Sensus Healthcare: Recurring Revenue Initiatives Are Interesting (NASDAQ:SRTS)

investment thesis

Sensus Healthcare (NASDAQ:NASDAQ:SRTS) is a company that provides equipment to treat skin problems, including non-melanoma cancer. These products have shown strong demand, but are usually affected during economically unstable periods such as 2020 and 2023, causing years as bad as the last.

In 2024, the company has recovered and management has started exciting initiatives to create recurring revenue streams to provide more stability and has also recently started expanding across Asia. For this reason, I think the company is a buy, although it has a high risk profile.

A solution for skin problems

Sensus specializes in the development of equipment for the treatment of dermatological conditions such as non-melanoma skin cancer or aesthetic treatments such as scars, keloids or fibrosis.

Their SRT machines use patented superficial radiation therapy for treat these problems and according to the company’s own clinical trials (take this with a grain of salt) the effectiveness ratio is around 94% for keloids and over 97% for skin cancer treatments. These low energy x-ray based machines are extremely beneficial to the users they are used on as the traditional method would be surgery to scrape the area with a sharp instrument or remove the skin cancer along with a margin of healthy tissue from i swear Invasive methods that are not always viable, for example, when the affected area is in sensitive areas, such as the fold of the nose, lips or ear lining.

In addition, the SRT-100 vision is used to plan treatment and track progress through ultrasound imaging. By doing so, the SRT product would greatly facilitate the work of surgeons and in turn reduce the invasiveness of treatment for patients, benefiting all parties involved and thus fulfilling a critical mission.

According to the Association of the American Academy of Dermatology, 1 in 5 Americans will develop skin cancer in their lifetime, and it is the most common cancer in the United States due to sunburn and UV exposure in general. Therefore, Sensus products are essential for treating these problems and will likely continue to be so in the future.

2024: A year of recovery

So far the qualitative side of the business looks good: A product that fulfills a critical mission and would revolutionize the way the problem is treated.

If we compare it with the numbers, we can see that the incomes really have a positive trend, but in the crisis they suffer a lot. For example, we can see that in 2020 sales decreased by 65%, and in 2023 by another 43%, although they returned the following year, these are not small decreases and also affected the profitability of the business.

This is because during times of economic distress, customers often pause their orders while the waters calm. And once the economic outlook looks better, demand quickly returns because the products are really in demand.

This is why in Q1 2024 revenues were up 215% year-over-year, and in Q2 2024 they were 100%. Furthermore, between 2014 and 2023, the average annual growth was 36%, even taking into account how bad 2020 and 2023 were.

Recurring income

Fortunately, Sensus management seems to have learned from these two bad years and looked for ways to maintain more predictable earnings. In this case, through its Sentinel platform, with which the data captured by the SRT-100 vision is stored and interpreted.

Also note that the SRT-100 Vision’s image-guided ultrasound capabilities and Sentinel technology make the recurring revenue model possible. This advanced technology is expected to play a key role in our growth.

CEO Joe Sardano on the Q4 2023 earnings call

Although this platform is still in its early stages, I believe that as the company collects diagnostic data, it will be able to create more complex tools in the future that will improve the customer experience and provide a competitive advantage. At the end of the day, data is the gold of the 21st century.

This would be in addition to the services currently offered, such as the repair and preventive maintenance of SRTs. In Q2 2024, services accounted for $1.16M or 12.6% of revenue, up 16% year-over-year, and is a segment I’m excited to watch closely over the coming quarters/years.

Customer focus

Now it’s time to talk about a gigantic risk that I cannot ignore, which is the focus of the company’s main customer. This is the information that can be found in the latest quarterly report:

A US customer accounted for 83% and 46% of revenue for the three months ended June 30, 2024 and 2023 and 92% and 85% of accounts receivable as of June 30, 2024 and December 31, 2023, respectively.

A single customer accounting for more than 85% of revenue and 92% of accounts receivable is very scary, and at the same time would explain why in tough years the company takes big hits in revenue. After all, it only takes one customer to drop their orders to lose 85% of their billing, and as long as recurring revenue doesn’t make up a larger portion of the total, this will continue to drastically affect revenue every crisis or economic slowdown. .

This makes sense since we are talking about a small company with a market cap of $100 million and only $36 million in revenue over the last twelve months. If it manages to grow and distribute its products to more customers, as it has been doing lately, the risk would be reduced. In the meantime, it would continue to be a high-risk investment.

In the last two years, we have made efforts to open new international territories. During this time, we have opened sales in Ireland, Guatemala, Turkey and now I am proud to announce that Sensus has sold the first image guided SRT-100 Vision system in Asia.

Chairman Michael Sardano on the Q2 2024 earnings call

ASSESSMENT

As mentioned before, the company has grown strongly year on year. This can be seen better if we break it down quarterly, with A representing reported income and E being my estimates:

Click to enlarge

My estimates are that by FY2024 the company will basically recover 2022 revenues and based on what we saw in the first two quarters of 2024, the entry into Asia and the development efforts of the Sentinel platform, I see it quite realistically. If this is true, we would be talking about revenues of $42 million for FY2024 and with a net margin of 17%, the net profit should be around $7 million (between 2022 and 2023, the net margin was on average 20%).

Divided by the 16.3 million shares outstanding and at a P/E of 20 times it would represent a price per share of almost $9 from the current price of $6.6, which is an upside of 33% over the next 12 months and nearly 180% over the next five years if it continues to grow at least 20% annually (since 2013 it has grown 35% annually).

conclusion

I mentioned earlier that this company has a high risk profile. This remains true, but it is also true that currently the potential returns are also attractive.

I think my assumptions fall on the conservative side based on the company’s history, meaning my estimated scenario could be met without expecting a turnaround or anything like that, simply with management continuing to execute as before. Added to management’s efforts to improve the quality of its earnings through recurring revenue, it makes me think the company is currently a buy.