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Take a pass on Think Research, says PI Financial

After releasing its latest quarterly numbers, PI Financial analyst Kris Thompson is having second thoughts about Canadian digital healthcare company Think Research (Think Research Stock Quote, Charts, News, Analysts, Financials TSXV:THNK). In an update to clients on Tuesday, Thompson lowered his rating from “Buy” to “Neutral,” saying the company’s lack of headway on earnings is a problem.

Toronto-based Think Research, which offers software solutions to support the clinical decision-making process, to standardize care and to improve patient outcomes, released its second quarter 2022 financials on Monday, coming in with revenue of $18.4 million, representing an 80 per cent year-over-year increase. 

“We are very pleased to report significant revenue increases for both Q2 and the first half of 2022 relative to the same periods in 2021, despite experiencing some revenue delays related to deferrals within our clinical research program associated with delays in our sponsoring drug program,” said CEO Sachin Aggarwal in a press release. 

“We expect these studies to come back on track during the second half of the year. Further, Think is increasingly winning larger deals and we are confident that our current trajectory is aligned with the Company’s near and longer-term growth and profitability expectations,” he said.

WISH"

Think’s revenue was split between its Software and Data Solutions segment at $6.9 million compared to $8.5 million in the previous quarter, Clinical Research Operations at $7.3 million compared to $8.0 million for Q1 2022 and Clinical Services revenue at $4.3 million compared to $3.7 million for the previous quarter. The company said the drop in Software and Data was due to the fact that the Q1 had elevated one-time services revenue associated with new programs, while the decrease in Clinical Research revenue was primarily due to the aforementioned delays in study timelines, with management promising a corresponding lift in that segment over the second half of the year.

Think’s Q2 adjusted EBITDA loss was $1.6 million compared to a loss of $1.3 million a year ago and a loss of $0.3 million for the previous quarter. Earnings per share was a loss of $0.13. 

On the path ahead, Think, which licenses its software to over 13,000 facilities worldwide, said it plans to expand its user base by promoting adoption and usage and creating sticky revenue sources, by increasing per user revenue and by monetizing licensed users directly. The company is now aiming for full 2022 revenue of over $80 million and an annualized run-rate at Q4 2022 of $84-$90 million compared to the previous guidance of $90-$100 million, while Q4 2022 EBITDA is now being pegged at a run-rate of $6-$9 million compared to $7-$10 million previously.

“Think plans to grow revenue with improving margins by becoming an increasingly essential data solutions provider for healthcare practitioners everywhere with the goal of delivering the best outcomes for patients,” the company wrote in the press release.

With a market cap around $39 million, Think’s share price has trailed off considerably since going public at the end of 2020. THNK has lost about 70 per cent of its value over the past 12 months and is down about 57 per cent year-to-date.

But the way forward is getting murkier, according to Thompson, who has paired his “Neutral” rating with a new target of $1.00 (previously $2.00), which at the time of publication represented a projected one-year return of 51.5 per cent.

Thompson called the company’s Q2 miss on the topline a setback, where the $18.4 million was below the analyst consensus call at $21.2 million and Thompson’s own forecast of the same $21.2 million. EBITDA at negative $1.6 million was also a miss compared to the Street’s call for $0.0 million and PI Financial’s positive $0.4 million. 

Thompson said the Q2 gross margin of 51.1 per cent was up sequentially from 45.1 per cent and better than expected (Thompson was calling for 46.8 per cent), but the analyst chalked the beat up to an accounting revision. Meanwhile, Thompson said if revenue doesn’t accelerate faster than the current pace, Think will need to make more reductions in operational expenditure in order to achieve attractive EBITDA margins.

Speaking on management’s updated guidance, Thompson said,”The revenue outlook is much lower than we expected and as such we are not confident that EBITDA guidance can be achieved.”

Overall, the impact of the quarter results is a negative, according to Thompson. He has lowered his estimates on a lack of revenue visibility and uncertainty on EBITDA potential, now calling for 2022 revenue of $79.0 million (previously $90.3 million) and EBITDA of negative $3.2 million (previously positive $3.7 million). For 2023, Thompson is forecasting $88.3 million in revenue (previously $106.9 million) and $0.7 in EBITDA (previously $11.7 million).

“We need to see evidence of EBITDA traction before becoming more constructive on the stock,” he said.

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