Mach7 Technologies Limited (M7T) Earnings Call Transcript & Summary

[Audio Gap] business update. My name is Francoise Dixon, and I'm Head of Investor Relations for Mach7. Today, our CEO, Mike Lampron, will provide an overview of our first half result. We will then open it up for questions, which will be answered by Mike and our CFO, Dyan O'Herne. [Operator Instructions] I'll now hand over to Mike for the half year update.

Thank you, Francoise, and welcome, everyone, to our first half year results. Hopefully, everyone has had a great reporting season and happy to have the last day of the season for everyone. We will jump right in and start running to our presentation. So we'll go through a quick business overview for those that are new to the story; we'll run through our FY '24 results to date or for the first half; talk a little bit about outlook; and then have a great opportunity to answer any of your questions. So Mach7, we're an enterprise imaging company. And what that really means is we specialize in handling imaging associated to all different departments throughout a medical solution. Of course, the biggest of which is radiology, but there are a lot of other departments that utilize imaging. It could be wound care, dermatology, oncology, the emergency room, cardiology. These are all different departments that all generate images. Those images, for us, our main component is to store those and then be able to provide a way to meaningfully use those images for their workflow so that the clinicians can provide the best care possible for patients at the end of the day. That's what we do. The systems that we use for that is really broken down into 3 major product lines: our Enterprise Data Management component or our Vendor Neutral Archive, and this is really the brain or the hub of our solution. This is where we consolidate all of the images. This is where customers can control all of their data. And this is a product that is either on-prem with our customers' infrastructure and taking advantage of what they've already invested in, or cloud infrastructure, could be a private cloud, could be public cloud, could just be an off-site data center. Those are all options for our customers in relation to that VNA. And then you have the Enterprise Diagnostic Viewing. That's our zero-footprint diagnostic viewer. This is the solution that's really used to be able to access that data that's stored on the VNA, at least our solution to access our data. This is a really important and very unique viewer. The zero-footprint nature allows it to be easily deployed, allows for easy maintenance from an IT organization perspective, great security because there is no caching of data, a great opportunity to image-enable electronic medical records by integrating this into the EMR system. This solution in combination with our VNA is a great solution for downtime PACS. And it's oftentimes used with research in relation to AI test platforms or workflow orchestration platforms, third-party platforms like Nuview and Nuance that are out there would utilize our viewer as a viewing platform for their workflow orchestration platform. When you add in this third component of workflow orchestration, this is where a lot of the magic happens from an efficiency perspective, data normalization, routing for complex workflows, integration to AI algorithms for workflow optimization, image life cycle management. These are core kind of workflow things. In combination with that and with our worklist capabilities, our diagnostic worklist capabilities, these 3 components altogether can create a PACS solution, more traditional PACS solution for customers. But what we really do here is we sell these as unique modules. And we customize the solution for our customers and what they need. So this is a really important slide, especially with our first half year results. We've gone through this before, but I'll try to walk everybody through this and then I can take questions at the end. But we've gone through this change within our business model where more and more of our contracts are subscription-based rather than capital license-based. And that's got some great impacts to our business, but it's got some short-term impact, too, that everybody should be aware with. So we'll take this from the lefthand side, and we'll think about this from a capital license. When we sign a sales order, the software is delivered immediately. The software is considered a license. There's a license fee associated with that. If the customer bought that from a capital license perspective, we're able to recognize 100% of that revenue upon delivery of the software. In this case, we used $1 million as an example. That would be the fee for the software. The CARR component, that contracted annual recurring revenue component, of which there's a CARR component with every capital license, it's 20% of the license fee. That's the support and maintenance fee that's going to get charged on an annual basis after the customer goes live. So in this case, you sign $1 million capital license, you're recognizing $1 million upfront and you've contributed $200,000 to the CARR component. Now if that was a subscription license rather than a capital license, we would have recognized $0 upon software delivery, but the CARR would have gone up. And in this case, the total value of the contract was $2.4 million. Again, that's the $1 million of software, right? Think of the $1 million of support and maintenance over 5 years, and you pay a little bit more for a subscription license than you would have for a capital license. So you have $2.4 million over 5 years or $480,000 annually that your CARR would go up. Implementation and training, essentially professional services, that is actually very unique to every customer. We use $300,000 as an example here, but that could be any number depending on the scale of the client. That's recognized on a percent complete basis. And it doesn't matter what the software licensing model is. Professional services are always going to be recognized on that basis. Now one of the differences is when our customers go live, this is what we call first productive use, on a capital license, that annual support, that 20% of the software license fee, right, that $200,000, that's when that would kick in and people would start paying that amount, right, over the course of the next 5 years. But that would then convert from CARR to ARR, right? That's where we get the CARR to ARR conversion. On the subscription license fee, of course, support and maintenance is just included in the fee that people are paying. So once that customer goes live, they're going to start paying that $480,000 annually, right, and that's where we'll get that benefit of long-term predictable revenue rather than the rather lumpy revenue of a capital license. You see the further breakdown for what that means for year 1. Obviously, in year 1, a capital license has more revenue for us, less license -- less opportunity for subscription in year 1. However, year 2 through 5, there's greater value on the subscription license versus the capital license. So we get this more predictable nature of our revenue by moving to a subscription model. We eliminate some of the lumpiness, and I think overall, make the business more predictable for us, more predictable for the shareholders and everyone. So it's a great move to subscription, but there's short-term pain, which is what this slide lays out for you. So now we'll talk a little bit more just about product and our KLAS rankings. So when we look at the Universal Viewer segment, we