Mach7 Technologies Ltd

ASX:M7T

Earnings Call Transcript 2024-Q2

[Francoise Dixon, executive]

Good morning, everyone, and welcome to the Mach7 Second Quarter FY '24 Business Update. My name is Francoise Dixon, and I'm Head of Investor Relations for Mach7. Today, our CEO, Mike Lampron, will provide an overview of our second quarter results. We will then open it up for questions, which will be answered by Mike and our CFO, Dyan O'Herne. If you have a question, please submit it via the Q&A text box at the bottom of the screen.

I'll now hand over to Mike for the Q2 update.

[Michael Lampron, executive]

Thank you, Francoise, and hello, everyone, and welcome to the Mach7 fiscal year '24 Q2 business update. Today, I'll go through a general business update as well as the results from our Q2 FY '24. We will be hosting another more robust update for the first half of FY '24 on February 29.

So some highlights for this quarter. Sales orders for the quarter were $16 million in Q2. That was a great addition to what has been a great year to date for us, contracted annual recurring revenue rose to $26.8 million. And our ARR grows as we bring clients live at the end of Q2, we were at $18.6 million. Cash on hand of $22.7 million, which was slightly better than this time last year. And we did just recently announced some new guidance for the year, and we'll discuss that during today's call as well.

So let's first just start off with some sales orders. And as I often say on these calls, sales orders remain a top metric as we measure the company's success. We feel this metric answers questions around if the product is resonating in the marketplace. To us, this is an indicator of future sales success. This metric for us specifically is also a good metric to show our customer stat and customer loyalty. Many of our sales orders, as you would note, are same-store sales part of our land and expand strategy. And as we see success there, we see the sticky and reliable nature of our ARR moving forward.

So in Q2, we realized $16 million in orders -- and pleasingly for us, out of that $16 million, about $14.5 million of it, $14.4 million of it will fall under recurring revenue, and -- with a small number of capital licenses being purchased of around $1.2 million and remaining about $0.5 million in professional services.

So with that, about 80% of the total contract value of those sales orders refer renewals. 20% was for add-ons and expansions in our customer base. This is a great representation in my mind of the power of our land and expand model. We did not bring on any net new customers in Q2.

However, our pipeline is still very strong. We still have a number of new logos in our pipeline, and we will convert those into our book of business over time. We have signed two new clients added so far this fiscal year. And I would expect for us to fall in the 3% to 4% range as we indicated, and we discussed the new logos for FY '24 at the end of FY '23. So again, think of that in the 3% to 4% range for net new customers on the fiscal year.

At this stage, we're seeing the vast majority of our agreements coming into us as a subscription model. And as a refresher for everybody, we do not dictate to our customers the model they use. We offer both the capital model and a subscription model and that pricing and the business model, that's something that's discussed at the tail end of our sales cycle.

So historically, this has been a bit of an unknown to us until the very end and it was represented sort of as a 50-50 mix for many years. It kind of moved to a 60-40 mix. And then as we alluded to this year, we thought we'd see some more change, 70-30, 80-20. But at this stage, I feel more comfortable saying that you can count on most opportunities moving forward to fall into subscription with just the occasional capital license. But we will still see capital licenses, particularly coming out of the APAC, Middle East more so than North America.

So when we think of sales orders, obviously, our sales orders are converting to revenue, right? So our ARR, we're currently generating around $18.6 million in recurring revenue at the end of Q2, and as a point of clarification on this, that the run rate is calculated by annualizing the revenue earned from subscription and support and maintenance fees, right? So this run rate was slightly higher than September. Our ARR will continue to grow as new customers achieve first productive use and existing customers renew at increased rates or achieve FPU on add-ons. And one more time, FPU is first productive use. It's an acronym that we use all the time.

Contracted annual recurring revenue was at $26.8 million at the end of Q2. CARR is calculated by taking the $18.6 million of ARR plus the fees for contracts that we have signed, but the customers have not yet achieved first productive use. At this point in time, that represents around $8.2 million. This is what we refer to as our backlog. These are contracts that we are working on to bring live, they all represent different products, different rollouts, et cetera.

So there is no real rule of thumb in regards to how long it takes us to convert this backlog to ARR. That being said, I will say that having a backlog is healthy for the company. Frankly, it's essential to always have a backlog. If we didn't, then that would mean our services team is outpacing our sales team, and that would indicate that we probably had some staffing issues going on.

So, frankly, having that backlog for us is welcome news. We want to shrink that backlog. Of course, we always want to shrink it every quarter, but we always want to be adding to it as well. So on average, the only guidance I can really give on the conversion here is that it takes us around 12 to 18 months to convert a full solution from contract signing to go live. That's a very broad statement.

