Vitalhub Corp. (VHI) Earnings Call Transcript & Summary

Third Quarter 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 security 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 facts. Such forward-looking statements reflect 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 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.

Thank you, Graham. Good morning, everybody, and thank you for taking the time to join us this morning. Our well-established business foundation remains a strong driver of robust financial performance. In Q3, Vitalhub delivered another impressive quarter, demonstrating consistent growth in revenues, gross profit, net income and cash generation. This success can be attributed to our unwavering commitment to expanding our health care product portfolio, further integrating into health care networks and broadening our geographical reach. As a result, we achieved a significant increase in our annual recurring revenue, marking 38% growth compared to the same period last year. We are very pleased with our strong presence in the market as our products consistently provide significant value to our customers. The future of our company holds tremendous promise, and we are very excited about the opportunities we see in our space. With that in mind, I will now proceed to present the financial highlights for this quarter. Total revenue for Q3 '23 was $13.2 million compared to $9.8 million in Q3 '22, an increase of 35% year-over-year. Total revenue for the 9 months ended September 30, '23, was $38.9 million compared to $28.7 million for the same period in 2022, an increase of 36%. Revenue from term licenses, maintenance and support in Q3 '23 was $10.8 million compared to $7.7 million in Q3 '22, an increase of 41%. Revenue from term license maintenance and support for the 9 months of 2023 was $31 million compared to $20.6 million for the first month -- 9 months of 2022, an increase of 50%. This increase reflects the impact of continued organic revenue growth in the company's suite of products, coupled with the revenue derived from acquisitions completed during the first quarter of '23 and previous years. Revenue from perpetual licenses in Q3 '23 was 57,858 compared to 204,233 in Q3 '22, a decrease of 72%. Revenue from perpetual licenses for the first 9 months of 2023 was 623,314 compared to $3.1 million in the same period of 2022, a decrease of 80%. Decrease is primarily attributable to the timing of the deliveries of the company's in touch products. In addition to the unusual volume of high-margin perpetual license sales of over $2.7 million in the first quarter of 2022. As a reminder, perpetual software licenses are dependent on the type of product sold. Revenue from professional services and hardware in Q3 '23 totaled $2.3 million compared to $1.9 million in Q3 '22, an increase of 22%. Revenue from professional services and hardware for the first 9 months of 2023 was $7.3 million compared to $4.9 million for the same period in 2022, an increase of 47%. The increase is primarily attributable to the deployment of the ongoing customer projects and additional services revenues from new subsidiaries. Annual recurring revenue, or ARR, of which we formally refer to as annual contract value, totaled $42.6 million as of September 30, 2023, compared to $31 million at September 30, 2022, an increase of 38%. The continued increase in ARR growth is reflective of our strategy to grow the business both organically and through acquisition. Gross margin on total revenue in Q3 2023 was 82% compared to 80% for the same period last year. The increase in gross margin in Q3 '23 was primarily due to an increase in higher maintenance and support revenues in the quarter, coupled with an ongoing effort to reduce costs and gain operating synergies. Gross margin on total revenue for the first 9 months of 2023 was 81% compared to 82% in the same period of 2022. Decrease in the year-to-date gross margins were due to the unusual volume of high-margin better license revenue in Q1 2022 compared to this year. primarily. Operating expenses in Q3 2023 totaled $7.9 million compared to $6.1 million in Q3 '22, an increase of 29%. Operating expenses for the first 9 months of 2023 totaled $23.7 million compared to $17.8 million in the same period last year, an increase of 33%. The increase is due to higher sales and marketing expenses for conferences and exhibitions and R&D expenses for acquisitions completed in 2023 and previous years. However, it is important to note that we continue to experience significant reductions in operating expenses as a percentage of revenue as a result of increasing operating cost synergies, 59.5% in Q2 '22 compared to 62.4% in Q3 '22. Net income before taxes in Q3 '23 was $1.8 million compared to net income of $409,498,000 in the prior period, an increase of 78% year-over-year. Net income before income taxes for the first 9 months of 2023 was $3.3 million compared to $2 million in the same period last year, an increase of 41% year-over-year. Net income after tax in Q3 '23 was $2.8 million compared to $41,000 in Q3 '22, an increase of 6,833%. Excluding a onetime tax reversal, Q3 '23 net income was $1.8 million, representing $0.04 fully diluted per share. Net income for the first 9 months was $3.6 million compared to $1.6 million in the same period in 2022, an increase of 133%. EBITDA in Q3 '23 was $2.9 million compared to $1.4 million in Q3 '22, an increase of 111%. For the first 9 months of 2023, the EBITDA was $6.9 million compared to $4.8 million for the same period in 2022, an increase of 44%. Adjusted EBITDA in Q3 '23 was $33.4 million or 26% of revenues compared to $2.1 million or 22% of revenues in Q3 '22, an increase of 59%. The increase was primarily attributable to the high recurring revenues of $10.8 million in Q3 '23 as compared to $7.6 million in Q3 2022, coupled with an ongoing effort to reduce costs and gain operating cost synergies. For the first 9 months of 2023, adjusted EBITDA was $9.3 million or 24% of revenues compared to $7.1 million or 25% of revenues for the same period in 2022, an increase of 32%. The increase was primarily attributable to the higher recurring revenues of $31 million for the 9 months ended September 30, 2023, as compared to $20.6 million in the equivalent period in prior year, coupled with ongoing efforts to reduce costs and gain operating synergies. Cash flow from operations before changes in working capital for the first 9 months of 2023 was $7.6 million -- $8.6 million compared to $5.3 million for the same period last year. Cash provided by operating activities for the first 9 months of 2023 was $15.7 million compared to $8 million for the same period last year. Cash on hand at September 30, 2020, was $29.8 million compared to $17.4 million at the end of '22. In comparison to Q2 '23, cash on hand increased by $6.9 million. With that, I'd like to hand the call over to Dan for an update on the business.

