| 2024 | 2025 | ||||||
| Price: | 32.60 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 21 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 706 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 356 | EBIT | 0 | 0 | |||
| TEV (in $M): | 1,062 | TEV/EBIT | 0 | 0 | |||
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Description
Omda AS
Omda – Thesis Summary
Omda is actively applying the Constellation Software playbook to the hospital vertical in Northern Europe. The business has exceptional software unit economics. Gross churn is 0%-1.4%. 84% of revenue is from software and recurring in nature while 75% is contractually recurring. Omda is paying 1-2x EV/sales to roll up the extremely fragmented hospital vertical software market, which is decades behind that of North America in its consolidation. The CEO and CFO are co-founders and own 20% of shares. We believe it has decades of high growth opportunity ahead of it. There were two prior VIC write ups on Omda under the company’s former name, CSAM Health.
Valuation
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Market cap = NOK 674mm = $63mm
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Our 10 year IRR, assuming an exit multiple of 4x NTM EV/sales (peers’ average multiple is 7.2x), which equates to ~19x NTM owner earnings: ~30%. MOIC: 13.8x.
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The 5 year IRR would be ~44%.
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Stock currently trades at 2.5x total 2023 sales, 12.4x 2024 EV/unlevered owner earnings. If entry = exit, the 10 year IRR would be 25%.
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Larger software serial acquirers trade at higher multiples with lower future growth rates per share (Omda’s EBITDA is temporarily suppressed and we believe it (and owner earnings per share) will grow at a 5 year CAGR of ~38% with sales growing at a 24.8% CAGR. We believe the future growth rate of the other companies will be lower than historically, due to the difficultly of maintaining such growth rates at a larger size. For example, Constellation must acquire more than 150 small companies per year and increase that every year to maintain its growth rate, or acquire larger companies at lower IRRs):
Business Description
Omda was incubated within one of Norway’s largest hospital systems, Oslo University Hospital, beginning in 1999. The hospital system’s IT department (led by Omda co-founder Glenn Kenneth Bruun) found that roughly half of their software came from large IT vendors that were relatively easy to manage, but they were frustrated with managing the hundreds of software systems for specialized, niche workflows that constituted the other half of their software spend. Glenn Kenneth created a project called “clinical systems all managed” (Omda – which was Omda’s first name) to integrate and streamline their niche software management, and Glenn Kenneth placed Omda’s co-founder and current CEO, Sverre Flatby, in charge of it. After the project proved successful, the hospital realized other hospitals could benefit from the software systems they had created and integrated. Omda was spun out of Oslo University Hospital in 2012 (the name at the point was Omda Health).
They focused on Norway until 2014, at which point they sought funding from Swedish private equity firm Priveq to engage in M&A across the Nordics. Priveq exited after the IPO. Omda is currently the largest aggregator of niche software businesses in the hospital vertical in the Nordics, with a plan to move into Europe aggressively over time.
Analog – Constellation Software
As many of you probably know, Constellation Software, run by CEO Mark Leonard and based in Toronto, built the playbook for consolidating vertical market software businesses in North America, earning an MOIC of 147x excluding dividends since IPO in 2007 (34% IRR).
Constellation generated its tremendous investor returns over the last thirteen years while using very minimal amounts of leverage, which is astounding. They have averaged 0.2x net debt to EBITDA. We believe that VMS (vertical market software) businesses should be levered at a minimum of 4x EBITDA. We believe that Omda will continue to operate at higher levels of leverage than Constellation, which will provide it with a compounding tailwind.
For more on Constellation, please see Appendix I.
Omda’s management has read Mark Leonard’s annual letters. Before they had heard of Constellation, the model they were trying to emulate was that of Visma, a private software company in Norway. Visma has, since the year 2000, engaged in 200 acquisitions and grown from NOK 100mm (€10mm) in sales to NOK 23.8bn in 2022 (a 28% sales CAGR over 22 years), creating enormous value for their investors (Warburg Pincus and Hg Capital among them). As with Omda, they provide software that is mandatory, mission critical and regulated by local/national laws. The former Chairman of the Board of Visma, Gunnar Bjorkavag, joined Omda’s board in 2021.
