Streamline Health: A series of unfortunate events; now emerging stronger than ever

A $STRM report

Thesis

For years, Streamline Health Solutions (STRM) has frustrated investors with its promise of EBITDA profitability always on the horizon. The dynamic has now flipped, with EBITDA profitability likely to occur imminently while management is still cautiously guiding investors that they’ll need to reach the horizon and then some. I love this combination: low expectations about to be blown away.

Trading at a market cap of just $13M, STRM appears significantly undervalued given its $10.7M implemented ARR, which could reach $15.5M ARR next month. Even applying a conservative 2x ARR multiple suggests a $31M valuation potential. At the same time, the tight float of 3.2M shares and concentrated ownership could amplify price movements when the market recognises the accelerated profitability timeline, likely to be clarified in the upcoming Q3 earnings call this coming week.

Introduction

Streamline Health Solutions, Inc. (STRM) is a healthcare technology company specialising in revenue cycle management solutions. The company provides SaaS-based solutions for healthcare providers, focusing on eValuator (automated pre-bill coding analysis), RevID (automated charge reconciliation tool), and legacy software for abstracting, coding, and clinical documentation improvement. These solutions aim to improve financial performance for healthcare organisations by ensuring accurate billing and optimising revenue capture. The company's business model is based on highly recurring revenue with low churn, providing stability and predictability.

A Story of Woes

Pre October 2023

Founded in 1989, STRM went public in 1996 and evolved from document management software to healthcare workflow solutions through the early 2000s. In 2019, when CEO David Sides left for Teladoc, STRM pivoted from EHR software to revenue cycle management solutions. The company later strengthened its position by acquiring Avelead Consulting for $20 million in 2021.

In the early 2020s, investors were optimistic about STRM due to its high-margin recurring revenue, large TAM, and the Avelead acquisition, which promised to double sales. The company's eValuator software demonstrated strong ROIs for hospitals, and investors anticipated eventual EBITDA profitability. In early 2023, STRM's stock peaked at $35 (post-split), but optimism faded after weak Q1 and Q2 results showing losses of ($0.75) and ($0.60) per share.

Restructuring – Oct 2023

In October 2023, STRM's stock dropped sharply after announcing a strategic restructuring (shown as R on the chart) that included a 24% workforce reduction (26 employees) for $5.8 million in annual savings. Investors were concerned by several aspects of this announcement:

• STRM lost a major client, Community Health Systems (CHS), with $4.5M annual revenue, not due to performance issues but because CHS's cloud transition made STRM's RevID product incompatible.

• STRM suspended its guidance for SaaS Annual Contract Value (ACV), abandoning the previous target of $30 million by the end of fiscal 2023, which created uncertainty among investors.

• The restructuring included leadership changes, with Ben Stilwill being promoted from president of the eValuator Solutions unit to CEO and Bryant Reeves appointed interim CFO.

• STRM is expected to incur a one-time restructuring expense of $0.8-1.2M by the end of fiscal 2023 for severance payments and benefits related to workforce reduction.

While the restructuring aimed to streamline operations and close the gap to profitability, these immediate challenges created significant uncertainty, leading to a sharp decline in investor confidence and a steep drop (~75%) in the stock price.

Recovery – Oct 2023 to Sep 2024

After the October 2023 restructuring announcement, STRM showed signs of recovery, and investors steadily regained their confidence, resulting in the stock price doubling from around $4 to $8 throughout the year. Several positive developments demonstrated STRM's ability to address challenges and position for growth, supporting the stock's recovery:

1. Cost reductions of $5.8M annually, notably lowering the breakeven threshold

2. New client wins for eValuator and RevID products

3. Recovery of ACV lost from Community Health Systems

4. Progress on potential channel partnerships

5. Product improvements in workforce automation and opportunity identification features

6. A clear path to profitability despite pushing the timeline to late 2025

Another Blow – Q2 2024

In September 2024, Streamline Health Solutions (STRM) experienced another 70% stock price decline following the release of its Q2 2024 financial results. The key factors contributing to this drop include:

• In Q2 2024, STRM received $2.8M in non-renewal notifications while adding $800K in new contracts, reducing booked SaaS ACV from $15.0M to $13.6M due to healthcare industry resource constraints.

• The company reported a net loss of $2.8 million for Q2 2024, compared to a $2.5 million loss in Q2 2023.

• STRM delayed its EBITDA breakeven target to H2 2025, disappointing investors who expected earlier profitability.

Despite 19% pro forma SaaS revenue growth (excluding a non-renewed contract) and improved adjusted EBITDA, investors focused on overall revenue decline and delayed profitability, leading to the sharp stock price drop in September 2024.

Why am I optimistic?

In November, STRM amended a credit agreement, signalling a major turning point: the company must achieve EBITDA breakeven by January 2025, significantly earlier than its previous guidance for the second half of 2025. The EBITDA requirements progress from ($225,000) in September to breakeven by January 2025.

Also, the amendment included a dramatically reduced maximum ARR Net Leverage Ratio from 0.60 to 0.35 in January 2025. This ratio measures the company's debt relative to its Annual Recurring Revenue. Assuming the debt is mainly unchanged, it would imply the ARR is about to jump up in Q4. This is consistent with the change in EBITDA.

Some other notes about the amendment: The amendment didn't require STRM to put up additional collateral or security, which would have been typical for a company showing financial stress. The credit agreement maintained its interest rate structure of Prime Rate plus 1.5%, with a Prime "floor" rate of 3.25%, rather than imposing more expensive terms. By amending the existing agreement rather than seeking new financing, STRM avoided potential dilution from having to raise additional equity capital at current low stock prices.

