Vitalhub Corp. (VHI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Vitalhub's Q3 2020 Conference Call. [Operator Instructions] I would now like to turn the conference over to Graham Farrell, Investor Relations Officer. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Vitalhub's quarterly conference call to discuss the company's financial results for the third quarter of 2022. This call will cover Vitalhub's financial and operating results for the third quarter ended September 30, 2022. Following our prepared remarks, we will open the conference call to a question-and-answer session. Our call today will be led by Vitalhub's Chief Executive Officer, Daniel Matlow, along with the company's Chief Financial Officer, Brian Goffenberg. Before we begin our formal remarks, I would like to remind everyone that some of the statements on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEDAR filings. I will now hand the call over to Brian Goffenberg. Please go ahead, Brian.

Thank you. Good morning, everybody, and thank you for taking the time out of your Friday morning to join us here today. Vitalhub is pleased to report another solid quarter as the company continues to hit its objectives for 2022. The business has maintained its trajectory that has been evident since the start of 2022 driven by both organic growth and accretive acquisitions. I'll now run through the highlights in the quarter before passing it over to Dan. Total revenue for Q3 '22 came in at $9.8 million compared to $6.6 million in Q3 '21, an increase of $3.2 million or 48%. Revenue for the 9 months ended September 30, 2022, was $28.7 million as compared to $17.7 million for the same period last year, an increase of almost $11 million or 62%. The company experienced a minor year-over-year foreign exchange headwind of approximately about $265,000 in the quarter due to a weaker British pound versus the Canadian dollar. Revenue from term licenses, maintenance and support in Q3 '22 was $7.7 million compared to $5.5 million in Q3 '21, an increase of $2.2 million or 40%. The increase in term license Matane support revenue is primarily attributable to new customer contracts and acquisitions completed. For the 9-month period ended September 30, 2022, total revenue from this segment was $20.6 million compared to $14 million, an increase of $6.6 million or 48%. Revenue from Perpetual software licenses in Q3 '20 was $204,000 compared to $328,000 in Q3 '21, a decrease of $124,000 or 38%. For the 9-month period ended September 30, '22, revenue was $3.1 million compared to $900,000 in the same period last year. This represents an increase of $2.2 million or 244%. Revenue from professional services and hardware in Q3 '22 totaled $1.9 million compared to $800,000 in Q3 2021, an increase of $1.1 million or 32%. This increase is the result of timing differences in delivery of hardware and implementation of our software solutions. Revenue for the 9-month period ended September 30, '22 was $4.9 million compared to the same period last year of $2.9 million, an increase of $2.1 million or 72%. Annual recurring revenue, or ARR, at the end of Q3 2022 was $30.1 million representing a decrease of $252,000 on a quarter-over-quarter basis. The decrease was due to the currency headwind of $1.1 million that the company experienced in the quarter. The company's true measure of ARR debt organically increased by $851,000. Gross profit as a percentage of revenue in Q3 22 was 80% compared to 82% in Q3 '21. For the 9-months ended September 30, '22, gross profit as a percentage of revenue was 82% compared to 79% for the same period last year. Operating expenses in Q3 ‘22 totaled $6.1 million compared to $4.8 million in Q3 '21, an increase of $1.3 million or 28%. For the 9-month period ended September 30, '22, operating expenses totaled $17.8 million compared to $12.2 million in the same period last year. This is an increase of $5.6 million or 46% year-over-year increases are directly attributable to acquisitions made throughout '22 while we continue to work through full-scale integration. Net income in Q3 '22 was $41,000 compared to a net loss of $576,000 in Q3 '21, an increase of $617,000 or 107%. For the 9-month period ended September 30, '22, net income was $1.6 million compared to a net loss of $1.3 million, an increase of $2.9 million or 215%. EBITDA for Q3 '22 was $1.4 million compared to EBITDA of $189,000 in Q3 '21, an improvement of $1.2 million or 35%. For the 9 months ended September 30, '22, EBITDA was $4.8 million as compared to $645,000 for the same period last year, an increase of $4.1 million or $641,000 OR 41%. The increase is attributable to several factors, including an increase in revenue, 62% and continued synergies gained from acquisitions. Adjusted EBITDA in Q3 '22 was $2.2 million compared to $1.3 million in Q3 '21, an increase of $900,000 or 68%. For the 9 months ended September 30, '22, adjusted EBITDA was $7.1 million compared to $3.2 million for the same period, an increase of $3.8 million or 21%. Cash flow from operations before changes in working capital for the 9 months ended September 30, ‘22 was $5.3 million compared to $1.4 million for the same period last year, an increase of $3.9 million or 278%. Cash on hand at September 30, '22 was $36 million compared to $16.3 million at December 31, 2021. The substantial increase in cash was primarily driven by a new revolving facility loan from Social Bank and the proceeds from a bought deal in April 2022. With that, I'd like to hand the call over to Dan for an update on the business.

