Mach7 Technologies Ltd

ASX:M7T

Earnings Call Transcript 2024-Q3

[Francoise Dixon, executive]

Good morning, everyone, and welcome to the Mach7 Third 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 Q3 results. We will then open it up for questions, which will be answered by Mike and our CFO, Dyan O'Herne. [Operator Instructions].

I will now hand over to Mike for the Q3 update.

[Michael Lampron, executive]

Thank you, Francoise, for that. Hello, everyone, and welcome to our FY '24 Q3 business update. Today, I'll cover a general business update as well as the results for our third quarter of this fiscal year.

So starting off with some highlights for the quarter. So sales orders for the quarter were $7.4 million, which was a great addition to what has been a great year-to-date with 56.9% so far this fiscal year and a little bit of time left to go in Q4. Our contracted annual recurring revenue rose to $28.2 million, that's up slightly from the end of Q2. And our annual recurring revenue run rate has grown to $22.3 million, that's up from $18.6 million from end of Q2. Cash on hand, $24.8 million at the end of Q3, which is a great result for us this quarter and end up about 9% or so from the end of Q2. And you will hear some more about this, but we definitely will be reaffirming our FY '24 guidance with a strong outlook on sales and cash flow for the year.

So normally what I do is, I go through -- through some of these metrics first, but I'm going to go a little out of order this quarter, and I'm going to start off by giving you guys a general update in our outlook, and then we'll move on to the metrics. I just think it's important as we look at the end of Q3 and as we start to finish up the fiscal year.

So earlier this year, as everyone would be aware, we updated the market with our growing transition from Capital sales to Subscription sales. That transition has been really important for our customers, but I really feel like it's been super healthy for Mach7 as well. And we've delivered another strong result this quarter, like I said, with 20% growth in ARR, and a record CARR of $28.2 million. We were able to reduce our backlog and that is our CARR to ARR from $8.2 million to $5.9 million. That represents really what our achieving first productive use for diagnostic imaging associates and recognizing some additional revenue from renewal dates for several customers, but that conversion of CARR to ARR was really pleasing for us this quarter. And it's a reflection of a great job by our services team as well as a quick transition with our renewals that reflect some of that upside volume that the sales team was able to capture.

So despite though, the ongoing subscription transition and what I felt was sort of an associated short-term disruption of revenue growth, our operating cash flow is great this quarter. Mach7 has a strong financial position, closing cash of $24.8 million. Again, that's driven by an increase in receipts through Q2 of FY '24, and it grew by about 24%. And many of you will recognize that our FY '24 sales orders have been filled with both renewals and new customers. The composition of those orders every year is very important, and it helps for us to really secure our foundational book of business into the future, given us better visibility to revenue in years to come and giving us some confidence in the sticky nature of our business. At the same time, bringing on significant new orders like the VA has helped us grow our overall book of business.

So think of it like this. The renewals have sort of created the foundation and long-term outlook for our book of business, right? And it's secured our ability to look into the future and sort of focus a little bit more on Q4 for this year and into FY '25 and really take a look at our strategic priorities, and make sure that they're really reflective of the purpose of Mach7 and why we're here every day. And really, that comes down to where we want to make a difference. And for us, we want to enable exceptional patient care by empowering health care providers to make better informed decisions. That's it in a nutshell. That's what we're doing, right? And today, we do that by making sure we do our part in making imaging data available to anyone involved in the care of a patient. And we will continue to invest in our people, our processes, our tools to further differentiate ourselves from our competitors.

The first step to that, honestly, is for us to keep an eye on customer success and our ability to have meaningful and long-lasting relationships with our customers. That's why the renewals in FY '24 have been so powerful for us, from my perspective. And our employees work every day to continue to focus on customer intimacy and customer success. And at the same time, we have this really great product and development team. And from a product perspective, they've been working really hard at establishing where we need to go into the future with our product. And we've sort of boiled that down to 3 major strategic anchors for the business as we continue to invest around innovation.

