Information Technology
Healthcare Triangle, Inc. (HCTI-NASDAQ)
Analysts on this report
HCTI: Continued Platform and Managed Services Adoption Should Drive Shares
Summary
We are reiterating our Buy rating on HCTI. We continue to like the risk-reward of shares here, as HCTI continues to scale its proprietary Platform offerings while expanding its Managed Services business.
Key Points
Platform Services. We view continued adoption of HCTI's Platform offerings as a key component of potential share appreciation (multiple expansion) and an improved financial profile (predictable/recurring revenue mix and long-term margin expansion). We believe that HCTI has approximately six Platform customers, up from four at the end of 1Q, and we would expect that total to expand steadily across the next several quarters. We are projecting $4.7M in Platform revenue in 2022 (10% of revenue), growing to $8.0M by 2024 (13% of revenue).
Managed Services. Along with the focus on Platform, we continue to expect HCTI to focus on growth of this recurring revenue stream. We note that YTD Managed Services revenue growth has been negatively impacted by a change in the way HCTI reports partner pass-through revenue, which has had an optically negative impact upon 2022 GAAP revenue with no impact on gross profit.
Cash and cash flow. A recent (July 2022) equity financing provided HCTI with $5.8M in net proceeds. Although HCTI has been opportunistically repurchasing its own shares, we would prefer that management allow cash to build on its balance sheet rather than deploy capital more aggressively toward repurchases, given the challenging macro backdrop. Free cash flow (FCF) was positive in 1Q and 2Q and we expect FCF generation to remain sound across the next several quarters.
Updating target and initiating 2024 estimates. Our target moves to $2.00 from $4.00 (2.3x 2023 revenue) given recent multiple compression in the space (our target multiple goes to 1.5x 2023 revenue) and other model adjustments (projected cash and share count). We are initiating our 2024 revenue estimate of $61.3M (+10%). HCTI recently traded at 0.3x our 2023 revenue estimate.
Risks. HCTI is capital-constrained and has above-average customer concentration risk; its largest customer generated 39% of 2Q revenue. The company’s CEO and CFO also serve as officers of another publicly traded company, SecureKloud Technologies, Inc., which owns 65% of HCTI’s common equity. HCTI has a relatively small float and is thinly traded.
Recent Research
Market Data
| Financials | Value |
|---|---|
| Rating | Buy |
| Price | $0.44 |
| Price Target | $2.00 (prev: $4.00) |
| Average Daily Volume | 62 |
| Market Cap ($M) | $17.3 |
| Enterprise Value ($M) | $16.3 |
| Dividend Yield | 0.0% |
Price Performance - 1 year
Estimates
| 2022E | 2023E | 2024E | ||
|---|---|---|---|---|
| Revenue ($M) GAAP | Q1 |
10.4 |
- |
- |
| Q2 prev: |
11.6 11.7 |
- - |
- - |
|
| Q3 |
12.6 |
- |
- |
|
| Q4 |
14.2 |
- |
- |
|
| FY | 49.5 |
55.9 |
61.3 |
|
| EV/Sales | 0.3x | 0.3x | 0.3x | |
| EBITDA Adjusted | Q1 |
(0.9) |
- |
- |
| Q2 |
(0.6) |
- |
- |
|
| Q3 prev: |
(0.5) (0.3) |
- - |
- - |
|
| Q4 prev: |
(0.2) 0.0 |
- - |
- - |
|
| FY
prev: |
(2.2) (1.8) |
(0.9) 0.0 |
0.4 |
|
Platform Services
The company’s proprietary platform offerings remain in the early stages of commercialization but should help the company transition towards a more predictable, recurring revenue base. These offerings include the following Platform Services:
- CloudEz: enables customers to build a secure, continuously regulatory compliant, self-serve cloud platform that can host a broad variety of critical enterprise applications. The enterprise, multi-cloud, vendor-agnostic platform allows customers to manage their cloud infrastructure across private, hybrid and public cloud infrastructures.
- DataEz: a cloud-native solution that enables organizations to securely, scalably and efficiently support data ingest, processing and analysis. DataEz has an Open API platform which allows it to integrate with leading visualization and reporting solutions. Data that are ingested are tested for quality based upon customized rules. DataEZ has a number of potential predictive benefits and applications, including population health interventions and clinical trial streamlining / data analysis.
- Readabl.AI: readable.AI is a Google Cloud-based platform powered by artificial intelligence and natural language processing to extract information in an automated manner from paper documents (such as faxes and clinical reports) and categorize and route that information.
Figure 1. CloudEz and DataEz Platforms
 |
Source: Company Documents
CloudEz and DataEz both became commercially available in the first quarter of 2019, while readable.AI became available at the end of 2020. Much of the revenue generated to this point has been delivered under a solution delivery model and HCTI has not yet generated meaningful subscription revenue from these products. We would expect this dynamic to change in future quarters.
HCTI had four Platform customers at the end of 1Q, which grew to six at the end of 2Q. We are modeling eight customers by the end of 2022, growing to 15 at the end of 2023 and 20 by the end of 2024. We are modeling annual subscription pricing of a few hundred thousand dollars per customer. We believe the long term operating margin of a subscription technology business can reach 30% at scale.
Exhibit 1. HCTI Income Statement ($M)
 |
Source: Company Documents, EF Hutton Estimates