Mach7 Technologies Ltd

ASX:M7T

Earnings Call Analysis

Mach7's Growth Outlook and Q1 Performance Highlights

In the first quarter of FY '25, Mach7's Contracted Annual Recurring Revenue (CARR) reached $27.5 million, marking a 2% increase, while their Annual Recurring Revenue (ARR) hit $22 million, up 3.5%. The company reaffirmed its fiscal year guidance of 15% to 25% growth in CARR. New customer acquisitions are expected to contribute, with at least 3 to 4 new logos anticipated. Further investments in customer support and integrations are prioritized to maintain low attrition. Despite a slow start in sales orders, the company emphasizes revenue growth as the focal point, aiming for approximately $25 million in ARR by year-end.

Revenue Growth Highlights

In the first quarter of FY '25, Mach7's Contracted Annual Recurring Revenue (CARR) reached $27.5 million, a 2% increase from FY '24. The Annual Recurring Revenue (ARR) was reported at $22 million, reflecting a growth of 3.5%. The company has reaffirmed its guidance for FY '25, projecting a growth rate in CARR revenue between 15% and 25%. This positions Mach7 to generate substantial future revenue as it continues to expand existing customer licenses and attract new clients.

Sales Orders and Business Strategy

Sales orders for Q1 totaled $2.2 million, which is seen as modest given the sizeable comparison from the previous year, influenced by a particularly strong performance. With a typical sales cycle stretching 12 to 18 months, this quarter's figures illustrate the necessity for a consistent long-term strategy. In aligning with market demands, the company is focusing on cloud enablement and enhancing customer service, identifying customer retention and satisfaction as business priorities.

Cash Position and Operational Expenses

Cash receipts for Q1 were $6.3 million, down from $8.3 million in the same quarter last year; however, the drop is attributed to a timing issue with customer payments. Operating cash outflows were reported at $3.6 million, up from $100,000 last year, mainly due to increased investments in personnel and tools. Despite higher expenditures in Q1, the company has maintained a robust cash position of $21.9 million, indicating sound financial health and a strategic focus on remaining cash flow positive in FY '25.

Recent Customer Contracts

Mach7 signed significant agreements post-Q1, including $2.5 million in license expansions with existing customers and two additional renewals totaling $1.8 million. This highlights the company's successful 'land and expand' strategy, with notable price increases on existing contracts; one renewal saw a 94% uplift in Total Contract Value (TCV). The guidance includes expectations for converting more of their CARR into ARR throughout the fiscal year.

Market Dynamics and Competitive Positioning

The management acknowledged the inherently lumpy nature of sales orders, with assurances that past performance has consistently met or exceeded guidance. Although competition remains fierce, especially from incumbents such as GE and Agfa, Mach7's emphasis on customer intimacy and tailored solutions is positioned as a competitive advantage. The company’s focus on complex workflows for healthcare providers aligns well with market needs, suggesting that Mach7 is well-positioned to capture growth across various regions.

Outlook for FY '25

Looking forward, Mach7 envisions growth across the APAC, Middle East, and North American markets. The sales pipeline is strong, with a reported 4x coverage for expected sales orders within FY '25. Continuous development and enhancements in product offerings, paired with a commitment to improving customer relationships, indicate a stabilizing outlook despite a slow start to the fiscal year. Management remains optimistic about achieving their fiscal targets with an almost certain increase in existing customer engagement and new opportunities.

Earnings Call Transcript 2025-Q1

[Francoise Dixon, executive]

[Audio Gap] and our CFO, Dyan O'Herne. [Operator Instructions] I'll now hand over to Mike for the Q1 update.

[Michael Lampron, executive]

Thank you, Francoise, and welcome, everyone, to the Mach7 FY '25 First Quarter Business Update. Tonight, I'm going to start off with some highlights, and then I'll add in some detail on some of the more important components of the update.

As I said in our FY '24 update, the story of Mach7 is really best told through the lens of revenue, contracted annual recurring revenue, which tells you what to expect in the future, annual recurring revenue, which gives you a baseline for business as usual and of course, total revenue, which can include any fluctuation that might occur through our contract mix, essentially subscription versus capital.

