Mach7 Technologies Limited

Hello and welcome to Mac7 Technologies' fourth quarter FY21 Business Update. I'm Andrew Keyes and I'm facilitating today's event. Please note the event is being recorded. Shortly you'll be hearing from Mike Lampron, CEO of Mac7. Mike is in Burlington, Vermont, United States. Also on the call today is Jenny Pilcher, CFO of Mac7. Jenny is in Melbourne, Australia. At the end of Mike's commentary, Mike and Jenny will be taking questions. If you'd like to ask a question, please raise your hand in Zoom or send through the question via the Q&A function and I'll facilitate it for you. Hi, Mike. Good evening. I'll hand over to you.

Thank you, Andrew. Hello, everyone, and welcome to the fourth quarter FY21 business update. We appreciate you taking the time to spend 30 minutes with us today. Our fiscal year results will be coming out at the end of August, but we did have some financial highlights that we wanted to give you for Q4 and for the year. We'll go into a little bit of detail on the highlights as well. Despite a tough year with the pandemic for us, we recorded record sales orders this fiscal year of $25.6 million. That's up 95% year over year, and $4.4 million of that was in Q4. We recorded record cash receipts of 21 million. It's up 23% year over year, of which 4.6 million was in Q4. And for the second year in a row, we will record positive operating cash. This fiscal year, we will have 1.2 million in positive operating cash. That gives us 18.4 million of cash on hand as of the end of June and no debt. Our annual recurring revenue run rate is 13.4 million, and that's up 105% year over year. So we're gonna dig into a few of these details. I'm not going to go through the whole release, but some highlights for you. Clearly the biggest highlight is around sales orders. With our orders growth, our customer count is now at 165 customers, 26 of which are both VNA and eUnity viewer customers. Our customer attrition remains really low. It's less than 2%. And we consider our business to be very sticky. We believe the sales orders and the continuation of building our book of business to be a true measure of the company's progress from year to year. We've seen quarter over quarter timing issues. We have some lumpiness that everyone is aware of. We have deals and revenues can be impacted by contract milestones and timing issues. So this past year's success from a sales perspective gives us confidence that we are on the right path and how we position our products and that our success will continue to drive a positive network effect on deals moving forward for this coming fiscal year. And I know that prior to the client outlook acquisition, we discussed a $40 million near term pipeline. As you can tell by this past year's sales orders numbers, we have realized some of those deals, but there's still more in the current pipeline that we continue to work. And some of the deals that we discussed back then have been on hold for the past year due to hospital budgetary concerns. And of course, we have some natural attrition out of that older pipeline as well. However, overall, the pipeline has been completely revamped since we're selling bundled products We're a year post-acquisition. We have new leadership in both marketing and sales. And what I can tell everyone is that our current pipeline, we have no concerns with, and our pipeline is supporting our sales efforts for this coming fiscal year without any issues or concerns on our part. So from a new customer highlight, you'll notice in the release there was quite a few highlights here. I'm not going to highlight all the new customers and expansions that was in our release, but I would like to highlight UVM. We had a recent announcement that we won their enterprise viewer business as an expansion from our V&A contract that we won years ago. Shortly after our announcement, PME announced their win for the PACS business at UVM. And I wanted to just mention a few points about that to make sure everyone heard what the story is there. You know, true to our tagline, which is independence through innovation, we migrated all of the imaging data at UVM from their various facilities onto our V&A. That gave UVM the flexibility to leave behind their old PACS vendors and choose a departmental radiology PACS solution, something that fits their needs and the radiologist's needs. We provide the long-term archive and routing workflow for all six hospitals, and this will be the first opportunity we actually have to integrate to the Visage product. We've also been contracted to provide the universal viewer for the enterprise. This will image enable the EPIC EMR system. So clinicians outside of radiology will use our viewer to view medical imaging. And then the radiologists will use the visage viewer for radiology specific advanced visualization. All things considered, this is a perfect example of how PME and Mach 7 both fit into the imaging segment. And we manage the data in Universal Viewer and PME provides the advanced visualization and radiologist experience. So it actually dovetails pretty nicely together at UVM. I just wanted to highlight that to eliminate any confusion. So moving on to annual recurring revenue, we're now generating 13.3 million of annual recurring revenue. That's revenue that's earned from live annual support contracts and monthly quarterly subscription licenses on an annualized basis. ARR has more than doubled since last year, and we continue to grow as existing customers become fully deployed. Examples like Trinity and Aventis that are not fully deployed yet. This ARR is now covering approximately 65% of our annual operating expenses. One of the questions I'm often oftentimes asked is if we will convert to an all SAS model. And, you know, well, we talk about this, but we continue to address and evaluate our model all the time. Currently, we have many of our largest customers who are very acquisitive. We deal with IDNs. We deal with businesses who are acquiring other hospitals. And as such, they prefer a capital model. They look to reduce operating expenses when they're acquiring a new hospital, just as we would if we were acquiring any business. So they really prefer that capital model. And I don't think that moving to an all SAS model will really help us with that business. But over the last couple of years, we've made progress towards increasing the overall percent of revenue that comes from recurring rather than one-time license fees. We'll stay the course and continue to increase the overall recurring revenue each year. As the market evolves and we see the right opportunities, we will adjust our model. And again, with the intention of continuing to grow our recurring revenue line every year. From a revenue perspective, revenue is more closely linked to cash receipts than sales orders in a given year. We are forecasting results in the $19 to $19.5 million range for FY21. This would represent approximately 15% growth if we normalize the FX rates year over year. We expect to see strong growth in revenue this fiscal year. The expectation is underpinned by the rollout of Adventist and Trinity healthcare contracts. You'll also note that we've had some continued success from a sales perspective recently with the announcement of Advocate Aurora just a couple of days ago. That further buoys our expectation for a fiscal year 22 revenue growth. And further to our commercial success, we have introduced Dave Medaffrey to manage the sales organization, and we have appointed Lisa Thompson as a VP of services. This will help to both ensure our continued sales success and also assist with shortening the cycle between sales orders and the realization of service revenue. So I think those cover the highlights for us with this update, with the Q4 update, and we want to leave plenty of time for folks to ask questions. So with that, Andrew, let's push it back over to you and see what kind of questions we have.

