Mach7 Technologies Limited (M7T) Earnings Call Transcript

Good morning, and welcome to Mach7's investor webinar to discuss today's FY '22 results. On today's webinar, we have CEO, Mike Lampron; and CFO, Steve Parkes, who will go through the presentation released this morning on the ASX. [Operator Instructions]. And we'll do our best to get through as many of those as possible. I'll now hand it over to Mike.

Thank you, and welcome, everyone, to our FY '22 investor presentation. We're going to start off today with a little bit of business overview. We'll just go through quickly the business and products, our footprint, our partners, value proposition and our revenue models just to ensure that those that are on the call that are new to the stock understand the business, and then we'll jump right into FY '22 results. So the first thing about our product lines at Mach7 is that we fall under the umbrella of enterprise imaging. Enterprise imaging is -- it's a bigger umbrella that encompasses many different -ologies. And it's all really about creating a longitudinal patient record for better patient care. Mach7's component of that enterprise imaging solution really is around the centralization, the storage, the organization of images. That's done through our vendor neutral archive and then the display of that data across the health care enterprise, which is done through our eUnity Viewer. This is common in connecting hospital networks to each other and to facilitate data flow between departments and clinicians even outside of the hospital network. Our product can work in conjunction with other third-party products, other third-party packed products, other third-party EMRs. And we oftentimes work in conjunction rather than as a replacement of those solutions. Occasionally, we do replace solutions, but our goal really is to work in conjunction with the infrastructure that the hospitals have already invested in to try to add value to each of those institutions. When it breaks down to the 3 particular products that we actually sell, it falls under the categories of Enterprise Data Management, which, again, is our vendor neutral archive. That's really the heart of our solution. And it's where everything is stored, and it's where everything is distributed out of that VNA. The Enterprise Diagnostic Viewer is a unique zero-footprint viewer. That's wonderful for the enterprise, meaning there's no software that you have to install on the workstations or on your iPad or on mobile devices. It's a completely zero-footprint HTML5 viewer, fully diagnostic, 100% of the time. Displays high-quality images so that physicians like radiologists can use it for primary diagnosis, but the zero-footprint nature of it also allows it to be really flexible for the enterprise physicians, the referring physicians that are downstream from the radiologists. And then the last component we have is what we call Departmental Workflow Applications. This is our capabilities for interoperability and to really use our VNA and the data that we're collecting and managing as a platform for third-party solutions like AI adoption, centralized worklists. We also sell our own universal worklist, our own quality control tools. And this is really where a lot of the sort of the brains of the workflow and communication occur through our solution. So our target market, you're looking at a graph on the right-hand side here of total addressable market across the world for the radiology IT segments. We did pare out a couple of segments that we don't really participate in, particularly the stand-alone RIS market and the stand-alone image exchange market. We did take those out of this overall number. But to give an idea of the breadth of our product, to the left here is a group of types of customers that we'll sell to, whether it's an IDN, which is sort of our bread and butter; whether it's an independent radiology practice, an independent hospital, a regional hospital, academic imaging center. Those are all types of customers that we sell to. We don't just sell to an academic segment. We don't just sell to an ambulatory segment or in acute care segment, we can sell our products across the breadth of the health care enterprise. We have hospitals who are using our system across the world. There's 150-plus customers, a little closer to 165 at this point, across 15 countries. Some of those countries are through resellers or partners, not directly through Mach7. We have a great partner in Italy, Esaote. We have another great new partner in Australia through AdvaHealth. It is an example of partners who get us into new regions, where we have a great way of giving access primarily to the eUnity Viewer. Again, these partners are really, really important to us. We have 27 partnerships currently. And they really run a breadth as well. InTouch is a telehealth client. DocPanel reads mammography. Esaote is really a cardiology solution. Allscripts is an EMR. Ambra, now owned by Intelerad, uses our viewer for diagnostic reading with more complex clients. Some of our partners, we actually resell their product. ImageMover, we resell their product when the timing is right. Bialogics is a NLP partner of ours who helps with analytics work. So a number of different clients that do -- partners that do a number of different things. We think that this really helps us from a networking perspective to get our software out into the space and to help us win new business. So just a minute about the value propositions