Description
Summary:
Veradigm is an IT solutions and services provider to healthcare organisations with MSD revenue growth and high-20s EBITDA margins. Currently trading at 7x EV/EBITDA and 12x EV/Unlevered FCF, we believe MDRX will rerate after submitting its current fillings and restated historical financials in Q4’23. Peer NXGN, an HSD grower with a lower margin profile, was recently announced as a Thoma Bravo takeout target for 13x EV/EBITDA.
Business Overview:
Veradigm provides IT solutions and services to healthcare organisations. The business is divided into two primary segments: Provider and Payer & Life Sciences (<4% FY22 revenue classified as “unallocated”).
Provider (77% of revenue, 53% Non-GAAP GM – FY 22):
Software applications for patient engagement and the sale of EHR software to single-speciality and small and mid-sized physician practices, including related clinical, financial, administrative and operational solutions.
- Health Records are designed to document, store, and retrieve patient health information.
- Revenue Cycle Management: Tools and services to manage billing, collections, and patient financial services.
- Practice Management: Solutions to help healthcare practices with administrative tasks, such as scheduling, billing, and revenue cycle management.
- Patient Engagement: Tools that allow patients to schedule appointments, view their health records, and communicate with their providers.
Payer & Life Sciences (19% of revenue, 60%+ Non-GAAP GM – FY 22):
Integrated data systems solutions and related services to health plans and pharmaceutical companies.
The Payer unit offers solutions to health insurance companies and health plans, which help them manage their beneficiaries, understand health risks, and ensure timely submissions for reimbursement. The company has relationships with 100 health plan clients.
The Life Sciences unit leverages MDRX’s proprietary healthcare data (collected registries and healthcare provider clients) to provide insights to life sciences companies, which can assist research, drug development, clinical trials, etc.
Thesis:
- Submission of updated/restated SEC filings in Q4’23 will de-risk common stock and bring MDRX back on the radar of institutional buyers.
- MDRX is cheap and a prime target for a PE takeout.
Background:
02/23/23, MDRX issued a press release announcing the detection of certain internal control failures related to revenue recognition. These IC failures occurred over the prior 6 Qs and resulted in a misstatement of reported revenues during those periods. Notably:
- The IC failures are attributed to a software tool the Company implemented in the Q3’21 to assist with the transition to ASC 606. The cumulative impact from Q3’21 to Q4’22 is ~$20M.
- The misstatements are related to GAAP accruals: there will be no impact to CFFO/FCF.
- MDRX has corrected FY23 guidance as follows:
- Revenue of $625M to $645M vs previous $640M to $660M (~$15M impact)
- Non-GAAP EPS of $0.80 to $0.90 vs previous $0.90 to $1.00
On 03/22/23, MDRX increased the misstatement amount by +$20M (now $40M) and determined that the misstatement impacted FY22 and the entirety of FY21 (vs previous Q3/Q4’21). Revenue guidance was modified to $615M to $635M and Non-GAAP EPS of $0.8-$0.9 was reaffirmed.
On 05/11/23, the MDRX announced an estimated filing date of mid-June, and that the misstatement would not exceed 5% of the full year for either 2021 or 2022.
On 06/13/23, MDRX announced that a portion of FY20 would also be impacted, and thus the impact to any single calendar year is now anticipated to be lower than previously expected. The deadline for fillings moved to September 18, 2023.
On 09/18/23, the company reduced the estimated impact to $20M. Reaffirmed guidance and provided FY23 aEBITDA guidance of $160M to $170M.
On 09/22/23, MDRX announced that the correction process was taking longer than anticipated due to the need to build a new supplemental revenue system tool and the extensive manual work to aggregate and map the Company’s historical transaction data into the new system tool. The Company currently expects to file everything during the fourth quarter of 2023.
On 10/09/23, the temporary stay of delisting of the Company’s common stock has been extended pending a hearing before the Nasdaq Hearings Panel (the “Panel”) on November 16, 2023, and the issuance of a final Panel decision.
Current State:
We believe that the most time/labor intensive portions of the correction process are in the past, and that MDRX will file corrected financials in Q4’23. Regarding the risk of delisting, MDRX will go through a hearing process in which it will present a viable plan to regain compliance within a specified timeframe. If the Panel upholds the delisting decision, the company typically has the right to appeal the Panel's decision to the Nasdaq Listing and Hearing Review Council. If the Council also upholds the delisting, further appeals can be made to the U.S. Securities and Exchange Commission (SEC) and eventually to the federal courts.
Guidance was recently reiterated at ~$625M revenue and ~$165M aEBITDA. Assuming a 26% tax rate (21% federal and 5% state), ~$1.8M interest, ~$35M CapEx, and neutral net working capital, MDRX should generate ~$100M of FCF. At a price of $13.9 per share, MDRX trades at ~2x EV/Sales, ~7x EV/EBITDA and ~12x EV/Unlevered FCF (using projected net cash position for Q4’23).
With dilution from the convertible note, MDRX net cash position is ~$640M: this is a company growing revenue MSD with a 27% EBITDA margin. Peer NXGN is being acquired for ~2.3x EV/Sales and ~13x EV/EBITDA, while having HSD revenue growth and an 18% EBITDA margin.
Risks:
- Further delays in filing timeline. However, we believe in this case MDRX can successfully appeal to lengthen the timeline to delisting.
- As identified by Probes Reporter, there is likely an undisclosed SEC investigation that began on 06/27/23 and was confirmed as ongoing on 08/28/23.
Catalysts:
- The company will submit fillings during Q4’23
- The company can be acquired
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
- The company will submit fillings during Q4’23
- The company can be acquired