Monday, February 23, 2009

Apple Inc (AAPL): Snapshot- Apple's Cash Growth

Apple Inc (nasd:AAPL) $91.21- Here's a quick snapshot of Apple's cash holdings over the past 9 quarters. In the case of Apple, it's extremely important to focus on cash flow opposed to accounting (GAAP) income due to the massive build of deferred revenue on its balance sheet. Total deferred revenue is $9.7B, $7.3B of which is iPhone related. Accounting EPS is often a poor gauge of a firm's actual earning power due to the many ways to legally (and illegally) inflate, obscure, or mislead actual performance. However, all one needs to do is follow the cash. The concept of investing is inserting cash into a vehicle that will return a larger cash amount back in the future. Cash flow, not earnings, best reflects a firm's investment prospects.

Apple's cash holdings swelled from $11.9B (Dec '06) to $28.1B (Dec '08), an increase of $16.2B. In terms of cash per share, Apple reported $31.20/share for Dec '08, and increase of $17.76 from the $13.44/share reported Dec '06. In the last 8 quarters, Y/Y cash growth has averaged north of 50% (per annum).

Just in the past 4 quarters, Apple's cash has ballooned $9.7B from $18.4B. Cash per share has increased more than $4 the past two periods, and last quarter (Dec 08), cash/share rose $10.71 from prior year quarter. What gives this cash holdings data meaning is the comparison to EPS. Apple's TTM EPS is $5.39, but TTM increase in cash/share is almost double, $10.71. Obviously, iPhone sales are responsible for the wide disparity.

Using price multiples as a valuation metric, Apple trades at 17x TTM EPS, but only 8.5x TTM cash/share. That's a massive difference, and many make the mistake of using PE ratios to compare Apple to its peers which is unreliable due to the EPS distortion caused by iPhone revenue referral.

Of course, the market is forward looking, as TTM ratios are less meaningful due to being historical-based metrics. However, the iPhone should continue to exhibit decent sales being a solid product in a growing market segment. This will cause the disparity between accounting EPS and cash flow to continue. Considering that Apple has historically traded at 40-50 TTM PE multiple, valuation is attractive on a long-term investment horizon. In my opinion, the short-term economic challenges are priced-in, but the long-term competitive advantage and earnings power is being ignored. That's the nature of the current mood of the market, and AAPL will probably go lower before it goes a whole lot higher. Eventually, when the economy shows signs of regaining its footing, and investors are comfortable owing stocks again, AAPL will go much, much higher. Downside risk is somewhat limited due to Apple's cash position and strong products that should at minimum, support valuations not terribly too much lower than the current share price.

Yet, risk still exists, and I would imagine shares stay range bound $75-$105. Apple's fundamentals provide strong support, but breaking through resistance above ~$105 and ~$115 will require sustained money flow from cash coming off the sidelines. Hence, participation by institutions and funds that have longer-term investment outlooks. Recently, Apple hasn't been able to sustain any sort of rally off positive news as traders have been quick to take profits, as well as selling/shorting into market weakness and rises of increased pessimism. If/when the equity investor were to return, Apple would be a popular choice at current levels.

Disclosure: long AAPL

Thursday, February 5, 2009

Authentidate (ADAT): Remote Patient Monitoring Presents Significant Opportunity

Authentidate Holding Corp (ncm: ADAT) $0.27- Authentidate is attractively positioned to benefit from the expected flood of spending aimed at modernizing healthcare IT. Remote patient monitoring, also known as telehealth, is one area where Authentidate stands to capitalize due to its unique and superior product solution. Patient home monitoring is expected to be a $12 billion industry by 2012. ADAT will earn $120M in revenue if it achieves just 1% penetration. This compares to $6M in revenue Authentidate earned last fiscal year. There are a decent number of patient monitoring devices deployed currently, yet very few have actual “telemedicine” functionality, whereby a patient’s vitals are electronically transmitted to the healthcare provider coupled with any patient instructions subsequently relayed back to the patient. According to an InMedica study, there were less than 1 million telehealth subscribers in 2008, yet that number is expected to climb to over 55 million by 2016. 

ADAT has 37 cents per share in cash, yet it is not currently profitable. Management expects to achieve cash flow breakeven in the near-term. Although ADAT has been putting up double-digit revenue growth, the slow pace of industry modernization has made achieving Authentidate’s potential elusive. I believe the new telehealth business aspect coupled with government spending and reform will accelerate the pace of revenue traction. My previous ADAT articles are here.

