Wednesday, December 26, 2012

Streamline Health ( Nasdaq - STRM ) -- Healthcare Information Systems

Streamline Health (STRM $5.35) is a leading provider of software products used by hospitals to enhance revenue and improve productivity.  New management took the helm in 2011 and converted most of Streamline's customer base to a software as a service ("SAAS") model where sales are recognized on a recurring monthly basis.  The new team additionally has beefed up marketing, improved product quality, and completed two high potential acquisitions.  Streamline's legacy content management line enables hospitals to integrate so-called unstructured data into standard computer records.  Those are mainly paper forms that are scanned in, allowing billing and medical experts to view the raw material when looking at patient records.  The company also provides workflow management systems that automate the process of combining different data sources into a single record.  Late in 2011 Streamline acquired a business analytics company that provided the expertise to examine those records automatically, to identify problems before they get out of hand.  In the October quarter of 2012 the company made another acquisition, this time of an automated coding provider.  The U.S. health insurance system is slated to implement a far more detailed billing scheme in 2014 ("ICD-10"), breaking down most medical procedures into more individual components than presently.  The latest deal positions Streamline to capitalize on that burgeoning opportunity.

Growth is accelerating.  The switch to a recurring revenue pricing model masked the upturn that's been building over the last two years.  Streamline formerly booked revenue up front.  Now sales are recognized as earned on a monthly basis.  Costs continue to be reported as incurred, though.  So profits were squeezed during the transition process.  Revenues and expenses now are back in balance.  Costs are relatively, fixed, moreover.  So while product development and marketing expenses still are advancing quickly, margins are starting to widen on improving volume.

Cross selling is enhancing growth further.  Streamline is integrating its three product lines on a single platform to enhance interoperability.  That's helping the company sell more products to its existing customer base.  The broader line additionally is leading to increased demand from new customers.  A large part of the potential market remains untapped.  Few hospitals have automated coding systems, and only a small percentage have business analytics software.  Even the content management side has significant potential since many hospitals are running outdated systems.

The Affordable Health Care Act could expand the total market.  As more people are covered by health insurance the volume of billing and related procedures is likely to rise.  The new coding rules, intended to save money, promise additional expansion.  Much of the health care industry is expected to come under greater regulation as a result of the new law.  Those rules could entail price controls and similar measures.  Hospital information systems appear likely to escape that pressure since better software is expected to improve overall productivity.  Streamline's margins are likely to reach their natural level in spite of the new regulations.

We estimate earnings (fully taxed) will rise 67% in fiscal 2012 (ends January 2013) to $.10 a share.  Next year a 50% improvement appears attainable.  Sales are headed towards $24 million this year (+40%).  Next year $35 million (+46%) looks achievable.  Fast gains are likely beyond as the ICD-10 coding rules take effect.  Sales of that line promise to lift Streamline's other products, as well, as customers try to reduce the number of suppliers they use.  Margins are poised to continue rising on the higher sales volume.  In 2-3 years sales could attain $50-$75 million to provide income (fully taxed) of $.30-$.50 a share.  Applying a P/E multiple of 25x to the midpoint of the range suggests a target price of $10 a share, potential appreciation of 85% from the current quote.

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