BRSYF - BrainsWay: Profitability Is Within Sight
2023-08-10 16:07:33 ET
Summary
- BrainsWay's Q2 results show continued revenue growth and improved cost control.
- The company is shifting its sales focus to larger institutions and enterprise customers, potentially improving sales efficiency.
- BrainsWay's market capitalization is still only approximately equal to its net cash position. Sustained profitability could move the stock significantly higher.
BrainsWay’s ( BWAY ) second quarter results were solid, demonstrating sequential revenue growth and a significant improvement in profitability. Despite this, BrainsWay’s market capitalization is still only roughly equal to its net cash position. BrainsWay appears deeply undervalued, but the company will probably need to demonstrate sustained profitability and begin redistributing capital to shareholders before the stock reprices.
BrainsWay has shifted its sales focus towards larger institutions and enterprise customers, which could help to improve sales efficiency. This may also be a necessary move given that there appears to be consolidation occurring amongst TMS providers. BrainsWay has stated that the balance of its business is now roughly 50/50 between new customers and large existing customers.
BrainsWay has had some traction amongst larger customers in recent months, with an order of 30 systems by a large TMS network of clinics based in the Western and Central United States. BrainsWay also recently received an order for 25 systems from a customer in India. Revenue from roughly 30 systems out of the 55 above was recognized in the second quarter.
The TMS market also continues to receive tailwinds from improved insurance coverage. Aetna now allows behavioral nurse practitioners to order and administer TMS treatments for patients with MDD. Patients also are no longer required to have a 4-month psychotherapy trial before becoming eligible for TMS. BlueCross BlueShield of Michigan also recently reduced the number of required antidepressant medication attempts from 4 to 2. Easier access to covered TMS treatments should contribute to increased demand for TMS systems over time.
Financial Analysis
BrainsWay’s revenues were fairly flat YoY in the second quarter but increased 18% sequentially. BrainsWay shipped a net total of 53 systems during the second quarter, along with 34 OCD coils. BrainsWay now has an installed base of 985 systems, up by 19% YoY, and nearly 50% of the company's installed base includes OCD treatment capability.
Revenue in the second quarter was negatively impacted by BrainsWay's inability to recognize around 1 million USD of lease revenue due to the financial condition of a customer. This issue is expected to be ongoing throughout 2023.
Figure 1: BrainsWay Revenue (source: Created by author using data from BrainsWay)
Despite recent headwinds, BrainsWay continues to scale its business. The recent focus on larger customers appears to be contributing to increased system shipments, and BrainsWay is now close to being the market leader in this regard.
Figure 2: BrainsWay Units Placed (source: Created by author using data from BrainsWay)
BrainsWay's gross profit margins were fairly consistent between 2017 and 2021 but have fallen off recently. BrainsWay has suggested that pricing has been steady, and that customers appreciate the company's differentiated value proposition. Gross profit margins are lower internationally than in the US and are also impacted by the mix between direct purchases and leases. The drop in gross margins is likely at least in part due to an inability to recognize some lease revenue.
Figure 3: BrainsWay Profit Margins (source: Created by author using data from BrainsWay)
BrainsWay's operating profit margins improved significantly in the second quarter on the back of higher revenues and cost optimization measures that were implemented earlier in the year. BrainsWay expects that improvements will become even more apparent as the year progresses. The company's goal of reaching breakeven in the fourth quarter looks achievable, provided that macro conditions do not deteriorate.
BrainsWay's cash burn is also improving, falling to 0.9 million USD in the second quarter compared to 3.5 million USD in the first quarter.
Figure 4: BrainsWay Operating Expenses (source: Created by author using data from BrainsWay)
Valuation
Despite the recent increase in share price, BrainsWay's market capitalization is still only approximately equal to its net cash position. If BrainsWay can continue to grow and begin to consistently generate free cash flow, the stock should continue to move higher.
If BrainsWay's P/S multiple were to return to its past average, the stock price in 2024 would likely be around 9 USD per share. It is likely that BrainsWay will need to achieve profitability and begin returning capital to shareholders before this type of move occurs, though.
Figure 5: BrainsWay Relative Valuation (source: Seeking Alpha)
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BrainsWay: Profitability Is Within Sight