BRSYF - BrainsWay: Positive Cash Flow And Continued Growth

2023-11-20 00:01:19 ET

Summary

• BrainsWay reported solid results in Q3 2023 and is now on the verge of sustainable profitability.
• BrainsWay's focus on larger organizations appears to be supporting growth and improving sales efficiency.
• While BrainsWay's share price has increased significantly from its lows, continued growth and consistent profitability are still not priced in.

BrainsWay ( BWAY ) again reported solid results in the third quarter of 2023, particularly in regard to profitability. The company is still sitting on a large cash balance, and barring a serious deterioration in macro conditions, appears to have reached the point of generating sustainable positive cash flows. While the share price has moved significantly higher in recent months, continued growth and a transition to profitability are not currently priced in.

Market

While the initial response of BrainsWay’s stock to the terrorist attacks in Israel was extremely negative, BrainsWay has stated that the impact on its operations has been limited. The company has sufficient inventory on hand to support expected demand and has contingency plans in place if a switch in supply is required.

BrainsWay's business has been negatively impacted by the macro environment over the past 12-18 months though. The rapid rise in interest rates, coupled with economic uncertainty, appears to have temporarily stunted demand. With the Fed likely done tightening, conditions may now be beginning to improve. The US market is slowly improving , with BrainsWay announcing a number of large commercial wins recently. BrainsWay has also had a number of big wins internationally over the past few months, adding to the signing of agreements with distributors. BrainsWay is relatively underpenetrated internationally, meaning this could be a growth driver going forward.

Separate to the demand environment for new TMS systems, end market demand from MDD and OCD patients continues to increase. Neuronetics ( STIM ) has seen fairly consistent growth in new patient starts and system utilization over the past 3 years. This indicates growing adoption of TMS and should be supportive of TMS system sales in a more conducive macro environment.

BrainsWay

BrainsWay’s sales strategy has evolved significantly over the past 12 months, and this appears to be supporting growth and improving efficiency. BrainsWay is now more focused on larger organizations and as a result, has had a string of successes in recent quarters. Wins include a mental health treatment provider in the northeast of the US ( total of 10 systems in 2023 ) and Katie's Way Plus (10 additional systems).

International markets are also a focus area for BrainsWay sales at the moment, with the company recently expanding its installed base in Taiwan to 16 systems. BrainsWay plans on utilizing distributors to drive expansion in Europe rather than selling directly. This could be a sizeable TMS market, both because of the population and the fact that BrainsWay is cleared for 10 indications in Europe.

BrainsWay is also seeking a distribution partner for the smoking cessation indication. Data from the initial patients utilizing Deep TMS therapy for smoking cessation continues to look favorable and BrainsWay is reportedly beginning to gain commercial traction. The Clinical TMS Society is also advocating for reimbursement related to TMS for the treatment of smoking addiction. The Clinical TMS Society is a medical society dedicated to supporting TMS.

BrainsWay is planning on launching its multichannel system later this year, which should help to further differentiate the company in the eyes of customers. The company intends on performing feasibility studies with the multichannel system to investigate areas like dementia and stroke rehabilitation. Opening up TMS to new indications that are large and likely to receive insurance coverage could help to create more investor interest in the company.

BrainsWay is still working to expand the adoption of TMS with its existing system. For example, BrainsWay recently presented two Deep TMS posters at the World Congress of Psychiatry, highlighting the benefits of Deep TMS in the elderly population and the potential of an accelerated Deep TMS regime, where accelerated refers to administering multiple TMS sessions each day to reduce overall treatment times. BrainsWay is also collecting data on addiction using its H4 coil, which could result in additional clinical trials.

Financial Analysis

Revenue growth in the third quarter was approximately 61% YoY, although this was largely the result of weakness in Q3 2022. While BrainsWay's growth has been lumpy, outside of temporary periods of weakness driven by the macro environment, the business has been steadily scaling.

BrainsWay shipped a net total of 56 systems during the third quarter, along with 48 OCD coils. Nearly 50% of the company's total installed base now has OCD treatment capability. The focus on larger accounts appears to be supporting increased system sales, despite the tough macro environment. Based on past data, around 50% of new systems go to current customers, and the other 50% to new customers, indicating a healthy growth mix.

BrainsWay has given limited forward guidance but has stated that based on its US pipeline and international momentum it has a positive outlook for the remainder of 2023 and into 2024.

BrainsWay's gross profit margin remains depressed but is beginning to recover from recent lows. While some of this could be due to pricing or inflationary pressures, BrainsWay has suggested that it is mainly due to revenue mix. The company's gross margins are lower internationally, and leasing margins appear to be higher. BrainsWay has previously stated that its products are differentiated in the minds of customers and that pricing has been stable. The revenue mix between the US and international has reportedly been steady at around 70-30 . Out of the 56 net systems shipped during the quarter, 46 were direct sales and the remaining 10 were leases.

Most of BrainsWay's recent progress toward profitability has been the result of the company reducing its operating expenses. It is currently unclear how much further operating expenses can be reduced, but continued growth should support a transition to profitability regardless. A focus on larger customers and a shift toward distributors may be supporting improved sales efficiency. In addition, BrainsWay appears to have pulled back on R&D to hasten its transition to profitability.

Liquidity has never been a major concern for BrainsWay, particularly after the company's large capital raise in 2021. BrainsWay still has around a 44 million USD cash balance and no debt. In the third quarter of 2023 BrainsWay's net loss was 230,000 USD and free cash flow was approximately 842,000 USD. Absent a deterioration in the macro environment, the company is likely to continue generating cash going forward.

Valuation

Despite the stock more than tripling from its lows, BrainsWay is still inexpensive. BrainsWay's EV/S multiple is only around 1 and its P/B ratio is roughly 1.25, both of which are heavily impacted by the company's cash balance. This is not reflective of a company with a differentiated product in a growth market that is capable of many years of profitable growth. Prior to the pandemic, BrainsWay consistently traded on an EV/S multiple of around 5. While the stock is unlikely to return to this type of multiple, there is still room to move significantly higher.

Risks

Like any investment, BrainsWay has associated risks. The most important of these are related to the company's small market capitalization and the stock's lack of liquidity. BrainsWay's stock price often moves far more than fundamentals warrant. This is illustrated by the fact that despite the company having minimal cash burn, a large cash balance, and solid prospects, BrainsWay has had a negative enterprise value for extended periods. As a result, BrainsWay's share price could fall significantly if investor sentiment sours.

While BrainsWay faces competition, the regulated nature of the market means that the competitive environment is only likely to evolve slowly over time. In addition, BrainsWay has focused on R&D and created a differentiated product that is also supported by clearance for a broader range of indications than competitors.

In terms of fundamentals, the main risk is a deterioration in the macro environment which undermines capital expenditures by customers. This occurred during the pandemic and again over the last 12-18 months as central banks tightened monetary policy.

Conclusion

BrainsWay's business continues to scale, and it is now generating free cash flow. The company also still sits on a large cash balance (worth more than half BrainsWay's market capitalization) and has a low valuation. Further penetration of larger customers, expansion internationally, and commercialization of smoking cessation should support growth going forward.

It will likely still take time for the market to fully recognize BrainsWay's potential value, but a demonstration of consistent profitability and positive cash flows in coming quarters should help. Investors may also want to see BrainsWay begin returning capital to investors, but this could be some way off due to the opportunities ahead of the company.

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