Orion Health optimistic it's on the road to recovery, investors less so

The healthcare software company announced operating revenue of $170 million.Photo: Getty Images

Fallen sharemarket darling Orion Health Group says $40 million of cost-cutting between 2017 and 2019, plus a strong order book, might see the software developer sneak into profitability this financial year. If not, it’s likely to be back in the black in 2020, according to chief financial officer Mark Tisdel.

But the sharemarket wasn’t impressed with the news, knocking the stock down 2.9 percent, after a brief upwards move.

The almost 25-year-old healthcare software company announced operating revenue of $170 million in the year ended March 31, down from $199 million in 2017. And it clocked an operating loss of $40 million, even more than the $33 million loss the previous year.

Orion Health has had a chequered career, starting as an innovative start-up founded by Ian McCrae back in 1994, progressing to strong international sales and a sharemarket listing in 2014. Trouble is, it has seemed to lose its way ever since.

The company still has an innovative range of IT products used by health providers to get systems talking to each other - whether it be patient records, hospital data or drug information. It still sells 90 percent of its products overseas.

But financial performance has been woeful, the share price has tanked from more than $6 in 2014 to 67 cents today, and worries about cash flow in 2017 saw auditors PwC draw attention to a “material uncertainty that may cast significant doubt about the group’s ability to continue as a going concern”.

Still, Tisdel is optimistic. A year into the CFO job, he said the company had trimmed $10 million of costs last year and was earmarking another $30 million this year, including cutting more than 170 jobs from the organisation, or 16 percent of the workforce.

While severance and other payments would increase expenses in the June quarter, savings from staff cuts should start to emerge from June. The company now has around 880 staff.

Another $1 million or so in savings would come from shrinking office space, there would be more reductions in research and development spending, and expense savings from redesigning the operating model and reorganising the company into three business units - Rhapsody, Population Health and Hospitals.

Tisdel said the operating revenue of $170 million for the 12 months to March 2018 was at the bottom end of its most recent forecasts, but below the $175 million-$190 million guidance earlier in the year.

He said the company had signed a major deal just after year end. If that had happened before April, as originally expected, Orion would have met its $175 million projection.

Although the $40.4 million operating loss was worse than the year before, Tisdel says the second half loss of $15.4 million was the smallest in four years, and he’s confident the company will be back in the black either this year or next.

Orion doesn’t break out its result by quarters, but Tisdel said it had “moved towards profitability in the second half of the second half of last year” and that it would be in a stronger position next year.

“With a reduction in expenses of $30 million, that will put us in a position where we can comfortably say there will be a small loss to break even this year, inclusive of severance payments.”

The goal was to definitely be profitable in 2020 and “I can see that happening at this juncture”, Tisdel said. Revenue was likely to be “flat to slightly up year on year”.

There has been speculation in the market that Orion is close to announcing a “trade sale” - when a company is bought by another company in the same industry - with the National Business Review suggesting the potential buyer could be a French company.

Tisdel didn’t want to comment on the rumours, although the company gave BusinessDesk an official statement.

“The group has continued to make solid progress executing on options that have come out of the strategic review which began last year. Work on due diligence and structure is now substantially complete and documentation is well advanced. However, until any final agreement has been reached, there is no certainty that any transaction will result, or the terms of any such transactions that might transpire.”

Ian McCrae still owns just under 50 percent of Orion Health. He remains overall chief executive and has taken on the role of CEO of Orion’s Population Health division under the new three-unit structure.

Interestingly, Tisdel has taken a higher-profile role at the company’s last two financial announcements than McCrae, including answering most analysts’ questions and fronting media interviews.

Although McCrae has said publicly he won’t remain the CEO long-term, he indicated last year he intends to lead the company back to profitability.

Another high-profile NZ tech company founder, Rod Drury from Xero, stepped down as CEO on April 1, saying he didn’t have the skill set to build a multinational business over the next five years. Drury remains with Xero, focusing on innovation and strategy.

If Orion’s 2019 financial guidance of “flat to slightly up” revenue and a “slight loss to break even” for profit seems muted, that may be a deliberate choice that under-promising and over-delivering would be a better than the reverse for investors.

One of the reason’s Orion’s share price has been knocked in the past has been the fact it has seemed unable to meet its revenue and profit projections.

This time, however, Tisdel said he was confident the company had its forecasts right.

“We are getting better at executing deals, at seeing what’s coming and increasing visibility. We need to know what deals we need to close and by when in order to meet our targets. We need these basic disciplines in the pipeline.”

Tisdel says moving from the traditional one-off licence model, when a customer pays for the software at the beginning of the deal, to a recurring model where they pay an annual subscription meant much more certainty around future revenues. At present, 50 percent of operating revenue is recurring, and Tisdel sees that gradually increasing.

Another issue for Orion has been a perceived cashflow problem.

Tisdel said he was confident in the company’s cash position. “We have cash on hand, record high accounts receivable, and backlog of deals that have been contracted but not invoiced yet.”

The company has renegotiated its ASB Bank facility and extended it through to the end of May 2019. Although the facility is less than the company had before - $20 million as opposed to $30 million - and it has dropped its $10 million standby facility, Tisdel said the company “came to the conclusion that $20 million was plenty for fiscal 2019.”