Vitalhub Corp. (VHI) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us this morning for our Q1 2023 conference call. Before we begin, I will read our cautionary note regarding forward-looking information. Certain information to be discussed during this call contains forward-looking statements within the meaning of applicable securities laws including, among others, statements concerning the company's 2023 objectives; the company's strategy to achieve those objectives; as well as statements with respect to management's beliefs, plans, estimates and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical fact. Such forward-looking statements reflects management's current beliefs and are based on information currently available to management and is subject to a number of significant risks and uncertainties that could cause actual results to differ materially from those anticipated. Also, our commentary today will include adjusted financial measures, which are non-GAAP measures. These should be considered as a supplement to and not as a substitute for GAAP financial measures. Reconciliations between the 2 can be found in our MD&A, which is available on sedar.com and our website. With that, I will hand over the call to our CFO, Mr. Brian Goffenberg, to go over our financial highlights for the quarter. Please go ahead, Brian.

Good morning, everybody, and thank you for taking the time to join us this morning. We continue to show momentum by consistently growing our client base, both organically and through M&A. This quarter, we've experienced growth in both revenue and gross profits as we focus on scaling our health care product offerings and integrate further into the health care networks, resulting in increased sticky recurring revenues. We are confident that our product solutions will continue to gain traction in our [ prominent ] health care sectors. On that note, I will share our financial highlights of the quarter. Total revenue for Q1 '23 totaled $12.6 million compared to $9.4 million in Q1 '22, an increase of 34% year-on-year. Revenue from term licenses, maintenance and support in Q1 '23 was $10 million compared to $5.7 million in Q1 '22, an increase of 74%. The increase reflects the impact of continued organic growth in the company's suite of products coupled with revenue derived from acquisitions. Revenue from perpetual licenses in Q1 '21 (sic) [ '23 ] was $310,000 compared to $2.8 million in Q1 '22, a decrease of 89%. This decrease was due to the unusual volume of high-margin perpetual license sales in Q1 '22, which really skewed our Q1 '22 numbers. Revenue from professional services and hardware in Q1 '23 totaled $2.3 million compared to $900,000 in Q1 '23 -- sorry, in Q1 '22, an increase of 148%. Revenues from professional services and hardware can vary depending on the timing of hardware deliveries and the progression of customer projects. Annual recurring revenue, or ARR, of which we formally refer to as annual contract value, totaled $39.6 million as of March 31, 2023, compared to $24 million as of March 31, 2022, an increase of 65%. The growth in ARR benefit from the organic growth, acquisitions and a slight increase in foreign exchange revenue. Gross margin on total revenue in Q1 '23 was 80% compared to 84% for the same period last year. The decrease in Q1 '23 was due to the unusual volume of high-margin perpetual license revenue in Q1 '22 compared to this year. Operating expenses in Q1 '23 totaled $7.6 million compared to $5.3 million in Q1 '22, an increase of 45%. The increases are due to costs from acquisitions completed during the year and the time it takes for synergies and cost savings from the integration of acquisitions to be realized. Additionally, with the lifting of travel restrictions, marketing and travel expenses have also increased compared to the same period last year. Net income before income taxes in Q1 '23 was $780,000 compared to $1.6 million in Q1 '22, a decrease of $783,000 or 50%. Net income in Q1 '23 was $162,000 compared to $1.4 million in Q1 '22, a change in 89%. This is versus a loss of $338,000 in Q4 '22. EBITDA in Q1 '23 was $2 million compared to $2.3 million in '22, a decrease of 16% versus an EBITDA of $470,000 in Q4 '22. Adjusted EBITDA in Q1 '23 was $2.9 million or 23% of revenue compared to $3.1 million or 32% of revenue in Q1 '22, a decrease of 4%. Decrease in adjusted EBITDA was primarily attributable to the higher volume of high margin perpetual licenses in Q1 '22. Adjusted EBITDA in Q4 '22 was $2.4 million. Cash flow from operations was $1.5 million in March '23 versus $2.5 million for the same period last year. Cash on hand at March 31, '23, was $17.2 million compared to $17.5 million at the end of 2022, that's after spending $1.8 million on acquisitions in the quarter. With that, I'd like to hand the call over to Dan for an update on business.

