Vitalhub Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2024

There are 7 speakers on the call.

Operator

morning, everyone, and thank you for joining us for our 2024 Second Quarter Conference Call. Before we begin, I will read our cautionary note regarding forward looking information. Certain information to be discussed during this call contains forward looking statements within the meaning of the applicable security laws, including among others, statements concerning the company's 20 20 4th objectives, the company's strategy to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Such forward looking statements reflect management's current beliefs and are based on information currently available to management and is subject to a number of significant risks and uncertainties that could cause actual results to differ materially from those anticipated. Also, our commentary today will include adjusted financial measures, which are non GAAP measures.

Operator

These should be considered as a supplement to and not as a substitute for GAAP financial measures. Reconciliations between the two can be found in our MD and A, which is available on sedarplus.com and our website. With that, I will hand over the call to our CFO, Mr. Brian Goffenburg, to go over our financial highlights for the quarter. Please go ahead, Brian.

Speaker 1

Good morning, everybody, and thank you for taking the time to join us this morning. We are pleased to present our financial results for the Q2 of 2024. This quarter and indeed the first half of the year reflect the substantial progress we've made across all facets of our business. Our robust performance underscores the successful implementation of our strategic initiatives leading to significant growth in operational efficiency. This success is anchored in the expansion of our health care product offerings, deeper integration within health care systems and the broadening of our global presence.

Speaker 1

Our focused efforts have yielded impressive results, particularly in revenue growth, annual recurring revenue, or ARR, gross profits, net income and cash generation. Today, I'm excited to share with you the financial milestones we achieved in Q2 and our highlights for the year to date. Revenue for Q2 2024 totaled $16,200,000 compared to $13,100,000 in Q2 'twenty three, an increase of 24% year over year. Total revenue for the 6 months ended June 30, 2024 was $31,500,000 compared to $25,700,000 for the same period in 2023, an increase of 23%. Revenue from term licenses, maintenance and support in Q2 'twenty four was $13,000,000 compared to $10,200,000 in Q2 2023, an increase of 28%.

Speaker 1

Revenue from term licenses, maintenance and support for the first half of twenty twenty four was $25,500,000 compared to $20,200,000 in the same period in 2023, an increase of 26%. This positive increase reflects the impact of organic revenue growth in the company's suite of products, coupled with revenue derived from acquisitions completed during the year. Term licenses, maintenance and support represent an important strategic source of revenue given its predictability and recurring nature and represents 80% of revenues in Q2 'twenty four compared to 78% in Q2 2023. Revenue from perpetual licenses in Q2 'twenty four was $22,000 compared to $255,000 in Q2 'twenty three, a decrease of 91%. And revenues from perpetual licenses for the first half of 'twenty four $144,000 compared to $565,000 in the same period 2023, a decrease of 75%.

Speaker 1

Prepare to software license are dependent on the type of product sold. Revenue from Professional Services and Hardware in Q2 'twenty 4 totaled $3,200,000 compared to $2,600,000 in Q2 'twenty three, an increase of 21%. Professional Services and Hardware revenue can vary depending on the timing of hardware deliveries and the progression of customer projects. Revenue from Professional Services and Hardware for the first half of twenty twenty four was $5,800,000 compared to $4,900,000 for the same period in 2023, an increase of 19%. The increase during this period is primarily attributable to the deployment of ongoing customer projects, deliveries of hardware and additional service revenue from new subsidiaries.

Speaker 1

Annual recurring revenue, ARR, which we formally referred to as annual contract value, totaled $51,300,000 as of June 30, 2024, compared to $41,000,000 at June 30, 2023, representing a year over year increase of 25%. The increase in AOR was primarily driven by organic growth of 6,200,000 dollars or 16% and acquisition growth of $3,300,000 or 8%. The continued increase in ARR growth is reflective of our strategy to grow the business both organically and through acquisition. Gross margin on total revenue in Q2 'twenty four was 81%, consistent with the same period last year. And gross margin for the first half of 'twenty four was also 81%, unchanged from the equivalent period in 20 23.

