It’s rare to read a ‘but’ in any report issuing from ‘Little Scottish Battler’, Craneware, which has been – and hopefully will continue to be – ‘David’ to the many Goliaths playing in the US healthcare sector. The ‘but’ is in today’s H1 report (to 31 Dec.) concerning the backlog, which although sitting at nearly $90m, is a tad lower than it was 6 months prior. This is in contrast to an otherwise sparkling set of results (as presaged in January) which saw revenues rise by 25% to $16.6m (all organic) and operating margins expand by 160bps to 25.7%.
There seem to be two reasons for the backlog erosion. Firstly, Craneware’s preferred modus operandi is to sign 5-year contracts with any add-ons (e.g. from cross-selling) co-terminating. Currently there are fewer contracts due for renewal. Secondly, and perhaps a little more worrying, is what CEO Keith Neilson refers to as ‘the inherent short term timing difficulty in signing large system sales and new channel partner agreements in any given period’. I don’t recall him alluding to this before.
Neilson has so far made a couple of strategic moves to address the problem. First, Craneware will move to an ‘evergreen’ contract model in line with larger US players. This, he hopes, will simplify the product cross-sell process, which Neilson is keen to accelerate. Indeed, fewer than 40% of Craneware’s customers have more than two products. Second, he is boosting the product set by acquisition, with first cab off the rank, Claims Trust, completed a week or so ago (see Craneware trusts Claim Trust).
In the end, Craneware’s fortunes (and those of the other players too, of course) will depend on how quickly – and in what shape – US healthcare reform will proceed. You can argue that whatever the pace, and whatever the shape, Craneware’s product focus on ‘revenue integrity’ should hit the spot. We certainly hope so.