Okay, thanks, Mike. A reminder for all attendees on the call, if you'd like to ask a question, please raise your hand in Zoom and I'll patch you through to the to Mike and Jenny or pop it in the Q&A function and I'll read it out. We do have Scott Power from Morgan's here. I'm just going to, you'll need to unmute your line, Scott. When you do, please go ahead.

Thanks, Andrew. Can you hear me okay?

Yes.

Yes. Good morning, Jenny, and good evening, Mike. Just wondering if you could sort of comment a little bit more on the upsell opportunity. So you mentioned 15% of your sales current customers have, have the full Mac seven offering. Um, can you perhaps just explain and give some thoughts on, um, how that might be upsold to the, to the balance of the, um, customer base? Thanks.

Sure. Yeah. You know, that's a, we're constantly looking at our install base for opportunity. Right. And, um, And it doesn't just stop with the eUnity or VNA. We have other modules that we try to upsell as well to existing customers. But strictly from an eUnity and a VNA customer perspective, we find that it's a little easier to upsell an existing VNA customer on the enterprise viewer. If we already own the data, we're already managing the data, the eUnity is a nice add-on to image enable in EMR, especially in an IDN segment. If it's an enterprise viewer customer, they may already have infrastructure. They may have already had an enterprise imaging strategy. It's difficult to say, and every customer is going to be a little bit different. But there are opportunities like that. As an example, Adventist West was an eUnity client that we upsold the VNA to. On the other hand, Advocate Aurora was a VNA customer that we upsold the eUnity viewer to. We have some customers who already have both products. So it's difficult to say out of our 165 clients, what percentage of those are in the market right now and we can upsell to. Certainly some section of them. And we look at that from an account management and from a continuing basis of who we think we can have an opportunity with.

Great. Thanks, Mike. If I could perhaps just ask one more question. Mike, can you just give some general commentary around how you're seeing the landscape in terms of the larger legacy companies, how they're performing? Have they picked their game up or are they still a little bit sluggish? And yes, if you could just answer that, that'd be great.

