Vitalhub Corp.

Good morning, everyone, and thank you for joining Vital Hub's 2023 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 are 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 two can be found in our MD&A, which is available on CDAR and our website. With that, I will hand over the call to our CFO, Mr. Brian Gothenberg, to go over our financial highlights for the quarter. Please go ahead, Brian.

Thank you both. 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, Vital Hub delivered another impressive quarter, demonstrating consistent growth in revenues, gross profits, net income, and cash generation. This success can be attributed to our unwavering commitment to expanding our healthcare product portfolio. further integrating into healthcare 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 nine months ended September 30th 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 nine months of 2023 was 31 million compared to 20.6 million for the first nine 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 nine 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 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 2023 totaled $2.3 million compared to $1.9 million in 2023, an increase of 22%. Revenue from professional services and hardware for the first nine 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 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 23 was 82% compared to 80% for the same period last year. The increase in gross margin in Q3 23 was primarily due due to an increase in high 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 nine 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 perpetual 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 2022, an increase of 29%. Operating expenses for the first nine months of 2023 totaled $23.7 million compared to $17.8 million the same period last year, an increase of 33%. The increase is due to high 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 Q3 2022 compared to 62.4% in Q3 2022. Net income before taxes in Q3 2023 was 1.8 million compared to a 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 nine 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 one-time tax reversal, Q3 23 net income was 1.8 million, representing 4 cents fully diluted per share. Net income for the first nine 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 nine 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 3.4 million, or 26% of revenues. compared to 2.1 million or 22% of revenues in Q3 2022, an increase of 59%. The increase was primarily attributable to the high recurring revenues of 10.8 million in Q3 2023, 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 nine 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 high recurring revenues of 31 million for the nine months ended September 30th, 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 nine 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 nine months of 2023 was 15.7 million compared to 8 million for the same period last year. Cash on hand at September 30th, 2023 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 time to say. We'll just highlight a few points and get some questions answered. 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 five 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, you know, gets 42 million. And we continue to add ARR between 800 and 100 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 transfer warm treat solution and the HICOM L'Oreal solution has been, but all of the divisions continue to contribute and we are still seeing, you know, impact from all of them. So we are still seeing growth. We've got visibility into growth still, and we continue to do that. You know, summertime is typically a little bit of a lower spend on sales and marketing, but for the most part, our cost reductions still continues to come in place and We continue to work on using our Colombo software, our Colombo base as effectively as we can. The nice part about the Colombo base, it's really evolved to much more than just an offshore development group. The innovation and the experience of that team continues to grow. I think we're up to 130 people in that group yet. 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. We're really excited as we move into 2024. And with that, I'll take some questions.

Thanks, Dan. Should you have a question, please use the Zoom raise hand function on the bottom of your screen, and we will make sure to open your line. The first question comes from Doug Taylor of Canaccord. Please go ahead, Doug.

Yeah, thank you. Good morning. This was another quarter punching at the very high end of the ARR growth targets, the 800,000 to 1.5 million. Can you talk through, you know, more specifically where the traction is coming from? And I know you said it's really 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? Yeah.

I think based on our pipeline, I think we can add that in 2024 at the same level. There seems to be inertia and we've got many different ways and many different products that we can do that. We're seeing momentum. Transforming is definitely seeing momentum in the UK marketplace and we're starting to see momentum outside of the UK marketplace. The treat product continues to win RFPs and we're seeing a lot more RFPs coming from Uh, the children's mental health space in Ontario, which, um, is going through a total revamp of how they, um, articulate the importance of digital health records. And we've become the, uh, the de facto standard that I think in many ways, uh, for that particular world. Um, and HighCom has that platform Oreo, which has continuously add users to that platform and continue to continue to grow that particular platform. So those three, 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 seeing work in the MCAT product in particular spaces. And we continue to see things happen in many different directions with those products. we're seeing it all over, but those are the primary ones, Doug.

So pretty broad-based. That's great to see. The next question, you said last quarter, I think you had more to do on the expense side, I think was the 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. We would like to add a little bit more in some of the sales and marketing costs 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 Mideast, 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, you know, getting those margins. But we're always committed to at least being that rule of 40 company and we'll keep sustaining that.

