Summary
- The company spent the pandemic years in the wilderness as blood donors stayed away and their accounting for brokerage from pharma programs was overly aggressive.
- But the company kept on sweeping up plasma centers as customers, laying the groundwork for an eventual recovery.
- That recovery is now here and has legs, but the question remains whether the company can move beyond plasma centers.
PaySign ( PAYS ), a fintech company servicing mainly the plasma center market has been in the doldrums for a couple of years due to some aggressive accounting on brokerage in their pharma business and the decline in blood donations during the pandemic.
But the funny thing is that all that time they kept adding plasma centers as new customers, so one could say that the fundamentals were improving all the time, even if the stock price got a severe beating:
FinViz
So basically, this was one of the better-announced turnarounds, as there would always come a moment when people would start donating blood again at the company's now greatly expanded clientele of plasma centers.
And we should not forget that they continue to add plasma centers as customers, no less than 62 in Q2 for a total of 437 centers (versus 356 a year ago).
Many of these new customers came very late in the quarter which added costs, but very little revenue, so we can look forward to further improvement in Q3.
The universe of plasma centers itself is a moving target as there are new entrants and PaySign managed to go live with three new entrants in Q2.
More significant is that the company managed to get the account of one of the two largest plasma collection companies in the US which manages 100+ of these centers and onboarding begins early next year, although with what speed that happens is not really known at this stage.
PaySign is now the market leader with an expanded share from 32% in Q1 to 40% in Q2, we assume that this big customer win is what brought them over the line but aren't 100% sure this is counted yet (as onboarding has yet to start).
The rest of the year will give more of the same, they expect to onboard 3-4 new centers a month for a total of between 90-95 new centers in FY22. Still, with all that good news we are still not back at pre-pandemic levels, but rapidly closing in on that:
Why do they seem to win customers so easily and become the no.1 player in this market? Management gave two reasons:
- Participating in RFPs.
- Offering multiple additional value-added services, which few others seem to do.
They also benefit from the demise of Wirecard and perhaps of the fact that they specialize in plasma centers which is too small for the big card processors to be bothered about.
They also still have pharma programs, and there was some good news from that segment as well ( Q2CC ):
Our pharmacy and medical claims benefit volumes continue to increase month-to-month as programs mature and the pharmaceutical products they support increase in market share. We continue to devote selling and business development resources to addressing industry issues, such as co-pay accumulators and spread margin. We have been successful in providing data-driven insights and solutions to current and future clients, helping to drive deep conversations that we are confident will lead to new program wins.
Still, with just $773K in revenue from pharma in Q2 this is still a very small base, although it was up by 21% from Q2/21.
But another favorable development was their Q1 customer win with Spentra in an entirely new segment, payroll cards. Apart from an entry in an entirely new segment, this deal came with a direct connection with Mastercard (MA) that could very well serve to open up more doors (Q2CC):
Our Mastercard connection allows us to offer greater choice to our clients by adding an additional payments network to our offerings. Additionally, with this connection, we are now enabled to support not only payroll but gift, general purpose reloadable, corporate incentive and debit on the Mastercard brand. The Mastercard connection also enables EMV, contactless and tokenization support for our products.
This is significant because at one stage the expansion opportunities in plasma centers is going to decline given their rising market share in this segment, and despite years of trying their foothold in pharma programs are still very small.
Two of their pharma programs end in mid-November, so they will have to win some more programs to keep the growth going.
If they can use their connection with Mastercard as leverage to enter other segments, this would be a game changer for the company.
The average revenue per month per plasma center was $6,625 versus $5,633 last year, but this is still suffering from the demise of their Southern market where many Mexicans used to cross the border to donate blood.
While this concerns only 7% of locations, these tended to be bigger, so it affects like 12%-15% of their market. So the revenue per plasma center is still not up to the pre-pandemic level of $8K+
The cash flow graph above is hugely inflated as nearly all of it is card funding (which is restricted cash, needless to say), but detracting that they did manage an operational cash flow of over $700K. They do have $6.5M of unrestricted cash, down less than $100K from the end of 2021.
There is another thing that we like about the company, which is their really solid gross margins:
Valuation
At 52M shares, the company has a market cap of $156M (at $3 a share) and an EV of $150M, which isn't cheap at over 4x FY22 EV/S. The company is basically at breakeven and analysts expect a modest $0.02 EPS next year, although we think they can do a little better than that, given the funnel of new business.
Conclusion
This is an interesting turn-around story. While donors largely stayed away from plasma centers during the pandemic, the company kept signing up more of them, setting the stage for an eventual turnaround.
The company is growing at 20%+ rate and producing 50%+ gross margins, which suggest to us that operational leverage will kick in at some point.
While the company hasn't had a lot of success in their other segment, pharma, the entry into payroll cards shows that they still have a decent shot at other segments, which is made easier with the direct link with Mastercard.
Given the near-time growth with the continuous onboarding of new plasma centers and the big win which starts with onboarding centers next year, we think the company's turnaround has legs.
For further details see:
The Recovery At PaySign Has Legs