Thanks. Sure. I appreciate that question, actually. You know, vendors continue to consolidate and buyers actually are continuing to consolidate. I think one of the things that happened through this pandemic is that some hospitals have had some weaknesses that they've chosen to be acquired. So we're seeing that consolidation in the buyer space, almost more than the vendor space at the moment. But I'll say this from an overarching perspective. My feeling is that vendors must either offer a comprehensive platform solution or like we do, to secure large enterprise deals or become a best of breed specialist in a specific competency like radiology. And then they would partner with platform vendors. Think small to mid-sized companies in imaging IT that focus on radiology and they have a limited capability to scale or support enterprise imaging. They're going to miss out unless they decide on one of those two strategies. So that's what I see in the marketplace happening. And I think everyone's having to choose a specific strategy in order to be successful.

Great. Thanks, Mike. And maybe just finally, just in terms of the hospital's budgets opening up, just a general comment on that.

Yeah, it's speeding up. There's no doubt that our customers and prospects have had budget constraints that they needed to deal with. I think that there's still a little hangover from those challenges. But by and large, I think things have opened up. You know, however, you know, some of the buyers may no longer be buyers, right? Priorities have shifted in each facilities in different in regards to where they stand from an investment perspective. The one thing we have seen consistently, though, is that investing in technology that will allow their clinicians to be able to do their job outside of the walls of the hospital continues to be an investment that gets a prioritization with every hospital. And as budgets opened up, more opportunities should open up. We're in a pretty sweet spot for that.

Great. Thanks, Mike. Andrew, that's all from me.

Thanks. Mike, we have a question in Q&A regarding the sales pipeline and the maturity of it, if you can provide some commentary there. Where are the opportunities? Are they at the start of the process or spread out across the pipeline in terms of timing?

Sure. Yeah, look, our sales pipeline is an ever evolving pipeline. New deals are coming in and deals are coming out on a weekly, monthly, quarterly basis. So it's very difficult to speak too concretely about a pipeline. What I can tell you is that we expect to have a strong first half of the year. Our pipeline is very supportive of that. We have a pretty evenly distributed pipeline. I will say that As of the last, I'll say, 60 days, 45 to 60 days, we've seen an increase in opportunities into our pipeline. The gestational period for some of those big deals that have started to come in, though, they're going to take a while. They're not going to be this year deals, deals that are just coming into the pipeline today. But we have a pretty, I would say, a pretty evenly distributed pipeline system. And we have more than enough deals to work with. And I think that our pipeline continues to grow every day.

Thank you. Reminder for attendees, if you'd like to ask a question, please raise your hand in Zoom or drop the question into the Q&A function. Uh, we have another question through by Q and a, um, from Nick Greenway, um, thoughts on M and a, are there any gaps in your capability that need filling or improving?

Sure. Um, you know, there's always, um, there's always areas to look at, uh, when it comes to, to M and a, um, you know, I'll, I'll say the same thing that I have said repeatedly though, that, um, We really want to see the full value of the client outlook acquisition and integration before we look at any larger scale acquisitions. We don't want to get too far ahead of ourselves from an M&A strategy. That doesn't mean that we're not in the market for a smaller technology company, but from a transformational acquisition like we're still currently going through with Client Outlook, I think we need to get through the other side of this one first. It's been a year now, and I think we have a little bit further to go with this integration before we consider that.

Thanks, Mike. Question from... Guglielmo Salatenna, relating to cashflow, how should we think about FY22 from a cashflow perspective? Are you aiming to remain cashflow neutral or is it going to be a positive view?

Yeah, we'll always continue to have a positive cashflow and we feel pretty good about having positive cashflow two years in a row now. We feel like we're on the right path and we'll continue to strive for that. Maybe I'll ask Jenny as our CFO if you have any further comment on that.

Yeah, no, I agree. We will be positive cash flow for FY22. Having said that, we will need to do a little bit more investment into some of the operating expenditure lines, but they'll be well covered by revenues.

Thanks, Jenny. Thanks, Mike. Question from Simon Grimes. Maybe... possibly for you, Jenny. Given MAC7 sales are mainly in US dollars, with noting that the Hong Kong dollars peaked to the US as well, is it time to start reporting ARR, new contracts, et cetera, in US dollars?

Yeah, we can do that. You've hit a good point. The FX rate has definitely impacted both our revenues and our ARR cash receipts, et cetera. this year compared to last year by quite some way. So yeah, I take your point. We could definitely start quoting those in US dollars. But at this stage, we don't have any plans to change the functional presentation currency of the actual results themselves.

Okay. Question through from Owen Humphreys at Canaccord. Given FY22 guidance, can you break down revenue growth expectations between recurring revenues and implementation slash license revenues?

