We Just Increased our Investment in ONE

Disclosure: S3 Consortium Pty Ltd (The Company) and Associated Entities own 8,818,333 ONE shares at the time of publishing this article. The Company has been engaged by ONE to share our commentary on the progress of our Investment in ONE over time.

We recently increased our Investment in healthcare technology company Oneview Healthcare (ASX:ONE).

Today we will explain why, and what we are looking forward to.

ONE raised $20M at 18c back in July, followed by a heavily oversubscribed SPP that raised a further $2.8M.

The ONE share price looks to have worked through the 18c placement stock and has been ticking upwards for the last six trading sessions.

(post cap raise, ONE didn’t trade near or below the cap raise price... usually a good sign).

ONE’s technology connects the patient in the hospital bed to nurses, meal service, medical images and records, educational content, entertainment and other in room systems to help make the hospital run better:

The more hospital beds signed by ONE = the more recurring revenue to ONE.

ONE is currently used in ~17,520 hospital beds around the world as of August 2023.

ONE is currently used in just 1% of the ~920,000 total hospital beds in the USA.

In June, ONE announced a value added reseller agreement agreement with $30BN capped NYSE listed Baxter International, who sells hospital beds and controls 75% of the hospital beds in the USA.

We think this partnership could be transformational and a company maker for ONE... IF it delivers the new sales velocity for ONE that we hope it will.

With our increased Investment in ONE, today we will be launching our new ONE Investment memo where we share:

• Our ONE Big Bet
• Our key objectives for ONE to achieve in the next 12 to 18 months
• Why we are Invested in ONE
• The key risks to our Investment Thesis
• Our Investment Plan

We will also share our assessment of how ONE performed against our first Investment Memo written back in January 2022.

In summary, the key thing we wanted to see in our first Investment Memo was for ONE to hit 15,000 beds.

They are now sitting at 17,520 beds.

In our new Investment Memo, we want to see ONE get to 25,000 beds by the end of 2024 (in 15 months time...) through leveraging the newly signed value added reseller agreement with Baxter.

We estimate that ONE has ~$24-25M in the bank after the July placement and SPP ($2.6M June 30 cash balance + $22.8M cash from the recent raise).

We were impressed that ONE managed to get such a decent raise away in poor overall market conditions back in June - a great vote of confidence in ONE.

This nice bank balance means ONE are well funded and ready to execute on increasing sales velocity directly and through the new Baxter value added reseller agreement.

Our blue sky scenario for our Investment is ONE is that it can see a sustained re-rate in its share price like $7.6BN capped ASX listed Pro Medicus.

ASX listed Pro Medicus delivers healthtech for the medical imaging sector.

Over an 8 year period between 2015 and today, Pro Medicus’ share price up ~7,100%.

Past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Pro Medicus delivered this return by steadily grinding out more recurring revenue and adding more users, year on year on year... so far ONE has been doing this too.

Like ONE, Pro Medicus also sells into the healthcare sector (a long, hard sales cycle), but also enjoys sticky customers once they are signed up.

Pro Medicus grinded out consistent sales increases over 10 years to deliver this share price return.

We have done a couple of very rough calculations based on publicly available info from ONE and Pro Medicus, we have tried to strip out non-recurring revenue:

Pro Medicus currently have $124M in recurring revenue as of FY2023 and have recently transitioned their model to a more recurring revenue basis, so at $7.6BN market cap, we think they are trading at, at a minimum, a ~61x revenue multiple.

ONE is currently at ~$10.3M annual recurring revenue in FY2022, and trading at just a ~10x multiple.

We think this is because the market wants to see a few consistent years of growth from ONE before rewarding it with a higher revenue multiple.

What we want to see from ONE over the next few years is to keep growing its recurring revenue (accelerated by the Baxter re-sale agreement) and demonstrate year on year growth every year.

Hopefully that will cause investors to reward ONE with a higher revenue multiple like they do for Pro Medicus.

How does ONE get there? The “blue sky” bet for ONE - access ONE tech on your own device...

ONE is also working on a “bring your own device” (“BYOD”) solution - where patients can bring their own phone or tablet to a hospital and plug straight into ONE’s platform on arrival.

This would effectively strip out all the difficult hardware supply issues that ONE has diligently worked to overcome over the past few years, and make it way easier for hospitals to adopt the solution.

Less adoption friction = more and faster sales.

We think that if successfully rolled out, ONE’s BYOD solution could take the company’s growth exponential.

Imagine a near ubiquitous patient experience platform accessible by patients in major healthcare markets...

Together with the Baxter agreement, this is why we’ve increased our Investment in ONE.

Our Initial Entry Price for ONE was at 6 cents, we then Increased our Investment in November 2021 cap raise at 27 cents and again a third time at 18 cents in line with the most recent capital raise.

