Mach7 Technologies Ltd

ASX:M7T

Earnings Call Analysis

Earnings Call Transcript 2024-Q4

[Francoise Dixon, executive]

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 Q4 results. We will then open it up for questions, which will be answered by Mike and our CFO, Dyan O'Herne. [Operator Instructions]

I'll now hand over to Mike for the Q4 update.

[Michael Lampron, executive]

Thank you, Francoise, and hello, everyone. Welcome to our FY '24 Q4 business update. Today, we're going to cover a general business update as well as the results for Q4. We'll host another update for the full fiscal year '24 results on the 28th of August. I will, however, touch on a couple of milestones for the fiscal year in today's comments, since it's hard not to.

So we'll start off with the highlights for the quarter. Sales orders were $4.4 million in Q4, up 37% on prior corresponding period. Contracted annual recurring revenue rose to $27.9 million, up 35% on PCP. ARR grew as we bring more clients live. At the end of Q4, we were at $22 million, up 29% on PCP. And cash on hand of $26.2 million as of the 30th of June, that's up about 12%.

And I would say, arguably, the most important message of the announcement was that we met our FY '24 cash guidance to be cash flow positive. In fact, we are operating cash flow positive on the year by about $3.2 million.

So let's start off by discussing sales orders to work our way through sales orders and revenue. Over the course of the last year, we were oftentimes we're discussing this transition to a predominantly recurring revenue model, right?

The discussion sort of as it's taken hold, the attentions turned more and more to a conversion of sales orders and revenue metrics and less about the actual sales orders. However, my opinion still remains that sales orders are the beginning of great things to come for any company.

So our sales orders for Q4 were $4.4 million. About average for what is traditionally a very lumpy sales cycle for us. When looked at on an annual basis over time, you'll see that lumpiness in the chart that was provided in the release.

However, I think the important part here is it brought our total sales orders number to $61.3 million for the fiscal year. That is a 52% growth year-over-year, and it's in line with our revised guidance that we provided in January.

In this particular year, I would point out that the metric for us specifically is also a good metric to show our customer satisfaction and customer loyalty. Many of our sales orders are what I call same-store sales and part of our land-and-expand strategy. And as we see success there, we see sticky, reliable nature of our ARR.

So in Q4, we realized that $4.4 million in sales orders and pleasingly out of that, $3 million of it will fall under recurring revenue with a small number of capital licenses being purchased at about $500,000. The remaining amount of about $900,000 was in professional services.

A couple of other ways of looking at this. Another way of looking at it is that renewals accounted for $2.6 million in add-ons and expansions, about $1.8 million. Looking at the same metrics across the year, you'll see that renewals in FY '24 accounted for about 61% of our sales or $37.5 million, along with new logos accounting for $13.2 million or 22%. Lastly, with add-ons and expansions of $10.6 million. Just a couple of different ways of looking at the numbers.

At this stage, we're seeing the vast majority of our agreements coming into us as subscription licenses. And as a refresher for everyone, we don't dictate to our customers the model they use, right? We offer both the capital and subscription pricing to our customers. I'd say even further, our pricing and business model is something that is 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 of the sales cycle, which, again, is around 12 to 18 months representing an almost 80-20 mix at this stage, subscription to capital. So I feel comfortable saying to all of you that you can count on most opportunities moving forward to be subscription with just the occasional capital license.

There is potential to see more capital licensing coming out of the APAC, Middle East and North America. But frankly, even that geography and the industry there is shifting towards subscription there as well, just maybe not quite at the same pace.

So next up, we'll talk a bit about revenue. Overall, for Q4, we did $7.6 million of revenue, which from an unaudited perspective, means we'll end the fiscal year at a little over $29 million, which is the high end of our revised guidance for -- from January of '24.

Annual recurring revenue, and then we'll talk a little bit about the contracted recurring revenue for the ARR. And as a reminder, we calculate this by annualizing the revenue earned from subscription and support and maintenance fees.

We're currently generating $22 million in recurring revenue at the end of Q4. This run rate was slightly lower than the end of March due to attrition and some foreign exchange movements. ARR was $5 million or 29% higher when compared to PCP. That attrition can be attributed to a distributor that had only 1 client that is no longer renewing that component with the client. The remaining attrition can be largely attributed to exchange rate.