Thank you, Brian. I don't have the time to say -- we'll just highlight a few points and get some questions to answer, but I think the financials and Brian's explanation are pretty self-explanatory and speak for themselves. We're proud of the quarter, and we're proud of what we've done to date. We're starting to see the fruits of a well thought out business plan that we've been articulating to our investor base over the last 5 years, and that continues to come to fruition, and we just keep thinking the foundation keeps getting stronger and stronger on a quarter-over-quarter basis. So we're proud of that. And it's all led by our high recurring revenue stream of it's $42 million, and we continue to add ARR between $800 and $1.5 million per quarter. We were on the higher end in this quarter, which is typically not what we do in a seasonally quarter in the summer, but it did happen, and we still see velocity in our pipeline, primarily driven by the transform TREAT solution in the [ indiscernible ] solution has been -- but all the divisions continue to contribute, and we are still seeing impacts from all of them. So we are still seeing growth. We've got visibility into growth still, and we continue to do that. summertime is typically a little bit of a lower spend on sales and marketing. But for the most part, our cost reduction still continues to come in place, and we continue to work on using our Colombo software, our Colombo based as effectively as we can. The nice part about the Colombo base it's really evolved to much more than just an offshore development growth. The innovation and the experience of that team continues to grow. I think we're up to 130 people in that group yet. And a lot of these people have been with us for a while now, and we're really starting to get some really good IP over there, and we're starting to see that in the products themselves from an innovative perspective. So, we're starting to look on new initiatives such as AI, other initiatives, add-on products that we can sell to our customer base. And we're really excited by some of the things that we're doing in there. M&A activity, nothing over the finish line, although we are working on some things, and we are finally starting to see some movement from some companies that we've been speaking to for a very long time that are finally getting to that point of going there. So we continue to build our war chest. Our cash is up to $30 million. We continue to add cash, on a regular basis. We still have the debt facility available to use, and we do want to do M&A, and we expect to be doing M&A in the next little while. So we continue to work there in that belief. We're in the budget process right now. We believe we're well positioned for 2024. The product -- the platform is stable in terms of what we do, in terms of our business plan, and it just keeps growing with our recurring revenue stream and our base. And we're really excited as we move into 2024. And with that, I'll take some questions.

Thanks, Dan. [Operator Instructions] The first question comes from Doug Taylor of Canaccord.

Yes. Thank you.. This was another quarter punching at the very high end of the ARR growth targets $800,000 to $1.5 million. Can you talk through more specifically where the traction is coming from? And I know you said it's early in your budget process, but is there any reason to think that you wouldn't on an organic basis, be able to add a like amount of ARR in 2024?

Based on our pipeline, I think we can add that in 2024 at the same levels. There seems to be inertia and we've got many different ways and many different products that's how we can do that. We're seeing momentum. Transforming iss definitely seen momentum in the U.K. marketplace, and we're starting to see momentum outside of the U.K. marketplace. The treat product continues to win RFPs and we're seeing a lot more RFPs coming from the children's mental health space in Ontario, which is going through a total revamp of how they articulate the importance of digital health records, and we've become the de facto standard that I think in many ways, for that particular world. And Hicom has that platform Orion, which just continuously add users to that platform and to continue to grow that particular platform. So those 3, but we've had impact from our Australian group. We've had impact from our new Coyote group in terms of new deals. We started to see work in the MCAP product in particular spaces, and we continue to see things happen in many different directions with those products. So we're seeing it all over, but those are the primary ones, Doug.