The first anchor is cloud enablement, which is sort of a nebulous word, right? But just last week, I was at a KLAS Enterprise Imaging Summit. And I'll say that the customers there were sort of split between those customers who are ready for the cloud and those that aren't. But the one thing everybody had in common was that over the next few years it will become inevitable that it will be a part of their strategy from an IT perspective moving forward. Our focus is to meet our customers' needs as their strategy becomes more and focused. So cloud enabling and we're working with both of our product lines across the cloud will become more and more acute over the next several years, and we continue to innovate around that from now and then continuing forward.

The other thing that is another anchor for us is the service and supportability of our products. We need to have a scalable business, right? Scalability comes by having good product. It comes by building the tools that we need to make sure that our product can be deployed easily and support it easily. We want to provide an exceptional customer experience and the interaction of our software, the deployment cycle, maintenance upgrades, all of that, every step of the way we want to innovate on the best ways we can make this experience the best in the industry.

And the last anchor really for us is interoperability. Super important for an enterprise imaging vendor. No vendor can do it all. Partnerships and integration are paramount to us being successful in the business and building the most flexible and feature-rich integration we can, that's what we're going to continue to focus on.

So that gives you an idea from my perspective of where I think we came through the quarter. The good news about our sales orders numbers, the sort of the composition of those sales orders, what it means for the business. And what I'm looking at moving into FY '25 now that we've really come through the other side, it was a really phenomenal renewal year that really helps solidify that customer base moving into the future.

So that being said, we'll move on to the metrics and sort of the meat on the bones, I guess. Start off the way I always do, talking about sales. Our sales orders have been fantastic this year. I've often said that this is the most important metric to measure our success against. And honestly, I continue to think this is true. But I also know that as we transition to subscription-based sales, our contracted annual recurring revenue will have an equal place in importance to everyone. And so you start to think about the sales order number and start to think of that CARR #2 as a number that's important as we start to grow going into FY '25.

Sales orders for the third quarter of FY '24 were $7.4 million. The majority of those were subscription-style sales. And again, just highlighting that transition to a subscription revenue model. Our ARR type sales were about $5 million, representing that subscription fees, maintenance and support fees, which will be recognized as revenue over the contract term, right? And that's, of course, after our customers achieve First Productive Use. Our capital software sales were $1.7 million. We know that's low because we know that we've been selling a lot more subscription than capital, right? And I don't see that changing into the future. Professional services of $0.7 million recognized as revenue on a percent complete basis. And our renewals were $6.2 million of the total sales number for the quarter.

So transitioning from sales and sales orders into revenue breaks down into this ARR and CARR, right? And from an ARR perspective, we're generating about $22.3 million as -- from a run rate, which is calculated by annualizing the revenue earned from subscription and support maintenance fees. That run rate has increased by about $3.7 million or 20% on $18.6 million that we disclosed at the end of Q2. And we see ARR will continue to grow as new customers achieve first productive use and existing customers renew and increased rent rates and increased license volume, and achieve first productive use for add-on products as well.

So we talked about our contracted annual recurring revenue, again, a very important metric for us. CARR was $28.2 million at the end of March. That was at $26.8 million at the end of December. The CARR consists of $22.3 million of ARR. That's for clients that have achieved First Productive Use and then plus another almost $6 million -- $5.9 million of subscription and support and maintenance fees that have not yet been recognized as revenue, right? The gap between CARR and ARR, that represents that future revenue, once First Productive Use is achieved for new customers. It also can be additional revenue from existing customers from the effective date of their renewal, right? Especially if they have license expansions and that sort of thing, right? So CARR is based on contracts in hand at the 31st of March, and it includes revenue associated with Q3 contract rents.

So from a cash flow perspective, cash receipts for customers in Q3 were $8.9 million compared to $5.4 million in Q3 of last year, and $7.2 million in Q2 of this fiscal. So despite the ongoing transition to subscription sales, we have a very positive operating cash flow of $1.4 million in Q3 of this year and for the year-to-date of $1.1 million. So with that, of course, we're reaffirming our guidance. Mach7 expects to be cash flow positive in FY '24, like we've said we would be. And we're getting there through careful cost management, increased fees for license renewals and improved receipt predictability from subscription contracts. And finally, on that side, the financial position of the company remains solid with no debt. $24.8 million cash on hand and looking very good for the fiscal year.

