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MTBC: Zacks SCR Initiates Coverage of MTBC With $5.50/Share Price Target

05/03/2018
By Brian Marckx, CFA

NASDAQ:MTBC

Zacks SCR’s Senior Med-Tech Analyst Brian Marckx, CFA has initiated coverage of Medical Transcription Billing Corp (NASDAQ:MTBC) with a $5.50/share price target. The initiation report, including financial model and valuation analysis, is available for free via the link below.

Investment Thesis

Medical Transcription Billing Corp (NASDAQ:MTBC) provides proprietary healthcare information technology products and services to physician practices in the U.S. The company’s flagship product, PracticePro, is a fully-integrated software-as-a-service (SaaS) web-based platform with a comprehensive suite of functionality designed to streamline the day-to-day operations of medical practices and improve their financial performance. MTBC’s proprietary technology and related services include electronic health records (EHR), practice management software and revenue cycle management (RCM) aimed at improving workflow, easing administrative burdens (such as those related to billing, insurance and patient scheduling), improving collections and reducing insurance claim denials, and meeting federal mandates related to adoption and use of healthcare information technology.

The EHR and RCM markets are in flux as physicians’ discontent with their healthcare IT and billing providers continues to escalate. Reimbursement pressures, higher costs, claim denials, insufficient functionality and lack of positive return on investment have healthcare CFOs pining for better RCM solutions. Small physician practices, with tighter budgets and lower revenue per patient, means that this segment is particularly discerning when it comes to ROI and decisions regarding outsourcing their medical billing functions. In order to win their businesses, providers want to see that an RCM vendor can return positive ROI in the face of tightening margins, rising costs and lower Medicare reimbursements.

The passage of the Health Information Technology for Economic and Clinical Health (HITECH) Act in 2009, which offered healthcare providers financial (‘meaningful use’) incentives for (and penalties for not) adopting EHR, had the effect of dramatically increasing demand for healthcare IT. It also significantly increased the number of vendors offering EHR products and services – from just under 100 in 2009 to more than 1,000 today. Recent vendor consolidation, with (mostly) larger vendors scooping up less-viable smaller players, as well as concerns about cost, complexity and lack of substantive usability has resulted in widespread dissatisfaction among smaller physician practices, whose EHR and medical billing needs are increasingly not being met.

Recent sunsetting of ‘meaningful use’ incentives, coupled with increasing reimbursement pressures, has meant that stand-alone EHR providers find it increasingly difficult to rationalize their costs to physician practices. These industry challenges have, in our opinion, created opportunities for MTBC. Employing a revenue model that is aligned with the interests of their customers, performance which is better than the industry average and cost that is amongst the lowest of all vendors, we think MTBC’s EHR and RCM offerings directly address practitioners’ needs. And with the ability (and cost-efficiency) to customize and tailor their products and services to the needs of current and prospective customers, we believe MTBC is well positioned to quickly adapt to what will likely continue to by a highly dynamic and rapidly evolving environment.

MTBC is on the front-end of implementing a multi-pronged growth strategy. Recent investments in sales and marketing infrastructure, leveraging relationships with industry partners, and introduction of new products and services (such as free EHR and mobile device functionality), is expected to benefit their organic growth strategy. Meanwhile, they have already demonstrated initial success with their acquisition-related strategy. By buying cheap, rapidly integrating, slashing expenses through the almost-exclusive use of (relatively very inexpensive, yet highly experienced and trained) Pakistani and Sri Lankan labor, MTBC has demonstrated the ability quickly realize synergies. Since their IPO in July 2014, MTBC has acquired assets of 10 RCM companies and grown revenue and adjusted EBITDA from $18.3M and ($1.7M) in FY2014 to $31.8M and $2.3M in FY2017.

MTBC’s competitive advantages relate to the comprehensiveness and ease-of-use of their EHR platform and expertise in medical billing, which is provided at lower cost than most of its competitors. Their pricing advantage is borne from the use of lower cost labor – MTBC estimates that Pakistani (most of the company’s 1,600 employees are in Pakistan) labor costs approximately 50% of that of comparable labor in India and 10% of that in the U.S. Additionally, MTBC has historically only competed in the small physician practice segment (95+% of their customers are practices with ten or fewer physicians) – which is more price sensitive, customer service oriented and which places high value on user-friendliness – attributes which many of the larger EHRs are failing to deliver on.

