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Analysis of Carasent

Carasent is a Norwegian company that fully owns Swedish Evimeria AB. Evimeria offers SaaS software for private primary and specialist care in Sweden and the company has developed a cloud-based journal system called Webdoc. This system also provides integrations with third-party solutions to expand the functionality for the customer. Examples of such integrations are accounting, dictation and analytics software. Carasent previously owned operations in e-health in the US and the company has total losses of 200 million crowns from prior years, which is equivalent to a positive tax effect of about 50 million Swedish crowns.

Summary
  • Strong economic moat due to high switching costs as clients are extremely reliant on the system and its integration into other software systems

  • Potential to expand in new geographies and verticals

  • Market leader with low competition, main competitor being outdated on-premise software

  • Riding on the digitalization trend in healthcare, both in the private and public sectors. 

  • Beneficiary of the effects COVID-19 has on the industry, partly due to accelerating digitalization as a whole but also with the company offering better solutions for remote working in healthcare clinics

  • Strong insider ownership, management's incentives are aligned with the shareholders

  • Non-cyclical business

 

Software as a service (SaaS) means that software is sold as a subscription service.. Customers pay a monthly, quarterly or yearly cost for the time the customer uses the software. Software has often sold as a license with a one-time fee that the customer buys and then may use in the future. The problem for the customer who buys software on a lifetime license is that the software is not updated and will therefore with time, become outdated. The customer will thus eventually want to replace and buy new software. It has also been an issue to integrate third party solutions into software as updating non-SaaS software has always been backwards looking as these services have to make sure that older versions of the software are compatible with the integrations. SaaS software does not have this problem as updates are pushed out to all customers immediately and they all use the same version. In addition to this, having the best software available is important for companies to stay competitive.

Using a SaaS service instead of buying a lifetime license for software has many advantages for customers:
  • Frees up more money to invest in the company as money isn't tied up in the purchase of a license

  • Saves the company time and resources with not having to evaluate and think about what software to buy next as the SaaS software is constantly updated.

  • The incentives are aligned as the provider of the subscription service has a greater incentive to quickly fix problems with the software when it is a SaaS solution compared to before when the provider rather had an incentive to focus on fixing their upcoming software launch instead of the software that customers had access to at the time. 

  • More flexibility in the use of the software because the software is available via the web instead of as a file stored on a specific computer.

The advantages of being a SaaS provider are the following:
  • As long as the software stays relevant and appreciated by customers, revenue will be very secure due to its recurring nature (recurring monthly payments). Vista Equity Partners Robert F Smith has stated that SaaS contracts are better than first lien debt and I believe that this statement is accurate in the case of Carasent considering how vital the system is for clinics and their daily work.

  • A SaaS model results in a higher lifetime value of a customer and allows the services to be sold to more companies, especially smaller ones, as the economic cost is lower, at least initially. 


Healthcare is one of the least digitized industries and the general trend of moving information to the cloud with the help of software is something that the healthcare industry is in the process of doing. There are several key drivers for this and among them are that the use of digital solutions is increasing availability to patients but also that digital solutions increase opportunities to share relevant information. As a first mover and market leader in Sweden, in addition to having very few competitors, Carasent is very well situated to take advantage of the digitization of healthcare. Furthermore, the digitalization in the industry has been accelerated by the COVID-19 pandemic. Medical personnel will increasingly want to treat patients virtually and be able to work from home. The legacy systems that clinics now use are on-premise which makes it impossible for doctors to work from home as they cannot access patient journals digitally since they can only access the systems on-site. Carasent recently took on tele-doctor Doktor.se as a client which is a consumer facing doctor consultation platform that treats patients virtually and can provide patients with prescriptions for medicine. 
 
Another overall trend that will benefit Carasent is the changing demography:
  • The proportion of the population aged 60 or older is increasing

  • Medical progress and the ability to manage illness are contributing to an overall increased average lifetime

  • Chronic diseases such as diabetes, obesity and other cardiovascular diseases are increasing and are treated over longer periods of time.  

To be able to treat these patients it will take greater resources and the healthcare system must leverage technical solutions to do this effectively. Carasent’s product offering fits this demand.


This has given and will continue to give momentum to the services that Carasent provides. The old patient-journal systems that many clinics use are also outdated and do not provide the same value that Carasent does in terms of functionality or the add-on integrations into other systems.  

The economic moat for Carasent is that the system and all its add-on integrations from third party providers become vital for the clinics in their daily work as all of the information needed to keep track of and treat patients is in the system. In addition to the clinics being dependent on Webdoc for the patient journals they rely on the system and its integrations into other software.

Of the sales, over 90% are recurring SaaS revenues and the remaining revenues are linked to the implementation of the software. Of these recurring revenues, approximately 50% of the reported turnover comes from revenue from the integrations. The revenue distribution for the integrations from third party providers is 50/50. The switching costs are therefore enormous as it is very costly to replace the system not only in the switching of the software and the integrations itself but also because the business can not operate at the same level during this period because of the reliance on the systems. It also takes time to export the information into another solution. This would make it hard for a competitor to challenge Carasent and creates a strong economic moat for the company. 


