An Update from Doctor Care Anywhere: Very Bullish Guidance, Disappointing Capital Raise
Here I discuss DOC’s FY21 announcement which included new data from 2021, bullish revenue and margin guidance for 2022 and 2023, and disappointing news of a capital raise near a 52-week low.
Doctor Care Anywhere (ASX:DOC) is a telehealth business listed on the ASX with its main operations based in the UK. In a previous article published a few weeks ago, I outlined DOC’s business model and provided some thoughts on their 2021 results. In 2021, DOC reported $46m revenue (+116% growth vs. guidance of at least 100%) and facilitated 440,000 consultations (+105% growth). I won’t rehash their results here, so I would encourage those unfamiliar with DOC or their 2021 results to go back and read that previous article.
In this short article, I discuss DOC’s FY21 announcement this morning which included:
Some relevant financial/operational data from 2021 not reported in their latest 4C update;
Very bullish revenue and profitability guidance for 2022 and 2023; and
Disappointing announcement of a $12.2m capital raise.
Interesting (New) Data from 2021
Impressive Engagement with Secondary Care Pathway
While DOC disclosed the number of patients who engaged with their secondary care pathway each quarter in 2021, we did not have prior comps for 2020. In this latest update, DOC reported that 17,100 patients engaged with their secondary care pathway in 2021, which was up a whopping 1,121% from 1,400 in 2020. This is an encouraging result and a testament to DOC’s positioning as an integrated digital health platform, rather than a sole provider of virtual GP consultations.
Increased Average Revenue Per Consultation
DOC’s average revenue per consultation increased 8% from £51.30 in Q4 2020 to £55.20 in Q4 2021, providing another tailwind for revenue growth.
Large and Widening Losses
In 2021, DOC reported negative EBITDA of £19.1m (-76% margin) which was up from negative EBITDA of £8.6m (-74% margin) in 2020. However, as mentioned below, DOC is forecasting for this to flip to positive EBITDA on a run-rate basis before the end of H1 2023 (16 months from now), which is another demonstration of why valuing fast-growing companies based on current profitability can be misleading. Operating leverage can kick in real fast.
Concentration Risk with AXA Health Remains
In the risk section of their FY21 presentation, DOC reported that their partnership with AXA Health accounted for 85% of their revenue in 2021. Thus, undeniable concentration risk remains with DOC. This partnership also prohibits DOC from partnering with competitors to AXA Health in the UK or Ireland (note: DOC is already the largest provider of private telehealth consultations in the UK), but this does not extend to other European countries (e.g., Italy, France, Germany).
Very Bullish Guidance for 2022 and 2023
DOC CEO Bayju Thakar noted on the conference call that two factors have substantially increased DOC’s revenue and margin visibility for 2022 and 2023: (1) updates to their operating model (discussed in detail in my previous article) and (2) renewed agreements with AXA Health in Feb 2022 which involved incorporation of their new operating model and price hikes on consultations.
Revenue Guidance
DOC management put forth the following revenue guidance for 2022 and 2023:
2022
Revenue of £35-38m ($66-71m AUD), which represents 40-50% growth from 2021. I was hoping for at least 30% revenue growth in 2022, so this was a welcome surprise for me. It is worth noting again that DOC reported 116% growth in revenue in 2021, so this 40-50% growth comes against strong comps.
2023
Annualised revenue run-rate of £45-55m ($85-104m AUD), which would represent 18-57% revenue growth over 2022. If we take the midpoint of their 2022 and 2023 revenue guidance, this would represent 37% revenue growth in 2023. In my latest article on DOC, I modelled for around 20% revenue CAGR from 2022-2026, so DOC is blowing these estimates out of the water.
Profitability Guidance
DOC also expects the following before the end of H1 2023 (around 16 months from now):
EBITDA profitable on a run-rate basis;
Gross margin of 50-60%; and
Contribution margin of 35-40%.
