Alcidion Group Ltd
ASX:ALC
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Alcidion Group Ltd
Earnings Call Analysis
Summary
Q2-2024
Alcidion netted AUD 21.8 million in sales, set to recognize AUD 700,000 in FY24, due to the South Tees contract renewing earlier than needed. This contract brings total contract value to AUD 23.3 million and is mostly recurring revenue. The U.K. Managing Director departed, with internal leadership restructuring to enhance efficiency, expecting savings of AUD 2.4 million annually. Revenues of AUD 126 million are forecast for the next five years, excluding the current fiscal year. Cash receipts increased by 28%, with a cash balance of AUD 7.9 million and no debt at the quarter's end. The company faces a strong contracted revenue base with little churn, looking to improve EBITDA and cash flow in the second half of FY24 pending tender outcomes.
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[Technical difficulty] For the 3 months ended the 31st of December 2023. Before we begin, I'd like to acknowledge the traditional owners and custodians of the various lands on which we work and meet today and pay my respects to their elders past, present and emerging. I extend that respect to aboriginal and Torres Strait Islander People who have joined us on the call today [Audio Gap] Chief Financial Officer, Matt Gepp.
Kate will begin by taking us through a presentation that covers off the commercial and financial highlights of the quarter followed by a Q&A. All attendees on the call will have the opportunity to ask any questions they have, but that will be at the conclusion of the presentation. If you would like to ask a question, please do so using the Q&A button at the bottom of your screen, and we will endeavor to answer as many as possible. We generally get quite a lot of questions and to avoid repetition, I may group them together or combine some. And if we do run out of time, please send us a -- please send us your question via the contact details on the bottom of the announcement, and we will come back to you by e-mail. And just as a reminder, the webcast is being recorded and will be available on the website later today.
So thank you again for joining, and I'll now hand over to you, Kate.
Thanks very much, Hannah, and thanks to everyone for joining us on the call, and wish you all a happy new year.
What was the first start -- the first half, I should say, sorry, of this financial year has been a challenging one in respect of the progress of new sales, generally as a result of market conditions that are beyond our control and somewhat out of the norm. We are very pleased with the progress of the rollout to our existing customers and the satisfaction and the benefits that's being reported by them. And that's really been evidenced very strongly by the significant contract that was signed with South Tees during the quarter. The signing of that contract extension continues to demonstrate the value that the Alcidion solutions are delivering and I think also the value of the long-term relationships that Alcidion has with our customers and therefore, the subsequent contracted revenue that Alcidion is building over time. And I'll talk a little bit more about that as the call progresses.
2023 was a year of reduced procurement activity across the digital health sector, specifically in our territories. And I know that's been experienced by our competitors in a similar manner to which that has impacted Alcidion. And on the second half, particularly saw health agencies impacted by budget cuts to what's referred to as back-office functions. That is budget cuts from governments indicating that you need to maintain your frontline staff, but you need to reduce your back-office functions in IT and digital health work covered by that. And those cuts were in the vicinity of 20% in some of our jurisdictions.
And then moving to look at the NHS, which we've seen impacted by post-COVID budget issues, but also compounded by the doctor strikes, new nursing pay deals and some of the challenges we've seen in that market in respect of ability to deliver services. Ultimately, that led to digital health funds in the U.K. in particular, being moved to support some of those short-term budget deficits. And the NHS, as has been pretty widely reported now, have moved the overall program out by a year or so in terms of those delivery commitments, and that has had an onward effect on procurement timing and contractual commitments. And this was, again, compounded by staffing shortages, which slowed down some procurements and implementations, many of these things, which I've talked about before.
The really good news, though, is towards the end of 2023. We have seen tender activity start to pick up, specifically in the U.K., albeit with extended procurement timelines, which was to meet the revised budget timing, which is pushing that -- those contracted timings out into the next financial year. But as we headed into January, I'm pleased to see significant increase in procurement activity in Australia as well as the U.K. And all of these are opportunities which we're well placed.
