Is Craneware's Acquisition Truly Game Changing?

7th Apr '22 by Jack Brumby

8 comments 4266 reads

A lot has been made of the apparent dearth of world class tech stocks in the UK markets. I would argue one can be found located in Edinburgh, and its shares are down nearly 50% from recent all time highs, while the company itself is at an intriguing crossroads.

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Craneware (LON:CRW) was founded in May 1999 by Keith Neilson (who remains group CEO) and Gordon Craig (who retains a 6.6% stake in the company). Chairman Will Whitehorn gives a glimpse of the group’s mission statement in the 2021 Annual Report:

I am proud of the impact Craneware has made in helping our US healthcare customers improve operational efficiency and margins so that they can continue to invest in providing quality care for their communities. Our contribution and continued success are made possible through the efforts of our dedicated and talented employees who work to push Craneware closer towards the long-term ambition of being the pre-eminent company in improving US healthcare.

The group wants to impact healthcare profoundly by delivering data-led insights. Its first software product provided proprietary revenue cycle management and it retains a strong position here, but has also branched out into other areas of this large market.

Our combined suite of applications and industry-leading team of experts help our customers contextualize operational, financial, and clinical data, providing insights that clearly demonstrate what great looks like. These value cycle insights deliver revenue integrity and 340B compliance, as well as margin and operational intelligence - something no other single partner can provide.

The group has steadily grown revenue over the past ten years from $41.1m in FY12 to $75.6m in FY21. This is a profitable, cash generative software-as-a-service (SaaS) company, with multi-year recurring revenue contracts that provide management with the visibility to confidently invest in growth projects and new product development.

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What the above graph doesn’t reflect, however, is the material acquisition of Sentry Data Systems made in FY21. This is a transformational development, significantly increasing the scale of the enterprise and expanding its longer term growth potential. It means now is a particularly interesting time to revisit the investment opportunity.

Craneware generated more revenue in the first half of FY22 ($80.2m) than it did in the entirety of FY21, and three-year revenue visibility has increased from c$200m to some $471m. Switching over to…

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Albertos

7th Apr '22

I'll play the devil's advocate here to ( hopefully) provoke comment because £CRW has always under-impressed me / made me wonder what I was missing.

First heard rumblings about it in 2018 - new to the community - looking at it then it looked shockingly expensive on a PER of @60.

However, it did have good quality metrics:-

RoC 36%

RoE 29%

OM 28%

Roll forward to now you have:-

RoC 2%

RoE 5%

OM 9%

Sneaking suspicion they did their recent major purchase to hide the failure of their current business model.

Mark Penney

8th Apr '22

Excellent points Edward.

I believe the true measure of this company going forward will be Management ability to execute the integration and drive profits-largely speaking it's a wait and see for me.

Great summary Jack

Silver Moon

Avon Protection (LON:AVON) has fared worse. Compare the history of each over the last 3 years. I hold in both companies, it's just the way the muck flops.

BnB

Sorry Jack, I think you're drinking the KoolAid gushing forth from the company's Annual Reports. Do take this a little tongue in cheek, but I nearly choked on my tea to hear you describe Craneware as world-class. In reality it's a teensy, tiny minnow operating in the world's largest ocean. The US healthcare system represents 18% of US GDP! These seas are teeming with companies that help US health system participants with data insights, from other minnows like Health Catalyst - still twice the size of Craneware - through entrenched sharks like Cerner, a hundred times the size and now owned by mighty Oracle, to big whales like United Health, a thousand times larger, and as much a data company as it is an insurer nowadays.

I can relate more to your title which refers to Craneware's potential to compound, but its revenue retention rate below 100% suggests that it's relevance to customers is on the wane. Strongly-growing SAAS software companies show revenue expansion rates of 125% or more. Whether prompted by a need to hide Craneware's growing irrelevance, or genuinely motivated by an opportunity that, bafflingly, the owners of Sentry Data Systems don't want to stay around for, I'd be surprised if healthcare participants' perception of Craneware changes much at all with the acquisition. It's now a hugely competitive field.

In your defence, however, I consider the valuation about fair for a decent quality, high single digits revenue growth software company. So it could be a steady compounder. I just don't see it becoming more than that.

aflash

Liontrust and Buffetology funds have large positions.

I hold both so it was a welcome explanatory article.

Keith Ashworth-Lord told us in an interview about a 'lightbulb moment', when experiencing first-hand U.S. Health services. One of his family was being treated via Craneware products and services and he was impressed.

The metrics may not appeal to P.I.s with limited capital but fund-managers and Stockopedia journalists/analysts can see the potential.

acdoug

9th Apr '22

i've watched Craneware (LON:CRW) from a distance since 2017 but was never convinced about its long-term viability in the US market. I've seen it go up and down, and currently i have to agree with BnB and Mr Canham. Jack's note is very good, but i will take his cautions to heart until i have enough cash to take a punt on it

Chasbas

10th Apr '22

I'm grateful for BnB pointing out Cerner, recently taken over by Oracle. Clearly a large and quality business but apparently has not perform as well as hoped, hence the takeover. Decent stockmarket performer though.
Health Catalyst is probably more comparable to Craneware with 2021 revenue of $242m but loss making under GAAP. Adjusted Gross profit $128m but adjusted EBITDA los of $11m. Terrible stockmarket performance!!
Frankly I'm more confused after Jack's write up and any comparisons with Cerner and Health Catalyst. I'm just not clear whether Craneware is 1. different to its US competitors with a superior business model and 2. big enough. Does current year revenue of say $170m provide enough scale if Health Catalyst is struggling?
Long term holders have lost money over last 3 years and I suspect we will have to wait at least another year or two before we know whether Craneware is a winner. I fear that if the share price hits 2500p again I might be tempted to move on.

Is Craneware's acquisition truly game changing?

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Jack Brumby

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