February 22, 2016 - 5:47pm EST by
2016 2017
Price: 1.43 EPS NM NM
Shares Out. (in M): 19 P/E NM NM
Market Cap (in $M): 27 P/FCF 6.7x 9x
Net Debt (in $M): 1 EBIT -5 -1

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  • Nano Cap


DISCLAIMER.  The author of this idea holds a position in STRM, and we may sell our position without further notice.
Streamline Health Solutions (STRM-$1.49)
This write-up is focused on a company with a market capitalization of less than $50 million and the
shares are therefore illiquid.
Investment Thesis. Streamline Health Solutions is a microcap healthcare solutions provider with a 20+
year operating history. New CEO David Sikes has successfully executed the first phase of the company’s
operating turnaround, reflected in significant reductions to operating costs, dramatic improvements in
operating margins and meaningful free cash generation. The second phase is expected to include
accelerated revenue growth, and we expect to see some progress in this area in 2016. Continued
progress in operations should drive a re-rating in the equity. Investors are also paying nothing for the
potential for strategic exit over the next 12 to 18 months
STRM offers highly asymmetric risk/reward in our opinion. The company's enterprise value is roughly
1/4 of what it was 2 1/2 years ago and STRM’s revenue base is virtually unchanged over that period.
The undemanding valuation is a function of tax-loss selling, the general market sell-off and the
evisceration of all things small cap. On EV/Sales, STRM is currently trading at 1.2x and 1.0x our 2016 and
2017 calendar year estimates, respectively. On EV/EBITDA, multiples are estimated at 9.5x and 6.5x,
respectively. Our target price of $3 (100% upside) implies the stock can trade at 2x EV/sales, which we
think is imminently achievable assuming a modest acceleration in organic sales growth from 5% in
Calendar 2015 to 10% in Calendar 2016.
More interestingly, we believe STRM is too small to remain public and we believe the board is likely to
head down a path of shareholder value maximization over the next 12 to 18 months. Applying a private
market multiple of 3x - 4x to calendar 2016E sales, we estimate STRM would be worth $4.30 to $5.60
per share in a strategic transaction, representing 189%-275% potential upside.
Description and Background. At the time of its IPO in 1996, Streamline provided its hospital clients
content management services (document capture and storage). The content management system
remains an important part of the company’s business today. Streamline's customer base (~100 clients) is sticky, which has allowed the company to largely maintain its revenue stream over the years despite a lack of historical success in building out content management and remaining narrowly focused on its single product offering. 