We're going to have some deals that convert very quickly. We're going to have some renewals that convert quickly, add-ons that convert quickly. But I'm just saying 12 to 18 months for a full suite of our products. And that is largely driven based off of customer requirements and size of customer sites, complexity of customer sites and the sort of the mix of customers that we're currently seeing and that we're currently signing. That may change over time.

If we sign more ambulatory than acute care that could change, if we sign more IDNs that could change. But for now, that's the best rule of thumb I can give you, but just know that it's imperfect.

So from a cash flow perspective, cash receipts from customers in Q2 were $7.2 million compared to $6.4 million for the same period last year. We have said in previous years, Q1 and Q2 are by far our most expensive. And this, in combination with the transition to subscription has contributed to a negative operating cash flow of $200,000.

Q4 has typically been a good cash collection quarter for us as folks will remember from last year. And with that, we have reiterated our guidance of being cash flow positive in FY '24. And we did end the quarter with $22.7 million on hand, and we remain debt free. So a little -- I'll talk for a moment about the guidance that we provided last week. Over the past year, we have spoken many times about the conversion of capital to subscription deals. Noting that we moved from a 60-40 split favorite capital deals for the last couple of years to a potential 70-30 or even an 80-20 split.

This transition has picked up at a pace to the point where we're mostly subscription. In the short term, that has an effect on FY '24 revenue. However, in the mid to long term has a massive upside to our business. So I'm happy to report that this transition is happening faster than expected. The net impact to our business did result in a change to our guidance.

Our sales orders guidance went from $48 million to $60 million plus. Our revenue went from 15% to 25% growth to $27 million to $30 million. Less than previously expected, and the one metric hit the hardest with this transition to subscription. We stated previously that our OpEx would be lower than revenue growth. Well, looking at best case, that would have meant that our OpEx would have been grown by only 15%. I stated this was based on a sliding scale based off of the company's success.

So keep in mind that our sales have been successful, and the one area that I have consistently said would need to continue to grow as our business grows, the service and support, that need hasn't changed because these orders are coming in. So just because our revenue forecast has changed with the accounting structure of our deals doesn't mean that our OpEx is going to be reduced a ton. But I will say that right now, our guidance has been that we will have less than 15% growth in OpEx at this stage. And we remain committed to being cash flow positive in FY '24.

So sort of as an outlook, Mach7 remains well positioned in my mind to respond to both the acute care and ambulatory care markets. I think we're proving that our products are resonating. Our sales orders are looking fantastic for the year, better than we could have imagined. We still have a strong pipeline, and it continues to mature. Our pipeline is diverse, which limits exposure to only a certain market segment. It includes new and existing customers, it's from both the acute care and the ambulatory care, and it's spread across North America and the APAC, Middle East geographies.

So we have a good spread of our pipeline and some good diversification there, and I look forward to providing a more robust outlook as part of our first half results, which, again, will be coming up at the end of February, on February 29.

So I think with that, Francoise, let's look to take some questions.

[Francoise Dixon, executive]

Right. Thanks, Mike. We'll start with a couple of questions from Madeleine Williams at Wilsons. First question, is the new $60 million sales order guidance conservative based on what is in the pipeline. Are you winning more of the expected ones, the pipeline that you announced at FY '23? Or have new opportunities become available?

[Michael Lampron, executive]

Pretty broad question. What I'll say is that when we looked at our forecast to revise our sales orders numbers, we looked at what we consider to be high confidence deals to come in based on -- in Q3 and Q4, high confidence, meaning a high confidence that the deals are going to happen and sign and a high confidence in what quarter they're going to sign in. And we have a sales rep confidence level as well.

So in totality, we take those high confidence deals. That's where we came up with our $60 million plus number. Certainly, there's upside to that number. And that's why we guided to greater than $60 million, right? or $60 million plus. We don't include in there any of the whales that we could sign in the second half of the year because that would just skew our statistics. And a $15 million deal can really change the outlook and look, so we just don't include those in our forecast.

And our forecast is constantly evolving. We're constantly adding new deals and new opportunities. And just we bring in these leads, like we brought in a bunch of leads from RSNA. Those leads take some time to convert to opportunities, which will then be added to the pipeline, but we need to qualify all of those leads before we put them into our pipeline. So all that stuff is part of our growth. And all that's working to our benefit right now in the pipeline.

[Francoise Dixon, executive]

Second question from Madeleine. In terms of updated guidance for revenue of $27 million to $30 million, does that risk on new contracts being capital at the top end and subscription at the bottom end?

