Evaluating Emis' Half Year Report

Emis Group is a British company that provides software and systems for the UK healthcare sector. Their aim is to digitise and integrate healthcare in order to enable services like the NHS to operate in a co-ordinated, efficient and effective way. Emis began in March 1987 as Egton Medical Information Systems and was founded by Dr Peter Sowerby, Dr David Stables and Tony Jones. Emis is one of only a handful of the UK’s listed software companies, and it certainly has some desirable characteristics for investors. Emis reported half year results on the 9th of September, and this article shall take a look at the recent results and Emis’ prospects for investors going forwards.


History


In 1987, the three founders identified an opportunity to build and supply management software to GP practises, as GP’s systems and records were largely paper based. Their first clinical software, EMIS, was released in 1990. In 1999, they began to develop hardware, engineering and technical services for the healthcare industry, which they named Egton. In April 2008, the whole of EMIS’ issued share capital was acquired by Emis Group as part of a management buyout. Emis Group was listed on the AIM market in 2010.


Today, EMIS Group’s products and services are used by 10,000 healthcare organisations in the UK; these organisations are primarily GPs and pharmacies, but Emis' products and services are also used by larger organisations within the NHS such as hospital trusts.

Emis generates revenue through:

  • Software subscriptions and support — recurring revenue.

  • Interface and connectivity charges — mainly recurring.

  • Hardware and related service — mainly non-recurring.

  • Other services — mixed recurring and non-recurring.

  • Perpetual licenses, training, consultancy and implementation — non-recurring.


Business Model


The business is split into two segments: Emis Health and Emis Enterprise. Emis Health comprises areas of the business where revenues are generated from NHS organisations — this includes the primary, community and acute A&E markets. The main software solution Emis sells to care providers in this segment is Emis web, a platform that allows for the storage, management and analysis of patient records (as of 2020, 40 million patient records are held under the Emis system). The Emis Health segment accounted for 68% of revenue in 2020. From 2019 to 2020, ​​Emis maintained its UK GP market leadership position with a market share of 57%. The Group holds a joint market leadership position in Acute A&E at 21% (2019: 23%) and the number two market position in community at 20% (2019: 21%).


This image is a graphic showing the two business segments of the company Emis. The first business segment is Emis Health, which accounted for 68% of revenues in 2020 and these revenues are derived from the primary, community and acute care markets. The second business segment is the Emis Enterprise segment, which is made up of medicines management (which accounted for 22% of revenue in 2020); partners, analytics and other services (which accounted for 9% of revenue in 2020) and patient-facing services (which accounted for 1% of revenue in 2020).
Source: Emis' Annual Report 2020

The Emis Enterprise segment comprises business areas where revenues are derived predominantly from B2B healthcare sector sources and includes medicines management (accounting for 22% of revenue in 2020) across both community and hospital pharmacy, the Patient services business (an app that enables you to book GP appointments, order repeat subscriptions and speak with your doctor over a video call, accounting for 1% of revenue in 2020) and the partners/analytics business, which utilises Emis’ data expertise to sell services to the life science industry.


Recent Performance


Over the last 5 years, Emis has struggled with growth. From 2016-2021, Emis’ top line growth rate averaged 1.5% per annum — hardly typical for a healthcare software company. However, as you will see later in the financial metrics, Emis has been quite a profitable business, and it has gone some ways to re-strategise and align with a more ‘growth orientated’ outlook.


In 2019, Emis decided to spin off its non-core specialist and care business to Northgate Public Services (UK) Limited for £14.9 million so that it could refocus on its core business and explore acquisitions that further aligned to Emis’ long term strategy.


In March 2020, Emis used some of that cash (£2.9 million) to acquire Pinnacle Systems Management, the owners and operators of the UK PharmOutcomes platform. Pinnacle’s sales in the first year of absorbing them into Emis were £2 million and operating profits were £0.7 million, so at a net consideration of £2.9 million, Emis is certainly not ‘spending its cash all at once’. The below describes Pinnacle’s software platform according to Emis’ website:


‘PharmOutcomes is a secure, web-based service management solution used by more than 11,000 community pharmacies to record and manage nationally and locally commissioned patient services such as: flu vaccinations, the Community Pharmacist Consultation Service and hospital discharge referral management.’


Half Year 2021

This image shows the 2021 H1 and 2020 H1 results for Emis. These results include their revenue, operating profit, cash flow and net cash, earnings per share and interim dividend.
Source: Investegate.com, Emis' Half Year Report

Half year results came in slightly ahead of management’s expectations. Revenue growth of 7% reflected improved momentum for Emis’ solutions, with growth even across all categories except hardware. The H1 figure for 2021 shows recurring revenues now account for 79% of the Emis total. Cash flow for the period was down significantly, impacted by a deferred tax payment from the prior period. Whilst revenue has ticked up nicely for the period, operating margins (on an unadjusted basis) have slipped slightly below the 22% seen last year to around 19%, a dip driven by heavy amortisations and reduced capitalisation of development costs.


Future Growth Drivers


Emis X


Emis’ future growth is being largely pinned on Emis-X, the second generation platform for Emis that is designed to be the UK’s first integrated clinical platform, aimed at further improving software integration in the NHS. The first application for Emis-X is an advanced analytics platform ‘Emis-X analytics’, which launched in 2020.


