We recently caught up with QIPT management to get an update on the company, and a better understanding of how Q4/22 and FY/23 expectations have changed. Based on our discussion we are making some updates to our expectations for Q4/22 and FY23. Key take aways from our discussion were EBITDA margin expectations of ~20-22% based on inflation related pressure (with a company goal of 25% EBITDA Margin), utilization of credit facilities for acquisition throughout FY/23 (US$110M facility, accretive revenue ~US$44M based on past acquisition multiples), organic growth expectations of ~2% and operational optimization based on technical implementation. As a result, we are decreasing our Q4/22 Revenue expectations to US$39.4M (from US$43.2M previously) and raising FY/23 Revenue expectations to US$199.4M (from US$175.6M previously). In addition to revenue expectations, we have adjusted our Q4/22 Adj. EBITDA expectations to US$7.0M (from US$9.5M previously) and FY/23 Adj. EBITDA expectations to US$39.1M (from US$39.0M previously). We are lowering our target price to $10.50 based on a 7.5x 2023 EV/EBITDA multiple.

EBITDA & Margins

We were able to get clarity surrounding QIPT’s expectations for EBITDA and margin for Q4/22 and FY/23 during our phone call. Management highlighted the pressure inflation was putting on the EBITDA margin which was reflected in the Q3/22 print of ~21% (versus 25% internal goal). The reduction of EBITDA/Gross margins vs. 2021 readings were largely in part to the unprecedented inflation faced throughout 2022. Supplementary to the general inflationary pressures there has been pressure on Respironics due to a recall on Phillips products.

On December 1st ,2022, CMS announced they would be adjusting the fee schedule for DMEPOS for calendar year 2023. The updates to the fee schedule are as follows: CBP items in former CBA’s +6.4%, CBP items in non-CBA’s +9.1%, and Non-CBP items +8.7%.

QIPT was able to leverage pre-existing relationships with suppliers and was not exposed directly to the Phillips recall, however, we see this recall and continued defect identification by the FDA as an additional pressure to gross margins moving forward. Until this recall is fully resolved we see continued pricing pressure on QIPT.

Although QIPT is looking to improve efficiency through technological application to eliminate redundancies, we do not see this having an offsetting effect to inflation and supply restriction pressures.

Considering these headwinds, we are expecting EBITDA margins to stay steady at ~21%, and gross margins to erode to 73% Q4/22 vs. 76% Q3/22 & 70% FY/23 (we are going to model for 70% until we get more clarity). We see the roll-up strategy of QIPT’s acquisitions having short term detrimental effect to the EBITDA margin. There will be redundancies which have to get resolved as the company identifies areas of improvement and areas for elimination.