placed #4 this year in best-in-class. And as a reminder, best-in-class is once a year, they take the information that was collected from January of '23, all the way to the end of December of '23, sometimes into January of '24, they collect that data and they rank vendors for best-in-class. You can't change the results. The results are what the results are. So we placed #4 this year. We placed #2 in the previous year. If we were to look at the live data in KLAS, we're currently ranked #3. And really, one of the more important things here is that our industry average has remained strong. We're over industry average. And we're one of only 2 solutions that are actually out there right now in KLAS that's being measured, that's been above the rankings. So we actually feel pretty good about where we've been on Universal Viewer. I'll make another overall comment in a minute after I talk about the VNA segment. The VNA segment was not quite as generous for us. I mean the good news here is that our positive feedback was about 12.5% higher than it was last year. The other thing is that we haven't gotten the benefit of these upgrades to B12. So let me just explain KLAS from a perspective of this is very much a lagging indicator, right? A customer could have been interviewed in February of '23 and then they could have had their problem solved. They could have received an upgrade in August of '23. But they're not going to get resurveyed until this coming year, right? So it's always a lagging indicator. So any improvements we make, we don't really see until the end of the following year in regards to KLAS rankings, right? We can read comments, we get good information from our customers. And we have. We've gotten great information from our customers. KLAS is a super valuable tool for us, but it is a tool. It is one data point for us. I would say that one of the things that's happened this year is that we've had these great renewals throughout the year so far. And when you look at that, that's another data point of saying, look, our customers are happy, right? Our customers are happy enough to either renew their agreements with us or for add-ons or expansions with our software. So don't take the KLAS data as a one-stop shop of indicating success of a product or no success with the product. At the end of the day, there's other data points and arguably, not losing customers and signing renewals is another really positive data point when you look at overall how do our customers feel about Mach7 and where do our products lie in relation to our customers' demands. So just some overall comments there on KLAS. We love KLAS. We love this information. I'm not going to read through these. You can read these at your leisure, but just some comments from people. And then let's just dig in to the highlight here of FY '24. Really, the highlight of the year so far for us has been record sales orders. $49.5 million of sales orders exceeded where we thought we'd be by the end of the fiscal year. You would have seen that when we released the Q2 results, we also revised our guidance. We revised the guidance on sales orders for $60 million from $48 million, but great, great first half of the year so far from sales orders. On the revenue side, we are taking it at its -- as face value, revenue has gone down. However, bear in mind, this change to subscription revenue from capital revenue, almost all of our contracts have signed as a subscription model, not as a capital model. That's great for long-term revenue, but this year, it hurts our revenue. So we're signing the sales orders. It's just not reflected in the revenue because of the business model change. So we are seeing an increase in recurring revenue, but overall revenue was down. Our CARR has gone up to $26.8 million, another great indicator of where our ARR will be in the following year. Our ARR right now is at an $18.6 million run rate. That's as of the end of December, right? We're not -- doesn't include anything we brought in, in January and February to convert CARR to ARR, you'll see that at the end of Q3. Some new contracts. We all are aware of these. The VHA was huge. Diagnostic Imaging Associates, another great contract. Hospital Authority of Hong Kong was a renewal. Sentara was a renewal. And frankly, our EBITDA and NPAT is fully impacted by the business model and where our revenue ended up for the first half, just based off of that changeover in business model. But even with that, we still have a strong financial position with no debt, $22.7 million in cash, slightly higher than where we were at the end of the first half in FY '23. So talking a little bit more about this subscription model. You can see on the right, the graph here that really indicates what these sales orders are looking like. And you can see the great sales order growth. Again, we won't benefit from that revenue for about 12 months after you sign the agreement, but that shows great growth right there. And the ARR is increasing and will continue to increase. Our capital software sales will not. I will say that at this stage, very few of our customers, we expect to actually sign capital in North America. When we talk about APAC and the Middle East, there will be a higher percentage of capital deals in that region. They haven't really converted over to a subscription model yet in some cases. However, that being said, there are some deals in APAC, Middle East and also will come in as a fee per study, which is a model that everybody should be familiar with, the model that the VA used actually. There are other areas of the world that use that same model. And professional services has gone up, and it's really unrelated to software order, right? And then when we think about renewals here again, look at renewals as a very, very important part of our business. It's my experience that as we build our book of business here at Mach7, we need good solid customers, and we need to retain our customers. It's very expensive to lose customers. And you want to retain all of those customers and you want to treat them well, you want to land those customers, expand those customers. You want to continue to do renewals, add-ons, expansions. Those renewals are critical to our business. They're critical to having a good, healthy book of business. So rather than thinking of the renewals as an afterthought or something that just happens, renewals are a byproduct of good customer relationships, of having a customer who finds value in your software and ensuring every day that you continue to nurture that relationship. That's where these renewals come from. The company, the team, the sales team, the marketing team, the operations team has done a great job in getting our customers to be happy with our products. So we're seeing that with our renewals, our add-ons and expansions. A little bit about just a few of these contracts. We talk about the VA a lot, right? And as everyone is aware, we originally had slated Phase I for first productive use in June. And again, I highlighted this before, I'll highlight it again. That was not our date. That was the date the government gave us. That has changed. The government has pushed back that date. That's not a reflection of where Mach7 is. It's a reflection of where we have multiple partners, including Mach7, the VA themselves, the government themselves, there's lots of reasons for these things to push out, everything from hardware to network, to integrations, to customer demands, to other things going on with facilities. So rather than put too pointed of a date on here, since it's pushing out from