How Orion Health lost so much shareholder value
Orion Health Group, whose shares hit a record low this week after the company cut guidance for the third time, can reach profitability with further cost-cutting and may not need to raise more capital, says chief financial officer Mark Tisdel.
The healthcare software developer's shares reached an all-time low of 57 cents this week after it said delays in concluding deals meant sales in the year ended March 31 missed its forecast and pushed out the timing of reaching breakeven. It aims to slash annual costs by between $25 million and $30 million. Orion stock has shed about 90 percent of its value since listing in late 2014 when the shares were sold at $5.70 apiece in an initial public offering and first traded at $6.50. The stock gained 5.1 percent to 62 cents today.
Tisdel, who joined Orion last June, says investors lost confidence in the company because of a pattern of failing to meet its own projections.
“In hindsight, we could have been much more conservative about financial guidance. We erred on the side of aggressive, optimistic forecasts and largely we haven’t met our numbers, which is why we lost the confidence of the investment community."
Investors are also concerned about the company's cash burn. Stephen Ridgewell, a senior research analyst at Craigs Investment Partners, says cash reserves may have shrunk to as little as $2 million from about $16 million in September 2017, meaning it may need more capital.
Tisdel says the company still has wiggle room, including a $30 million working capital facility from ASB Bank, and an additional $10 million ASB standby facility but added that there has been no lack of interest from potential investors, and "we expect to give further updates in the coming months".
In its notes to the accounts for the six months ended Sept. 30, 2017, Orion's auditors PwC expressed their concern about the company's financial position, drawing attention to “a material uncertainty that may cast significant doubt about the group’s ability to continue as a going concern”.
Tisdel says although PwC is right to be cautious about Orion’s financial outlook, the company is confident in its revenue projections and that there will be enough money coming in.
"PwC was saying ‘You have $16.1 million in on the balance sheet, average monthly spend is $17 million. That means you have less than a month’s worth of cash, so if you can't hit sales, it’s a problem. That brings uncertainty," he said. "But we came within 1-3 percent of the target we set. This is the lowest loss in the last eight quarters and we are going to demonstrate to the market we can hit those numbers."
Deep cost cuts will involve a "substantial" restructure of global operations, Orion said this week. It is looking to pull back from expansion in non-core regions. At the moment, Orion has 25 offices across 15 countries. Some of those offices may close, Tisdel says.
The company has been reviewing its business since May last year as it seeks to return to profitability having foregone short-term earnings in the hunt for global expansion since going public in 2014. That review was initially to source new capital, including minority investments in the company, but was later broadened to a review of Orion's long-term structure. It has already cut $10 million from annual costs by trimming its workforce to 1,050 from 1,200.
Craigs analyst Ridgewell says the biggest cost cuts may be made at Orion's unprofitable Population Health and Hospital businesses, while the highly-profitable Rhapsody division containing Orion’s flagship data integration product may be largely spared.
But it isn’t going to be easy, he says.
"While deep cost cuts may be sufficient to return Orion to breakeven at its current revenue run rate, we are wary about the potential for a negative ‘feedback loop’ ie a fall in staff morale, further key staff departures and a fall in delivery capability. This will make it harder for Orion to keep existing customers happy and/or win new customers, keeping in mind only 47 percent of revenue is recurring."
Ridgewell says the company has been slow to restructure but he agrees with Tisdel that any comparisons with failed crime-fighting software company Wynyard Group, which listed around the same time as Orion, and whose share price trajectory looked remarkably similar to Orion's before it went bust in late 2016, are unfair.
"Orion has some very successful products," Ridgewell says. "They have problems and need to manage their way out of those, but their path is for long-term survival."
Tisdel joined Orion from California-based software company Model N, which also struggled after listing in 2013 but then managed to turn itself around. He says that gives him optimism about Orion's long-term outlook.
Orion has some world-leading products in a growing health tech market but suffered the speed wobbles of fast-growing tech companies - for example, largely funding their business through cash flow in the initial stages, then listing and finding themselves with a big pool of money to spend. he said. The risk is that companies lose focus on their core business.
"I’ve seen it before. These companies hit a revenue wall and they believe the market they are in isn't big enough," he says. "The tendency is to try to expand their product or geographic range to increase sales, without looking at whether [the expanded offering] matches the ‘secret sauce’ of what they do really well."
They also have a tendency to underestimate the investment necessary in new markets, "and we have underestimated the amount of cash needed in some markets," he said. "We are going through a strategic review to decide where we are going to continue to grow and invest and where we will just maintain [our position]."
And what about the future of founder Ian McCrae and of chair Andrew Ferrier, the former Fonterra CEO? Tisdel says the board and senior management team could do with a bit more diversity - the board is 100 percent white male, and there is only one woman in the nine-person executive leadership. But he isn’t talking change at the top.
“I’m not privy to any conversations to indicate [any change in McCrae’s leadership]. Ian knows the business extremely well, he’s very passionate about the business, and many people who work for this company are there because of the passion Ian has demonstrated.”
Last year McCrae dismissed calls for him to step down as chief executive, saying what was needed was a return to the business principles that saw the Orion succeed as a private company.
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