Tyler Technologies is another successful VMS roll up story. The stock is up 33x since 2009 (a 31% IRR). Tyler, like Omda, operates in one vertical (government software). Their gross organic growth has been 10% historically, also like Omda. Their historical churn has been a bit higher than Omda’s at 2.2%, and they have typically made 2-4 acquisitions per year.
Vitec Software is a successful VMS roll up story in the Nordics (~49 acquisitions) and at a smaller scale than Constellation or Tyler. Vitec has a $1.9bn market cap and its stock has generated a 32.5% IRR (excluding dividends) over the last 19 years.
Management
Omda’s co-founder and CEO, Sverre Flatby (62), worked in the Oslo University Hospital IT department prior to founding Omda. He has worked within hospital software for over 30 years. His training as a young man in the 80s was at IBM’s sales school. His co-founder and CFO, Einar Bonnevie (58), was brought on board due to his experience in finance prior to Omda (he worked at a hedge fund). Sverre and Einar each own 10.3% of Omda (20.6% between the two), or ~$25mm, which constitutes the vast majority of their wealth. Their salaries are roughly $300K per year, so their incentives for Omda to become much larger on a per share basis are aligned with ours. Both Sverre and Einar plan to work for as long as the Board will allow them (at least age 70). They are both physically fit and enjoy running and cross country skiing. They strike us as honest, focused and straightforward, and they appear to work well together and complement each others’ skill sets.
If you include other members of management alongside Sverre and Einar, including the third co-founder Glenn Kenneth Bruun (Omda’s Chief Strategy Officer), they collectively own ~31.5% of shares.
Capital Allocation
Sverre, Glenn Kenneth and Einar are in charge of M&A. Our conversations with them indicate they are thoughtful about capital allocation. To illustrate their thought process, when describing how they think about their product development capex, Einar stated that they consider whether that sum would be better spent on an acquisition or as a dividend paid to shareholders. They don’t, however, have any intention of paying a dividend anytime soon (unusual for a Norwegian company) because they understand the returns are compelling in rolling up their industry.
An example of their mindset on capital allocation is how they finance acquisitions, “to make their capital on a per share basis reach as far as possible.” For instance, in 2019 they paid 20% cash upfront for an acquisition with the rest in a seller note (the seller note was at a 0% interest rate!). As with many Norwegians, Einar, Sverre and Glenn Kenneth are open minded, fiscally responsible, humble and rational, and from our analysis we have concluded that they have proven that they listen to thoughtful advice on capital allocation over time.
Leverage
Management states they can maintain significant leverage due to exceptionally low churn (typically sub 1%) and their customers being AAA credits (95% of their customers are public health providers in the Nordics). Before the IPO, they were operating at 3.7x net debt/EBITDA. They do not have a specific leverage target, but have stated they are open to running the business with 4-5x net debt/EBITDA leverage, which we view as appropriate. They are levered as such at this point. They have stated that as shareholders, they understand the benefits of leverage in creating per share equity value. We believe they will continue to be able to use seller financing in the future; this form of financing, for Omda, is typically interest free.
Board
The Chairman of the Board is Ase Aulie Michelet (68), who is a staple of the Norwegian business community. She serves as the Chair of four boards, including Norway’s most prestigious business school. She has served on numerous other corporate boards, including those of large Norwegian corporations Orkla, Norske Skog and Cermaq. She spends the majority of her time on two boards, one of which is Omda.
From 2012-2015, she was CEO of Teres Medical Group, which operates private hospitals in Norway. Before that, she was CEO of Marine Harvest (now called Mowi), the largest salmon farmer in the world, which she turned around to profitability in two years. She strikes us as sensible, experienced, efficient, energetic and laser-focused on results.
As we mentioned before, the former Chairman of the Board of Visma, Gunnar Bjorkavag, joined Omda’s board in 2021.
Over the long term, we believe Omda will need to strengthen its management bench. Omda has begun doing so, since they shifted to a decentralized operating model (more on this later).
Unit Economics
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Omda’s unit economics are very similar to Constellation’s, although organic revenue growth has been much higher (more on this in the Growth section below). EBITDA margin was 27% in 2020 and will be around 30% going forward. Margins will have a tailwind as Omda scales administrative and product development costs, but they will also face periodic headwinds when management acquires low-margin businesses and spends 18-24 months improving them. We expect this to net out at an average of 30% EBITDA margins, but you can see from their history that sometimes margins will drop after significant deal activity and then slowly march up towards 30% as they implement their 18-24 month playbook.