June, we've indicated first half of FY '25. I wouldn't be thinking worst-case scenario there, but it's going to make it easier to say, first half of FY '25, well, there's a little bit at the moment, a little bit of motion in relation to exactly where that actual date is going to land. And Phase I and Phase II, remember that they are completely decoupled from one another. So the first question is going to be, well, as Phase I pushes out, what's that do to the Phase II? Well, it may push Phase II out. People may wait for Phase I to go live before they start thinking about Phase II. Or I could get a phone call tomorrow and somebody might want to move forward with Phase II tomorrow. We don't know that. There are no milestones. There are no contractual milestones that have to be hit in Phase I in order for Phase II to start. So we don't have a time line around Phase II. The other deals on here to talk about are DIA. I think the interesting story about this is they're an ambulatory client. They were a very small -- like very small, like 20,000 a year studies with eUnity, and now they've become a much bigger client for us using our full suite of products. A great example of how an ambulatory land and expand can continue to help build the business for years and how important it is that you have good customer relations. That customer intimacy thing is something that Mach7 really wants to focus on. The Hospital Authority of Hong Kong, this was a 5-year extension of their support and maintenance agreement. And with Sentara, this is a 5-year subscription agreement for the Enterprise Imaging Platform and the eUnity Viewer. And this one and particularly, we start to see ARR right away in January. So there's a quick conversion there for this particular contract. So the short-term revenue impact, I've mentioned this already a couple of times, but just be thinking about this graph to the right. At the end of the day, subscription licenses are healthy for our business. They're good for the predictability of our business. They're good for predicting when we're going to start to see the jaws of this business open up and when we're going to start to see more profit. Well, it's a lot easier to predict profitability in the subscription model than it is with a mixed model where you don't know where your next launch is going to come from. So that, in my opinion, is good news for the mid- to long-term growth of the business. And in short term, yes, it's a little painful in the short term, but I think it's worth it to get there. It was always a path that we were likely to go down. It's not something that we forced, but it's something that just naturally and organically started to occur in the market. So we take advantage the best we can. With our CARR number, something to keep in mind with CARR is, look, I want to see a backlog, right? I like a backlog. I think a backlog's indication of we've got a rightsized workforce. If I didn't have a backlog and we had more than enough resources to throw at every deal that comes in the door, then I would be spending a lot more in OpEx. So by having a backlog, that helps our business grow. And it's okay to not be able to start a client for 30 days or 60 days after they sign a contract, that can be okay at times. It's nice to be able to start contracts as soon as they come in the door. And clearly, we don't want to push those out any further than we have to, but there's a line there on profitability. And we're very careful of our OpEx. We're very careful of trying to grow at a profitable way. We want to look out for our EBITDA, we want to look out for NPAT. Those are key metrics for us. So we want to find ways that we can bring our customers live faster. We want to find ways that we can convert CARR to ARR faster. That's going to always be something that we strive for. But in the case that we're in right now, we're actually converting at a pretty good rate. We're doing a pretty good job here. And bear in mind that it does take us 12 to 18 months for a customer to go live after they sign a contract with us. And it all depends on their size. We've had some that have gone live in 90 days. We've had other conversions that go live like Sentara right away, right, because it's a renewal, not a net new customer. And then we've had some like the Trinitys, or Adventists of the world, which seemingly took forever to bring live, right? So it kind of runs the gamut there. So despite the revenue decline, though, good strong growth in receipts. A great job by Dyan and her team, and we still have some good cash flow with a bit of cash flow improvement. We ended the first half of the year with $22.7 million, slightly higher than where we ended first half in FY '23. We brought in $15.5 million of cash receipts. That's all due to different contractual milestones, customers going live, renewals, add-ons. Those sorts of things are all part of different milestones that get matched for us to be able to invoice and collect. So a great, great job, great teamwork on that, actually. And our cash is looking good and our cash is still looking good for the full fiscal year. As we said, we would expect to be cash flow positive in FY '24. There we are. The next slide. We're cash flow positive in FY '24. This transition from subscription, it should have a limited impact on short-term cash flow. The reason for that is that we don't really predict because of contract milestones, a lot of cash to come in on a capital contract. Revenue perhaps, but cash not so much because we just don't know what those milestones are going to be when a contract is signed, especially as we're looking to do our forecasts pretty far in advance. So outlook, not a lot has changed here. We still have a fragmented imaging market with long-time legacy vendors still losing market. Dynamics continue to skew towards ambulatory but slowly. And for us, there's opportunities created on both segments of that market. Again, for us, what we're looking for are deals with a more complex reading environment where remote workforces have become more normal. Enterprise imaging strategies, they require a lot of interoperability to give hospitals and the ambulatory folks a way to simplify their image management and diagnostic viewing from any location, anywhere. That's really important to them. That's complex. We work better in the complex than we do in the simple. From a subscription, from a business model perspective, look, accelerating that transition does have some short-term revenue decline. But again, that ultimately will result in higher quality recurring revenue and greater predictability for our future. Our sales pipeline continues to be great. That's building year-over-year-over-year. We continue to build a great pipeline. Dave Madaffri and team have done a wonderful job there. The marketing team is a big advantage for us there. And it wasn't necessarily our choice for everyone to have a preference for a subscription model, but it is what it is, and we're happy to see it though, and we're ready for it. And we have a flexible business that can accommodate for it, and we're happy for that. And then the bottom right here, just our FY '24 expectations. This was the revised guidance that was sent out at the end of Q2. Sales orders of $60 million; revenue of between $27 million and $30 million; OpEx growth of less than 15%. You will have noted that in the first half of the year, OpEx was about 9%, so there's a little bit of leeway there; and then again, cash flow positive in FY '24. So I think that's a good place for me to stop, Francoise, and we can move on to questions.