So pretty broad-based. That's great to see. You also -- the next question, you said last quarter, I think you had more to do on the expense side, I think, was to quote. "This quarter, you actually hit your 25% medium-term EBITDA margin target". So I guess the question is, is there still more to do? Do you think that the 25% margin or 26% you delivered this quarter is sustainable? Should we be expecting something in that range going forward?

I think you can do it you can sustain it. Like we would like to add a little bit more in some of the sales and marketing costs. And as we go into 2024, but still sustain those levels as we get into some new geographies. We're seeing some increased activity in the Mid East, and we think there's some opportunities there to add in some other areas. So we're balancing investment into some of those areas versus getting those margins. But we're always committed to being that Rule of 40 company, and we'll keep sustaining that.

Well, congratulations on another good quarter.

Next question comes from Christian Sgro of Eight Capital.

I'll start on seasonality, which I think used to be a bit of a more pronounced impact with the U.K. government year-ends in Q1. As you called out, Dan, the summer was, I think, stronger than we all expected, and it can be slower with the government there. So would you say with how the business is becoming more broad, that seasonality is less of a trend quarter-to-quarter? Should we think of the Q1 of '24 coming up has been the bigger one than normal as in other years? Or is this becoming a smoothing pattern with the growth?

We're still -- Only a $50 million company and $44 million, and we're -- although we're adding $800 million to $1.5 million per quarter of ARR earning. I wouldn't be surprised if in the summer quarter, we added $2 million, and I wouldn't be surprised in the Q1 quarter if we added $500,000. It's not purely as predictable. Typically, it's hard to get procurement to move in the summertime as much as possible. A bunch of this revenue that we got in Q3 was spillover revenue that from Q2 that was there, and we just had to go through procurement and stuff like that. But it's typically summers are not the easiest to do. So I would expect seasonalities to continue in the summer. We definitely had a good quarter this summer. But if you ask me if we can do it again next summer, I would still say seasonality still becomes an issue with it, but you just never know.

Okay. That's helpful. And I'll ask one more follow-on related to what Doug was getting at with respect to profitability and reinvestments. How do you -- the margin and cash flow profile is very strong through the 25%. How do you balance growing that profitability versus investing in headcounts and sales? Like are there geographies where you could you think add a couple of people and really increase the growth? Or are you comfortable with the capacity currently? Like how are you thinking about.

Putting a little bit more growth into the Mid East. We put -- we did invest in Australia with the team in the middle part of this year, which hasn't started to produce significantly yet on the flow [ indiscernible ], but we do start -- we are starting to see a pipeline from that group into 2024, which we're optimistic about. Mid East, we do through -- we do have implementations in the Mid East through our [ ITOM ] acquisition, and we do have a couple of personnel over there already and we've been spending time flying in and out of there, and we have started to build some partnership and more relationships. So we will put a little bit more investment into that. But we don't want to -- we won't enter a market unless it's with a distributor or we enter it through an acquisition. Every health care market is very different. So the markets we're dealing in right now are the Mid-East, Australia and Canada, the U.K. We're looking at acquisitions in Europe still, we'd like to get something done that open up new markets. But we'll continue to work in these markets. There's enough TAM here for us to do what we need to do, and we're hoping to get acquisitions that will help us get into new markets, and we continue to do that.

Next question is from Gavin Fairweather of Cormark Securities.

Can you hear me?

Yes, we can.

Congrats on the strong numbers. I wanted to start out on some of the acquisitions that you've done, which were historically a bit more mature, like JX, Roxy, clarity, Coyote. Are you seeing any interest from those customer bases to upgrading to some of your more flagship offerings like in touch or TREAT? And any thoughts on kind of encouraging movement over time, just thinking about whether we could start to see those bases move your flagship platforms.

They are already are moving to our flagship platforms, the JF spaces. I think we've done last year and one of the deals this year is already was movement upwards into the intent space. So we are seeing that. That's the plan for that JF space, at least with the larger clients. We're moving them forward. The [ indiscernible ] based is -- we've moved a bunch of the bigger ones, and we continue to move bigger ones into the TREAT platform on a go basis. And actually, some of those are partially moving to the Coyote platform now because Coyote has [an affinity] to that as well. So there's some of that that's happening Coyote has been a welcome surprise in terms of it's tech stack and some things that it offers different for the smaller type of organizations where TREAT would be for the bigger ones. So we are starting to move those guys through. A lot of the [ Alimak ] and beautiful information, they're sold with transforming. It's really one offering that's coming through into those offerings. So we've integrated those offerings into a little bit more of a comprehensive base of transforming, which was always the plan there.

