Auxilio – Brian Bissett’s 2 Cents on the MPS Giant

The following was written by Brian Bissett, publisher of The MFP Report

Screen Shot 2013-06-27 at 8.12.44 PMSometimes it seems like middle age is all about “What if?” … What if I had done this or that? Or what if I were now to change and do something different? After almost two decades, the MFP industry is certainly approaching middle age, and hence it too should be subject to certain what-if questions. The hope is that such questioning spurs new thinking, points to new opportunities, and serves as a catalyst for change.

On a personal level, of course, one’s usually left to wonder what really might obtain from a big change in direction. In business, however, one can reliably look at the experiences of similar real-world companies that actually have tried to make the same kinds of changes. That’s what led me to an interesting company called Auxilio.

I can’t say I ever knew a lot about Auxilio, but what I did know was generally positive. And why not? Auxilio appears to be the epitome of what those in the know say the MFP industry needs to do in order to survive. MPS? Check … Auxilio is focused completely on managed print and has won awards for its MPS capabilities. Vertical? Check … Auxilio serves only the healthcare market, specifically hospitals, and it’s the biggest player in that industry. Business model? Check … services are 85% of revenue, Auxilio is proudly vendor neutral, and it operates nationwide.

Auxilio has another advantage, too, at least from my selfish analytical perspective. It’s a pub- lic company, albeit a thinly traded “pink sheet” one in the OTC market. Nonetheless, that means Auxilio is obliged to release quite a bit of finan- cial detail on a regular basis. No guesswork.

The origins of this southern California company go back to 1995, but the current name and fo- cus on delivering MPS to hospitals and health- care facilities date from only 2004. In its most recent investor pitch, Auxilio says it’s the “first health care exclusive, vendor neutral MPS company in the US.” At last count, Auxilio had a presence at over 80 hospitals and 1,600 affiliated care facilities in 22 states. Across those MPS engage- ments, the company manages more than 1.6 billion documents annually, and it supports over 50,000 printers and MFPs serving more than a quarter-million end users. According to Auxilio, it’s saving current customers at least $70 million over a five-year term. Impressive indeed.

Where I begin scratching my head is when I look at Auxilio’s financial results. From 2007 to 2011, Auxilio’s MPS revenue was fairly stable at about $19 million. The high was $21.8 million in 2011, while the low was $15.4 million the year before that. In those same five years, however, the company’s annual losses ballooned, going from just $72,000 in 2007, all the way to a big $2.6 million loss in 2011 … a 35-fold increase.

Then in 2012, things started to improve … a lot. Revenue last year rose a very healthy 63% to reach almost $36 million, and the loss fell 8% to $2.4 million. That positive trend has continued. Compared to the year before, Auxilio’s revenue in Q1 of 2013 was up 54%, and the company’s loss was 86% smaller. Management is forecasting a crossover to profitability this year.

But the big rise in sales, dramatically lower losses, and a promise of profits around the corner haven’t done much for Auxilio’s stock. The company’s market cap has been stuck around $20 million for over four years, and the share price hovers around a dollar. Except for brief intervals, Auxilio’s stock has traded below $2 for a decade. And the day after those blowout Q1 results were released? The stock rose four cents. Granted, it’s not easy being a narrowly traded OTC stock, but is some- thing else dampening interest in Auxilio?

Auxilio’s history as a high-flying MPS provider unshackled from traditional office imaging norms and its leadership in an key vertical re- veal some important caveats for those further back on the MPS learning curve. For starters, growth isn’t easy. Auxilio’s sales were flat for a half-decade before solid top-line growth kicked in. And profits are even more elusive. Auxilio has never shown a profit, and losses climbed to more than 10¢ on every dollar while sales were flat. In addition, MPS is labor-intensive. At the end of Q1, Auxilio had 180 people. That’s annualized revenue of $225,000 per person … similar to what a well run dealer or branch can do.

Keep in mind Auxilio still gets 15% of its revenue from hardware. Most of that’s when engage- ments begin, and it’s often with little or no profit. And that points to a quite worrisome squeeze that afflicts even this big-time MPS provider. Faster growth means bringing on an ever larger number of accounts and devices. But the costs for those deals are heavily front-end loaded in people, equipment and poor productivity, which means lower profits. Meanwhile, customers over time produce fewer pages and expect lower cost per page, especially at contract renewal. That means lower revenue and tighter profits, too. Maybe that’s what investors fear about Auxilio.

So what can you do? The big lessons from Aux- ilio are threefold. First, expand faster to keep a flow of accounts into the magically profitable middle phase. Second, squeeze out every inefficiency and seek economies of scale. Third, move up the ladder to ECM, workflow, BPM and better remunerated software and advisory services.

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