On the contracted recurring revenue side, CARR was $27.9 million at the end of Q4. CARR calculated by taking the $22 million of ARR plus the fees for contracts that we have signed but customers have not yet achieved first productive use, which either would be the trigger point for a support and maintenance agreement or the trigger point for subscription licenses to begin.

At this point in time, that represents about $5.9 million that backlog and there are contracts that we are working to bring live, right? And they represent different products, different rollouts, et cetera. So there's no real rule of thumb in regard to how long it takes us to convert this backlog to ARR.

However, I will say that backlog is healthy for a company. I mean, frankly, it's essential to have a backlog. If we didn't, that would mean our services team is outpacing our sales team, and that's not what we want to see. And so we welcome having a comfortable backlog. Our CARR is up about $7.3 million or 35% on PCP.

So moving from revenue to cash flow. Cash receipts from customers in Q4 were $10.5 million. That's consistent with what it was at the same period last year. 19% higher than Q3 of this fiscal year. So Q4 is generally a good quarter for us from a cash receipts perspective. Has been that way for the last couple of years. Total cash receipts from customers in FY '24 were $34.9 million, up 40% on FY '23.

With this, we're also reporting a positive operating cash flow of $2 million in Q4, which gives us a $3.2 million gap on the fiscal year. We think of this as a pretty major milestone for us. The fact that it occurred at the same time we went into a predominantly subscription sales model. We're always talking about how we try our very best to take a disciplined approach to our spending. And this fiscal year has been no different.

We ensure that we spend where necessary for growth and we pay close attention to our overall expenses as a business and we do that year-over-year. And for this year, we're really quite excited to be operating cash flow positive.

Another part of paying attention to these numbers is the fact that this year, this -- we're just announcing this for the first time that the Board has decided to capitalize development costs related to specific R&D projects. In this case, for this fiscal year, we had $100,000 of development costs that were incurred at the end of March.

We will further capitalize another $100,000 of costs in Q4, bringing the total capitalized cost to $200,000 for FY '24. So not a very -- not a major expense by any stretch, right? This has been related to a very specific project and any further capitalization that we do would be associated to very specific projects as well.

In total, for this current project, we would expect to spend about $600,000. And we have a great end of year from a strong financial position with no debt and $26.2 million of cash on hand as of the 30th of June.

So sort of moving on to some management changes and my outlook. As noted in our release, Ravi Krishnan, who has been our General Manager for the APAC/Middle East region has resigned from Mach7, and he'll be leaving the company at the end of September.

Ravi has been an important part of our business. His efforts will have a lasting contribution to our Asia and Middle East presence as well as the overall company. He's been ingrained in the company for more years than I, and he's been a pleasure to be able to work with. He's been a big advocate of the business. And the only thing I can say is that as sad as we are to see him leave, we are equally excited to see Sathyan step into the vacancy.

Sathyan was brought into the business by Ravi, and he has been working side-by-side with him over the past year. So this is a good time to pass the torch over to Sathyan, and we look forward to his leadership and what I'm sure will be a very smooth transition for our customers and our employees in the region.

And as we look towards the future, I mean, not much has changed quarter-over-quarter in our industry. The medical imaging market continues to be highly fragmented market that's going through an ongoing shift in North America, and frankly, other geographies as well from what has traditionally been a mostly acute care market to an ambulatory market.

The need for imaging is growing by the day. With advancements in technology, clinicians need more and more data. And giving clinicians access to this data and enabling them to provide the best care possible gives purpose to our business, and this is a core belief that we have. We believe in our contribution to have a positive and ever-changing impact to the standard of care across the globe, and this matches perfectly with our purpose statement as a business.

So just as a reminder, I threw out a lot of metrics this morning, so I just want to go through this. And of course, this is from an unaudited perspective, but some things to keep in mind.

Sales orders grew 52% over FY '23. CARR grew 35% over FY '23. ARR grew 29% over FY '23, and cash grew 12% to its highest level in 4 years. We're operating cash flow positive in Q4 and for FY '24 by $3.2 million.

A great result, I think, for Q4 and a great result for FY '24. We will be releasing our audited FY '24 results on the 28th of August. And please refer to that ASX announcement that was issued on the 11th of July for further details on that.

Think, Francoise, with that, let's open it up to questions that we may have. Francoise, you're on mute.

