Mach7 Technologies Limited (M7T) Earnings Call Transcript & Summary

Welcome to Mach7's Second Quarter FY '25 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 Q2 results. 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 Q2 update.

Thank you, Francoise. Good morning, everyone, and welcome to Mach7's FY '25 second quarter business update. I'll start off the way we typically do with these meetings. I'll start off with some highlights and then add some detail about some of the more important components that I think we really want to highlight. So highlights for the quarter. Contracted annual recurring revenue or CARR was AUD 31.8 million at the end of Q2. That's up 15.6% on Q1 from a reported basis perspective. up 4.3% in constant currency. The ARR run rate was AUD 25.1 million at the end of Q2, that's up 14% on Q1 on a reported basis and 2.9% just about 3% in constant currency. Sales orders of AUD 14 million in Q2, and that's compared to Q2 of FY '24, which was AUD 16 million, again, in constant currency. Cash was great at AUD 23.6 million at the end of the year, at the end of Q2. And at the end of January, well, January 29, you will have seen that our cash was at just a little over AUD 25 million. We did announce that we are starting to participate in a buyback program of up to AUD 5 million. That's expected to commence in early March. I'll talk a little bit more about that when we talk about outlook for the rest of the year. So as you can tell, the way we're highlighting this information this quarter, exchange rates worked with us for the quarter. And we -- so we actually gave you constant currency as well, just for transparency. I think for those that would be interested, we -- from a currency perspective, we hold about 70% of our cash in USD and the remainder in AUD. So just from a cash perspective. So the message really for Q2, everyone is pretty simple. We're on track to meet FY '25 guidance. We provided a solid quarter. And as we sign new contracts with existing customers, I think, once again, proving the value of our land and expand model along with the rationale for the investment we've made in customer intimacy. Throughout the quarter, we continue to invest our time and energy into our 3 strategic pillars of cloud enablement, customer service and integration and interoperability. Those 3 pillars, we believe, will bring value to our customers today enhance our ability to compete into the future. So very important that we invest some resource, some time, some money into those very important 3 strategic pillars. So kind of getting to the meat of the announcement, let's talk about sales orders first. Our sales for second quarter were AUD 14 million, and most of those sales were coming to us through the ARR type sale. ARR sales were AUD 8.8 million. Our capital sales were AUD 2.8 million. And then we also had about AUD 2.4 million in professional services. And as a reminder, those professional services those are the services that we sell to deliver our product and the revenue for those professional services is recognized on a percent complete basis as our customers move from throughout the implementation process. Overall, 67% of our sales in the quarter were add-ons and expansions, renewals made up the remainder of that sales number. You'll also note that we included a chart in our announcement around orders. The intent really is to show the fluctuation quarter-over-quarter in our sales orders showing that we really don't have seasonality so much. We simply have some lumpy sales that are somewhat difficult for us to predict quarter-over-quarter. It's very easy for something to slip from December 30 to January 3. And as an example. So there's just some lumpiness there still. No doubt for the remainder of the year, for the whole year, but certainly for the remainder of this fiscal year, our focus is on net new customers in relation to sales, right? We still believe just like last year, that we can bring in between 2 to 4 net new customers on the year. And we have line of sight to meet that statement, and we look forward to delivering that over the course of the next 2 quarters. So moving on from sales orders and talking a bit about revenue. Usually start off with our annual recurring revenue. That's currently generating 25 -- a little over AUD 25 million. Run rate increased by about AUD 700,000 since the end of Q1 in constant currency. It's important to note though that ARR will continue to grow as new customers achieve first productive use and existing customers expand their licenses. As they add on new features, renewal increased price points, all of which are equally valuable to our overall revenue number. The CARR number is at AUD 31.8 million at the end of Q2, an increase of a little over AUD 1 million, AUD 1.3 million since the end of Q1. That equates to the AUD 25.1 million in ARR plus the AUD 6.7 million in subscription maintenance and support fees that are not yet recognized as revenue. And once again, as a reminder, the gap between CARR and ARR that represents future revenue once first productive use is achieved for new customers as well as additional revenue from existing customers from the effective date of the renewal or once first productive use is achieved for something that's an add-on sale. And CARR is based on contracts that we have in hand as of the 31st of December, and that includes revenue associated to anything that came in through Q2. Moving over to cash. Cash receipts from customers in Q2 were great. We were at AUD 9.6 million, up 34% compared to AUD 7.2 million in same quarter of last year. Our operating activity payments for the quarter were AUD 1.2 million lower compared to Q1. That included some annual fees of approximately AUD 900,000 related to the company's investment in our strategic pillars. So not recurring costs that will happen in the quarter, of course. We collected AUD 9.6 million, spent AUD 8.7 million in the quarter for a cash inflow of AUD 900,000. So we were operating cash flow positive in Q2, which we typically have not achieved in the past in Q2 due to RSNA expenses and to kind of a timing of when salary actions hit for our employees as well. So this outcome is great for us. It will help improve our year-over-year operating cash situation and has given us confidence knowing that Q3 and Q4 are typically strong quarterly cash quarters for us. So great news on the cash front for the quarter, and we continue to evaluate and capitalize our R&D costs as appropriate for the business. In Q2, that amounted to around AUD 200,000. We'll have a more complete view on this with our first half results after our audited results are in. So just a general outlook for us and a couple of things I want to highlight for everyone. RSNA, I mentioned, it is our most expensive marketing initiative every year, and this year was no different. Our products were showcased at over 10 vendor booths across RSNA along with our own booth, generating a 78% increase in net new leads. Powerful RSNA for us where we had a chance to highlight our proprietary integration and relationship with NewVue and our collective new product called UnityVue. And this continues to generate new leads for us. We have some marketing campaigns that are ongoing and some new ones that are coming out over the coming months. So look forward to traction with the UnityVue product. And another highlight from an outlook perspective is we continue to have a strong financial position, no debt, growing cash balances and we do take a disciplined approach to costs and cash management. We're committed to our shareholders and as a team, we feel very confident in our business and in our future. And with that, we announced an on-market buyback yesterday. We think that currently, this represents an efficient and opportunistic capital management opportunity for us as we head into what we think will be a very good second half, especially considering the historical results of Q3 and Q4 for the business. And I think the last thing I'd like to really make a comment on, and it wouldn't be a quarterly report, if I didn't make a comment about our NTP deployment. We fully expected that customer to go live by the end of the year, but we did suffer some further delays on that project. And we have a new go-live set for the end of Q3 of this fiscal year. There isn't a specific reason I can give you for the delay beyond the fact that this is a multifaceted complex deployment and we have a lot of interlinked moving parts from various companies creating this solution. So there's no one place that I can put my finger to tell you there was a specific problem. It's more a team decision between the vendors and between the customer to make sure that the customer is positioned to be successful when they do go live. And again, right now, collectively, we're in agreement that, that will be at the end of Q3. I guess I'll end just by saying that we continue to have a strong pipeline. We're reaffirming our FY '25 guidance for 15% to 25% growth in CARR and revenue and the commitment to our OpEx growth, that will be less than our revenue growth, getting us incrementally closer to profitability, which is the ultimate goal. We're committed to cost management as our growth continues. And I'd just say that I will assure everyone on the call that both cost containment as we grow and commitment to executing against initiatives are equally important and vital to the long-term success of the business. So there's a fine line there where we need to be super cautious of how we spend and super cautious on where we invest. And I feel that we've made good investment in the business, and I think we're starting to see some good results from that investment that we made at the early part of -- or the early part of calendar year '24. So with that, I think Francoise, I will hand it back over to you, and I can take on any questions that you have.

