Alcidion Group Limited (ALC) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Alcidion's half year results investor webcast this morning. [Operator Instructions] Today's webcast will feature a presentation from Alcidion Managing Director, Ms. Kate Quirke, followed by a Q&A. [Operator Instructions] Please note we will hold on all questions until the conclusion of the presentation. I'd now like to hand over to Kate Quirke, Managing Director of Alcidion. Please go ahead, Kate.

Thanks, Sam, and thanks, everyone, for joining us. I know it's a very busy time of year for many of you, so I won't take up an enormous amount of your time this morning. But we will be talking this morning to the Alcidion's half year financial and operating update that were lodged with the ASX this morning. And also, we also lodged the presentation I'll be going through. So if you want to use that or you want to refer to it lately -- later, it is also on the ASX platform. Joining me on the call today is Colin MacKinnon, our Chief Financial and Operating Officer, and we'll be happy to answer any questions that you have at the end of the presentation. So to kick off, I'm really pleased to report Alcidion made very solid progress in the first half of FY '21. During that period, we delivered one of our strongest sales performances to date, all at the same time that we were also focusing on making continued improvements to the business to strengthen our operating capabilities and establish a foundation for rapid growth from here. So momentum across the business continues to accelerate. And that's enabled us to make important headway that positions us favorably for the remainder of FY '21 and beyond. Looking in a little bit more detail at the financials as they've been lodged. I'm pleased to report Alcidion delivered revenue of $11.1 million in the first half of this financial year. This is a strong result. It's 36% higher than the $8.2 million that we delivered in the first half of last financial year. Our gross profit was $9.8 million at a margin -- at a gross margin or a margin of 81 -- 88.1% compared to $7.1 million gross profit and a margin of 87.4% for the half last year -- for the first half of last year. As we foreshadowed and detailed in the FY '20 results presentation, we have reclassified the way we report gross profit, and we've done that to more appropriately align with other ASX-listed software companies that many of you will compare us to. I'll come back to this shortly on the next slide just to give you a little bit more detail. Those of you who have been following previous presentations will be aware of that change. Alcidion delivered an EBITDA loss in H1 of $900,000, which was a 47% improvement on the H1 last year, same period last year. From a cash perspective, receipts in the first half were $10.8 million, which is 17% higher than the previous period last year. As I mentioned on our last webcast, for those of you that were on it and when we're doing the January quarter update, this figure excludes an additional $3 million, which was received from South Tees in the first week of January, which was due to be received in December. So we entered the second half of the financial year with a solid cash reserve of $12.5 million, and that's now been further strengthened with the receipt of that $3 million from South Tees. Looking a little bit around the profit and loss now just to give you a little bit more detail around that from a comparative perspective. This slide here is a pro forma profit and loss table that compares the first half of FY '21 to the first half of FY '20. Approximately $4.8 million of the $11.1 million first half revenue for this year is classified as nonrecurring. However, it's important to note that approximately 60% of that nonrecurring revenue is for product implementation work. That is actually sold at the time that we will sell Miya or Miya Precision or Miya Observations contract. And that revenue is important in that it supports the ongoing recurring license fees that come once we have implemented that. So they're very closely linked to that. It's a significant contribution from a product perspective. During the half, we added $17.4 million of contracted revenue, albeit not all of this will be recognized in FY '21. Obviously, we need to deliver on some of those projects to recognize it all. However, our contract revenue to be recognized for -- able to be recognized for FY '21 now stands at $21.7 million. That's 17% higher than our full year revenue for FY '20, and we still have a further, well, 6 months, if you take it from the end of the report, but in reality, it's 4 months from where we are today remaining in this year. And any new sales that we make, a portion of those could further contribute to that revenue position as we head through the rest of this year. Of the $21.7 million, approximately $14 million is recurring with $7.7 million in nonrecurring. As the table on the right-hand side here highlights, our recurring revenue is almost all generated from products, be it Miya Precision; Patientrack, which we obviously refer to as Miya Observations and Assessments now or Smartpage, with the implementation of those products being a major part of the nonrecurring revenue component. Just going back to what I mentioned earlier about the classification of gross profit and how we report that and why we've done that to align better with industry practice and other ASX-listed companies. To put it simply, going forward, all salary -- well, not