What I think is really important to note is Alcidion is in a very strong contracted position in respect of our revenue. We have a base of revenue that comes from over 90 different ongoing customer contracts. We've got a current year contracted revenue of AUD 35.5 million at the end of the first half, with further sales to be made. And importantly, to note that beyond this financial year, there's another [ AUD 126 million ] of revenue contracted or due to be renewed in those subsequent 5 years, and we have an excellent product suite that's producing tangible benefits to our customers. The project with Leidos for the delivery of the longitudinal health record is going extremely well. Overnight, we went live with a new flow implementation -- patient flow implantation in the U.K., which adds to our position as one of the leading providers of patient flow and bed management software in the U.K. So overall, whilst I acknowledge that sales for the first half have been slower than we have anticipated, although buoyed by the South Tees significant contract sale, the position and the progress of Alcidion is a very positive one.
This morning, we -- just moving my slides up -- this morning, we released the quarterly cash flow statement and I'd like to walk you through just some of the details of that and give you an update on the business before I turn to take some questions. During the quarter, we secured AUD 21.8 million of new sales with about AUD 700,000 of that expected to be recognized for revenue in FY '24. That would be a lower revenue recognition for a sale of that size than we would normally expect. But that's predominantly in relation to the fact that the South Tees contract extension involves some revenue that's already taken into account because they signed for 10 years earlier than they needed to do.
Predominantly, that contract is made up of 99% recurring product revenue and about 1% of sort of additional implementation services that they've contracted for. The extension and the corresponding revenues will commence once that initial contract period has expired in 2025. And so that's why, as I said, we said revenues in FY '24 remaining predominantly unchanged from that. The contract extension is for 8 years on top of what was already contracted, and it brings the total contract value to AUD 23.3 million.
At the end of Q2, total contracted revenue for FY '24 stands at AUD 35.5 million, which is up 4% on the prior corresponding period. And of that 73% is product revenue and 27% is services revenue. If we look forward to the 5 years beyond FY '24, excluding this financial year, we will generate revenues of AUD 126 million before any further sales, assuming all renewals take place. This includes, as I said, all sold in renewal revenue such as South Tees over the next 5 years. It doesn't include, though, potential additional revenue where customers have contracts for new modules that can be taken up over the course of their contract without further procurement. And you'll note over the last 12, 24 months, there have been some contracts signed where I've indicated that there is the option to take up additional modules, such as we saw the Leidos contract do. And -- so there are options for that across a number of our existing contracts as well.
Cash receipts for customers in Q2 were AUD 8.7 million, up 28%, resulting in an operating cash outflow of AUD 3.4 million. The debt balance at the end of the quarter was AUD 7.3 million, which included material invoices for a major customer, which were due within Q2. The payment was delayed due to the numerous public holidays that occur between December and it was received in the first week of January. You'll note that this is potentially a recurring theme for large invoices that are due to be paid during that period. We do have some -- if you see -- if you look at where we've signed new contracts, there's a lot of them in Q2. And therefore, we're just seeing that sort of lag in payments during that Christmas period. The company's cash balance was AUD 7.9 million at the end of the second quarter with no debt. And this was further strengthened by receipts of AUD 3.9 million in the first week of January.
We -- these graphs reflect the trends over time. And as has always been the case, the new sales revenue can be lumpy with no real discernible trend in relation to when new sales fall, although predominantly that has been in the second half with the exception of Q2, which has seen this trend over the past few years, there's some large deals being signed in that quarter. And this year was no exception, obviously, with the South Tees deal contributing much of that TCV. The new sales we delivered of AUD 21.8 million comprised almost 100% recurring revenues.
Cash receipts from customers in Q2 were AUD 8.7 million, which you can see is broadly in line with Q2 of prior years. The company incurred the cash outflow of AUD 3.5 million as indicated and ended the month with the debt balance of AUD 7.3 million, which included the AUD 3.9 million from one customer, which we received early into January, in that first week of January.
I have touched a little at the beginning on the South Tees contract extension and the importance of this to Alcidion and our market position in the U.K. I have recently returned from the U.K. I was there early in January. And during that visit, I met with the South Tees executive and I had the opportunity to walk the words and see Miya Precision in action. And I have to say I was incredibly impressed with the engagement and the satisfaction of the clinical teams that are using our solution. The executives at South Tees are very excited to see how we continue to roll out further capability. And I met with them and the head of their EPR steering committee. And they have a particular interest in working with us to demonstrate the value of the data that they've now got access through using the deployment of AI and our natural language processing capabilities. They're really pushing forward with some of that.
