Vitalhub Corp. (VHI) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for our 2024 First 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 2024 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 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 sedarplus.com and our website. With that, I will hand over the call to our CFO, Brian Goffenberg, to go over our financial highlights for the quarter. Please go ahead, Brian.

Good morning, everyone, and thank you for joining us today. The first quarter has set a strong pace for 2024, and I'm thrilled to discuss our accomplishments and the exciting trajectory we are on. We kicked off the year with remarkable growth, marked by significant increases in revenue, adjusted EBITDA and net income, reflecting the success of our strategic initiatives and robust operational execution. Our focus on expanding and enhancing our health care technology solutions continues to drive increased adoptions and -- adoption and deeper engagement health care providers worldwide. We've also made strategic acquisitions that are already contributing to our top line growth, while our operational efficiency efforts have helped improve our financial health. As we move forward, these results not only demonstrate our ability to execute our business plan but also position us well for sustained growth throughout the year. I'll now highlight our key financial performance for the quarter. Total revenue for Q1 2024 reached $15.3 million, marking a 21% increase from $12.6 million in Q1 2023. This growth is driven by both organic initiatives and strategic acquisitions, demonstrating our commitment to expanding our market reach. Revenue from term licenses, maintenance and supporting Q1 2024 reached $12.5 million. up from $10 million in Q1 2023, reflecting a 25% increase. This growth is primarily attributable to our sustained organic revenue increases with our core product offerings bolstered further by strategic revenues accrued to our recent acquisition. Term licenses maintenance support continue to be a critical pillar of our revenue strategy due to their predictable and recurring nature. They comprised 82% of total revenues in Q1 2024, maintaining a consistent share compared to 79% in Q1 2023. Revenue from perpetual licenses in Q1 2024 was $121,771 , down from $310,398 in Q1 2023, marking a decrease of 61%. Perpetual software licenses, which are influenced by the specific product mix sold in any given period, saw this reduction primarily due to the timing of delivery of several key [ Intouch ] products. Revenue from professional service hardware in Q1 2024 totaled $2.67 million compared to $2.29 million in Q1 '23, an increase of 17%. This revenue stream contract at based on the timing of hardware deliveries and the progression of customer projects. The increase this quarter is primarily attributable to the successful deployment of new and ongoing customer projects, coupled with timely hybrid deliveries which have contributed positively to our growth in this sector. Annual recurring revenue, or ARR, of which we formally refer to as annual contract value reached $47.8 million as of March 31, 2024, up from $44.6 million at the end of December 2023, marking a sequential increase of 7.2%. A substantial portion of this growth, $1.5 million or approximately 3.4% of the total ARR and translating to an annualized growth rate of 13.6% was organic, underscoring our commitment to sustained growth through enhancements in our core service offerings. Gross margin on total revenue for Q1 2024 was 81% compared to 80% in the same period last year. This improvement is primarily attributable to an increase in high-margin maintenance and support revenues, which represents a larger share of our overall revenue mix. Recurring revenue constituted 82% of total revenue this quarter, maintaining a consistent level with Q1 2023, highlighting our strong focus on sustained revenue streams. Operating expenses in Q1 '24 were $8.8 million, reflecting a 15% increase from $7.7 million in the first quarter of 2023. This increase is mainly due to elevated sales and marketing activities, which included additional spending on conferences and exhibitions as well as a sustained investment in research and development to further enhance our product offerings. Notably, despite the increase in absolute figures, the operating expense as a percentage of revenue improved significantly, decreased 57.5% in Q1 '24 from 60.7% in Q1 '23. This demonstrates the ongoing operational efficiencies and cost synergies being realized across the company. Net income before income taxes in Q1 '24 was $2 million compared to net income of $780,428 in the equivalent prior period, representing an increase of 154% year-over-year. This substantial growth in profitability for the quarter can be largely attributable to the significant rise in revenues driven by both organic growth and strategic acquisitions alongside continued efforts to optimize costs and enhance operational cost synergies across our business units. Net income after tax in Q1 2024 was $1.3 million, a significant improvement from the net income of $162,000 in Q1 2023. This marks an increase of 713% year-over-year. highlighting our successful financial strategies and the robust growth stemming from both enhanced operational efficiencies and strategic acquisitions. EBITDA in Q1 '24 was $3.1 million compared to $2 million in Q1 '23, an increase of 56%. The substantial growth in EBITDA underscores our successful strategic initiatives and operational efficiencies that continue to positively impact our bottom line. Adjusted EBITDA in Q1 '24 was $4 million or 27% of revenues compared to $2.9 million or 23% of revenue in Q1 '23, representing an increase of 38%. This improvement was largely driven by an increase in recurring revenues, which rose to $12.5 million in Q1 '24 from $10 million in Q1 '23. This revenue growth combined with our persistent efforts to streamline operations and realize cost synergies has significantly bolstered our adjusted EBITDA margins. Cash flow from operations before changes in working capital for Q1 '24 was $2.9 million compared to $1.5 million for the same period last year, representing an improvement of approximately 98%. This significant increase highlights in our advanced operational efficiency and robust revenue performance. Cash on hand at March 31, '24 was $33.3 million compared to $33.5 million at the end of '23. The slight decrease over the quarter can be attributable to strategic financial moves, including an investment of approximately $5.3 million in acquisitions. Despite these expenditures, the company maintained a robust cash position due to strong operational cash flows and ongoing revenue growth. When you add our recent financing, the company now has in excess of $70 million in cash. With that, I'd like to hand the call over to Dan for an update on the business.

