STREAMLINE HEALTH SOLUTIONS STRM S
August 21, 2013 - 11:50pm EST by
roc924
2013 2014
Price: 7.45 EPS $0.00 $0.00
Shares Out. (in M): 19 P/E 0.0x 0.0x
Market Cap (in $M): 142 P/FCF 0.0x 0.0x
Net Debt (in $M): 11 EBIT -4 0
TEV ($): 153 TEV/EBIT nm 0.0x
Borrow Cost: NA

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  • Healthcare
  • IT Services
  • SaaS
  • Cash Burn
  • volume declines
  • Weak Balance Sheet

Description

This is a recommendation to short STRM at $7.45. STRM is a $140m market cap healthcare IT company with a SaaS business that has a $7m annual run rate revenue that grew 14% y/y last quarter, including the benefit of acquisitions. The stock was under $1.50 two years ago and a large part of the 5x run up in the stock is because it is in the SaaS category. However, the business is declining (bookings including acquisitions and revenues excluding), the company should raise money and is burning cash, has a DSO of 144, and there is a 5m share overhang (see Dec 2012 and July 2013 S-3s). I think at this valuation with the core business declining, an additional 5m shares (38% of outstanding) potentially hitting the market and the company’s weak liquidity position combine for a solid risk-reward for the short. 

  • Acquisitions are masking a decline in the business; expectations for growth are very high.
    • Reported revenue growth was 19% y/y last quarter, but without the Metahealth acquisition, revenue would have declined 13% y/y. Even including the Metahealth acquisition, new contract bookings declined y/y last quarter
    • Management’s guidance of $35-37m in revenue is very back end loaded this year and calls for hockey stick revenue growth. Guidance assumes an acceleration of pro forma growth from 15% last year to 22% this year. Analysts estimate pro forma growth of 65% in 4Q. But last quarter revenues declined 13% organically and bookings were down y/y.
  • Weak liquidity position
    • Cash burn was $3.2m last quarter and $2.7m last year excluding payments for acquisitions. This is important given the company’s liquidity situation.
    • The company has $19m combined of revolving LOC and term loans, of which $13.4m was outstanding at April 2013; the LOC and term loans mature in one year. Cash was $4m. The company recently obtained a waiver for covenant violations.
    • The cash burn, covenant violations, negative tangible equity, limited liquidity and strong stock performance point to a likely equity or equity linked financing in the near term. The company notes in its July S-3 that increased SaaS business would hurt near term cash flow.
  • Accounting issues
    • Revenue recognition seems aggressive: DSO including contract AR stands at 144 days, up from 57 days a year ago
    • STRM may be under-reserving. Accounts receivable and contracts receivable combined were up 204% y/y, or while the allowance for doubtful accounts was up only 34%
    • Deferred revenues excluding acquisitions were down last year, pointing to lower quality recognized revenue.
    • Relatively high capitalized software (7% of last quarter’s revenue)
  • Both the COO and the CFO resigned this year.
  • Customer concentration: 5 clients accounted for 27% of the last fiscal year’s revenue. The company’s S3-A notes FTI, GE and Telus as its major remarketing partners. The business with GE fell off when GE started using its own solution.
  • Valuation and capital structure
    • Apr 2013 fd shares outstanding are 19m: 13m out + 4m shares upon conversion of Series A (see recent S-3 and 10-K) + 1.4m warrants (k=$4) + 2.75m options (k=$3.41)
    • $142m market cap
    • $13m debt + $1.3m earn-out payment obligation; $4m cash
    • 2013 guidance is for $36m revenue at mid-point, so 4x EV/sales, but I think they miss guidance; adjusted EBITDA guidance is $7.5-9.0m, so 18x EV/EBITDA, but earnings quality is low (EBITDA derived from cash flow is negative versus the positive number reported by the company due to increasing DSOs, etc) and again, I think they miss guidance
  • Risks
    • Backlog was $51m as of January 2013 ($53m Apr 2013). If the company is able to convert the same proportion of backlog into revenue as last year it would meet guidance.
    • I think small caps recently experienced a blow off top and are set for a big fall, so I’m biased against companies like STRM that are losing money and in a poor liquidity position. Maybe this is clouding my judgment.
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