Company Description: (from ADAT 10-k):
Authentidate Holding Corp. (Authentidate or the company) is a worldwide provider of secure workflow management software and web- based services. Authentidate and its subsidiaries provide software applications and web-based services that address a variety of business needs for our customers, including increasing revenues, reducing costs, raising service levels, improving productivity, providing automated audit trails, enhancing compliance with regulatory requirements and reducing paper based processes. Our scalable offerings are primarily targeted at enterprises and office professionals and incorporate security technologies such as rules based electronic forms, intelligent routing and transaction management, electronic signing, content authentication, identity credentialing and verification and web and fax-based communication capabilities to electronically facilitate secure and trusted workflows. Authentidate currently operates its business in the United States and Germany with technology and service offerings that address emerging growth opportunities based on the regulatory and legal requirements specific to each market. In the United States the business is engaged in the development and sale of web-based services largely based on our Inscrybe™ platform and related capabilities. In the United States, we offer our patent pending content authentication technology in the form of the United States Postal Service ® Electronic Postmark ® (EPM). In Germany the business is engaged in the development and sale of software applications that provide electronic signature and time stamping capabilities for a variety of corporate processes including electronic billing and archiving solutions. Our web-based services and software applications are compliant with applicable digital signature rules and guidelines. We sell our web-based services and software applications through a direct sales effort and reseller arrangements. See USPS EPM.

Company & Industry Background:
Authentidate has struggled to gain revenue traction primarily due to the glacial pace of modernizing the IT infrastructure within the healthcare industry. The industry can be characterized as one with excessive “paper pushing” which swells the overall cost of healthcare. Evolving to an electronic document workflow paradigm would significantly reduce costs, errors, and turn-around times. The reason that healthcare has slow to move away from paper records and postal delivery is because the primary players haven’t been appropriately incentivized. HMOs experience the greatest benefits by reducing labor costs and working capital needs, yet those savings hinge on physicians converting to e-document platforms. Doctors have been hesitant to implement technology since the benefits to physicians haven’t been adequately communicated. In addition, physician thinking tends to be revenue-oriented, as opposed to cost oriented, generally solving high or increasing overhead costs with higher billings. Essentially, the thinking focuses on boosting revenue by “how do I charge more,” instead or focusing on boosting the bottom line by reducing expenses. Since patients, or rather customers, only pay a very small portion of their medical bills coupled with the absence fee comparisons and the inelastic nature of demand for healthcare treatment, medical practitioners have considerable pricing power. An individual’s cost for healthcare is pushed off on HMOs, insurance companies, and Medicare, which in turn spread those costs among its base of participants.

Instead of increasing efficiency and eliminating unnecessary costs, doctors can maintain profits with higher and/or additional fees that ultimately raise everyone’s cost of healthcare. As a result, HMOs and insurers have implemented fee caps for certain services and treatments, which essentially eliminates pricing power. However, some medical practitioners will choose not to accept specific types of medical coverage (or insurers chose not to cover specific physicians), or physicians will abandon treatments/services with unfavorable fee reimbursement caps. Even with restrictive fee caps, a physician could increase his/her bottom line from greater cost efficiency/productivity by migrating to an electronic document platform. Not only can overhead costs be reduced, time and other resources can be freed up and deployed for new revenue opportunities. Some doctors spend considerable time attending to office visits based primarily on paperwork issues for approvals and signatures, etc.

In my opinion, the catalyst for widespread migration to modern information technology is the Obama administration. For years, the government has been encouraging electronic medical records and electronic form remittals, but progress has been slow due to the reasons I outlined earlier. However, Mr. Obama’s goal is to have all medical records digitized in five years. According to the NE Journal of Medicine, only 4% of physicians use electronic health-records systems. The economic stimulus bill includes $20B for healthcare IT alone. Authentidate isn’t directly engaged indigitizing health records as it focuses more on the secure processing of electronic medical forms and signatures. However, as the industry migrates towards e-health records, it will become substantially easier for Authentidate to market its IT solutions. Mr. Obama understands the importance of technology and the benefits it provides; one has to look no further than President Obama’s fight to keep his Blackberry as evidence to his commitment to technology. Mr. Obama is also aware of the potential cost savings healthcare IT can deliver, and his ambition to make healthcare more affordable and available to all will require implementing IT solutions such as the ones offered by Authentidate.