of Mach7. So first and foremost, with the Mach7 solution is we want to fit the individual needs of the clients. We don't have a solution in a box, and we don't sell it as a solution in a box. We sell it as a number of individual components that can add up to multiple different solutions. We're selling solutions to our customers. We wanted to fit into their existing technology, and we wanted to scale with the scaling of their business. It's been designed from the enterprise from the ground up, meaning our purpose is to get these medical images and information out from inside of radiology, out from some of these other -ologies and out to the referring physicians, whether it's images that are associated to dermatology, cardiology, ophthalmology. We want to be able to both manage and then serve back out to these clinicians in a meaningful way these images, which can help them with their diagnosis and ultimately helping patient care. The flexible workflows that we introduce are workflows that are around things like point-of-care ultrasound is a great example where we can help the facilities to capture more charges but we can also help the customers by having a more complete medical record. We consider our technology to be a lasting technology. We are, at the end of the day, neutral. And we want to remain neutral. We want to be able to work with third parties. We want people to be able to store their images in our solution, and they can store them there forever. Sort of back to fitting individual needs, we want to solve immediate needs. We definitely believe in the land-and-expand model with our clients where we want to be able to solve and show value to our customers right from the very beginning. We want to make -- we have a lot of faith in our software. We know we can add value. So the moment we start bringing value to the clients, we become a trusted adviser. Once we're a trusted adviser, we can help them on their journey through enterprise imaging, which is very complex, and it includes products across the spectrum. That's the reason we have customer partnerships. Those partnerships, that's part of being on the journey with Mach7 from an enterprise imaging perspective. The flexible contract terms are very important to us. Just as our software is flexible, we want to be flexible as a business. That means that we have 2 primarily different models -- business models. We either have a subscription model, where we have a capital model. We'll talk a little bit about that when we get into the business models. We've considered ourselves to have cutting-edge technology. And I know that everyone considers themselves to have cutting-edge technology. We really truly believe this at Mach7. We're a reasonably new software platform to the industry. We don't have 30 years of spaghetti code that are in the background trying to manage this. We are a very modern technology platform. And we have the added benefit of being a global company, which offers some sense of help to our clients and knowing that we're going to be here tomorrow. We feel that as our business is growing, as our cash is growing, as the size and maturity of our business is growing, as our footprint has grown, it gives our clients some ability to really know that we're going to be here tomorrow, which is important to them. It's important to that partnership. A little bit about our revenue model. We get asked this question quite frequently. So we thought it would be ideal to go through this just for a moment. If you look at our model here and you start off to the left with our sales orders signed and software delivered. That's a license fee. And if it's a capital license, as soon as the sales order is signed, then the software is delivered. As soon as it's delivered, we can recognize 100% of those software fees from a revenue perspective. The contribution then to our CARR number is 20% of the software fees. In this case, in this example, we're saying that we sold $1 million of capital licensed software. That means we would have a $200,000 per annum fee for maintenance and support for the next 5 years, their 5-year license agreements. That same deal from a subscription license perspective, when we deliver the software, we would recognize $0. And we have a much bigger contribution to the CARR and the ARR because we wouldn't be able to recognize that revenue right off the bat. We will recognize that revenue if you go down to where the software is live in first productive use. You see that on the subscription license there, follow along that line. That's when we would begin to recognize the software on a subscription license. Once the customer goes live, we start to recognize the revenue. If that takes 6 months, if that takes 12 months, however long it takes, once the customer is live, that's when we'll begin to recognize that revenue. And you can tell by the total contract value, over 5 years, and you look at the capital license of $2.3 million in this example, and the revenue recognized on a subscription is slightly higher at $2.7 million. We do charge a bit more from a subscription license perspective than we do a capital license perspective. The implementation, professional service fees, they remain the same regardless of software model. That's recognized on a percent complete basis. When -- if you sell someone 100 days of service and you use 50 days of service, then you're recognizing 50% of the revenue associated to those services. So that's a little bit about our model