Thanks, Mike. We have received several questions via e-mail from [ Michaelson ], and so I'll start with these. How confident are you that some of the VISNs will sign up in FY '25?

Well, look, I -- we would have expected to see 1 or 2 VISNs in the second half of this fiscal year. So from now to June, that, of course, was predicated upon the customer going live. We always said that the Phase 2 will start after Phase 1 goes live. So with the delay in Phase 1, there's going to be a bit of a delay in Phase, but we do have VISNs lined up. We have good relationships with them. We continue to have good conversations with them. I continue to have faith in Phase 2. We just need to stay focused on Phase 1 right now to get the customer live, to get them using our software, and then we'll worry about Phase 2.

Right. The second question from [ Michaelson ] was incumbents have been noted as the biggest competitor. In recent experience what percentage of contracts are you seeing being won by the incumbent?

Yes, good question. Look, I'll make an assertion on this, of course, off the top of my head, I don't have specific numbers, but I would say that at least 50%, maybe 40%, but I would say probably 50% of the people that we see coming through our pipeline they'll stick with their incumbents as they work through the process and then maybe eventually they transition away, but it's usually like a multiyear process, right? You start working on a lead, it turns into an opportunity, you work with that opportunity for a couple of years. And during those couple of years, they -- it takes them that long to decide if they're really going to move away from their incumbent vendor. So I would say a good portion of the RFPs we see clients still maintain -- end up maintaining their relationship with the vendors. And part of that is that there's to a degree, held captive by those vendors. They end up in a managed service contract where it's very difficult for them to extract themselves from the hardware and services that vendor is providing. It's expensive to move and sometimes cost prohibitive.

Thanks, Mike. I'll now turn to the live chat, and we've had several questions on the VA and most of those questions you've answered. [ Peter Cooper ] did ask a question on Phase 2. And I'm just going to read it out and if you feel there's anything you want to add, please add. Mike, can you please advise when Mach7 will make its final submission for the VA Phase 2 contract and when Mach7 will be advised if it was successful?

