We observed a slightly weaker Q4 2023 report from Physitrack in terms of both topline revenue and profitability compared to our expectations, especially from the Wellness division. The market’s reaction, sending down the share by approximately 14% intraday, seemed somewhat exaggerated as the share was already trading at compressed levels. We understand the market’s concern with the Wellness division’s performance, with an 8% y/y growth. The Wellness division is supposed to be the growth engine within the Group, yet the Lifecare division outperformed this quarter. Management has been outspoken about their strategic shift, prioritising contracts that improve margins and have positive working capital dynamics over a “growth at all costs” strategy. This shift in strategy resulted in a slight decline in revenues on a quarter-on-quarter basis in Q4 2023, mainly due to a decrease in one-off revenue sales. However, when excluding the decrease in one-off revenues, sales grew by 16% year-on-year and by approximately 4% quarter-on-quarter within the Wellness division. This is more in line with our growth expectation of 20% in Q4 for the Wellness division. Further, we noted growth in both year-on-year and quarter-on-quarter segments in the subscription revenue segment within the Wellness division.
Notable highlights include a positive free cash flow of EUR0.3 million and a 12% year-on-year increase in ARR. In FY 2023, organic growth reached 22%, surpassing the 18% median of its peer group for 2023 estimates. However, the H2 2023 figures evidently indicate a slower growth trajectory for 2024.

Physitrack reported Q4’23 sales of EUR3.8m, 9% y/y growth and 4% below our estimate. When excluding negative FX effects, organic sales grew by 11% y/y. Sales decreased marginally on a q/q basis. Organic growth was derived from both the Lifecare and Wellness divisions, which grew 12% and 9%, respectively, y/y.

In Q4 2023, organic revenue within the Lifecare division saw a 12% year-on-year increase, rising by 10% when factoring in FX effects—the Lifecare division stood for 63% of the group revenues during the quarter. Lifecare subscription revenues continue to be the primary contributor, comprising approximately 57% of the group revenues. During the quarter, Lifecare’s subscription share of revenues rose to around 93%, up from 91% in Q3 2023. Year over year, Lifecare achieved a 13% organic sales growth or 10% when considering FX effects, a performance in line with our expectations.
We maintain our expectation of approximately 10-14% year-on-year growth rate from the Lifecare division, with a significant portion of this growth attributed to price increases. Despite annual price hikes, churn levels trended inversely, implying pricing power. In Q4, Lifecare expanded its subscription base by 4,500 licenses, bringing the total to an average of 61,000 subscription licenses by the end of Q4 2023, indicating a 14% year-on-year growth rate.

Organic revenue within the Wellness division increased by 9% year-on-year in Q4 2023 or 8% when including FX effects—the Wellness division stood for 37% of the group revenues during the quarter. Despite our anticipation of a stronger performance with a 20% year-on-year growth rate, sales declined on a quarter-on-quarter basis during the quarter. The primary reason for this decrease was a decline in one-off revenue sales within the division, amounting to approximately EUR0.1m. However, when excluding the decrease in one-off revenues, sales grew by 16% year-on-year and by approximately 4% quarter-on-quarter.

Subscription revenue now surpasses one-off revenue within the Wellness division, accounting for 19% and 18% of the group revenues, respectively. Previously, we highlighted the significance of monitoring the growth of subscription revenues within the Wellness division as a crucial key performance indicator (KPI). This growth is essential for determining the division’s success and facilitating overall margin expansion for both the division and the Group. In Q4’23, Wellness subscriptions totalled cEUR0.7m, representing a 2% quarter-on-quarter growth and comprising approximately 52% of the total revenues in the Wellness division.

Recurring revenues grew by 22% y/y, representing 78% of total revenues. On a q/q basis, recurring revenues grew by 4%. The Annual Recurring Revenue (ARR) experienced a 9% y/y growth and a 2% quarter-on-quarter increase, reaching EUR12.0 million, which is in line with our expectations.

Adjusted EBITDA-CAPEX amounted to approximately EUR0.1 million. We observed a slight quarter-on-quarter EBITDA-CAPEX margin decrease of 1 percentage point during the quarter. Our preferred profitability measure for SaaS businesses is EBITDA-CAPEX. However, due to the significant positive impact of earnout write-downs on EBITDA in Q4, we chose to use the reported adjusted EBITDA for Physitrack. For reference, we consider a positive EBITDA-CAPEX margin to indicate underlying profitability and an EBITDA-CAPEX margin above 15%, implying solid profitability. Hence, only 12 out of 41 companies in our SaaS update for Q3 2023 surpassed the 15% threshold. Looking at the Lifecare division individually, we estimate an EBITDA-CAPEX margin of c20% for 2024e, implying solid performance and profitability.

For SaaS businesses such as Physitrack, EBITDA and EBITDA margin are not ideal profitability metrics as they do not account for R&D costs. Since R&D is often a significant expense in this sector, metrics like EBIT (which amortises capitalised R&D over time) or EBITDA minus capitalised R&D / EBITDA- CAPEX offer a more precise perspective on underlying profitability. Our preferred metric is EBITDA minus CAPEX, treating all R&D expenses as upfront costs.

OPEX, excluding adjustments and D&A, amounted to EUR2.9m and was on par with our estimate. The management’s efforts towards enhancing operational efficiency have yielded positive outcomes during 2023, stabilising the cost base over 2023. We expect the cost base to continue to hover around EUR3.2 m (after adjustments) per quarter.