This is really important to us and probably the greatest measure for how the company is doing as we've sort of migrated from a capital-intensive, sales order-intensive business to a subscription business, which is really geared towards our customer installed base and net new customers. We'll talk a little bit more about that here in a few minutes. But the numbers I'm about to talk about, just as a reminder here, they're in currency. And really, we did that this quarter just to give you the best picture for true improvement for the business.

In Q1, our CARR, that contracted annual recurring revenue ended at $27.5 million, which is up 2% for the end of FY '24. The ARR was $22 million or up 3.5% from FY '24. Sales orders were $2.2 million compared to what was a huge Q1 of last year. So, likely not a valuable quarter-over-quarter comparison [Audio Gap] process tool in Q1.

And importantly, we are reaffirming our FY '25 guidance for 15% to 25% growth in CARR revenue, and we also guided to OpEx growth to be less than revenue growth.

So, we'll move on first to sales. And in Q1, sort of in accordance with our strategy, we targeted investment in people, process tools, improve the scalability of our business. And as I stated, as we move to a more highly concentrated subscription model, keeping our attrition low and maintaining a happy customer has become a top priority for us.

This investment reflects that focus. And part of that strategy includes an increased focus on cloud enablement, service and supportability, integration and interoperability. And you've heard me talk about these things from our strategic pillars in the past. These are really important from a product strategy perspective, representative of the feedback we've received from customers and our own anticipation of market trends. But above all, [Audio Gap] focus there.

So, with that in mind, as we talk about sales orders in Q1, bear in mind that our sales cycle remains long. It's a 12- to 18-month sales cycle. We do have a team that's working tirelessly on winning new logos, which is important to us this year and converting a substantial pipeline of opportunities.

Similar to last year, we would expect to sign at least 3 to 4 net new logos in FY '25. At the same time, we'll continue to grow ARR through expansion and add-ons with our existing installed base. And although in Q1, we signed some significant expansion renewal agreements with customers that sort of highlights the success of that land and expand strategy that we always talk about.

So, sales orders consisted of ARR of $1.4 million, a capital software sale of $600,000 and some professional sales of $200,000, giving us to $2.2 million. And we included a chart this quarter, which kind of highlights our sales orders by the quarter since 2021. And this chart really shows sort of the lumpiness and maybe the lack of seasonality in our sales cycle.

So, comparing PCP is not always the best view of the quality of the quarter. And I think you can tell by looking at that chart, the volatility we've had quarter-over-quarter, which makes it really difficult to use that as a good measure of progress from a sales orders perspective.

So, as we think of revenue and we think of ARR, which is currently generating $22 million, the run rate increased by $700,000 since the end of FY '24, since the end of June. And it's important to note that, that ARR will continue to grow as new customers achieve first productive use and existing customers expand their licenses, add on new features, renew at increased price points, all of which are equally valuable to the overall revenue number, right?

So, that's important to think about that and think about where we said revenue would be for the fiscal year. We said 15% to 25% growth. And we're looking at $22 million in revenue right at the moment at the end of Q1.

Our CARR number is $27.5 million, an increase of about $500,000. That includes the $22 million of ARR plus $5.5 million of subscription and maintenance and support fees not yet recognized as revenue. So, some of that CARR, you can expect to convert to ARR throughout the year as well.

We'll talk a bit about cash flow and then we can come back to revenue too. Cash receipts for customers in Q1 were $6.3 million. That's compared to $8.3 million in Q1 of FY '24. This $2 million flux there is primarily due to the Q1 FY '24, including a $2.5 million fund transfer, I'm sorry, '23, including a fund transfer remitted by a customer.

Everyone would remember that we received an electronic payment on the 30th of June, but it wasn't processed until the 3rd of July. That kind of threw off the balance there quarter-over-quarter. And so, when you're looking at that Q1 of '23 versus Q1 of '24 or '25, you see that fluctuation there.

We had $1.6 billion of operating activity payments in Q1 over Q1 of FY '24, and that's what reflects the strategic investment in people, process tools that we undertook over the quarter as well as the fact that September, just in general, is a very expensive quarter for us. Q1 and Q2 are both expensive quarters for us, and we make up for that in Q3 and Q4 traditionally.