Thanks, Brian. Just a few comments to add to that. I think it is pretty [indiscernible] for our summer quarter were health care IT selling to the government. So traditionally, it is our weakest quarter, although I think we performed pretty well in that quarter. I think as we explained, we had some lower one time perpetual license sales in the quarter. They were definitely lower, and that's what we expected in our world. And corresponding with that would be the hardware that really comes from the InTouch platform. The services revenue helped alleviate some of that gap in the quarter, and that was primarily led by our SELIC General project, which kicked off in the quarter, and we're starting to see services revenue, which we expect to continue in a pretty consistent basis for the next while for that particular project. So we're there. We also have the full quarter of Hicom in the quarter. It was almost quarter last quarter. It was just a little light of that, but it was this quarter. As we mentioned, we were pricing some headwinds with our U.K. currency. I think we talked about that on our last call and so forth. We have a natural edge for our U.K. currency in terms of cost. So the real number to look at from our perspective is the adjusted EBITDA number, which added pretty nicely at $2.2 million for the quarter and continues to grow with it. We also added nicely on our recurring revenue. We consistently are hitting above the $800,000 recurring level of new organic growth, and we did that again in Q3 with the addition of another $850,000 recurring. We had some good uplift from our transforming based product set in the U.K., which continues to add deals considerably, and we expect those deals to continue on a consistent fashion. We think we're sitting there at $2.2 million of adjusted EBITDA. We don't have the CDS acquisition into the numbers yet. Those will come in next quarter. But as we report on the acquisition, that organization is pretty profitable as it is already, and we do expect those numbers to get add into our adjusted EBITDA on a go-forward basis. The ADI acquisition we completed is a breakeven based acquisition, a small acquisition, so we don't expect anything considerable to come out of that in the near future. But we do view that as a solution or technology-based pretty strategic acquisition, and we do feel in the future that we will be able to sell that as part of our Intouch platform and other platforms on a go-forward basis. So we were very excited to be able to get that technology set. It was something on a road map that we want us to build that we just accelerated that product set considerably with the ADI acquisition. The CDS acquisition, we think, is already starting to bear fruit in the Australian marketplace. We've got some great opportunities in Australia, we expect to continue in the next little while. I thought adjusted EBITDA is running at $10 million to $11 million clip right now when you add the CDS acquisition into the equation on a regular basis. So we'll continue to do that. We're adding more recurring on a regular basis. We're trying to control costs. So we think we're starting to get to the levels where we like to see where we're generating cash on a pretty consistent basis. I think I mentioned, I think we're in our best position we've ever been from a cash generation perspective. So we're starting to get to that level. We're still sitting on significant cash on hand. We renegotiated our bank in [indiscernible] subsequently to the quarter, and we paid off that line subsequent to the quarter, as you saw in the announcement to do that. So that debt overhang isn't there anymore. And we're still sitting on several cost we're generating cash. We plan to continue to look at M&A. We still got opportunities that are there, although we're going to be careful that on each one that we do on a pricing perspective to make sure we're being pretty careful with our cash at this point. And that's where we're at. And we would like to turn it over for any questions.

[Operator Instructions] Your first question comes from the line of Christian Sgro from Eight Capital.

The first question I'll dig into M&A, more backward looking on this one, just the CDS acquisition in Australia, one of the larger acquisitions this past year. Could you just talk through you impact a little bit of it, but some of the rationale there, how that increases your footprint in Australia and then some of the cross-sell opportunities that you see in the region?

