Physitrack PLC

STO:PTRK

Earnings Call Transcript 2023-Q1

[Henrik Molin, executive]

Good morning, everybody, and welcome to Physitrack's Q1 2023 Results Webcast. I'm Henrik Molin and I'm the CEO and Co-Founder of Physitrack. I'm joined by Charlotte Goodwin, our CFO. Let's kick this off.I'll give you a little short summary of Q1 with some highlights, and then we'll look at the businesses, and then we'll have Charlotte walk us through some of the financials in detail. Use your Q&A function at the bottom of your screen to ask us questions, and we will answer those as we come to the Q&A session at the end of this call.All right. Let's go. Some nice numbers here at the top of the screen that we can see. 45% growth year-on-year, which is very nice. 36% on an organic basis, which is a real sign of strength here for us, showing that this combination of great entrepreneurs with the great technology is really working out for us. Very happy about that. 23% growth in adjusted EBITDA year-over-year.Some of the highlights, of course, maximizing revenue generation and both Lifecare and Wellness have done very well. Worth pointing out Wellness has grown by over 101%, and given that our last acquisition was on the 6th of May 2022, most of this growth is now coming from organic growth. So it's very nice.Continuing to look at profitability, obviously, is a little bit like driving a car with one foot on the gas and one on the brake. So we plan our hirings, we plan our spend, and we plan our investments very, very closely to be able to achieve the growth with profitability. But we are very pleased here to see that we are at 25% EBITDA margin here for the quarter. And this is in line with what it was in Q4. So carefully optimistic that this is the trough that we've seen there in the margin contraction that comes out of growing a business with a lower margin compared to growing a business with a higher margin with that mix that we have.Now some of the updates from the sides of the business. Let me just kick this off by just showing you the tilt between the 2 divisions there. So looking on the left-hand side, that's our Lifecare division, where we sell technology to healthcare providers around the world, and that's 63% of our business today. On the right side there, we have that with technology that we sell to corporates around the world, that's now 37% of the business. A fun fact, we just passed a $15 million annualized revenue level or run rate, which is a big milestone for us.Looking at the Lifecare here. We have some great revenue growth there that we've seen. It is a diversified set of factors that have driven that revenue. And so we have new users in the ecosystem. We have revenue enhancers, meaning upsells with things that our customers who want to do more, whether with data-driven analysis, custom apps or some of the tools that we offer for remote therapeutic monitoring in the U.S. is something that's become quite big in the last year or so. So using outcomes, data to get bigger reimbursements from Medicare and Medicaid and other payers, that's really driving customers our way for some of our enterprise solutions. Very, very exciting development of that business line.Second point there, we have some ninjas in place, as you know, on our engineering side of things and on the product side of things. We continuously look at improvements, optimizations. And it's so great to have smart people wake up every morning to think about, "What can we do to make things run smoother and faster and at a lower cost base?" So that's very much what we have in place. So we see some great cost drivers there that are coming down.Now third point, there more to come on that. I think in the next quarter PT Courses is getting ready for the launch of the new platform with some great new content and a new brand, PhysiCourses. Of course, SEO and cookie-based advertising and so on will still be based partly on the old brand because there is a lot of recognition there, but PhysiCourses is the overall look and feel and naming that we'll have in place there.Something worth pointing out, churn continues to go down. It's a negative trend that we've seen for a long time now, for well over a year. And I'm happy to say that this is continuing as an effect of the really hard work that some very smart people are doing on the product side, on the customer value side of things and, of course, for the input of our excellent engineering team. So very nice to see.Moving over to Wellness, very impressive growth, 101% year-over-year. Champion Health U.K. and Wellnow are the growth locomotives here. They've done incredibly well in this, should we say, extreme product market fit environment that we have there. Now thanks to the macro environment, there are some notable wins. Coca-Cola is a new logo there that we're very happy to collaborate with. And worth mentioning here, great recruitment there with Nick McClelland, and he's heading up the London sales office, seeing some great work there on a wide range of prospects that have come in thanks to Champion Health's excellent social media presence and a lot of the exciting things that are going on with how they cater to corporates.Very strong sales pipeline across the board for Wellness and worth pointing out that the Nordics have done very, very well rebooting that business following the departure of the previous founders of Fysiotest. Now this is Champion Health Nordics. And Alex and Chris have done a tremendous job with that business. So very excited about what's to come there over the next couple of quarters.Just looking at this makes me immensely proud. And as I pointed out, we passed the EUR 15 million annualized revenue milestone or run rate here in this quarter and it has been a tremendous development of our business here. We more or less doubled since the IPO, and it's a sign that we have some very, very hard-working, smart people doing their very, very best to elevate the world's well-being and it's very visible here in the numbers. We have no reason to believe that this growth will come back down anytime soon. And in fact, we are very, very positive about developments to come. That's my little business update, and I will now hand over to Charlotte for some deep dive into the financials. Over to you, Charlotte.