In January 2011, unhappy with the stagnant growth profile of the company, the board replaced the founder and brought in a new CEO (Bob Watson) to run the business. Mr. Watson quickly recognized an opportunity to leverage the well-liked content management system and broaden the company's offering into other areas.  
The company made a number of acquisitions over the next several years:
Financial analytics (Interpoint Partners) Acquired in 2011 for $5 million.
Coding and Clinical Documentation Improvement (Meta Health) Acquired in 2012 for $14.8
Clinical Analytics (licensed from Montefiore Medical Center) Acquired 15-year term license in
2013 for upfront payment of $3 million.
Patient Scheduling Software (Unibased Systems Software) Acquired in 2014 for $6.5 million.
From an operating standpoint, Mr. Watson's tenure as CEO (which ended in January 2015) could be
summed up as "overpromise and underdeliver." Several senior executives joined the company only to
depart after 1 to 2 years. Employee morale was hurt by excessive turnover leading to poor execution.
The execution issues contributed to unnecessary revenue churn and client dissatisfaction in both 2014
and 2015.
While operating the business and integrating acquired assets were a clear weakness, Watson's notable
strengths included his ability to raise capital opportunistically and deploying that capital with some
success into the aforementioned acquisitions.The product portfolio provides a solid foundation for the
future of the company.
New CEO. In September of 2014, David Sides was brought in as President/COO and in January of 2015,
Sides was promoted to CEO, with Watson leaving for a bigger job at NantHealth. Sides has a long history
of working in Healthcare including 17 years at Cerner, including some fairly senior roles.
David Sides promoted to CEO (1/8/15)
David Sides joins company (9/14/14)
Sides has quickly moved to improve execution, repair client relationships, boost cash flow generation
and rationalize the cost structure. For the 9 months ending October 2015, free cash flow improved by
$8.4 million from ($4.73) million to $3.71 million. Moreover, in the fiscal third quarter (October 2015),
EBITDA margins improved dramatically year-over-year from (3.5)% to 23.6%.
Year-to-date, expenses have benefitted from consolidated savings efforts, with SG&A decreasing
significantly despite increased investment in sales. Management plans to invest the savings associated
with switching auditors (KPMG to McGladrey) into expanding the salesforce.
Streamline third quarter results
Quality Product Offering and Client Base. For a small company, Streamline’s product offering is well
regarded. Most notably, the company is currently enjoying strong interest in coding and clinical
documentation improvement. This demand is being driven by the government’s mandated
implementation of ICD-10 (October 1, 2015).Streamline's legacy content management system is being
integrated with coding and CDI into one platform, which should improve the company's ability to sell
both products. Finally, while immaterial to date, the clinical analytics offering licensed from Montefiore
has the potential to be a significant driver of long-term shareholder value.
STRM recently announced a reseller partnership agreement with himagine solutions, the largest
healthcare outsourced provider of inpatient and outpatient coders to the healthcare industry. It is
noteworthy that such an important staffing provider to hospitals has chosen to partner with STRM’s
coding and CDI offering. We believe this partnership offers the potential for meaningful revenue
STRM remains in discussions with several channel partners and management believes these
partnerships have the potential to be important contributors to top-line growth in the second of C2016
and beyond.
The company has a strong client base consisting of ~100 hospitals; the most important customer
concentrations are located in the New York metropolitan area, Philadelphia, Texas, Southern California
and the west coast of Florida.
Revenue Growth Expected to Accelerate in C2016 and C2017. With operations stabilized and the right
cost structure in place, CEO Sides is now focusing his attention on driving Streamline’s revenue growth.
The company generated an estimated $29 million of revenue in F16 (January 2016.) Of this total, we
estimate that roughly $25 million was recurring.
Management is focused on driving both direct sales and the partner channel. Sides is looking to hire a
dedicated salesperson to manage the partner channel and to add a few salespeople to build upon the
direct selling efforts. There is a typically meaningful lag (3 to 6 months) between healthcare software
sales and product implementation. Accordingly, while we are optimistic that momentum for STRM will
continue to build in 2016, we are likely to see a more pronounced impact on bookings before we see a
substantial step up in reported sales. Accordingly, we are assuming 10% growth in sales for C2016,
followed by 12-15% growth in C2017. We expect coding/CDI solutions to be the principal driver of
growth in each of the next two years.
Alignment of Management and the Board. Shareholders are fully aligned with management and the
board. Taken together, management and the board directly own an estimated 2.4 million shares or
roughly 13% of shares outstanding. In addition, there are 2.4 million options at an average strike price
of $4.52, 1.2 million warrants ($3.99) that were issued to Noro-Moseley Partners and Great Point
Partners, and three million convertible preferred shares with a face value of $9 million, convertible into
common stock at $3 per share. Excluding Great Point's warrants and preferred shares (Great Point does
not have a board seat), insiders own 27% of fully converted shares outstanding.

Over the past four years, insiders have been aggressive buyers of the stock. Current management and
board members (to the best of our knowledge) have not sold a single share over this time period.
Moreover, during the past three months alone, 7 separate insiders have purchased roughly $540k of
stock at an average purchase price of $1.61. Purchases have taken place as recently as January 13th,
prior to the window closing on the quarter.
Potential for Takeout. Former CEO Watson’s vision was to grow STRM into a $100+ million revenue
company and beyond. That vision has come and gone and the Board recognizes that STRM is
suboptimal in size. Healthcare IT is a competitive industry and scale is a clear competitive advantage.
We believe that the board would like to see some better revenue momentum and a recovery in the
equity before pursuing a sale of the company, but, in our opinion, a strategic exit is the most likely
Noro-Moseley (NM) and Great Point Partners' (GPP) Preferred Stock. NM and GPP collectively own
three million shares of redeemable convertible preferred with a $3 per share conversion price, $9
million face value. Moreover, NM and GPP collectively own an additional 1.2 million warrants with an
exercise price of $4. The preferred shares are redeemable in August of 2016. Wells Fargo sits ahead of
the preferred holders in the capital structure and preferred holder leverage is somewhat limited.
Accordingly, we are not concerned about any type of credit event.
Having said that, Noro-Moseley does sit on the board and they clearly have a voice; this may influence
the timing of a strategic process. It is worth noting that at $3 per share, STRM’s enterprise value to
revenue multiple would only be 2x, and a $4 per share, STRM's EV/sales multiple would still be relative
low at 2.7x. In a sale, the company’s value could clearly exceed this level. Depending on business
operating momentum and STRM's share price, there very well could be some interest in maximizing
value during mid 2016. It is also quite conceivable that the August redemption date of the preferreds
could be extended for a year.
There is clearly more value to NM and GPP from a strategic transaction than to simply redeem their
Revenue concentration. Top 5 clients accounted for 24% of revenues in year-ending January 31, 2015.
Competition. STRM’s competitors tend to be much larger and better capitalized.
Company Presentation.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Operating results

Potential for strategic alternatives

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