Will Craneware's migration to cloud-based software be positive for its shares?

Craneware is a UK technology company backed by Baille Gifford, Liontrust Asset Management and Sandford DeLand. It provides software and analytics services to the US healthcare industry and aims to improve financial and operational performance in hospitals. Unlike UK hospitals run by the NHS, the US hospital system is private, with insurers, corporations and patients having to pay for patient care at the point of access. This means that a hospital is actually a financially complex organisation, which not only has to provide care, but also facilitate payments; manage insurance claims and appeals; analyse efficiencies; individually price treatments, medical interventions and devices; and lastly (considering they are competitive private companies) analyse vast amounts of their internal financial data to ensure they are making good margins and performing well in a fierce marketplace. This is where Craneware steps in, with an array of software solutions that are tailored to the specific challenges of the operations and financial management of hospitals. Examples of these are:

  • The Chargemaster Toolkit, which captures optimal reimbursement for providers.

  • The Physician Revenue Toolkit, which is a solution for physician KPIs and charges.

  • The Patient Charge Estimator, which simplifies patient bill estimates to improve upfront collection.

  • The InSight Audit, which is an application to manage government and commercial audits.

  • The Trisus Healthcare Intelligence, which is a cost and revenue analytics platform.

Recent developments at Craneware have largely revolved around creating a central cloud based platform called Trisus, where all of their various tools can be hosted and the data shared between solutions. The migration of solutions to the cloud platform is underway with the current roll out of the Trisus Chargemaster and Trisus Pharmacy solutions ongoing. This migration to a central system should prove useful for healthcare providers, as they will have access to all Craneware’s solutions in one place. It will also provide opportunities for Craneware to cross sell platform add-ons to customers.

A robot that looks like a human, touching the centre of a digital wheel projection, with the word 'Craneware' at the top right of the image.

Image courtesy of Craneware

A key trend that underpins growth for Craneware is the transition of the US healthcare system from a fee-for-service system to a value-based system where hospitals and physicians are renumerated upon health-related outcomes for patients. As Craneware states in its annual report: ‘A hospital’s ability to participate in a value-based care system is dependent on the collection of granular data and the use of insightful analytics to understand the opportunity to deliver better value.’ It is this thirst for data and analytics within the healthcare industry that has driven Craneware’s expectations for the market for healthcare analytics in North America to grow at 29.5% CAGR (Compound Annual Growth Rate) from $3bn in 2020 to $11bn in 2025. With 2020 revenues of $71.5m, Craneware represents a very small portion of the total market, but its niche and highly tailored solutions could grow significantly into an expanding market.

Craneware sells software packages in the SaaS (software as a service) format — this means customers have to pay a recurring fee to use the software, typically locked into a four-year contract. This provides a consistent revenue stream, with the only risk of business loss occurring around the contract renewal date, for which it becomes Craneware’s utmost priority to sign customers up for a further contract. Customer retention rates as of the last update from the business are running at around 90%, showing a pretty good level of ‘stickiness’ of the core offering. It is due to this recurring nature of sales that Craneware is able to forecast out revenues with good accuracy (citing the recent update, revenue visibility for recurring contracts for the three years to 2023 is currently $206.4m). This revenue visibility added to a debt-free balance sheet and a cash position of $50m gives Craneware some very attractive qualities to the prospective investor. It’s well worth taking a look at the Craneware balance sheet for yourself, as it is spectacularly simple. A rarity in investing is to find a company with no non-current liabilities, in other words, Craneware is totally debt free and its current assets such as cash and trade receivables amply cover any short term liabilities due within the year.

This table above picks out some of the key financial metrics for Craneware, to which you can see some very superior operating numbers. Compound sales growth estimates for the next three years are estimated at 6.2%. I would consider this somewhat conservative, but as contract values are split out over the total lifetime of the contract as opposed to recorded on the year of signing, revenue growth is typically more modest and steady growing than other software providers. Operating margins are very high at 26.9%, a testament to the profitable nature of Craneware’s niche SaaS business model. Return on Capital Employed (ROCE) is also equally impressive at 23.7%, showing the company is amply efficient at generating financial return from its assets.

Craneware’s growth may not look explosive, but its services have yet to be fully developed. With a growing market and a very niche, but profitable, focus, Craneware has many opportunities to accelerate growth in the coming years as its products become more widely recognised for their quality. At the current price of 2037p, Craneware trades on 43 times forward earnings. Adjusting for the $50m in net cash, Craneware has a P/E ratio of 38/39 times forward earnings. Craneware stock is expensive. However, considering its reliable revenue flows from the SaaS model, its debt-free balance sheet, its fantastic financial metrics and the possibility of its growth, I think at current levels the shares are well worth the premium.