Speaker 1

Operating expenses in Q2 2024 totaled $9,800,000 compared to $8,200,000 in Q2 2023, an increase of 20%. And operating expenses for the first half of 'twenty four totaled $18,600,000 compared to $15,900,000 in the same period last year, an increase of 17%. The increase is due to higher sales and marketing expenses for conferences and the exhibitions and R and D expenses from acquisitions completed in 2024 previous years. However, it is important to note that we continue to experience significant reductions in operating expenses as a percentage of revenue. 74.9 percent of revenue in Q2 'twenty four versus 77.4% in Q2 'twenty three, demonstrating our ability to achieve operating cost synergies.

Speaker 1

Net income before income taxes in Q2 'twenty four was $1,400,000 compared to net income of 740 $2,000 in the equivalent prior period, an increase of 86% year over year. Net income before income taxes for the first half of twenty twenty four was $3,400,000 compared to $1,500,000 in the same period last year, an increase of 183%. The increase for the quarter and the year to date period is primarily attributable to the significant increase in revenues from organic growth and acquisitions, coupled with ongoing efforts to manage costs and gain operating cost synergies. Net loss after tax in Q2 2024 was $335,000 compared to net income of $624,000 in Q2 'twenty three. And net income for the first half of 'twenty four was $983,000 compared to $784,000 in the same period in 2023, an increase of 25%.

Speaker 1

EBITDA in Q2 'twenty four was $1,970,000 compared to $1,980,000 in 2023. For the first half of twenty twenty four, EBITDA was $5,100,000 compared to $4,000,000 for the same period in 2023, an increase of 28%. Adjusted EBITDA in Q2 'twenty four was $4,200,000 or 26 percent of revenue compared to $3,000,000 or 23 percent of revenue in Q2 'twenty three, an increase of 41%. The increase was primarily attributable to higher recurring revenues and ongoing efforts to manage costs and gain operating cost synergies. For the first half of twenty twenty four, adjusted EBITDA was $8,200,000 or 26 percent of revenue compared to $5,900,000 or 23 percent of revenue in the same period of 2023, an increase of 40%.

Speaker 1

Cash flow from operations before changes in working capital for the first half of twenty twenty four was $5,100,000 compared to $4,100,000 for the same period last year. Cash on hand at the end as of June 30, 2024, was $71,600,000 compared to $33,500,000 at the end of 2023. This increase is primarily due to a bought deal offering of approximately $37,000,000 in net proceeds plus cash generated from operations less paid for acquisitions. With that, I'd like to hand the call over to Dan for an update on the business.

Speaker 2

Thanks, Brian. The summer months, I don't have a ton to say. And hopefully, we'll get some questions that we'll be able to flush out the quarter and give everybody some outlooks in terms of what we're looking for. But we continue to execute on the business model as anticipated. Majority of our revenue is recurring and we have a huge backlog of services revenue to fill that backlog, which represents the majority of what we do from revenue perspective, do that.

Speaker 2

So, all of our revenue indicators and most of our financial indicators have all gone in the right direction as anticipated, maybe excluding perpetual license, which is a little bit by design as we've moved a bunch of those deals into more of the recurring base business model on a gradual basis. So we continue to do that. We continue to get contribution from all of our products. Again, the treat product in Canada, the shrewd transforming solutions product in the UK and the OREAL project in the UK continue to be the brighter shine, but we are getting contributions from everywhere. Our Nova Scotia project continues to ramp up and they continue to give us more work and they're continuing to add users on a continuous basis as well.

Speaker 2

So, all those are there. U. K. Continues to be a prime source of where our revenue is coming from and is where we've done a lot of our acquisitions. We still see pipeline there.

Speaker 2

We still continue to do things, although there is a new government that is in place. So we wait for new initiatives and new items. So far, everything verbally or what we've been hearing, they plan to continue to invest in the NHS and the digitization of it, and we think we're positioned there to continue to do that. So we continue to execute on moving our resources to our innovation lab in Trumbull. We have some new initiatives now with the BookWise in the Premier acquisition and soon to be the Mid Current acquisition to do that.