Yes. It's primarily aligned to our 3 product business, which is our go-to product in the community health agency space in Canada. We researched out Australia marketplace pretty considerably, and there are some vendors that have a Canadian footprint that have gone into Australia recently. And we've been beating those vendors out on RFPs and tenders in the Canadian marketplace. So Australia is a market that we think we can get into with that 3 product set. And the CDS product set is a lighter weight version of our community agency space, but it doesn't have the ability to go to those bigger base organizations where street is predominantly set forth. So CDS brings us a whole team that understands that whole space, and they haven't been able to go upstream with something more powerful. And now they have something more powerful. And we know the competitive landscape there pretty well. It's a great acquisition for us. It gives a speed ball. It gives us a great little business right there. We can still go after those smaller base organizations with their product. It's been continuously growing. It's a growing business, and it's producing some pretty good cash out of its operations right now. So we got an operation that's out of the box for our community agency business, which we like.

Okay. That's helpful. For my second question, I'll turn back to Canada and the EHR solution and traction here. It sounds like the solicitor general contract is moving well and on schedule. So maybe if there's any color you could share on progress there and how that's progressing into the new year? And then also poke into Nova Scotia as well, I think the last update, is that one's been slow to progress. But if any factor and then anything else you show in Canada.

I'll talk about both of those projects. The social products did get kicked off in the quarter, and we did start to recognize a little bit of recurring, not much of it, but a little bit in the ARR number. It didn't come into the revenue number, but a little bit probably did, but ARR number, a little bit of that $850 is [ SoGen ] but we still got most the line carotid come in, in the first half of next year towards the maybe throughout the entire year, but I think in the early part big chunk of it. And we did start generating professional services. So there is a lot of product that we need to build or extension to get that working. So it is positioned for the [indiscernible] services sector. That work has begun. We're getting paid for that work, and you'll see that coming through in our services number. On the Nova Scotia business, we're actively in build mode for what they call the MyAccount project, which is a portal, which will allow income assistance, residence of [indiscernible] to apply further income assistance and get their income assistance payments through the portal system. And that's always been the bulk of that project. Our intent is to go live with that product Q1, Q2 of next year where that revenue should start to come in on the ARR perspective or finally be in its stock for a while during COVID it started before COVID it stopped in COVID and now its back in pretty active mode in high-profile mode. So we're hoping that will lead to some significant revenue towards the mid end of next year and probably through the year after, but that project is progressing.

Your next question comes from the line Gavin Fairweather from Cormark.

I wanted to start out just on the U.K. sales environment. Continued headlines around the operating metrics continuing to be challenged in that market in the past, that's been a tailwind for you. Curious how you think this busier sales period is going to shake out kind of across Q4 and Q1 and what you're hearing on kind of budgets and grants given that kind of backdrop for the NHS.

We're going through our budget and our forecasted scenario with our U.K. group for next year. And they don't feel pretty bullish in terms of where their pipeline sits and where those things all come together. We've got a lot of different product sets in that particular market. So one it doesn't come through others well. But we're starting to see, for example, we're starting to see uplift from our MCAP product because we didn't do anything during the COVID, but we used to do a lot of work with audits and that product before COVID that we couldn't get into [indiscernible] but we're starting to see that particular products that started to pick up in the U.K. marketplace. We still feel pretty bullish, although we're going to be selectively careful in that particular market. But I think it's still bullish any factor Health care is somewhat insulated from the macro based world. There's still a lot of work that's needed to digitize and there's still a huge backlog of work in basins in that market in COVID and the world being locked up. So health care is somewhat insulated from macro environment, but time will fall in terms of where those budgets as in Q1 will be a good indicator. I don't think we will anticipate a Q1 like we had last year, but Q1 is still really a pretty good quarter for us. We'll see what happens as we push the year-end, but we know there's a lot of projects that people are trying to get over the finish line there still.

That's great. And then maybe just building on Christian's question around the Australian market. I mean, you touched on the potential for treat in that market. I'm curious how you view penetrating that market with some of your patient flow and operational visibility tools. Do you think you can kind of hire in sales and grow that organically? Or are you really out kind of shopping for some patient flip platforms in that market to be able to increase penetration there?

