Thanks for sharing your thoughts TomMorley. Always healthy to look at things from a different perspective.
To promote a healthy discussion, below are my thoughts around key reasons on why the share price has been drifting down. I welcome ideas from both sides and agreeing/disagreeing in a constructive manner.
Revenues are not growing quickly enough
The market might be expecting stronger revenue growth that the 9% uplift in FY20 revenue (using lower end of FY20 guidance, $18.3M vs $16.9M in FY19).
As mentioned in my previous posts, there are many factors contributing to this with the most obvious being Brexit (government in care taker mode and a new government being formed) and Covid19. Not only have these occurred during what would usually be the busiest period for Alcidion, it has also obscure the view of what would have been the first 'clean' full year (post integration etc) of the new Alcidion (old Alcidion + MKM Health). Because of this, the market does not have full visibility of the revenue generating profile of Alcidion in a typical year.
Nevertheless, I still think for Alcidion to be able to achieve revenue growth and beat revenue guidance in these difficult circumstances is a good effort.
It is also important note that the healthcare industry is a very slow moving beast, particularly so in the public system where the biggest proportion of Alcidion business reside. Customers are sticky, contracts are typically between 3 and 5 years, long winded procurement process, risk avoidance trumping innovation aka inertia etc. Consequently, things take a much longer time than many anticipate - for example:
- customers would let their existing contract (if with a different provider) run down before they invest in a new system
- the tendency to go with big multinationals as they are perceived to be lower risk
- no one wants to be the first with an innovative product, safer to be follower than a leader (the concept of first movers advantage does not apply here!)
- contract negotiations take a bloody long time (the MidCentral DHB contract took around 2.5 years to negotiate and execute - refer here for a summary of my previous discussion with the ex-CFO and ex-Chairman)
- time lag between the scaling up of sales and marketing capability and growth
Alcidion has experienced the short term pain in Brexit and Covid19, but I think there would be some long-term gain. There will be an acceleration in the digitisation, data analytics and artificial intelligence because of regulatory compliance, demand for greater efficiency gains, capacity constraints etc.
Misinterpretation of contracted revenue figures
26% fall in FY21 contracted revenue of $12.8M vs. $17.2M in FY20 and also the perceived fall in recurring proportion of the contracted revenuesIt is my belief that some market participants might have interpreted the 'contracted revenue' reported in the 4C of Q4 FY20. The contracted value relates solely to the start point of FY21. Without reading carefully the chart headings, some might assume there was actually a decline in contracted revenue performance.
However, if you compare it to the corresponding start point for FY20 (which was reported in the 4C of Q4 FY19, there is actually a 9% uplift. Not only is this a healthy starting point for FY21, there is also an increase in both the proportion of recurring revenue (up from $7.7M to $9.7M) and product revenues (up from $7.1M to $9.7M). Alcidion earns higher margins in revenues derived from recurring activities and products.
It can also be observed that the contracted revenue pipeline also gradually increase throughout the course of the financial year.
Growth in operating expenses has continued to outstrip growth in both revenues and cash receiptsGrowth in Cost of Sale of Goods and Services is expected to outstrip revenue growthIn my view, Alcidion has been upfront in explaining this to the market for some time now. The focus is to increase top line revenue in the three key geographical markets, noting that the 'old Alcidion' pretty much did not have a sales and marketing team. The 'new Alcidion' therefore has to improve and enlarge its sales an marketing team and capability to cross and up sell the additional products and services.
As mentioned above, there is a time lag between the scaling up of sales and marketing capability and when growth actually flows through.
One of the key takeaway from the recent webinar is that the COO/CFO expects headcount to still increase but with the costs to stabilise around the $4.75M per quarter mark. Give or take, all else being equal, Alcidion really needs consistent cash receipts of approximately +$7.6M to achieve positive cashflow.
One might reasonably ask why is this important. Again, based on my previous discussion with the management, it is my understanding that some of the institutional investors that they have engaged with had given the feedback that Alcidion needs to achieve 'consistent' positive quarterly cashflow before they would consider investing, mainly due to risk management and their investment mandate.
A lot of optimism or expectations were baked into the market capitalisationAt market valuation >$120M, the market was valuing Alcidion as a typical SaaS business and expecting strong revenue growth and quicker execution of contracts. The current trajectory does not match this profile.As mentioned above, the public segment of the healthcare sector that Alcidion is focusing on is notoriously slow. Perhaps I also have been previously guilty of valuing Alcidion as a typical SaaS business and using peer comparison without fully appreciating how slowly things can move.
I was quietly impressed with Alcidion's performance in FY20 despite the headwinds. But obviously the market holds a different view, partly explaining the recent share price decline following the release of the 4C of Q4 FY20.
But then market sentiment can change quickly - for better or worse. Hopefully, it will turn for the better as management continues to execute and hit some sixes for us.