[Charlotte Goodwin, executive]

Thank you very much, Henrik. So I'll start off here with a brief overview of the key financials for the quarter ended March 2023. In the 3 months, we delivered revenue of EUR 3.7 million, up 45% from EUR 2.6 million in the prior year. On a pro forma basis, adjusted for acquisitions, revenue increased by 36% ahead of our medium-term targets.In the quarter, the Physitrack Group delivered adjusted EBITDA of EUR 0.9 million, up 23% from the prior year. And this resulted in adjusted EBITDA margins of 25% compared to 29% in the prior year. This fall year-on-year represents the relatively stronger growth in the wellness businesses, which currently operates at a lower margin than Lifecare.Pleasingly, these adjusted EBITDA margins were flat from Q4 2022, indicating that we have reached the trough in margins last year, slightly sooner than we expected. Total EBITDA has increased 171% from the prior period to EUR 0.7 million as we incur less costs relating to M&A and integration work. Operating cash flow has increased 31% to EUR 0.7 million.Now through to the next slide for a closer look at revenue. On the left here, you can see group revenue by quarter, both on an absolute and a pro forma basis. Total revenue in the quarter has grown by 45% year-on-year and on a pro forma basis by 36%. On the right-hand side here, we can see revenue split by Lifecare and Wellness. In Lifecare, growth in the quarter versus the prior year was 15% on a pro forma basis, driven by growth in the ecosystem and continued upward price momentum. In the Wellness division, we've experienced another quarter of strong pro forma revenue growth of 101%, driven by the U.K. and Europe.Going to the next slide, moving to profit. On the left-hand side here, we see the prior year figures. Last year's Q1 EBITDA was EUR 0.2 million. With adjusting items of EUR 0.5 million stripped out, adjusted EBITDA was EUR 0.7 million. In the current year, EBITDA has risen to EUR 0.7 billion. Within this, there are EUR 0.2 million of nonrecurring adjusting items relating to costs associated with the integration of the acquisitions and the restructure of Fysiotest. With these amounts stripped out, adjusted EBITDA has increased by 23% to EUR 0.9 million.Adjusted EBITDA margins have fallen slightly from 29% last year to 25% in the current year due to the shift of the group towards Wellness revenues, which currently operates at a lower margin, plus investments into future growth. Quarter-on-quarter, these margins are flat. Over the medium term, we expect these to rebound to our target EBITDA margins of 40% to 45%.Through to the next slide. On the left here, we have adjusted EBITDA shown by quarter for the prior year and the current year. On the right, we have EBITDA by division. In Lifecare, which is the longest established division, EBITDA margins are up 49%, in line with the prior year. In the Wellness division, margins are currently at 4%. This is an increase quarter-on-quarter as revenue growth has started to drive margin expansion. The gray bar represents group costs such as Board fees, listing fees and associated advisory fees, and these are flat year-on-year.Moving to the next slide, now looking at cash. We opened the year with a cash position of EUR 0.6 million. Adjusted EBITDA in the period generated EUR 0.9 million and was offset by a working capital movement of EUR 0.3 million and interest payments of EUR 0.1 million. The working capital impact, which is driven by proportionately less of our contracts being sold on a 12-month cash upfront basis. Intangible assets and fixed asset additions were EUR 0.8 million and consists of development of the Lifecare tech platform and investment in the virtual wellness ecosystem.As signaled, this is a fall from previous quarters as one-off projects relating to the integration of acquisitions went away. There were deferred consideration payments in the period of EUR 1.6 million and related M&A and integration costs of EUR 0.2 million. We do not expect to pay any further deferred consideration payments in the current calendar year. In July 2022, we entered into a GBP 5 million revolving credit facility with a 3-year term.In the year, we drew down GBP 2.2 million of this facility. This leaves the group exiting the quarter with cash of EUR 0.7 million, plus remaining undrawn facility of EUR 2.7 million, giving total available liquidity of EUR 3.4 million. We expect this liquidity to be sufficient for the group's requirements.Moving to the next slide, this shows free cash flow by quarter. Due to spend on M&A and integration costs recognized as adjusting items in the P&L and investments in both the Lifecare and Wellness divisions, we've had a net cash burn in recent quarters. As these investments are completed and operating cash flow improves, we'll see this cash burn decrease. In 2023, we expect EBITDA to continue to increase, resulting in improvements in our cash generation. Although there will be quarterly variances in working capital, overall we expect this cash burn to continue to decrease and result in net cash generation before the end of 2023.Through to the next slide, now moving through to group's balance sheet. The first line here indicates internally -- includes the internally developed technology platform as well as intangible assets and goodwill arising on acquisitions. Cash and borrowings we've already covered, and trading and other receivables have increased due to the increase in revenue.Deferred revenue is primarily generated by Physiotools and Champion Health, who bill upfront for 12 months and longer contracts. Deferred tax arises on the intangible asset balances recognized on acquisitions and will unwind over the period of the amortization of these assets. Deferred consideration relates to the Champion Health Plus, [ formerly ] Rehabplus, Fysiotest, Wellnow and Champion Health acquisitions.That's all for me. So I'll pass you back to Henrik. Thank you very much.