So again, ONE now has two major avenues to securing more contracted beds

1. Baxter agreement
2. “Bring your own device” (“BYOD”) solution

We see both avenues as working together to enable ONE to chase down our new goal for our ONE Investment which is to see it hit 25,000 beds in the next 15 months.

This is Objective #1 in our new ONE Investment Memo, which we are launching today.

We see Pro Medicus as a great model of what successful healthtech looks like on the ASX - and more importantly - this shows where our hope our ONE Investment might go.

Note that just because Pro Medicus had success in the past, is not and should not be taken as an indication of ONE’s success in the future.

With that said, we have high hopes for ONE and our new ONE Investment Memo reflects that...

IM-2: Oneview Healthcare (ASX:ONE)

Memo Opened: 22 Sep 2023

Shares Held: 8,818,333

What does ONE do?

Oneview Healthcare (ASX:ONE) is a health tech company that provides hospital patients a “virtual care and digital control centre” at their bedside.

ONE’s products are cloud-hosted patient dashboards that help make hospitals more efficient and patients more engaged in their own care.

What is the macro theme behind ONE?

Nursing shortages brought on by the pandemic highlighted the systemic issues in healthcare systems. The trend now is for these institutions to modernise by adopting new healthcare technology.

Big tech companies like Google, Amazon and Microsoft are looking to enter the health tech space and companies with an early-mover advantage should thrive or become takeover targets in their own right.

Our ONE Big Bet

“ONE will sign on enough new hospital beds at an accelerating rate to achieve a $1BN valuation (based on 5x to 10x forward annual recurring revenue) and be acquired by a large health tech provider.”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved, and it will require a significant amount of luck. There is no guarantee that it will ever come true. Some of these risks we list in our ONE Investment Memo.

Why do we continue to hold ONE?

Proven tech, liked by customers

ONE is moving into the growth stage having proven out its tech products in a hard to enter sector (hospitals). Customers are sticky and sign long term contracts.

Value Added Reseller agreement with largest hospital bed supplier in US

ONE now has an initial 2 year “value added reseller agreement” with the largest hospital bed supplier in the US (Baxter International).

Under the agreement, Baxter will sell ONE’s technology to certain customers in Baxters’ current customer base (~75% of the US hospital bed market). Given the market reach of Baxter, this agreement could unlock significant growth in contracted beds for ONE.

Well funded to grow further

ONE completed a $20M placement in July 2023 that should provide the company with the funds it needs to become a sustainable operating cashflow positive business and further penetrate the US healthcare market.

Potential faster growth from “bring your own device” (“BYOD”) solution

ONE is developing a platform for patients to use their own phone or tablet.

This upgrade in ONE’s tech could remove the hardware costs associated with setting up ONE in a hospital potentially increasing ONE’s margins, reducing how long it takes for ONE to close a deal - and most importantly, helping hospitals more rapidly improve the patient experience.

Nursing shortages driving demand for healthcare solutions

Since the pandemic nursing shortages in Australia and the US have worsened.

These shortages put pressure on healthcare systems which causes more stress and ‘burnout’ for existing nurses.

Due to these issues, hospitals are now looking for technology to better improve their healthcare service and reduce the burden on nursing staff.

Although hospitals are notorious technology laggards, we think that the nursing crisis will be the impetus that drives change in these institutions and improves the healthcare system overall.

What do we expect the company to deliver?

Objective #1: Repeat sales success and hit 25,000 beds

For ONE, ‘contracted beds’ is like an ‘active user’ metric for a tech company. We think this is the basis for judging ONE’s success.

More contracted beds = more revenue.

Building on ONE’s previous 15,000 bed achievement, we want to see ONE hit a total of 25,000 in CY2024, primarily out of the USA.

ONE is projecting growth of 20-25% across this metric in FY23 excluding the potential beds from the Baxter agreement and BYOD solution.

Objective #2: More deals with major hospital networks through Baxter agreement

We want to see ONE sign more deals with more hospitals.

Given Baxter’s large share of the US hospital bed market - we think Baxter is the ideal partner for ONE to achieve this goal.

Baxter can introduce ONE’s products to major US hospital networks that already have Baxter’s products.

The Baxter value added reseller agreement has started and the market launch is expected in Q3 CY2023, and we are hoping to see sales traction from this agreement in Q1 CY2024.

Objective #3: More progress on BYOD solution

With sales and marketing activities already commenced for the BYOD solution, we expect the product to become available in Q1 CY2024.

This includes the launch of the product through a pilot program in the US with an existing US hospital customer - NYU Langone.

If the pilot program is agreed and is successful, we’d want to see ONE expand the program to eventually capture a large potential market in the US and other key markets.