Thanks, Mike. Our first question comes from Ivan Tanner. Shareholders have been patiently waiting for the cash to start flowing in the last 5 years. That is Mach7 [indiscernible] breakeven, small cash loss or profit. However, regardless of the great work done in securing new orders, customers and expanding the business, the cost of doing business has increased significantly. When will meaningful cash start flowing and be reflected on the cash flow statement?

Great question, Ivan. Look, it's a focus for Mach7 to start showing more meaningful positive earnings. We can't -- like I mentioned earlier in the presentation, we are concentrating on EBITDA. We're concentrating on NPAT. And I think what you're really asking me here is when do we -- what's that path to profitability? When are we going to start growing that cash. And ultimately, that would lead to a great outcome for shareholders here. And listen, I think as I've indicated before, I think over the next 3 years, as we start to see our ARR align with our OpEx, we see that alignment and our ARR will start to outpace our OpEx, and that's when we'll start to see the scaling. And I think it's important to keep in mind that although we see these revenue changes in the first half, bear in mind that we as a company really have tried to take OpEx control very seriously. We have only increased our OpEx by 9% in the first half to try to accommodate for this change in revenue, right? The orders are coming in. So it's not like the business isn't coming in. So the business has to grow to accommodate these sales orders. It's just that the revenue is going to be lagging, right? So we have to be careful of not investing in the business and not being able to execute. We need to invest to be able to execute and do the right things for our customers, but we need to do it as judiciously as we can, so we can curate that very careful balance and try to show profit for everyone.