So just a couple of last words around guidance and outlook. I've said this before, but I'll just reiterate it. We feel that we're well positioned to take advantage of a highly fragmented market in medical imaging. And there's an ongoing shift in demand from acute care to ambulatory care, and we're seeing that. And the shift when I say ambulatory, that includes teleradiology, which we're seeing as a big factor there. The company has a strong sales pipeline, which reflects opportunities with new and existing customers across various different regions, care settings and product combinations.

We are a business that is maturing. We've proven that we can grow organically and inorganically, both of which will continue to help shareholder value and bring value to our customers. And we've seen that through our increase in sales orders, we've seen that through our acquisition of client outlook, we've seen value in both of those pathways. And we're committed on that path to provide the best possible customer experience for our customers, and we will continue to have a focused product road map to help meet our customers' growing needs. So with that, we're reaffirming our FY '24 guidance. Sales orders of $60 million, revenue between $27 million and $30 million, OpEx growth of less than 15%. And of course, the company expects to be cash flow positive in FY '24.

So I think with that, Francoise, I will hand it back over to you, and maybe we have some questions I can answer.

[Francoise Dixon, executive]

Our first questions have come from Madeleine Williams at Wilsons via e-mail, and I'll start with a couple, then we'll go back to them at the end.

First of all, can you provide any more color on the additional sales orders in the quarter, [ hence state ] accounted for $3.1 million, any other renewals of note?

[Michael Lampron, executive]

I mean, yes, we've had some additional renewals in there, and I'm not really sure how to answer that from -- of no perspective. I mean, we definitely had some renewals in there and we've had for the Year 3 net new customers. So not just in Q3 but across the fiscal year, we've got 3. We expect to get 3 to 4 for the year. And then the rest of our sales orders numbers are made up of expansions, add-ons and renewals.

So I think the other note I would make to that question is just -- not just Q3, but just -- since we're talking about renewals, just keep in mind that we're towards the end of the renewal schedule for FY '24. We maybe have one more significant renewal left for the year. And then maybe one small minor for the year, but renewals are just about over for the year. So I think that's really the comments for the Q3 sales orders.

[Francoise Dixon, executive]

How are the new contract wins tracking? I spoke to -- this is from Madeleine. You spoke 2 new material contract wins previously -- you spoke 2 new material contract wins previously. Are they still expected to fall before FY '24 end?

[Michael Lampron, executive]

Yes. Look, we brought in 3 net new logos so far in the year. We have a pipeline that we're continuing to work with deals that could certainly fall in this quarter that are net new logos. I'm not making a promise that they will. I said that we'd bring in 3 to 4 net new logos this year. I think we're at 3. Actually, I think I said 2 to 4. I think we're at 3, and there's certainly a possibility that we'll get to that high end of 4 before the end of the fiscal.

[Francoise Dixon, executive]

And this will go into the chat. We have a question from Peter Cooper. Who are the new customers won in Q3 FY '24?

[Michael Lampron, executive]

I'm not sure by name who they are. Dyan, do you know?

[Dyan O'Herne, executive]

The new customer was Nuvodia, a U.S. radiology.

[Michael Lampron, executive]

I think like a couple of different names, yes. That's right. It's a teleradiology firm.

[Francoise Dixon, executive]

And we have another question from Peter Cooper. Is Mach7 undertaking any additional internal programs to improve on the recent class rankings?

[Michael Lampron, executive]

Yes, a lot actually. We've been spending a considerable amount of time on that. We have a company-wide initiative that we've instituted and it's developed a lot of different programs from each department and every department is providing monthly updates to that. We're taking that really seriously and everything from sales through product, through development, of course, all of our customer service areas, everyone has got independent departmental initiatives. Something small, as an example, that just went live this week. We've never taken support calls directly. We always have used a call center for our support calls. But just this week, we started taking direct calls from our customers. So something simple like that, that can really make a big difference in providing that sort of a more intimate customer support.

