U.K.-based Craneware PLC (LSE:CRW, Financial) is a software company that develops, licenses and supports its automated value cycle solutions for U.S. hospitals to improve margins and enhance patient outcomes. The company generates its sales through software licenses (84.7% of fiscal 2019 revenue) and professional services, including installation and training (15.3%).
Craneware was formed by CEO Keith Neilson and Gordon Graig in 1999, the same year they signed up their first customer. By the end of the next year, the total customer base amounted to over 20, and today, the company serves more than one-third of all registered hospitals in the U.S. According to the recent filing, Neilson and Craig own nearly 12.7% and 8.9% of the total shares outstanding. Derek Paterson, the chief information officer, holds around 3.3%. In our view, this current insider ownership aligns the management’s interests with (minority) shareholders.
We particularly like the “annuity SaaS” business model at Craneware, which enables the business to generate reliable, repeatable sales. A typical license agreement lasts for five years, and the renewal rate has been over 100% in dollar value recently, with its historical norms between 85% and 115%. Superior customer loyalty is attributable to a high switching cost as well as the high quality of the product. After each sale, Craneware provides associated professional services engagement to embed the software within the customer’s core processes to maximize the value the software can bring to them. While customers are being “locked in,” they are also satisfied with the product and service. According to the company’s website, the Net Promoter Score of Craneware is among the highest in the technology space, beating Apple (AAPL, Financial), Google (GOOG, Financial) (GOOGL, Financial) and Microsoft Office (MSFT, Financial). Furthermore, the non-cyclical nature of its clients has been making Craneware’s business more bullet-proof. It should be no surprise that the company increased both its sales and operating income throughout the Great Recession (see below).
Per the chart below, Craneware delivered higher returns on assets on a more consistent basis than its peers, including Cerner (CERN, Financial), CPSI (CPSI, Financial), Athenahealth (ATHN, Financial) and Allscripts Healthcare Solutions (MDRX, Financial), indicating the management’s decent capital allocation as well as the existence of a solid moat.
We believe that industry tailwinds of an aging population and regulatory pressure will continue to benefit Craneware in the long run. The ongoing transition to value-based care is a powerful growth driver for the company as health care providers increasingly depend on accurate financial and operating data. In the meantime, the management at Craneware recognizes that “Build” is often the best growth strategy forward, while considering “Buy” or “Partner” complementary to expanding its portfolio of products. The company invests significantly in research and development (capital expenditures doubled in fiscal 2019), which could widen the moat and fuel long-term growth.
On the risk front, the continual evolution and reform of the U.S. health care system could have a considerable impact on Craneware’s market opportunities. The ongoing market consolidation among U.S. health care providers is another unfavorable trend for the company. At the same time, given that the company already serves over 30% of the current target market, we may feel some weakness in the long-term organic growth opportunities at some point.
Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Craneware.
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