Speaker 2

So we continue to optimize our cost base, and we continue to really work hard on processes. It's really a big part of what we're trying to do. We're getting close to 470 employees there, hitting the 500 mark that are spread across. So processes, optimization and data are key elements that we use to run our company. So, we invest in those software products and those tools that are helping our organizations in terms of optimization.

Speaker 2

So, we are looking to keep peeping that up as much as possible and adding appropriate outside senior personnel that have had experience scaling up M and A Companies before to our senior teams. So we continue to focus on that as much as possible. A little bit about the MedCurrent acquisition. I'm sure there's a lot of questions on that. It won't close until early September, and we'll be able to give more fulsome numbers at that point in time when it happens, but we are virtually certain it will close going through those marks.

Speaker 2

We're very excited about that. It is a unique solution. It's a new area that we're not in, in terms of the imaging world where there's a ton of patient flow based initiatives that come out of there. So patient flow is something big. It's something unique in terms of it does have an AI component on it.

Speaker 2

And it has been proven in multiple international jurisdictions. The team's done a good job of getting the footprint and getting the some pretty high profile healthcare organizations onto the platform that are using it that are showing the results, which should be extremely referenceable. And there are national funding initiatives on several jurisdictions to get broader expansion for those particular products, which is really what that earn out is all about is the ability for this type of product to potentially grow pretty fast and robust. I don't think it moves as quick as everyone thinks in healthcare. So I ask everybody to be patient in that respect with it.

Speaker 2

The earnout is situated in a way that is very protective of making sure that VitalHub still hits all its metrics in terms of acquisitions and still hits all its metrics in terms of profitability and organic growth. So it is structured in a way that's hopefully a win win for both organizations, but we're definitely protected on that structure on a go forward basis. So we expect to see some good things with that product, but time will tell after we get it. And that's what I have to talk about today. We'll take any questions.

Operator

If you have a question, please use the raise hand function in the bottom of your screen to show your interest. The first question comes from Richard Baldry of ROTH Capital. Richard, please go ahead. Richard, your line is muted.

Speaker 3

Thanks. Sorry about that. Can you talk about how you're feeling about your sales capacity and productivity, whether you feel there's some need to add to headcount, even doing pretty good on your target ARR. So and then maybe talk about on the productivity side, is it is there any noticeable changes between sort of new logos versus cross sell and the trending there? Thanks.

Speaker 2

We continue to add new logos and we continue to cross sell. Cross sell is still a big portion of our business, but cross sell is a pretty blurry item with us. We're dealing in these geographical niches in towns, but we continue to see that. We have ramped up a little bit on our sales groups over the last year, and we continue to evolve that into a little bit more of a mature methodology as we beef up our different products that, go on for it. We are really starting to accumulate, especially on the patient flow side, a really robust suite of solutions.

Speaker 2

And with some of the M and A we got cooking, we think we're going to add to that a little bit more. So the messaging can go to a little bit of a senior higher level and so forth in terms of what we do. But we have ramped up a little bit. We'll continue to gradually ramp up and continually to evolve the maturity of our sales and marketing group, which is getting there and has always been relative to other healthcare IT companies, I think has been a pretty good sales group. But relative to what I've seen over my career, I still think we got room to grow in terms of what our go to market formal processes and executions are as a company and as part of the byproduct, I think of M and A based business.

Speaker 2

So we continue to work on all areas of our businesses to really start refining the professionalism and just the mature ism of how we work. So we continue to do that.

Speaker 3

And last maybe, some of our non med centric companies starting to talk about uncertainties in pipeline sort of delays to pipelines. Can you talk about sort of whether you view your space as more defensible, if you've seen any changes in sort of approval processes or increasing burdens or sales cycles extended or if you think that the space really hasn't been hit the same as some other areas have? Thanks.

Speaker 2

I would like to think it's more defensible than other spaces, just being government focused, healthcare, IT, as results have shown, so far so good. I pinch myself sometimes in that respect, and we are hearing that. And it sometimes gets difficult to tell, right, until you get to the final throws. We're sitting in Q3 right now, which traditionally is a slower quarter for us. It wasn't in 2023, but all the other years it was.

