Alcidion Group Ltd

ASX:ALC

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, everyone, and welcome to Alcidion's quarterly results investor webcast this morning. [Operator Instructions]Today's webcast will feature a short presentation from Alcidion Managing Director, Ms. Kate Quirke, followed by a Q&A. [Operator Instructions]I would now like to hand over to Kate Quirke, Managing Director of Alcidion.

[Kate Quirke, MD, CEO & Executive Director]

Thanks, Sam, and good morning, everyone, and happy new year to you all. Thank you very much for joining us today on this call to -- I'll give you an outline of Alcidion's financial and operating performance for the second quarter of the financial year FY 2021. Today, I'll be referring to the appendix 4C quarterly cash flow and business update that was lodged on the ASX platform this morning. I'll keep the call fairly brief and nicely cover off what was in that business update. It's obviously been a very positive quarter for Alcidion. With me on today's webcast is Colin MacKinnon, Alcidion's Chief Operating and Financial Officer. And at the conclusion of the presentation, Colin and I will be very happy to answer any questions that you have. So following on from an already strong start to the year in Q1, I am really pleased to report that we've accelerated this momentum into Q2. And Q2 has actually been one of our best sales quarters to date. We've made really solid headway in the U.K., which, as many of you've heard me talk about before and will know yourself is a market where the government is leading digital transformation of health care. And we're seeing that taking place across the NHS. And this is despite their ongoing issue, which you'll all be very familiar with in terms of COVID. In the U.K., we signed a milestone deal during Q2 for all of the Alcidion products and services. We also delivered new Smartpage contracts into the U.K., and we expanded our reseller product offering into the U.K. as well. And then -- and our achievements in that market have been bolstered in Australia with several new contracts and extensions signed with customers for our services capabilities as well. As this in-planned investment phase that we are currently moving through, which began in November 2019. As it begins to taper off, the progress made this quarter is a really important validation of our market-leading value proposition to health care, and that is that we are a full-service provider of healthcare-IT capabilities. And this -- the expansion of our sales team and its ability and how we've grown it over Q2 and Q1 is now starting to see that conversion and that growth and so having significant positive impact on the pipeline. I thought just to take a moment now to discuss the sales performance and do a little bit of a deeper dive into the significant contract wins and renewals that we've had for the quarter. As I mentioned earlier, Q2 was one of our best sales quarters to date. And in this quarter, we actually added $12.6 million to our sold revenue base. That's 163% higher than the September quarter and 260% higher than Q2 last year. I'd also like to point out that more than half of that that's $6.9 million, it will be recognized in this financial year. So it's important, obviously, that we sign these sales, but the ability to convert those to revenue is obviously another indicator of how we've been progressing. Our sales performance in Q2 place also us advantageously for the full year. At the end of Q2, we have $21.7 million in contracted revenue that is set to be recognized this financial year. And that's 17% higher than our full year revenue for FY '20 of $18.6 million, which was delivered last year. And we still got 6 months of the year remaining for sales to convert to revenue. On the screen right now, you'll see the revenue split for our FY 2021 contracted revenue, where we've got solid increases, have been delivered to products and to recurring revenue. Since the last quarter, our recurring revenue has grown from $9.9 million to $14 million, and our nonrecurring revenue was up from $4.8 million in Q1 to $7.7 million at the end of Q2. If we look out over the next 5 years to FY 2026, there's an additional $23 million of sold revenue that will be able to be recognized, as 97% of that is recurring revenue. Moving to some of the contract wins in Q2. Of most significant was the milestone 5-year contract and the subsequent extension signed with South Tees Hospitals, NHS Foundation Trust. South Tees is actually the largest trust in the Tees Valley in the U.K. and they provide care for more than half -- 1.5 million people. They've got about 9,000 staff and 1,000 beds, which are concentrated on mainly over the 2 acute hospitals in that trust. In early November of 2020, we signed an initial contract with South Tees, which was to implement Miya Precision embedders medication management software across the entire trust. And Miya Precision accounted for about 80% of the revenue from that initial contract. This was then closely followed in December by an extension to the agreement to include Smartpage as well as cloud hosting services for the -- to deploy all our products into South Tees on the cloud and specialized business change management services that we will help to deploy across the life of the project. So the combined value of the contract and the subsequent extension is $11.3 million over 5 years, making it Alcidion's largest ever Miya Precision contract. It for us, it's a really important recognition of the unique value proposition we have in the U.K. market, where we're positioned as being able to provide an orchestration capability or an alternative to the electronic medical record that we see as widely deployed in the Australian market. And so we don't just offer a handful of products but we have products that are supported by significant capabilities, allowing transformation of healthcare delivery in that country and obviously here closer to home. It's also important to note that South Tees is actually the second NHS trust in the U.K. that implement Miya's Precision capabilities alongside Better's medication