Well, yes, it doesn't -- it's not really working like that, right? The contract has been awarded for Phase 2 already, right? So now each VISN has the opportunity to decide if they want to participate in Phase 2. So it's not a bidding process. It's not a proposal process. The bid has already been out there. The bid has already been awarded. VISNs can choose to take advantage of that awarded bid or they can choose to go out to bid on their own for a third-party solution that's unrelated to the contract. They're not forced to abide by this contract. So it's not like there's an open bid out there that we're competing in so that people shouldn't get confused by the fact that the VA and you're hearing conversations in the marketplace around it's got to NEIS, National Enterprise Imaging Solution, that's entirely different, an entirely different program designed around replacing their VistA product, which is a homegrown solution, has nothing to do with Phase 1 or Phase 2 of NTP but it is out there. That probably won't be awarded, I'm going to guess for at least another year, 1.5 years. But has nothing to do with Phase 2. And look, we hope to see VISNs move over to Phase 2 as they see success with Phase 1.

Thanks, Mike. Our next question comes from [ Andrew Tan ]. Read your FY '25 guidance for 15% to 25% growth in CARR, is this on a constant currency basis?

Yes. Look, when we came up with our guidance, what we were working off of what our CARR was at the end of FY '24, right? We weren't taking into consideration any specific fluctuation in FX rate, right? So I would say that, look, we were basing it off of reported dollars, and we expect to be doing the same at the end of the year.

Thanks, Mike. Our next question comes from Shuo Yang at Microequities. What gives you confidence you can land new logo clients in the second half? Are these tenders awaiting decisions or in contract negotiations stage?

Yes, a little bit of both. We have some that are in negotiations, and we have some that were final vendors. So a little bit of a diverse pipeline there at the end of the pipeline with deals that we have high confidence in that our sales team has high confidence in makes us feel good about the second half of the year.

Our next question is from Iain Wilkie at Morgans. I'm interested in the RSNA showcase in over 10 booths. Is this direct through Mach7 or possibly several service providers who use your products?

Yes. So this was partners of Mach7 that are using our products. So as an example, our product was showed in the AWS booth. Our product was showed in the Nuance booth, our product was showed in Blackford amongst all these different partners that we have, that's where our products were being displayed. NewVue is another one of our more recent customers -- our partners. So yes, it was partners that are reselling our software or partners that are important to us and are using our product as part of their product like as an example, Nuance uses our viewer as part of their product, right, for PowerShare. So a combination there.

We have another question from Iain Wilkie. If you had to quantify the new leads from RSNA, maybe not in dollar contract terms, but in percentage versus prior years, that would be great, better than prior years or about the same?

Look, definitely, better than prior years, I'll say that the pipeline growth coming out of RSNA is changing. When I look -- if I look to stratify those deals, I'm seeing an influx of opportunity from radiology groups from what we call the ambulatory section, right? I mean, just to make it a little broader statement. Ambulatory teleradiology is picking up in interest. And we're getting a lot more interest too out of the Middle East. The Middle East seems to be opening up. And it's always been unpredictable, and it remains unpredictable region, but interest is picking up, and our brand recognition is picking up in the region. So that brings us some good opportunity there as well.

We have a question from [ Andrew Ribeiro ]. What happened with the company's contract with Trinity Health?

Nothing has happened with the contract with Trinity Health. That's still an active contract and Trinity Health has our VNA and our eUnity Viewer. I think what people are probably thinking, obviously, they saw an announcement from Pro Medicus where they won their PACS solution, which they certainly did. I just remind everybody that there are a lot of customers out there that have the visage front end for radiologists, and they use our VNA as a back end and use our enterprise viewer as a distribution software across the rest of the enterprise. Trinity will now be the first customer that has that type of a configuration and most likely won't be the last either.

Our next question comes from [ Carlos Gil ]. Just to clarify, the guidance of plus 25% in ARR is in Australian dollars. That is not in constant currency.

It is in Australian dollars, and it is not in constant currency.

Our next question comes from [ Andrew Brest ]. Had you considered a capital return to shareholders rather than a share buyback?

No. Look, we -- as a Board, have had these conversations on and off and we've had the idea of buybacks brought up to us, geez, over the last couple of years, the question continues to come up. So the Board is oftentimes thinking of capital management. I wouldn't say that a direct cash back to the shareholders was the direction we would have thought to go in. We think that going with the route that we did more of a traditional market buyback, we'll give a good return and give a good boost. And ultimately, hopefully, give the market some confidence that as a team, as a Board, we do have a lot of confidence in our delivery and where we stand as a company.

Before handing back to Mike, I'll pause in case there are any final questions. Mike, we have no further questions, so I'll hand back to you for closing remarks.

Super. Thank you all. Thanks for attending the Q2 update. And just as a reminder, in a very short order at the end of February, we'll be coming out with the first half year results to give everybody some further clarification on where we ended the first half of the year and projections for the second half of the year. So we look forward to having the opportunity to talk to you again soon. Thank you, everyone, for your attendance.