Speaker 2

It's just healthcare IT is a little bit slower in those quarters and we expect that to happen to some degree. But so far so good this quarter in terms of how things are working. But you never know until you get to the end of September in that respect. But we'd like to think we're a little bit more defensible than other things. We've got a lot of different ways to add revenue to our mark where we like our ARR growth, we want our ARR growth, but our business model isn't just ARR growth, it is cash flow, cash from operations, cash reduction.

Speaker 2

So if we're not getting that ARR growth, we're going to get it on the other side. And our anticipation and I've been continuously saying that on these calls, our anticipation is to continue to produce ARR, but there could be some quarters that we don't and some quarters that we do really, really well. It's just the nature of how this how our product set works. It's not one product, unicorn based product. It's multi different areas that ought to contribute to get to that number, which is both good and also potentially could be some risk.

Operator

Thanks, Tricia. Next question is from Doug Taylor of Canaccord. Doug, your line is open. Please go ahead.

Speaker 4

Yes, thank you. Good morning. We're seeing with MedCurrent a bit of a different style of acquisition. As you alluded to, it's a growthier asset, perhaps you're paying multiple that might be at the higher end of what we've typically seen from you. And I guess the question is whether or not you're increasingly considering this type of target for any particular reason, including whether the current currency and multiple that VitalHub is trading at

Speaker 2

overall? The currency does for sure helps the situation, although I don't think it really would significantly change our investment thesis on it. We look at the profile of MedCern and we look at what it does and we look at the proven customers that they have out there already and we look at the robustness of their pipeline and the government programs that are funding these things, which should lead to some growth and we get excited about it, but we equally get excited about the cost base, what it takes to implement the solution and just the basic structure of how the software is being built. And a lot of those things are pretty interesting in terms of, hey, not only can we get some pretty good growth out of this, but we think we can get some pretty good profitability out of this based on scaling out their structure. With that being said, there's always risk that gets associated with that upside.

Speaker 2

So, the win win solution was to come up with a very aggressive earn out based schedule, which we did. But there's a chance that none of that earn out could get paid out and Vital Health could still be very strong on this acquisition and we're fine with that. And if you don't know if it gets paid out, we're all really, really fine. So it's all been carefully modeled and so forth. So, we think we met it within our metrics.

Speaker 2

But we're excited about the opportunity is. But you're right, sometimes it is worth paying a little bit more just to get some of the strategic stuff. We do need more growth profile assets in our offering. We're starting to build up that up and this was one of those that makes sense and it does make sense to pay a little bit more for growth profiles at this stage of where we think the business is.

Speaker 4

A couple of your other prior, I'd say more substantial acquisitions you've sort of used as a platform to tuck other smaller targets underneath. Would you say that MedCurrent has the potential to be that? Yes,

Speaker 2

it's positioned really nicely. It's a Canadian company based in Toronto. So that team well, we've known the team for a while, integrating that into Canada should be good. They do a significant amount of business in the UK and have struggled to a degree in terms of how doing implementations from over there from the Canadian side of the ocean. They're doing work in Australia as well.

Speaker 2

So snapping those into our teams will help the entire organization, right? And we'll be able to assist them in their growth profile and they're giving us a pretty innovative asset with a really great team. We really like the personnel that are there and we'll tuck it in into those applicable areas where applicable.

Speaker 4

We'll look forward to hearing more in September on that. One last question for me. BookWise and Premier, you alluded to the integration progress. Can you speak to the timetable for those getting, I guess, closer to fully optimized? And then maybe related to that, you had an elevated level of integration and restructuring costs in the quarter.

Speaker 4

Can you speak to what that's tied to?

Speaker 2

Yes. The book wise has moved along. There's still more to go, but it's moving pretty fast. Premier is just starting. You just got that and a little bit of a delay.

