Q2/F24: PROVIDER SOLUTIONS (SAAS) SPINOUT PLANNED; MORE TO COME?
THE TD COWEN INSIGHT
We are surprised at the share price weakness following the Q2 beat/raise, with solid performances across almost all key metrics, including a much anticipated margin rebound. We don't think the potential slight delay in the Wisp/Circle strategic review announcements is concerning, while other initiatives to help unlock shareholder value, including one or more spinouts, are key near-term catalysts.
Impact: SLIGHTLY POSITIVE
Provider Solutions spinout in the works. Building on WELL's plans to help unlock shareholder value (a key theme of its recent Investor Day), which includes the ongoing strategic reviews of Wisp/Circle, it announced plans to spin out its WELL Provider Solutions (WPS) business. WPS is WELL's SaaS & Tech business excluding the (lumpy) cybersecurity business (overview in Fig. 2 on Pg. 4). WPS serves >37k practitioners, including ~1/3 of all Canadian doctors, in >4k clinics.
In Q2/F24, WPS' revenue grew 24% y/y organically to C$10.4mm (>90% recurring) with 86% GM and 30% EBITDA margins, making it a Rule of 50 company.
The spinout is planned for H1/F25 and WELL intends to retain a majority stake. We believe this is important to ensure the business, which is critical to the success of its Canadian clinic business, continues to align with WELL's overall strategic direction.
Canadian small cap healthcare tech is trading at healthy valuations. WELL believes a WPS spinout would trade at a higher valuation to itself, which we would agree given WPS' much higher mix of contracted recurring revenue and margins.
We note that similarly sized Canadian small cap healthcare software peers trade at much higher valuations, including Kneat (KSI-T) at 6.3x, Vitalhub (VHI-T) at 5.2x, and soon-to-be majority owned HEALWELL AI (AIDX-T) at 6.9x EV/Revenue (C2025E) compared to WELL at 1.3x. Even factoring in a valuation discount for WELL's controlling stake, it seems like there could be good valuation creation with this spinout.
We also note the smaller Canadian small cap SaaS universe following elevated M&A activity since early 2023 (details in our April 2024 M&A report), which could allow WPS to benefit from some scarcity value for high quality small cap SaaS names.
WELL is hesitant to pursue M&A in this space, given the much higher valuations in the healthcare software space (and the very attractive clinic valuations). Accordingly, spinning out WPS would allow it to more aggressively grow through M&A to complement its strong organic growth.
More spinouts ahead? If the WPS spinout is successful, we believe more spinouts could be in store.