Volpara (ASX: VHT) is a New Zealand based software company focussed on making it easier for women to detect breast cancer earlier, and thus avoid the most serious impacts of cancer. It is remarkable for the fact that it has grown its annualised recurring revenue (ARR) from virtually zero in 2016, to NZ$31.8m at the end of March 2022.
What is Volpara’s ARR multiple?
At the current price of $0.88 (Australian), Volpara has a market capitalisation of about $220m AUD or about NZ$242m. That means it is trading on about 7.6x ARR. Over the last year, ARR grew about 19.5% organically.
However, the catch is that Volpara has been very bad at cost control, and this probably explains why it trades on a relatively low multiple of ARR. To wit, even in this quarter, the best in many years, it has burnt through about NZ$3m in cash. It has about NZ$18.1m in the bank, so at current rates of cash burn, it will need to raise capital in one year (to be prudent) and it will completely run out of money in 18 months.
The good news in today’s report is that cash burn from investing and operating cash flows (which consistently excludes lease payments of about $150k per quarter) is the lowest it has been in years. That’s a good thing.
However, on the conference call, the CFO said that “costs are predictable, but what is uncertain is cash inflow”. Essentially, the timing of customer payments can cause fluctuations in cash burn. Specifically, he said “our cash burn is going to be lumpy over a full year.”
The CEO said that over the longer time frame (that is, over the course of years, rather than individual quarters), “the general gist is heading towards profitability while still getting good growth.”
I believe that Volpara is run by an honest and competent management team, and I trust that the company will indeed head towards profitability, as I think management are beginning to realise how important this is for the share price.
However, questions remain about how quickly the company will do so. As you can see from the chart above, Q4 FY 2022 was scarcely any better than Q4 FY 2021. Additionally, the CFO said on the call that Q1 is the quarter that they have the most expenses, so I wouldn’t be surprised if cash burn does increase next quarter.
Finally, the company also has fairly high expenses in Q2, including some fairly hefty insurance premiums. Therefore, even though this quarter was an improvement on last quarter, overall I don’t take much comfort from these results.
Ultimately, I think that these results are consistent with the view that Volpara will need to raise capital again. I think that the nature of the business and its leaders means they are hesitant to let staff go, so cash burn will only decrease slowly as revenue rises.
Personally, I have already reduced my Volpara holding to a minuscule size. I would like to own shares so that I can participate in any capital raising that the company may do in the future. Ultimately my base case for Volpara is that the share price continues to languish as a result of the fact that the company spends too much money on salaries relative to revenue.
I think that the focus of the company has been to build a strong business, and that has meant poor cost control when it comes to salaries. This puts the business in a bit of a pickle because obvious management as a team have no intention to pay themselves less.
The only way out is to freeze pay rises and allow revenue to catch up with expenses. It remains to be seen whether that can be done but if it does happen, and the company reaches cash flow breakeven, then I expect it would trade at more than 7.6x ARR. Until the company can sustainably reduce cash burn, I will continue to watch with interest, but am unlikely to build a meaningful position.
Please remember that these are personal reflections about stocks by an author. I own an insignificant amount of shares in Volpara. This article should not form the basis of an investment decision. It is an investment diary valuable only for the cognitive process it demonstrates. We do not provide financial advice, and any commentary is general in nature. Please read our disclaimer.
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