Value Investors Club / STREAMLINE HEALTH SOLUTIONS (STRM)

Description

DISCLAIMER. The author of this idea holds a position in STRM, and we may sell our position without further notice.

https://drive.google.com/file/d/0By1oSLoXimIvTlZvenQ2VUdlRDg/view?usp=sharing

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

million.

 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)

http://investor.streamlinehealth.net/releasedetail.cfm?ReleaseID=890446

David Sides joins company (9/14/14)

http://investor.streamlinehealth.net/releasedetail.cfm?ReleaseID=870031

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

http://investor.streamlinehealth.net/releasedetail.cfm?ReleaseID=946617

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

contribution.

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

outcome.

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

paper.

Risks

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.

http://files.shareholder.com/downloads/AMDA-MWDK3/1545566338x0x765634/7F61A8C8-375D-

4AEB-BE0C-49A7673753CF/Investor_Presentation.pdf

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.

Catalyst

Operating results

Potential for strategic alternatives

show sort 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
TEV (in $M):	37	TEV/EBIT	NM	NM