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Management believes they could easily raise EBITDA margins to 40-50% if they stopped M&A (which they won’t, but it demonstrates the quality of the businesses they own).
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ROTC approaches infinity due to negative tangible capital, driven by low PP&E and negative working capital (~-27% of sales in 2020). Constellation’s net working capital, on average, has decreased at an annual average of 26% since 2008. Tyler Technologies’ NWC has decreased similarly, at an annual average of 28%, and Roper Technologies’ has decreased 62% annually.
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The interest rate on their $50mm bond (which can scale up to $100mm if desired) is LIBOR plus 300 bps (currently ~8.5%); it would be +550 bps on the second $50mm. They refinanced the bond in November 2023 so they have no maturities in the next few years.
Growth
Omda is focused on growing recurring revenue organically and through M&A.
Organic
The businesses that Omda has purchased so far have achieved net organic growth of 9%+ historically. This is much higher than the historical average 1.2% net organic growth of Constellation and roughly in line with Tyler’s 8%. Omda’s market is large and growing as software continues to be developed to replace more business processes. IT spending in Norway’s overall healthcare system grew at a 10% CAGR from 2012 to 2018:
Gartner forecasts 10% annual growth in overall Norwegian IT spend going forward, even though Nordic hospitals are more fully digitalized than those of other European countries. With Omda’s low gross churn and inflation pricing escalators built into most of their contracts, we believe the company’s forward target of 5-10% gross organic growth is realistic and that actual organic growth is likely to remain above 10% if inflation remains above 2-3% (organic growth was 13% in 2023).
As with Constellation, due to the extremely sticky nature of specialized hospital software, Omda rarely grows organically by bringing in new clients. Instead they cross sell new software to their existing customers as they acquire new products through M&A, which is what has driven their consistent organic growth. To minimize churn, Omda does not typically raise prices on existing solutions (hospital contracts in the Nordics are structured so that tender processes are not triggered unless the vendor attempts to raise price). This is why Omda has some 20+ year contracts in place that have never tendered. Omda trades the better retention for the lost pricing opportunity, knowing that they have historically successfully upsold and cross sold to drive organic growth at 5-10% (and above that when inflation was high).
TAM
Omda will focus on the Nordics at first because almost all the hospital systems are currently customers and management believes it won’t be a heavy lift to go from 15% to 30% market share there. They believe attaining 50% market share is a realistic longer term objective. Demonstrating the margin of safety inherent in this investment, in a low case scenario in which Omda does not acquire further in Europe and only achieves 30% market share in the Nordics, revenue would be >2x larger than today.
VMS is a simple and standardized enough business that Omda will be able to acquire across Europe over time. In 2021 they acquired a Swedish company with 20% of its revenue in Europe, and they also plan to acquire European companies that have customers in the Nordics. They believe the European hospital software market is ~10x that of the Nordics, or ~$7.2bn. Half of that goes to large ERP and CRM vendors such as Oracle and SAP, while half represents niche software that is extremely fragmented among thousands of small vendors, and represents an opportunity for Omda.
Another way to look at the TAM is through the number of potential targets. If hospital VMS is 5% of all European VMS, that would indicate there are approximately 2-2.5K hospital VMS firms in Europe (Omda has made 15 acquisitions so far). Hg Capital, a British PE firm focused on tech in Europe and the US, estimates there are 30K hospital VMS companies across the world, which, if correct, would indicate that 2.5K is low, considering that Asia, South America and Africa have lower numbers of VMS companies than Europe and North America. Omda already has a list of 400 Nordic targets with whom they’ve spent 10 years building relationships.
Management Growth Target
Management has communicated a medium term target of NOK 1bn in sales to the market. Sverre has high confidence in this figure and states he would be very dissatisfied if they did not grow around a 40% CAGR over that time. We believe their growth targets are reasonable: to achieve 40% growth annually, they only require 2-4 acquisitions per year.
We believe management’s target achievable in the Nordics alone (they would have 26% market share by that time, less than the 30% target), but Omda will be acquiring in Europe as well over the next five years.