[Francoise Dixon, executive]

Thanks, Mike. Our first question was received by email from [ Mike Goodson ] . How is Mach7's experience at SIIM '24?

[Michael Lampron, executive]

Good question. So SIIM is one of the 2 major trade shows that we go to. It's significantly smaller than RSNA, right? But SIIM's a great show. It was in Maryland this year. The great thing about the show is that you have a captive audience. People can't really escape you, right? It's a much more smaller intimate show.

It was really great to see a bunch of partners, potential business partners, current business partners. We had a number of leads. I think that our leads coming out of the show was over 50 leads on the show. So it was definitely everything that we would hope for it to be and continues to be a great achievement by our sales and marketing teams.

[Francoise Dixon, executive]

Thanks, Mike. We've received several questions on the live chat. To begin, we have a couple from [ Peter Cooper ] . If Mach7 is successful in securing part of the VA Phase 2 contract in FY '25, does Mach7 have enough staff to implement the contract?

[Michael Lampron, executive]

Yes. Good question. Look, staffing is always an ongoing conundrum for every business, right? Whether you have too much, whether you have too little, trying to thread that needle and having just the right amount of staff and adding new staff just before you need it, especially when you need to have a technical team that sort of has some time to ramp up.

But look, we feel comfortable with our current level of staffing. We feel comfortable with what we're doing with the VA right now. Look, we're sort of heads down working with the VA. And as the NTP program goes live, those resources open up for more business to implement more facilities across multiple business.

So we do have a capability of throttling on and off resources through a consulting group that we use to bring contractors onto the team. So we do have a bench of people that we can pull on as necessary that have skills with Mach7. So we'll use them as needed to throttle resources on and off the team.

[Francoise Dixon, executive]

Thanks, Mike. Our second question from Peter Cooper is what is the ARR forecast for FY '25?

[Michael Lampron, executive]

Yes, good question. And I knew we would get a bunch of questions, everyone, on FY '25. But unfortunately, we don't have guidance yet for FY '25. Our guidance on our financial metrics will be released when we release our FY '24 audited results at the end of August. So until then, it's a little difficult for me to really provide any guidance on where our metrics are going to hit for FY '25.

[Francoise Dixon, executive]

Our next question comes from [ Jay ] . How does Mach7 plan to leverage its R&D investments to stay ahead of the competition in the medical imaging software space? And what new product innovations can we expect in the near future?

[Michael Lampron, executive]

Sure. So listen, it is an ever-evolving space, right? And one of the things that we know about enterprise imaging, and we look at this broadly more than just radiology, right, as a business. Enterprise imaging requires integration and interoperability with third party. We don't expect or intend to build all of these feature functionality that our clients need ourselves.

So we will heavily depend on partners. And one of the strengths of this company is our ability to have good integration and good interoperability tools so that our customers can buy best-of-breed products. We can integrate with those products. So that's kind of core to who we are.

Beyond that, when we think of innovation, we have 3 strategic pillars in this company that we're focused on. Cloud enablement is one of them. Service and supportability in our products is the second one. And our third one is integration and interoperability.

So all of our R&D efforts, all of our software development efforts, all of our investment efforts are around those 3 pillars, whether it's investing in people, process, tools, partners, R&D, all of them are focused in those areas. And we look forward to bringing new product and, most importantly, efficient integrations to our customers.

[Francoise Dixon, executive]

Thanks, Mark. Our next question comes from [indiscernible]. Could you please elaborate on the attrition that occurred during the quarter?

[Michael Lampron, executive]

Yes. Look, some bad timing is part of it, but we had a partner who I'm not going to name, but they had a single client that they resold our software to. They've been a client for over 5 years. And they decided we're not going to resell our product to that particular client anymore. So that's where the attrition really came from.

Beyond that, there were some exchange rates that affected the ARR. And of course, CARR. If ARRs affected, CARRs affected, right? So look, on the downside, it's 1 less client that's using our software, a little less revenue there that we miss.

But on the positive side, it opens up an opportunity for us to sell organically to that customer, too, because the customer was still happy with the product. So we'll go after that customer from an organic sales perspective now and have one less hurdle we have to jump over with the reseller.

[Francoise Dixon, executive]

Our next question comes from Jay. How is Mach7 investing in its people, processes and tools to foster innovation and growth? And what measures are in place to attract and retain top talent in the industry?