Thanks, Brian. Good morning, everybody. Just a brief update from me. I think we just spoke about 6 weeks ago with the end of the year. So not [indiscernible] change. Again, a good quarter for us in Q1. Again, proof of our business model being cemented in. And -- we continue to make acquisitions. We did get one over a finish line with BookWise in the quarter, and organic growth continued to go at a pace of $1.5 million, which is the high end of our guidance. Again, it's again, proof of our ability to make an acquisition, I think it was highlighted our cash position to remain the same, although we still made the acquisition of BookWise for [ $5 ] million in the quarter. So we're using our own cash in that particular situation to make acquisitions. So it's something that we'd like to highlight. Again, as you know 1.5 was the high end of our guidance in terms of ARR. A little bit on the BookWise acquisition. We're excited about that one. It's a company that our U.K. group has known for a while and has worked with and competed with in terms of room and resource booking in respective outpatient facilities. So we have a little light module like BookWise already in the Intouch suite of products, and it just gave us a more base. So we hope to get some good cross-sell base sales of that as we continue to work towards that. Again, our organic growth was across all of our product lines but was primarily led by treat and transforming based solutions. We're seeing and continue to see some uplift in that particular product set and really good activity in respect to that. We did have some questions that came to me by e-mail, which I do want to address, some people start looking at the high balance of our accounts receivable relative to the other quarter. Q1 has a lot of seasonality in respect to our accounts receivable. We have, as a lot of our government year ends at the end of March. So we do have a lot of our renewals that will come in at the end of March. So that has a lot to do with our ARR perspective to do it. In respect to M&A, our expectation is to be very robust on that in the next little while. Our pipeline is really strong. We have a lot of activity going on in the M&A perspective with some of that being on the high end of the ARR side. So we're excited about that. We're excited about getting to the next phase of growth with M&A when positioning our organization to be able to absorb some of these larger acquisitions. So we are starting to make investments into our -- more into our corporate infrastructures, our integration methodology, so that we're ready for these in a concrete fashion. You saw the promotion of Pat Mazza to COO. He's a seasoned veteran in terms of working in this particular space. We have other senior folks that are stepping up and other senior folks that we're looking to bring in to help us with the integration. A lot of that is starting to happen on a go over basis. So we continue to make investments in sales as well in our areas that we're not into that much in terms of the Middle East and Australia primarily. We're starting to see a little results of that, and we're starting to see the pipeline grow in both those areas, and we expect that to happen at the end of the year. So on a go-forward basis, as we make some of these acquisitions, our financials could get a little bit blurred with these acquisitions in terms of as we work to rightsize them and bring them into our fold. So we expect that to start happening over the next little while as we get into the latter part of this year. And I'll take any questions that anybody has.

