What Authentidate Said Last Week

| About: Authentidate Holding (ADAT)

Author's Note: This article discusses a microcap stock. Please be advised of the risks associated with microcap stocks.

We had the chance to hear Ben Benjamin, CEO of Authentidate (NASDAQ: ADAT), present at the LD Micro investment conference in Los Angeles last week. We own a significant percentage of the company so we've been flooded with inquiries as to what they said at the conference. We figured it would be useful if we summarized the key points. For investors new to the company and wanting background reading, please see our management interview and earnings call summary.

We were very pleased to hear that management found a way to take significant cost out of Electronic House Call, which is the company's telehealth monitoring device. Authentidate's technologies allow clinicians to remotely monitor patients over a number of vehicles. This can be over an ordinary phone or an app on your smartphone, or by a dedicated monitoring device which the company sells and is the leading channel at the moment.

We believe the future of the company is as a recurring, high margin, subscription-based business. But that's not what Authentidate is today. Last quarter's sales were lead by telehealth (65%, with the balance to software sales). Of that, we believe telehealth sales are still largely hardware driven, at least for the time being. Company-wide gross margins were 28% in the quarter.

The good news on this front is that Authentidate will be moving manufacturing offshore as part of a plan to reduce device cost by 60%. This will have the impact of moving device margins from 20% today to 50%, so very significant. The company expects these changes to take place in January.

These cost savings will allow Authentidate to lower the cost of the device. This is a big deal. Our research indicates that Authentidate is widely recognized for its technology leadership. Their device offers remote update capabilities, video playback, and the ability to process complex disease management protocols that competitors lack. The web-based backend, which clinicians use to monitor patient populations, is considered best in class due to its ease of use and sophisticated reporting functionality.

One hold back for the sales team, we believe, is that Authentidate's device does a lot, but at $1,300 - 1,450 a unit, was hundreds more than competing devices. Some hospitals don't flinch at the cost because Authentidate's telehealth devices are driving down their cost of patient care dramatically, as much as 50%. Other hospitals are more hesitant for any initiative that involves upfront equipment costs. The new lower cost profile should significantly reduce the price gap between Authentidate's product and competitors' products and empower the sales team.

Most of the rest of the presentation was a recap of Authentidate' business model and opportunity, familiar stuff to long time company watchers. Here is a summary:

  • The company highlighted that it is at an inflection point. Reasons for this include:
    • Increasing importance of healthcare cost savings coupled with growing clinical evidence of the cost savings possible from telehealth
    • New regulations penalizing hospitals for patient readmission, a risk Authentidate's solutions can cut by as much as 70%.
      • Penalties can include no reimbursement for same-ailment rehospitalization in a 30-day window, which is happening at a 20% rate in Medicare/Medicaid patients
  • Recurring revenues are key to the company's business model
    • Telehealth subscriptions: $50 - 60 per patient per month on the device, with 85-90% gross profit margins
      • Monthly subscriptions for phone-based monitoring are around half the device rate, we believe, with similar margins but no need for inventory or shipping product
    • Hospital discharge software: $3,000 - 5,000 per month, per discharge location
      • A hospital with 500 beds could discharge 2,200 patients a month. The software offers significant cost savings since it would otherwise cost $300 per discharge, which is $660,000 monthly
      • This software can cut discharge time from 6 hours to 45 minutes, and free up hospital beds
    • Workflow management software: a per transaction model, costs $2.50 on their software vs. $10 - 12 when done manually
      • Reduces document completion time by 30 - 70%
      • Can reduce users' time to payment from 28.5 days to 4.5 days
  • Authentidate sees the FDA's 510(k) clearance of its telehealth device as a competitive advantage, as only seven companies have this
  • The VA is the company's marquis client which brings a lot of credibility since the VA is viewed as the global innovator in telehealth
    • The VA has 9 million covered lives and 30% will need a telehealth solution
      • Note: Authentidate has only one competitor in selling the lower cost phone-based telemonitoring solution to the VA, which is the method the company thinks will eventually be used in 75% of cases
  • They also named some commercial clients of the company, including Humana and Highmark
  • They are seeing and bidding on many requests for proposals, and note that these are increasing in size
    • Management previously noted that they expect to hear back on several RFPs in coming months
  • The company has received inquiries from Western Europe, South America and other countries seeking to replicate the VA's results in telehealth

Whenever we write about microcaps, it's important to note risks inherent to the space. These companies are small, often illiquid, and with fewer financial resources than their larger cap brethren. A thorough analysis of Authentidate is warranted before you invest in the company.

One key risk to consider is that the company competes in the fast-changing technology market, in some cases against much larger competitors with deeper pockets. Another key risk is that the company to date has not been able to get to a sales run rate indicative of its potential. Sales were up 96% last quarter to record revenues, but there is no guarantee that trends will continue in that direction. Historically, the company has experienced delays and slow-moving customers and these challenges are likely to persist.

If you'd like to hear a recording of Ben's presentation, visit the investor relations section of the company's website. There is a recording there (12/3/13) as well as the slide deck (11/26/13), and we believe a transcription is on its way.

Disclosure: The author is long ADAT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I will not trade this stock for the next 72 hours. This article and, if applicable, the interview herein, may contain historical information and forward-looking statements within the meaning of applicable securities laws with respect to the business, financial conditions, and operational results of the interviewed company (the "Company"). Such statements reflect the current beliefs, views, assumptions, and expectations of the Company with respect to future events and are subject to uncertainties and risks. Many factors could cause the actual results, performance, or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Some of these factors may include changes in the markets in which the Company operates and in the general business environment and economic conditions, the loss or gain of customers, unpredictable sales cycles, competitive pressures, market acceptance of new products, inability to meet efficiency and cost reduction objectives, changes in business strategy, and various other factors, both referenced and not referenced in this article. In addition, various risks and uncertainties, including but not limited to those described in reports filed by the Company with the Securities and Exchange Commission or other regulatory organizations, as applicable, may affect the Company's operational results. No obligation is assumed to update any forward-looking statements.