We note a Q1 2024 report from Physitrack that was in line with our expectations without any significant surprises. The company seems to be on the right track, posting q/q growth, strong ARR growth, slightly improved profitability on a EBITDAC basis, and positive FCF for the second quarter in a row. We are also encouraged by the development of SaaS revenues, which now constitute 80% of total revenues, up from 72% last year, indicating a 23% year-on-year rise. Overall, it is a solid start to 2024, in our view.

Physitrack reported a y/y organic growth of 10%, resulting in sales of EUR4.1m, which is in line with our estimate. Further, sales rose by 7% on a q/q basis, an encouraging improvement from last quarter when sales were flat q/q. Organic growth was derived from both the Lifecare and Wellness divisions, which grew 10% and 11%, respectively, y/y.

SaaS revenues now amount to 80% of the total revenues vs 72% last year, a 23% increase y/y. We appreciate this ongoing revenue shift as the SaaS revenues hold better margins and are recurring. ARR grew by 15% y/y and amounted to EUR13.0m, representing an 8% q/q growth and 6% above our estimate.

In Q1 2024, organic revenue within the Lifecare division saw an 11% year-on-year organic increase—the Lifecare division stood for 63% of the group revenues during the quarter. Lifecare subscription revenues remain the primary contributor, comprising approximately 60% of the group revenues. During the quarter, Lifecare’s subscription share of revenues rose to around 96%, up from 90% in Q4 2023.  

Lifecare expanded its subscription base by c4,300 licenses, bringing the total to an average of 65,300 by the end of Q1 2024, implying a 19% year-on-year growth rate. We maintain our expectation of approximately 10-15% year-on-year growth rate from the Lifecare division. According to management, 1/3 of the y/y growth is attributed to price increases and 2/3 to volume increases. Despite annual price hikes, churn levels trended inversely, implying pricing power. The positive churn trend in Lifecare continues to be stable, decreasing y/y from 12.4% in Q1 2023 to 11.4% in Q1 2024.

Organic revenue within the Wellness division increased by 10% year-on-year in Q1 2024—the Lifecare division stood for 37% of the group revenues during the quarter.

One-off revenue surpassed subscription revenue within the Wellness division during the quarter, accounting for 19% and 18% of the group revenues, respectively. Previously, we highlighted the significance of monitoring the growth of subscription revenues within the Wellness division as a crucial key performance indicator (KPI). This growth is essential for determining the division’s success and facilitating overall margin expansion for both the division and the Group. In Q1 2024, Wellness subscriptions totalled cEUR0.7m, flat on a q/q basis and comprising approximately 49% of the total revenues in the Wellness division.

Adjusted EBITDA-CAPEX amounted to approximately EUR0.3 million. We observed a slight quarter-on-quarter EBITDA-CAPEX margin increase of 3pp. Our preferred profitability measure for SaaS businesses is EBITDA-CAPEX. For reference, we consider a positive EBITDA-CAPEX margin to indicate underlying profitability and an EBITDA-CAPEX margin above 15%, implying solid profitability. Looking at the Lifecare division individually, we estimate an EBITDA-CAPEX margin of c20% for 2024e, implying solid performance and profitability for the division.

For SaaS businesses such as Physitrack, EBITDA and EBITDA margin are not ideal profitability metrics as they do not account for R&D costs. Since R&D is often a significant expense in this sector, metrics like EBIT (which amortises capitalised R&D over time) or EBITDA minus capitalised R&D / EBITDA- CAPEX offer a more precise perspective on underlying profitability. Our preferred metric is EBITDA minus CAPEX, treating all R&D expenses as upfront costs.

OPEX, excluding adjustments and D&A, amounted to EUR3.1m and was on par with our estimate. We expect the cost base to hover around EUR3.2-3.4 m (after adjustments) per quarter during the year.

Adjusted EBITDA (adjusted for EUR0.1m in acquisition and integration costs) reached cEUR1.1m in the quarter, corresponding to an EBITDA margin of 26% (25%), 1pp below our estimate. The margin gap between the two divisions remains large, whereas adjusted EBITDA for the Lifecare division stood at 49% during the quarter and was 6% for the Wellness division.

Cash flow from operating activities before payments of adjusting items was EUR1.1m (EUR0.7m), whereas the Free cash flow was – EUR0.1m. By the end of Q1 2024, Physitrack held a EUR0.6m cash position, but the available liquidity, including the Revolving Credit Facility (RCF) corresponds to EUR2.7m. Physitrack’s net debt was cEUR3.0m by the end of the quarter, on par with last quarter.

Management notes continued strong license growth into Q2 within the Lifecare division. The positive outlook is supported by increased confidence in securing more significant Champion Health agreements during Q2 and expectations of organic growth rebounding to the 30% level in H2. Short-term growth drivers for Wellness also include a new version of Champion Health, with localisation into eight languages, which will go live in Q3 of 2024. We expect the Swedish and German markets to be the prioritised markets initially in terms of marketing efforts.
Management expects a positive cash flow result for FY 2024. However, it is worth noting that they do not include earnout payments when referring to FCF. EUR1.1m in earnouts sits under current liabilities on the balance sheets, and we expect a payment in Q4 2024. Due to seasonality effects in Q2 with a higher cash burn, we believe it will be challenging for Physitrack to post positive FCF next quarter.
The report reaffirmed the financial midterm targets, encompassing a 30% year-on-year organic growth and EBITDA margins ranging from 40% to 45%.

We anticipate the slowdown observed in H2 2023 within the Wellness division will persist during H1, with an expected group growth rate of 12-14% during this period. H2 is expected to be more robust in terms of growth and profitability. Additionally, comparables become less challenging in H2.

Following Physitrack’s Q1 2024 report, our estimate adjustments have been minimal:

We expect Physitrack’s cash position combined with the RCF to be enough to reach positive cash flows and the RCF and FCF to cover further earnouts. Nevertheless, our estimates allow for a little margin of error. Relative to Physitrack’s mid-term targets of 40-45% EBITDA margin and 30% organic growth, we have adopted a more conservative stance regarding growth and margins in the midterm perspective. For further estimates, see the tables below.

Our fair value range remains intact at SEK9-75, with a base case of SEK35 per share. Currently, Physitrack is trading at an EV/EBIT multiple of 7.4x and EV/Sales 1.2x based on our 2025e.

Our valuation is based on the financial forecasts in the table above (Base case) and long-term assumptions outlined in the table below.

In reference to our DCF valuation, one could consider the potential value of the Lifecare division on a standalone basis. We employ an EBITDA-CAPEX valuation method for the Lifecare division with the following assumptions:

Our multiple valuation suggests a fair market capitalisation of approximately SEK365m for the Lifecare division and a fair enterprise value of around SEK350m when half of the Group’s debt is considered. Our fair value market capitalisation of SEK365m can be compared to today’s market capitalisation of approximately SEK200m for the Group, including the Wellness division. We believe the market worries about the growth and margin expansion potential in the Wellness division, pricing it to a negative value according to our alternative valuation.

Compared to its peers, median EV/Sales multiples for 2024e–2025e, Physitrack trades at a 49%-63% discount. Moreover, the discount is also prominent when comparing median EV/EBIT multiples for 2025e, with Physitrack trading at a c60% discount to its peers. We believe the market worries about the growth and margin expansion potential in the Wellness division.