EMIS Group — Preparing for the next stage of growth

EMIS reported y-o-y revenue growth of 6.8%, with growth from every division. Recurring revenues increased 4% y-o-y. Adjusted operating profit increased marginally over the period – investments in the Patient business combined with the increased headcount in PC&A to deal with customer support issues offset the upside from revenue growth in CP and S&C. The company noted that if the investment in Patient is excluded, adjusted operating profit increased 8% y-o-y.

The company incurred an effective tax rate of 19.1% in H118, resulting in flat EMIS adjusted diluted EPS on a year-on-year basis. The company ended H118 with net cash of £32.3m, up from £10.5m a year ago and £14.0m at the end of FY17. We note that the company has not yet finalised the amount it owes to NHS Digital (provided for last year as an £11.2m exceptional item). The company expects the amount to be covered by the charge already taken – we believe this is likely to be paid out in H218.

The company announced a 10% y-o-y increase in the interim dividend to 14.2p, ahead of our 13.4p forecast.

When we wrote after FY17 results, we highlighted that the company had three short-term priorities.

The company believes it has made good progress in resolving the customer support issue in Primary Care. Support and development headcount was increased to deal with the backlog of software issues and to make sure that on an ongoing basis, EMIS can continue to meet NHS Digital service level agreements, which it has done since 1 July. The company noted that as well as bringing Primary Care service levels up to the required level, it has also worked on completing outstanding commercial agreements in Community and Acute Care. It has invested in the leadership team for the wider group, with a focus on service delivery, with the current team of 46 including 18 new hires.

In late March, NHS Digital confirmed that the GPSoC framework would be extended until the end of 2019, to give it more time to develop the new IT Futures framework. EMIS has just received the first set of information from NHS Digital regarding requirements, and expects two more releases of information over the next few months. The company can have a dialogue with NHS Digital up until the end of this year. From the start of next year, the formal bid process begins, with each prospective technology supplier submitting their proposals to NHS Digital The company expects that the new framework will be agreed by next summer.

Alongside this, the company is looking to upgrade EMIS Web. This is somewhat of a chicken-and-egg scenario – the company will need to be sure that it can support all of the requirements of the new framework, but does not want to fix its technology roadmap before the full scope of requirements, and confirmation that it has been successful in being selected to go on the framework, have been received. It is currently talking to user groups in primary and community care to create a user-defined roadmap for the upgrades and is starting to develop an understanding of the requirements of IT Futures. Unlike the introduction of EMIS Web, upgrades are likely to be put through on a modular basis, and will not require EMIS staff on GP premises to effect the upgrades.

The company has indicated for several months that it is defining its long-term growth strategy and is working on its five-year product roadmap. It plans to unveil this at its capital markets day on 29 November. We assume that by then, the company will have a clearer picture of the requirements and opportunities thrown up by IT Futures.

PCA grew revenues 3.6% y-o-y while maintaining flat adjusted operating profit. Upside from the one-off Australian licence sale in Acute was offset by the costs of extra headcount brought in to improve the Primary Care support function.

In Primary Care, market share in the UK was maintained at 56%. This business continues to participate in the Scotland bid for primary care, where it currently has 54% market share and generates revenues of c £2.5m pa. Management noted that it has finite resources and depending on the requirements for both the new Scottish framework and IT Futures, it may have to make decision on whether it can continue to be involved in Scotland. The division’s Egton business is seeing growth in several areas: CCG (Clinical Commissioning Group)-funded NHS Wi-Fi, paper records digitisation services and automated arrivals kiosks.

Community Care won several new contracts, increasing market share by 1% to 18%. A new Windows-based mobile app was released in beta for “clinicians on the go”.

The Acute business increased its market share of the hospital pharmacy business by 3% to 32% (maintained No 2 position) and maintained its No 2 position and 19% market share in A&E. Despite its announced withdrawal from the Australian market, it signed a licence for legacy software in the Northern Territory in Australia and agreed a support and maintenance contract until the customer has switched to a new software provider.

CP saw strong revenue growth of 13.5% y-o-y and adjusted operating profit growth of 36.4%.The business maintained its market share at 37%. The roll-out of ProScript Connect across the direct estate continued (2,277 customers now upgraded; 69% of direct estate) as well as across the Celesio independent estate (880 sites upgraded; 44% of estate). While the shift to ProScript Connect in itself does not increase revenues, the new software provides opportunities for EMIS to sell add-on modules and hardware.

Celesio has decided not to roll ProScript Connect out to its Lloyds Pharmacies estate – we had expected this to take EMIS’s market share up to nearly 50%. EMIS believes that this process may be restarted at some point in the future.

New Care screening programmes that started in H117 contributed to the strong y-o-y revenue growth of 20.4% for S&C. The division was profitable at the adjusted operating profit level, increasing from a margin of 2.0% in H217 to 3.7% in H118.

The Patient business is still in investment mode. The business released a new version of Patient Access during H118 which is now being used by 2.2m patients. Management presented some usage statistics for Access, showing that in H118 monthly users increased 34% y-o-y, log-ins increased 21%, medical record views 49%, appointments booked 14% and repeat prescriptions 27%. As the company views Patient Access as the gateway to NHS services and third-party healthcare offerings, this bodes well for the development of the Patient business in the longer term.

The Patient.info part of the business saw average page views per month increase from 25m in H217 to 26m in H118, after the upgrade of the website in H217. Since the end of H118, a change in Google algorithms has reduced traffic to the site and this is likely to have a negative impact on advertising revenues in H218. We note that Patient.info has been affected by Google search algorithms changing in the past; in our view this is an ongoing cost of doing business when the majority of traffic is generated via Google.

The company traded in line with expectations in H118 and management anticipates that it will meet the board’s expectations for the full year. We have made the following changes to our forecasts:

The EMIS share price has now recovered to the level it was at before the NHS Digital support issue was announced. However it continues to trade at a discount to peers on a P/E and EV/EBITDA basis for FY18e and FY19e. In terms of profitability, EMIS performs at the top end of the range; however, limited revenue growth means that its earnings growth lags its peers. With the Primary Care business support issues seemingly resolved, this removes one obstacle to share price recovery. Uncertainty over the outcome of IT Futures as well as the wait to hear the company’s long-term strategy are likely to weigh on the share price in the short term. A credible plan to drive growth above the low-to-mid single digits currently forecast is likely to be the first trigger for share price upside.