[Michael Lampron, executive]

Yes, okay. So look, from a tools perspective, tools really affect how people work, particularly in software development, right? So it's everything from what do we use to -- from a code perspective to our product and our stories and how we develop our products to our QA and how we test the product.

We've updated those products over the last 6 months to give our software developers more efficiencies and make them more in alignment with our product management team. So we get them all on a core set of tools across what our full development team really has 2 teams, right? The VNA team and the eUnity team.

The more we can put common tools in place across the group the more efficient we can be. You can't just trade out skill sets, right? You have C++, C#, .NET. It's not all the same on the developer side, but having some common tools and processes is helpful.

On the services side, we've just implemented or we're in the process of implementing a professional services automation tool. That will help from a project management and project deployment perspective, help us keep a closer eye on the metrics that we want to measure in regard to efficiencies there over the course of the next year.

On the support side of the house, we had 2 separate support ticket systems. So you can have a customer who actually had to use 2 separate support ticket systems. We've consolidated that to 1 support system.

And on top of that, we've now started -- we always use the call service in the past, and now we've started to take calls organically here just to do business directly so our customers can call directly into our support line and get a live Mach7 support engineer. So that's just an example of some of the various different things that we've invested in, in the short term.

From a people perspective, you continue to invest in performance reviews, continue to invest in what they want to do as develop as an employee, right? Where do they want to go with their career.

We've started up a new program to measure and monitor where our employees want to take their career so we can make sure that we match them with the right path moving forward. So look, we have about over 100 people in the company now, and our processes are maturing as our company matures.

[Francoise Dixon, executive]

Thanks, Mike. We have a similar question from Scott, but it does have a different focus. Mike, from Scott Power at Morgans. Mike, congratulations on the results. How should we think about the cost base going forwards, specifically attracting or maintaining sales staff?

[Michael Lampron, executive]

Look, I almost look at that as 2 separate questions. Maintaining our cost is one thing, continuing to excite our sales team is another thing. And I think that from a cost perspective, we're in the middle of making our FY '25 budget now.

We're at the final stages of that, and not the final stage of rolling that out to the leadership team. We pick and choose where to make our investments for our employees and for our customers, and we're very judicious about how we do that.

From a sales team perspective, we give them a pretty good latitude in owning their own book of business. If you own a region, you own the region, and you have to come up with a business plan for that region. And so they have a lot of ownership there. And I think that the good sales managers, the good sales leaders, they appreciate that, and they appreciate being able to manage their business.

And I think that's how you maintain excitement for them is you give them good tools, you give them good products, you support them from a sales operations perspective and you let them go and do their job. And that's what they're good at. So I'm excited about where our sales team is right now, and I'm excited about what they're going to be capable of in FY '25.

[Francoise Dixon, executive]

Thanks, Mike. Our next question comes from Melissa Benson at Wilsons. Is there any seasonality in RFPs, particularly in the U.S. market? That is, is the third quarter a busy period post-RSNA? Or are they really lumpy and can arrive at any point?

[Michael Lampron, executive]

Yes. I wish there was some seasonality I can point to, but there is not. It's lumpy. It's been lumpy from the beginning. It's lumpy across the whole industry. There's no -- the end of the calendar year doesn't like get people motivated to do something the end of a budget cycle. Everyone's on the different budget cycle. That doesn't really seem to get people moving RSNA. It's just all over the map, and you'll see that.

And if you look in our release and you look at our sales orders numbers and bear in mind the 12- to 18-month sales cycle, but you'll see that there's not really any rhyme to reason quarter-over-quarter. It's all about timing, and it's all about whatever cycle the independent customers are falling into.

[Francoise Dixon, executive]

Thanks, Mike. Our next question comes from Shuo Yang at Microequities. Given the company is calling out the focus on winning new customers in FY '25, would it indicate there are a number of deals at the final stages of decision-making and you are quietly confident of winning?

[Michael Lampron, executive]

Yes. Great question. Look, we don't talk a lot about our pipeline and funnel because it's -- it changes a lot. It's complicated, right? So we don't talk about numbers. But what I can say is that we have a well-balanced funnel going into FY '25.

