OMDA AS: Pursuing Quality in European Healthcare Software

A Nordic VMS software roll-up with serial acquirer characteristics.

Disclaimer: Nothing written here constitutes investment advice. Views are my own. I do not hold a position with the issuer such as employment, directorship, or consultancy. Do your own due diligence. OMDA AS is a microcap company and is highly illiquid, invest at your own risk.

Introduction

OMDA AS is the leading provider of specialized software for healthcare and emergency services in the Nordics with a growing presence in Europe, North America and the Pacific. The company serves more than 500 customers in 27 countries and employs almost 300 dedicated specialists. The company is based in Norway with a market capitalization of about 900 million NOK (82m USD).

Core Hypothesis: OMDA is at a inflection point, with EBITDA margins improving and near term accretive acquisitions increasingly likely. If actioned together, these would prove both OMDA’s unit economics and serial acquirer status, deserving of a significantly higher valuation than the market affords it today on healthy revenue growth.

I do not claim any prescient knowledge into OMDA’s future, instead, I simply believe this to be a high quality business at a reasonable price today.

Assuming 2024 FY average EBITDA margin of 25% on 2024 FYE 440 MNOK, OMDA trades at only 8x 2024 FYE EBITDA today, which is a very reasonable price for a business with long term predictable recurring revenue. Current valuation offers a strong margin of safety even if EBITDA margin improvement and acquisitions fail to materialize.

Full disclosure – I have initiated a position at NOK 38 per share.

OMDA Napkin Notes

• OMDA was spun-out of the Oslo University Hospital. OMDA knows its customers intimately.

• Hospitals are excellent customers and OMDA’s customer attrition rate is extremely low.

• Aging populations will see increasing need for healthcare IT spend and digital optimization in the coming decades as staff to patient ratios come under pressure.

• The Nordics represent some of the most digitalized economies in the world. As digitalization in hospitals accelerates in Europe, OMDA’s organic growth could accelerate.

• Starting from a relatively small base but with Nordic first-mover advantage, OMDA has an established history and long runway to continue rolling-up healthcare software companies in Europe.

• Secular trends in sector standardization enable economies of scale via universal management practices, such as the adoption of ISBT 128 for blood management. OMDA now has 100% of both the Swedish and Danish blood management markets and a significant presence in Norway.

• The EU’s Medical Device Regulation disincentivizes start-up entrants as it adds prohibitive regulatory friction costs to small players. Small players are structurally disadvantaged without compliance to the EU MDR, making them more amenable to acquisition by OMDA.

• OMDA carries significant debt, but with strong future revenue visibility, leverage is appropriate.

• OMDA management is implementing a Constellation inspired model, but can they deliver?

Management & Ownership

OMDA is a founder led business with high insider ownership. CEO Svere Flatby and CFO Einar Bonnevie each own 9.7% of OMDA via their shared holding company Equilibrium AS. Both have been involved with OMDA for over 15 years having overseen 15 successful acquisitions to date.

They have come to appreciate Mark Leonards decentralized multiple small business unit model strategy and have publicly lamented the decision not to decentralize sooner. Like Constellation, OMDA has realized that easier to both integrate and scale acquired businesses inside distinct business units as well as to measure the success of these against their internal hurdle rate.

With the Constellation reference to boot, its worth noting that the Leonard’s are actively involved with OMDA via Mark Leonard’s public vehicle Pinetree Capital per PNP.TO’s Q4 2023 MD&A disclosure. Per Pinetree’s investment approach, they will take a “more active role by advising management of the businesses in which we have an ownership stake” where warranted. No coincidence.

Revenue & Growth

OMDA has excellent unit economics and boasts a diversified base of 500 customers in 27 countries. Public healthcare customers are typically AAA rated and on long term contract, offering long term predictable recurring revenue for years and even decades into the future. Recurring revenue grew 14% in 2023 over 2022.

OMDA’s history of innovation allows it to meet customers demand for iterative improvements in mission critical systems while ensuring contract continuity. Historically, OMDA has achieved organic growth of around 10%. This typically results from cross-selling opportunities from the existing customer base.

