Streamline Health Solutions, Inc. Is A Massive Medical SaaS Opportunity
Summary
- Streamline Health Solutions, Inc. is a relatively unknown, high-growth investment opportunity in the medical billing space trading at a ~ $68 million market cap.
- Streamline’s acquisition of Avelead will double current sales immediately and create an opportunity for cross-selling solutions to hospitals.
- Streamline’s (together with Avelead) core business is a $900M recurring sales opportunity which implies 45x sales growth.
- Even though the COVID pandemic has been an obstacle for sales, the core business still grew 56% over the last 12 months.
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Here's the problem for acute-care hospitals with over 200 beds: managing billing with the thousands of International Classification of Diseases codes (ICD-10). There are now over 130,000 unique billing codes. Hospitals lose millions of dollars by under-billing with the wrong codes. Even when the hospitals over-bill they potentially lose money because the insurers might deny the claim and/or the government can fine them. Regardless of whether money was lost, a poorly coded bill can take months to rectify. Currently, the best practice for hospitals is to audit 2-4% of cases to catch coding problems. The new best practice is to automate pre-billing analysis of 100% of cases.
The solution to this problem is software, of course. Streamline Health (NASDAQ:STRM) provides a particular software package called eValuator that is used (pre-billing/post-coding) to audit the ICD-10 coding for hospitals. Hospitals love this system because it saves them so much time and hassle. Also, they generally enjoy double-digit ROI on their investment in eValuator.
You can get an in-depth look at how hospitals are using eValuator from this KLAS research report in which they interview 6 eValuator users from 5 different hospitals. From the report: "Customers praise eValuator's robust rule sets and targeted reporting and see Streamline Health as willing to engage on opportunities to enhance the system. While customers report proactive communication and software updates from the vendor, a few note delays in support." According to this article, KLAS Research Analyst Mike Davis noted that "Automating the review of billing codes reduces overhead on the coding teams and increases the percentage of clean claims, which in turn reduces days in A/R. Clients are seeing expected outcomes within six months."
Streamline gives an example for how hospitals can make significantly more revenue by simply using the right code:
source: Streamline Health Solution's Investor Presentation
In this case, you can see that with eValuator software, a patient with the same symptoms and diagnosis can make the hospital either $14,355 or $7,504. The hospital can double the billable amount they charge by simply using the correct code.
Selling eValuator to hospitals is not hard when you can prove that they will capture a positive ROI by using the software. Also, one of the most frustrating and high-turnover jobs for hospitals is the coders in the billing department. Software that can help improve the outcomes is reducing the amount of frustration in these offices. Even so, the numbers speak for themselves. In the table below, you can see that some Streamline Health's hospital customers are experiencing ROIs from 6.6x up to 20.2x. The software is re-recurring revenue for Streamline and they sell it to hospitals at a $300-$500k per year rate, depending on the size of the billing department.
source: Streamline Health Solution's Investor Presentation
When Streamline approaches a hospital, they are never having to replace any other solution. Without eValuator, hospitals don't have a software solution to automate auditing coding work. eValuator and RevID are both EMR agnostic software and both optimize the coding part of the billing process regardless of whatever EHR/EMR software the hospital uses (Epic, Cerner, Allscripts, etc.). They also work with all the other billing software packages including 3M or Optum. It's important to work well with EMR and billing providers.
The company has undergone a 20-year transition from Electronic Health Records (EHR) software (competing with the likes of Cerner) to billing software that it produces today. This transition included losing CEO David Sides to Teladoc (now COO of Teladoc) in 2019 (good timing for David, right?). Before he left, David recognized the opportunity that eValuator had for the company and decided to focus on growing sales for that product. The company then convinced Chairman Wyche "Tee" Green to step in as interim CEO. Tee is now the permanent CEO and is gearing the company for growth.
Tee Green and his father, Tommy founded a medical software company, Greenway Medical Technologies, in 1998. They took the company public in 2012 and then sold to Vista Equity Partners for a $644 million price tag. With his experience in the medical software space, Tee is the right leader to take Streamline to the next level of growth.