We have a pretty disciplined sales cycle that Dave Madaffri has brought to the organization. And it is stratified between those deals that are at the final stages versus early stages.

And we are very confident in our ability to execute in FY '25, we feel good with our funnel. We feel good with our opportunities and we feel that we've got some decent visibility to the market right now. So yes, we are quite confident in our funnel, and we're feeling really good about the year.

[Francoise Dixon, executive]

Our next question comes from [ Lackland Rogers ] . Has there been a reallocation of sales and marketing resources from a renewals focus in FY '24 to a new sales focus in FY '25?

[Michael Lampron, executive]

I wouldn't say that there was a focus one way or the other. It's not like we said to our sales organization, "Look, I want you just to focus on existing customers this year." And we don't have inside sales versus hunters versus -- we don't have a stratification.

Again, what we do is we've got in North America and in APAC, we've got regions. And in every region, we have a sales director who's responsible for the book of business in their region.

They're responsible for growing that book of business, bringing on new business, and they're also responsible for maintaining good relationships with their existing customers that fall into their region. Making sure that they renew, making sure they have add-ons and expansions and making sure that they're well taken care of.

So every manager, every sales director has that region, and they're all looking at ways that they can expand it and at the same time, looking to foster better relationships with our existing customers. So I wouldn't say there's necessarily a focus.

What I would say is that we went through a really large renewal program last year. The renewal program this coming year is not as large, and our sales directors are definitely going to be more focused on net new logos because they're not going to have the sort of the distraction of all the renewals that have to happen, which take a lot of time and effort. Believe it or not, those don't just come.

So you sound like you just get a sales order in the mail, right? I mean they take a lot of effort. So the sales team has done a great job in getting those renewals. I'm very happy and pleased with the effort they put in this past year.

[Francoise Dixon, executive]

Thanks, Mike. Our next question comes from Carlos Gil at Microequities. During FY '24, Mach7 has made a concerted effort to improve its support team capability and reach. Can you see any early tangible benefits of that effort in terms of customer satisfaction or feedback and sales or referrals?

[Michael Lampron, executive]

That's a great question. We have started up internally our own NPS program because we haven't had a good way of sort of objectively measuring some of these things. But I will say this, our class data on the DNA, where anyone who's been watching us, that class ranking kind of dropped down a bit, right?

We did just here in June, it did go up by 3 points. And some of the comments are very pleasing, and it's really around the support organization. So I would say, yes, we are starting to see some tangible evidence like increasing in scores and class.

But then there's more somewhat -- something I can't put a metric or a number to, which is our customer feedback, right? And we're getting great comments from our customers that we're easier to access. They love the fact that they can call and get somebody directly.

We got more and more rigor in regard to how we actually respond to cases, how quickly we can respond to cases, starting to measure some of that turnaround time for cases and what we call time to relief for cases that people call in. So yes, we're starting to see both tangible and intangible evidence of a happier customer base by that investment.

[Francoise Dixon, executive]

Thanks, Mike. Our next question is from [ Ivan Tanner ] . Mike, the share price is at the same level it was 5 years ago. Everything appears to be on track. But do you see any reasons why this is not reflected in the share price? And is this of any concern to management?

[Michael Lampron, executive]

Well, I mean, yes, listen, stock price is always a concern to management. But there's also a point in time where you know you just have to focus on the business and focus on the fundamentals, continue to do what we know is the right thing to do for the business, continue to fundamentally grow a strong business. And you sit back and hope that at some stage, the market rewards you for that work that you do.

You can't manage a business just focused on stock price. But it's certainly depressing from time to time when your stock price doesn't perform the way you wish it would. When the market doesn't respond to what you think is a thriving business, certainly, that's frustrating, sure.

But again, I'm not -- we're not going to manage the business to that frustration. We're going to continue to build a fundamentally strong business, and I'm going to hold out the hope that the market will eventually reward us for growing a really good business.

[Francoise Dixon, executive]

Thanks, Mike. I'll now pause a moment in case there are any final questions.

We have no further questions, Mike, at this time. So I'll hand back to you for closing remarks.

[Michael Lampron, executive]

Great. Yes. Thank you, everyone, for joining. We appreciate the opportunity to reach out to you and have a conversation. And we look forward to releasing our final fiscal year '24 audited financials there on the 28th of August. So thanks again for attending, and we look forward to seeing you again.