In summary, we believe Physitrack´s Q2 2023 showed stable performance. We find the organic growth of 25%, combined with effective cost management in the face of ongoing challenging market conditions, particularly encouraging. The management’s efforts towards enhancing operational efficiency have yielded positive outcomes, stabilising the cost base compared to the previous quarter. Topline growth was less aggressive than the previous quarter but aligned with our expectations. We note that this quarter’s comparables were challenging for the Lifecare division, but the upcoming Q3 and Q4 comparables are softer.

Q2 2023 revenues came in at EUR3.8m (EUR3.0m), in line with our estimate. Lifecare revenues amounted to EUR2.4m (2.4m), on par with our estimate. Wellness revenues amounted to EUR1.4m (EUR0.7m), in line with our estimate. Net sales growth in Q2 2023 equalled c23% y/y, c2pp below our estimate of c25%. Organic growth was, however, 25% y/y.

Looking at revenue generation per segment, Lifecare subscription remains the main contributor, generating c52% of the revenues. Wellness one-off is still larger than Wellness subscription, representing 21% and 16% of the revenues, respectively. In our view, the growth of Wellness subscriptions is one of the most important KPIs for investors to monitor, as it is set to fuel growth as we advance.

Recurring revenues grew c20% y/y, representing 71% of total revenues. On a q/q basis, recurring revenues were unchanged. We believe the lack of q/q growth is more of a timing issue, as tenders sent out before summer often are attended to after the summer. As such, we expect growth to take off again in Q3.
ARR grew by 17% y/y and 2% q/q. The ARR in Q2’23 was EUR11.5m vs EUR9.8m in Q2’22. We believe the solid y/y growth of the ARR underpins a strong business momentum. We also believe that the swift y/y ramp-up of recurring revenues/ARR, implies that the Wellness division is on the harmonisation and standardisation path. The Lifecare division had 87% recurring revenues in Q2, and Wellness reported 43%.

OPEX, excluding D&A and adjustments, was SEK2.8.m, in line with our estimates. The management’s efforts towards enhancing operational efficiency have yielded positive outcomes, stabilising the cost base compared to the previous quarter. We expect the cost base to continue to hover around EUR2.8m due to management’s counited focus on operational efficiency and profitability.

Adjusted EBITDA reached 25% in the quarter, the same as in Q1’23 and Q4’22 and 2pp below our estimate. During an interview, Henric Molin, the CEO, mentioned that in Q2’23, the margin could likely be enhanced. However, the management decided to forgo this option as it could potentially hinder the company’s growth trajectory. Physitrack’s adjusted EBIT was 1% (11%) in Q2 2023, 4pp below our estimate. D&A amounted to EUR0.8 (EUR0.6).

After adjusting items, cash flow from operating activities was EUR0.3m (EUR0.1m). Physitrack uses capitalisation – i.e., it records an asset (in this case, development costs) on the balance sheet instead of immediately expensing this on the income statement. In Q2, we estimate that Physitrack capitalised EUR0.8m for development, implying that EBITDA minus capitalisation amounted to EUR0.2m.

By the end of Q2’23, Physitrack held a EUR0.7m cash position, but the available liquidity, including the Revolving Credit Facility (RCF) corresponds to EUR2.8m. Deferred consideration (non-current) was cEUR9m vs EUR10.7m in Q1, and capex continues to linger around EUR0.8m. Management “re-confirms that there is expected to be no further deferred contingent consideration payments for the remainder of the financial year, and no capital raising via share issuance or debt”. Further, management is confident that the business will be FCF positive by the end of the year. Free cash flow is defined by Physitrack as net cash from operating activities, less purchase of intangible assets and property, plant and equipment and finance costs.
We expect Physitrack’s cash position combined with the RCF to be enough to reach positive cash flows and the RCF and FCF to cover further earn-outs. Nevertheless, our estimates allow for a little margin of error. By the end of the quarter, Physitracks’s net debt was cEUR3.0m.

We find it favourable that beginning this quarter, Physitrack has introduced an additional growthmetric, namely organic growth. Organic revenue entails the translation of the current year's revenue into the group's presentation currency (Euro) using exchange rates from the previous year. Considering Physitrack's exposure to fluctuations in foreign exchange rates, this metric offers investors a comparable measure for evaluating pro-forma revenue from the prior year.

Management emphasises their commitment to delivering profitable growth, indicating that they have and will continue to decline customers if they don’t meet the margin threshold. Moreover, there is a positive outlook for the strong start of Q3, especially within the enterprise customer segment of Champion Health. Physitrack appears adept at navigating the current challenging market conditions, and management expresses confidence in the ongoing resilience stemming from business diversification.
Champion Health Nordic (formerly Fysiotest) has effectively executed a turnaround, and management holds high expectations for growth and profitability. Additionally, there are no signs of growth stagnation within the Wellness division. During the Q2’23 webcast conference, we learned that the US market is the next launch market for Champion Health’s digital product aimed at SME (Small and Medium Enterprises) customers. Presently, active marketing campaigns for this product are limited to the UK, and management seems content with the progress of the launch.

The report reaffirmed the financial midterm targets, which encompass a 30% year-on-year organic growth coupled with EBITDA margins ranging from 40% to 45%. Furthermore, management is confident in achieving positive Free Cash Flow (FCF) by year-end.

We have made minor adjustments to our near-term estimates following Physitrack’s Q2 report:

Relative to Physitrack's midterm-term targets of 40-45% EBITDA margin and 30% organic growth, we have adopted a more conservative stance regarding growth and margins in the midterm perspective. For further estimates, see the tables below.

We have increased our fair value range on the back of the estimate revisions and the increase of the EUR/SEK that impacts the valuation positively. Our new base is SEK41 (SEK38) per share, while the bull and bear case stands at SEK80 (SEK72) and SEK12(SEK11), respectively. Our valuation is based on the financial forecasts in the table above (Base case) and long-term assumptions outlined in the table below. We have used a WACC of 12%, derived from Redeye’s Rating model.

Compared to its peers, median EV/Sales multiples for 2023e–2024e, Physitrack trades at a c40%-45% discount. Moreover, the discount is also prominent when comparing median EV/EBIT multiples for 2024e, with Physitrack trading at a 60% discount to its peers. Despite the management’s guidance, we believe the market continues to worry over the size of potential upcoming earn-outs and a capital infusion need.