Streamline Health (STRM): Earnings Thoughts?

Question

What do you think of Streamline Health (STRM) first quarter results that were published in June 2012? The company appears to be turning around successfully.

Answer 1

Yes, Streamline Health's (STRM) Q1 earnings were impressive and were a major improvement over last year's results. But, given our natural skepticism concerning earnings results, we would highlight several negatives about the results.

1. The company would like to call attention to STRM's EBITDA results, which were excellent. However, EBITDA is a very misleading metric for STRM because the company capitalizes software costs, and has a chunk of debt to the balance sheet. As such, EBITDA is not a valid measure, at all for STRM's profitability. Investors must take EBITDA and subtract regular cap-ex, software development costs, and interest costs, to arrive at a more accurate cash-flow metric for STRM. For the quarter, STRM's cap-ex was $200K and there was about $500K of software development costs and $200K of interest expenses. With EBITDA at $1.7 million, the more accurate operating cash-flow measure is $1.7 million - $900K or only $800K ($3.2 million annualized). With around 10 million shares outstanding, and net debt of around $4 million the company's EV/Operating Cash Flow is around 10X. Now, this is not expensive on a relative basis, especially for a growth company, but still the company is not as cheap as simple and misleading EBITDA figures would imply.

2. The expense level of the company was somewhat lower than it will be in coming quarters because there is a bit of a lag time on hiring, which will be needed to maintain growth levels and provide service. As such, annualizing this quarters results may not be appropriate, unless one assumes continued growth in the coming quarters to more than make up for the additional expenses.