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CloudMD has target slashed by Echelon Capital

The digital healthcare technology sector has been hit hard over the past year and a half, but investors can expect better times ahead for CloudMD Software & Services (CloudMD Stock Quotes, Charts, News, Analysts, Financials TSXV:DOC), according to Echelon Capital Markets analyst Rob Goff, who reviewed the company’s latest quarterly results in an update to clients on Tuesday.

Vancouver-based CloudMD, which provides SaaS-based health tech solutions for medical clinics across North America, announced on Monday its second quarter 2022 financials, showing revenue up 157 per cent year-over-year to $40.3 million. The Q2 adjusted EBITDA loss was $3.2 million compared to a loss of $0.6 million a year earlier, while the company’s net loss of $44.2 million for the quarter (compared to a loss of $6.6 million a year earlier) was attributed in part to a $33.0 million non-cash impairment charge.

“Our Q2 results reflect the strength of our core Enterprise Health Solutions (EHS) business in the face of headwinds and distractions from our non-core business and overhang from previously made acquisitions. There is an incredible opportunity for our EHS division as industry trends converge with our differentiated product offering. We are taking the necessary steps to enable the performance of our core business to shine,” said Karen Adams, CEO of CloudMD, in a press release.

CloudMD President, Adams took the company reins as Interim CEO in April after Founder and then-CEO Dr. Essam Hamza stepped down. Earlier this month, the Board of Directors unanimously appointed Adams as CEO, along with putting in John Plunkett as CFO to replace Interim CFO Sean Carr. 

CloudMD’s second quarter featured the launch of its new integrated health service offering, Kii, Personalized & Connected Care, now the company’s flagship offering, while earlier this month CloudMD delivered a business update where it spoke of rising customer momentum including several new multi-year contracts. The company also noted a Ontario Government contract win by MindBeacon, CloudMD’s provider of Therapist Assisted Internet Cognitive Behaviour (TAiCBT), a two-year contract expected to grow over time to help with mental health supports to Ontario citizens.

Plunkett said in his quarterly comments that the company is focused on reaching profitability and positive operating cash flow, which hit a negative free cash flow of $13.7 million for the second quarter.

“We are taking steps across the organization to align costs with each division’s revenue and to divest non-core assets which will provide some near-term capital. The team has made progress in cleaning up our cost structure, balance sheet, and outstanding issues from past transactions. We will continue to focus on further optimization for the remainder of the year,” Plunkett wrote.

Commenting on the Q2 numbers, Goff said they were roughly in-line with his forecast. Revenue of $40.3 million compared to Goff’s estimate at $40.4 million and the consensus at $41.6 million, while adjusted EBITDA of negative $3.2 million was larger than Goff’s call at negative $2.0 million and the Street’s negative $1.4 million. Gross profit at $12.5 million was also a bit under Goff’s estimate at $13.6 million and the consensus $14.1 million.

Looking ahead, Goff has reset his forecast for CloudMD, calling for $40.6 million in revenue for the third quarter 2022 compared to his previous forecast at $48.0 million and for Q4 revenue of $44.3 million compared to $51.7 million previously. For the year, Goff is expecting $166.6 million in revenue compared to $181.5 million previously and for adjusted EBITDA of negative $9.6 million compared with negative $3.4 million previously.

Overall, Goff said the cloudy picture on the company looks to be clearing, even as positive EBITDA has been pushed out to next year.

“While we remain confident in the underlying value of CloudMD’s EHS and mental health capabilities, we are admittedly more conservative on the Company’s near-term outlook and thus are level-setting our expectations,” Goff wrote.

“With a flurry of negative headwinds surrounding [2021 acquisition] VisionPros, leadership departures and a weakened post-COVID revenue profile now in the rearview mirror, we look for the Company’s recently confirmed leaders in CEO Karen Adams and CFO John Plunkett, along with an expected new Board Chair soon (we look for confirmation with CloudMD’s annual general meeting later this year) to establish a renewed focus around execution and profitability,” he said.

On comps, Goff said DOC is currently trading at a 2023 EV/Revenue multiple of 0.5x and an EV/Gross Profit of 1.8x compared to its Canadian digital health peers at 1.6x and 2.5x, respectively.

With his report, Goff reiterated a “Speculative Buy” rating on DOC while dropping his target price from $1.80 per share to $1.00, which at the time of publication represented a projected one-year return of 150.0 per cent.

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