Thanks, Mike. Our next question. We've got a couple of questions from Madeleine Williams at Wilsons. Update on the new contracts. When can we expect these over the second half? Mentioned 2 at the quarterly. Is that still on track?

Yes. Yes, it is. I think we'll have a net new customer that will likely be announced here in Q3. And I think, hopefully, we'll be able to pull in the fourth one before the end of the second half of the year here. But yes, we're on track for that net new logos.

All right. And Madeleine's second question is delaying updates to systems with ongoing cost pressure, is this what you were seeing? Does this impact any of the new customer discussions?

It doesn't delay any of the customer conversations, no. Look, again, we're just trying to be -- we try to be careful here. We see delays in delivery occasionally. Some of that's in our control and try to do our best to resolve those issues. Some of it's not in our control, some of it's customer related. But look, again, I think we will continue to make investments in our business to make sure that we can deliver as quickly as possible. That transition for first productive use is very important to us. We want to continue to work on that. And that's ultimately where we start to get to revenue faster, right, is that conversion. So ongoing operational improvements there.

Thanks, Mike. We've got a lot of questions on the chat. So I'll begin. The first one comes from Wei Sim at Jefferies. He was asking if you could provide any color on the recent JV that Akumin has entered into and what opportunity it may provide for Mach7?

Yes, not really. I mean, to us, that's just another customer for Akumin. They chose to go JV rapid. It's really just a -- this happens all of the time in the ambulatory image space, all of the time. JVs happen constantly. So I would say that, if anything, maybe it could add some additional volume to Akumin once they're all up and running. But in the short term, no impact to us. In the longer term, look, the better Akumin does as a business, the better we're going to be, right, because they're going to keep increasing their volume and buy more licenses and all that's going to be great. So hopefully, this allows for their business to grow more. And maybe someday, we'll take advantage of that. But for now, I would say, we don't have any visibility to change.