[Michael Lampron, executive]

Yes. I mean, look, it certainly has a big impact, right? If we're able to bring in a couple of extra capital deals in the second half of the year here, it's going to have an impact to our revenue, and that will get us up to that higher range. The other thing that could impact that is if we bring in deals from the APAC region and the Middle East region, that can have an impact, too. Again, we don't typically add those to our forecast because the timing of those deals is often time shifting. But yes, those are things that certainly can have a big impact to the $27 million to $30 million range as well as the business model mix.

[Francoise Dixon, executive]

And just another one from Maddy. Should we still expect a capital portion for Advocate Aurora to come in, in the second half of '24.

[Michael Lampron, executive]

I don't believe we have anything forecasted for Advocate Aurora in the second half from a sales order perspective. I know we have some cash to work out with them -- cash payments. But there -- by the way, they are a perpetual license. And so there's no additional software that they'll be buying that I'm aware of in the second half of the year.

[Francoise Dixon, executive]

Okay. Our next question comes from Scott Power of Morgans. Mike, are you surprised by how quickly customers have moved to subscription licenses.

[Michael Lampron, executive]

Yes. Look, I am. When I first came to Mach7, I was surprised with how many deals were capital licenses. But as I spent more time at Mach7 and as I spent more time with our customers, our customers really liked the fact that we were flexible from the beginning. And a lot of our customers were acquisitive at the time. Now I feel like our customers are shifting. They still may be acquisitive, but they're shifting faster because I think the cost of debt has gone up to the point where it's just not worth it for them.

So they're just trying to protect their cash. And I think everyone is transitioning to this model. And I mean, almost every deal we work on, we're seeing that request now. So yes, I'm a little surprised over the course of the last 2 years how quickly it's transitioned.

[Francoise Dixon, executive]

Our next question comes from Carlos Gil at Microequities. There seems to be a widening gap between CARR and ARR. When do you expect some of that gap in the -- the $8.2 million gap to fall into ARR?

[Michael Lampron, executive]

Look, some will follow in here in Q3. As I said, I would like to see a nice healthy gap between CARR and ARR. But of course, we need to convert that every quarter, too, right? Every quarter, certainly every half year, you need to see some conversion of that CARR added to your ARR, but we want to make sure that we've appropriately staffed so that we can convert that from a services perspective.

But again, we want to keep some gap there, too, not because we want to slow down implementations, but because we want sales to continue adding. At some stage, and this happens with most companies in our industry, at some stage, you need to start saying to your customers that, hey, look, if you sign a deal now, we're not going to be able to get started for 3 months before we start the implementation. That's a normal thing in our industry.

Right now, we're not there, we're starting our customers as soon as they're ready to start. I think sometimes that surprises our customers, and they're not necessarily ready. But yes, we're constantly working on our operations to crunch that time frame so we can convert as much CARR as we can. And you'll see some of that conversion here in Q3 and Q4.

[Francoise Dixon, executive]

Next question comes from Shuo Yang at Microequities. Can you comment on whether the time frame to achieving first productive use has lengthened and whether you need additional resourcing to bring clients live.

[Michael Lampron, executive]

It's a little bit of a roller coaster ride, I would say. There's times when we get really busy, and then there's times where it can low a little bit. I would say that we are appropriately staffed, but I would also say that services and support are the areas that we need to continue to strive to scale, well, our customer base scales.

So, over time, you will see us spend some additional dollars and service resources and support resources to make sure that we provide the most important thing, which is a good customer experience, whether that customer experience is a 12-month time frame or an 18-month time frame, at the end of the day, we want to meet customer expectations.

And we want to at least be able to stay at pace or outpace our customers' capabilities, right? Right now, we're dependent on our customers to participate in these deployments. And so it's not always based off of us. I could double the size of that team. It doesn't mean I'm going to reduce the time frame in half. So those are all factors to how we staff. But I'd say we're appropriately staffed, but we will see some additional costs and services support over the coming, I'll call it, 12 months.

[Francoise Dixon, executive]

Thanks, Mike. Our next question comes from Wei Sim at Jefferies. What are the assumptions underpinning our guidance for cash flow positive for FY '24? And will we be managing OpEx in order to execute on this.

[Michael Lampron, executive]

Yes. Maybe I'll talk about the OpEx pace and then maybe Dyan will have you talked a little bit about cash flow and the drivers for cash flow. But to answer your question on OpEx, yes, this is something that I feel like as a company, we've done a pretty good job of trying to manage over the years. And we certainly are managing that and trying -- the biggest cost we have is our people. It represents 75% of our costs. So we're trying to find efficiencies where we can.