[Operator Instructions] First question comes from Gavin Fairweather of Cormark.

Congrats on the strong results. Given that you're a consolidated, we often focus on what products you're buying. In the prepared remarks, Brian referenced some of the organic R&D work that's kind of going on behind the scenes just to expand your TAMs and expand products and drive organic growth. Maybe you can speak to a couple of current initiatives that you're excited about and you're working a way on in terms of organic R&D.

Yes. I think couple of examples [indiscernible], and there's more of it we've set up like a business intelligence based group that's centered out of that acquisition we've made last year call called Alamac in the U.K. and has been beefed up by a group in our Columbo based office, which does business intelligence where we can start adding BI and decisions support modules to all of our products. And that seems to be happening as an add-on module. It makes our products a lot more stickier. It gives a lot more value. Primarily, we've been doing a lot of that work on the transforming product set. So not only is the read-only data coming in, but they can start doing business intelligence reporting and predictive analysis on the back end of it. A lot of our EHR products, they would like to start seeing for no better words a portal or patient input into the EHR. So we've added a portal-based solution on our treat-based solution and other solutions on the EHR side, so that outside patients or clients can get access into systems and start communicating with that. So again, add-on modules that we'll continue to do that. The S12 product, we've added more additional modules that we could upsell a lot of forms perspective, the BookWise acquisition is another module that can be upsold on Intouch. Those are, we're working with the Australian group on moving some of the TREAT and Coyote-based functionality down to the Australian market, which gives some new features and functionality. We're only looking at new initiatives like that. And those are some of the examples, Gavin.

Yes. I appreciate that. And then just secondly, on M&A. I think you referenced -- maybe I'm reading between the lines that may be there's some larger acquisitions coming. You certainly have the capacity for larger acquisitions given the cash that you have. So should we be expecting generally deal size just to start to trend higher over time, do you have a preference for those? Would you still consider tuck-ins? How would you frame that?

I wouldn't use the word trending to get bigger, but we do have bigger scenarios that are in play internationally, which -- I guess, in excess of like $8 million to $10 million of ARR that are in play. So some of them are of significant size. So again, those are -- you never know how these things turn out. But all I can say is it's more than we've ever had in that perspective in terms of staring that in the phase.

What kind of competition are you seeing in that segment these days?

There's always competition. I think for a large percentage of them, where you go in good position there. You never know on how these things work. We stick by our business model, and we stick on what we do and time will tell.

That's fair. And then a couple of financial questions. Services revenue was quite strong this quarter. Is that mostly TREAT related? And maybe you can just touch on kind of the services backlog through the rest of the year in terms of whether the current run rate that we saw in Q1 could be maintained, which is quite a bit stronger than we saw last year.

TREAT is a nice chunk of that, although we are seeing some coming from the transforming base with those deals coming through as well. But TREAT is the biggest bulk of that. There's a tremendous backlog of services work in that area that continues to grow and somebody gets a little bit overwhelming for our groups, but it's a good problem to have as part of the implementation processes, people are looking for new things and a little more complexity in terms of some of those implementations. We're still heavy into the sold in work, and we expect that to continue and know it goes and continues to add additional modules and services work to continue to come into play as well as other initiatives. So we have the ability to execute that with our Columbo base. We do expect that to continue at least through -- we have visibility at least through 2024 into pretty robust services work at least through the next couple of quarters per se. But yes, we'll see how that entails to in the long run here in terms of what happens.

Great. And then just lastly for me, term license and support. I've got us at times, it tends to run a little bit higher than your ARR would imply. And this quarter, it was a bit more notably ahead of what your ARR would imply. So can you speak to what's driving that outperformance? Is there kind of some onetime support or things like that, which are flowing through that line and maybe you don't.

Sometimes there's catch-up. There's catch-up transactions where the -- we know that they're going to come in, but they're not committed yet to coming in just delays and then you get a catch-up in the quarter on that. So you just -- it gets a little bit on the other side of it because we're catching it up. It's just a conservative revenue recognition perspective that we have there.

