Q3 2011 Results
Brian Marckx, CFA
OnPoint Medical (
ONMD
.PK)
filed their 10-Q for the third quarter ending September 30, 2011 on
November 14th. As expected, the company did not generate any
revenue. Operating expenses (consisting entirely of general and
administrative expenses) were $307k, $137k below our $444k
estimate. EPS was ($0.03), compared to our ($0.05) estimate.
$163k in software development costs were capitalized in the
quarter. As OnPoint completed development of their MRI QA software
in September, future software development costs will be expensed
rather than capitalized. $368k in total capitalized development
costs will also begin to amortize (over an estimated economic life
of 2 to 6 years) once the software is commercialized - OnPoint
notes in the 10-Q that they expect to commercialize their MRI QA
software in Q4 of this year.
OnPoint exited the quarter with $126k in cash and equivalents
(excluding $25k restricted cash in escrow relating to investor's
purchase of ONMD stock), compared to $412k at 6/30/2011. Cash used
in operations was $347k and another $163k was used for software
development purposes. OnPoint received $174k in cash proceeds from
the issuance of 200k shares of common stock in the quarter. As we
noted in our initiation report on OnPoint (9/13/2011), the company
will need to raise additional capital in the very near term to
remain operational. Also as we explained in our initiation report,
with a best-in-class product nearing commercialization and the
company running very lean (only ~$170k per month cash burn), we
expect OnPoint to continue to be successful in attracting operating
capital. Insider ownership is also significant (management and
directors of the company owned approximately 25% of the common
shares as of 6/30/2011) which should also bolster confidence that
management's interests are aligned with those of outside investors.
As there were no surprises in the 10-Q and timelines remain
commensurate with our earlier estimates, we have made no material
changes to our financial model, our outlook, price target or
investment recommendation. We continue to value OnPoint at $3.50
per share and are maintaining our Outperform
rating.
OUTLOOK
We estimate OnPoint's direct U.S. market opportunity for MRI QA at
approximately $250 million annually with the international market
worth another ~ $300 million. While substantial for a company of
OnPoint's size, perhaps not significant enough for imaging
heavyweights such as GE (
GE
), Siemens (
SI
), Philips (
PHG
) or Toshiba to enter organically - if, however, they do decide to
enter the space, OnPoint could be an acquisition target. While we
believe OnPoint can reach profitability and generate positive cash
flow with only a modest penetration of the domestic MRI market, the
company is already looking to diversify into other imaging
modalities including CT, mammography and nuclear which would
substantially increase the size of their target market, as well as
their visibility.
As OnPoint has yet to launch its software and is still a
development-stage company, there remains a significant amount of
unknowns which makes predicting its future challenging. And
although OnPoint's software appears to be a major improvement over
manual QC with the potential for significant added-value (including
streamlined processes and less scanner downtime), novel
technologies often suffer from slow acceptance. This may especially
prove to the case with smaller imaging facilities which may have
only one scanner and have less of an opportunity to reap the
benefits of OnPoint's software. Our "Outlook" considers these
challenges and risks (such as assuming the early-adopter market are
facilities with more than one scanner) and reflects our "best
guess" of how OnPoint's future will develop based on our due
diligence of the company, industry, market and competition.
Based on our discussions with management (and supported by verbiage
in the Q3 2011 10-Q), we look for commercial sales to begin in Q4
of this year. Management has proven to be fairly frugal and
cash-conscious and we expect the initial roll-out will be
reflective of this cautious approach. The selling function will at
first be handled by a skeleton crew of industry veterans including
OnPoint's CEO who will be calling on high-potential business
contacts. The initial launch will likely be somewhat anti-climactic
from a revenue standpoint but is expected to be as much about
making sales as it is about generating publicity and interest in
the software as well as receiving customer feedback. With virtually
no direct competition, OnPoint has a rare first-mover advantage and
we expect the company will exploit this opportunity by offering
attractive front-end pricing in an attempt to grab early market
share. Assuming feedback is positive and customer retention high
(both of which we expect will be the case), there will hopefully be
opportunity to significantly raise prices over the
longer-term.
OnPoint expects to continue to further develop the software
(handled by outside consultants) following launch so as to include
additional functionality. Management will also be gauging demand
and collecting feedback throughout the remainder of the current
year which will help determine staffing requirements (sales and
support staff will be added in increments) and assist in directing
marketing initiatives. While OnPoint will need to raise additional
capital to fund these initiatives, we feel comfortable that there
will be sufficient investor interest to continue to finance
operations for the foreseeable future. Our model incorporates an
assumption that OnPoint raises additional capital through secondary
stock issuance in the late-2011/early-2012 timeframe.