In Q1, we paid an annual fee of about $600,000 for tools that directly correlate to that service and supportability strategic pillar around proactive support tools. Additionally, around $300,000 was paid for R&D expenses that relate to the cloud enablement program and integration and interoperability pillars. And the remaining increase is related to staff costs and team initiatives that just align with the company's 3 pillars.

So, we're reporting operating cash outflow of $3.6 million compared to a cash outflow of $100,000 in Q1 of FY '24. But that being said, the cash position of the company remains strong with $21.9 million of cash on hand at the end of the quarter. And I'd like to remind everyone that we continue to aim to be cash flow positive in FY '25. Again, understanding that Q1 and Q2 are both traditionally very expensive quarters for us and we'll make up for that in Q3 and Q4.

So, as I think about an overall outlook for the business, following up on Q1, some of you may have seen the announcement that came out earlier this week. We've signed $2.5 million in license expansions with existing key customer. We also signed 2 smaller renewals with a combined TCV of $1.8 million. That all happened in the early part of October.

The license expansion is for additional eUnity and VNA licenses and that will contribute $1.3 million in software revenue in this quarter, Q2 of FY '25, increase the ARR by an additional $240,000. And again, that's net new for an existing customer. And then we also signed 2 renewals, a 5-year capital license, which we actually achieved a 94% increase on TCV for that renewal to $1.2 million, software rev of $600,000 will be recognized in Q2 for that.

The second renewal was a conversion of a capital to subscription license. And I've said in the past that, that's infrequent that, that happens, and it is infrequent, but occasionally, it does happen. This is an example. This was a smaller customer for us. But nonetheless, we still saw a 13% increase in pricing for a total TCV of $600,000.

So, when thinking about that, I think the important part is to recognize that we are going after increase in fees on these renewals. We're oftentimes asked for a percentage, what percentage do we get when we do a renewal. These are 2 examples that make it difficult. One got a 94% increase; one saw a 13% increase. So, a big variation there and what can happen in these renewals.

But nonetheless, we're looking to increase the value every time we renew. So, my view is Mach7 is poised for more growth in FY '25. We continue to see demand and increase in volume from our existing customers, which leads to those expansion of volume.

The company is well positioned to take advantage of these opportunities for both the new and the existing customers. And we expect to see growth across each of our regions this year, APAC, Middle East as well as North America. And we have a pretty diverse approach to our product offerings, and we have clients that are finding value in all of our components individually. And we look forward to continuing the enablement of our health care providers to make more informed decisions sort of the purpose of Mach7.

And we know that the value we're bringing is helping them in a meaningful way, and we look forward to continuing to have good results for our customers over the remaining 3 quarters of the year, 2.5 quarters of the year. So, I think with that update, Francoise, I'll hand it back over to you, and we can get into some Q&A.

[Francoise Dixon, executive]

Right. Thanks, Mike. We received several questions earlier via e-mail from Mike Goodson, so, I'll start with these first. The first question is, you've highlighted customer intimacy as a differentiator from your competitors. Do you see Mach7 being able to maintain its customer-centric/intimacy approach as it grows in the years ahead?

[Michael Lampron, executive]

Yes. Good question. I think the way to answer that, too, is to go back in history a little bit for us because, I mean, to be blunt, we were not always focused on customer intimacy. And really, this became a sharper focus to us in January of '24 where we really settled on this as being important as we converted to a more subscription-heavy company away from these heavy capital licenses.

And it became that much more important. I mean, I think as a subscription business, as a primarily subscription license business, you need to have great relationships with your customers. And I do think that we're well poised to do that in a better way than a lot of our competitors can.

A lot of our competitors are very large vendors who care a lot less about individual customer attention. And, for us, we think that can differentiate us. And we definitely see that as part of the plans into the future to really double down on that and make it valuable to our customers.

[Francoise Dixon, executive]

Thanks, Mike. Our next question is, would you please talk about Mach7's presence at RSNA this year?

[Michael Lampron, executive]

Yes, sure. So, RSNA, of course, one of the 2 big trade shows that we go to every year, by far, the biggest for everybody, great for us. We actually have unique -- we started doing this last year, but even more this year. Our products are actually going to be in over 10 other vendors' booths.