Okay. That's helpful color. And then on M&A, I mean, you referenced it has been a little bit of a slower year so far. It sounds like you've got some kind of irons in the fire, but maybe we can dig in a little bit just on kind of the deal flow that you're seeing and the deal environment.

We've had some deals that we thought we were doing and then pulled out at the last minute just in terms of quality and so forth. We're just being careful. But there -- we have our targets. We speak to them regularly, but we're starting to see some movement on some companies that we've been speaking to for 2, 3, 4 years that have finally decided that this might be the rate that will go. And so we do get some cost for most [ indiscernible ].

Is that moving just timing related to kind of the principal behind the [ indiscernible ].

Yes, it's usually what it is.

Okay. Good stuff. Maybe for Brian, the working capital has been a nice tailwind to your cash balance over the past alot. Like if I look over the past four quarters, you've been kind of adding on average, like $1 million coming out of working capital. So if the sales kind of keep up at this $5 million to $6 million per year rate on ARR, look, can we start to bake in that tailwind into your results? Or is that too aggressive and maybe some of this is more timing related?

So much time, but I think we can. I think as we -- going forward, we think we're generating we probably did about -- I mean, our cash funds gone up significantly from last quarter. Some of it is due to timing. But part of it is due to the business itself. We're generating probably about $350 million, just under $3 million cash a quarter. So yes, I think we can.

Okay. That's helpful. And then just given that cash balance, obviously, you want to keep a good chunk of it for M&A. But given how much cash you're now generating, would it make sense to start to allocate a little bit to the buyback to get out there and buy your own stock given the valuation?

We're hoping the market takes care of that for us, if you don't have that we don't feel a need to buy but acting I think we can do better with the money. I think we can probably make accretive acquisitions. I'd rather use it for that which I think we can do.

Next question is from Gabriel Leung of Beacon Securities.

Congrats on the quarter. I don't have a ton more to ask, but I was going to say, Dan and Brian, you both look very rested, but is there anything that's keeping up at night either one of you in terms of the business, what you're seeing macro wise, et cetera, et cetera?

Right now, we're in a pretty good spot. We see the pipeline looks pretty positive. It's there -- we're working our way through this. So nothing that's really staring me like it's nice having a base of $42 million of recurring, right? Like one of these quarters, we're just not going to hit that organic number. I just -- I keep saying it, but we keep can keep hitting it. But it's still -- it's -- you just don't know what government funded health care like just procurements and stuff. Compliance is getting a little bit crazy. I think you guys saw a couple in the news that there's some ransomware going on in some of the Ontario hospitals. And we're seeing that in U.K. concern. So the -- we have to be in a position to articulate our security and our platform. The good news that we have is we really compete in most cases, with a lot of smaller competitors, and we've made a ton of investment into our security infrastructures into our certifications, both in the ISO and in the SOC 2 based world. And that's becoming a lot more of an important criteria for buying software. So a lot of these smaller companies, which are targets, our competitors are really going to struggle on a go-forward basis to be able to articulate and really meet what the stringent compliance-based guidelines that are starting to come into our sector a lot more, especially in hosted based worlds. On the flip side of that, it costs us money to keep those component structures. We try to pass that on to customers and so forth, but we are forced to invest heavily into our IT resources and into our certifications and into our compliance, which we think are good investments on a go-forward basis, but it is cost. Most of those costs are already baked in. We do have a significant group that does it already. So that's the good news that comes with it. But I can't anticipate that's going to get any easier on a go-forward basis, it's going to get tougher. And it could also lengthen sales cycles as you prove the ability to have those in place prior to being able to implement at these customer sites.

Got you. And maybe just one of the last thing. I know you guys are in the budgeting process, I guess, for next year now. But I'm just curious if -- I think somebody asked the question previously, but do you actually have a preference for scaling back margins a little bit to drive a bit more growth? Or do you aspire to move on to the next EBITDA margin milestone of maybe up to 30% now.

We believe in these markets and into the future, a company like ours, with how we operate is, for the most part, going to be evaluated on our margins and our EBITDA. I think they want growth as well, but I do think the EBITDA has to come first, and we're not going to sacrifice that for sales and marketing, and we do selectively add into other markets than we do. But I think at the end of the day, my belief and our Board and the [ indiscernible ] and the other we'd like seeing that cash balance grow on a quarter-over-quarter basis. That's sort of what we're about.

Got you. That's helpful.

Next question is from Richard Baldry of ROTH Capital Partners.