going forward, the way in which we're reporting in this set of financials is that all salary-related expenses for staff, be that product management, product development, sales and service delivery that were previously in the gross profit component have now been taken into operating expenses. And they're shown in the salaries and wages line in this pro forma P&L you're looking at here. The cost of sales expenses now only consists of fees paid for resold products, so the reseller agreements that we have with NextGate and Better and services associated, managed cloud hosting where we're providing services to manage a cloud environment, sales commission and expenses such as travel and accommodation that directly relate to a project delivery. So if we were deploying people to Murrumbidgee or Wagga Wagga Base Hospital, for example, the expenses related to that, they would go into this -- into that bucket. EBITDA for H1 FY '21 was a loss of $900,000 or $0.9 million, or $600,000 if you add back in the nonoperational advisory services and the share-based expenses. So you've heard me talk previously about the investment phase we've been in, in terms of building the capacity and the capability in the organization to support the growth profile that we plan to have. The investment phase in those key areas of our fixed cost base for areas such as sales staff, IT and people-placing cultures now largely complete. And that will result in a stabilization of the cost base and a move toward profitability from here, albeit the second half that we're now in will incorporate the full year impact of investments made in H1, and some of those investments were made towards the end of H1 in terms of new people. Moving on just to look at some of the milestones that we achieved during the half. From a sales perspective, the U.K. has been a significant focus for us. And you've obviously heard me talk about it in the past and has continued to be a focus over the past year, and it's our largest market opportunity. Our performance in this market has been strong, notably the signing of a milestone 5-year contract and the extension for that -- that came shortly after with South Tees Hospitals NHS Foundation Trust for all -- the full suite of our products and services, including Miya Precision, Better Medications, Smartpage, cloud hosting, managed services and some business change management services as well. So the combined value of that contract and the subsequent extension was $11.3 million, which makes it Alcidion's largest Miya contract to date and we certainly hope shapes some of the Miya contracts to come in the future. It's also strategically important in the U.K. as it's our second Miya Precision reference site in this market, following on from Dartford and Gravesham Foundation Trust. And the experience of these 2 early adopters and early implementations will establish a really strong reference point for the significant value Miya Precision can bring to hospitals in terms of their workflows, in terms of clinical decision-making and supporting that clinical decision process, patient management and flow and, obviously, bedside care at hospitals in terms of mobility and providing that access to critical information at the bedside and, more increasingly, in the home being managed from the hospital. In Australia, we saw important Miya Precision contracts signed here as well in this half with Murrumbidgee Local Health District and with Sydney Local Health District. At Murrumbidgee, the clinical staff there are using Miya Precision and Miya Memory to support better clinical decisions at the bedside. But we are also -- have also implemented COVID-monitoring dashboard and monitoring capabilities for both in and out of hospital. Of course, in Australia, they don't have many COVID patients. So we're -- at Murrumbidgee, we're actually using that for a range of patients being able to be treated in the home. And we'll continue to see expansion that as those capabilities that have been set up during COVID are now used to monitor patients with chronic conditions such as diabetes and monitor people receiving palliative care at home. At Sydney LHD, Miya Precision has been deployed in their remote hospital monitoring capability, RPA Virtual. And that's, again, to support remote care of COVID-19 patients who are isolating at home. So obviously, we have had some of that but, again, not as many, thankfully, as perhaps they've had in the U.K. But our discussions with RPA now are how we support that, again, moving into chronic care and other conditions that can be better managed in the home. So both of these initial contracts provide us with a really strong opportunity to increase the scope of work for those sites and also into New South Wales more broadly where we've seen commitment from the New South Wales government to establish a virtual care panel so that procurement of solutions like ours can be done more effectively and also funding available for virtual care in New South Wales as well. So although our goal is continuing to secure large contracts like Miya Precision, it's really important to point out the strategic nature and the success that we are continuing to have with Miya Observation and Assessments, known to some of you as Patientrack and Smartpage. And those contracts are continuing. We signed one in January with the Isle of Man who are an existing Patientrack customer, for example. Some other contracts beyond Miya Precision that was signed during the half include, as I mentioned, increasing