We already have about 10 or so implementations in Australia. And within those 10 galvanizing pretty high-profile implementations that have done it in a pretty significant fashion. We have a deal cooking with a new build or a new hospital there, which we believe we're going to get, although the revenue will come in for a while building that hospital, but they're going through and as part of the new building and touch has traditionally done that in the face of more part of new builds would put the Intouch platform along with it. But we've got a good penetration level in Australia. We've got really good references there. I think we do need some feet on the street there. We've been handling it through the U.K. with people flying over there. There's a little bit of people there that we inherited through the JX, which we really support people. But now that we have the CDS offices and a senior team there that also has some experience in terms of these guys have come from a bigger corporate background before and we think they provide some pretty good leadership. We think with the U.K. guidance, maybe add some people there or work with people in the future to do that. But at least we have a footprint there for some degree to help us go forward with that.

That's helpful. And then obviously, it's been a busy year on the M&A front. Should we be expecting kind of a pause while you take some time and integrate? Or are you still continuing to see some pretty active platforms?

I'd like to think that we can still continue to do that. We've got some stuff on the go still. We do need a little bit of breathing. We do some integration here. I think we've done 15-ish of these things, and it's getting a little crazy, although we've got a pretty good engine and I think we've done a great job to go do it. We got the facilities to do it. There's a good deal out there. We're going to do it. But it needs to be a good deal. We need to be careful as we always have been, but we're continuously looking, we're continuously doing things and both do those deals. And I think we're absorbing our acquisitions pretty good. So we'd like to continue to do them. But it is a little bit level more careful going on here with us, but we're not stopping.

Just lastly for me. You've always been pretty conservative on the balance sheet in your prepared remarks. So you're talking about the expanded EBITDA base of the company, you're now producing pretty meaningful and predictable kind of free cash flow. I guess I'm curious whether at the margin that's shifting your comfort level with leverage and using that social facility, which you have in place?

Our EBITDA, it’s in place. We still think we're generating more than enough as 9-year amortization on that particular line. Yes, the rate pinout it's not going to strangle us on covenants, and we will have the ability to use it. Although that being said, we still have significant cash, and we're starting to get into being able to start producing up of our cash, along with our cash to do a fair amount of the acquisition. So we'll see how it goes. It's there if there's a really good synergistic deal that makes sense, and we need to use it, we will, but we're going to be pretty careful with that for sure.

Your next question comes from the line of Gabriel Leung from Beacon Securities.

Two things. Dan, just going back to Australia for a second. Just based on sort of your pipeline of M&A that you've got in the region, do you have that level of confidence that you might be able to achieve market share penetration in Australia similar to what you have in the U.K.? And then organically, do you get a sense in speaking with the potential customers down there that there is the same urgency to digitize health care operations in Australia as there is in the U.K.

There are different markets, right? Australia has a little more similarity in the Canadian marketplace. It's [indiscernible] health care. So you need to go at that country as you would in Canada product by product with different drivers on a project where the U.K. has a national system of [indiscernible] a little bit of a different dynamic when you go with it. We don't see the penetration level of the patient prototype of products in Australia like we do in the U.K. So there is opportunity there for sure. It's probably a little bit of a slower market in terms of adoption and how things work. So I think that's just driven because of the provincial nature versus the national nature of what it does there. So yes, we think we can be a player in Australia we’ll grow at the same speed that the U.K. is probably up, but it doesn't need to. It just needs to add. We're not relative to what we're doing, if we can just keep moving in that marketplace that will go. We know in all of our marketplace, things start growing when you start getting customers and they start talking to each other and things start happening and they tend to buy what their neighbors buy. So that's our goal in Australia. We've got a good opportunity. We've got a footprint to do that. We're also starting to see some uptick in Canada finally on the U.K. product. So both those markets, I think Canada and Australia were affected by COVID way more than the U.K. was in terms of buying things. I think if you see after COVID than Canada and Australia is what we're seeing, but we are seeing those markets starting to look at to buy things again with COVID behind us.

Got you. Just one other thing. I know you talked a bit about sort of prudent cost management, your preamble. But are you seeing any sort of wage inflation tailwinds that might impact your services margin line or any other operating expense lines on the P&L?