Good morning, everybody. Welcome to the conference call. I was thinking of words that we could talk about, I think it seems like yesterday, but it was a year ago that we were sitting here after announcing a huge volume of perpetual licenses, mainly on the Intouch software fleet that we had in record times. And this quarter, the question was, can you sustain it? I said, I think that's going to be a pretty difficult thing to do. But the reality of it is, is we came pretty close to the exact same adjusted EBITDA, pretty well the exact same adjusted EBITDA a year ago when we did $2.7 million of perpetual licenses compared to $310,000 this year. So this year's model reflects pretty accurately what our model is, and we think we're in a great spot. We don't think we've been in a better spot since we've started. We've got 80% of our revenue as recurring in nature, and that's been that way for a long time, and we expect that to continue. 40 million -- we're at the 40 million mark, which gives us some great flexibility in terms of really trying to understand our business and being predictable in all those different areas. We've had contribution from all areas of the business. There hasn't been, I think, all areas contributed to the increase in our organic ARR growth, which was still at about $1.5 million, which we've consistently predicted that we believe we can do between $800,000, $1.5 million on a quarterly basis. And I think we've done that consistently over the last 10 quarters, we've been announcing these things. But we've seen contribution ARR from all of our business sectors. The 3 main areas we're seeing it are from the Hicom business. It's a business we bought last April. It has a product called Oriel, which is a national NHS service for the recruitment of clinical people primarily physicians into practices and they use that system. And it just keeps expanding with more skill sets and more areas and just keeps adding recurring revenue on a quarterly basis from that business. The TREAT business in Canada, we've seen a really nice uplift, and we expect that to continue with RFPs that we've been seeing issued in the mental health area primarily in the children's area, and we continue to win business in the Canadian marketplace. In the Transforming business, the Transforming SHREWD product continues to expand across the NHS. And we are seeing traction in the Canadian market now. So there's lots of opportunity, we think, on that product expanding in many different jurisdictions. We still think we got more work to do on the cost side. We continue to work on that particular area. Our Colombo, Sri Lankan base is -- continues to build and mature. I think we're up to about 110 employees in that area across all the different skill sets. But we still got work to do in terms of our -- a base, in terms of getting products over there and so forth. So we continue to work on that. We still live by our guidance on our organic growth stuff. We still expect that to continue. We see lots of opportunities, lots of RFPs and we still -- we're still there. On the acquisition front, there's work in progress. We're being careful, but we do believe that we are going to get things across the finish line before the end of the calendar year. We continue to explore, and we continue to look at that area, and that group has been very active. We're being very careful in our situation. We got lots of cash. We're above $17 million in cash for the quarter. We still got our bank facilities that we can call on and we're generating cash from operations. So we are just inching into the true compounding nature, which we predicted what would happen in 2023. So we're bullish, and I'll turn it over to anyone who has any questions.

Thanks, Dan. [Operator Instructions] The first question comes from Gavin Fairweather of Cormark.

Congrats on all the progress. Dan, you talked about the breadth of the growth this quarter kind of across products and geographies. Curious if you think that should make your sales performance maybe a little bit less seasonal, a little bit more smooth though over the year kind of over time.

Yes. I think I do think that should be the case, in terms of what we got going on. We're not seeing it just being one product that's contributed and it's not relying on government-funded envelopes, et cetera, et cetera, that's kind of there. So I think that's probably a good statement to do it. I've never felt like Q1 definitely has traditionally in our sector being a better quarter for everybody. But I've never felt that's a firm statement in looking at our business. We look at our pipeline and we see things moving across all this. Theoretically, we should get more business and often we do. But it doesn't mean that you can see a Q1 quarter in Q3. It just depends on how things happen. We had a fair amount of new deals on a regular basis, but we're not -- it's not a huge amount of deals. So there's still not enough there to really predict in terms of like, "Hey, this quarter is just going to be that much more than that quarter," because it could happen in any quarter.

Got it. And then given all the acquisitions that you've done in the U.K. market, can you just touch on how kind of the nature of your sales is changing? Are you talking to different people? I think last quarter, you talked about potential for a strategic deal for Transforming. Are you seeing more cross-selling come through? Like how, with your expanded scale, has your sales motions changed in the U.K. market?

