Mach7 Technologies Ltd

ASX:M7T

Earnings Call Transcript 2022-Q4

[Unknown Executive]

Good morning, and welcome to Mach7's investor webinar to discuss this morning's fourth quarter and FY '22 business update. On today's webinar, we have CEO Mike Lampron and CFO Steve Parkes who will cover today's release on the ASX. To ask a question, please submit them through the Q&A at the bottom of the screen, and we will endeavor to get through as many of them as possible.

I will now hand it over to Mike.

[Michael Lampron, executive]

Thank you, [ Ben ]. Hi, everyone, and thank you for joining us for today's Q4 review and general business update. After I get through this update, we will be taking some questions. So please do ask as many questions as you can.

All in all, this was a very pleasing quarter from Mach7, had a great result. In this quarterly update, we are giving you a glimpse of some financial metrics for the fiscal year. Please remember that all results are preliminary and pending audited financials before being finalized. So we'll start off with some financial highlights.

For Q4, we recorded $6.4 million in sales orders. And for the second year in a row, we will achieve record-breaking sales orders of $33.2 million, showing around 30% growth year-over-year. We recorded record cash receipts of $9.7 million in Q4, giving us a total of $28.2 million on the year. And we had a positive operating cash of $5.2 million in Q4, giving us a total of $6.7 million positive movement on the year, representing a huge improvement year-over-year.

And we have cash on hand, $25.8 million. That's up from $20.6 million at the end of Q3. We now have an ARR run rate of $14.4 million, and we expect to have between $26.5 million to $27.5 million in revenue when we return to you with audited financials.

And to round out the quarter, we notified everyone that we did have a case of dismissal for the pending patent infringement case. We'll talk a little bit about that and what that means for the business as well.

So as we've indicated in the past, we believe sales orders are a good metric to measure how our business is progressing. The timing of cash receipts, revenue continue to be varied quarter-over-quarter. Both cash and revenue can be affected by contract milestones, revenue recognition rules and continued diversity between capital and subscription agreements. This gives us some variable monthly over month (sic) [ month-over-month ] or quarter-over-quarter, and it's more of a reflection of timing than progress. So we really encourage sales orders to be a great metric for you to measure our progress against.

From a sales orders perspective, we have provided more detail around Q4 and our sales order results in the release. But at a high level, I thought I'd go through this for everyone. So for the fourth quarter, we did $6.4 million in sales orders. We break this down to $1.5 million for new customers, $3.2 million with existing customers who signed renewals, $400,000 for add-on orders and $1.3 million in expansions. These are license fees for people who are extending the use of the platform for more than their existing volume licenses. Just as a reminder, the way we license our software is based on exam volume.

For the year, that means we're going to record around $33.2 million in sales orders. $19.4 million of that is in sales that will be recurring revenue. That's support and maintenance contracts and subscription licenses. $10.5 million of it is in capital software license and $3.3 million in professional services. Again, we broke this down further in our update to give you an idea of where the sales orders are being generated.

On the year, we're looking closer to a 60-40 split in regards to recurring revenue versus onetime capital revenue. indicating, again, further movement on our larger goal of covering our OpEx with ARR. On the topic of ARR and contracted annual recurring revenue, CAR, or contracted annual recurring revenue, is comprised of support and maintenance fees for capital contracts and license fees for subscription contracts. So when our customers achieve what we call first productive use in their production systems, Mach7 begins to recognize either that support and maintenance and/or the subscription fees as revenue. But until first productive use is achieved, the support and subscription fees are included in the contracted annual recurring revenue number. CAR currently is $17.3 million, that's comprised of $14.4 million of our annual recurring revenue and then $2.9 million of essentially what you can think of as deferred revenue.

On the cash front, we had a terrific cash receipts this quarter and then, frankly, for the year, $9.7 million collected in Q4 and $28.2 million on the year. This is a result of the advanced sort of upfront nature of customer payments for software where revenue has yet to be recognized. This also should give everybody a little bit of comfort in the fact that our CAR number will be realized over time as clients have paid a considerable amount of their fees upfront. Traditionally, we ask for around 50% of the software license fees to be paid upfront.

This is the third year for us of having positive cash flow, and we are maintaining a strong financial position with $25.8 million cash on hand and continuing with no debt.

From a revenue perspective this quarter, we had $5.9 million, and is forecasted to be between $26.5 million and $27.5 million. We're leaving a little bit of room for audited financials to be finalized there. This will represent an approximate growth of around 40%, 42% year-over-year from FY '21, which was at $19.1 million.

