Mach7 Technologies Limited

Good morning, everyone, and welcome to the MAC7 second quarter FY24 business update. My name is Françoise Dixon, and I'm head of investor relations for MAC7. Today, our CEO, Mike Lampron, will provide an overview of our second quarter result. We will then open it up for questions, which will be answered by Mike and our CFO, Diana Hearn. If you have a question, please submit it via the Q&A text box at the bottom of the screen. I'll now hand over to Mike for the Q2 updates.

Thank you, Francoise. And hello, everyone, and welcome to the Mach 7 fiscal year 24 Q2 business update. Today, I'll go through a general business update as well as the results from our Q2 FY24. We will be hosting another more robust update for the first half of FY24 on February 29th. So some highlights for this quarter. Sales orders for the quarter were 16 million in Q2. That was a great addition to what has been a great year to date for us. Contracted annual recurring revenue rose to 26.8 million. And our ARR grows as we bring clients live. At the end of Q2, we were at 18.6 million. Cash on hand of 22.7 million, which is slightly better than this time last year. And we did just recently announce some new guidance for the year, and we'll discuss that during today's call as well. So let's first just start off with some sales orders. And as I often say on these calls, sales orders remain a top metric as we measure the company's success. We feel this metric answers questions around if the product is resonating in the marketplace. To us, this is an indicator of future sales success. This metric for us specifically is also a good metric to show our customer sat and customer loyalty. Many of our sales orders, as you would note, are same store sales, part of our land and expand strategy. And as we see success there, we see the sticky and reliable nature of our ARR moving forward. So in Q2, we realized 16 million in orders. And pleasingly for us out of that 16 million, about 14 and a half of it, 14.4 of it will fall under recurring revenue. And with a small number of capital licenses being purchased of around 1.2 and remaining about a half a million in professional services. So with that, about 80% of the total contract value of those sales orders were for renewals. 20% was for add-ons and expansions in our customer base. This is a great representation in my mind of the power of our land and expand model. We did not bring on any net new customers in Q2. However, our pipeline is still very strong. We still have a number of new logos in our pipeline, and we will convert those into our book of business over time. We have signed two new clients added so far this fiscal year, and I would expect for us to fall in the three to four range, as we indicated, and we discussed some new logos for FY24 at the end of FY23. So again, think of that in the three to four range for net new customers on the fiscal year. At this stage, we're seeing the vast majority of our agreements coming into us as subscription model. And as a refresher for everybody, we do not dictate to our customers the model they use. We offer both a capital model and a subscription model. And that pricing and the business model, that's something that's discussed at the tail end of our sales cycle. So historically, this has been a bit of an unknown to us until the very end. And it was represented sort of as a 50-50 mix for many years. It kind of moved to a 60-40 mix. And then as we alluded to this year, we thought we'd see some more change, 70-30, 80-20. But at this stage, I'd feel more comfortable saying that you can count on most opportunities moving forward to fall under subscription with just the occasional capital license. But we will still see capital licenses, particularly coming out of the APAC Middle East program. more so than North America. So when we think of sales orders, obviously our sales orders are converting to revenue, right? So our ARR, we're currently generating around 18.6 million in recurring revenue at the end of Q2. And as a point of clarification on this, the run rate is calculated by annualizing the revenue earned from subscription and support and maintenance fees. So this run rate was slightly higher than September. Our ARR will continue to grow as new customers achieve first productive use and existing customers renew at increased rates or achieve FPU on add-ons. And one more time, FPU is first productive use. It's an acronym that we use all the time. Contracted annual recurring revenue was at 26.8 at the end of Q2. CAR is calculated by taking the 18.6 of ARR plus the fees for contracts that we have signed, but the customers have not yet achieved first productive use. At this point in time, that represents around 8.2 million. This is what we refer to as our backlog. These are contracts that we are working on to bring live. They all represent different products, different rollouts, et cetera. So there's no real rule of thumb in regards to how long it takes us to convert this backlog to ARR. That being said, I will say that having a backlog is healthy for the company. Frankly, it's essential to always have a backlog. If we didn't, then that would mean our services team is outpacing our sales team. And that would indicate that we probably had some staffing issues going on. So frankly, having that backlog for us is welcome news. We want to shrink that backlog. Of course, we always want to shrink it every quarter, but we always want to be adding to it as well. So on average, the only guidance I can really give on the conversion here is that it takes us around 12 to 18 months to convert a full solution from contract signing to go live. That's a very broad statement. We're going to have some deals that convert very quickly. We're going to have some renewals that convert quickly, add-ons that convert quickly. But I'm just saying 12 to 18 months for a full suite of our products. And that is largely driven based off of customer requirements and size of customer sites, complexity of customer sites, and sort of the mix of customers that we're currently seeing and that we're currently signing. That may change over time. If we sign more ambulatory than acute care, that could change. If we sign more IDNs, that could change. But for now, that's the best rule of thumb I can give you. But just know that it's imperfect. So from a cash flow perspective, cash receipts from customers in Q2 are 7.2 compared to 6.4 for the same period last year. We have said in previous years, Q1 and Q2 are by far our most expensive. And this in combination with the transition to subscription has contributed to a negative operating cashflow of 200K. Q4 has typically been a good cash collection quarter for us as folks will remember from last year. And with that, we have reiterated our guidance of being cashflow positive and FY24. And we did end the quarter with 22.7 million on hand and we remained debt free. So I'll talk for a moment about the guidance that we provided last week. Over the past year, we have spoken many times about the conversion of capital to subscription deals, noting that we've moved from a 60-40 split favoring capital deals for the last couple of years to a potential of a 70-30 or even an 80-20 split. This transition has picked up at a pace to the point where we're almost mostly subscription. In the short term, That has an effect on FY24 revenue. However, in the mid to long term, it has a massive upside to our business. So I'm happy to report that this transition is happening faster than expected. The net impact to our business did result in a change to our guidance. Our sales orders guidance went from $48 million to $60 million plus. Our revenue went from 15% to 25% growth to $27 to $30 million. Less than previously expected, and the one metric hit the hardest with this transition to subscription. We stated previously that our OpEx would be lower than revenue growth. Well, looking at best case, that would have meant that our OpEx would have been grown by only 15%. I stated this was based on a sliding scale based off of company success. So keep in mind that our sales have been successful. And the one area that I have consistently said would need to continue to grow as our business grows, the service and support, that need hasn't changed because these orders are coming in. So just because our revenue forecast has changed with the accounting structure of our deals doesn't mean that our OpEx is going to be reduced a ton. But I will say that right now, Our guidance has been that we will have less than 15% growth in OpEx at this stage. And we remain committed to being cashflow positive in FY24. So sort of as an outlook, Mach 7 remains well positioned in my mind to respond to both the acute care and ambulatory care markets. I think we're proving that our products are resonating. Our sales orders are looking fantastic for the year, better than we could have imagined. We still have a strong pipeline and it continues to mature. Our pipeline is diverse, which limits exposure to only a certain market segment. It includes new and existing customers. It's from both the acute care and the ambulatory care. And it's spread across North America and the APAC Middle East geographies. So we have a good spread of our pipeline and some good diversification there. And I look forward to providing more robust outlook as part of our first half results, which again will be coming up at the end of February on February 29th. So I think with that Francoise, let's look to take some questions.

Great. Thanks, Mark. We'll start with a couple of questions from Madeline Williams at Wilson's. First question, is the new $60 million sales order guidance conservative based on what is in the pipeline? Are you winning more of the expected ones, the pipeline that you announced at FY23, or have new opportunities become available?