Sorry about that. You've been hitting the upper end of your ARR target pretty frequently lately. So I'm sort of curious how you feel about sales capacity and productivity, whether with the existing group you've got, you can take that up to the next level? Or without stressing your EBITDA margins, you think near term, intermediate term, there's a sort of a step function increase to the sales to kind of bring that up.

Yes. I'm conservative by nature, Richard, I do think the pipeline would support that we could have quarters above that $1.5 million in the near horizon based on some activity that we got going on, but I'm always hesitant to do it because we could have some lower quarters as well. But I do think there's there. We really need -- in order to in order to grow once you start seeing a little bit more evidence from our other geographies that products taken off. I think we already have a fair amount of investment in sales, people in Canada that are trying to bring and in Australia and the Mid-east that are trying to bring newer products from other markets into those markets that have somewhat hit our growth, but I don't think it's hit as significantly as it can in the next little while. So we are making investments in those markets right now as we speak. And our expectation is that, that will contribute to some of the growth. And so we'll selectively add more. But I think just based on the TAM of the markets and stuff, I think we're well suited with our investment in sales and marketing, and we tend to upsell into our base. We'd rather make more acquisitions and get more products and get more growth. So that's really where I think our focus is right now is we want to get some of these acquisitions over time.

The extension of that. If you look at the defensibility of your space, probably should be better in a macro sort of uncertain world. Inside your sales that you closed or even the pipeline you look ahead, have you seen any changes to things like how much is coming from greenfield versus cross-sell, upsell, retention rates, maybe different geographies.

It's hard to really like define what the definition of cross-sell versus greenfield, like some of them are obvious, right? But the NHS, for example, is NHS is sort of an entity and health care tends to buy in a herd mentality type of mode. So on the children's mental health, if we get one government agency or 2, when that RFP comes out next, there's probably a pretty good chance that we've done a good work and the other one is that we're going to get that business again and again and again and again. And if you're the one that's there. And every time you implement, you put something in a little bit more on that is specific to that particular geography and you become the standard for that. And a lot of our products are that standard. So it's greenfield, but it is somewhat cross-sell as well. And then once we're in there, new products, got added to it, we spent a fair amount of our money on what we call customer success account management retention, a, to protect our recurring and b, to add on new modules. There's a lot of work still to mine on our customer base with add-ons of products and existing stuff. It's still a big part of what our is. But we do -- we get greenfield as well.

Next question is from Daniel Rosenberg of Paradigm.

Dan and Brian, just a quick question on the macro. I was curious about the budget landscape. Coming out of COVID, there was a lot of support from health care organizations to support budgets and grow them. I'm curious how you think about this trend in the next several years and how you square this away with your business? Just any thoughts around what you're seeing on budgetary discussions with clients.

You don't see budgets for digitization of systems. There's still a lot of work going on in health care to get it to the next level, right? It's somewhat insulated from this macro world. It depends on the market, but NHS seems to continue to put out envelopes for strategic initiatives in which we fit into in numerous times. So we're still seeing money that's being circulated. We're not seeing the amount of -- in Canada, we don't think we ever signed an offer [ indiscernible ] like at least for our products. In U.K., there's a little bit of craziness going on in spending, maybe not to the extent that it was before, but as you can see through this quarter and what we see that we're still seeing demand in capital to -- for them to expand and grow their digitization. There's still a lot of work to go -- to get move those places forward.

And then as a follow-on, so in the U.K., could you categorize kind of what inning we're in as far as digitization getting it to like a global updated standard versus Australia or the Middle East or some of the other European markets [ indiscernible ].

I think the United States would be the gold standard, I think, that you would have and U.K. would probably be a 4 compared to where the U.S. would be. Canada is probably a little further ahead because we're closer to the U.S., but they still got a ways to go.

There are no further questions. With that, I will hand over the call back to Dan for his closing remarks. Thanks again, everyone.

Yes. Thanks, everyone, for your support, and again, particularly where we are. We think we've built a really strong foundation with our business model. And as I said before, we focus on 3 things every day. One is to make accretive acquisitions. I think a lot of M&A companies do. We're really focused on that right now to try to get some things over the finish line. Secondly, organic growth, high-margin recurring-based revenue. And as that grows, it comes to the bottom line, and we're seeing that come to the bottom line quarter-over-quarter. And we have the ability to move resources into our Sri Lankan based resources for both innovation in a cost-effective fashion and that allows us to service this market in an effective way and in a cost-effective way. And all 3 of them seem to be working really well. We spent a lot of time on it, and we just keep building block by block, and that's what we're all about, and we continue to do it.

Thanks, Dan. Thanks, everyone. This concludes our conference call. You may disconnect now.

Thanks, everyone.

Thank you very much.