Looking forward to FY '23, the company expects to see strong double-digit growth again. This is underpinned by a delay in revenue recognition with Trinity and Adventist West, 2 accounts that we spoke about in the past who have had delays in revenue just due to rollout strategy and customer requests.

Finally, we did announce the dismissal of the patent litigation lawsuit that was filed against us by AI Vis. We indicated prior to the announcement that we really don't allow this to be a distraction to our business. But nonetheless, it's pleasing to put this behind us. AI Vis does have until the 8th of August to appeal the decision. And I think the other thing of note for folks to understand is that, to date, we did have shared counsel with Nuance. So we have accumulated less than $75,000 in legal fees associated to this case. So this has not been either a distraction to us operationally nor a material event for us financially. There still could be additional legal fees to come. We'll see. But if things stay the course, then this should be behind us and really not that painful from a financial perspective.

So I think that will run through our quarterly update and hopefully give you some great information on the fiscal year, a little bit of insight into FY '23. And I think with that, [ Ben ], we can maybe move to questions and see what questions are out there.

[Unknown Executive]

Yes. Thanks, Mike. A reminder, if you would like to ask a question, please do so by the Q&A button on the screen.

Our first question, Mike and Steve, could you please outline how Mach7 passes cost inflation to its customers, for example, annual CPI increase? And are there any other contractual mechanisms for increasing prices?

[Michael Lampron, executive]

Yes, sure. Most of our contracts do allow for CPI increases, particularly for support and maintenance. However, I will say that most of those agreements do have a cap on them from right around 2.5% to 3%, typically. Year-over-year, this cap has never been a problem for us. I mean, frankly, the inflation rate is really high this year, but I don't think that we could reasonably or fairly tell our customers that they're going to have an 8% to 10% increase in support and maintenance costs with no warning.

So what we have done is we've updated our price book this year, and we evaluate our price book every year to ensure it's still accurate and depicts where the industry is as a whole. And we do every year increase by CPI what we can on any of our support and maintenance contracts for any contract that allows for it. And we reach -- especially in a case like this, we'll look to achieve the cap on any contracts that do have a cap.

[Unknown Executive]

Thanks, Mike. We have a couple of questions on the AdvaHealth partnership [indiscernible]. So could we please detail more about that partnership and what you see as the opportunities here?

[Michael Lampron, executive]

Sure. Yes. Look, AdvaHealth is a great opportunity for us. They have developed a RIS and PACS cloud platform where they're really targeting more ambulatory space, teleradiology space, space where they can go in and offer a cloud-based solution and try to disrupt the market in regards to the more traditional on-prem solutions to provide these services. They think they can do it in a really cost-effective way. And they have some customers who are very sophisticated and need more advanced tools than what their current software offers. So they have partnered with us, and they will be reselling our eUnity Diagnostic Viewer for those customers that they have that require a more advanced tool set.

I think it's a great opportunity for us. It gives us some ability to potentially investigate the Australian market. They're interested in New Zealand. They also are throughout APAC. So they're in areas either geographically that we're interested in or geographically we're already in. So it has the potential of being a really nice partnership for us, and it looks like it is a great group of folks and a nice company. Look forward to seeing how that partnership goes.

[Unknown Executive]

Thanks, Mike. Question from Jules Cooper of Shaw and Partners. Sales orders were ahead of 30-month guide -- 3-month guide. Sorry. Does this reflect deals you didn't expect to land or just conservatism on timing?

[Michael Lampron, executive]

Yes. It's really about timing. Our deals sometime can work to our advantage and fall into a quarter. And sometimes, we just miss. Not unlike if anyone recalls last fiscal year, shortly after fiscal year-end, we signed our agreement with Trinity and had a really big sales order for Q1. Similar to that, we can get some deals that came in, in Q4. Q4 ended up being a bigger quarter for us than really we anticipated from a sales orders perspective. But certainly, welcome additions.

[Unknown Executive]

Another question. Can you please talk about the pipeline as it currently stands?

[Michael Lampron, executive]

Yes. Look, we don't really provide a lot of guidance specifically on our pipeline. What I can tell you is that we have growth projections in mind for our sales orders year-over-year. And our pipeline has grown by around 30% from May to June, which was really a direct correlation to some new deals that came into our pipeline. New deals usually take 12 to 18 months to percolate. But our pipeline right now is as healthy or healthier than it has ever been. We feel that we have around 3x coverage to our goals in our pipeline. So we're feeling really good about it and we're feeling good about its continued growth. And the quality of the pipeline continues to get better and better. I have a lot of faith in Dave Madaffri, who's come on board, and he's doing a great job offering some discipline to the sales team and making sure that our pipeline, our funnel is really stratified so we can understand this fiscal year versus future fiscal years with our pipeline.