[Francoise Dixon, executive]

Our next question comes from Ron Shamgar. Do you expect Q4 standalone to be cash flow positive?

[Michael Lampron, executive]

Q4 standalone, yes.

[Francoise Dixon, executive]

We have a question from Adam Tanner. Can you give an update on the VA contract implementation and extension?

[Michael Lampron, executive]

I mean, there's nothing that I can say that's overly meaningful in regard to the VA beyond the fact that, look, we're continuing to move forward. It's an ongoing deployment for NTP. There are a lot of various tentacles that are growing out of the VA that our General Manager is working through. But just from a specific deployment perspective, we're working through all the integrations. We're working through the deployment. I think the last update I gave everyone was that we expected the VA to go live sometime in the first half of FY '25, and that would remain to be the case.

[Francoise Dixon, executive]

We have a question from Wei Sim, Jefferies. Can you talk about how our 3 major anchors ties into investment outlook beyond FY '24?

[Michael Lampron, executive]

Well, look, I think I want to be a little careful here because we have not done a lot of our financial planning for FY '25. But what I can say is this in regard to those strategic anchors. Those are very important for us to stay competitive in the market. And those are areas that are going to highlight both product innovation from the perspective of new things that the customers want to need into the future. It's going to make us more profitable when we think of the service and supportability. We think about how important it is to bring our customers live the fastest way as possible. So the more streamlined we can make our product, the more easily deployable we can make our product, the faster we can convert that CARR, right? That's important to our business.

And from an interoperability perspective, again, I think that especially as we start to think of AI and the different aspects that AI is going to play across the enterprise imaging, the ability for us to have really impactful APIs and integration points for other partners will become hugely valuable to our customers. All of those things impact shareholder value. All of those things impact our company and our profitability and future NPAT.

[Francoise Dixon, executive]

Next question comes from [ Stuart Powell ] at Morgans. Hi Mike, congratulations on the results. Any update on the VA contract and the hospital of Hong Kong? Also, any update on your progress in the Middle East?

[Michael Lampron, executive]

Yes. I'll take those in opposite or I'll say that, I think I've already provided some feedback on the VA there. But in regard to Hong Kong and in regard to the Middle East, Hong Kong is doing great. They did sign a renewal this year. So our relationship with Hong Kong remains steadfast and they remain an anchor to the region for us, very, very important customer for us and to hold down that APAC region.

In regard to the Middle East, we continue to make progress, as I've said before, to everyone. The Middle East is an area where you're never quite sure of the timing of deals. You'll continue to work the deals and continue to wish for the best from a timing perspective, but most of these are national or government-funded programs, and sometimes they get caught up with inertia that's being developed internally. So timing is tough, but we're definitely making progress, and we've got a few good deals that are pretty far along in the pipeline.

[Francoise Dixon, executive]

Our next question comes from Carlos Gil of Microequities. Could you give us a little color around the active pipeline and how it is shaping FY '25?

[Michael Lampron, executive]

I guess what I can say about FY '25 pipeline, we started to see this at RSNA of this past year. We're seeing a resurgence of interest around VNA. And even though the concept of enterprise imaging has been around for a decade, it has been slow moving and people have been looking more at their "departmental PACS replacements", rather than having a true VNA and an enterprise philosophy. We're starting to see more and more shifts towards that true enterprise perspective. And that's driving some increases in our sales pipeline. At the very least, it's driving interest in Mach7, interest from an RFP perspective, interest from conversational perspective and getting us in the door. We're seeing more and more people trying to kick the tires of what a true enterprise solution looks like. So I think that just from an industry trending perspective, that's a good sign of a pipeline and funnel build into FY '25 and FY '26.

[Francoise Dixon, executive]

We have a couple more questions from that -- Williams. First of all, you mentioned that beyond FY '24, the company is focusing on investing in our people, processes and tools to further differentiate ourselves from our competitors. Is there anything new here? Or is this aligned with previous commentary of ongoing product development?