Along with growing the eValuator business, Streamline is also acquiring growth. Streamline announced in August of this year that they have acquired medical software company Avelead for $20 million in cash and stock (with a $15 million performance-based earnout down the road). Avelead's ttm sales of $10.2M should close to double Streamline's current sales. This will be reflected in the 3Q earnings report, which will come out on December 8, 2021. An interesting aspect of this acquisition is that Streamline's eValuator software and Avelead's RevID could be complimentary products. While both packages are pre-billing solutions, Streamline's eValuator works post-code and RevID works pre-code. RevID helps to optimize the coding and eValuator helps to evaluate and audit the coding. In the graph below, you can see where these solutions fit in the hospital's revenue cycle. Right now, there is no overlap in the hospitals that these products are in. So, there is potential to cross-sell these products as a complimentary package.
source: Streamline Health Solution's Investor Presentation
I mentioned earlier in the article how important it is for Streamline's software to work well with EMR and billing companies. One other benefit of the Avelead acquisition is that they have a great relationship with $21 billion EMR software company, Cerner. Apparently, Cerner continues to introduce Avelead to many of their hospital relationships. Relationships like these should help drive growth for both RevID and eValuator.
The company estimates that these 2 core products (not including all the other software solutions that exist and are in the pipeline) have a $900 million revenue opportunity. If they reach their potential, that could mean a 45x growth in sales from where they are today. The million-dollar question is: how fast can they get there?
Now, the company readily admits in previous conference calls that the COVID-19 pandemic has slowed sales. Despite this, eValuator sales have grown 56% in the past year. Hospitals are being slow to consider changes or purchases while they prioritize pandemic efforts. It is not hard to understand that they have bigger issues to deal with than adopting new software packages. So, it may take some time for the company to ramp up revenue growth.
At $1.35 per share, the market cap of the company is roughly $68.7 million. As of June 30, 2021, they have $16.7 million in cash and $0 in debt. With Avelead now part of the company, annual sales should be closer to $20 million, without growth. With this much growth potential and stellar balance sheet, I believe the stock is considerably undervalued.
The stock price has recently declined ~ 23% from a share price of $1.75 in mid November to $1.35/share on December 2. There is no company-specific news that is driving this decline, so we have to assume the decline is market driven. Although large cap indices are only down 4% in this time period, the small cap index (Russell 2000) is down over 13%. Microcaps like Streamline Health are down even further because they are considered more risky. Also, Streamline may have traded down due to the fear that the Omicron variant of the COVID-19 virus will cause further obstacles for Streamline's sales team.
Admittedly, Streamline does not look significantly undervalued compared to CareCloud (MTBC) and R1 RCM (RCM). However, Streamline's core products are a bit different and could experience significantly more growth. Also, CareCloud has roughly $61 Million in preferred shares, yielding just over 9% and they have really only been able to grow inorganically so far. CareCloud's capital structure will need some costly work.
Name | Enterprise Value | EV/Sales |
Streamline | $53.2 Million | 2.66 |
CareCloud | $111.4 Million | 0.83 |
R1 RCM Inc. | $7.4 Billion | 5.25 |
R1 RCM is a much larger company but has still grown sales at 61% for the last 5 years. However, the company is maturing and last year's sales growth was roughly 12%. Although down almost 30% from it's high, RCM stock has still grown roughly 7x in the last 5 years. And 5 years ago, they were trading at close to an $850 million market cap. I think this type of growth and valuation is something attainable for Streamline Health Solutions.
The company has a very clean balance sheet and capital stack. As you can see in the table below, Streamline will have roughly $13M in cash, $10M in debt, and 53M shares (adjusted after Avelead acquisition).
source: Streamline Health Solution's Investor Presentation
In conclusion, I believe that Streamline Health Solutions is now able to finally grow. With experienced management at the helm, new focus on pre-billing healthcare software, and the recent acquisition of Avelead, the company has cleared the hurdles they experienced in the past. The risks include increased competition, management unable to execute, etc. With this company being a micro-cap, there is less liquidity and potentially significantly more volatility than larger caps, of course.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of STRM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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