The global EHR market is estimated to be worth approximately $22B (~$4B of which is ambulatory) and forecasted to expand at a CAGR of 5% - 7% over the next seven years. Growth in the U.S., which represents about 50% of the worldwide EHR market, is expected to be on the higher-end of this growth range and spurred by government incentives/penalties, healthcare policy changes, reimbursement related complexities, competition and increased demand for operational efficiencies. Meanwhile, the U.S. RCM market is forecast to grow from $9B in 2015 to almost $29B in 2025, representing a CAGR of more than 12%.

While MTBC will continue to seek additional acquisition candidates and recently beefed up their cash balance to facilitate their growth strategy, they have also focused on cleaning up their balance sheet and paying down debt. They paid down over $14M of debt during 2017 and exited the year with less than $300k in notes payable on the balance sheet. Current cash balance sits at approximately $13M. Another $5M is available under an untapped revolver. Additionally, management indicated their intentions to continue to improve upon profitability and (per their Q4 ’17 earnings call in March ’18) are guiding for adjusted EBITDA to show “significant growth” in 2018 from the $2.3M record high generated in 2017.

Our Outlook

Solid Cash Position, Cleaned-Up Balance Sheet
MTBC has made a deliberate, and successful, effort to clean up their balance sheet over the last few quarters in order to put themselves in a solid position to execute on their growth strategies. They paid off more than $14M of debt during 2017, exiting the year with less than $300k in notes payable on the balance sheet.

MTBC’s recent preferred funding source has been, and continues to be, their Series A preferred stock: 11%, cumulative (28 consecutive monthly payments have been made), perpetual, non-convertible. There are currently 1.536M (inclusive of the April 2018 sale) Series A shares outstanding ($38.4M notional). MTBC can, at their option, redeem the Series A at par (i.e. $25/share) beginning November 4, 2020. The Series A preferred was used to raise $16.5M (net) in 2017 – much of which was used to pay off debt and fund acquisitions. The most recent Preferred A related raise was in April with 420k shares sold, netting $9.4M and bringing their cash balance to approximately $13M. Another $5M is available under an untapped revolver.

2017 Set Records on Revenue, Adjusted EBITDA and Cash Flow… Revenue grew $7.3M (+30%) from $24.5M in 2016 to $31.8M in 2017, a new record high. The yoy improvement was largely a result of $9.7M in incremental revenue from MediGain (and, to a much lesser extent, from the other companies that were also acquired in 2016), which contributed $17.0M of revenue in 2017 and $7.3M in revenue in 2016, which was partially offset by some customer attrition.

Given that much of the underlying ‘value’ of RCM companies lies in their customer relationships (i.e. billing contracts with their physician practice clients), a significant portion of the purchase price of MTBC’s acquisitions have been (and will likely continue to be) allocated to intangible assets (amortized over three years) as well as to Goodwill. Importantly, MTBC’s opportunistic acquisition strategy of buying at depressed prices (which, in some cases, required insignificant intangibles or Goodwill capitalization), quickly integrating and wringing out revenue has meant only modest growth in Goodwill balance over the last few years (with no significant recent write-downs) and very significant accretion to operating income in 2017.

Similar to revenue, MTBC set several other new records during 2017 including on adjusted operating loss, EBITDA and cash flow. From 2016 to 2017 adjusted EBITDA increased from negative $605k to positive $2.3M, operating loss improved from $7.9M to $4.5M and cash flow from operations grew from an $889k outflow to a $282k inflow.

….And, 2018 is Expected to be “Significantly Better Than 2017”
While 2017 was a record year, management expects even better results this year. Given the rapid integration of MediGain and what appears to have been stabilization of attrition of their customers during 2017, we are hopeful that MediGain-related revenue will show meaningful net growth during 2018. In the past MTBC has provided full-year revenue guidance (which MTBC met in 2017, even after they upwardly revised). Management has been clear that they will put their cash to work and expect growth to come from organic means, acquisitions and/or their partnership strategy. So, while MTBC decided not provide 2018 guidance on the Q4 2017 call (March 7th), they are clearly confident in their ability to deliver on their growth strategies, noting that “our 2018 numbers will be significantly better than 2017”.