from a capital license and a subscription license perspective. We do not really favor one or the other. We have really been a 50-50 split on capital licenses and versus subscription licenses. It is starting to tend to lean a little bit more towards subscription, at least in the last year, and we see that as a growing trend. We'll talk a little bit about that later, but we definitely can see how that trend will continue as a business. So we'll hop into just the FY '22 results for everyone. Hopefully, the business update is a little helpful to get everyone grounded in what we do, the value that we bring and how we do business. But for our business in FY '22, we did for the second year in a row of a record sales order of $33.2 million. We had record revenue of $27.1 million. Our CARR increased to $17.3 million. Our ARR was $13.4 million, but it's important to recognize this $14.4 million on a run rate. Essentially, that's taking the last month of recurring revenue times in that across 12 months. We had some great contract wins. We'll talk about those in a little bit. Our EBITDA is up to $2.8 million. We've had great cash flow -- positive cash flow again of $6.3 million. And we're in a strong financial position with $25.7 million of cash in the bank and no debt. Great results. So a little bit about our sales orders. You can see to the right, the graph that we've put together for you to show you the subscription versus capital versus professional services. So you get a feel for what makes up that FY '22 sales order number versus FY '21. You could see that the subscription model growing there. That can affect in-year revenue, right, like I discussed with the model. You -- you're not recognizing revenue right upfront. But overall, it's a great value to the company. The other thing that I'll mention on this slide is just the brand recognition. As our sales orders go up and as we increase the number of clients that we're touching, the brand recognition is getting greater. We did release our KLAS rankings this past year, and those KLAS rankings have really helped us get involved with the market. We get more phone calls, more feedback, more meetings set up by consultancies and by potential clients just based off of the fact that we're listed in KLAS. It gives us a bit of good recognition by independent group. We feel like our sales team is the right size. We have a lot of new sales members. We started off with a new sales leader in July of -- just into this fiscal year. We had almost a full replacement of the sales organization until September of '21. So our sales team has been in place for coming up on one year here at the end of September. We feel like we have the right-sized team. It's a great team. They've had great success. Great success from sales orders, great success from building a pipeline, doing an excellent job. Our partnerships are growing. And we've had them contribute $2.8 million this year. We suspect that will go up pretty significantly into FY '23. We have brought on a new partner manager to help us grow those partnerships. And then from a sales order perspective, we're targeting $36 million in FY '23. That was based off of a 20% growth rate with the expected sales orders of $30 million. Of course, we beat that target with $33 million. So when we look at this, we look at $36 million as a floor, not a ceiling from a sales order number for FY '23. So some new customers and some understanding again of the breadth of this. We threw in a chart here to show new versus renewal versus expansions and add-ons. So what this is showing is that we had a number of new deals signed next this past year. And we've had several renewals. Renewals are important. Renewals show that our customers find value in our software and that they want to renew their agreements with us. We feel like we have a very sticky software platform. We know we're adding value in these renewals and these expansions in these add-ons that just underscores the importance of the land-and-expand model and how that works and sort of the satisfaction our customers are having and the value our customers are finding with our software. Changing over to revenue of $27.1 million, up 42%, a great year for us. This was split between the eUnity and the VNA on the right-hand side here, so you can get an understanding of which side of the business brings in revenue. We really look at these 2 product segments. Now on the pricing side, there's a few things to recognize going into this fiscal year and going into part of last fiscal year. Our VNA pricing has gone up. We review our pricing annually. Our VNA pricing has gone up. But the eUnity pricing has gone up quite a bit more. Now this is a big number, 300%, right? And it doesn't sound quite right. But if you go back 5 years from today, some of these eUnity contracts were signed, Client Outlook was a start-up company, and they were a hungry business, they wanted to just bring in net new customers, and they want to be relevant in the marketplace. So they would do it at a small price point. So when we have the opportunity to renew these contracts, they're renewing at a much higher price, because we know the value that, that software is bringing to the clients, and we're a more mature business. So that pricing has gone up significantly as these renewals start to hit. When we talk about inflation being priced in, what we're really talking about here is we have new pricing from a price book perspective. But from a maintenance