Mach7 Technologies Limited

Good morning, everyone, and welcome to the MAC7 first quarter FY24 business update. My name is Francoise Dixon, and I'm head of investor relations for MAC7. Today, our CEO, Mike Lampron, will provide an overview of our first quarter result. We will then open it up for questions, which will be answered by Mike and our CFO, Diana Hurton. If you have a question, please submit it via the Q&A text box at the bottom of the screen. Alternatively, you can email me at ir at mac17.com. I'll now hand over to Mike for the Q1 update.

Thank you, Francois, and welcome to everyone attending this morning's call. Q1 was a great start to what I think will be a pivotal year for Mach 7. As I've said in the past, I think sales orders are our biggest leading indicator for our success and showing both the stickiness of our install base with renewals and the fact that our products are resonating in the marketplace with new deals, sales orders is all the more important to us. This quarter, we're happy to report 33 and a half million in sales orders. This has translated into further growth of our contracted annual recurring revenue, reaching 25 and a half million or up 24% since the close of Q4. Following our CAR is our annual recurring revenue, reaching $25.5 million, which has increased 8% at the close of Q4 to $18.4 million on a current run rate. We had $23.8 million in cash at the end of Q1, showing positive cash growth from $23.4 million at the end of June. So let's talk a little bit about sales orders first. As I said, 33.5 million sales orders. The bulk of these orders were subscription-oriented, highlighting the ongoing transition from our buyers to a subscription revenue model versus capital licenses that we have had historically. In the past two years, we've mentioned that we have around a 60-40 split of subscription to capital licenses. This year does look like we'll see further step change in that mix. It's difficult for us to say exactly where the mix will land, so early into the fiscal year, but 70-30 or even 80-20 would seem reasonable at this stage. In Q1, 85% of our total sales order value, or $28.6 million, was represented with subscription licensing fees. or support and maintenance fees, which was the case with the Hospital Authority of Hong Kong Agreement. We had about 500K in capital licenses, around 4.4, four and a half million of professional service fees. But I wanted to take a moment today just to provide a word on revenue recognition and how these sales orders translate to revenue and then cash. We don't spend a lot of time talking about that on these calls. As a standard, we sign five-year term licenses. And the customer will choose what business model works for them during the end of the sales cycle. So if they choose a capital license, then when we deliver the software, which is shortly after contract signing, we'll recognize 100% of that software fee as revenue. Each customer will have unique payment milestones, so it's hard to give a rule of thumb on the translation to cash. But once a customer goes live, we'll then bill and begin to recognize the revenue for annual support and maintenance components that accompany every capital software license. With a subscription license, we will not recognize any revenue upfront. When the customer goes live, we'll generally bill and recognize that on a quarterly basis, support and maintenance is included in the subscription fee. So when we sign a subscription deal, a general rule of thumb would be 12 months or so before we begin to recognize the revenue. And then in regards to professional services, we recognize that revenue on a percent complete basis. This will be recognized independently of whatever business model the client chooses, whether it's capital or subscription. Having that high quality and predictable revenue of a subscription license will be beneficial to us in the long-term growth However, we will always have some components of capital licenses, especially for those customers in the APAC region who are primarily capital intensive agreements. You'll note that we had nearly 12 and a half million in new sales and 15.8 million in renewals, along with 5.3 million in add-ons and expansions. So a moment on that, a renewal is when one of these five-year agreements has come to an end and a new agreement is put in place. An add-on is when a customer buys something additional from us. As an example, if they're a V&A customer and they buy eUnity or vice versa. An expansion is when someone expands the license volume from us for a product they are already using. These are all important factors in how we grow our book of business and our future book of business. So I wanted to take just a moment to make sure everybody was really clear on that. So now let's move on to the contracted annual recurring revenue. And this is a really important metric to understand and understand how we're doing as a business. Our car was 25 and a half million at the end of the quarter, an increase of 24% over 30 June. Our car consists of 18.4 of the annual run rate of ARR run rate for customers is another way of looking at it. that have achieved first productive use for the software, plus another 7.1 million of subscription and support and license fees that are not yet recognized as revenue, because first productive use is still pending, as I discussed with the revenue conversation. We had a backlog of 3.6 of the end of June. I like to see a healthy gap between CAR and ARR. So seeing that 7.1 million gap to me is good. It shows that we continue to grow and it shows that our sales team is outpacing our deployment team, which gives us a nice healthy backlog for the services team to work through. And as you see the number grow, you'll see a general expectation of where ARR will be for the following year, giving you a guide to how we are progressing on our ability for ARR to cover OPEX. So moving on from CAR over to cash, cash receipts for the customers in Q1 amounted to $8.3 million compared to $2.6 million in Q1 FY23. We were cash flow positive in Q1 by about 400K compared to about a $4.2 million decrease in cash in PCP. You can go through the foresee for details on expenses on that. We have pointed out in the past, but it's worth noting again, that Q1 is typically very expensive for us. It includes short-term incentive plans that we paid out, numerous G&A expenses like insurance renewals, things like that. Q1 is followed by Q2, which has our second largest quarter from an expense perspective. That includes our marketing expenses for RS&A, which is the single largest marketing expense we have in the company. So that's an expensive quarter as well. But then things even out over the second half of the year. And that's been pretty traditional in our company. So moving on to some board changes, Mach 7 has been undergoing a process of board renewals for FY24. Our chairman, David Chambers, announced his retirement after five years, and our non-executive director, Philippe Poussiau, also will be stepping down. We are fortunate to have recently announced that Rob Bazzani, who's been on the board for the past three years, will be stepping up as chair. And Rebecca Thompson will be coming on board as a non-executive director. These changes to us provide the company with a new and diverse perspective and provide us with a good mix of skills, as well as keeping some company experience on the board. There'll be more about these changes, the upcoming AGM on the 16th of November. So in closing, just to give you the following as a sort of an outlook for Mach 7. Look, from my perspective, we've never looked stronger. We're well positioned with our products to take advantage of what we believe is to be a highly fragmented market. We see an ongoing shift to the ambulatory market, which we're prepared to address. We have a strong sales pipeline, which is really reflective of a great team that I have a lot of confidence in. We've had a really strong start up to the year with Q1. We're cashflow positive heading into Q2. And we expect to return to positive operating cash flow on FY24. Guidance that we provided in August for sales order growth of 20% PCP and revenue growth of 15 to 25% is reaffirmed. The company expects the growth in operating expenses to be less than revenue growth. And look, we're providing a range here. because of some of the uncertainty around subscription versus capital license mix. So that's why you see the 15 to 25% range. And that's why we're saying, you know, we have to keep a close eye on our OpEx and that's going to shift as our revenue profile shifts. So we wanna make sure that that stays in line. We have a rapidly closing target from ARR to cover our OpEx. We said that we'd be able to do that in three years time. As we make this transition to subscription licensing, we will become a bit more predictable business. We'll show an increase in margin as we progress. We still believe that we have a very scalable business, and we look forward to being able to provide good results to our shareholders throughout the rest of FY24. So with that, Francois, why don't I hand it back over to you and see what we have for questions?

Okay, we've got a few questions for you, Mike. The first one comes from Peter Cooper. Will Mark 7 complete the 12-month milestones for the new VA contract and thus qualify for future contracts?