[Henrik Molin, executive]

Thank you, Charlotte. I'll just whiz through a couple of slides here on strategy and the outlook and what we can expect from our segment. And then we'll pass on to Q&A.In terms of the wellness strategy, I thought it would be good to reiterate why this is such an exciting place to be. Just from a macro point of view, this is a segment that's expected to grow very, very nicely here over the next few years. And this opportunity just on a macro level represents something very significant for us as a business.And I'm not saying that we expect to be a large percentage of this EUR 1 trillion by 2028, but what I'm saying here is that if we can maintain a competitive position in this target market, the whole business is expected to grow just on the basis of macro. If we are, in addition to that, very, very competitive and can be a market leader in several geos, well, then the macro plus the micro factors will drive this development of the wellness segment into to a very, very interesting place for us as a business.Now if you look at some of this trends that we see in the market here -- and I'll just whiz through this one by one. On the top level here, the first line, continued maturity and adoption of digital technologies. And this is a strong trend that's continued to be driven by the consumer side of things. So consumers are great in asking their healthcare providers and asking their companies to get more savvy with technology. And that's very much driving the development and investments into the space, where, in a lot of places, it's very, very important to have digital technology and have a road map so that you can be competitive.And of course, as we discussed previously, consumers are very aware of the fact that having 5 or 6 apps that do 5 or 6 different things, that's a pretty clunky way to do things these days, and there's a need for this holistic approach in app development where you can have those 5 or 6 things run in the same app ecosystem, which we do both on the Lifecare side and on the Champion Health side of things. Very interesting there.Second point, cost reductions. This is very important, particularly in public healthcare. It's a trend that's really never going away. But of course, now in this type of challenged climate where you have price adjustments due to the inflationary environment, this is something that's also very important in terms of finding efficiencies and finding increased productivity, et cetera, that can drive costs down, both for corporates and on the healthcare side of things. And that's very, very important for us in terms of how we look at these things in our sales process and how we communicate.The third point there, employee well-being is a competitive advantage. We hear a lot of stories about companies letting go of staff to reduce their cost base to respond to this challenging macroeconomic climate. But we don't -- we hear less things about the desire to retain the staff that you really want to invest in and the people that who are actually going to continue running this business and achieving growth and weathering the storm here. That's an incredible challenge for those individuals. These are companies that run the same amount of business but with fewer people. And to support those brave and hard-working people, you need to invest in well-being solutions. And it's very much something that's turning into a competitive advantage for our customers. So of course, this is something that's driving demand.Last but not least, connecting the dots there between the actions that you do on the well-being side with the outcomes of those using data is what's -- connecting the dots is something that's incredibly important out there in the corporate world. And the plug-and-play nature of a solution like Champion Health is something that's providing these tools in a very, very quick and easy way for a lot of these corporates. And that increased demand is certainly something that we are very good at catering to.I'm not going to walk you through all of these points here on the value proposition because we've covered most of them, but continue to have that holistic focus with great technology is something that's really helping us power through that product market fit. It's quite extreme in some places of the business as we've seen with those growth numbers.And on the second point there, we are really, really well-positioned there in the macro environment and we're doing exactly what's needed here for a lot of corporates and also for a lot of our healthcare provider customers there.We are a robust company. We are widely diversified in terms of our revenue streams, not just with the 2 divisions, Lifecare and Wellness, but also within the divisions, looking at both segmental diversification, catering to enterprises and small to mid-size businesses.Looking at it geographically, where Physitrack is available in 15 markets, that's also something that will be translated into Champion Health in terms of localization into several markets just to create that robustness, the diversification of revenue streams. And of course, what this leads to is an all-weather type business, and not just because of the commercial climate, but the way that it's set up with that nice diversification across product and geos and market segments.Last slide here, just reiterating our financial goals there on the right side. We are expecting to continue delivering growth around that 30% mark over the foreseeable future. We see no reason to believe that, that growth pace is going to decrease anytime soon. Very, very interesting place to be with our business. On the profit margin side, as I said in the -- at the start of this, running this business in this type of environment where growth is really, really high, it is like driving a car with one foot on the gas and one on the brakes. So we are watching our margins, we are watching profitability. We make really informed choices and priorities based on the data that we see from the different parts of the business.Over time, we are confident this will lead to margins coming up overall with the business where they are in the Lifecare segment, which is 40% to 45%.And that's it in terms of our little presentation there. So let me just see what's here in the Q&A side of things. I'm just going to pin us to the screen here so that you can watch us both as we answer questions.