The eUnity product is in 10 other booths. Some of those are all the hyperscalers. So AWS, Azure, Google will all be using our viewer in their booths. AWS displaying some of their new health care APIs that they've built that we've integrated with. So, some great things showing there, showing in the Nuance booth, showing with many of our NTP VA partners. So, a pretty big presence in our booth and outside our booth around the floor at RSNA, and we look forward to having a really good year this year.

[Francoise Dixon, executive]

We have another question from Mike Goodson. What opportunities do you see in the Middle East?

[Michael Lampron, executive]

I feel like we're getting, and I've said this starting really the last quarter, we're getting a better view on our pipeline in the Middle East. We've traditionally had a, I would say, maybe a little bit of a lack of rigor in how we look at our funnel and pipeline over there. So, that's coming into focus for us. And Sathyan, who took over as the GM in July, he's doing a great job.

We do have several opportunities that I think are working their way to a close one way or the other coming up in the next several months. It's very difficult to predict some of these deals in the Middle East, which way they're going to go or when exactly they're going to close, but they're coming to the last stages of the deal. So hopefully, some good news coming out of the Middle East in months to come.

[Francoise Dixon, executive]

Thanks, Mike. Our final question from Mike Goodson is around Class. Class ratings have been previously labeled as just one point of reference for potential new customers. With pleasing improvements this year as well as performance incentives now being linked to these ratings, does the company now consider class performance as more than just one point of reference? What are Mach7's current rankings? And where would you hope to be placed when results are announced in early 2025?

[Michael Lampron, executive]

Well, I guess to answer that question, the easiest components of that first, we're actually ranked in the top 3 on both of our categories, Universal Viewer and DNA at the moment. I would expect and hope that when they do the best-in-class results that we would remain in the top 3 and certainly within the top 5, but I hope within the top 3 of both products.

So, we've seen great improvement there, great improvement on the VNA and over a 9% improvement on the VNA score, about 3% improvement on the viewer. In regard to we think it's more than just a data point. I mean, no, it is. It's just a data point. And KLAS is an imperfect system.

They don't always get it right. And sometimes it's difficult to understand their data, but it is sort of the consumer reports for health care IT. So, buyers do go there. And more importantly than what's on the KLAS website is what KLAS says about you when they get the calls from the buyers.

And having good relationships with KLAS is important because we want people to understand our product offerings and getting feedback from them on our customers is a good voice of the customer feedback loop for us.

I don't want to ignore that, whether I like the results or not or besides the point at the end of the day, it's a data point for us to make improvement. And it's a data point for the customers to make decisions on who they want to do business with. So, I say it's still just one data point, but it's an important data point, and we want to do everything we can to get the most out of it because they're going to cover us one way or the other.

So, in regard to that being part of comp and all that, look, that's just a reflection of the fact that as a business, we find customer intimacy to be one of our really important pillars right now and KLAS represents in a sort of empirical way of measuring some of that customer success.

[Francoise Dixon, executive]

Thanks, Mike. We'll now go to questions from the live chat. Our first question comes from Peter Cooper. Mike, sales in Q1 FY '25 are the lowest in the last 5 years. How can you assure shareholders that sales growth will accelerate in line with previous management statements?

[Michael Lampron, executive]

Look, I'll talk for a second about sales, but what I'll say is that what we want to be paying attention to right now is revenue and revenue growth. We have an ARR of $22 million, a CARR of $27 million. You can expect to see about $25 million at the end of the year around ARR, and if you think of what we guided to 15% to 25% on revenue, our focus is really growing on that revenue. And that revenue can grow through add-ons, through expansions and through net new logos.

We estimate that we do about $4 million or $5 million a year in professional services. So, in regard to what do we need to do from a net new logo and new sales in FY '25 to ensure we hit our guidance in FY '25, it's not a large punt to get there. We've got good line of sight to get there.

So, having a lumpy Q1 doesn't really deter me in my feelings towards the rest of the year at all. We have soft quarters, and that's okay. It is a lumpy business. We've always been lumpy. We remain lumpy, but we've got a solid pipeline that we're working through, and we've got a really good sales team that I've got a lot of faith in.