We're trying to staff where we have to. And we're asking a lot of questions internally before we bring those people in to make sure we're bringing people in for the right reasons, not just to satisfy a need because we have a bad process. So from an OpEx perspective, certainly, we're keeping a very close eye on things. And then Dyan, do you want to comment on cash flow and our comfort around cash flow statements?

[Dyan O'Herne, executive]

Sure, Mike. With regards to forecasting out our cash, we obviously go off the timing of the expected receipts for the customer contracts. We've had the increases for renewals, so the timing of the renewals coming through when we expect to collect the cash. With the shift to the subscription model, it is a bit easier to forecast the timing for cash receipts, especially if it's a renewal at a larger rate, that revenue will start recognizing upon the renewal date and then the cash, the feasible in advance.

And then with regards to expenses, our expenses in the first half of the year are always higher than the expenses in the second half. And we do -- like Mike said, we're managing our costs to make sure that we can stick to the guidance that we've put out there.

[Francoise Dixon, executive]

Thanks, Dyan. Our next question comes from Scott Power at Morgans. Can you make some comments on progress in the Middle East? And any partnerships or collaborations that are generating revenue.

[Michael Lampron, executive]

Yes. So first piece on the Middle East. We actually are at Arab Health this week. And we have a team of folks that are there with our partner, Atlas. And listen, we are making a lot of good headways in the Middle East. We've got several good-sized opportunities there. And Sathyan, who's managing sales for that area is doing a really fantastic job and has the right relationships and is doing the right things to try to leave a fingerprint -- a Mach7 fingerprint in the Middle East.

So I expect that we will -- that will bear fruit sooner rather than later, but the timing of which we still are a little uncertain. In regards to partners, I'm going to assume that, that's like a little bit of a broader statement, not just the Middle East but sort of across the spectrum of our geographies. And I would say that leading the charge there from a revenue perspective is Nuvodia from the perspective of reselling our software, a very important partner that works with most of the ambulatory space, but they're doing a great job.

And then I would say from a vendor that's really helping us in regards to positioning. Our relationship with Nuance is as strong as it's ever been, and really starting to bear fruit, especially through the NTP program and the various different integrations we're having to do with Nuance to make that a success. So we have 27 partnerships in total, some of which are resellers, some are just technology partners. But I think those are two of that I would highlight.

[Francoise Dixon, executive]

Thanks, Mike. We've got a couple of questions on the VA contract. First one is from Ivan Tanner and there's one -- a similar one from Carlos Gil at Microequities. Ivan Tanner asked, can you give an update on the implementation progress of the VA contract? And Carlos asked a similar question, can you give us an update on Phase 1 and how confident you are about getting to Phase 2?

[Michael Lampron, executive]

Okay. Sure. Look, we're following the government's time line on this contract, right? And the government has made it clear that their time line is to go live in June. So barring that changing, we're prepared to go live in June. And we've been working very closely with all of our partners to make sure that, that can happen. So that is going quite well for us, and we look forward to continuing to get that ready to go live and what that's going to take.

It's, so far, been a very positive experience for all of us, customer and partners, all of us have had a good experience. In relation to Phase 2 and where Phase 2 is going to lie. I mean, honestly, we haven't really concentrated on Phase 2 with the VA at this stage. We've really stayed focused on Phase 1. I will say that we've concentrated on education, and making sure that various different VA entities know that this NTP contract exists and that they can leverage this.

We had a number -- I mean, a number we probably had 20 or more people that came through various different VA systems that stop by our booth at RSNA. So words definitely getting out through the VA, which is exactly what we need in order for Phase 2 to be successful. And even more importantly than that, we want to make sure Phase 1 is successful. So that's kind of the focus and the update there.

[Francoise Dixon, executive]

Great. Thank you, Mike. Our next question comes from Wei Sim at Jefferies. Can you give us an update on business with Akumin.

[Michael Lampron, executive]

Moving forward, I think I know there was those that were concerned about Akumin's cash flow and their financial fluidity. But we did receive our most recent payment from them in December as we would have expected. So from that perspective, they have no outstanding invoices for us. We're moving forward with them. And as a matter of fact, lining up a pretty good migration with them. So Akumin continues to move forward at a good clip and all as well.

[Francoise Dixon, executive]

Our next question is from Mason Thomas. Has there been any change in appetite from existing and potential customers to spend on new technology implementations. Our budget is more constrained.

