Summary
???? Nightingale announced today that it has been selected as one of
three vendors approved for funding by OntarioMD, backed by
the province.
???? We see this 15-year contract significantly enhancing Nightingale’s
revenue growth prospects in Canada, starting early next year.
???? Raising our estimates and target price to $1.20 (from $1.10).
Analysis
Today, Nightingale announced that it has signed a 15-year agreement
with Ontario MD to be one of three approved suppliers to provide
hosted medical practice management and electronic medical records
technology to the province’s 22,000 doctors. Ontario MD is a
subsidiary of the Ontario Medical Association and receives its funding
for this healthcare technology from the Ontario Ministry of Health.
While we expect it will take several years for doctors in the province to
adopt the technology, we see this contact as a significant boost to our
expectations for Nightingale’s Ontario business and should enable it to
build a long-term, profitable recurring revenue base at reasonable
marketing costs. We believe that a technology adoption rate in
Ontario of ~3,000 doctors/year (7–8 years for province-wide
adoption) is not unreasonable. A typical small medical practice deal in
Ontario for Nightingale consists of an upfront license and
implementation service revenue, plus ongoing annual subscription
revenue. We estimate that today’s contract has the potential to boost
Nightingale’s Ontario business by ~$5 MM next year (F2009 ending
March 2009), and create a similar-sized, rapidly growing annual
maintenance revenue stream thereafter.
In addition, given Nightingale’s current 1.2x EV/S (F2008 ending
March 2008) valuation, we also see this long-term agreement as
significantly enhancing the attractiveness of Nightingale as a potential
take-over candidate in the eyes of the larger healthcare IT vendors,
such as Emergis (EME-T; HOLD; $7.15 Target) and its U.S.
competitors (see Exhibit 1 on the following page).
Conclusion
In our opinion, this contact, when added to its province-wide win in
Nova Scotia and in the Northwest Territories, clearly places
Nightingale in a leading position in the Canadian hosted practice
management and electronic medical records space and should enable
it to continue to profitably grow its Canadian business unit (~22% of
total revenue this year) for the foreseeable future. With the increase in
our estimates for Ontario, our target price rises to $1.20 (from
$1.10), based on 2.5x F2009E EV/S.