We have another couple of questions from Ivan Tanner. The first one is assuming the first stage of the VET contract is successfully implemented by June, when would discussions commence for the implementation of the second stage involving the 7 VET networks [ or business ]?

Yes. Look, I think I may have already answered this question, I think, for you, Ivan. But yes, look, our Phase I is pushed out past June. I made that comment. And Phase I and Phase II are decoupled from one another. There are no contractual milestones that tie them together. So the timing of which is difficult for me to guess. I don't know if people are going to wait to see how Phase I works and if those customers are going to go live and be happy with it first before they move to Phase II. Or I could get a call from a VA hospital tomorrow who wants to move into conversations around buying the technology. I just don't know. So all I can say is that the Phase I and Phase II are decoupled from one another.

Okay. Another question from Ivan is it's clear AI will play a significant role in scanning medical images. Can you explain what Mach7 is doing to facilitate the seamless integration of AI by third parties into Mach7's offerings?

Yes, a couple of different answers there from a different product perspective. One product perspective is from the VNA, where we are an integration platform and we are agnostic to this. We don't go out to partner with specific AI companies. We partner with our customers. They bring in these AI algorithms that they want to use, and we help them integrate that, either through an API integration within VNA or to the clinical viewer. Sometimes there's some specific protocols that can be used to take advantage of some of the byproducts, some of the products that the AI is putting out and make that part of the everyday workflow for the radiologists or for the clinicians. It could be completely outside of reality, by the way. So both products interact with AI slightly differently, and we have integration opportunities with both products. We continue to improve our interoperability capabilities every quarter with our software. So I think that's our play with AI as an integration partner.

Our next question comes from [ Andrew Hewitt ]. Who are the companies ahead of us in KLAS? And what differentiates them from us? And how do you expect to close the gap? Do you think the KLAS ranking affects new contracts materially? Or is it just one more data point companies use to compare?

Yes. I guess I'll answer that in reverse order. Yes, I think it's just one more data point. The sales team is very educated around this process and capable of speaking to this. And we've got other good customers who are referenceable points to us. So yes, it's just 1 data point for the customers. I don't know if I can remember. I think on the eUnity side -- I'm sorry, on the Universal Viewer side, Agfa came in first. I think Visage message came in second and then I think Merative came in third and we came in fourth, I think. On the live data right now, I think Merative is first. I can't remember who's second and we're third, but maybe Agfa is second and then we're third.

That's right, Mike.

And then on the VNA, we ranked #6 I think on that. And we -- I'm not sure what the ranking order was on the VNA. But I will say that the competitors haven't changed in the VNA space.

Our next question comes from [ Dev Ramachandran ]. Would the quarterly revenue signify growth if it was in the same basis before changing to the subscription model? What would be the growth rate?

Oh good question. I'm not sure. You'd have to take all those sales orders and convert those to capital licenses. And the VA alone would have been pretty considerable if that was a capital license versus a subscription license. We haven't looked at that as a one-to-one kind of relationship to see what that would have done with capital.

Our next question is from Wei Sim at Jefferies. Have we had much capital contracts which were renewed as subscription during the period? And what impact did that have on our revenues as a headwind?

It's not that frequent that a renewal comes in with a different business model. Generally speaking, if people are originally bought as a capital, they stay as a capital. It's happened a few times. Not very many. I would say Sentara was a little complicated because they were a mixture of contract types. Now they're full subscription. So I wouldn't -- it's not that the renewals choosing to go subscription have had the greatest impact there. It's net new deals that move to subscription that have the biggest impact there. And the renewals, like I said, they generally stay the same. Occasionally, they'll convert to subscription, but that's pretty infrequent.

Our next question comes from [ Andrew Hewitt ], who asks Phase I first half '25, is that financial year '25?

That is financial year '25, yes. Yes, so before December.

Our next question comes from Shuo Yang at Microequities. Can you comment on your renewal pipeline in the second half '24 and FY '25 and what pricing increases you're aiming for?