The economic moat and the “stickiness” of the product is demonstrated by it’s churn rate (amount of customers who buy the service and stop using it) which is less than 1%. Of Evimeria's current growth about 70% comes from sales to new clients and 30% from additional sales to current customers. This means that the ARPU (Average revenue per user) increases over time which coupled together with entirely new customers buying the service will lead to very good sales growth. Another important metric for SaaS businesses is the customer acquisition cost (CaC). The market for health clinics is very fragmented with a lot of smaller players. They often take references from other clinics when they buy products which means that good or bad experiences are shared quickly. Due to the very positive reputation the company has, it has been able to grow almost purely by word of mouth as the advantages of their software has been told in the industry. 

The company has great potential to expand in multiple verticals and geographies. A launch of Webdoc in Norway is in the pipeline and this market has the same dynamics as the Swedish one and approximately the same size. In addition to Norway the company could expand to other countries in the Nordic region. Chairman Johan Lindqvist has also stated that the company is looking into creating a simplified version of Webdoc to sell in emerging markets which is a very interesting vertical. As of now, the company does not sell it’s services to the public sector but this could also provide significant revenue for the company.


There are 6500 private health clinics in Sweden and the private primary and specialist care market in the country has a total revenue of about 50 billion SEK/year. This market sees a growth of about 10% a year. The company's customers pay about 1,5% of their total revenue for Evimeria’s software. This means that the total addressable market is about 50 billion SEK x 1,5% = 750 MSEK of which Carasent has a market share of 10%. Of this market, about 50% of it is addressable for Carasent (375 MSEK). This is because the private clinics that work with the public sector have been forced into using the old on-premise software systems that the hospitals use and are not allowed to choose their own software systems. Some private clinics have gone so far as to refuse to taking part in contracts with the public sector because they do not want to be forced into using outdated software that makes the running of their business much harder (https://lakartidningen.se/Aktuellt/Nyheter/2019/08/Vardcentral-sags-upp--vagrar-byta-till-utdomt-journalsystem/). Management believes that these restrictions will disappear as there are enormous efficiency gains to be made for the public sector by using more efficient solutions that allow integrated patient journal systems (estimated to save upwards of 34 billion SEK). 


Since the healthcare industry is still in the early stage of digitalization, clinics spend increasingly more money on digital solutions and as a result, the market is estimated to grow an additional 10% a year. In the words of chairman Johan Lindqvist: “If we did not take on any extra customers at all, our business would grow 10% every year”. 

  • 375 MSEK market

  • 20% yearly market growth

  • The Norwegian and Danish markets are estimated to have the same market size


Financial statements
  • EBITDA% rose from 23,3% in 2018 to 33,9% in 2019

  • Gross margin % rose from 80 to 82% same time period

  • Churn rate less than 1%

  • 43,6% revenue growth last three years

  • Strong balance sheet with assets totalling 156 MNOK and debt totalling 61 MNOK




EV/S

EV/EBITDA

Revenue growth last three years

Carasent

18,6

61,7

43,6%

Fortnox

27,6

68,2

40,8%

Admicom

20

45,3

38,9%

Lime Technologies

8,8

43,3

21,8%



Rising ARPU due to the yearly price increases and customers buying add on software will continue to improve the margins of the business. This together with the exceptionally low churn rate and high revenue growth will lower valuation multiples as sales and margins improve. When comparing the business with other SaaS-peers we see that it is a reasonable valuation. However, many of the SaaS-peers lack the competitive advantages that Carasent possesses, operate in industries with more competitors and are more cyclical than Carasent. 

The Nordic countries are reasonably small markets with certain market characteristics that makes it hard for a foreign competitor to launch a similar product. It also takes a lot of local expertise to be able to integrate the system with local databases and integrate the patient journals according to the standards and regulations present on the market. Foreign competitors do not have this edge. Because of this, I deem the threats of new competitors as low. As discussed, the solutions available at the market today lack many functionalities and integrations that Carasent provides and this should allow Carasent to outpace market growth as they capture market share from competitors.

As the Swedish healthcare system is mainly government-funded this entails political risks. In case of changed regulation that would make the private healthcare sector smaller this would mean a smaller customer base for Carasent’s services. However, the healthcare system in Sweden already suffers from long waiting times from not having enough capacity and reducing the private clinics would make this problem far worse. The government has set initiatives to make the healthcare system more efficient by 2025 and it is widely believed that private healthcare will play a big part in achieving these goals and many expect the private segment to grow. In my opinion, there are no incentives for politicians to commit to drastic regulation on the private healthcare sector as this would worsen problems and hurt their long-term goals of improving the system. Instead I believe the political situation can benefit Carasent if municipalities and other state organizations decide to loosen the rules on what software clinics can use. 
 

Catalyst
Continued execution of growth strategy and launch into new geographies and expansion into new segments with new product offerings could serve as catalysts.

Disclaimer: I own stock in the company.







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