Telehealth Monitoring:
According to a SUNY Fredonia 2008 study, the patient monitoring industry is expected to reach $12 billion by 2012. Authentidate entered into a joint venture with EncounterCare forming ExpressMD, which uses EncounterCare’s Electronic House Call patient monitoring appliance with Authentidate’s Inscrybe web-based software platform. The combination allows physicians to remotely monitor their patients’ vitals and adjust treatment accordingly. The benefits are immense. The patient receives higher quality care since the increased amount of data available provides better diagnosis and treatment. In addition, the monetary savings are substantial due to the reduction in doctor office/emergency room visits. Several studies have suggested telehealth monitoring can reduce healthcare related costs by at least 50%.

Patients visit their physician several times a month, or even a week, just to have their vitals taken. HMOs cap physicians billing at $137/month for this type of service. Thus, no matter how many times any one individual visits his/her physician’s office to have vitals taken, the attending doctor will take in no more than $137. This results in these types of visits using a disproportionate amount of a physician’s resources that aren’t proportionally monetarily compensated. In addition, it is estimated that the average monthly transportation billing for these types of patients is $527. Telehealth home monitoring reduces transportation costs by 80%. Due to the transportation cost savings, as well as other associated expense reductions, HMOs permit physicians to bill at $199/month if patient is on a telehealth home monitoring program.

Incentives for adopting remote patient monitoring exist for all major parties- patients, physicians, and insurance providers. Doctors can take in more revenue with less office visits. This frees up office space, time, and other resources for treating other patients, hence increased revenue opportunities. Thus, it’s not just the extra $62/month that doctors can generate with telehealth, it’s also the opportunity cost of lost revenue from office visits that can be recaptured with home monitoring.

Telehealth Monitoring Business Economics:
According to my sources familiar with the JV agreement, EncounterCare and Authentidate split the $30/month revenue (per device) 50-50. Authentidate earns an additional $8/month for services provided through its Inscrybe platform. This brings Authentidate’s revenue to $23/month. Yet, Authentidate can charge $50/month to third parties, such as pharmaceutical and medical research companies for access to data reporting. According to a source, a research group in Florida has implemented 2000 units thus far. Drug companies and researchers can measure the efficacy of their products being used in treatment, since patient vitals data can show the response to such treatment.

ExpressMD™ Solution (from company website):
The complete ExpressMD solution combines Electronic House Call™, an advanced in-home patient vital signs monitoring system with a web application that streamlines the practitioner’s job anywhere they have Internet or a Windows mobile communication device. The in-home portion includes the latest in simple-to-use monitor devices for unassisted patient vital signs measurement as well as question-and-answer mode for manual input. The self-contained home unit is perfectly suited for patients that require repeated assessment and reminders of their care plan schedule while practitioners can easily monitor patient progress remotely. Patients can review their own vital statistics history or even view and order products specific to their condition that support their care plan.

This proven system improves overall care outcomes for patients with chronic illnesses such as COPD, CHF and Diabetes. It delivers better continuity of care for elderly or special needs patients, as well as many others with chronic illnesses such as chronically ill pediatric patients. Patients using the ExpressMD in-home monitoring system have shown dramatic improvements in medication and therapy compliance. The overall effect produces significant reductions in the overall number of physician office visits, emergency room visits and hospital readmissions.

It provides intelligent routing to alert on-duty caregivers whenever patient vital signs are outside of the practitioner pre-set ranges. Parameters are set to automatically route to caregivers based on patient specific needs, payer preference and location. In addition, care providers can remotely access the system from Windows communications devices, delivering true portability of care management.

Some of the additional services available to the ExpressMD solution by adding Inscrybe™ Healthcare are: verification of physician and practitioner credentials allowing online input, review, update and electronic signature of medical documentation such as prior authorizations, care plans and physician orders. With this option, practitioners can customize a care plan for each patient based on their vital signs history that optimizes therapy results and improves patient quality of life. There is an online diagnosis and treatment library for physicians or practitioners. Additional services for physicians like the Care Plan Oversight module to support allowable reimbursement reporting and online entry of physician orders are also available.

ExpressMD Joint Venture Press Release (June 10, 2008):
The joint venture called ExpressMDTM Solutions will provide in-home patient vital signs monitoring systems and services to improve care for patients with chronic illnesses and reduce cost of care by delivering results to their health care providers via the Internet. ExpressMD Solutions will combine EncounterCare's Electronic House CallTM patient vital signs monitoring appliances with a specially designed web-based management and monitoring software module based on Authentidate's InscrybeTM Healthcare platform. ExpressMD Solutions will enable unattended measurement of patients' vital signs and related health information. Patients' data will then be securely sent electronically to each patient's health care provider for review. ExpressMD Solutions will be designed to aid wellness and preventative care, and deliver better continuity of care to specific patient segments such as the elderly, special needs or pediatric patients with chronic illnesses who require regular monitoring of serious medical conditions.