In this image, Emis' market positioning and capabilities are split into six segments: patient, pharmacy, research and life sciences, primary care, community care and emergency care.
Source: Emis' Investor Presentation, Market Positioning and Capabilities

As you can see from the above, Emis-X looks to span across all of Emis’ current competencies and remove the silos between each function, resulting in significant streamlining for customers in the NHS.


Digital Transformation


While the Covid-19 pandemic presented many challenges for the healthcare sector, it has provoked change in the ways that the UK healthcare system operates, leading to a rapid adoption of digital healthcare systems. The NHS had already put into place a plan to digitise, set out in the 2019 NHS Long Term plan, which included initiatives such as NHS England’s “total triage” model (where every patient who contacts their GP practice must first provide information on their reasons for contact and is therefore triaged before making an appointment). This long term plan sets the agenda for more widespread data sharing and growing focus on the digital delivery of front line healthcare.


Many believe these changes are here to stay: the National Audit Office (NAO) reported that “digital transformation in the NHS will increase in importance as a result of the crisis” and NHS Confederation chief executive, Niall Dickson, has said that we should see “virtual by default” as the new normal in key areas of delivery. The government’s 2020 spending review includes £559 million to support modernisation of technology across the healthcare system.


Covid-19 has also highlighted the importance of data to protect public health. Data-driven analysis has become a critical tool, from tracking and monitoring the spread of the virus to understanding the risk factors for different population groups. EMIS is clear that it aims to be at the forefront of this advancing technology for the UK IT healthcare sector.


Risks


The commercial success of the Emis group is dependent on the healthcare sector’s strategic direction to use IT to reduce costs and improve efficiency.


The NHS represents a significant proportion of the Group’s revenues, and therefore how it is organised and procures goods and services could affect the Group’s ability to sell effectively to this market. Emis Group’s appointment to the GP IT Futures framework in 2019 and the nature of the Digital Buying catalogue has reduced the level of risk, however, the framework imposes obligations for continuous development and interoperability, as well as future competitive tender processes at a local level.


There is also risk that new competitors, including major global technology companies, may impact Emis' market share and financial returns. Google have attempted to make moves into acquiring public healthcare records and data in the past and other healthcare technology companies are rapidly seeing the value in acquiring health data. Whilst this could pose a risk for Emis, I think it also states the intangible value that Emis has with its significant bank of patient record data at hand, which it is trying to monetise through its various analytics offerings.


Financial Metrics

This image is a financial table detailing the financials of Emis Plc. The table includes figures from the time period 2017-2021, and includes Emis' revenue, its revenue growth in percentage, its gross profit, its gross profit margin in percentage, its operating profit, its operating margin in percentage, its debt to equity ratio and its ROCE (return on capital employed) in percentage.
Source: The Twenties Trader

Looking at the financials for Emis, we can better understand the fundamentals of the business. Firstly, looking at revenue, you can see that Emis has struggled to generate any real levels of growth over the five year period above, with the growth rate from 2016 - 2021 averaging 1.5%. There have been reasons for this lacklustre growth, and Emis has adopted a turnaround strategy of refocusing the business and developing products like Emis-X for the future. However, despite its future prospects, I think the growth rate likely reflects the NHS’ structure and the lack of growth available to Emis with its core customer. The number of GP surgeries in the UK, and other health systems within each local commissioning group, isn’t growing that fast. In fact, excluding temporary staff, the number of GPs since 2015 has been falling. The fact this market isn’t expanding likely reduces Emis’ ability to grow with the market, and thus results in tepid growth numbers.

This infographic shows the total number of GPs, nurses and other staff members in the UK.
Source: Institute for Government analysis of NHS Digital, 'General and Personal Medical Services, England'; NHS Digital, 'General Practice Workforce 30th June 2019'.

Despite Emis’ poor levels of growth over the past 5 years, profits have been quite good. Gross margins of 90% are some of the best you will see in the stock market. However, Emis isn’t brilliant at turning strong gross profits into cash, seen by the average operating margin of 20% — a figure that generally would be seen as quite good, but one that I would expect to be higher considering the company is generating 90% gross margins.


Looking closer at the income statement, Emis has been incurring some pretty significant operating expenses that drag down profits, namely staff costs and amortisation of intangibles to the tune of £11 million and £14 million in the year prior, equal to 7% and 9% of revenue in each year respectively. Given Emis rarely makes an acquisition, which is where companies usually amortise items off of the balance sheet, it must mean Emis’ legacy software is being run down and weighing on unadjusted operating profits. Despite the slightly inefficient drop through of gross profit into operating profits, Emis has improved its return on capital significantly to a level touching 30%. This is a keen indicator for a quality business, and Emis shows strength here.


On the balance sheet Emis is very strong, with a net cash position and no long term debt, resulting in a very manageable debt to equity ratio of 0.62 (total liabilities to equity).


Valuation and Summary


Emis certainly looks to have a strong position in the UK NHS market. It is also very profitable, having a loyal base of customers, who are unlikely to switch platforms given the embedded records and files in Emis’ database. However, the big issue for Emis is the lack of growth and the structural challenges faced by the NHS, which I doubt will ever be a high flying customer ready to spend lots of cash on Emis’ services. This leaves me with little conviction that Emis will get its top line growth rate above 5-8% in the medium term.


With a valuation of 27x 2022 expected earnings, I think Emis looks fully valued despite its profitability, and unless it executes a successful pivot to selling services to the private sector, such as life science and health data companies, I think there are better opportunities elsewhere.


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At the time of writing, The Twenties Trader did not own shares in Emis Group plc.


For the full list of Twenties Trader Portfolio holdings, view here.


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