And they stated to me that they really want to be a demonstrable leader in the uptake of digital health in the NHS, and I'm looking forward to the ongoing development of this partnership as it progresses. As part of the contract extension with South Tees, it extends out to 2033. There are further options to extend it again to 2038. This also includes options for additional modules, which could increase the annual value of the contract should they be implemented. If all of those were taken up, the TCV for South Tees could be in the vicinity of AUD 54 million over the next 15 years. So a very significant contract for us.
During the quarter, our U.K. Managing Director, Lynette Ousby resigned for personal reasons, completing her 4-year tenure in January, and we acknowledge the work that Lynette has done to position Alcidion in the NHS. We do not plan to replace the position of Managing Director as such. Instead, we will distribute the day-to-day operational activity to the U.K. senior management team with more direct involvement from myself and the wider senior leadership team.
Paul Deffley, our Chief Medical Officer, is based in the U.K. and he, along with Tom Scott, who has been our U.K. commercial lead for nearly the last 4 years, will have direct oversight of all sales activity and positioning of Alcidion on a day-to-day basis in that market. Both are very well known to our customers. Whilst I was over there, I met with most of our significant customers, all of whom have worked with Paul and Tom for some time. The team in the U.K. are deeply connected with the NHS and have been instrumental in securing many of the new customers that we have and certainly in rolling out those new customers to a point where we have a very satisfied customer base. And I have full confidence in their ability to win new customers and to continue delivering the excellent customer support that they have been providing thus far.
We continue to look at the efficient running of Alcidion. We have taken steps during the quarter to look at reducing costs and aligning resources to better deliver on our commitments, acknowledging that sales have been challenged as a result of market conditions. We have restructured the marketing team, which is now led by Nick White. We've also restructured the ANZ sales team and made redundancies as appropriate to ensure that we are best placed to win the opportunities that are ahead of us, whilst delivering and maintaining the company in its most efficient manner. The impact of these cost savings will be around AUD 2.4 million on an annualized basis and have a positive impact of around AUD 1.2 million to the second half. As I've mentioned previously, the pipeline remains strong, and we have seen increased tender activity since the start of 2024.
Whilst the challenges I've discussed before remains, I recently visited -- as I said, in the U.K., but whilst I was there, I also met with leads from NHS England who confirmed that the current funding for the digitization program remains committed albeit moved out. We have also begun -- continued our conversations with existing customers about additional modules, which is positive. And we continue to see interest in the modular capabilities of our solution. As I've said before, the EPR program certainly had an impact also on the modular sales, whilst people stopped to consider what funding was available for NHS England versus what they would fund themselves, but I expect, as we progress now, to see some further opportunities for our modular sales emerge again.
As I touched on earlier, South Tees are starting to see the full benefits now of having rolled out Miya Precision across much of the trust. They became -- first became a customer of Alcidion's in November 2020 for Miya Precision, which we signed during the pandemic. They initially rolled out Miya Precision along with electronic prescribing and medications administration from our partner [ Better ]. Shortly after that, the contract was extended to also include Smartpage, cloud hosting, managed services and some further business change management services. And we've continued to build on that relationship with them over time. At present, that contract is worth AUD 23.3 million to us up from the AUD 9.5 million it was when we first signed it. So it demonstrates, I think, the value of not only the modular nature in which we go to market from a platform perspective, but also the value of the contractual relationships we have and the possibility and potential for those contracts to grow and expand over time.
We now provide technology to the acute services and major trauma centers at South Tees with over 1,000 beds and 37 specialties across the 2 sites. Some of the -- I think I've talked before about some of the time savings that we are seeing at South Tees. I was able to go to the ward and actually see on the ward say right up the positive feedback they have about the deployment of Miya Precision. And it was -- it really was extremely positive experience to be able to see the results being written and demonstrated and articulated directly to me in respect of how well our solutions are being adopted.