perspective, the bulk of our contracts have given us the ability to increase annually our fees by CPI caps. That's usually somewhere in the 2% to 4%. I know CPI is quite high in North America this year. But really, it's going to be around 2% to 4% on an annual basis that that's going to increase. We've continued to find strong demand for the eUnity diagnostic capabilities. COVID and post-COVID environments have really underscored the importance of having software that allows you to read images remotely outside the walls of the hospital. We've continued to have low churn. We don't -- again, it's a sticky business, and our customers are generally very, very happy with us. We have strong revenue growth, double-digit growth scheduled for FY '23, just as we did for FY '22. On the recurring revenue side, we've increased our CARR and just remember that the difference between CARR and ARR is the contracted annual recurring revenue versus the annual rate. So there's a gap there that you see that $2.9 million gap, that's generally from clients who have not gone live yet. So if the customer hasn't gone live yet, then we're not recognizing support and maintenance. So that support and maintenance value is sitting in that CARR bucket, and it will convert to ARR when the client goes live. The other time that will come into play is if it's a subscription model on a subscription model, then that number will reside in the CARR number until the client goes live, and then it will go into the ARR as well. So that's the gap you always want to see a gap between the CARR and ARR. We should always have a healthy gap between the two. We're looking to -- and we've talked about this for the last couple of years, but we're looking to cover our operating expenses through our ARR run rate. We're targeting full coverage within the next 4 years. Right now, we have 65% coverage. That, again, is underpinned by the whole idea of our subscription models sort of taking a lead on our new sales. Right now, we're looking at about a 60-40 subscription to capital split which is a change from the 50-50 split that we've seen in previous years. We're finding that there's a little less resistance to the subscription deals right now. Some of our customers are actually looking to spread those costs. We look at some significant contract wins for us. Trinity Health was a big win for us. We've talked about that a number of times. Advocate Aurora was a VNA client. They bought our eUnity Viewer showing some great cross-selling capabilities there. Cabell Huntington was a renewal. They did sign in Q4, and they did actually convert their contract from a capital to a subscription model, which was one of the first times we've seen that kind of a conversion. We're not sure if that will be a trend or not, but it certainly did happen to Cabell. Penn State Hershey, a long-term client and St. Luke's a net new customer for the eUnity Universal Viewer. So look, from a cost perspective, we feel that we have a scalable business. Our revenues are growing faster than our expenses. Our expenses did go up this year as we would expect them to go up to some degree every year, but nothing material. We have cash flow positive for the third year running. $25.7 million in cash. And again, we have no capitalization of R&D. From an outlook perspective, or from what we're seeing in the market, hospitals have now sort of emerged from COVID. They're returning back to sort of business as usual from an investment perspective. We see more and more integration following M&A consolidation. We're seeing a lot of M&A within the hospital space. Again, at least in North America, we're seeing that trend. And that's tending to lead to more spend. Acquisition is certainly a strategy amongst the health care institutions, especially in the larger IDNs like the Trinity Healthcare of the world. Our customers continue to prioritize. I've been talking about this for the last year or so. But even though things have returned to normal, hospitals still have a responsibility and they're still looking at ways that they can save money and still provide better patient care. They're looking to make sure that they have a stable environment, that their physicians can work outside of the walls of the hospital should they ever have to again. And for us, our primary buyers are the CIOs, the CMIOs and those are folks that are both looking at the spend from a technology perspective, but also the benefit for patient care. And concentrating on requests from the physician base in regards to the technology they need to do their jobs. It's a little different than selling directly into the radiology space, as an example, where you're selling to the radiologists. We feel we've got these award-winning products, highly acclaimed products from KLAS, strong interest and well-attended industry conferences. We're focused on innovation with our R&D team. We will continue to be focused on R&D for years to come. And our sales team has got a strong pipeline. This is an experienced sales team. They've been able to build their pipeline as they've come on board. Our pipeline actually has grown by 30% since June, that's reflected in deals that we're now either speaking to or responding to bids for. We have 3x coverage for our goals, for our sales order goals for this year -- for this year, right? So 3x coverage just for this year, not our total pipeline in totality, but for FY '23 coverage. So I think -- with that, I think we can open things up for questions.