Comment on that, Jenny?

Can you just repeat that, Andrew, so I've understood the question?

Yeah, sure. From Owen at Canaccord, given FY22 revenue expectations, can you break down revenue growth expectations between recurring revenues and other revenues?

Well, we don't really comment on that other than to say that our recurring revenue is... you know, continues to be above 50% of our total revenue. And I don't see FY22, I don't see that changing for FY22.

Question regarding sales growth. Interesting coming off a nearly doubling

sales values in the year what is required to accelerate sales growth would a larger sales team help yeah look um you know we we we think about this all of the time uh we we could add more more sales folks um we could add different skill sets um OEM managers, business partners for our partnerships. We could add different geographies. We will be expanding to some extent over the course of the year, both in the APAC region and in the US, but not considerably. And what we really strive to do is make sure that we have the appropriate coverage for the deals that we have, for the opportunities we have in the pipeline. At the end of the day, this isn't a business where people knock on doors. And we need to make sure that we've got all the right infrastructure to make sure that people are successful in their sales roles here. I will say David Daffrey, having come on board now for around 30 days or so, he's taking a close look at that. And we'll be making some decisions probably over the next 45 to 60 days in regards to sales org structure.

Reminder for attendees, if you'd like to ask a question, please pop it in the Q&A function or raise your hand in Zoom. A question from Rob Pizzaschetta from Morgan's, has the competitive landscape changed and the pipeline, what is the success rate you'd like to deliver?

The landscape, I wouldn't say, has considerably changed. From a vendor perspective, it's competitive. It depends on what we're selling. The enterprise imaging market is still pretty wide open. The PACS market is a replacement PACS market. The vendors have largely remained the same. In the US, our biggest competitor from a V&A perspective is Highland Imaging. In APAC, it tends to be more of the traditional multinationals that have the PACS business. the traditional risk packs business and APAC, it's the GEs and the AGFAs care streams of the world tend to be the bigger owners. And then in regards to sales pipeline, and I assume that you're asking about conversion rates, like it's difficult to say whether we counted that by the dollar or whether we counted it by the deal, because we have a lot of deals that could be an eight or 10 or $12 million deal or it could be a $50,000, $100,000 deal. So, so the, the conversion rate varies, but, but, you know, I think that, you know, we, we hope to have, you know, somewhere, somewhere in the, the 10 to 15% conversion rate in any given year. Understand though, that, you know, our, again, the, the, the, the late, it's an 18 to 24 month sales cycle. Can be 12 months, can be six months, but it's a long sales cycle.

We don't have any new questions in Q&A or raised hands. Jenny, just going back to the question about

recurring revenue and and the trajectory that's on um do you have any further comments on that um yeah i mean as per our release with the arr run rates around 13.4 million today and um it's over it's more than doubled that of where it was this time last year so we're very pleased by the um by that and we continue to see good growth in the subscription or SaaS model of our business as well, which we think is really important.

Okay, thank you. Question from Sam Curry. With the current security threat landscape, technology firms are dealing with how is security managed when developing your platform and service offerings?

Yeah, we have a regulated product and because we are an FDA regulated product, cybersecurity and penetration testing is a necessary part of our software development on an annual basis. So we have certain things that we need to do annually to ensure that our software stays up to par. Not only do we do that, and we hire a third party to do that for us, but our customers are constantly doing it. Our customers ultimately are the ones who take a lot of ownership of the security of their systems. And they're the ones that really spend the time and energy of coming up with protocols and policies on a site-by-site basis.

Question through a Q&A, Mike, regarding technology offering from peers, competitors. Is there anything visible that looks like it's a game changer or a step changer from peers when Mac7's tendering for opportunities?

I mean, nothing specific that's really come up this year. Now, keep in mind that to a large degree, all of us haven't traveled in the last 18 months. We haven't had trade shows. And so, you know, from a competitive landscape perspective, you learn a lot when you go out to visit customers face to face. And when you visit with partners, when you're able to attend trade shows, you start to get a lot of competitive intel. Our first conference in 16 months is coming up here in the beginning of August, the HIMSS conference. So maybe we'll see things over the next six months or so. But, you know, look, it's been pretty consistent. And I wouldn't say that there's any one particular technology that really seems like it's winning the day on the RFPs that we're seeing. I think the important part is scalability, supportability, dependability. And those remained sort of the hallmarks of success in the software world for our clinicians.