We can get information to you on that. I don't have that readily available. I will say that renewals slow down in the second half of the year, for sure. There are a couple in there. But again, if you look at our current sales orders of $49.5 million and we expect to be at $60 million, a portion of that's going to be renewals. But that I wouldn't expect that to -- I mean, the math there is not as significant as the first half for sure. And then in relation to '25, the renewals slow down quite a bit year-over-year from '25 I think. Generally speaking, I don't want to give a specific number on this, but it's going to be 1/2 -- less than 1/2 of what we saw in FY '24 for renewals, certainly less than 1/2. And yes, was there a second part of that question, Francoise, that I missed?

No. That was it. Yes. No, no, think you got it. Another question from Shuo Yang. Does the VA delays actually assist in phasing your resourcing and implementation of new contracts across the entire organization?

No, not really. Unfortunately, it's not like we walk away from the job and wipe our hands of it and go back to work whenever they call us back. We stay engaged. We continue to work. We continue to move them all forward. We continue to work on the integration with the other companies. And we've got a number of all projects all simultaneously in deployment right now. So I mean, it's always nice to get a little bit of pressure release there, but I'd rather not. I'd rather keep the pressure up. But no, I don't think it -- it doesn't materially impact our staffing one way or the other or give us that much relief.

Our next question is from Iain Wilkie at Morgans. This may be a tricky question, but can you give any color on renewals over the half and which were previously capital and have shifted to recurring just so we have a bit of clarity on where the results would have sat if everyone renewed on a same contract style?

Yes. And I'm not so sure. Dyan, do you know off the top of your head if any of our customers converted? I don't think they did in the first half.

The only customer where you could consider it's slightly different was Sentara. Otherwise, everybody else renewed for the same type of model that they were previously on.

Our next question comes from Wei Sim at Jefferies. What was DIA original subscription contract worth when small use case?

It's 20,000 studies a year. It probably -- it wasn't worth much. It was probably worth $20,000, $25,000 a year.

Yes, Mike, the release from 21st of July, said that it added $0.6 million of annual recurring revenue at the renewal.

Our next question is from [ Andrew Brist ]. Who are the major competitors? And are they selling on a subscription model?

Yes. I think everybody is selling on a subscription model now, pretty much everybody in the industry is. And again, people stay flexible. I think everybody stays a little flexible and people aren't going to turn down deals. But I think just generally speak, people are just looking for more of an operating model. And our competitor list has not really changed. And geographically speaking, GE is still a big competitor in APAC. Agfa is still a big competitor in APAC. In North America, Hyland from a VNA perspective continues to be a competitor. Fuji has a great VNA. They're a competitor in North America. And then really for us in North America, the biggest competitor, and this has always been the case, it's whoever the incumbent vendor is, right? Incumbent vendors do have an advantage over bringing in a net new company, so it's about with whoever is there.

We have a couple of questions now from Indi Rajakaruna. Hi, Mike, a few questions from me. First, gross margin. Notice the gross margin has decreased by 2 basis points. Is it due to change in the sales mix or dealer sales?

Do you have any comments on that, Dyan?

I do. So the gross margin with our cost of goods sold, because goods sold are not applicable to all contracts, if you look at the financial comparing December '23 versus December '22. But when you look at what the gross margin was for the second half of fiscal '23, it's in line with that.

And second question from Indi is you mentioned about the Middle East. What's its contribution to sales orders in the first half of FY '24?

No contribution in the first half of '24. We're hoping for some contribution in the second half.

Okay. Our next question is from Ashly Smith. Is there any idea of a time line for resolution of the patent case?

Yes, I wish. No, unfortunately, we have not heard a word on that. It still remains with the Federal Court of Appeals. And we have received no updates.

Okay. And [ Andrew Hewitt ] has got a follow-up on his original question. What differentiates us from the companies ahead of us? And how do you plan to close the gap?