Next question is from Gabriel Leung of Beacon Securities.

Congrats on all the progress. I got two questions for you, Dan. So first off, has there been any sort of change in the M&A environments, whether from a valuation standpoint or a number of bidders you're dealing with or even time lines around executing on your M&A pipeline. I would have prompted you or the Board's decision, I guess, to augment what was already a pretty strong balance sheet to begin with. I'm just curious any thoughts on that?

Yes. We think the M&A in general, especially on the bigger side. We've been seeing companies that have the market's open to raising cash isn't like it used to be, right? So we're seeing some of these companies that are sitting there. There's a little bit of growth and big ARR numbers, and we think they can do better, but I think it's just been -- they finally just come to conclusion starting to exercise their ability to sell and they put things up for sale. So we are seeing more of that going on, and we are seeing less competition from what I'll call unknowledgeable buyers, right? So I think anybody that -- I don't think anyone is going to take a flyer on a health care company unless they really know it. I think the people that are looking at these type of acquisitions are people that understand the space as opposed to not smart money as I would determine it. So less competition in that realm, we think, on these deals. And I think that's putting us in a better position to get.

Got you. That's helpful. And then secondly, I mean, you guys obviously provided a pretty thorough operational update. So maybe I'll ask a bigger picture question. If you sort of look out 3 to 5 years from now, what does Vitalhub look like? Is there enough opportunity within the existing product portfolio that you think you can sustain sort of that let's call it 50%-plus organic growth profile in ARR? Or is there an underdeveloped opportunity that you see out there that you don't address right now, but would like to aspire to?

Listen, as we start making more acquisitions -- at the Board meeting yesterday, and I set the canvas we need to keep building the canvas so that we can build beautiful art. And that art, to me, is both organic growth and the bottom line. I know I was saying it all the way to like our ability to sustain those high teens organic growth isn't really what is going to happen here, right? I do think it's -- we will make acquisitions that we don't expect to grow and that we can really good bottom line access to, and that's part of our strategy. When we get some of the deals, we look at it from both sides of the angle. We'll pay less for those acquisitions and -- but we'll get a pretty good return on it. But it is going to -- it will impact the top line growth because not all of our products are meant to get top line growth. But -- we do expect to continue core products and core sets to get top line growth, and those will be offset by some of our product sets, which we expect not to grow as much. But we're always looking for cross-sell opportunities and trying to train our groups. But it's going to be an amalgamation of those. So our belief is -- we want to be a compounder. We want to generate the bottom line first than the top line second, but it doesn't mean that we ignore totally the top line at all. We want the top line, but we're not going to be that organization that's willing to take 1 of our assets and wait 3 years for it to get huge organic growth because of a TAM, I'm trying to create a unicorn within here, right? That's really, really not what we're trying to do here. Some of those scenarios for sure, are getting good growth, and we'll continue to look for those growth opportunities. But the bottom line is really what we're trying to focus on.

Next question comes from Christian Sgro of Eight Capital.

One follow-on question on the M&A path. You've kind of outlined the criteria for M&A, which seems consistent with the longer-term mission and historical recurring and profitability mixes that you're looking for. I guess as you look at the current pipeline, would you tilt towards something that's more accretive financially or technically? Like would you say it being accretive to EBITDA or the margin profile is a priority for you? Or you want to see, first and foremost, fit within the portfolio? How would you tilt that way?

Well, they're both important to us, Christian, although one is a nonstarter and one is a starter, like if it doesn't have the financial metrics, and it's synergistic, it doesn't matter. So it's got to hit the financial metrics first and then synergistic second. And if it's not synergistic and meets those financial metrics like we would -- we might do something like that as we break into a new area or a new vertical or a new country or something that makes sense, but we would think really hard before we did that, right? So I really we want both, but we want something that meets into our narrative and meets our financial metrics and I can say that everything we got in play at this stage is in both of those -- yes, in both of those areas. So we're -- that's how we look at it.