management software, the first being our early adopted Dartford integration trust, and many of you have heard us talk about them before, and perhaps some of you have seen that customer speak on a webinar that we did back in September last year. We've seen significant success in Q2 with Smartpage sales, and this came after Alcidion was awarded a place on the NHS XS' clinical communications procurement framework, which was back in August of 2020. This framework is really just one example of the U.K. government's commitment to investing in digital and paperless healthcare delivery. And it's very specifically, the framework is to support the NHS' aim of phasing out pages by the end of 2021. And it allows U.K. health care providers to quickly and easily procure solutions like our Smartpage solution without the need to go to tender. And so new Smartpage contracts in the U.K. included a 5-year contract with Lancashire Teaching Hospital. And a Smartpage contract to implementation at the Isle of Man, who is an existing customer of our patient tracked product, now known as Miya Observations and Assessment. So that's an upsell into an existing customer. As well as the addition of Smartpage to the South Tees implementation in that contract extension. Closer to the home in the Australian market, several new contracts and extensions were signed with existing customers, including Northern Territory Health for program management services for their very big program of work they've got going on up there. With some additional integration contracts with ACT Health and New South Wales Health, and that was to provide further technical services relating to the child data hub and enterprise bus that we manage in South Wales. Our Miya Precision deployment at Murrumbidgee Local Health District and Sydney LHD, which was signed back in July, proving to drive better clinical care and improve patient outcomes at the bedside and conversations with those customers about deployment and future expansion of the scope there continue to be positive. In addition to the sales that I've talked about there, I do want to mention that in Q2, we signed an extension to the existing reseller agreement we have with NextGate solution. Many of you all know, they're a leading global provider of healthcare enterprise into identification and provider identification registry. And we've got significant contracts with them in Queensland and Victoria. Following on from the successful relationship we've had with them in this part of the world, we expanded our agreement to include the United Kingdom and Ireland. And we're really pleased to be able to add those solutions to our U.K. market offering where they can be implemented and integrated with Miya Precision on a number of the hospital sites there. Looking now at cash flows for the quarter. The cash receipts from customers were $4.4 million. This excludes the receipt of a $3 million payment from South Tees, which we expected and was actually had been paid by the customer to insight who we use on the framework there. So we expected to get that in late December, but due to the vagaries of processing large payments in the U.K. around bank holidays, it landed on the first business day in January instead. Had we received that payment as we had expected to, we would have had a very solid cash flow positive quarter. Our operating cash outflows were $6.5 million. This was $1.1 million lower than the previous quarter, and that's due to the fact we had several larger staff and reseller product payments were made in Q1 as they often are in the Q -- that first quarter of a new year. Overall, our net cash outflow for the quarter was $2.2 million. Our cash reserve remains very healthy at $12.5 million at the end of the quarter, and this figure is now being further strengthened by the $3 million payment received at the beginning of January. Looking ahead, our strong performance in the first half of the year has placed us really advantageously for the second half. With 6 months of the year to go, we're already positioned to deliver full year revenue growth. And our sales pipeline in all 3 of our markets remains very strong. Whilst, of course, we're carefully monitoring the COVID situation in all our markets and in particular, obviously, the U.K., we're really confident that the healthcare procurement in our case, it'll continue close to normal as hospitals now have protocols in place to manage COVID cases, and that resumed -- there has been renewed focus on what they're doing in terms of IT projects. Obviously, the U.K., at this point in time through December and January, the staff has been quite hit in fact that they're obviously looking at -- they're helping to treat COVID patients. But January is obviously a generally quiet time anyway, in terms of IT projects proceeding. So we are confident that we will continue to be able to deliver on those projects, and that COVID has actually presented an opportunity to demonstrate the value that our products can actually bring in improving patient outcomes. So the first half of the year has shown us that the investments we began back in November 2019 and now taking hold and delivering value. Going into the second half of the financial year, we're poised to deliver further growth. Our Miya Precision solution is market leading. And together with the broad offering we have in healthcare IT products and services, we offer a value proposition to healthcare providers that is quite unique across U.K., Australia and New Zealand. And we're really focused on using that to enable a better standard of safer, more efficient healthcare. The expanded sales team. I'm really pleased with their progress. They've made strong headway in the U.K. market. We are continuing to see significant investment in healthcare IT in the U.K. and here in INZ, we're seeing a strengthening pipeline, and we are very much looking forward to seeing this momentum continue in line with our strategic plan. At that point, I'd like to conclude the business update and the outline of the quarter -- quarterly cash flow and hand it over to questions if anybody has any.