The U.K. market continues to do that. Definitely a little bit lighter on the Intouch product set, but we still see business in that area. And we still continue to close deals, and we do it. The Transforming SHREWD product still sees a fair amount of opportunity to expand into that marketplace. We're having deals. There's a lot of exposure on a national scale for what the type of products that Transforming can do in the visibility-based solution. There -- we think there's opportunities there, and we're seeing a lot of conversations of being able to grow that product in a material way in the U.K., but time will tell if that comes to fruition. You just never know where that step goes. The S12 product set has been pretty quiet over the last couple of quarters, but we've been very busy in the development world to creating 2 add-on modules. So we already have 80% of mental health practitioners that would do the S12 compliance-based world on that platform. And they've been asking for new modules and new opportunities. So we finally finished those modules. So we think there's going to be opportunity in the latter half of the year to be able to add more revenue into that product set as well. So we're continuously working on that, and we expect that product to contribute a little bit more in the second half of the year. The ADI product set is being integrated into, the Intouch set is also being integrated into the Hicom diabetes module because they're looking for a portal-based solution there. So there's opportunities on there for cross-selling the products within the U.K. market as well. So we're seeing different pockets of things that we're working on, and different ideas that we can keep creating and adding add-on products into our suite, that we're trying to be opportunistic on.

How should we think about perpetual licenses going forward? Obviously, last year, you had kind of like the gold rush of perpetual licenses there, more modest this year. Are you being much more selective in when you sell them? Should we expect those to kind of gradually decline over time as you're shifting the sell side? How would you think about that?

Well, that decline in perpetual license is 2 reasons. One is just didn't close as many Intouch deals as we did in the previous quarter, but more is that we introduced a recurring revenue model for that product set, which we wanted to go into. So we've never really want to be a perpetual license-based company, and we're still going to do some. There's still some opportunistic side. There's a hardware component to that product, which -- we always want to do as a onetime license. So it's a little bit challenging to do one element as onetime and the other element as recurring. So that's why we get those perpetual deals on the Intouch side that come out of there. But we do expect that not to be high as ever in that particular area. You never know what can happen but we don't expect that.

Got it. And then just lastly, before I pass the line. You touched on M&A integration and still having some work to do. Do you have a sense of kind of how much cost you'd like to reduce or how much work, further work you can shift to Sri Lanka? And how are you thinking about the timing of that taking place?

Yes, I think it's an ongoing process, and we're constantly quarter-over-quarter, making that way. We've done a fair amount of acquisitions over the last little while. It's a lot for Sri Lanka to digest, and some of the companies have been very technologically heavy. So we've got a queue of work to do there. And we expect quarter-over-quarter just keep to either complement those existing groups to get more innovation or if necessary, trying to reduce the cost on to perspective. I don't feel comfortable putting guidance or numbers on it. But we're constantly going to chip away at it.

The next question is from Christian Sgro of Eighth Capital.

I'll follow on the cost side of the business, Gavin's last line of questioning. Only just unpack some seasonal fluctuations in G&A and R&D that we saw in Q1. And I know you don't want to give forward guidance then, but maybe help us understand, maybe some of the increases, decreases in Q1. Maybe some of it is due to FX or other reasons. And then again, without giving guidance, where you think the OpEx profile can trend through the year?

Yes. We've been -- when you're doing acquisitions and so forth, trying to get proper allocation sometimes becomes a challenge. We've introduced in the latter half of last year an analytics team and platforms and so forth, right? So coming into this year, we did a lot of work on reallocation of costs into the particular buckets to get that. And so part of it is that going on into the perspective. Part of it is the introduction of the acquisitions where you get more different skill sets that lead to that particular areas of those G&As. But G&A is what it is, right? It's a cost-based stuff that usually gets flat. We don't expect that to grow. We've invested a fair amount in the latter part of last year and this year in terms of beefing up our processes and our procedures. And we've introduced more of a corporate operations group, which is helping with some things that we purchased a bunch more software to help us in our integration side. So that's also part of it. R&D, we're constantly looking at that, right? So we'd like to move as much offshore as we kind of to do that, which really just goes back to Gavin's old question. We're going to constantly nip away at that.

Okay. Perfect. And then on -- back to revenue on the professional services segment of the business. Probably a way we would think of the growth there is just stable growth as the company is busier in scales. But do you have visibility into services maybe increasing more than we would expect with deployments in Canada. Anything else going on in the U.K., Australia, where do you see the sort of trending?

