Description

Vitalhub

Vitalhub is a Canadian-based healthcare software roll-up. The Company offers software for health and human service providers designed to simplify the user experience and optimize outcomes. It offers a comprehensive suite of software-as-a-service (SaaS) solutions, which include electronic health record (EHR), case management, care coordination, and optimization; patient flow, operational visibility, and patient journey optimization, and workforce automation.

Whilst initially focused on the Canadian market, the company has been actively acquiring UK businesses over the past few years, with the CFO mentioning in a company presentation that the NHS was now the single largest customer of the company. They generally have a Commonwealth focus, looking to acquire companies in Canada, UK and more recently Australia, while also having a Middle Eastern presence. They have mostly eschewed the US market to date due to a combination of lack of single payer system and a more competitive marketplace, but have mentioned interest in gaining a foothold in the European market and perhaps US at a later date.

Vitalhub’s clients include hospitals, regional health authorities, mental health and addictions services providers for children and adults, long-term care facilities, home health agencies, correctional services, and community and social services providers.

The company has grown revenues significantly over the past few years, with the growth coming from the twin engines of successful execution of their M&A rollup strategy (having executed dozens of acquisitions over the past few years- see figure 1), as well as strong organic growth from previously acquired companies.

Figure 1: From most recent Investor Presentation – company website

Vitalhub’s M&A playbook is generally to look for acquisition targets with the following characteristics:

·         Annual Revenue between $1-12mn – breakeven to profitable

·         Pay a revenue multiple between 1-2.5x

·         Targetting strategic acquisitions in key operating geographies (Canada, UK, Australia) or geographic expansionary acquisitions

·         EBITDA margins between 20-30% post acquisition

Unlike a traditional PE firm, whom they compete with for deals, Vitalhub examines the value that they can add to deals and how it complements their existing structure. There are many potential levers that the company can pull, depending on the acquisition and this can include 1) generating organic growth, by introducing the newly acquired product to new geographies, where they have a salesforce on the ground, 2) incorporating the newly acquired software to enhance existing product offering and 3) generating cost synergies through consolidation of G&A and offshoring of software R&D to their Sri Lankan innovation hub (which I will discuss in greater detail later).

A good illustration of Vitalhub’s M&A model at work, is by examining their tuck-in acquisition of BookWise earlier in the year. Bookwise is a UK-based healthcare scheduling software with focus on Oncology, Outpatient and Renal scheduling. The transaction was done for $2.5mn cash and 1.2x sales/2.3x Annual recurring revenue, with the company described as being modestly profitable. Vitalhub gets to incorporate Bookwise’s superior Outpatient functionality into their existing Intouch platform, whilst management concluded there were substantial cross-sell opportunities with the majority of Bookwise’s 150 customers being new to Vitalhub’s product suite. Management can then generate substantial cost savings, by leveraging their existing UK salesforce, whilst outsourcing R&D to the Sri Lankan innovation hub, and expect to get the business towards a 30% EBITDA margin, before considering further revenue synergies to other Vitalhub products.

The success of this playbook is evident in the impressive organic growth numbers that Vitalhub is able to generate, which is typically well above their consolidator peers. Over the last year they’ve managed to achieve 15 % organic growth, as they optimize their salesforce on recently acquired platforms. The twin engines of acquired and organic growth, combined with disciplined cost control, has seen margins rise and free cash flow inflect to a respectable $16mn run-rate after years of break-evenish cashflow generation and a reliance on equity financing to fund acquisitions. The market has rewarded this, with Vitalhub shares up almost 100% ytd on continued excellent results and a revived M&A pipeline, however we think they are just getting started and there is a clear path to >20% free cash flow growth as the company continues to execute its playbook.

Key Investment Strengths

Management: Dan Matlow (CEO) and Brian Goffenberg (CFO) have been the architects of Vitalhub’s M&A/organic growth strategy since 2016 and have executed it masterfully. Both executives have a long, successful history in the healthcare IT space, having previously collaborated at Medworxx and successfully organically growing the business over a number of years before exiting to private equity. If you look at their previous conference calls over the past few years, they’ve generally provided conservative guidance and achieved it. They appear shrewd, disciplined deal makers, which deals being consummated within the guidelines they’ve outlined, whilst on organic growth they’ve typically under-promised and over-delivered with actual ARR growth coming it at $1.4mn in the past eight quarters versus their guidance of $800k-1.5mn. Management also own 25% of the company and appeared well aligned with us.

High quality revenue:  Given the healthcare focus of the software, the underlying demand drivers for the software are not subject to the vagaries of the economy. Also the software is typically mission-critical in nature and highly integrated into the workflow of their clients, typically resulting in very low churn numbers (3-4%, usually attributed to a client being acquired by another company that doesn’t use Vitalhub products)

Whitespace: Given the highly fragmented nature of their industry, Vitalhub believe they are only capturing 2% of their potential TAM (60,000 bed install base vs 3mn TAM in key Commonwealth geographies). Even if this TAM is inflated/bombastic, a fraction of this number would suggest substantial opportunity for Vitalhub to multiply their business in the coming years. They also track currently ~400 businesses that broadly meet their acquisition criteria, should something become available.  

Sri Lankan Innovation hub: A large part of Vitalhub’s secret sauce is their Innovations Lab in Sri Lanka. What started out over fifteen years ago as a small team of four people supporting one product, is now a 170-odd strong team, supporting dozens of products and accounts for about half of Vitalhub’s overall headcount. The Innovation Lab is a fully-owned and operated offshoring solution, and allows the company to save substantial costs on software coding/R&D and customer support cost (the CFO described it as a 30c on the dollar saving). This allows the company to generate large cost synergies in their acquisitions.

Dry powder: Vitalhub currently benefits from a pristine balance sheet, with over $71mn in cash, zero debt, almost $30mn in undrawn bank faclities and run-rating at $16mn annualised fcf (and growing). They have plenty of dry powder to acquire from here, and based on management’s track record in accretive M&A deal-making and extracting revenue and cost synergies, this represents a very large potential future source of incremental returns. After a relatively benign 2023 on the acquisition front, the company has been more active this year and suggest that sellers are lowering their sale requirements to more reasonable levels.  

Valuation

Vitalhub trades around 20x EV/FCF and ~5x EV/Sales – not exactly cheap, but given the high quality recurring nature of their revenue and track record of generating organic growth, it doesn’t seem like one is paying too high a premium for the potential value accretive M&A the company can generate going forward, if they can execute like anything in the past.

If the company can continue to grow free cash flow at >20%, and the market rewards the company with some multiple expansion, then the valuation math for a double or more is quite achievable in a few years.

Catalyst

Continued successful execution of M&A/organic growth playbook