Assuming the MRI launch is successful, OnPoint will begin a greater
focus on follow-on imaging modalities, including CT which we think
could come to market in 2012. We note, however, that while our
model incorporates revenue contribution from CT, that we assume
that this added functionality is more of an up-sell opportunity
offered at a significant discount to existing MRI customers -
meaning margins on the CT product will be a fraction of that for
MRI (and with little in the way of fixed costs, OnPoint has
flexibility in trimming expenses based on the level revenue). Based
on our current model, we believe OnPoint can reach profitability
and generate positive cash flow on their MRI product alone. There
may also be an opportunity to begin selling overseas, although we
do not currently incorporate any international sales into our
model. We believe longer-term success will be largely determined by
the rate of penetration of the domestic MRI (and to a lesser extent
the CT) market.
Revenue
Our revenue model is based on certain assumptions including the
rate of growth of OnPoint's share of the domestic MRI and CT
imaging markets, overall growth in each of these markets, and
OnPoint's initial pricing (for both MRI and CT) and future pricing
power (which will largely be driven by demand/market share).
We look for OnPoint to limp into the market later this year. While
we model only inconsequential revenue in Q4, management's focus
will be to get their foot in the door and generate a buzz about
their software. Initial contracts will be relatively low-dollar and
possibly shorter-term but there may be potential to score some easy
shots on goal through business generated from management's industry
contacts.
For the first half of 2012 we model more of the same - a slow ramp
in sales with little in the way of price increases as OnPoint
focuses on building the installed base and completes development
for CT. By the back half of 2012 OnPoint may begin to see a bigger
return on their scaled-up sales and marketing efforts and have the
opportunity to start ratcheting up pricing. We model OnPoint's
software to claim roughly 3% of the total MRI QC market (or about
6% of the early-adopter market - as defined earlier) by year-end
2012. We also assume their CT quality assurance software is
released towards the middle of 2012 which expands the company's
total target market opportunity by approximately 50% (in $ terms).
As noted previously, while there are roughly the same number of CT
scanners in use in the U.S. as there are MRI systems, the
additional CT functionality to the software will not double
OnPoint's target market as many imaging facilities offerboth CT and
MRI - as such, we view CT functionality mostly as an up-sell
opportunity (i.e. - volume price discounts) to existing MRI
customers. We model total revenue of $1.8 million in revenue in
2012 which includes $1.6 million from MRI QA (representing ~ 195
customer contracts) and $60k (representing ~ 30 customer contracts)
from CT QA (with the remainder from installation and training
revenue).
From 2013 and beyond we model the overall domestic MRI and CT
markets to grow at about 3% and 5%, respectively. We look for
OnPoint to capture about 7% and 2% (15% and 5% of early-adopters)
of these markets in 2013, growing to 20% and 11% by 2015. We also
assume OnPoint has ample pricing power and is able to increase
average pricing by about 300% in 2013 (compared to 2011 pricing -
when we assume OnPoint's pricing barely covers variable costs) and
550% in 2015 (compared to 2011 pricing). We do not believe our 2015
assumed pricing, at about $1,500 per month per MRI scanner and $650
per month per CT scanner, is aggressive especially when comparing
this to the cost of annual scanner service contracts (~ $100k per
year) or the cost of unplanned scanner downtime ($1,000 per hour).
We model MRI and CT related revenue of $9.2 million and $1.3
million in 2013, respectively, growing to $47 million and $12.9
million in 2015.
EPS
Despite a highly scalable and low-cost business model, we do not
expect OnPoint to generate positive net income in 2011 or 2012 as
meager revenue from incentivized front-end pricing and a relatively
negligible number of customer contracts is insufficient to offset
the scale-up in R&D (related to follow-on modalities and
software enhancements) and SG&A ( related to increased
marketing and additional sales and support personnel). We model EPS
of ($0.22) and ($0.13) in 2011 and 2012, respectively.
We expect revenue to begin to significantly ramp in 2013 as a
result of firmer pricing, a full-year's worth of CT sales and
realization of the benefits of ramped up sales and marketing
efforts. Revenue growth should outstrip that of operating expenses
and, combined with significantly wider gross margins as a result of
price increases, should result in 2013 being OnPoint's first full
year with positive net income. We model EPS of $0.02 in 2013 and
$0.19 in 2014.
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