Volpara (ASX: VHT) share price rises, but Covid-19 impact remains unclear

Volpara Health Technologies Ltd (ASX: VHT), a software-as-a-service company specialising in algorithms that enhance breast cancer screening, released a business update yesterday for FY2020, which ended 31 March 2020 (it has a New Zealand reporting calendar, and all the figures in this article are in NZD unless otherwise noted). Happily, Volpara Health Technologies recorded Annual Recurring Revenue (ARR) of $18m, beating its target for FY2020 of $17.8m. This was a strong increase of 172%, but not all that growth was organic, given a substantial acquisition in the second half of last year.

By market close on Tuesday, Volpara shares had gone up by 6.5 cents to AUD $1.23, an increase of some 5.6 per cent. As to the anticipated financial impacts of the pandemic, the market update simply stated, “[T]he exact quantum remains to be seen.”

As mentioned, the ARR growth comes in part from the $23m acquisition of Seattle-based MRS Systems. Thus, along with the new revenue stream, the acquisition increased costs, principally the increased staff-costs and overheads associated with incorporating the MRS business into Volpara’s operations. Having said that, subscription revenue from the underlying Volpara business has continued to trend upwards.

The real question on our mind is how recurring Volpara’s revenues will really be, given that many of their clients will not be operating at usual volume during the pandemic lock-down. Therefore, one might reasonably query whether Volpara will need to suspend invoicing those clients, lest they damage the long-term relationship. Alternatively, some subscriptions may simply be cancelled or not paid if client businesses run into serious trouble.

However, the CEO Dr Highnam had a more optimistic take, commenting, “We are confident that screening will ramp back up as the world learns how to deal with COVID-19. We will continue to update the market as we learn and understand more.”

The underlying proposition of Volpara’s breast-cancer screening software continues to appear solid. Even if a long-term suppression of consumer demand follows the lifting of Covid-19 restrictions, breast cancer screening will undoubtedly resume normal operations eventually. But when a company already operating at a loss faces potential medium-term suspension of a good portion of its revenue, investors could be forgiven for requesting more substantive reassurance. For example, it would be interesting to know what discussions Volpara is having with its clients, what proportion of the revenue is based on the number of studies performed, and whether clients are entitled to suspend their subscriptions.

Finally, we note that Volpara has a strong cash balance of $31m after raising capital last year. The company did not say how much money they lost in the full year, but based on the last half, we’d say it is burning around $16m per year. That means it doesn’t desperately need more capital, but still falls short of being a sustainable business without capital injections. Yesterday’s announcement said, “Prudent measures are being taken on operating expenses,” which implies the company is cutting costs.

Christian Tym does not own shares in Volpara.

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