Looking forward, we remain confident in the progress of Alcidion with AUD 35.5 million in contracted and scheduled revenue already booked for FY '24 with the half -- for the half year to go. We expect to see increased activity and as a result of that, a material uplift in receipts. As I said, the tender activity has increased, and we are seeing more tenders aligned to our capabilities in the U.K. as well. Whilst acknowledging the longer-than-expected procurement timelines for these tenders, we are definitely pleased to see that activity increase. We have AUD 126 million in contracted and renewal revenues for the next 5 years, which excludes the current financial year with little to no customer churn. And that positions Alcidion in a very strong position financially.
We continue, as I said, to monitor the cost base, and we have tightened those costs by undertaking some restructure and subsequent redundancies and have not replaced several staff who've left the business. It's worth mentioning, I think, that whilst there are some roles we haven't replaced, we don't expect this to have impact on our ability to deliver or on the scalability of the business. We are -- have been able to absorb these changes predominantly as a result of some of the new technologies and systems that we've been able to implement as we scale the business and then looking at how we allocate responsibilities across roles within Alcidion. Having delivered an annualized cost saving of AUD 2.4 million, as I said, we will continue to review that as the year progresses and we'll adjust the cost base further if needed.
Our cash balance at the end of the quarter was AUD 7.9 million. And as we said, there were subsequent payments in the first part of January. We expect to vastly improve second half after a slower-than-expected first half, which was driven predominantly by reduced overall market activity. There's been a significant increase in the tender activity, and we expect to see that come to fruition through the second half of the year, albeit our expectations on full year EBITDA and cash flow will depend on the timing of tender awards and the speed in which we can move to contract execution and revenue recognition. The business is in a strong position with that very significant contracted revenue base and an increasingly positive customer reference base as we head into that second half of the financial year '24.
I am happy at this point to take questions.
Thank you very much, Kate. We do have a few that have come in. [Operator Instructions] How are you finding competitive pressures and the landscape given the broader NHS delays?
I think the competitors, the same group of competitors are there, if you're talking about the modular EPR market, which are the larger providers and then the likes of Nervecentre and systems, say, who we probably compete quite directly with. And then if you're looking at the patient flow market, you will see again some of the similar competitors. So I haven't seen any significant changes, although I'm sure some of the smaller competitors who do not have as [ large a ] base, will be feeling the lack of activity in those markets as well.
All right. So there's another one here. Good to see some costs being removed. What other levers do you have to manage spend? And can the current staff manage the existing tenders and implementation should you win those contracts?
Thanks. Good question. I mean we're very mindful of costs across the board. Of course, staff is our most significant expense. But travel, marketing spends, we're just very mindful across the board in respect of those expenses, office expenses. We're not -- we look to close the Canberra office. It had a small number of people there. But the most significant is obviously in respect of people.
We are mindful of balancing the tender activity against the ability to deliver and so forth. So I'm comfortable with where we sit at the moment. And as we progress through those tenders, we are adequately staffed to deal with those opportunities as they arrive, but we do need to strike the balance around that hoping that we are successful with some of those as we move into -- further into 2024.
All right. Kate, can you provide more detail and breakdown on the makeup of the 27% services revenue?
Predominantly services revenue for us will be implementation of our products. So when we sell something like Miya Precision, there is a reasonable component that is implementing project managing, running the integration for them. So that's the majority of it. There will also be some services revenue around a couple of significant integration programs of work that we run, one of which is for New South Wales Health, where we manage their enterprise services bus, but predominantly, it's related to our own products.
All right. An interesting one here, and it says, why aren't there more NHS trusts looking at the benefits of the Alcidion product suite at South Tees providing into the range?
Well, the NHS trusts are required under the frontline digitization program to go through a very detailed procurement process. And that's basically what trusts that are in a position to look for an electronic patient record are doing at this point in time. Those procurements at the moment are basically taking upwards of a year to run from initial tender release through to contract negotiation. And I think that is one of the challenges that we are seeing in that market at the moment.
All right. Can you touch on historical and expected customer churn with regards to renewals?
Well, one of the benefits of how we contract with our customers is that usually they're 3 to 5-year contracts. And so we often have a long-term contract. So it's not really impacting our renewals. It is much more impacting customers going to new -- to purchase new solutions. So we have not really seen the reduced budget impact renewal activity. It's just there's been less tender -- new tender activity as a result.
All right. There's actually quite a lot of questions similar to this. So I will group all together. And it says, I understand that there have been EPR tenders awarded to other providers. How do you feel about the [ powerhouses ] impacting your confidence?
