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BrainsWay (NASDAQ:BWAY) reported strong results again in the first quarter, with continued profitability, positive free cash flow and strong growth. This strength is particularly notable in light of Neuronetics’ (STIM) relatively soft quarter, which the company attributed to the macro environment.
I previously suggested that BrainsWay’s stock should continue to rerate higher as the company’s profitable growth trajectory becomes more recognized. This hasn’t happened so far, with the stock falling significantly after my last article. The share price will eventually follow the company’s fundamentals, but the catalyst for this is unclear at this stage.
Market Conditions
Neuronetics has suggested that a number of its customers are finding it difficult to secure credit for capital purchases. This is due to lenders performing more due diligence rather than denying credit though. Neuronetics also suggested that the Change Healthcare cyberattack contributed to soft system revenue in the first quarter.
In comparison, BrainsWay hasn’t made any suggestions that market conditions are causing it problems. BrainsWay had an extremely difficult 2022 due to a rapid tightening of financial conditions. This appears to be largely in the rearview mirror now though, with the company’s sales continuing to rebound strongly.
Figure 1: Percentage of Domestic Banks Tightening Standards for Loans to Small Firms (source: Created by author using data from BrainsWay)
BrainsWay Business Updates
BrainsWay continues to expand its installed base, driven by a focus on larger institutional and enterprise customers and international growth. The company’s backlog and pipeline are reportedly strong, with small and mid-size accounts and current customers driving growth.
Katie’s Way Plus recently ordered an additional 18 systems, bringing its installed base to approximately 40 systems. Katie’s Way Plus provides active-duty military members with mental health services. The company is likely now one of BrainsWay’s largest customers.
International markets are an area of growing importance, with BrainsWay recently appointing a VP of international sales. Reimbursement rates in Israel have been increased by 45%, supporting demand for TMS. BrainsWay recently installed 11 systems in the country and expects to install additional systems in 2024. BrainsWay has also suggested that it is seeing strength in Korea, Taiwan, India and parts of Europe.
BrainsWay will likely look to gain clearance for another indication (addiction or neuro) in 2025 and has appointed a CTO to help expand its platform. BrainsWay recently published a review summarizing six studies into the treatment of Parkinson’s Disease using TMS. Many patients received a two-stage TMS protocol targeting prefrontal and motor targets. Clinically meaningful improvements in motor symptoms were generally observed, and improvements in daily living and mood were reported in studies that assessed non-motor symptoms. Success in Parkinson’s would be enormous for BrainsWay as there are more than 10 million people living with the disease globally.
BrainsWay has also shown recent interest in using TMS to aid post-stroke rehabilitation. Success in either of these areas would expand TMS in a very different direction, helping BrainsWay to penetrate new customers and significantly increasing the company’s TAM. BrainsWay already has CE mark for neuro indications in Europe and has suggested that demand looks good.
The company also recently launched a clinical trial assessing a protocol which compresses the treatment period into a matter of days. This could unlock demand by reducing the time patients have to commit to TMS treatment.
BrainsWay also recently announced positive results in a late-life depression post-marketing analysis. The study showed a 79.4% response rate and a 60.3% remission rate for older adults (60-91 years of age) receiving at least 30 treatment sessions. BrainsWay’s existing FDA depression labeling does not extend to patients aged over 68, meaning this study could help support a meaningful expansion in the company’s MDD TAM.
There is also the potential for commercialization of TMS has an aid for smoking cessation but given how this is dragging out, it doesn’t appear to be particularly positive. BrainsWay is reportedly in discussions with potentially interested parties and hopes to have something in place before the end of the year.
Financial Analysis
BrainsWay shipped a net total of 57 systems during the first quarter, bringing the company’s total installed base to 1,158 systems. BrainsWay also shipped 31 OCD coils during the first quarter and has OCD treatment capability on 50% of its installed base.
Figure 2: BrainsWay Units Shipped (source: Created by author using data from company reports)
BrainsWay generated 9.1 million USD in the first quarter, a 37% increase YoY. While growth is moderating as prior year comparable periods become more difficult, the company’s financial performance is still extremely strong, particularly given the company’s low valuation. BrainsWay continues to expect 37-40 million USD revenue in 2024, representing 16-26% growth.
Figure 3: BrainsWay Revenue (source: Created by author using data from BrainsWay)
BrainsWay’s gross profit margins have begun to bounce back in recent quarters, which should be supportive of its bottom line going forward. Gross margins may not fully recover to pre-COVID levels though, given the company’s international growth.
Figure 4: BrainsWay Gross Profit Margin (source: Created by author using data from BrainsWay)
BrainsWay generated 0.1 million USD net income in Q1, its second consecutive quarter of profitability. Cash flows from operating activities were approximately 3.2 million USD during the first quarter, with cash flows improving substantially in each of the last 4 quarters. BrainsWay has generated approximately 4.8 million USD free cash flow over the last 12 months, with three consecutive quarters of positive free cash flow.
BrainsWay plans on continuing to invest in growth (R&D, sales team expansion, marketing) which may limit further near-term improvements in profitability. Regardless, the stock is only trading on something like a 10x multiple of free cash flow while generating double-digit revenue growth.
Figure 5: BrainsWay Operating Profit Margin (source: Created by author using data from BrainsWay)
Conclusion
BrainsWay’s valuation remains difficult to understand given that it is growing, profitable and has an extremely strong balance sheet. There are also a number of potential catalysts on the horizon:
- Commercialization of TMS as a smoking cessation aid
- Expansion of TMS for MDD into the elderly population
- New indications (Parkinson’s disease, post-stroke rehabilitation, addiction)
- Accelerated TMS protocol
- Rotational field TMS
The biggest uncertainty at this point is probably whether BrainsWay will prudently allocate its capital given its large cash position and strong free cash flows. The company has no debt and around 48 million USD in cash, cash equivalents and short-term deposits against a market capitalization of under 100 million USD. The company is also likely to generate something like 5-10 million USD free cash flow in 2024. Management has suggested that they intend to grow the business organically and inorganically, which introduces the risk of a value destructive acquisition though.
Figure 6: BrainsWay EV/S Ratio (source: Seeking Alpha)
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