[Unknown Executive]

Thanks, Mike. Another question from Jules Cooper of Shaw and Partners. You have targeted $30 million of sales orders, which is another record, but are you seeing any caution emerge in terms of customer demand related to macro environment?

[Michael Lampron, executive]

What I would say we're seeing from a macro perspective in the market is, no, there's no what I would call kind of layover effect of COVID. But what we're seeing is we're still seeing judicious spending because the hospital systems have got the same questions, the same issues as all of us in business do around inflation. They have the same staff shortages, they have the same inflation for staff, they have creeping costs, just like all the rest of the business out there.

And so they are definitely prioritizing their projects. They're prioritizing their work. They're doing their due diligence. But the one thing for sure is that we're seeing hospital spaces continue to invest in electronic medical capabilities. And I think we're in a sweet spot for that. I think our type of work, our type of software is being prioritized, and I only see that getting better and better for us over the course of the next 2 to 5 years.

[Unknown Executive]

Thanks, Mike. Just another question on the FY '23 sales target of $36 million. What's the mix between renewals, new logos and expansion?

[Michael Lampron, executive]

Yes. I can tell you that from -- our renewals will not be as heavy this fiscal year. It will be more reliant on new customers, which is good. We want to add new names to our book of business. So I would say we'll be weighted towards new customers. Our renewals will be slightly less than we've seen in FY '22. Expansions will very likely still remain a key contributor to our overall sales.

And then from a sort of recurring subscription, recurring in comparison to capital, again, I think we're looking -- we've been around 50-50 from a percentage perspective. And I think we're edging closer to 60-40 towards the side of more subscription and recurring models.

[Unknown Executive]

I just see a couple of questions regarding headcount and retaining staff. So what's the headcount versus 12 months ago and the number of open positions today? And just in that, what are the challenges and solutions to retaining skilled staff?

[Michael Lampron, executive]

We -- our current staffing stands at 86. We do have several open headcount, mostly to help us with either customer support or there is some attrition certainly that we have to make up for but not a lot. I think the trick for retaining staff is really more than salary, right? It's all the things we all know. The retainment has a lot to do with people enjoying where they work, feeling like they have a valuable mission, feeling like they're valued as employees, making sure that they enjoy what they do and making sure that they feel like they have something that they want to fight for in Mach7.

And I think those are all really important contributing factors as much or more than salary. Salary certainly is part of it though. With inflation, employees are taking a hit. And certainly, as a company, we want to be fair and reasonable in our approach to making sure that our employees are taken care of and feel like they're being valued from a financial perspective for the company. So we're doing what we can on that front and building that into our FY '23 budget.

[Unknown Executive]

Thanks, Mike. A couple of questions regarding the pipeline win rate. So what's the win rate of your topline in FY '22 and how that compares to FY '21? And do you see this changing much going forward?

[Michael Lampron, executive]

We haven't seen a lot of fluctuation in our win rate. Win rate continues to be difficult for us to measure because deals have such a long lifespan and they can come and go. They could be active for 4 months, and they can be inactive for 8 months, and they can come back to being active for 4 months. So unless we know that we've lost a deal, then we generally feel that we're still in a deal.

And so it's difficult quarter-over-quarter, year-over-year to really measure that win rate. We used to say to folks that the best way to measure this from a quantitative perspective is by number of RFPs that we're competing against and what's our win rate on RFPs because those deals are deals that we generally know. You're either going to win or lose, and you generally get some concrete data back, one way or the other. So it's a yes or no kind of thing.

I feel like when we were participating in fewer RFPs, we were winning a higher percentage of those RFPs. Now that we're participating in a lot more RFPs, our win rate on that perspective is going down. I think the number we typically use is around 25%, but it definitely fluctuates year-over-year, depending on the quality of the RFPs and whether they're a good fit for us or not.

[Unknown Executive]

Thanks, Mike. So that concludes the Q&A segment. I will now hand it back to Mike for any closing remarks.

[Michael Lampron, executive]

Yes. Thank you, everyone, for joining. I hope that the Q4 update was helpful for you. As always, we appreciate everyone's support of the business, and we look forward to a great fiscal year '23.