Doctor Care Anywhere: A Sleeping Telehealth Giant
Overall, Q1 was another excellent quarter for DOC, but the market continues to show no love for the stock. The market cannot continue to ignore stellar results for much longer.
This is the third article I’ve written on Doctor Care Anywhere (ASX:DOC), the largest private provider of telehealth services in the UK. You can read those articles below to get a more detailed breakdown of DOC’s business model and their 2021 financial performance.
In this short article, I discuss the highlights from DOC’s recent Q1 2022 results, released to the market on the 21st April 2022. Overall, DOC reported another excellent set of results and I will continue to average down into the position over the coming weeks.
1) Continued high double-digit revenue growth
DOC reported another quarter of strong revenue growth in Q1 2022. Underlying revenue (revenue generated from their core telehealth business) reached A$16.2m, up an impressive 9% QoQ and 95% YoY. DOC does not provide quarterly revenue guidance, but this 95% growth rate is well above the high end of their annual guidance for revenue growth of 40-50% in 2022.
2) Solid growth in core operational metrics
DOC also reported solid growth across all three of their core operational metrics: consultations, activated lives, and eligible lives.
DOC completed 151,900 consultations, which was up 6% QoQ and 68% YoY. The difference between the growth rate for consultations (+68%) and revenue (+95%) reflects an increase in the price of GP consultations from their new operating model and increasing engagement with their secondary care pathway.
Activated lives (the number of people who create an account and enter their personal details on DOC’s website) increased to 735,100, which was up 9% QoQ and 48% YoY. This growth in activated lives indicates increasing engagement with DOC’s telehealth services in the UK market.
It was also pleasing to see 5% sequential growth in eligible lives (the number of people who are eligible to use DOC’s services through their private health insurer), as this number had been flat for the prior few quarters. In absolute numbers, DOC added 128,100 eligible lives from Q4 2021 to Q1 2022, which I imagine comes from the recent partnership with Nuffield Health. Increasing the number of patients at the top of the funnel is important to ensure that DOC can continue to convert eligible lives into activated lives without reaching a plateau in conversion rate (I imagine this number would be somewhere around the 50-60% mark).
3) Significant gross margin expansion
DOC reported significant gross margin expansion this quarter. Underlying gross margin reached 45.5%, which was up from 35.7% last quarter and 43.2% in Q1 2021. This is a stellar result and a product of normalising GP wage costs, which were inflated throughout the back half of 2021 as DOC had to offer increased wages to attract GPs who would have otherwise worked in the UK’s COVID-19 vaccination program.
DOC should not need to offer such elevated wages in future as: (1) governments (excluding China) become more reluctant to engage in mass lockdowns in response to to COVID-19 outbreaks and (2) DOC rolls out their new operating model which adds the option to see an advanced nurse practitioner, helping to distribute patient demand across both GPs and nurses.
4) DOC’s secondary care pathway continues to steam ahead
DOC reported another quarter of growing engagement with their secondary care pathway, which involves referral for a diagnostic test and specialist review of results. Around 7,200 patients completed a secondary care pathway this quarter, which was up 11% QoQ and a whopping 227% YoY, albeit off a low base.
This secondary care pathway is a core driver of growth for DOC as it allows them to monetize multiple steps of the patient journey, rather than a single GP consultation. Seeing continued growth in engagement with this pathway is a big green flag for investors.
5) More returning patients means recurring revenue for DOC
I am appreciative that DOC management provided more granular detail in this earnings release about the percentage of consults which came from returning vs. new patients. DOC noted that 67% of all consultations in Q1 2022 came from returning patients, which increased from 65% in the prior quarter and 58% in Q1 2021.
This demonstrates that patients are satisfied with their customer experience and is a big positive for DOC as it leads to a higher base of recurring revenue (although it is not classic recurring revenue in the SaaS sense as patients do not sign up for consults on a consistent basis, but rather on a more ad-hoc basis).
6) Cash burn remains high but should reduce in the coming quarters
The sole negative result in this earnings release was that DOC’s cash burn remained high, reporting A$10.4m of net operating cash outflows. At the end of Q1 2022, DOC has A$32.1m in cash on their balance sheet, which is almost unchanged from the prior quarter due to their capital raise in Feb 2022. At the current burn rate, DOC has three quarters left before running out of cash.
However, I am confident that cash burn will reduce over the coming quarters because: (1) management guided in their last quarter that cash burn will reduce in 2022 relative to 2021; (2) DOC realised annualised cost reductions of A$6.2m in this quarter as a result of reducing their headcount due to changes in their operating model; and (3) DOC’s gross margins should continue to expand to approach 50%, which will increase their EBITDA margins.
7) Re-affirmed bullish guidance
DOC also re-affirmed their bullish guidance for 40-50% revenue growth in 2022 and to become EBITDA profitable by the end of H1 2023 due to an expansion in gross margins to the 50-60% range. Given the significant gross margin expansion that occurred in this quarter prior to full rollout of their new operating model, I am confident management will meet (or even exceed) these forecasts.
Conclusion
Overall, this was another excellent quarter for DOC, however, the market continues to show no love for the stock (note: this is not a DOC-specific problem but is applicable to all public telehealth businesses).
DOC trades at an undemanding valuation of 1.1x NTM revenue (around 2x NTM gross profits) and boasts high double-digit revenue growth, a clear path to margin expansion and becoming EBITDA profitable, and a management team focused on constant innovation to improve their patient experience. The main risk for DOC is that their cash burn remains high and investors have to suffer through another dilutive capital raise at a depressed valuation before the end of 2022.
Given the positive momentum bubbling beneath the surface at DOC and their bullish guidance for 2023, I expect their valuation multiple to re-rate higher in the coming 12-24 months. If we assume DOC has 2023 revenue of around $100m (consistent with their guidance), I would expect to see DOC’s market cap in the $200-300m range (note: their current market cap is around $100m), providing a phenomenal IRR for patient investors. The market cannot ignore stellar results for much longer.
Current market cap @ 21.27M (17/1/2023); seems like a solid business and undervalued.