According to a January 2008 research study conducted at the State University of New York at Fredonia, the demand for patient monitoring systems in the primary healthcare sector in the United States is forecast to increase 5.9 percent per year to an estimated $12 billion market by 2012 based on expected contributions to positive therapeutic outcomes and efficiencies. Additionally, the study indicates that the market for self-monitoring activities will also expand as treatment for chronic care patients, especially patients with asthma, diabetes and heart disorders focuses on preventative care.

Using ExpressMD Solution's offerings health care providers will be able to easily view their specific patient's vital statistics and make adjustments to the patient's care plans via the Internet. ExpressMD Solution's easy to use patient monitoring system is intended to provide patients with increased peace of mind and improved condition outcomes through a combination of care plan schedule reminders and comprehensive disease management education on their in-home communication unit. The service will provide intelligent routing to alert on-duty caregivers whenever a patient's vital signs are outside of the practitioner's pre-set ranges.

Health care providers and health insurers also are expected to benefit by having additional tools to improve patient care, and reduce overall in-person and emergency room patient visits. "EncounterCare's expertise with in-home patient monitoring technologies and Authentidate's expertise in online healthcare systems and securely managing patients' documents has allowed us to shorten the development cycle and ready this solution for delivery in record time," said Ron Mills, CEO of EncounterCare Solutions, Inc.
"The ExpressMD Solutions joint venture will allow Authentidate and EncounterCare to leverage existing portions of our respective healthcare products as well as existing healthcare industry relationships from both companies," said Ben Benjamin, President of Authentidate Holding Corp. "The telemedicine market is a large market that we believe will benefit from our document management capabilities. By entering this market through a joint venture, we will be able to strongly penetrate an emerging market, while expanding the use of our platform within the health care community.

ExpressMD Signs First Contract with Cyntrist:
On July 8th 2008, it was announced that Authentidate and EncounterCare had signed their first user contract with Cyntrist, for use in remote monitoring of Diabetes patients located through out the Southeastern U.S. The opportunity in the Diabetes space is colossal. In a recent study, the CDC reported that 24 million Americans (8% of population) are afflicted by Diabetes, a number which has increased by more than 3 million in just two years. The ExpressMD solution provides physicians with the ability to remotely monitor patients’ glucose levels, weight, etc. on a daily basis and adjust treatment as needed. Not only does this enhance the quality of patient care, it reduces the need for regular office visits, thus reducing the cost of medical care. The advantages are compelling, and with such a large addressable market, ADAT may benefit substantially.

Authentidate Outlook:
Using a conservative projection of the industry  achieving $6B in 2012, Authentidate stands to capture at least 3%. This equates to roughly $200 million in annual revenue. Assuming 70% margins, EPS would be slightly less than $4.00 given the $105M+ tax-loss carry forward. Due to the degree of operating leverage in the revenue model, profit margins could be considerably higher, and expand with volume due to increasing returns to scale. Using the same margin assumptions, but a $12B market with 5% capture, ADAT would earn over $9.50 per share. The potential is staggering. However, just assuming a 1% capture of a $6B market would produce EPS of $1.00. Assigning a 15X multiple gives a $15.00 share price, or 55X current share price.

The reason that ADAT shares trade at such a low price, below cash, is due to the lack of investor awareness of the massive revenue opportunities. As evidenced by the scant daily trading volume, and the lack of participation in online discussion forums and conference calls, very few investors follow ADAT. Many that did, abandoned ADAT years ago when the company was rapidly burning though cash without much promise of increasing revenues. Authentidate has been bringing its cash burn under control, down to $1.5M last quarter compared to cash burn of $4-5M per quarter in earlier periods. In the last two quarters, revenue growth for the U.S. business has averaged more than 50%. As the speed of IT adoption in the healthcare industry accelerates, revenue growth could increase to 5000%. As I have said in earlier articles, the Authentidate’s primary challenge has been the industry’s slow pace to modernize. The new administration along with increased spending and reform, will expedite this transformation. Health benefit providers are beginning to incentivize doctors to adopt cost saving solutions such as the ones offered by Authentidate. I believe it won’t be long before Authentidate’s offering gain meaningful traction.

Disclosure: Long ADAT
Memphis, TN, United States