Well, as far as I know, of the contract -- of the EPRs that we have gone for in the U.K. and as I have said before on this call, we will not be going for every EPR opportunity in the U.K. because some of them are very specifically about extending an existing Cerner trust next door. And so they're written in a way that, that's fairly obvious. So there was one Derby and Chesterfield that was let to a competitor, noting that, that competitor already had implementations in all of the surrounding trusts in that region. So there are other factors at play in respect of that. It is a competitive market. We have -- we are in a position, I think, given our demonstrable value at South Tees to be confident that we ought to be able to repeat that success in other tenders as they come to fruition. But the real tender activity for Alcidion has come towards this part of the frontline digitization program.
Are considering acquiring any of your competitors?
Not at this stage.
One here says, when you mentioned AUD 126 million contracted and renewal revenue to come, should we view that as your annualized subscription revenue and therefore, approximately AUD 25 million per annum?
Doesn't exactly work like that because some contracts will be 3 years. Some could be front loaded. I don't know, Matt, if you want to add a little bit more detail to that.
Yes. Look, it's predominantly recurring subscription revenue because implementation revenue won't typically run into '25, '26and '27 million. There might be a little bit in '25. That number is -- of AUD 126 million is probably kind of front-loaded, a bit higher in '25, '26 and '27 and would kind of drift off a bit in '28 and '29. But will continually refresh as we release that number.
All right. And one here, can you clarify directors will [ lately ] be able to purchase shares on market during February? That would be ahead of the half-year results.
No. They're in blackout.
They're in blackout. Yes.
Yes. Okay. Given the delays with procurement intense timelines, do you expect the need to raise more money in the coming months?
No, we do not expect to raise more money in the coming months. Obviously, as I have indicated, we have made some adjustments in respect to the cost base, and we will continue to keep that under review as we progress.
All right. There's one here where I think [ that they may have their ] statistics incorrect. And it says, given that the NHS has now hit its 90% EPR target, what opportunities do you see going forward in the U.K.
An interesting statistic that has been released by the NHS did demonstrate some of their progress. If you actually really dig into it, it indicates that 90% of trusts have some formal portion of the beginning of an EPR. If that were the case, there would not be so many NHS trust currently out to market. So it's a statistic.
Okay. And one here that's slightly different. What are your thoughts regarding outpatient care and community-based health services? Are there any plans to develop or consider a module directed at outpatient chronic health care?
So Miya Precision already supports outpatients. We are currently deploying that for South Tees. We also use our virtual care capabilities support patients outside of the hospital in particularly those with chronic conditions where we are attempting to help the hospitals avert admissions to the hospital using virtual care. So it's very much in our capability, and we're looking forward to South Tees demonstrating equally the benefits of rolling it out to the outpatient environment as they have the inpatient.
Well, I think we've just got time for maybe 1 or 2 more. One here, can you please provide clarification on what blackout period means?
Matt?
So the directors are obviously privy to the -- our first 6 months results and the numbers that we'll be releasing in -- at the end of February, since they are privy to that information, they are classed as insiders and are unable or they're not allowed to trade in our stock until 24 hours after the release of the Appendix 4D late in February.
These documents -- these are actually on our website in respect of the blackout periods that apply. So if anyone wants a bit more detail, they can find it under the Investor section of our website.
Yes. And it's not in an Alcidion thing obviously, it's always the company's trade under [ these roles ].
All right. And we have reached time today, and we will close the webinar. Before we go, Kate, do you have any final comments?
Other than to say, again, thank you and acknowledge all of our shareholders and your continued and ongoing support, I recognize it's a challenging time at the moment. But as I hope I've outlined today, the business is in a strong financial position. We have a strong forward-looking revenue outlook, and we are continuing to manage the business to ensure that we demonstrate and achieve the growth, albeit not as fast as we would have hoped at the moment. And I thank you for your ongoing support. And I look forward to giving you a further update in a month or so's time when we release the half year results.
Thank you very much, Kate and thank you, Matt. And to everybody on the call, this recording will be made available later this afternoon and will be updated to the website. So if you want to watch it again, please go there to view it. And thank you all for joining.
Thank you, all.
Thanks, everyone.