Adjusted EBITDA (adjusted for EUR3.8m in a revaluation of earnouts, acquisition and integration costs) reached cEUR1.0m in the quarter, corresponding to an EBITDA margin of 26% (25%), 2pp below our estimate. Adjusted EBITDA FY 2023 came in at 7% in the Wellness division, an improvement from last year, where the figure was 2%. The margin gap between the two divisions remains large, whereas adjusted EBITDA FY 2023 for the Lifecare division stood at 46%.

Cash flow from operating activities before payments of adjusting items was EUR1.4m (EUR1.3m), whereas the Free cash flow was – EUR0.3m, an improvement of EUR0.3m q/q. By the end of Q4 2023, Physitrack held a EUR0.5m cash position, but the available liquidity, including the Revolving Credit Facility (RCF) corresponds to EUR2.4m. Physitrack’s net debt was cEUR3.0m by the end of the quarter, a decrease of EUR0.3m from the last quarter.

As anticipated, a significant revaluation of earnouts amounting to approximately EUR5.5m was reported. The non-current deferred consideration on the balance sheet now stands at EUR2.4m compared to EUR8.4m in Q3 2023. It is worth noting that EUR1.1m was transferred from non-current to current deferred consideration. Consequently, it is likely that EUR1.1m in earnouts will be paid out within the next 12 months. Additionally, a write-down of Fysiotest's goodwill balance of EUR3.3 million was carried out, reducing Fysiotest's goodwill to a carrying value of EUR1.4 million (Fysiotest was acquired in 2021 for SEK15m, excluding earnouts).

Champion Health had another good quarter in sales, enlarging its pipeline with several significant deals slated to conclude in the first half of 2024.

The positive churn trend in Lifecare continues to be stable, decreasing y/y from 13.5% in Q4’22 to 11.4% in Q4’23. Physitrack's churn appears high at first glance compared to other SaaS peers. In a "normal" SaaS company with primarily enterprise customers, a more than 10% churn rate would likely be detrimental to the business. However, in Physitrack's case, the main driver of churn comes from SME customers in the Lifecare division (smaller clinics and private practitioners) rather than enterprise customers. These SME customers likely have a low customer acquisition cost (CAC), and the onboarding and sales funnel is strictly digital. Easy come, easy go – but it does not significantly affect overall performance as it would in a SaaS company without the same customer base.

In the quarter, the company continued to embrace AI as the cornerstone of its business, both operationally and in product innovation. The AI co-pilot tool in Physitrack is paving the way for new user growth in market segments that need assistance with recommended exercise programs via a powerful LLM. Further, AI has been used to localise various platforms across the Group.

Q1 2024 appears to be off to a promising start for the Life Care division, with strong growth continuing from late Q4 2023 into January and February 2024. Additionally, following the success of recent growth initiatives within the division, management now anticipates that Lifecare will contribute to the overall growth to a greater extent as they have identified untapped potential.
Regarding the slowdown in growth during H2 2023 within the Wellness division, management states that it is not attributed to product-market fit but rather to the process of training and educating the sales team to prioritise contracts that improve margins and have positive working capital dynamics over a "growth at all costs" strategy. While this task has been challenging, according to management, the strategic shift has now been implemented, and they expect growth levels for the overall Group to return to around 30% in H2 2024. This indicates a temporary slowdown for the Wellness division.
Management expects a positive cash flow result for FY 2024. However, it's worth noting that they do not include earnout payments when referring to FCF. As mentioned earlier, EUR1.1 million in earnouts has been moved from Non-Current to current. Additionally, it should be expected that some quarters may not be cash flow positive due to payment cycles, with Q2 typically being such a quarter.
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%.
We hold a cautiously optimistic outlook. Short-term growth drivers for the Wellness division include product localisation, with expected launches in Sweden and Germany in 2024. Additionally, we anticipate that new contracts for Champion Health will bolster growth in the Wellness division throughout 2024. Management asserts that several significant enterprise contracts (some larger than the Curry agreement) are pending and expects them to be finalised during H1 2024.

As we head into 2024, comparables become more challenging, particularly in H1 2024. We anticipate that the slowdown observed in H2 2023 within the Wellness division will persist during H1, with an expected group growth rate of 12-14% during this period. However, comparables become less challenging in H2.

We have made adjustments to our near-term estimates following Physitrack’s Q4 report:

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 earnouts. Nevertheless, our estimates allow for a little margin of error. 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.

Our Base case fair value has been adjusted to SEK35 (SEK38) per share due to the impact of a weaker EUR/SEK and estimate adjustments. Our fair value range is adjusted to SEK9-SEK75 per share (previously: SEK12-SEK76). Currently, Physitrack is trading at an EV/EBIT multiple of 13.5x and EV/Sales 1.2x based on our 2024e.

Our valuation is based on the financial forecasts in the table above (Base case) and long-term assumptions outlined in the table below.

In reference to our DCF valuation, one could consider the potential value of the Lifecare division on a standalone basis. We employ an EBITDA-CAPEX valuation method for the Lifecare division with the following assumptions:

Our multiple valuation suggests a fair market capitalisation of approximately SEK365m for the Lifecare division and a fair enterprise value of around SEK350m when half of the Group’s debt is considered. Our fair value market capitalisation of SEK365m can be compared to today’s market capitalisation of approximately SEK200m for the Group, including the Wellness division. We believe the market worries about the growth and margin expansion potential in the Wellness division, pricing it to a negative value according to our alternative valuation.

Compared to its peers, median EV/Sales multiples for 2024e–2025e, Physitrack trades at a 55%-62% discount. Moreover, the discount is also prominent when comparing median EV/EBIT multiples for 2024e, with Physitrack trading at a c40% discount to its peers. We believe the market worries about the growth and margin expansion potential in the Wellness division.