Hi friends,

Kooth is one of the most interesting businesses in mental health.

They’ve been around for over 20 years.

They’re publicly traded.

They have the gross margins of a software business.

And in 2024, they grew their revenue by 100%.

Because they are public, we get a great insight into the performance and financials of a true mental health tech business.

I’ve been following them closely since I wrote about them last year and last week, they announced their earnings report for 2024.

It’s full of interesting nuggets - from insights on margins, to valuation and the performance of their US contracts.

In today’s report, I break it all down for you.

Let’s get into it.

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1. Financial Highlights

Kooth smashed it in 2024.

Massive revenue growth, profitability and cash generation. Frankly, it would be hard to ask for more.

Here are the highlights.

• Revenue was £66.7M (+100% YoY)

• Gross Profit was £52M (78% gross margin)

• Adjusted EBITDA was £15.8M (24% Adj. EBITDA margin)

• Operating profit was £9M (13.5% operating profit margin)

• Cash generated from operations was £17.1

• The company has no debt and £21.8M in net cash

However, despite strong YoY revenue growth, H2 vs H1 growth was much more modest (+5%).

Either way, the market liked these results, with the share price jumping 15% on the news.

When we zoom out however, Kooth’s valuation is still down more than 50% from their recent highs in September 2024.

Looking more closely at their valuation, we see that they have an enterprise value of only £33m and an EV/Revenue multiple of a mere 0.49.

Even for an industry with low multiples across the board, this is an outlier.

The market appears to have little appetite for Kooth and its growth story.

Kooth leadership believes they are undervalued, however, and bought back £1.5M of stock - a clever move if you believe the market is not accurately pricing your stock.

2. Business and Impact Highlights

Financials aside, what were their major business milestones this year?

• The first year of delivery on their California contract appears to have gone well.

  • Kooth said they met contract objectives and accelerated usage growth in Q4 2024.

  • 95,000 young Californians have now used the app (Soluna).

  • They say they are on track to hit their target of reaching 1 in 44 of the 13-25 year-old Californian population by the end of 2025.

• Interestingly, they appear to have stopped reporting on “service user logins”, which served as a good proxy for product adoption.

• They launched a pilot with the State of New Jersey for 50,000 K12 students, worth $1.45M in the pilot year.

• They launched a Medicaid pilot with Aetna Better Health in Illinois.

• Their contract with the Pennsylvania Department of Human Services was not renewed. Interestingly, this appears to have been a politically driven decision by a certain State Representative. In relation to this termination, Kooth noted how they are “learning to meet system and political challenges”. Welcome to the US my friends, there’s plenty more where that came from.

• They also noted how continued cost pressure in the NHS resulted in funding losses for their adult-focused solutions in the UK. UK Revenue is down 6% YoY.

• They’ve started work to migrate Soluna (the version of their platform they built for California) back to the UK

• As announced previously, Kate Newhouse takes over from Tim Barker as CEO this year.

• On the labour front, Kooth had 268 practitioners involved in the direct provision of their care product at year-end (down from 304 in 2023). They plan to increase this number again in 2025.

Kooth also shared some impressive stats about the impact they are delivering through their platform.

In California alone, they report that:

• 87% of users report positive outcomes from single-session therapy

• 50% of users report that it’s the first time they are accessing mental health services

• 1 in 3 wouldn’t have had access to mental health support without Soluna

• 57% of their California users come from under-resourced communities

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3. Their plan for 2025

Kooth’s strategy for 2025 is pretty straightforward: execute in California, grow US pipeline and stem the bleeding in the UK.

California Execution:

Like last year, Kooth must deliver results for this contract. The contract has an expected value of $188 million over its four-year duration, which is a massive revenue opportunity.

Their performance in California will heavily influence their prospects nationwide. If they fail to deliver—or worse, lose the contract—it's unlikely other payers will engage with them.

So what do they need to do to deliver? It’s all about getting engagement with young people.

There’s one stat in their earnings release that stuck out to me.

They said that they need to reach 1 in 44 of the 13-25 year-olds in California by the end of 2025 to meet their targets. By my calculations, that’s about 180,000 young people.

Hitting that number will require Kooth to attract an additional 85,000 young people onto Soluna this year, approximately doubling their existing user base. That will certainly be challenging, but also, seems achievable.

Given the political turmoil in the US, that contract may come under scrutiny, especially as it is now costing tens of millions of dollars a year. If Kooth are getting lots of young people to use Soluna and can demonstrate outcomes, then they can stand up to that scrutiny. But even evidence of adoption and impact may not be enough to survive the funding cuts flying through the US system right now.

US Growth:

Kooth have a massive revenue concentration risk, and they desperately need to mitigate it by landing more US deals.

In their presentation, they shared some high-level details on how they are approaching this.

While there seems to be some level of pipeline here, they don’t provide a huge amount of confidence for new deal flow. This will be crucial for the business and for investors moving through 2025.

EBITDA Contraction:

Interestingly, they expect EBITDA margins to return to “more typical levels” in 2026. If that means they will return to historical averages for Kooth, that will be quite a step down. In 2023, adjusted EBITDA Margins were 7%, in 2022 they were 8% - both significantly below the 24% achieved in 2024.

Although I haven’t seen any specific guidance from them yet, I wonder what is driving this.

Surely they don’t expect revenue shrinkage, considering they say they are expecting to hit their California performance goals. So will this EBITDA shrinkage all come from higher expenses? If so, why?

They do plan to increase practitioner headcount, and presumably, they also plan to invest heavily in user acquisition to ensure their success in California. Lastly, we can expect an increase in sales and marketing expenses to drive the pipeline needed to diversify their customer base.

If they see compelling investment cases in these areas, they would be wise to commit to them. They just need to make sure they work - a 17-point reduction in adjusted EBITDA margin (from 24% down to 7%) is quite the price to pay.

4. Final Thoughts

Why don’t the markets like Kooth? They doubled their revenue, have high gross margins and great operating margins.

They have no debt and over £21M of cash in the bank.

And yet, their valuation is so, so low.

Revenue concentration risk is definitely a concern, but I believe it goes deeper than this.

I think investors are concerned about a lack of defensibility.

I’ve said many times before that the mental health market suffers from a lack of network effects, economies of scale or switching costs. All of these make it hard for any company to develop a competitive advantage in the marketplace. Kooth is no exception to these forces (or lack of them).

Yes, they must execute in California and land new US contracts in 2025.

But while they’re doing that, they must also develop a longer-term strategy that builds true defensibility. One that makes it very hard for a payer to just end a contract on a whim (like what happened in Pennsylvania). One that allows them to easily acquire users at scale. And one that allows the effectiveness of their core platform to compound over time, creating defensibility by having a product far superior at delivering outcomes than competitors.

They must get investors to buy into this story, showing them why Kooth is not a good investment just for impact reasons, but because they have a clear path to developing defensibility and a competitive advantage in a large and growing market.

A compelling story will deliver investor buy-in and as a result, the valuation needed to execute their strategy. Many of the greatest business leaders are also the best storytellers. That is not a coincidence.

Let’s hope Kooth can find and communicate a story that allows them to attract investment, continuously improve their product, help millions of young people and become the commercial and clinical success that this market needs as a guiding light!

As always, I’ll be following closely and keeping you updated.

That’s all for this week.

Keep fighting the good fight!

Steve

Founder of The Hemingway Group

P.S. feel free to connect with me on LinkedIn