So, I'm really not concerned about our sales. And if you look at sales across the last 3 years, you'll see that sales orders for our company have never been an issue. We've never been lacking in sales orders. I think we've always hit or exceeded our numbers that we've guided to in sales orders. I suspect this year will be no different.

[Francoise Dixon, executive]

Thanks, Mike. Our next question comes from Andrew Hewitt. Which market do you see your greatest potential in?

[Michael Lampron, executive]

Yes. This is a really tough one. The market can be broken down in so many ways. You can look at it as the acute or ambulatory market. You can look at it as the enterprise versus radiology market.

What I tend to say to people is that our best customers are customers that have complex workflow. So, that could be a teleradiology group that's got 100 radiologists that are reading across 200 locations or it could be an IDN that's got 5 hospitals with centralized radiologists or it could be an acute care center.

So, anything with a lot of integration points, maybe 5, 6, 7, HL7 integration points, 3, 4, 5, 10 different PAC solutions, multiple departments, the more complex, the better for us. That's where we really shine and show value. So, it's hard to break it down to just like acute or ambulatory. But I would say we've got the bread and butter is really the complicated. The complex is really the bread and butter for us.

[Francoise Dixon, executive]

Thanks, Mike. We have another question from Andrew Hewitt. What do you see as your greatest competitors? And where do you see your differential having the greatest impact in getting new clients?

[Michael Lampron, executive]

Good question. The odd truth to the matter when it comes to who are we competing against the most is the answer is whoever the incumbent vendor is. I think it's important for everybody to understand that in any developed country that we do business in, everybody already has an imaging solution, right? They're already reading digital images, and they're already reading it off of somebody else's technology.

So, this is a replacement market, not a greenfield market. So, the greatest competitor that we have to deal with is whoever is the incumbent vendor and making a compelling case to the buyer that our software is worth the pain and agony to move off of their existing solution and on to a new solution.

There's a lot of work and pain that goes with that. We try to make it as easy as we can for those customers and give them enough reasons to add value that they would be willing to go through that pain. That's the biggest competitor for us. And that could be a GE, it could be an Agfa. It could be on the VNA space. It could be a Highland VNA.

It could be an older, more antiquated VNA. But that's really the case there. From a value proposition perspective, our view on enterprise, our view on the different features that our VNA has, the federating capabilities that our viewer have, the zero-footprint nature of our viewer, we have both technical areas that we differentiate and then we have workflow areas that we can differentiate our product from others, which we think are compelling to both acute care and ambulatory space.

[Francoise Dixon, executive]

Thanks, Mike. Our next question comes from Shaw Yang. Can you comment on the size of the sales pipeline and whether you are seeing some elongated sales cycle in parts of the market?

[Michael Lampron, executive]

Look, our sales pipeline, I mean, it continues to grow. I mean we look at it so we have our overall funnel. And then we have our pipeline, which covers the fiscal year that we're in. We know in FY '25 for just that pipeline for FY '25, we've got 4x coverage for the sales orders that we expect to achieve this year. That's just the pipeline.

Of course, the overall funnel is much, much larger than that. But I tend to just talk about specific pipeline for the fiscal year because the overall funnel, it's like, it's too abstract. It's too big of a number, frankly, a lot of things happen to a funnel. So, I think we've got really good coverage, but I will say that the market is moving slow.

And if you were to look at other announcements that other companies have made, you're not seeing a whole lot of announcements in Q1 here since July, July through September, you're not seeing our competitors make very many announcements on net new deals either. The only one I think you'll see any consistent information about net new logos being signed is with Sectra.

Short of Sectra, you won't see a whole lot in the news sections of our competitors. It was just a slow quarter. And hopefully, things speed up as the year progresses.

[Francoise Dixon, executive]

Thanks, Mike. We don't have any more questions on the chat, but I might just pause a moment in case there are any final questions. We have no further questions. And so, I'll hand back to you, Mike, for closing remarks.

[Michael Lampron, executive]

Yes. Thank you, everyone. First, I appreciate your time, and I appreciate you visiting with us and spending a bit of time with us. And as always, always happy to answer questions as they come up throughout the weeks and months ahead. So thanks, everyone, for attending, and look forward to seeing you next time.