Thanks, Mike. [Operator Instructions] Yes, we have some questions that have come through. First, with growing free cash flow, what is the thinking planning for the deployment of this?

So look, we've had good cash flow for the last couple of years. We continue to grow our cash flow. But at the end of the day, we have a little over $25 million in cash we evaluate constantly at the Board level what we're going to do with our cash and what we can do to add value from a shareholder perspective, whether that includes inorganic M&A or whether that includes for future investment in R&D or in innovation. For right now, we're again evaluating our opportunities with no clear plan on using that cash for anything immediate but certainly gives us some flexibility as we look at the industry and as we start to consider any type of acquisition that gives us more flexibility than we've ever had in the past.

I guess as a follow-up to that, we could ask this other question. Would Mach7 contemplate using its surplus cash to conduct share buyback?

Yes. I think at this point, the answer to that would be we're not considering a buyback at the moment. I understand the value of a buyback. But again, just to emphasize the fact that it's $25 million, I think that there's other ways that, that cash could be used to bring more value to the shareholders than just through a buyback program. I do understand the desire for that, but I think our strategy is going to have to come first, and we want to grow this business.

Okay. Thank you, Mike. Assuming that the sales process and cycle is similar to both smaller and larger-sized contract opportunities. Are there larger value contract opportunities available for the company to pursue? And if so, whether they sit in the sales cycle time line?

Look, we -- similar to the slide where I showed the different markets that we sell into. All of those markets have different requirements. They all have different price points. They all have different needs from a technology perspective. So we sell to a spectrum of clients. It could be anywhere from $20,000 or $30,000 migration to a full Enterprise radiology pack solution. The range for those larger deals falls anywhere from, honestly, $1 million to $15 million to -- $15 million or so. If we look at deals like Hong Kong, or other national deals. It could be upwards of $20 million for those national deals. While we do have those big deals in our pipeline. I would say the average deal size in our pipeline is around -- for the larger clients, it's usually between $1 million and $5 million for the slightly larger, it could be anywhere between $5 million and $20 million. And then we have a number of deals that are below the $1 million threshold for us. So it's a spectrum of opportunity for us. But certainly, we have what we consider to be larger-scale deals in the pipeline for this fiscal year.

Thanks, Mike. Do you see any emerging threats or opportunities with the growing interest in the health IT space coming from Microsoft, Apple, Google, Amazon and how are you envisaging it -- how do you envisage these companies reshaping the health IT landscape?

Yes. I've seen these companies sort of dark in and out of healthcare. They show interest and then they sell off their divisions and then they regroup and they rethink. At the end of the day, these larger players, the Googles, the Amazons, the Microsofts, what they're really interested in is data. right? And where they can get that data from. Healthcare is just a market segment for them to collect data. They think that they can add value there. They think that they can add value with precision health care. They think that they can add value through data analytics into AI functions. So that's really what I think their goal is. Their goal is to try to show value through to data science. And I think that they're definitely in this game for a while. That does seem like the wins shift oftentimes with these larger groups, depending on how the rest of their business segments are going. But I don't think that they're going to go anywhere permanently. I think that they're here to stay in the game from a data perspective.

Thanks, Mike. A couple of questions from Scott Power from Morgans. First, did you have any pushback on the higher prices charged for the renewal and expansion of clients?

No, we really didn't. Well, you always do, right? I mean you're always going to get some pushback from people. But I think a lot of people expected, especially those renewals where people knew they think they got a really, really good deal 5 years ago. I think that they realized and they knew that those prices were going to go up. And part of that is -- shows also the strength of our relationships with these folks. We don't surprise them with a sudden shift. We work with them proactively so they don't know that it's coming so they can budget for it appropriately. So this isn't -- this wasn't really a surprise to them. For some, they could afford it for some, they had to push back a little bit. for some, we meet them halfway. And we'll give them where they need to go over a course of a couple of years perhaps. So I would say not a lot of pushback, but certainly, there's always a little bit, yes.