I see no reason for management to agree to such an amendment if they were not very confident in their ability to deliver on the requirements. It would make no sense and only create problems for them with the creditor. As a result, I find it highly probable the company is about to enjoy a step up in ARR and is on the verge of EBITDA profitability.

Likely ARR in January

Consider the following quote from the Q2 call.

As Ben mentioned, our booked SaaS ACV as of July 31, 2024, totalled $13.6 million, and we continue to expect that we can generate persistent positive adjusted EBITDA above $15.5 million SaaS ARR run rate. Currently, $10.7 million of our booked SaaS ACV is implemented and we anticipate we will successfully implement and achieve that $15.5 million ARR run rate during the second half of fiscal 2025.

Let’s clarify what all these numbers represent:

1. Booked SaaS ACV ($13.6M): This represents the total annual contract value customers have signed/committed to, but not all are generating revenue yet.

2. Implemented SaaS ACV ($10.7M): This is the portion of the booked ACV currently being implemented and generating revenue. This number represents STRM's current Annual Recurring Revenue (ARR).

Therefore, STRM's current ARR is $10.7M, meaning they are $4.8M short of the breakeven number at $15.5M. Part of this gap will be closed by successfully implementing the remaining $2.9M of booked but not implemented ACV. The remaining $1.9M would have to come from additional contracts.

Are we about to witness a 45% increase in ARR from $10.7M to $15.5M by January? This increase in ARR matches the 42% reduction in the ARR net leverage ratio.

Valuing the company

It’s hard to assign a valuation based on earnings without a better understanding of the company’s trajectory. Valuing the ARR directly, conservative multiples between 2x and 4x seem reasonable. Using 2x ARR would reach a market cap of $31m, compared to the current market cap of $13m.

Another way to think about valuation would be as follows. The company is in a better position than in early 2023, when the stock price was around $25. STRM would be at a similar revenue level (~$25m) and would have reached EBITDA profitability (that long-dreamed-of milestone for STRM investors). One could argue that the market overvalued the stock at the time, but considering the stock is currently at $3.24, it seems there’s significant room for the stock to appreciate.

What happens next?

Next week, STRM will report Q3 earnings. When they do, they will likely show improving metrics and are likely to disclose that they are about to hit the EBITDA profitability milestone in Q4 (which ends in Jan). If they didn’t disclose this, it would be keeping material information from investors. We should even get colour into what changed their fortune. It’s hard to see how the stock does not at least double in short order on this significant news.

Some important facts to note: With only 3.2 million shares in the public float and concentrated ownership among long-term shareholders, any significant buying pressure could quickly drive up the price. The average daily volume of 43,220 shares represents only about 1.3% of the float, meaning large orders could have an outsized impact on price.

Some other considerations

Runway & competitive space

Streamline Health Solutions's SaaS solutions have a total addressable market of over $900 million across 579 accounts in the US. The company's current booked SaaS Annual Contract Value (ACV) of $13.6 million represents only a tiny fraction of this potential market.

While companies like Truven Health Analytics, ArborMetrix, Qualifacts, and Mediware offer healthcare analytics solutions, STRM has a unique position in automated pre-bill code auditing. Management claims they never compete directly for replacements, as "hospitals don't have a software solution to automate auditing coding work" without eValuator. The primary competitor is internal teams within hospitals doing it manually.

More research is needed to confirm whether STRM has a defensible moat in this niche. However, the competitive landscape is not central to the current investment thesis.

Management

While management owns nearly 25% of STRM, most shares were awarded rather than purchased on the open market. High share-based compensation is a concern, though understandable given the push toward cash flow profitability. I plan to get to know the management team better before committing to STRM as a potential long-term investment.

Momentum

The business should show fundamental momentum for all the reasons I expressed above. The stock has negative technical momentum, but I’m hopeful that will reverse soon.

Risks

The November 2024 credit agreement requires STRM to achieve EBITDA breakeven by January 2025, significantly earlier than their public guidance of the second half of 2025. While this formal commitment suggests high management confidence, risks remain, including execution, client churn, implementation delays, and resource constraints at healthcare organisations. However, agreeing to such strict near-term covenants in a credit agreement, rather than just providing optimistic guidance, adds credibility to management's outlook. It’s also good that management hasn’t guided for January; the market isn’t pricing in this milestone, so the downside will be reduced if it doesn’t pan out.

In August 2021, STRM took on a $10 million 5-year term loan with favourable repayment terms to fund the Avelead acquisition, marking a shift from their previously debt-free balance sheet, which had $16.7 million in cash. The November 2024 credit agreement amendment maintained the existing debt structure and interest rates (Prime Rate plus 1.5%, with Prime "floor" rate of 3.25%) while only updating covenants, suggesting the lender's continued confidence in STRM's financial trajectory despite recent challenges.

Summary

I believe STRM will soon guide to turning EBITDA positive by January; investors have been waiting for that moment for a very long time and many more have given up, hence the opportunity. I’m not investing in STRM because I believe it’s a long-term compounder. It may turn out to be – I don’t know. All I know is that this seems like a crazy valuation for a stock about to have a hugely significant positive catalyst. It feels very like HTCR in that regard. The writing is on the wall, and once the market realises, the stock could explode just like HTCR’s.

Author’s Disclosure: I have a beneficial long position in the shares of STRM either through stock ownership, options, or other derivatives. I wrote this post myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. I am not a licensed securities dealer, broker or US investment adviser or investment bank.

Breakout Investors’ Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Breakout Investors as a whole. Breakout Investors is not a licensed securities dealer, broker or US investment adviser or investment bank.