Back in 2020, management communicated that they would reach NOK 1bn in sales by 2025. That now appears unlikely. They grew over 40% in 2021 but then grew 12% annually (all organic) in 2022 and 2023. That they have not done any M&A in two years is the largest risk factor in our eyes, although management is extremely confident (and not in an arrogant way) that they will ramp up M&A again soon and get back to ~40% growth. They state that M&A pipeline activity is currently at its highest level ever. For more of our thoughts on this, see the Risks section of this memo further below.
M&A Model
Omda’s M&A model is similar to Constellation’s. They purchase targets that have roughly 0-10% EBITDA margins, which they improve to ~30% over the first 18-24 months (slower than Constellation). As with Constellation, Omda improves margins through multiple avenues, including improving working capital, removing third party vendors for large solutions that Omda can provide, removing third party consultants, eliminating wasteful R&D and sales and marketing spend, shifting the product mix further towards recurring software, jettisoning legacy hardware businesses, and cutting extraneous senior executives and unnecessary perks (company cars).
Because Omda cannot raise prices quickly (or at all – raising prices triggers a tender, and their essentially 0% churn is a good trade off for not raising prices), they do not improve margins as quickly as Constellation. Rather than raising prices, Omda will renegotiate contracts. Often the small vendors that sell their companies to Omda do not know best practices for how to structure a contract, whereas Glenn Kenneth saw thousands of such contracts when he was managing over 2K software vendors as head of IT at Oslo University Hospital. Glenn Kenneth is able to improve recurring revenue and often pricing through these contract renegotiations, but that is done slowly. It takes about 18-24 months for this to flow through to revenue, because the first year or so is spent proving to customers that Omda is a trustworthy owner of the software they just acquired, then the conversation starts on bringing the contract up to best practice standards, and then it takes months for that to end up in Omda’s P&L. Omda gets it done, it’s just slower than Constellation. At the same time, Constellation has to offset its 3-4% gross churn with 3-4% organic revenue growth to come out flat, while Omda typically has 0% gross churn.
Omda has a frugal culture which is also focused on M&A: most employees are engaged in some form of M&A related activity.
Competitive Moat
Omda benefits from two primary competitive advantages: their solutions are extremely painful (even dangerous) to switch from, and they have a proprietary M&A process and pipeline.
High Switching Costs
We believe that Omda ranks highly in terms of business quality relative to other software businesses. The competitive landscape within specialised eHealth solutions in the Nordics is highly fragmented among many small players. Customers have little desire to switch suppliers because it is costly, and patient treatment workflows are deeply embedded with users. Because these workflows are so complex and entrenched, very few tenders appear in the market. As such, Omda faces relatively limited competition at the product level.
The strongest indication that Omda has a wide moat is its 0-1.4% historical gross churn (far below Constellation’s 3.5% and also below Tyler’s 2.2%). There are many examples of other VMS roll up businesses that prove that churn tends to be in the low single digits over time for VMS.
M&A
Omda has methodically built a proprietary M&A sourcing engine and network. While still within Oslo University Hospital, they built a database cataloguing the over 2K software vendors the university used; they’ve updated this over time and use it as their prospecting database, ultimately refining a list of 200 potential targets worth NOK 3bn in revenue. They are continually adding to the database, especially in Europe. Further, Sverre and his Glenn Kenneth know exactly which companies are the most interesting targets, based on their many years as clients of those companies and from years of relationship-building. This is a massive advantage over potential competitors.
Omda is also building a reputation for being a good buyer for entrepreneurs facing a succession issue. Roughly 1/3rd of their deals are the result of inbound leads.
Why Does This Opportunity Exist?
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The European VMS market is decades behind the North American market in terms of consolidation.
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The Omda story is not known outside of Norway, and even not very well within Norway. Management is not promotional.
