Mach7 Technologies (ASX: M7T) Share Price Rises On Largest Ever Contract Win

Mach7 Technologies (ASX: M7T) is a radiology software company selling a radiology viewer, archiving, and workflow software. I have previously discussed why I find the company interesting, and already own a very small shareholding. Earlier this week, the share price traded up around 20% to $0.685 because the company announced a license sale to Akumin Inc (TSE: AKU) worth a total Contract Value of ~$16.7 million.

Mach7 said “Payments will be staged annually across the life of the contract on the 30 December anniversary date with revenue of $7.5m expected to be recognised in FY23 and annual support fees weighted to the second half of the contract term.” The contract runs for 10 years, so the average revenue across the latter 9 years will be just over $1 million per year, though this will be spread unevenly. I imagine the earlier years might generate substantially less than average revenue, so the biggest significance of this contract might be the year 1 sugar hit.

Akumin generated an EBITDA of around $33m off revenue of slightly less than about $750 million in the trailing twelve months, according to S&P Cap IQ. It’s not profitable at an NPAT level, so it’s probably fair to say that ‘low ongoing cost’ was a reasonably high criteria for them when choosing an imaging software provider. If (and only if) the implementation is a success, this could help Mach7 win further contracts.

The announcement also mentioned that Mach7 “is well progressed in discussions with several large healthcare firms and will update the market where these translate to new contract wins.” That means, with a little bit of luck, FY 2023 could end up being a strong year for the company. Last year Mach7 lost over $6 million on revenue on around $27 million in revenue. You’d hope that the company would make a profit in a strong year, but we can’t count on it.

CFO Transition A Negative

One bit of bad news for Mach7 is that its CFO Steve Parkes has ceased with the company as of January 2023, after only a little more than 2 years. Generally speaking a CFO leaving is a bad sign, but a CFO leaving after only 2 years is also a bit more concerning than if they left after 4 or 5 years. As a result of this, I’d be very cautious of Mach7 shares.

Personally, I own a very small shareholding (being less than 1% of my portfolio). I’d like to continue following the business, as I think it could be very interesting if and when it becomes profitable. However, with the CFO departing and given Mach7’s long history of poor financial performance, I’d be very cautious about the stock until we get better visibility on when it can become sustainably profitable.

In the medium term, I’m keener on this growing profitable under-the-radar ASX small cap stock, even though it probably has less long term potential than Mach7.

Disclosure: The author does own shares in Mach7, and will not trade them for at least 2 days following this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).

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