Description

Streamline Health Solutions (STRM)

This is an idea for small funds or personal accounts only.  Since we wrote up STRM two years ago, much has changed.  While the story has not played out as we anticipated, we believe that 2018 could be a breakout year for the company, as the company’s new SaaS product offering, eValuator, picks up clients at an accelerated pace.  We believe the eValuator bookings will exceed $4 million in 2018 (up from zero in 2017) and project 2019 bookings/revenue will approach $8 million in 2019.  Longer term, we see potential for a $20-$30 million SaaS revenue stream if the company is able to successfully scale the business.  If management can execute upon the opportunity in front of the company, we are likely to see a meaningful increase in shareholder value.  We value STRM at $2.55 in 12 months (2.1x EV/revenue) and believe the stock has the potential to increase 3x over the next 24 to 36 months.

The company has two main product offerings:

Enterprise content management system.  This represents the company’s legacy 20+ year-old offering which generates roughly $10 million of revenues at a 65% contribution margin).  The annual attrition rate on this product offering is roughly 10%.

Coding solutions.  The coding solutions include clinical documentation improvement (CDI), abstracting and the newly acquired coding audit solutions segment, which includes eValuator.  In our prior writeup, we were optimistic that the coding solutions segment could drive material growth for the company.  Unfortunately, the company faces well entrenched competition from 3M in this segment.  Many hospitals are spending well over $1 million a year doing business with the likes of 3M and Optum.  The company has learned just how difficult it is to displace these competitors.  Notably, however, we do not believe the eValuator solution faces the same challenges.  eValuator principally competes in a greenfield market that could be as much as $500 million, including inpatient, outpatient and physician offices.  

Opportune IT (auditing solutions and eValuator) Acquisition.  In September of 2016, Streamline acquired the code auditing solutions provider, Opportune IT, for $1.4 million.  STRM successfully leveraged the IP and platform of Opportune IT to develop a software solution that enables automated pre-bill auditing.  This comprehensive rules based engine was introduced at the HIMSS conference in early 2017.  

https://www.prnewswire.com/news-releases/streamline-health-to-introduce-new-looking-glass-evaluator-software-solution-at-himss-300408789.html

We believe eValuator is a competitively differentiated solution and we believe early results reinforce that view.  Since being introduced in March of 2017, the company has secured 6 clients.  We estimate the average revenue per client at roughly $100k, given the smaller scale of the early adopter clients.  eValuator competes against 3M Audit Expert and PWC Smart (which is bundled as part of its consulting offering).  The company believes its product offering to be best in class, with its recommendation engine and its pre-bill auditing capability as prime sources of differentiation.  Based on case studies published in recent presentations, we estimate client ROI to be well in excess of 10x. We believe STRM’s pipeline is the strongest it has been in many years, driven by eValuator.   

Projections

Overall, we expect revenues in 2018 to be largely flat with 2017, as contributions from auditing solutions and eValuator are largely offset by declines in content management.  However, we expect to see material growth in new bookings and, in the second half of the year, we expect to see nice year-over-year gains in revenue + change in deferred revenues.   

The driver of the bookings growth is expected to be eValuator, where we expect sales productivity to improve to a run rate of 4 new clients per quarter, with average annual recurring revenue per client exceeding $200k.  Based on 22 clients exiting the 2018 calendar year (January fiscal), we estimate $4 - 4.5 million of bookings for the year.

By 2019, we expect to see notable contributions from the partner channel.  We currently estimate that eValuator direct bookings/revenue will total $6.5 million, with the partner channel contributing another $1.5 million to this total.

In aggregate, we forecast C2018 revenues of $25 million (January fiscal), growing to $28 million in C2019 and $40 million in C2020.  

Valuation

At the end of 2018, we believe the stock can trade at 5x 2019E eValuator SaaS revenue and at least 1x core/legacy.  Based on 5x SaaS estimated revenue of $8 million and 1x core revenue of at least $20 million, we arrive at a target EV of $60 million, which works to $2.55 per share.  This represents an EV to total revenue multiple of 2.1x.  Looking out to 2020, we see a path to $20 million of eValuator revenues.  Similar math would yield a price target objective in the neighborhood of $5 per share.  

Risks  

Execution.  Management has had a history of underdelivering on expectations in past years.  The company appears to be on path to improving execution, but the stock is unlikely to have a sustained move higher until the company proves that it can scale the eValuator business.

Competition.  Competition in healthcare IT is intense and Streamline is a very small player in the market, which makes it very difficult to win new business.  

Catalyst

-Announcements of new client wins for eValuator (ramp expected in April or July 18 quarter)