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The stock is very illiquid due to high insider ownership, making it very difficult for mid-sized funds to build a significant position. Most funds need to acquire shares through block trades, as the open market is too illiquid. In February 2024 one large seller recklessly sold on the open market instead of looking for blocks and drove the stock down from mid 30s to NOK 23 (note: that seller is out of the stock). The stock requires patient investors with strong hands. Carnegie is the broker covering Omda and is adept at finding blocks of shares for larger funds. Mikael Pappos is an adept Omda broker there: [email protected]
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Omda’s bond was coming due in 2024. Investors were worried that management wouldn’t be able to roll the bond over, since the financial markets in the Nordics had seized up a bit due to Sweden’s housing bubble bursting. However, Omda successfully rolled the bond over in late 2023. The stock has yet to react. It is possible that the investor base is turning over, from investors who have lost patience after the last few years of stock price decline, to new investors who have not been burned by Omda stock and see only the opportunity.
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FCF generation has been weak since 2019. In 2019 they made a few acquisitions, one of which was 80% financed by zero-interest seller credits. This was a phenomenal deal for Omda, but it hurt FCF that year. Then in 2020 margins were lower due to IPO and bond issuance costs (all one-time), and in 2021-2022 EBITDA margins were lower due to acquiring (by design) some underperforming companies that took 18-24 months to get to 30% EBITDA margins. Then when margins improved in 2023, NWC was a headwind due to some one-time effects. In 2024 and going forward, both margins and NWC should prove a tailwind to FCF. NWC should be -10% of sales or better each year. In principle FCF should not be more complicated than EBITDA – capex – interest paid – taxes payable (not very much) +/- changes in NWC. EBITDA – capex should be ~20%, fairly similar to Constellation.
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The main reasons for the stock decline began in late 2021. Here’s the full story:
In 2022, revenue multiples of 25x+ for high growth software companies coming back to Earth captured most of the headlines (how could they not, with 70%+ stock price drops)? However, very high-quality software companies that traded for 1-4x revenue prior to the market downturn also saw their stocks fall dramatically. The market drawdown for software companies proved somewhat indiscriminate.
On the Oslo stock exchange, small software companies had an especially rough year, not just due to fear from Russia’s invasion of Ukraine (Norway and Russia share a small border). There was a slew of small software IPOs (including Omda) around 2020, all of which forecasted 30%+ annual growth. Investors tended to lump all of these companies together. In 2022, four of them (all backed by the same firm, Viking Ventures) crashed and burned in fairly spectacular fashion. Unlike Omda, they were all horizontal software businesses building ERP-like SaaS systems within their own niches. They were mostly sub-optimally managed and generated negative FCF margins. The more acquisitive ones demonstrated little capital discipline, and often diluted shares excessively to finance expensive acquisitions. Omda has not issued any shares (they’re actually repurchasing them and storing them for future acquisitions, so that they won’t have to dilute in future if a seller wants equity), is well-managed, operates in a lower-churn segment, and has historically generated 30% EBITDA margins.
The market reaction to the 2020 software IPO companies was to throw them all out, including those whose operations and plans, we believe, remain on track (such as Omda and Nordhealth). You can see the correlation between the fall in these stock prices below:
What’s interesting is that the four Viking Ventures companies that failed to live up to the market’s expectations and were forced to sell (none of these four firms are included in the stock price chart due to their cessation of trading; their stock performance was similar if not worse) were acquired (by PE or other software consolidators) for 3.5x, 4.4x, 6.5x and 8.4x TTM sales. Omda currently trades at the far lower multiple of 2.4x TTM sales. The valuation disconnect is not something we expect to persist. Every Nordic and European investor we speak with seems to understand that Omda is a better company than the four “failures,” but they still want to see strong profitability for a few quarters after Omda surprised the market with an unprofitable quarter in Q4 2021 that wasn’t well telegraphed. The reasons for the unprofitable quarter were threefold:
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The company organically won two major implementations (including the blood management system for all of Denmark). These types of implementations require massive work upfront (in one of the cases, Omda had to build and run two parallel systems to ensure no customer downtime during the switch to the new system), but do not generate meaningful revenue until after most of the work has been completed, and then the revenue is recognized over many years. Thus, Omda experienced elevated costs, which have since disappeared after the implementation was completed (for example, 20 consultant FTEs, which are twice as expensive as in-house employees, disappeared as a cost; this almost single-handedly lifted the company back to high twenties EBITDA margins), with no associated increase in revenue (yet). Investors took the impact of the RFP wins as a negative (we believe they were “once bitten, twice shy” by the other “failed” companies they lumped in with Omda), while we view them as a positive. Management could have better communicated, in advance, how much it would cost in the short term and how no revenue from the projects would be recognized in the short term. They were relatively new to the public markets and we believe they learned much from this episode. In an industry in which there are few tenders (leading to very low churn), and tenders for a system for an entire country are rare, winning these large projects occurs only occasionally; it is not something we expect to happen to Omda in most years.