Professional services is a direct correlation to the mixture of the product sets that we have, and the increase in that is primarily attributable to the high common, the TREAT business, which have the ability to do custom development and get paid for it as part of their implementation cycle. So both those products have started to contribute, which you didn't really have a year ago in our mix, right? We're also really working hard with our subsidiaries to get paid for professional services where, in the past, they didn't get paid as much as they probably should have in the delivery of their product set. Started just rolled it in as a lot of small companies do is rolled in the installation and rolled in the work as part of the license fee, and we're not firm believers of that particular model. So we're just culturally changing our acquisitions to say, "Hey, we got to get -- we've got to get paid for this stuff." So that's a direct correlation of where our services revenue is increasing as well. And -- we've been working hard on just getting that cultural change within the organization to get paid that and trying to get our services business as an accurate P&L for the business.

The next question comes from Gabriel Leung of Beacon Securities.

Dan, can you talk a little bit about the breadth of the assets you've got in your M&A pipeline right now? And as you look towards closing some of these, what's the bottleneck that's preventing them near-term? Is it more financial? I was just trying to figure out if it's a right fit for you guys right now.

I just answer we got the ability to execute it and we will. It's just trying to get the sellers to get an appetite to do something, right? These economies put people in cocoon, even though the valuations might go down, it's the same. I've talked to analogies way too much in what I do, but I think it's the same analogy of why are people selling their houses now when they were selling them 2 years ago, right? It's because they don't think they can get the price for their house and the market has gone down. So they take that off the market. They want to live here for another 3, 4 years until the market increases. And I think that's a part of what we're seeing in M&A. I have been reading stats of private equities down on M&A and an extensive amount, and just volume overall is just down overall, and I think that's attributable to it. With that being said, we're also being more careful than what we do in terms of where it goes. And we know we're being measured on the bottom line, not on the top line. And we got to feel really comfortable that we can get that bottom line. So a lot of the business that we have might be breakeven businesses that we've got to bear some pain for a little while, until we get them into our mixture of what we do. So we need to really carefully look at that, and we want to be careful with everything that we do from the acquisition side. But we do have things going on, and we expect still to do stuff on a basis. So we want to do stuff and it was not like we've put the brakes on it all. We're definitely looking.

Great. And in terms of the stuff, the pipe, are there are more tuck-ins, you think, in the interim? Or is there stuff that could, I guess, more meaningfully move the needle on your ARR?

Yes. I think the part that I do think there are opportunities for businesses that do have investors that are in them, that their valuations have decreased and the investors are saying, "Hey, I want some liquidity options." And they're exploring liquidity options or thinking of exploring good liquidity options. So there are scenarios like there that we're communicating with and we would like to get involved with some of those, and those would be more on the larger scale type of stuff, because that's got the investors and the ability to do that. With that being said, we're also doing the tuck-ins, which wouldn't necessarily have those characteristics at all. But those are the attributes that we're doing, and we continue to look at it.

Got you. And just one last thing for me. Any additional talking points around geographic expansion outside of your existing core areas?

Yes. We're -- Australia is still an area that we've beefed up cost there on the sales and the marketing side. We're starting to see activity with the TREAT business in the Australian marketplace, which is really exciting for us. We haven't been able to that. We haven't tried to move that out of Canada, but Australia, we think is really prime for that business. And early indications, at least, the customers that we've spoken to go, "Wow, this is something we don't have in this market," which has been really exciting for us. The Mid East with Hicom has given us the ability to look at -- has given us much more leverage with our U.K. products into the Mid East. And the sales group that has been responsible for Hicom in the Mid East has been really helpful for us. So we got some things going on. On the acquisition side, we broadened our scope into more of the European marketplace, and we've got more activity cooking there. We would like to get into the European marketplace a little bit more. We think there's a lot of our product set that those markets don't have yet. And but we would -- we need to -- we don't want to enter to those markets really without a beachhead of an acquisition. So it would be nice to get something there. But again, we'll be patient to make sure we do it in the right way.

Actually, as a follow-up to that, your comment on the interest of TREAT in Australia. Would that -- do you think that would translate into a little bit more additional lumpiness on the license services side? Or do you think you can get an arrangement whereby, TREAT might be offered more on a subscription basis as opposed to a bigger license?

TREAT is not a subscription basis, although there's a services element, right? It's all recurring for that business. Yes, the lumpiness comes in the services side of that particular area. But it's the same business model there that it would be in the Canadian marketplace. The only difference is we got a team. We've got a 20-person team with the CDS acquisition that actually understands the domain and understands the space and is getting trained on the TREAT product set, to go out there and try to go sell it, right? So -- and they’ll be the ones that need to do the implementations of it. So we have seen RFPs in that marketplace responding. We're responding to those RFPs and they're pretty favorable.