So we have some great differentiators already. It really depends on what it is we're selling. Our zero-footprint viewer is different than everyone else's. It's a very unique diagnostic viewer that's zero-footprint and it has a lot of great differentiators that make that a great product in the industry. Our VNA product has got a lot of different differentiators as well. But what we compete against oftentimes is not companies that have modular solutions but companies that have a single solution that fits a GE solution or a Philips solution. They have a single ecosystem where they're supplying radiology, cardiology, workflow, enterprise or VNA, PACS solutions, all in one ecosystem. So it depends on the customers and what they're looking to achieve. But generally speaking, from an industry perspective, that's the gap are there's these large-scale companies like that, that have a full ecosystem. And then there's the smaller niche companies who offer more specific products for specific workflows, and that's where we reside, right? But we'd end up competing with some of these bigger entities. And we have to prove to the clients that a niche vendor is a better solution than just going with the inferior product because it belongs to a vendor you already have a relationship with. So that's a key selling point for us that we have to get around and where our competitors sometimes have -- it's not that there's a specific product gap that needs to be filled. It's not a missing product. There's not a missing piece of functionality. It's finding the right workflow and finding the right value-based solution for the customers and what they're looking for.

Our next question comes from [ Hugo de Vries ]. With $49.5 million in sales orders achieved in the first half, why has sales order guidance of $60 million for the full year not been upgraded?

Because we think that our sales orders for the year will fall right around $60 million. Look, it's not always equal, right? You can't just take the first half and assume that you're going to do the same business in the second half. Our sales cycles are 12 to 18 months. Sales orders are lumpy. Sales orders are somewhat unpredictable in what quarter they're going to fall into or what half they're going to fall into. So when we look at our forecast, we take a lot of things into consideration. That include the reps' confidence level that the deal is going to sign and the reps' confidence level of how well we know the timing of when it's going to sign, as well as where they're at in their stage of sales. We take that all into consideration. We weight it and then we determine our forecast for multiple quarters or half years or full years out. So in this case, we feel that by looking at what we have in front of us for FY '24, for the rest of FY '24, we end up at around $60 million. I'd love to exceed that number. But frankly, our sales orders have already exceeded where we expected to be this year. So we're quite happy with where we stand with sales orders. But yes, you can't really expect the business to grow sort of predictably in that nature and just like times half 1 by half 2.

Thanks, Mike. Our next question comes from [ Darren ]. What would signify a successful second half FY '24? A contract win of a certain size? A key metric? A renewal? An upgrade?

Yes. Look, we're really happy with sales orders right now. And our sales orders for the year, I feel are great. The sales team has done a wonderful job in doing what we've asked them to do this year. So look, a successful year for us is coming in within our guidance. At the end of the day, we are looking to inch our way more towards profitability. So we want to continue to grow our book of business. We want to continue to have great relationships with our existing installed base. We want to watch our operating expenses. We want to invest in the business as well so that we don't fall behind and we can continue to execute and deliver so we can get that recurring revenue. So it's a combination of all of those things that we have to concentrate on, which will make a successful second half and a full year for us.

We now have a couple of more questions from Madeleine Williams at Wilsons. The first one is: to confirm, is 95% gross margin correct going forward? And is this due to the revenue mix that is a lower license fee? And does this improve as sales orders drop into the P&L?

Do you have any comments on that, Dyan?

So 95% is a reasonable expectation moving forward. As the projects achieve those productive use, there's certain costs of goods sold that we need to incur. So it all depends again on cost of goods sold what we're going to spend in the future, but I think 95% is a reasonable estimate to use.

We have another question from Madeleine. Can you provide a breakdown of OpEx into rough buckets? That is, sales and marketing, roughly 17% of employee and staff expenses; R&D, still 29% of revenue?

What I can tell you with confidence is that still 75% of our total OpEx is people, if not edging slightly higher than that now. And the breakdown by department of that OpEx, it's -- for sure, R&D is still going to be sitting at around 30%. In regards to sales or services support, where they fall, I don't have those numbers off the top of my head. But nothing has fundamentally changed with our OpEx development or where we're spending our money for sure.

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

Yes. Great. Thanks, everyone, for attending. And again, I hope everyone had a great reporting season. And hopefully, we're able to give you some good information on Mach7 and how our first half of the year has come about. So thank you all, and appreciate your time.