[Operator]

[Operator Instructions] The first question is, may I please ask -- may I please know how the sales team is remunerated and incentivized?

[Kate Quirke, MD, CEO & Executive Director]

So very similar to salespeople in any healthcare IT or IT industry for that matter. They have a base salary that they're paid to do their jobs, and then they have a component of their remuneration is commission based. So they are paid a percentage against the value of the sales that they bring in. And so that is how they're incentivized to make those sales.

[Operator]

The second question we have here is, was the $3 million payment received in January, one-off or recurring?

[Kate Quirke, MD, CEO & Executive Director]

Colin, do you want to answer that in terms of the classification of recurring and nonrecurring revenue?

[Colin Bruce MacKinnon, CFO & COO]

Sure. Yes. So it will get reported as we're carrying revenue because it is product related. And therefore, we do include all product-related revenue under the classification of recurring. That includes license fees, no matter how they paid, whether they're paid upfront or by way of annual subscription as well as the annual support and maintenance. And in some cases, sort of hosting fees. They're all considered recurring because the idea being that over time, those licenses will continue, and we will get payments over a number of years for those licenses. It's just that some of those payments are lumpier than others. But given the number and timing of the different customers, we have -- it does spread out very generally. And now we don't suffer massive peaks of one-off revenue from product. Our revenue -- recurring revenue from product has been reasonably steady and increasing year-on-year. But in terms of are we going to receive that every quarter? No, we're not.

[Kate Quirke, MD, CEO & Executive Director]

So there are other -- just to confirm that there was other parts of South Tees that obviously, the South Tees contract is $11.3 million. So that is just one of the many payments that they will make over the course of that contract life.

[Colin Bruce MacKinnon, CFO & COO]

And it does not represent 100% of the license fees due. It presents an initial installment of those license fees.

[Operator]

The next question is, has the timing from conversion of pipeline revenues to do contract revenues started to shorten with the normalization of IT procurement teams' activities?

[Kate Quirke, MD, CEO & Executive Director]

It will be different in each of our markets. As I mentioned, the U.K. has become very focused on using frameworks as a way of shortening procurement cycles. And so we are definitely seeing a shortening of that in the U.K. And here in Australia, we're starting to see jurisdictions tackle that in similar ways. For example, New South Wales Health is out to market at the moment for a panel contract, which is very similar to a framework contract for virtual care acceleration. So we are definitely seeing it is having a positive impact on the shortening of procurement cycles.

[Operator]

The next question is, how does the team go about building pipeline in the U.K. and what competitors do you usually come up against in tendering?