opportunities for Miya Observations and Assessments. During that period, we signed a 5-year, $1.5 million agreement with the NHS Lanarkshire in Scotland to implement Miya Observations and Assessments across that board. And that's our second Scotland board that has implemented that Miya Observations and Assessments, the other one being NHS Fife. Also during the period, Smartpage was appointed to the NHS Clinical Communications Procurement Framework, which is a government-led procurement in the U.K. that's been set up to help the NHS phase out pages by the end of this year. It was going to be the end of last year, but COVID slowed that down a bit. And the framework is really important because it's an example of where -- and the U.K. government is very innovative in doing this that they set up and commit to frameworks that enable procurement to happen more efficiently. And this then helps them to achieve their goal of digital maturity, which is a real focus of the NHS, and our appointment to that contract allows trust to quickly and easily procure Smartpage without the need for going through a tender process. Since we've been appointed to that, we've signed Smartpage contracts with Lancashire Teaching Hospital as well as, I've mentioned, the Department of Health and Social Care for the Isle of Man. And both of those are existing Miya Observations/Patientrack customers. In Australia, we continue to see services contracts and extensions signed. Alcidion has a very strong reputation for delivery of services in the health care IT space. And this included contracts with Northern Territory Health for program management services, additional integration contracts with ACT Health were signed. And with New South Wales Health, we signed some contracts for further technical services relating to the Child Data Hub, which has been a very successful project with New South Wales. Here in Victoria where I am based, we were appointed to a panel for the Victorian Department of Health as 1 of 2 suppliers that would provide implementation and support services to deploy the Victorian Health Incident Management System (sic) [ Victorian Hospital Incident Management System ] Across the state. And we're continuing to work with possible customers around using our services here in Victoria. As mentioned on our last call that I gave, in H1, we also expanded our reseller partnership with NextGate to cover the U.K. and Ireland. So our relationship with NextGate has been a very positive one. And it's great that we're able to provide this type of capability to our customers. What they do is provide a market-leading, enterprise-wide identification and provider registry for both patients and for providers of health care. And it's about overcoming the challenges resulting from duplicate records and consistent data simply because many people will have multiple identifiers, depending on how many hospitals they visited over a period of time. So that software complements the capabilities of our product suite and enhances our competitive position everywhere, and now we're able to also provide that in the U.K. Overall, I'm very pleased with the headway we've made in all markets, both in terms of sales but also in the operational improvements we've made to continue growing our product offering, service and delivery capabilities. We're entering this second half of the year in a very advantageous position. We're on track to surpass our FY '20 revenue with the contracted revenue, as I said before, already 17% higher than what the full year revenue was last year with still 6 months remaining from when this report was -- with the close off of this report. In addition to us, over the next -- in addition to what I've outlined here in terms of current year, we also have revenue contracted out for the next 5 years because, as many of you know, contracts can be 3 to 5 years in term. So we have around $23 million contracted revenue, which will be recognized over that time period with $22.4 million of that, the majority of it, as recurring product revenue, which we expect to be delivered at a gross margin of 85% or plus that. Furthermore, what isn't in those numbers is that during that time of that FY '22 to FY '26, a number of our contracts will come up for renewal, and this happens quite regularly. And those contracts generally are just extended or signed in a fairly simple process. So we would expect to be continuing to add to that forward-looking recurring revenue with very little impact on our sales team. That's usually handled by our customer advocacy team. From a market perspective, the sales pipeline continues to grow, and we're seeing health care procurement progressively return to pre-COVID levels in all markets, really, as hospitals have established protocols to deal with COVID cases and also have understood far more the opportunity that digital provides them in the delivery of health care. We're very favorably positioned across all our markets. And in all of those markets, we're seeing a growing focus on government-led adoption of digital health care. And it's accelerating at pace. And as a result, it is a very exciting time for Alcidion. I'm very proud of our team. The achievements that they've made over this period. And I'm looking forward to continuing to share our successes in this coming half with all of our shareholders. At that point, I'm going to complete -- conclude going through the details of the update, and I'll stop sharing my screen and will hand over for some questions.

