LiDCO (AIM: LID), the hemodynamic monitoring company, announces an update on trading and outlook for the 12 month period ending 31 January 2019.
Based on current trading, the Board now expects LiDCO product revenues for 2018-19 to be similar to the last financial year. The principle reasons are the deferral of revenues as the Company makes more rapid progress to transition existing large UK customers to its High Usage Programme (HUP) business model, an anticipated order from South East Asia being delayed, and longer sales cycles in the US.
Following the previously announced termination of the Argon distribution contract and subsequent signing of new third party opportunities, the Board expects that third party sales are likely to be in the region of £1.0m (2017: £1.4m) this financial year. The Board anticipates gross margins to be a little stronger than last year and expenditure continues to be tightly controlled, with operational expenses expected to be around £0.3m lower than last year.
LiDCO continues to make headway with its differentiated HUP, Software as a Service (SaaS), business model following its launch in July 2017. As the business wins HUP contracts, it transitions towards multi-year licence revenues, giving greater visibility alongside stronger cash generation as customers pay in advance of services being provided. At the end of November 2018, the Company had £1.3m (November 2017: £0.3m) of annualised HUP contracts globally with the revenue recognition being spread over the term of the contract as opposed to monitor and consumable revenues being recognised at the time of transaction.
In the UK, LiDCO is seeking to convert its largest customers to the HUP business model. The Company initially tested this approach with its largest UK account in January 2018 and, encouragingly, the customer has been able to treat more patients and has increased its investment in hemodynamic monitoring. Following this success, in recent months, two more of LiDCO’s larger customers have converted to HUP. This decision to actively convert UK customers to the SaaS business model will have a transitional impact on sales revenue recognition within this financial year by deferring revenues which would normally have been booked this year to be recognised over the 12 months from signing the HUP agreement. The Board strongly believes that this is the right strategy, as converting its largest users to HUP will drive greater transformational growth in the future as well as improving forward visibility and sales efficiencies.
In the US, there remains an encouraging pipeline of prospective customers, many at an advanced stage of contracting, but the timing of finalising these agreements remains difficult to predict and at this stage any which are signed will not have a material impact on reported revenues for this financial year. Whilst, at times, progress appears slower than originally anticipated, the Group’s management and sales team are learning how to anticipate and overcome identified causes as well as building various relationships to help penetrate the US market, which is the largest in the world for hemodynamic monitoring. The Company has not lost any prospects from its substantial pipeline since the interim period end and is very focused on closing those at the most advanced stage. The Board believes that its disruptive HUP model will continue to gain traction in the US and anticipates that its US operations will become cash flow break-even during the course of the coming financial year.
The Company’s cash position was expected to benefit in H2 2018-19 from further growth in HUP contracts, with the upfront payments made this financial year. However, given likely timing of signing new HUP contracts, the Board now anticipates an overall cash outflow in H2 of around £0.5m with the cash benefits of anticipated new HUP contracts being received in the next financial year. The Board believes that LiDCO retains the appropriate strength in its balance sheet to deliver its strategic objectives. The Company remains debt free.
The Board is confident that the HUP business model is the right strategy for driving transformational growth for the Company, albeit additional time is needed to realise the significant opportunities, particularly in the US. The Board anticipates significant revenue growth in FY 2019-20 sales as the current annualised base of HUP contracts carries forward into next year, partially offset by lower third party sales as the business transitions to the new third party distribution agreements. Gross margins are expected to improve due to a favourable LiDCO product mix and higher margins on the new third party sales, whilst operating expenses are expected to remain broadly stable.
The Company intends to announce its results for the full year to 31 January 2019 on 26 March 2019.
Commenting, Matt Sassone, Chief Executive Officer of LiDCO, said: “Having just returned from visiting a number of prospective HUP customers in the US, I remain very positive with our prospects for penetrating this market. In addition, we are making good progress with converting customers to our HUP model in the UK. As a result, I am convinced that we will continue to grow a strong foundation of contracted HUP recurring revenues. We will continue to keep costs and cash flows under control as we transform the business to a Software as a Service model which will be a much more predictable business.”