Speaker 2

So there's both work still going on, on both of those on the restructuring costs. We had in the quarter, we also started taking the big chunk of the met current costs. So even though the deal wasn't closed, you still got the costs that get associated with it and there's a significant amount of costs that are associated with that MedCurrent base transaction. So, although we don't have any of that business in there, those costs are in the quarter, which did lead to the bigger restructuring costs for the quarter being set out plus the things going on with the book buys in Premier and stuff. So that's why that is significantly higher for the quarter.

Speaker 4

All right. That helps. Thanks very much.

Operator

Thanks, Doug. The next question is from Christian Skro of 8 Capital. Christian, your line is open.

Speaker 5

Hi, good morning. I wanted to ask one follow on question on MedCurrent. Just the extent to which you think you'll integrate it into the platform, bring it under the VitalHub umbrella and then push some of the cross sell or some of the penetration in the UK all under one suite? Or with the earnout structure and other considerations, are you comfortable letting MedCurrent run independently for the next little while? Just my question is, what's your strategy to either to wrap it all in or let the assets kind of grow on its own?

Speaker 2

We haven't firmly come to any conclusions on that yet, Christian, until we close and until we operate it. The overall pitch or the overall discussions on those side is they need some assistance in some of the resources that we provide in our other jurisdictions. And we're going to use those resources probably as soon as possible in some areas to go do that. But the goal is to maintain brand and maintain the work that they've done and maintain those things and enhance it, not hurt it. So we will use those resources on go to market for sure and get that into our broader distribution channel as quick as we can and move that way and also start assisting in the implementation and other parts of that side of the business using those resources.

Speaker 2

But, MedCurrent will still direct that as an entity for a lot of what they can do. So, we haven't figured out exactly how that's going to work. But the goal, if we're seeing we're seeing growth on that product, they're going to need assistance for the rest of the organization.

Speaker 5

Okay, great. And I'll ask a second question on the services segment of the business. You called out a backlog and that segment has been performing well quarter over quarter. Maybe just decompose where geographically some of the services work is at the capacity of your services team, anything else you think could be helpful for us to know about the services work being delivered this year?

Speaker 2

Yes. We've got service contribution from all of our business units, but the primary business unit is the Canadian Community Services Treat based business. Those larger contracts usually come with a significant amount of implementation and training and in some cases, custom development, which we use with our Sri Lankan base group. So the majority are the bigger emphasis is in the Canadian side of our business for that. So that's where the bigger chunk of that services business traditionally come from.

Speaker 2

HICOM itself also has the ability to do a little bit more customized development work and so forth. So they contribute as well into that services business. But it's really the tree business. Nova Scotia gives us a significant amount of work. Our SolGen project, our jail project gives us a consistent amount of work.

Speaker 2

We expect the work for both of those to continue through 2025 for sure and probably into 2026. But so far that's where a big chunk of that work comes

Operator

Next question is from Gavin Fairweather of Cormark. Gavin, your line is open.

Speaker 6

Hey, good morning and congrats on strong numbers. Maybe just to continue on the MedCurrent theme, there's a strong initial use case there around medical imaging, but the press release referenced the ability to expand the use cases into other areas. Maybe you can just discuss where else you think the software could have some applicability and the extent to which you can extend the TAM as you move into some of these other areas?

Speaker 2

The next group that they've done and actually have worked in actual customers using it for is the pathology area. The need for taking pathology and not taking pathology and are you getting into the right pathology and using the proper criteria to those particular groups. So there has been work being done on in a couple of different sites on that particular area. But those are the 2 that have been the focus at this point, but it can grow to other areas in terms of using guidelines and rules to understand appropriate for different types of all tests, I would think, that would go along in those particular areas. So, hey, we'll be happy just in the imaging area by itself for the products that's a huge TAM and opportunity.

Speaker 2

And they seem to have some early moving advantage in the space and we'll continue to see what we can do to keep moving that forward.

Operator

Yes, that's good to hear.

Speaker 6

And then maybe secondly for me, transforming has been on a pretty serious growth curve in recent years. Recently, it's been aided by a bit more funding in the UK, but now you've been building up a pipeline in Canada and Australia. I guess I'm just curious for your sense on kind of the outlook and the pipeline and whether that momentum can be sustained.