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They were still integrating several acquisitions from 2021 of companies that were unprofitable before Omda acquired them. It is Omda’s business model to acquire unprofitable companies and bring them to profitability over a 18-24 month period (the length is dictated by how slowly changes are made to customer contracts, a negative trade-off of Omda’s wonderful 0% churn). Omda has proven several times in the past that the hit to its overall margin from large acquisitions is temporary, and they have since proved it again, with margins up close to their 30% target in Q3 2023 (Q4 was down again but due to some one-time items).
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Omda management, after several conversations with some of their American shareholders, decided that to best scale their organization and prepare it for an increased pace of acquisitions, they would move from a centralized to decentralized structure. We have found that the best serial acquirers, such as Constellation Software and TransDigm, operate an extremely decentralized organization. Once it was shared with them, Omda management understood the power of this concept immediately, and we are impressed they quickly implemented the change. The organizational restructuring led to higher one-time expenses that contributed to the negative margin quarter. We believe the investment will prove well worth it over the coming years.
All in all, we have strong confidence that Omda will have ~30% EBITDA margins in 2024 for their existing business (overall margins may be lower if they close new acquisitions).
Investor Base
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As we have mentioned, management owns ~30% of shares.
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The second largest shareholder, at ~13.5%, is Long Path Partners, a concentrated, long-term investment firm based in Stanford, CT. The founders of Long Path previously ran Brown Brothers Harriman’s 1818 Fund, which is a legendary concentrated compounder fund. Long Path’s small cap portfolio has an exceptional (>20% IRR) track record since inception.
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Pinetree Capital, run by Mark Leonard’s son Damien who invests Leonard family capital, owned 3.3% of Omda as of Pinetree’s Q4 2023 filing. This represented 7.4% of Pinetree’s 14-position portfolio.
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We estimate that Sun Mountain Partners, Will Thorndike’s (of The Outsiders fame) public equities vehicle, owns >3%.
Risks
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Risks |
Mitigants |
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Execution: The greatest risk is in execution. It appears to us that the managers in charge are the right people for the job. However, Omda has not done a significant acquisition in two years. Management claims the reason for this is |
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Increased competition: Constellation Software has been in Europe for years. |
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SaaS completely replaces on premise software. |
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OpenAI’s ChatGPT4 AI large language model (LLM) has made it clear that massive changes are coming for how software is built and consumed. |
We have been following this closely and the best estimates indicate a 30% improvement in software engineer productivity over the next 3-6 months. Over the next few years, it is likely LLMs will get to the point where any non-engineer can have a personal AI agent build software for him/her without any need for that person to see any code. This begs the question, what software will be provided by AI agents versus outside companies? It is impossible to predict exactly what AI will look like in a few years, as it is self-developing at such a rapid rate. What is most important is to watch the development of LLMs and the software industry very closely. At the same time, a few things do appear to be clear now. It is true that replacing a technical solution that exists today will become easier with LLMs. However, the inability to replace a technical solution has never been the main competitive advantage of Omda. On the contrary, some of Omda’s software is not technically complex and would have been relatively easy to copy for decades. The primary moat is distribution, teamed with high switching costs and the price of their software being a very low percentage of total customer costs. The best way to approach the question of whether Omda will be negatively disrupted by AI is to look at each specific software that exists today, and analyze if/how/why a customer would switch from that to an AI’s or competitor’s software. Omda’s software is built into niche workflows (often related to life-and-death situations) within risk-averse and government-run Nordic hospitals. The hospital market is split roughly 50/50 between large systems of record like ERP/CRM, which large, well-funded players provide, and niche workflows which aren’t of sufficient size to move the needle for the large players. These niche systems see much less competition and Omda is essentially their only acquirer. Omda’s gross churn has averaged roughly zero over time. The technology isn’t what provides the moat, it’s distribution (having the customers, who have no incentive to switch) and being