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Why the Orion Health Group Ltd share price was slammed today

The Orion Health Group Ltd (ASX: OHE) share price has been slammed more than 7% today after the group released a trading update this morning.

While the ASX-listed shares of Orion Health are extremely illiquid (only around $3,000 worth of shares had changed hands by 11:45am AEST), the group’s New Zealand-listed shares had also fallen around 11% so far this session.

Orion Health is an eHealth software company whose solutions are used by clinicians around the world, helping to facilitate care for tens of millions of patients. For example, its products enable smoother patient flow within the hospital environment, helps hospitals reduce unnecessary admissions and manage at-risk populations, amongst other benefits.

Unfortunately, the company disappointed the market this morning when it announced that its growth had stalled. On a positive note, Orion stated that it remains committed to reaching profitability during the 2018 financial year (FY18) while it expects to deliver a full-year net loss of between $32 million and $38 million this year – an improvement of roughly $20 million from FY16 (all reported figures are in $NZ).

However, it also said that its operating revenue would be lower this year than it was last year. It said:

“A number of contracts that were expected to close before the end of FY2017 did not do so but remain in progress. Forecast FY2017 Operating Revenue is now between $194 million and $200 million. Although FY2017 revenue is now forecast to be a decrease on FY2016 in GAAP (generally accepted accounting principles) terms, we still expect to see year on year revenue growth in constant currency terms, albeit modest.”

A Big Tick for Investors

I was impressed by how quick management was to accept full responsibility for the poor update, without making excuses. It acknowledged it has not executed on the sales pipeline as efficiently as expected and said that contracting periods have extended now that contract values are moving into higher dollar brackets. It has thus identified the need for improved sales processes and forecasting as core areas of focus.

It also said that the lower revenue is not due to the loss of customers and that any delayed contracts, if finalised, will instead contribute to 2018’s result. It will also continue to focus on improving margins and spending the necessary amount on research and development to ensure its products continue to advance.

Finally, Orion’s CEO Ian McCrae said:

“As the majority shareholder I am directly aligned with all shareholders and this is not the outturn we had targeted. We have been taking, and continue to take, direct measures to right size our costs with our revenue growth and despite the slippage, we remain on track with our profitability objective. The Board and I remain focused on long term shareholder value and will evaluate the merits of any partnerships or minority investments to help Orion Health achieve its potential.”

Foolish Takeaway

Today’s update was clearly disappointing for investors, and there are reasons to be concerned about the group’s long-term growth objectives. However, the high level of transparency from management, not to mention the CEO’s alignment with long-term shareholders, is reason to be enthused. Although a level of caution is necessary, it could be worth investors taking a closer look at Orion’s shares.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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