Expect MTBC to Capitalize on Disconnects in EHR / RCM Markets
We think MTBC’s business, revenue and operating models, coupled with a strategy aimed at addressing the disconnects between the needs of EHR / RCM consumers and the products / services being offered to them, bodes well for continued growth in revenue and profitability.

We believe that their organic growth strategy is well-suited to take market share of the small-to-medium sized physician practice EHR / RCM market. Recognizing that cost, usability, customer and technical support, and ability to meet regulatory mandates (so as to avoid penalties) are priorities for physician practices, MTBC designed their business model around meeting these needs. Practice Fusion has already demonstrated that free, well-designed and comprehensive EHR is associated with high customer satisfaction – expect MTBC will look to leverage the receptiveness of the market for their offering and poach customers that are likely to defect from Practice Fusion as that vendor ends their free EHR offering. With Ryan Howard, Practice Fusion’s founder and former CEO, coming on board in April as a ‘special advisor’ to MTBC, there is no doubt that the company views this as a major opportunity.

In situations where MTBC does not get the EHR contract, their partnering strategy could be a win-win for them and their partners. Stand-alone EHR providers will be more pressured to rationalize their cost given the sunsetting of meaningful use incentives and as customers margins tighten. One way to do that is to contract with MTBC to provide RCM services.

RCM market opportunities…
The RCM market is similarly in flux as providers’ discontent with their RCM vendors continues to escalate. Reimbursement pressure, higher costs, claim denials, insufficient functionality and lack of positive return on investment have healthcare CFOs pining for better RCM solutions. But, as recent industry surveys highlight, almost 50% of healthcare practices may not have the budgets to spend on an end-to-end RCM system. As a result and with an almost hyper-focus on cost, almost one in three providers that had intended to replace their current RCM vendor has yet to do so. In order to win their businesses, providers want to see than an RCM vendor can return positive ROI in the face of tightening margins, rising costs and lower Medicare reimbursements.

With a revenue model that is aligned with the interests of their customers, performance which is better than the industry average and cost that is amongst the lowest of all vendors, we think MTBC RCM’s offerings directly address practitioners’ RCM related demands. And with the ability (and cost-efficiency) to customize and tailor their products and services to the needs of current and prospective customers, we believe MTBC is well positioned to quickly adapt to what will likely continue to by a highly dynamic and rapidly evolving environment.

Sustainable Cost Advantage…
While much of MTBC’s competitive advantages lie in their use of relatively low-cost labor, which might be argued is an advantage that could be threatened if competitors employ a similar strategy, we think the barriers-to-jeopardy are actually significantly high for several reasons. MTBC enjoys a high comfort level in Pakistan as a result of having operated in that country for 16 years and has expended considerably resources in the past on establishing a safe, secure and highly capable infrastructure and workforce. The operation and personnel have proven to function extremely effectively. In addition, MTBC’s board member, Cameron Munter (joined as Director in June 2013), served as the U.S. Ambassador to Pakistan from October 2010 to July 2012. So, while MTBC’s Pakistani labor-derived cost advantage could theoretically be replicated by competitors, we think the unique comfort level that MTBC has in that country and (likely) hesitance of other U.S. companies (particularly relatively small, direct competitors) to operate there does provide a substantial and sustainable competitive advantage.

Acquisition Strategy Likely To Accelerate
MTBC has demonstrated success in buying cheap, quickly integrating, cutting costs and wringing out revenue and margin. MediGain, the most recent large deal, was particularly successful. While we have no insight into when MTBC’s next acquisition will be, we have no doubt that they will be looking for opportunistic purchases, particularly now with their beefed-up cash balance. The churn in the RCM market as providers dump vendors for ones that fit their needs likely means more RCM services providers will struggle to keep afloat – that is likely to present MTBC with additional opportunities to buy RCM assets (i.e. physician practice’s billing contracts) on the cheap.

Valuation

Our model should be considered fluid, particularly given the potential for near-term acquisitions. We base our valuation on the average of implied EV/EBITDA and P/S multiples from analysts’ estimates of publicly traded EHR / RCM companies and providers of related technology and services. We currently model MTBC 2018 revenue of $32.7M and adjusted EBITDA of approximately $2.6M. Based on a fully diluted share count of 15.6M, we calculate fair value of MTBC at approximately $5.50/share.

READ THE FULL RESEARCH REPORT HERE.

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