Orion to raise $32.9M in rights offer after posting full-year loss, sees profit in 2018

Tuesday 30th May 2017

Orion Health is to raise $32.9 million in a discounted two-for-nine rights issue to shore up working capital after posting a full-year loss that reflected weaker Europe, Middle East and Africa sales. It expects to be profitable in 2018 even after a drop in recurring income from a US customer.

The health management software company's net loss was $34.2 million in the year ended March 31, down from $54.4 million a year earlier, and in line with its revised guidance last month that warned delayed execution of contracts would impact earnings. Operating revenue fell to $199 million from $206.9 million and total net cash outflows grew to $51.5 million from $38.5 million, leaving Orion with cash reserves of $6 million at balance date, $30 million in working capital debt facilities and a $10 million standby facility.

The rights will be issued at 90 cents per share, a 21.4 percent discount to the theoretical ex-rights price of $1.14, based on yesterday's closing share price of $1.20, it said. The shares fell 8.3 percent to $1.10 immediately after NZX trading commenced at 10 am and have declined 40 percent this year.

Describing the last financial year as "challenging", Orion chief executive and 50.8 percent majority shareholder Ian McCrae said the company was still on track to achieve profitability in the current financial year. Still, presentation slides detailing the result warn that because of a merger between a major US customer, Cal Index, and Inland Empire HIE, "the company has budgeted for a material reduction from Cal Index in FY2018 with the result that the company's recurring revenue percentage is expected to drop just below 40 percent for the current year".

Recurring revenue from regular licence payments are a key measure for software-as-a-service companies and stood at 46.4 percent in the last financial year.

The $32.9 million two-for-nine rights offer and existing bank facilities would "provide the business the financial resources to achieve" profitability in the second half of the current financial year. A loss is forecast in the first half of the year "of similar magnitude" to the first-half loss in the year just ended of $18 million, "substantially offset by planned material improvement" the second half of the 2017/18 year.

"Operating cash flow is expected to follow our earnings profile," the notes say, "absent large one-off sales on non-standard payment terms".

The company expects revenue growth of between zero and 10 percent in the year ahead in constant currency terms to give Orion revenues of between $200 million and $220 million.

McCrae will take up his full $15 million entitlement under the rights issue, along with 9.6 percent shareholder Geoff Cumming and the company's New Zealand-based directors.

First NZ Capital is underwriting the balance of the $32 million rights offer. The shares have dropped heavily over the last year as Orion has fallen prey to deteriorating sentiment towards cash-burning SAAS 'growth stocks', which expect to accumulate losses while building scale, and reflecting slow contract execution and institutional shareholders' question marks over founder McCrae's tenure as managing director.

The company is in the midst of a strategic review and has cut some $10 million from its annual operating costs.

McCrae confirmed the company continued to entertain "out of scope" expressions of interest received in the course of the review, which had included a search for sources of additional capital, including minority investments in the company.

"Orion Health has decided to widen and extend the review to explore that interest, focused on ways to maximise shareholder value and deliver outcomes that are in the best interests of all stakeholders," McCrae said. “I would like to take this opportunity to acknowledge that recent events have created a challenging time for our shareholders. We have made, and will continue to make, appropriate changes to improve business performance. At the core of our business we have an impressive list of prestigious customers internationally, modern scalable technology and our staff are passionate and talented. Therefore I remain totally committed to the business and have supported the rights offer to the greatest extent I can.”

The results presentation shows total revenue from the North American market grew by two percentage points to 65 percent of total revenues in 2016/17, and totalled $129.5 million, compared with $125.4 million the previous year, to be the only one of the company's three geographies where total revenues rose. Of that total, recurring revenue was 54 percent of the total, up from 49 percent the previous year. The North American contribution to operating earnings for the year trebled to $37.9 million, from $12.2 million the previous year.

The company made strong progress migrating North American customers to cloud-based Amazon Web Services, a key part of its strategy, but warned the Cal Index and Inland Empire merger had "resulted in reduced usage of Orion Health software pending a potential vendor review process, with a consequential material reduction from Cal Index in the current year".

Performance in the Europe, Middle East and Africa segment was affected by a slowdown in contracting by Britain's National Health Service, with total revenues falling to $38.6 million from $48.4 million the previous year and making a contribution to operating earnings of $4.7 million last year, compared with $15.2 million the previous year.

Asia-Pacific revenues, covering mainly Australian and New Zealand operations, were down slightly at $30.2 million from $32.4 million the previous year for a contribution to operating earnings of $7.4 million, against $7.7 million.

Notes to the Orion balance sheet say the company took a $27 million on revenue in advance liabilities, caused mainly by a change in payment terms by one significant customer. The company also entered into a receivables purchase agreement with the Bank of New Zealand to provide immediate cash while allowing BNZ to collect receivables from a "large international corporate" that is making payments under extended terms.

The company said it signed a number of new agreements in North America, including a significant contract with Saint Francis HealthCare Partners, a growing network of over 1,000 independent health care providers serving more than 500,000 patients in Connecticut in the US.

The record date for the rights offer is June 8, and further details on the rights offer, including how shareholders can take up their rights, are expected to be released on or around June 7. The offer is expected to open on June 14.

(BusinessDesk)

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