  • Catalysts
    • Overhang and sale of shares underlying the 4.0m outstanding Series A 0% Convertible Preferred, which is convertible at a conversion price of $3.00 per share on a 1:1 basis into common stock, and the 1.4m common stock warrants with an exercise price of $3.99. These securities are from the August 2012 financing. Please see the S-3 from July 2013, 10-K and S-3 from December 2012.
    • Possible equity financing
    • Company lowers guidance
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    Description

    This is a recommendation to short STRM at $7.45. STRM is a $140m market cap healthcare IT company with a SaaS business that has a $7m annual run rate revenue that grew 14% y/y last quarter, including the benefit of acquisitions. The stock was under $1.50 two years ago and a large part of the 5x run up in the stock is because it is in the SaaS category. However, the business is declining (bookings including acquisitions and revenues excluding), the company should raise money and is burning cash, has a DSO of 144, and there is a 5m share overhang (see Dec 2012 and July 2013 S-3s). I think at this valuation with the core business declining, an additional 5m shares (38% of outstanding) potentially hitting the market and the company’s weak liquidity position combine for a solid risk-reward for the short. 

    • Acquisitions are masking a decline in the business; expectations for growth are very high.
      • Reported revenue growth was 19% y/y last quarter, but without the Metahealth acquisition, revenue would have declined 13% y/y. Even including the Metahealth acquisition, new contract bookings declined y/y last quarter
      • Management’s guidance of $35-37m in revenue is very back end loaded this year and calls for hockey stick revenue growth. Guidance assumes an acceleration of pro forma growth from 15% last year to 22% this year. Analysts estimate pro forma growth of 65% in 4Q. But last quarter revenues declined 13% organically and bookings were down y/y.
    • Weak liquidity position
      • Cash burn was $3.2m last quarter and $2.7m last year excluding payments for acquisitions. This is important given the company’s liquidity situation.
      • The company has $19m combined of revolving LOC and term loans, of which $13.4m was outstanding at April 2013; the LOC and term loans mature in one year. Cash was $4m. The company recently obtained a waiver for covenant violations.
      • The cash burn, covenant violations, negative tangible equity, limited liquidity and strong stock performance point to a likely equity or equity linked financing in the near term. The company notes in its July S-3 that increased SaaS business would hurt near term cash flow.
    • Accounting issues
      • Revenue recognition seems aggressive: DSO including contract AR stands at 144 days, up from 57 days a year ago
      • STRM may be under-reserving. Accounts receivable and contracts receivable combined were up 204% y/y, or while the allowance for doubtful accounts was up only 34%
      • Deferred revenues excluding acquisitions were down last year, pointing to lower quality recognized revenue.
      • Relatively high capitalized software (7% of last quarter’s revenue)
    • Both the COO and the CFO resigned this year.
    • Customer concentration: 5 clients accounted for 27% of the last fiscal year’s revenue. The company’s S3-A notes FTI, GE and Telus as its major remarketing partners. The business with GE fell off when GE started using its own solution.
    • Valuation and capital structure
      • Apr 2013 fd shares outstanding are 19m: 13m out + 4m shares upon conversion of Series A (see recent S-3 and 10-K) + 1.4m warrants (k=$4) + 2.75m options (k=$3.41)
      • $142m market cap
      • $13m debt + $1.3m earn-out payment obligation; $4m cash
      • 2013 guidance is for $36m revenue at mid-point, so 4x EV/sales, but I think they miss guidance; adjusted EBITDA guidance is $7.5-9.0m, so 18x EV/EBITDA, but earnings quality is low (EBITDA derived from cash flow is negative versus the positive number reported by the company due to increasing DSOs, etc) and again, I think they miss guidance
    • Risks
      • Backlog was $51m as of January 2013 ($53m Apr 2013). If the company is able to convert the same proportion of backlog into revenue as last year it would meet guidance.
      • I think small caps recently experienced a blow off top and are set for a big fall, so I’m biased against companies like STRM that are losing money and in a poor liquidity position. Maybe this is clouding my judgment.
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    • Catalysts
      • Overhang and sale of shares underlying the 4.0m outstanding Series A 0% Convertible Preferred, which is convertible at a conversion price of $3.00 per share on a 1:1 basis into common stock, and the 1.4m common stock warrants with an exercise price of $3.99. These securities are from the August 2012 financing. Please see the S-3 from July 2013, 10-K and S-3 from December 2012.
      • Possible equity financing
      • Company lowers guidance
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