integrated deeply within the customers’ workflows. To replace Omda’s software, the workflows would have to be redesigned, other software would require replacement, and all of the nurses and doctors in the hospital system who engage with that workflow would have to be retrained and change the way they treat patients. Doctors hate changing the way they do things. Efforts to do this for large systems of record, such as Epic in Trondheim, Norway, take 3-5 years. The Trondheim implementation of Epic has proven a disaster, with doctors and nurses performing walkouts in protest of the new system. Why would a hospital customer go through agony for a tiny niche Omda system that works fine and isn’t a meaningful cost line item? In fact, we believe that LLMs will prove a boon to Omda by drastically increasing software engineer productivity. This will allow Omda to either significantly reduce its workforce (engineers are their largest cost item), leading to higher normalized EBITDA margins than 30%, or improve its products faster. It is our opinion (which we reserve the right to change if the facts change) that Omda’s software is an example of one of the least likely to be negatively disrupted by AI. |
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Customer concentration risk: after Omda acquired Carmenta in 2021, SOS Alarm, Sweden’s national ambulance service, became Omda’s largest customer. We estimate it is at less than 13% of revenue. |
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The share price volatility of Omda is likely to be higher than the market over time. It can also take longer for improvements in fundamentals to lead to an increase in the stock price because the market is less efficient in micro caps. |
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FX: risk that the NOK declines against a strong USD. |
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Appendix I – More on Constellation Software
Constellation is like a direct sales organization. We estimate they have ~500 M&A-focused employees, including the analysts that support the portfolio managers. Founders often sell to Constellation when it’s time for succession. The sourcing funnel (“far higher than 40K companies” according to Constellation’s CFO) is much larger than the number of acquisitions that are completed in any year. Constellation learned that the VMS industry is highly fragmented, which makes for a fertile M&A hunting ground when you have the right model. From founding to IPO, Constellation averaged three acquisitions per year, and had reached a run rate of 17 the year of IPO. The last they reported was 40 in 2015, but say they’ve acquired over 100 per year over the last few years. We believe the median multiples they have paid for acquisitions are 1.2x EV/sales and 5.1x EV/EBITDA before operational improvements.
Portfolio managers also manage several VMS businesses, often within the same vertical and/or geographic region. Combining several VMS businesses in the same vertical under one manager removes a large layer of costs, as each business no longer requires its own CEO.
ROTC’s tend to be very high, bordering on infinite. Net working capital, on average, has decreased 26% annually since 2008 (generating cash flow). Returns on incremental invested capital (including the intangibles that result from acquisitions) are still >30% today, with overall ROIC historically in the mid-30s. Constellation acquires small, undermanaged companies with 0-10% EBITDA margins and improves those margins to ~20-30% within a few years. Constellation uses its vast portfolio of companies as a benchmarking database, which allows them to quickly determine how to improve each business they buy. They take out costs (often relating to excessive R&D and marketing spend), and frequently raise prices as well. Their strategy is to maximize the share of wallet of each customer, rather than to add new customers. The benefit of VMS is that it’s almost impossible to lose a customer unless the customer goes out of business; the flip side of this is that for a mature vertical, it is very difficult to take customers from competitors and grow organically. Constellation does not focus on adding new customers (net organic growth has averaged ~1.2% since 2007), which yields a minimal sales and marketing budget. Until 2017 (when they ceased disclosing the data), gross churn averaged 3.5%.
We know that Constellation Software and Topicus have been acquiring in Europe for years, but Omda management has yet to run into them or any other company trying to execute their roll up strategy. We believe the opportunity size is so large that both Constellation/Topicus and Omda can do very well for a long time. Further, Omda has the advantage of being firmly rooted in, and focused on, the hospital vertical, and of their proprietary database and 10+ year relationships with potential vendors, while Constellation/Topicus will be acquiring across all verticals and building relationships from scratch.
As with Constellation, Omda is also likely to continue to benefit from valuation arbitrage. Omda acquires at 1-2x EV/sales, yet Omda’s stock trade will trade well above that over time. This valuation arbitrage approach has created tremendous value at Constellation over time.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Resumption of acquisitions and reacceleration of topline growth.
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