All right, we've got a couple more questions in Q&A, so we'll work through those and then we'll be getting towards the end of the call. This is in relation to investment in costs heading into FY22. Are you expecting SG&A staff costs to remain stable in FY22? Do you want to take that one, Jay?

You're on mute, Jenny.

Sorry, I couldn't find the button. Yeah, no, the staff costs will grow a little bit into FY22, maybe around 5%, 10%, something like that. We do have some staff replacement costs and we do need to invest a little bit more in certain areas of the business. Good.

Another question from Simon Grimes relating to, I guess, the relevance of the MAC7 offering to competitors, are there opportunities similar to what they've seen recently where Mac7's infrastructure was an enabler for PME to sell a specialist package to the University of Vermont. Are there similar opportunities perhaps for joint bids or introductions to other hospital groups, either with that participant or someone else, or would that sort of, working hand in hand create problems rather than opportunities?

Yeah, I mean, look, it's a legitimate question. I don't know that I have all the answers to that. I will say that it's pretty common now in North America anyways to find with our customers on their journey to enterprise imaging strategy that they're going to implement a VNA. And with that, they're going to implement a universal viewer and they're going to implement a departmental PAC solution. it's becoming more and more common to find that scenario. Now, oftentimes they don't want to do that all through the same vendor because then they feel like they're being held captive by their vendors. So to avoid that, they like to have some of this flexibility and having multiple vendors involved. Many of our competitors, they want you to buy into their whole ecosystem. So that's part of the value proposition that Mach7 is bringing is the ability to separate your backend archive and storage management from the rest of those PAC solutions. Now from a cross-selling opportunity and how many, a lot of people out there are selling both the departmental PAC solution and their version of a VNA. Do they want to partner with a, with an independent VNA company? I don't know. But in some cases, I think customers are going to push people in that direction. And again, there's always going to be cases where customers want one single vendor, and there's always going to be cases where our customers want multiple vendors. So when it comes to partnerships and things like that, we take it as they come, and we see where it leads us.

Thank you, Mike. A question from Michael Murray. How is MAC7 tracking against the $27 million revenue target which was provided at the time of the client outlook acquisition and that target relates to calendar year 21?

Jenny, do you want to make a comment on that?

Yeah, sure. So just to emphasise Andrew's point there, that target was a calendar year 21 target. If you look at our guidance today, you can work out that second half... For the first half of this calendar year, the revenues will be between 12 and 13 million. So we essentially need to repeat that for the second half plus a little bit. And we're well on track to doing that, particularly with the uptick in AR recurring revenue and also the rollout of Trinity and Adventist.

Thank you, Jenny. And we might make this the last one, Mike and Jenny. Question regarding... discussion of artificial intelligence in the industry. Can you talk about its impact and what you are seeing, for example, in LITIC in the US?

Yeah, so that's a big topic. When we talk about artificial intelligence, it takes on such a different meaning and so many different components of it. You know, where we see it is for the radiologists. We also see it from an IT perspective and predictive analytics perspective. So if we talk about operational AI where we're talking about predictive analytics and we're talking about large data sets, certainly there's a demand for that and people are interested in it. We encourage our hospitals to investigate and buy their own AI algorithms or build their own because many of our customers are also interested in building their own. And we provide that platform to allow them to do that and the interoperability to plug those into our system where our data is being stored. That's how we encourage that AI front. We're seeing some demand of that, but not huge. It's talked about a lot more than it's actually implemented. And then on the clinical side, we see AI become more important with the advanced visualization tools. And that really, what it comes down to there is radiologist workflow and developing the right pattern and the right technology to easily enable the radiologist to use some of these algorithms. And I think that's an area that is ripe for improvement at the moment. There's a lot of specific algorithms being built, but whether or not they're easily accessible for the radiologist is a whole nother story. And I think that that's a component that companies are going to have to work on in order to get everyday traction in the radiology front with some of those clinical tool sets. It's coming though, and people are working on it. And it can be very helpful for the radiologists in the long run.

Thank you, Mike. And thank you, Jenny. That will draw the call to its conclusion there. Thanks for all the attendees for participating today and questions. Mike, any closing remarks you'd like to make?

No, just, you know, thank you all for attending. I love the opportunity to answer questions. Hopefully it's been helpful for you and I appreciate your time today.