[Michael Lampron, executive]

Look, I'll give you a larger view first and then maybe narrow it down to my -- our perspective in Mach7, Health care systems in North America are having a hard time. Their costs are high, cost of labor are high. You see this in the news pretty frequently that they're trying to figure out their operations.

Now, all of that being said, from a technology provider, what these hospitals are really clinging on to is that technology is the way forward for them to help give them some of those efficiencies that they need to gain. And for us, in particular, giving physicians, clinicians, the work-life balance of being able to work remotely, not from inside the walls of the hospital is something that is important to them and helps them keep their staff engaged and keeping a healthy staff is as important to the hospital right now as making money.

So for us as a technology provider, we're not seeing a lot of constraints from the hospitals. But without a doubt, hospitals are concerned about their overall costs. So it's a little bit of a push and pull there, I think.

[Francoise Dixon, executive]

Okay. Our next question comes from Ross Marples. You are planning to be cash flow positive in the near term. Do you have a plan for when you will achieve a positive NPAT?

[Michael Lampron, executive]

Look, we started to discuss NPAT a little bit at the end of FY '23. When we look at our NPAT A, we actually have a pretty nice looking NPAT A number. A lot of the reasons around not having a great NPAT are because of amortization and some costs associated to our acquisition and client outlook, pull those out, we don't look bad. But we are getting closer and closer to a positive NPAT. I mean we have a bit more work we need to do now that we see our business model shifting a little bit and going more heavily towards subscription. That's not a number that we forecast. That's not a number that we provide guidance around.

But certainly, NPAT and having a positive EBITDA number are areas that the company is certainly focused on and making sure that we achieve, I would say, in the near to midterm.

[Francoise Dixon, executive]

Thank you. We have another question from Madeleine Williams at Wilsons. Staff costs appear to be lower in the quarter. Can you speak to changes there? I'm thinking about the OpEx guidance in FY '24. How is that being managed given the lower revenue?

[Michael Lampron, executive]

Yes. From an employee perspective, sometimes it can be a little bit lumpy, doesn't really mean anything. Where an expense might go away at 1 month, it will come back in another month or 2 once we were able to recruit to replace if that was the driver. But overall, our headcount has been staying pretty consistent across the company, it hasn't really been growing and it hasn't been shrinking. The makeup of that headcount sometimes changes though, sometimes costs go down, sometimes they go up.

But look, in regards to how managing our OpEx, we're really concentrating -- again, bulk of our cost is people. So what we're really focused on as a business is making sure that before we hire people, we've got a good process in place. We understand sort of the value mapping of our individual employees and where we're falling short when we're feeling understaffed in what particular area, what particular skill set, and is it a skill set that we need just for today? Or is it a skill set we need in the future? If it's a skill set we need for the future, it's worth an investment. If it's a skill set that we might just need for today, maybe it's a consultant that comes in rather than a new hire. We have to evaluate that with every opportunity we have to look after our costs.

[Francoise Dixon, executive]

We have another -- we have a question from Sylvia Luo at JPMorgan. Beyond the comments on greater engagement and interest at RSNA last year, can you comment on any other highlights from customers? And if there was anything you did differently at RSNA 2023?

[Michael Lampron, executive]

Well, we -- there were some things that were different. We did do a little bit more marketing this year, and we did some more work with our partners this year over previous years. We had our viewer in every major cloud booth at RSNA, public clouds or Google, Azure, AWS. All we're displaying our eUnity viewer. Nuance was displaying our eUnity viewer. I think there was 10 booths in total across RSNA was that was displaying -- that were displaying our viewer. And we -- our partners were -- did a great job in FY '24.

Our marketing team did a great job with our booth in our locations this year for FY '24. We did have great engagement with customers. I would say the one resounding thing that really came up to me and sort of like presented itself as different. And I've been going to RSNA since 1995.

So I've seen a lot of our RSNAs. And one thing this year was that the idea around what used to be called the deconstructed packs is certainly back out there, best of bread. And the VNAs are making a comeback. I think VNAs were quiet at RSNA for the last few years, and a lot of people were talking about VNAs and how it will help them with their enterprise imaging moving forward. So big topics of conversation that I think have adjusted from years past.

[Francoise Dixon, executive]

Okay. We have no further questions, Mike. So I will hand over to you for closing remarks.

[Michael Lampron, executive]

Okay. Well, thanks, everyone, for joining. We appreciate the opportunity to talk with you and answer your questions. And again, we'll be having our next webinar on the 29th of February. You're not going to want to miss it. Thank you all for attending.

[Dyan O'Herne, executive]

Thank you.