What could go wrong?

Sales risk

Despite a strong customer retention rate and the endorsement of the product by prestigious hospitals, ONE could lose key clients or not seal as many deals, hurting their revenue and share price.

Large institutions like hospitals don’t tend to adopt new technology very often and the sales cycle can be long. This feature of ONE’s customer base can cause delays in sales that drag out over a long time,

Marco factors in the market including a recession can cause a reduction in spending on new technology, affecting ONE’s ability to make sales.

Distribution partner risk

A key part of ONE’s strategy is to sell its products through a distribution partner like Baxter, Microsoft or Samsung.

Although ONE has a strong relationship with these companies, if they move slowly - or don’t prioritise ONE’s products when making a sale - then it could reduce the sales outcomes for ONE.

Funding risk

Although ONE raised $20M in July 2023, growth companies need cash to achieve their goals. If ONE doesn’t use the money from this raise wisely, then share price pain could follow. This was ONE’s fourth capital raise since it listed in 2016.

Technology risk

ONE will need to add functionality to its products over time as the health tech industry advances. The BYOD rollout may not go as planned.

Also, ONE has flagged that a range of additional features are in the pipeline, and the successful roll out of these features could help it reduce this particular risk as hospitals become more advanced.

Market risk

Tech stocks could fall in value again. Even if ONE does everything right from an operational standpoint, the market could always sell off or favour different sectors.

What is our investment plan?

We plan to hold a position in ONE for the next 3-5 years (and beyond) as it progresses its plan to gain significant market penetration in the lucrative US healthcare market, and (as always) may look to take some profit by selling up to ~20% of our holding if the company successfully delivers on the key objectives listed above and the share price hopefully re-rates again.

Retro: IM-1: Oneview Healthcare (ASX:ONE)

Memo Opened: 13th Jan 2022

Shares Held at Open: 8,525,000

Shares Held at Close: 8,818,333

What does ONE do?

Oneview Healthcare (ASX:ONE) is a health tech company that provides hospital patients a “virtual care and digital control centre” at their bedside. ONE’s products are cloud-hosted patient dashboards that help make hospitals more efficient and patients more engaged in their own care.

What is the macro theme behind ONE?

The pandemic has rapidly accelerated the trend towards healthcare modernisation, and we believe any product or service that brings efficiency to healthcare systems will be highly sought after. As big tech companies like Google, Amazon and Microsoft look to enter the health tech space, companies with an early-mover advantage should thrive or become takeover targets in their own right.

[Memo Assessment - 22-September-2023]: Sentiment = Strong

We saw ONE develop an incredibly strong sales pipeline as a result of the pandemic as evidenced by its large number of RFP/RFIs which it is now in the process of converting into sales. We see this sales pipeline as indicative of the strength of the macro theme.

In addition, this sales pipeline grew as a result of nurse shortages in the US during the pandemic, which led hospitals to seek new ways of improving efficiency through the adoption of tech like ONE’s offering.

Why do we continue to hold ONE in 2022?

Proven tech, liked by customers

ONE is moving into the growth stage having proven out its tech products in a hard to enter sector (hospitals).

[Memo Assessment - 22-September-2023]: Grade A

We see the Baxter International deal as evidence that ONE is firmly in the growth stage and has the big brother it needs to rapidly expand.The fact that the largest hospital bed supplier in the US wants to sell ONE’s products to its customers validates ONE’s value proposition.

$20M capital injection to fund rapid growth

ONE completed a capital raise late in 2021 and with a war chest to fund its growth we look forward to ONE becoming cash flow positive and quickly increasing the number of contracted beds it has in the US.

[Memo Assessment - 22-September-2023]: A

ONE secured $20M in a placement at ~27 cents. This placement caused minimal dilution to existing shareholders and funded the company’s growth through a rough bear market for small caps tech stocks.

Under promise, over deliver:

ONE’s management team has delivered everything they said they would since we Invested, so we are confident they will hit their revenue projections and US market share objectives in 2022.

[Memo Assessment - 22-September-2023]: A

ONE introduced its Bring Your Own Device (“BYOD”) solution over the course of this Investment Memo which was a major positive surprise. ONE did very well at delivering in this regard.

What do we expect the company to deliver in 2022?

Objective #1: Fast revenue growth and contracted beds in excess of 15,000.

For ONE, ‘contracted beds’ is like an ‘active user’ metric for a tech company. We think this will be the basis for judging ONE’s success in 2022. More contracted beds = more revenue. We want to see ONE hit a total of 15,000 in 2022, primarily out of the USA.

[Memo Assessment - 22-September-2023]: A

While ONE took an extra quarter to deliver on this metric, we think it made significant progress in the US market and is now primed for more growth via the Baxter International value added reseller agreement.