[Michael Lampron, executive]

Yes. Look, it continues to stay aligned. What I will say is that I think that appropriately, we've been very focused on our OpEx and our operating cash flow. And what I'm saying here is that as our business continues to grow, one of the things we have to be super cautious of from a people perspective primarily is that we don't allow ourselves to get put into a hole, right? Where we see investment being necessary for us to hit those strategic anchors, to ensure the customer intimacy, what we're feeling right now is that we've just had this wonderful renewal year where our customers have continued to make commitments to us. And it allows us to start to take a look at what's it going to take for us to continue to be successful over the next several years as these renewals run through. And part of that is keeping up with our staff. Part of that is keeping up with our tools, changing our process to become as efficient and profitable as we can, but we'll continue to invest in the business.

So I wouldn't say there's anything radically new or different there than what we've done historically. I would just say that it's not something that I guess I've really talked a lot about. And I think as we go into FY '25, I want to spend a little bit more time talking about those initiatives and everyone really, really understands how Mach7 is different and the things we're doing for the industry, and what it means to us and what it means for our customers and what it will ultimately mean for shareholders.

[Francoise Dixon, executive]

I have another question from Madeleine. The rest of the world contract opportunities recently at a conference in the Middle East, any developments?

[Michael Lampron, executive]

Yes. Like I just said, we do have several deals that were -- that we think are progressing well through our funnel from the Middle East. The timing is just tricky for me to make a commitment around it. I'm just not sure when they're going to hit, but I can tell you that the APAC team feels very strongly with their funnel build, and they feel really good about the opportunities that they have in their pipeline right now.

[Francoise Dixon, executive]

And we have a couple of further questions from Wei Sim. Can you talk about how we view pipeline and get conviction around the strength of our pipeline?

[Michael Lampron, executive]

Look, we don't specifically talk about, and we're not ever going to talk about like named accounts in our pipeline and our overall funnel, right? The funnel changes every week. The funnel changes every month. It changes every quarter. And so I can only say that the funnel is a living, breathing entity, right? We have various different deals that we're working for the long term, right? These are 12 to 18 months. And the VA's case, it was 2 years before these things converted to actual orders. So we continue to foster our relationships there. We continue to build that pipeline, and we just continue to cycle through. And I think the best way for people to feel good about our sales pipeline is to look historically at our sales numbers the last few years.

And I think that we've done an impressive job hitting our metrics and hitting our goals over the last few years on sales orders perspective and continue to see good growth. And this year is no exception to that, where I think we're delivering an extra $10 million to $12 million this year over where we thought we would at the beginning of the year because we've had such a good sales order year. Yes, some of that's renewals for sure, right? But those renewals are equally as important as net new customers, and that will be the foundation for our business. So super important. But I think beyond that, it's hard for me to really give more in-depth explanation of our funnel.

[Francoise Dixon, executive]

From Wei Sim again. Appreciate we haven't done the budgeting for FY '25. But would the general thought process be to remain cash flow positive in FY '25?

[Michael Lampron, executive]

Yes. Look, absolutely, we want to be. Look, again, please do keep in mind, we've not provided any FY '25 guidance to the stage, right? And I'm not prepared today to give an FY '25 guidance. But we absolutely are always looking at cash, that's been a fundamental value for our business for the last several years, and we will intend to continue to be cash flow positive as things progress.

[Francoise Dixon, executive]

Well, Mark, we have no further questions at this time. So I'll hand back to you for closing remarks. Actually, Mike, sorry, one just come in at the last minute from [ Ivan Tenev ]. Do you expect capital expenditure to remain around 15% going forward for the next couple of years?

[Michael Lampron, executive]

Yes, that gets into the same thing, I think, Ivan. We're just -- we're not prepared just yet to provide FY '25 guidance, so I hesitate to say anything about that. What I will say is that we're happy with this year's results from an operating expense perspective and keeping things where we were. And I would expect for us to apply the same level of management to our OpEx moving into the future -- for future fiscal years.

[Francoise Dixon, executive]

Great. Now over to you to close, Mike.

[Michael Lampron, executive]

All right. Well, thanks, everyone, for all the great questions. Hopefully, this was helpful for everyone. And as always, if you have any questions or need more follow-up, Francoise is always here to help. So thank you all.