Thanks very much, Kate. Yes, we'd now like to hand -- open up the webcast to questions, and we'll try to get to as many as we can. [Operator Instructions] The first question is, Kate, congratulations on the first half results and execution of the strategy so far. Given the product set is in place now, what are the revenue targets for 3 to 5 years hence?

Look, we're still in a -- and I think we're still in a path in terms of the evolution of the company and the way in which our customers are procuring software. That is difficult to predict kind of what the revenue target year-on-year is going to be. I'd probably like to wait and see what the next half looks like before we start considering kind of giving forecasted revenue about that. I am very confident that we're going to continue to see the sorts of increases on revenue that we're currently experiencing, and we will hope to be able to deliver that and update you more as the uptake becomes more steady in its nature.

Thanks, Kate. The next question is, Colin, thank you for your clear reporting, given the investment in operating expenses and as revenue grows, can you give us some information on how operating expenses will grow in line with that?

Sure. As Kate has mentioned, I think -- and as explained in the announcement, we think we are sort of getting to a stage where the increased investment we've been making in both sales capability and the other overheads we need to support the expanded business are starting to get to a stage that we're now happy with. So it's leveling off, and we're getting a -- we, therefore, expect that to plateau. Having said that, I guess, we will look for H2 to probably still see a slight increase in the over OpEx for H1 because there's still some investments that haven't come through to be fully booked in the half year. And there will be some -- there's still a bit of investment to go. And as COVID starts to affect us less, then we will see a bit of an uptick in some expenses in the area of marketing, travel and other things, which have been suppressed to date. But certainly, we're looking for a leveling off whilst we're obviously hoping that, as Kate just said, revenue will continue to grow along current lines, and that's what will drive us towards profitability.

Thank you. We've got a similar question. Looking at the cost base, given the recent investments in new hires, how should we look at the expense base on an annualized basis?

Well, I think when you look at OpEx, ignoring cost of sales, and that, as indicated in the table, is about $10.5 million per half, as I said, if we were to look for that to increase slightly in H2, then I think you're looking at annualized OpEx around sort of $22 million going forward. And we wouldn't expect a major increase in that. There will inevitably be some increases in the business as revenue grows but nowhere near the level of increase we've seen through recent investment.

Thanks, Colin. We've got a couple of questions come in around reseller products. What percentage of revenue is our third-party products such as OPENeP? And what margins do you make on them as a reseller?

I guess from my perspective, they've never been a major focus of the business. We do it for strategic reasons. Currently, they wouldn't represent more than about 10% of revenue that we make. And generally, our margins on that are inevitably less than we ultimately make on our own license products, but that would be traditionally somewhere in the sort of 30%, 40% margin range.

Thank you. Our next question is, which product offerings have seen the highest -- are seeing the highest level of demand at this point? And has it changed with COVID?