[Kate Quirke, MD, CEO & Executive Director]

So there's many different ways to build pipeline. And obviously, we've had to be a little bit more creative about it during COVID because one of the ways would have been at trade shows. But we have seen a lot of those go -- become virtual. And they've been very positive for us. We've focused our attention a lot on webinars and the webinar I mentioned earlier that we did in September, which was quite U.K. focused, created a very significant impact on the pipeline. So using our marketing capabilities and our marketing team is definitely a strong way of building it. Of course, we have literally created an entire new sales team in the U.K. over the last 7 or 8 months, and they brought with them their own set of relationships. We have a whole team that have joined us, who have had many years' experience in healthcare IT. And so they also build pipeline through using their existing relationships and their experience. And so that is another way in which we've seen a lot of that pipeline development. So I'm very pleased with the work that the U.K. team has been doing. As a matter of fact, I'm very pleased with the whole sales team and the investment we have made. We have an excellent team at the moment who are now -- and we're starting to see return on that investment.

[Operator]

The next question is, now that the investment phase is coming to an end, how do you expect operating expenditure to stabilize from here?

[Kate Quirke, MD, CEO & Executive Director]

Yes. We will still -- we'll see it stabilize over the next couple of quarters. We -- whilst we fully invested in the sales team now, there's still some other work we will continue to do, although it's tapering off now, so you won't see it grow as it has over the last few quarters, I would expect in the next quarter or 2 that those outflows will taper off, and we'll see revenue growth continue, hopefully, and that impact dropped to the bottom line.

[Operator]

The next question is, congratulations on another great result. What could we look forward to in the next quarter?

[Kate Quirke, MD, CEO & Executive Director]

Thank you. Hopefully, more of the same. Obviously, I'm not suggesting we will sign necessarily South Tees every quarter, although that's obviously the aim as we continue to grow and people in the market continue to understand more about what Alcidion has to offer and what our proposition is. So as we move into this quarter and the final quarter, our sales team is continuing to prosecute the pipeline. And convert those to sales. So I expect to continue to see Alcidion increasing success around new contracts. And as we can demonstrate the success out of implementation such as Sydney LHD, Murrumbidgee LHD, Dartford and then South Tees as they start to implement.

[Operator]

Thank you. The next question is cash payments for the quarter at $5.9 million was significantly lower than the $7 million level of the preceding quarters. Can you provide some color on this? Is it exchange rate related to a degree?

[Kate Quirke, MD, CEO & Executive Director]

There might be to some small degree, but Colin can talk about that. But the 2 key things is, as I mentioned when I was giving the update then, in that first quarter, we've got payments to staff of bonuses and things from the previous year. But more significantly, we had greater payment to third-party providers for software. So one of those was for the better medication's management into Dartford. So it's where they fall in terms of those payment to third-party providers. There may have been some small conversion there, but I don't think that's accounted for any significance. Is that fair to say, Colin?

[Colin Bruce MacKinnon, CFO & COO]

Yes. We are subject to, obviously, the exchange rate movements just now. But -- yes, and the actual -- the cash outflow -- operational cash outflows in quarter 2 are actually $6.5 million. So that compares to $7.5 million in Q1.

[Kate Quirke, MD, CEO & Executive Director]

Thanks, Colin.

[Operator]

The next question here is, are you seeing an increase in the organic inbound interest from referrals?

[Kate Quirke, MD, CEO & Executive Director]

Yes, absolutely. We have both in the U.K. and here in our Australian customers. The customers that we're working with at the moment are really very supportive of us and certainly very happy to refer us on Active Referees and just generally, we're hearing a lot of increased talk about what Alcidion's proposition is, and that is leading to kind of inbound referrals that we received through a number of channels.

[Operator]

The next question here is around competitors. Some of this might have already been answered. But can you comment on competitor's progress in the U.K.? And does rising Australian revenue rising to the -- sorry, does the rising Australian dollar affect revenues from the U.K. as well?