Yes, I think there is inflationary pressure to some degree on wages increase. We're going through that scenario right now. We're also seeing in the backdrop of that less supply and demand in our sector with layoffs and so forth. I do think we've got a very loyal staff in our organizations. And I think we offer a pretty fair compensation, and we'll continue to do that. It could be a little higher than normally, but not to the degree, I think, that other inflationary pressures would indicate there. So there's some degree that's definitely offset by our strategy to use our offshore tumble resources as effectively as we can. To do that, I do think the tumble scenario definitely offset the other scenario, a large margin there.

So then as a follow-on, notwithstanding fluctuations on the perpetual license side. How do we think about EBITDA margins progressing, call it, over the next 12 to 18 months? What's a good, I guess, midterm target for us to think about?

We're setting a 20% or 22% on the quarter. And we anticipate that number to increase we've got CDS added there, every time you add what we're selling gross margins there. So we do anticipate that, that should be growing on a little by little basis quarter-over-quarter. And that's what we're focused on, and that's what we're trying to do.

Your next question comes from the line of Daniel Rosenberg from Paradigm Capital.

So just one quick follow-up on the cash flow. I was just wondering how you think about R&D and developing a kind of more internal IP versus acquiring it now that you're just kind of running and self-sustaining and able to have the resources to do that if you choose. I'm just curious how you think about the balance of investing in new products, new features.

I think we have been on a similar basis, always will go in our IP like 3 products, that is a good example of that. I think we got a little bit more tenure with that. I guess 6 years into it. That product has evolved tremendously with it, and we've also taken functionalities and features from, for example, our [indiscernible] we made, we've taken workflow and functionality from that and we've moved it into our trade-based product. There's work going on with the Hicom product set that we just took over. There are some really good clinical lab facilities and an amazing firm engine-based facility, and there's work that's going to be done in terms of integrating that to the 3 product and there's some other components that are there. So we look at each one of those acquisitions and we take components and we accelerate development by bringing components out of there into other products at that many necessary moves. We like customers to pay for some of that development all the way through that, but the products are definitely evolving, and we're looking at the work that's necessary. So all of our products have road maps. They're all working on roadmaps, there's innovation that's being worked on there. So we've got a pretty large R&D growth, right? Our tumble group is -- I was just out there last week or the week before. And we've got 100-and-something people there, and there's some really bright technology people that are doing some really great work for us out there. So there's innovation going on in this company for sure.

Okay. I appreciate that. And then just lastly on small, the ADI Health acquisition struck me as quite interesting given the price and it seemed like you got a lot of bang for your buck given it's so complementary and comes with customers and technology. So I was just wondering, are you seeing more opportunities like this? Or did this one just kind of maybe stands out from the current market and the type of valuations you're seeing?

I think ADI is a definite result of the where this sector is going, right? It was a high net worth VC-funded based business where the group didn't want to go at it anymore, and we said, "Hey, this is something we think we can take over and we think we have the know-how and the development group to be able to do that.” So I don't think something like this going to come up probably 1.5 years ago in that economy, so it's definitely corresponding to that. Are we looking for those initiatives? 100%. We'll do those types of initiatives if they make sense, and we're looking at those things. We'll see what happens as they go through, but there are companies that are starting to get upside on their covenants and getting squeezed on financials, and there's the cash isn't coming in there, but if there's something there that is strategic, we don't want to take over something that we're inheriting all those losses. We're really concentrated on that adjusted EBITDA number. So even though you might be organic or cheaper that's going to hit our P&L out in a negative fashion. That's not what we want to do. But we'll look at these things as they come at us. And if it's opportunistic, we'll do it.

There are no further questions at this time. I'll be turning the call over back to Dan Matlow. Please proceed.

Yes. I think we said everything as I said in our press release, we think we're in pretty good shape. The companies we got ourselves into a good spot. We're generating cash. We're producing organic ARR. We're looking at some more M&A that comes in there, but we're just steady as we goes as we always have been here. We're just going to just keep inching forward. And this is still a long-term game for us. We still think we've got a lot of ways to go and we're going through a pretty tough cycle on the stock right now. But we think that the valuation right now relative even on an adjusted EBITDA [indiscernible] perspective. It is not justifiable that we're just keeping spending business as we always have, and we'll keep doing it. I'm always around if anyone has any questions afterwards. And we look forward to it. I guess, we got a little bit of a break here till March, which will announce our year-end, but to everybody. We get ready for the now, and we'll see you all later.

Thank you, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.