Today, I’m putting out a call-out to my friends, my readers and all other analysts. I’m on the look out for small software as a service companies in the healthcare industry, and I need your help.
You see, my biggest shareholding is Pro Medicus (ASX: PME). It is a founder led company that has increasingly grown its annualised recurring revenues (ARR) by selling its top notch software products to clients in the USA.
Since Pro Medicus turned out to be a great investment, I like to monitor other software companies operating in the healthcare space, with a particular eye on when a company may be reaching an inflection point, in terms of annual recurring revenue.
One small company I watch closely (and indeed own shares in) is Volpara Health Technologies Limited (ASX: VHT), a company selling software designed to measure breast density (which is a key risk factor in breast cancer). I was pleased to see it report strong annualised recurring revenue, today. You can see what I mean in the image below, taken from their investor presentation. Like Pro Medicus, it is growing by selling to clients in the USA.
So what’s the catch?
Well, with Volpara, it is growing revenue off a very low base, it is still cashflow negative, and it is still making a loss. In fact, the company lost $9.5 million (New Zealand dollars) in the year to March 2017, and it only had about $12 million in the bank, at the end of the year. That means there is still lots of risk investing in Volpara.
However, the company has several features I look for.
- It is a software company with growing recurring revenues.
- The founders and the CEO have a significant shareholding.
- Its clients are healthcare operators. I like healthcare because it is very important to everyone (unlike pizza).
Overall, I would be interested to know if you know any other software companies in the healthcare space that are growing recurring revenues very quickly.
Volpara is only appropriate for experienced small-cap investors who know how to manage risk in their portfolio. The company has a lot of potential to improve the diagnosis of breast cancer, but the fact is it is very early stage at the moment. Personally, I have both bought and sold shares in the company in the past (and may buy more or sell shares in the future). However, I recently bought shares at 32 cents each, which I think is a very satisfactory price, given the potential upside. Also, to date, I am reasonably impressed with how management has executed the strategy they previously outlined.
Over the next 12 months, the key for Volpara is to grow annual recurring revenue without growing expenses, thus reducing the loss (very quickly).
That will be a test of discipline (and the team that is currently in place)!
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Claude Walker is a Motley Fool investment advisor. He own shares in Volpara Health Technologies and Pro Medicus. You can follow Claude on Twitter @claudedwalker. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).