[Kate Quirke, MD, CEO & Executive Director]

Well, the second one in terms of any changes in conversion rates and so forth haven't impacted. We've already signed the contract, obviously, between when they pay us and so forth. But we do adjust our pricing in line with that, if that's where we are in the sales cycle. The main competitors in the U.K. and Australia are actually different depending on the proposition. But to focus on the U.K., and I think I've said this many times before, what Alcidion is doing is a very unique proposition in that. We are creating a platform that can bring together data and digital healthcare data from many different sources and provide a single view or a single record that has a unique and attractive user interface. We do not have a direct competitor who is actually positioning themselves in the market in the same way. So what we end up doing in the U.K. is we're finding ourselves competing with an electronic medical record from the Cerner or Epic likes, where a customer is seen they're going, do I want to go down that path? Or do I want to do something that is quite different, innovative and allows me to protect the investment I've already made in my underlying systems without having to throw it all out and replace it with one of those large electronic medical records. So the proposition for us is very much about in the U.K. is about finding those customers that are looking at doing things differently to what the historical legacy products has done. And we are seeing a lot of interest in that type of approach. Closer to home in Australia, we're very much positioning ourselves as adding value to those EMR providers sitting on top of it of it, providing a single user interface clinical decision support that is easy to use and that doctors and nurses want to use. And again, we don't have any direct competitor that is trying to do that. So you'll see us competing in Australia against people, again, who are trying to perhaps look at implementing an EMR or a data analytics platform as opposed to our proposition, which is quite unique.

[Operator]

Now we have time for a couple more questions, and we've had a lot come in. So if we can't get to all of them, we'll come back and get in and being touched. [Operator Instructions] The next question is a follow-up question on the cost of doing business. Is the business adequately resourced to optimally access a large commercial opportunity that lies ahead? Or does some additional investment in fixed costs need to be made at some point.

[Kate Quirke, MD, CEO & Executive Director]

Thank you. Good question. As I touched on before, we are tapering off from an investment perspective. There will still need to be investments here and there in terms of some of the fixed costs. We believe -- we actually put 39 staff into the company in 2020. I think, we hired 39 people, couple might have left during that time as well. But that has really positioned us excellently for scale and for delivery and so I'm quite confident that we're getting to a point where that investment will support the revenues going forward. Of course, there is -- it's not -- it's not a linear relationship. There will be some step-up as you -- if you add 10 customers or 30 customers, you will see some of those fixed costs go up, but not proportionately in line with revenue.

[Operator]

So this next question is a 2-part question, so I'll ask it in 2 parts. Are there other geographical areas outside the U.K., Australia and New Zealand, other you're looking to expand into over the next financial year?

[Kate Quirke, MD, CEO & Executive Director]

Look, we've always stated that we're interested in geographical expansion, and we've continued to work with [indiscernible] who have been very supportive of us, looking at where the next best geographies might be to move to. And whilst COVID has slowed down a little bit, we are still paying, I think, in the next -- during this calendar year to look at areas outside of that. And I've always said the same thing that entry to North America would be interesting through Canada, Southeast Asia, Singapore and maybe the Nordic countries, if you were looking at Europe. And they are just the logical springboards for anyone that has -- had created IT solutions from a healthcare system that is run as a socialized and not free healthcare, but obviously, also from a socialized healthcare perspective. So we will continue to look at that as this year unfolds.

[Operator]

And the -- it looks like the second part of that question has been largely answered. So just now, I think with that, we will wrap up our questions. And if we couldn't get to your question, we will be back in touch very shortly. So there are no further questions, and I'd like to hand back to Kate for closing remarks.

[Kate Quirke, MD, CEO & Executive Director]

Thank you, everyone, for your time today. I really appreciate you taking time out of your day. On behalf of the Board of Alcidion, the management and myself, I'd really like to thank you for your ongoing support. As today's quarterly performance has shown, it's a really exciting time for our company, and we really look forward to updating you on our progress throughout the second half of the year. Our next results presentation will be our half year results later in February. So I very much look forward to speaking to you then. Thank you, and have a lovely day.