Speaker 2

There's still deals that are cooking on it. I don't know if we'll sustain that to this level on a continuous basis here. But there are still deals that are cooking on the transforming side and we're hoping to offset that by some other geographical deals. But we continue to work with that product and we continue to get customers asking for new indicators, new add on, new data sources for it and so forth as it continues to grow. But yes, it's not we could have stops and starts with that product on a go forward basis with it, but it continues to be a really strong product set for us and the results are good and we continue to move with it.

Speaker 2

But, yes, you're not wrong, Gavin, in terms of can you sustain that, where it will go. But we've got other products in the works now with the med currents and other products that hopefully can take up some of that if it does go a little bit, not as fast growing per se, but that's what our business model is. That's what we deal with.

Speaker 6

Maybe just on the Middle East, I think it was January or February that you announced that partnership with M42. So curious just how that's progressing. I know you'd identified a number of your products, which you thought had some applicability in that market. Are you starting to see pipeline building? What's the uptake like and how are the teams working together?

Speaker 2

Yes, we have ramped up an M42 team with an M42 and those sales reps have been over to the UK and other areas to get trained and they've been sent back and we're doing presentations and our partnership calls are better and we're seeing more activity and more proposals that are moving in that direction. No serious contribution, I think, yet this year, but we do see some things on the horizon. So again, another just another way to get some channels built and trying to see some things go forward. But, so far, we continue to move there, but there's no results there yet of materiality to talk about.

Speaker 6

Just lastly for me, I mean, obviously, you have a very strong balance sheet and you touched on the M and A deal flow, but maybe, you could talk a little bit about your efforts to scale up the corporate infrastructure to ensure you can source, complete and integrate these deals? How is the team and capacity looking like on that front? And what are you doing to scale that up?

Speaker 2

Yes. We put Todd Maza a little while ago and he's working hard on terms of we're putting we're enhancing our Salesforce implementations, our customer success software based implementation, our churn awareness reports. We just hired an EDP of Global Professional Services to streamline that from a global operations perspective and putting better processes, typical larger scale based processes for that in place and incorporating new different project management things. We're looking at better software solutions, better process solutions all the way through and ramping up personnel that help monitor those type of things. So again, just part of becoming a bigger software company and you like to do this stuff quicker, but we gradually just keep making investments in process improvement and organizational structures and so forth.

Speaker 2

And I think we've done a pretty good job at it. We still got a ways to go and doesn't happen overnight, but we're as every acquisition, we got a little bit bigger and you need to invest back. Also, we are investing a lot into our security hosting infrastructures that unfortunately starts hitting you on the COGS line a little bit and starts hitting you on some of those other aspects of the middle of the line. But we need to invest in security profiles. It's 2024 with what's going on here.

Speaker 2

And we also think it's starting to turn into a very big advantage for us in terms of competitive mode, in terms of what we offer. So, we are investing in security, compliance and in those areas on a go forward basis. And we expect to continue to add costs to that area just to make sure that those mistakes don't happen.

Operator

Thanks, Kevin. There are no further questions. I'll hand the call back to you, Dan, for your closing remarks.

Speaker 2

Yes. Just again, we're in the summer months and we're moving ahead. We're excited about the MedCurrent. It should close in September. And there's more acquisitions on the horizon.

Speaker 2

We expect to continue to add towards the latter part of this year. So we've done 3, and I really think we'll definitely get 4 done, maybe even 5 this year. So we continue to work and we continue to scale and continue to work on the profile. Just keep reminding people that we're geographically centric based businesses with a bunch of different pockets. So you get ups and downs with those type of businesses and we continue to keep a level head here and keep moving forward.

Speaker 2

We like our business model. We're excited about it. But we also know the constraints of our business model. So we're careful and we're a steady as you go organization. It's a long run business and we appreciate everyone for digging in and trying to understand our business from its totality and we're always available to answer any questions that anybody has.

Speaker 2

So we look forward to seeing you guys in another 3 months and enjoy the rest of your summer.

Operator

Thanks, everyone. This concludes today's call. You may disconnect.

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Earnings Conference Call
Vitalhub Q2 2024
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