% on volume on the day they announced their good numbers. It’s important to me to see the stock perform on good news. In energy-land, that rarely happens (Canadian junior oil producers continue to churn out huge Free Cash Flow and trade at just 3x cash flow-CRAZY!). I notice volume on the US listing, ARHH, is also picking up.
Overall, I couldn’t have asked for anything better. Great numbers, a more visible growth runway, and the stock responds. No analyst coverage, no institutional ownership. Management owns a huge chunk of the stock. Positive cash flow; high gross margins. This is the kind of company I’m trying to uncover all the time at www.investingwhisperer.com.
I think this stock and several others at my other service are going higher. Sign up for a trial subscription today – click HERE