I think it's pretty -- I have to say it depends on what's going on in each territory. So for example, in the U.K., Miya Precision is getting quite a lot of attention. But we still have a steady interest in Miya Observations and Assessments, which is the Patientrack equivalent. But as a result of the Smartpage framework, which is 1 year kind of money being made available, we're seeing a really significant interest and demand in that. So it will depend often on what's going on at any given time. Here in Australia, the focus is not on Miya Observations and Assessments at all because that is generally handled by the large EMR vendors like Cerner or Epic that have gone in. So we're seeing a lot more focus on Miya Precision from Australia perspective and, in New Zealand, the interest lives in Miya Precision, medications and Smartpage. I don't believe there's been a significant shift across the board in terms of COVID driving one particular product, but it is certainly shaping some of the ways in which our product, which is a platform that has a lot of capabilities offered in terms of the Miya Precision platform, how it may be used. So here in Australia, for example, COVID is driving the virtual care component where we're now seeing not just the integration of hospital data but how can we bring all of that additional data that could be captured in community care and in mental health and in the home and bringing that into a central area. That is a key driver for us in the Australian market. The driver in the U.K. market for Miya Precision is very much around a wave -- we have -- people are, I think, starting to become -- or NHS trusts starting to become a little dubious about the return on investment that they are making in these very large EMR systems and what they're getting out of it. And so we're starting to see a wave of people questioning those approaches and moving towards a best-of-breed solution as we have put it, and Miya Precision being the orchestration layer that brings that data from pathology medications and radiology together and then add our clinical capability to that environment. So I'm sorry it's a long answer, but it's because it is quite different depending on which market we are talking to.

Thanks, Kate. The next question is, what level -- it's a 2-part question. What level of sales and pipeline activity have you been seeing in the calendar year to date? And is there a pent-up demand from that COVID period where health care IT procurement was focused on COVID-related issues?

Look, I think there will be some pent-up demand. Although I have said before, and I'll continue to say, that we have seen continued sales activity, continued significant pipeline growth, particularly in the U.K. through the COVID situation. And in the U.K., they've had, obviously, a far more intense period around management of COVID. So -- and I think that comes from the fact that funds are available in the NHS, and they need to be spent, and they generally need to be spent within the calendar year in which they are made available. So COVID or not, that -- those funds are available for digital health. So there is some pent-up demand as we're getting in towards the end of the financial year for them. But we've just heard that Matt Hancock has announced the second round of digital aspirant funding into the U.K. South Tees, for example, was someone that used that funding in order to seed the funding of the purchase for Miya Precision. So that's where we're really focused. We're really focused on following the money in terms of who's got the funds to make those decisions. I am very happy with the pipeline growth. It is steadily increasing with Miya Precision opportunities. But we are also, as I've said before, seeing increasing opportunities around Smartpage and Miya Observations and Assessments because of this funding being available throughout the NHS.

Thank you, Kate. The next question is, thanks for a great half year for investors. What does the current sales pipeline in the U.K. look like for the second half? You have answered that a little bit. And the second part is, are multiple NHS trusts looking into Alcidion over competitors?

Sorry, I didn't hear that one, Sam.

My question is, what is the current U.K. sales pipeline in the U.K. for the second half? Are multiple NHS trusts looking into Alcidion over competitors?

Right. I think I've answered the first question in terms of the pipeline. Yes, we have multiple -- we are engaged with multiple NHS trusts. And in some of those -- most of those, they will be looking at a competitor as well because even when they use a framework, they generally need to be able to demonstrate that they are getting best value for money. But we are and have continued to be involved with a growing number of trusts. In 2 weeks' time, the biggest annual digital health conference in the U.K. is held, Digital Health Rewired. Some of you may know that I was over there 1 year ago. And myself and Malcolm were doing a mad dash to get back before hotel quarantine when COVID commenced. And that's going to be a virtual conference this year, but it's very well signed up to, and we're looking -- very much looking forward to continuing to demonstrate to the NHS market through that what we have to offer. So there are still -- there are lots of opportunities despite lockdown over there to continue to get our message out. And I'm very happy with how it's being received by those trusts. And yes, we will come up inevitably against a comparison to something like Cerner, but I think the market is starting to understand that our proposition is quite different.

Thanks, Kate. The next question is, can you provide some insight into the contract renewal process that occurs particularly for those contracts that are shorter in length?