Okay. Great. And then for my second question, on transforming in the U.K. Is there anything to be said about reaching a level of saturation under their current -- under current buying or your current penetration? Or do you think very positively on the TAM there? The visibility into growing that expanding across the NHS this year?

You're talking about just the NHS in itself?

Yes, for transforming or more broadly, if it's elsewhere.

Listen, you're -- it's a pretty powerful TAM, and we still think we've got work to do there and more things to go on, and penetration levels are still there, but it is a limited TAM like anywhere else. And that we need to move those products outside of those markets than we are. And we need to make acquisitions that are continuing to grow to do that. So both of those are all in the works. But yes, we -- our expectation is to continue to make sales of those things at least in the next little while for sure. And other things will take its place and new modules will take its place. And the bigger we get with acquisitions, we still think we're going to be able to obtain some pretty good organic growth numbers across the entire organization. It's a combination of a bunch of things. It's not just 1 product set. But right now, those product sets are in a pretty good run.

Next question comes from Doug Taylor of Canaccord.

Another couple of questions about the M&A strategy and road map here. Obviously, your cost of capital here is reduced. Have you changed your aperture in terms of the amount that you'd be willing to pay for some of these growth here and more sizable acquisition targets?

It's just how we model it at the time to let if we have to pay more and the models to work that we can make good money on it, we'll pay more, right? But if it doesn't, it doesn't. So it's all how we model each scenario and how we look at it strategically. And how it all fits and everyone has it -- every acquisition has its pros and cons, and trains and understanding the markets to be able to assess it. So sure, we would pay more, we always would for something that makes sense to go to do, but it has to make sense.

So maybe said another way, you have changed your the goalposts with respect to valuations as a result of having a lower cost of capital now?

Yes, I don't think the lower cost of capital is really driving our methodology at all. It's always going to remain the same.

Okay. You spoke, I think, on the last call or at least recently about some M&A opportunities that happened over the last short a couple of quarters that you had passed on or you were outbid that might be coming back around. I mean, is it, do you want to update us on whether some of those opportunities still exist? Is that what you're referencing with some of these $8 million to $10 million ARR acquisition targets?

Yes, I don't know if they were ever outbid or not. Some of them are -- most of them are, most of them are companies we've been talking to, the companies that I've owned for 20 years in that bucket, right? So there are groups that we continuously talk to and we continuously have conversations, and CEO to CEO speak and say, this plus this makes a lot of sense. And I think it's good for you guys, and I think it's good for us, and this is what we can do with it together and let's see what we can do to make these things happen. So I know it's really what the scenarios are.

Okay. And last one for me. At the end of your prepared remarks, Dan, you made the comment that we might expect or could see the financials get. I think to use your terminology blurred or blurry the financials of Vitalhub as a whole. Maybe I just want to maybe press you on exactly what you mean by that statement? Are you referring just to the relative size of what you're acquiring versus the existing business? Or...

Yes, we're going to -- we start making some of these bigger acquisitions that they're not going to hit our growth profile or our earnings profile out of the get-go, right? And it's going to take us time to move these things around and to ship. They're bigger, right? So we got to be prepared for that. That's why we cashed up. That's what we think we need to do as a company is get more size and scale and get things going, but there will be potentially if we get these things over the finish line, some transitionary time frames to make that all happen. And it will take some quarters until we come back and maybe see the same profile here. So, yes, it's something just if it happens, it hasn't been, but that can happen and just try to manage the expectations of everybody that this is a long run that we're looking at.

There are no further questions. Dan, back to you for your closing remarks.

Yes. I just like to thank everyone for coming and this Q1. We won't see everyone until, I guess, August here, but we're available for any questions. We're really excited where we are as a company. We're sitting with -- we're generating cash. The organic growth machine keeps going and we're ready to get to the next level of move into getting this company over the $100 million mark. So that's what we're focused on right now. We're inch and forward every quarter, and we'll just keep running the business model per se. And thanks, everyone, for their support. And if you need any questions answered, give us a call.

Thanks, Dan. Thanks, Brian. Thanks, everyone. This concludes our call today. You may go ahead and disconnect. Thank you.