OMDA also grows by acquisition, having acquired and integrated 15 companies since 1999. OMDA employs a buy-integrate-build acquisition strategy. Potential acquisitions must have an established customer base, own 100% of their solutions’ code and intellectual property, and have a team delivering a full upgrade cycle to customers.

But OMDA has not done any M&A in the past two years. Management is signaling increasing activity in its pipeline of interesting potential targets but remains committed to cost discipline. Its worth noting that the EU’s new MDR directive increases the cost of compliance for smaller firms, giving OMDA more leverage in M&A dialogues with smaller targets.

To quote CFO Einar Bonnevie from the Q1-24 transcript “So we say the thing is, when we haven’t announced anything, what we don’t publish is all the times that we’ve said, “No, no, thanks. No way.” So no news on the acquisition side doesn’t mean no activity. Maybe refrain from doing something wrong is also an activity.”

For this investment to really work, they need to acquire good businesses at reasonable prices at a relatively frequent cadence. Cost discipline is a wonderful management characteristic, but it also requires acquisition candidates to be willing to meet OMDA halfway.

Given OMDA’s profile, this thesis hinges on their ability to make OMDA a desirable home for owners seeking to sell and grow their businesses with OMDA’s reputation and scale.

This brings us to my core hypothesis: OMDA is at a inflection point, with EBITDA margins improving and near term accretive acquisition(s) increasingly likely. If actioned together, these would prove both OMDA’s unit economics and serial acquirer status, deserving of a significantly higher valuation than the market affords it today.

Valuation

Management has guided towards 30% EBITDA margins long term, however, EBITDA margins are subject to fluctuation due to the ebbs and flows of contract wins and onboarding costs. Noting that Q1 2024 EBITDA margin was 14%, it may take time to reach the 30% target.

Margins have recently been weak due to a confluence of factors, including but not limited to, integrating acquired businesses from 2021 and a temporary overreliance on external consultants for large projects like the rollout of the Danish centralized blood management system contract win in 2021. Personnel expenses should recede to 50% of revenue, others costs to 15%, and COGS to 5%, for a bridge to 30% EBITDA.

On a relative valuation basis, OMDA trades a significant EV/EBITDA discount to established serial acquirer VMS software peers like SGN, TOI and CSU. This discount is not unduly deserved however, as OMDA is still proving its quality and serial acquirer status – herein lies the opportunity.

Assuming 2024 FY average EBITDA margin of 25%, OMDA trades at only 8x 2024 FYE EBITDA today. This base case assumes achievement of management guided 2024 EBIDTA margins of 30% by end of year approximating 110 MNOK EBITDA on 2024 revenue of 440 MNOK and no acquisitions in 2024.

Bear case sees EBITDA margins stay at 15% for the full year with no acquisitions in 2024 approximating 66 MNOK EBITDA on 2024 revenue of 440 MNOK, valuing OMDA today at 14x EBITDA. While this outcome would be disappointing, 14x EBITDA for a business with OMDA’s diversified and recurring revenue is not unreasonable, implying a good margin of safety.

Bull case presumes a combination of a successful acquisition and improving EBITDA margins over 2024. No EBITDA multiple is given here, but this case assumes that the market rewards a disciplined acquisition with a higher multiple off of improving margins.

Closing Remarks

This writeup is not comprehensive and certainly one could spend untold hours diving into the balance sheet, OMDA’s business segments or OMDA’s competitive position in the European software market. I recommend additional reading on VIC, where there are 3 past writeups on OMDA (two under its previous name CSAM) with an excellent recent contribution from user jezzdawg77, and on OMDA’s investor relations site, where transcripts and their newsletters offer good insight into management’s process.

Disclaimer: Nothing written here constitutes investment advice. Views are my own. I do not hold a position with the issuer such as employment, directorship, or consultancy. Do your own due diligence. OMDA AS is a microcap company and is highly illiquid, invest at your own risk.