Departure of a single client knocked the stock down a third in one day. A year later the company reports record numbers
Nearly two years ago an American healthcare company announced in a regulatory filing that one of its clients had exercised a 90-day option to terminate the contract. The client was an employer with 670,000 covered members, which in the prior year had accounted for about 13% of total revenue. The stock shed around a third of its value in a single day, analysts slashed price targets across the board, and US law firms opened investigations over management statements of nearly 100% client retention made just a few weeks before the announcement.
Key points
The loss of its largest client masked real growth. Reported revenue grew 10.4% last year, but after stripping out the departing Amazon, the underlying business grew 20.3%. This year that effect ends and for the first time the company will have nothing to explain.
The promised doubling of profit does not come from operations. The GAAP profit jump to $1.23–$1.34 per share is primarily due to a drop in stock-based compensation from $131.9 million to roughly $80 million, while adjusted profit will grow only eight percent.
Contracts can be terminated on 90 days’ notice without penalty. One client still accounts for 300,000 covered lives, and the company does not disclose the largest customers’ share of revenue, so the risk of a repeat cannot be verified.
The balance sheet is exceptionally strong. No debt, $225 million in cash, operating cash flow of $210 million, and buybacks that more than offset dilution from stock awards: the diluted share count fell from 95.4 million to 84.8 million.
The stock is at half its 2021 peak while the business is two and a half times larger. However, at 16 times this year’s adjusted earnings it looks more like a fair price than a bargain, and the share price is trading above the average analyst target.
The company never downplayed the loss of the client. In every subsequent earnings report it presented two revenue growth figures side by side: the reported figure, which looked poor, and the growth rate excluding the departing client, which remained in double digits. For a year and a half, investors had the opportunity to choose which number they believed.
The answer has meanwhile arrived. For the most recent fiscal year the company reported its highest-ever revenue, operating profit and operating cash flow. It has not a dollar of debt, bought back 8.8 million of its own shares in two quarters – about one-tenth of the total outstanding – and the share price has more than doubled from last year’s low. Yet the market still values it well below where it stood at the end of 2021, when it had barely half the revenue and lower margins.
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