[Henrik Molin, executive]

So we have a question here. Can we expect any new enterprise deals for Champion this year? Can you give us any info regarding that? So that's a 2-part question. So I will answer that.The answer is, yes, we can expect new enterprise deals for Champion. This is, in fact, something that is happening on a regular basis, because that is exactly what they do. They are quite enterprise-focused. We only recently diversified into SMEs or small-to-midsized businesses. And although we don't talk about these things in the form of press releases, our customers are quite secretive in a lot of ways. This is a competitive advantage after all. There is a steady deal flow, a lot of prospects and a lot of things going on there.Second part of that question. Do you still think that we will see margins double up and 100% growth in the Wellness segment by the end of 2023?Now -- so these are very specific questions in terms of doubling up margins and 100% growth. So I can't answer to those and being specific. But we are seeing a great trend there for the margin expansion. We're seeing that these very clever entrepreneurs that are onboard and running that business are doing a great job accelerating that businesses. It's keeping one foot on the brake, making sound decisions in terms of investing in people and in staff and technology and anything that just underpins this tremendous growth. So we're very confident that the margin expansion will continue and it will hit levels of where it should be with this year. So that's 10%, 12%, 15% of where that could be.100% growth in the Wellness segment. From here, we certainly will continue to see very strong growth. This is exactly where we are right now.Second question here. And I would invite Charlotte to answer this. How should we think about OpEx development during 2023?

[Charlotte Goodwin, executive]

Yes, of course. So on the OpEx side, as you'll have seen, we'll expect margins now to at least remain where they are and then start to expand further into the year. And that sort of logically follows the OpEx. Therefore, we'll grow as the year goes on as the group grows, but it will not grow as quickly as revenue grows. So we start to see those margins coming up.

[Henrik Molin, executive]

And I should add that we feel that we have the crew on board. We have a great team on board that can achieve these goals of ours of growth and profitability. So we always keep an ear to the ground in terms of interesting people that are available to us. But in terms of the very senior headcounts and the big names, names like Nick McClelland, we're unlikely to make any of those bigger recruitments this year.But that said, on the sales side of things, notably in Champion, we are growing that team. We are growing that footprint here in London with that great in-person office and very dynamic sales culture. So there will be some incremental recruitments, but nothing really, really big. We feel that the cost base is quite solid where it is. And that means with continued growth, with nice margin on those products, we'll see nice margin expansion.Last question there. Did I interpret you correctly that you expect Q1 to be the margin trough?And the answer to that is yes. And I will leave to Charlotte to elaborate on that if she wants to.

[Charlotte Goodwin, executive]

Yes, yes. I mean I think -- probably Q4 last year given that was the point that we hit the 25. But yes, we are pleased to see that, that margin decrease has now leveled out.

[Henrik Molin, executive]

We have another question here. Do you expect to raise any additional capital or any additional debt? Or does the liquidity that you have -- is the liquidity that you'll have sufficient to see you through your growth and profitability goals?And the answer to that is, yes, we don't expect any additional cap raises or debt raises. And what we have here is sufficient for us to be able to accelerate the way that we have planned.All right. And we'll open up if there are any additional questions. And we'll give that a few seconds. And if not, thank you very much for watching this webcast. The report will be available on physitrackgroup.com momentarily alongside a replay of this if you want to watch it again.Thank you very much, everybody, and have a great day.