Westwind research on Nightingale Q2

This research note was put out by the equity research team at Westwind Partners:

“Q2 Revenues Ahead; U.S. Traction Improving

Insight or Development:

NGH reported Q2/F08 revenues of $7 MM, just ahead of our estimate of $6.5 MM, and improving EBITDA margins.

Traction in the U.S. is improving, while Ontario should ramp next year.

Analysis:

On Monday, NGH reported Q2/F08 results (for the period ending Sept. 30) that were just ahead on the top line and showed good improvement on the EBITDA line. Revenues were $7 MM, up 100% over last year, vs. our estimate of $6.5 MM. While forex headwinds in the U.S. were ~$400K, NGH’s Canadian business outperformed in Q2, generating $2.1 MM in revenue vs. $1.1 MM last year. Overall, organic revenue growth in Q2 was +20%. Recurring revenue of $4.4 MM, or 63% of total revenue, was in line with our expectations.

The integration of VantageMed (closed in April 2007) has been largely completed and expense levels have improved. EBITDA margin was $0.33 MM, or 4.7% in Q2, just below our $0.43 MM estimate mainly due to the revenue mix. Going forward, we expect annual EBITDA margins to continue to improve, although quarterly fluctuations are expected as large licence wins impact gross margins. On its call, management noted that it expects to be cash flow positive by March 2008. NGH ended the quarter with cash of $3.7 MM and available credit lines of $2 MM. Headcount stands at 178, or $152K revenue/head on our F2008 estimate.

NGH also announced that CFO Nick Vaney was moving to be VP, Operations and Chief Strategy Officer. The company is bringing in Michael Ford as CFO. Mr. Ford is an experienced finance executive having held several CFO roles, including at Enghouse (ESL-T; $7.01; not covered).

The recently announced 15-yr contract with OntarioMD to be one of three approved providers of a hosted Electronic Medical Record (EMR) solution to Ontario’s 22,000 doctors has entered the set-up phase. Currently, funding of $28,600 for a 3-yr period is available for each of 2,700 doctors (total $77 MM). While we anticipate that this contract should begin generating revenue for NGH in Q4/F08, we believe the near-term Canadian revenue impact for Q3/F08 will be negative as doctors in the province hold off on buying licence-based systems until NGH’s hosted option is fully available (and funded) in early 2008. We have adjusted our estimates accordingly.

In the U.S., NGH continues to ramp its sales force, recently adding four new reps to take the count to just over 10, and noted that its pipeline is building. In Q2, four small EMR cross-selling deals were secured, as well as a $475K contract with a 45-provider clinic in Boston. Management is also actively working on developing new channel partnerships to help drive further market penetration.

Conclusion:

NGH is gaining traction and improving operating margins, and yet is very attractively priced compared to U.S. competitors that trade at EV/S of 3.5x-13x (2007E based on consensus estimates). We maintain our SPECULATIVE BUY rating and $1.20 target based on a 2.5x F2009 EV/S.”

MRM
(disclosure – our Fund III owns warrants in NGH)