Objective #2: Increased sales/marketing spend leading to more deals with major hospital networks

ONE now has a proven tech product that is valued by its clients. As of this memo, ONE spent less than 10% of its receipts from customers on advertising and marketing - if its to quickly accelerate contracted beds (revenue), we think upping spend in this area is crucial.

[Memo Assessment - 22-September-2023]: A

While following the 2022 $20M capital raise ONE did increase sales/marketing spend which played a big role in driving its sales pipeline, ONE had to subsequently reign in its sales/marketing spend as the 2022 tech wreck played out on the markets.

Although this wasn’t exactly what we wanted to see when we wrote our Investment Memo, we think that the pivot was a prudent move given the market conditions.

That is why we gave them an A for this Objective.

Objective #3: More sales through Microsoft and Samsung partnerships.

As Samsung tablets are the device which works with the ONE product - Samsung sales reps should be incentivised to push ONE’s product. Likewise, since Microsoft’s Azure Marketplace is the cloud platform that ONE has opted to work with, we would like to see sales growth through this channel.

[Memo Assessment - 22-September-2023]: C

It does not appear that partnerships delivered significant value for ONE (yet), but could still prove valuable in the future. We have now added “Distribution Risk” to our next memo to highlight some of the challenges of leveraging a third party to drive sales for the company.

Objective #4: Material contribution to revenue from upsells to older coaxial wired hospitals wings

ONE is now providing “coaxial set-top boxes” which allow older hospital rooms that are wired up using legacy coaxial cables to use ONE (where previously they couldn’t) - we we want to see a wave of sign-ons of older hospital rooms that previously couldn’t use ONE, enough to materially impact topline revenue.

[Memo Assessment - 22-September-2023]: A

These coax setups helped ONE secure additional business and revenue over the course of this IM and will continue to help ONE get its platform into more hospitals.

What could go wrong?

Sales risk

Despite a strong customer retention rate and the endorsement of the product by prestigious hospitals, ONE could lose key clients or not seal as many deals in the coming 12 months, hurting their revenue and share price.

[Memo Assessment - 22-September-2023]: Decreased

ONE’s deal with Baxter International has potentially decreased sales risk as ONE now has a clear avenue to significant market penetration and will potentially have to do less leg work with Baxter helping drive sales.

Competition risk

ONE has an early mover advantage, but it is not alone in the space it operates in. We think ONE has a really powerful product that should be helped by its traction at some of the most prestigious hospitals in the US. That being said, a big tech company could launch a competitor product.

[Memo Assessment - 22-September-2023]: Decreased

ONE continued to develop its product “moat” by investing in new innovations and technologies that will reduce risk from other competitors in the market - in particular the launch of its BYOD solution.

Since this memo ONE has entered at least 5 new hospitals.

Given how slow hospitals are to adopt new technologies, each new hospital partner reduces the competition risk for ONE.

Funding risk

Although ONE raised $20M in November 2021, growth companies need cash to achieve their goals. If ONE doesn’t use the money from this raise wisely, then share price pain could follow. This was ONE’s third capital raise since it listed in 2016.

[Memo Assessment - 22-September-2023]: Decreased

ONE completed another $20M placement in July and an oversubscribed SPP at 18c. We see this as providing a great runway for the company as it approaches operating cash flow positive status.

Technology risk

ONE will need to add functionality to its products over time as the health tech industry advances. ONE has flagged that a range of additional features are in the pipeline, and the successful roll out of these features could help it reduce this particular risk as hospitals become more advanced.

[Memo Assessment - 22-September-2023]: Decreased

ONE is rapidly improving its offering, not least of which is its BYOD solution. We also believe ONE will be able to take advantage of AI more in the future to build out its offering and extend the capabilities of what is already a highly valuable product. AI could mean more features and less overheads on product development.

What is our investment plan?

We have invested in ONE twice since we announced it as our Tech Pick of the Year for 2021 in March last year.

The first time at 6 cents and the second time in the recent cap raise at 27 cents.

ONE experienced a significant share price re-rate during 2021 after it announced several new contracts and the health tech sector became hot. As per our usual investment plan we partially de-risked our position selling 22.37% of our total holding, achieving a partial free carry.

We plan to hold a position in ONE for the next 3-5 years (and beyond) as it progresses its plan to gain significant market penetration in the lucrative US healthcare market, and may look to take some profit by selling up to ~17% of our holding if the company successfully delivers on the key objectives listed above and the share price hopefully re-rates again.

[Memo Assessment - 22-September-2023]: A

During the memo we sold around ~15% of our Total Holdings, in line with what we planned. We also increased our Investment at the 18c placement price.