Congrats on the progress.

The next question comes from Richard Baldry of ROTH.

Can you hear me now?

Yes, perfect.

Can you talk about how much of the organic growth is cross-sell versus new clients? And then maybe speak to that breadth of the sales, whether that's globally or across your product sets. Sort of trying to figure out if it's across the portfolio or if there's some hotspots in weaker areas.

Yes, I think the sales are done -- all of our products, I mean, there's nothing that's really sticking out. Every -- most of our business units that we expect to contribute -- we have some business units that we don't expect to contribute to our sales, and they're just upsell or opportunities for other products as we've got duplicate products in that particular area, so we don't expect them to increase. But those areas that we expect to are primarily the Hicom, Oriel product set, the TREAT product, which is the HInext acquisition, the early product set that we have, and the Transforming solutions products set. Transforming and Hicom are probably U.K.-based. Transforming is -- most of those sales are new entities that just keep expanding. Within it, Hicom, is upsell within its existing set, it's just adding more users and more skill sets. It's just a one website implementation that just keeps growing. That's there. TREAT is all-new product sets as well. But if you look at the Transforming set, a lot of those customers are probably Intouch customers. So they are add-on and what impact -- did impact Intouch had with that, probably in some of the cases, yes. We got product all over the NHS. I think we're installed everywhere, right? So every deal that we do probably had some impact from another person to do that. So it's not really qualifies as a new customer and add-on. But most of our contracts is because our sales groups and our teams have those relationships. And if they don't -- if one group is trying to get in somewhere, we see that we have another product set, we call that particular group and say, hey, can you get me in here? And that's what happens, right? So we get access to decision-makers. We get access to buyers through our product sets and a lot of our deals are sold that way from most of them.

Then maybe to build on that. Can you talk about -- you've done a lot of acquisitions. So how do you feel about the overall combined sales head count you've got, the productivity levels you're at, the capacity to sort of keep up this organic growth rate? I don't know if you want to think about it in terms of how long a tenure they have with your company specifically. So how good they're at selling the suite of products? Just an overall thought there.

We got a sales force that’s been doing this for a long time. There's not very -- we just -- we have increased our sales force in the Australian marketplace. Those are newer sales reps, but we did hire people with experience that sold into those marketplaces before. The group that's been in the Mid East has been doing it for a long time. The Transforming team has been in the market for a long time. The Intouch suite, we've got sales reps that have been there for 15 years. So we got some pretty mature sales reps. Do we have enough of them? I think in some areas, we've got too many of them and in other areas, we don't have enough. Probably need to rebalance that to a degree on our TAM and which products we can sell more than other products. But that's one of the advantages of growing through M&A and adding new product sets. You just don't get the products, but you get the people. And we're pretty good at keeping the people on our team, at least, the ones we want to. And preserving the brand and the integrity and what they've built up over the years and try to use that as a platform to grow it and not destroy it. So we've got lots of expertise there, Rich. Hope that answers your question.

Congrats on a great quarter.

Thanks, Richard. There are no further questions. I will hand over the call back to Dan for your closing remarks.

Yes. I just -- I guess the message is we got ourselves, I guess, if you take our debt to EBITDA, close to $3 million at producing $12 million of adjusted EBITDA on a 50-ish, above $50 million level of revenue, with 80% of it is recurring, and we expect to continue to grow off of that, expand off of it and move ourselves forward. It would be nice to add some more M&A to that equation, and we will. And we just keep on the business model. But I think quarter-over-quarter, just becoming -- just keeps coming clearer and clearer. We just keep growing that number. So I think we got ourselves to, I don't know, under an enterprise level, if you use our cash, we got no debt. Maybe 8x adjusted EBITDA-based world. So it's just a question on what the investors want to see because I'll just keep going and some point it will be 7x, 6x, 5x EBITDA, I don't know what the valuation will be unless the stock goes up. But we just keep looking at it and we keep going, and we hope the investors can understand we're trying to be transparent with our business model, and we'll continue to do that. So we're excited about what we did in Q1. And as you can see, the foundation is there. We expect to continue just inching this forward.

Thanks, Dan. Thanks, everyone. Appreciate everyone joining the call this morning. You may disconnect now.

Bye-bye.

Have a great day.

Thanks.