This represents a major step change in DOC’s margin profile. In 2021, DOC’s underlying gross profit margin (excludes revenue from irregular items like technology platform licensing fees or digital design service fees) was 36.7% as a result of increased incentives paid out to attract GPs. In 2020, underlying gross margin was higher at 45.4%, but still well below their future guidance.
DOC’s updated operating model is being rolled out from Q2 2022 onwards. The inclusion of advanced nurse practitioner consultations is expected to come into effect towards the end of 2022. Due to this staged roll-out, DOC expects gross margins to improve with each successive quarter throughout 2022.
Non-operating costs are also expected to decline in 2022 as DOC leverages their prior investments in technology and staffing. As a result, DOC should be EBITDA profitable on a run-rate basis in mid-2023, which is reassuring in the current climate where investors seem to once again value profits and cash flow.
“As the benefits of these investments in scale and efficiency are realised across FY 2022 through improvements in gross margin and enhanced operational leverage, non-operating costs are expected to decrease both in absolute terms and, with scale, even faster on a per consultation basis.” (Preliminary FY 2021 Results Announcement)
Expansion in Eligible Lives
DOC noted in their update that eligible lives should increase in 2021, but did not provide a specific growth estimate.
“There is further growth potential across the Company’s existing base of 2.4 million Eligible Lives, a figure that is expected to increase across FY 2022 through the launch of new partnerships, such as the recently announced agreement with Nuffield Health.” (Preliminary FY 2021 Results Announcement)
As this partnership with Nuffield Health expands in 2022, DOC expects a reduction in concentration risk with AXA Health. The signing of further channel partnerships outside the UK will also help to reduce DOC’s revenue dependence on AXA Health.
Disappointing Capital Raise Near a 52-Week Low
However, it’s not all sunshine and rainbows. DOC also announced a capital raise of $12.2m, of which $11.2m has already been committed by existing institutional shareholders and $1.0m is available to retail shareholders. Three things frustrate me about this capital raise:
DOC is raising capital near a 52-week low after shares had fallen more than 40% in 2022 and 70% in the past 12 months.
The issue price is a significant discount to last prices (13% discount to the latest trading price and 17% discount to the 5-day volume weighted averaged price (VWAP).
CFO Dan Curran stated on the Q4 conference call just one month ago that there was no imminent need for DOC to raise capital because cash burn would reduce in 2022.
The capital raise represents around 10% of DOC’s existing issued capital, which means notable (but not fatal) dilution for existing shareholders. When asked about the reasons for the capital raise, CEO Bayju Thakar replied that the funds would be used to accelerate the launch of their new operating model. He also re-iterated numerous times that DOC’s current cash balance will take them through to becoming profitable on an EBITDA basis in mid-2023. I hope this is the case.
However, it also appears that DOC is considering future acquisition targets with this capital raise:
“The Company is in various stages of negotiations with counterparties in relation to such acquisition opportunities, particularly in the United Kingdom, which are aligned to the Company’s existing strategy to link primary and secondary care providers using technology.” (Doctor Care Anywhere Closes A$11.2m Placement and Launches A$1m SPP)
Based on the above comments, I would not be surprised to see DOC announce an acquisition in the coming months.
Outstanding Questions
Overall, I feel that the bullish guidance for 2022 and 2023 outweighs the negatives of the capital raise at a 52-week low. However, I still have the following outstanding questions about DOC:
When did DOC management change their mind about needing to raise capital? Was this the result of an acquisition target that materialised in the past month?
How is GP2U performing since the acquisition? There has been little discussion of it in recent updates.
Can DOC replicate their success in the UK in other European countries?
Although not certain, I am leaning towards participating in the SPP. DOC trades at just over 1x forecasted 2022 revenue and less than 1x forecasted 2023 revenue with 35%+ revenue growth expected over the next two years, rapidly improving gross margins, and EBITDA profitability on the horizon. I’ll end with these wise words:
“The stock market is a device for transferring money from the impatient to the patient.” (Warren Buffet)