Well, congratulations on another good quarter. I'll pass the line.

Thanks, Doug. Next question comes from Christian Scrow of Aid Capital. Please go ahead, Christian.

Hi, good morning. Thanks for taking my questions. I'll start on seasonality, which I think used to be a bit of a more pronounced impact with the UK 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 as as being the bigger one than normal as in other years, or is this becoming a smoothing pattern with the growth?

You know, we're still like, we're still only a $50 million company and 44 million. And, you know, we're, we're, although we're adding 800 to 1.5 million per quarter of ARR, I wouldn't be surprised if in a summer quarter, we added 2 million and I wouldn't be surprised in a Q1 quarter, if we added 500,000, um, it, it, It's not purely that it's 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 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... the easiest to do. So I would expect seasonality to continue in the summer. We definitely had a good quarter of the summer, but if you asked 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, you know, getting out with, with respect to profitability and reinvestment. How do you, the margin and cash flow profile is very strong, you know, through the 25%. How do you balance, you know, growing that profitability versus, you know, investing in headcounts and sales? Like, are there geographies where you could, you think, add a couple people and really increase the growth? Or are you comfortable with the capacity currently? How are you thinking about?

Putting a little bit more growth into the Mideast. We put, we did invest in, australia with a with a team in the middle part of this year which um hasn't started to produce significantly yet on the flow stuff but we do start we are starting to see a pipeline from that group into 2024 which we're optimistic about uh mid-east we do through we do have implementations in the mid-east through our high comm acquisition and we do have a couple personnel over there already and we've been spending time flying in and out of there and, and we have started to build some partnerships and more relationships. So we will put a little bit more investment into that. But we don't, 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 healthcare market is very different. So the markets we're dealing in right now are, you know, the, the mid East Australia and Canada and, 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.

Great. Thanks for the call, Dan. And thanks for taking my questions.

Thanks, Christian. Next question is from Gavin Fairweather of CoreMark Securities. Go ahead, Gavin.

Hey, good morning. Can you hear me?

Yes, we can.

Awesome. 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 InTouch or Treat? And any thoughts on kind of encouraging movement over time, just thinking about whether we could start to see those bases move to your flagship platforms?

There already are moving to our flagship. our flagship platforms. The JX base is, I think we've done last year and one of the deals this year already was movement upwards into the Intech base. So we are seeing that. That's the plan for that JX base, at least for the larger clients. We're moving them forward. The Pirouette base is moved. We've moved a lot. a bunch of the bigger ones and we continue to move bigger ones into the Treat platform on a goal basis. And actually some of those are actually 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 its 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 Alamak and beautiful information. They're sold with transforming. It's really one offering that's coming through and into those offerings. So we've integrated those offerings into a little bit more of a comprehensive base with transforming, which is always the plan there.

Okay, that's helpful, Kyle. And then on M&A, I mean, you referenced it. 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.

Yeah, 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, you know, 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, you know, two, three, four years that, uh, um, have finally decided that this might be the route that we want to go. And so we do got some talks going on.

Is that moving, uh, just timing related to kind of the principle behind the, yeah, usually what it is.

Yeah. Okay.

Good stuff. Um, uh, Maybe for Brian, the working capital has been a nice tailwind to your cash balance over the past little while. Like if I look over the past, four quarters, you've been kind of adding on average, like a million dollars coming out of working capital. So, you know, if the sales kind of keep up at this, you know, five to six million per year rate on ARR, like, can we start to bake in that tailwind into your results? Or is that too aggressive? And maybe some of this was more timing related.

Some is timing, but I think we can. You know, I think as we're going forward, you know, we think we generally, I mean, we probably did about, I mean, our cash balance has gone up significantly from last quarter. Some of it's due to timing, but part of it is due to the business itself. We're generating probably about three, there's a few million, just under three million cash a quarter. So, you know, 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, that we don't feel a need to buy back. And I think we can do better with the money. I think we can probably make accretive acquisitions. I'd rather use it for that than which I think we can do.

Okay, that's it for me. I'll pass on. Thank you.

Thanks, Gavin. Next question is from Gabriel Leung of Econ Securities. Please go ahead, Gabe.

Morning. Thanks for taking my questions and 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 you 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 We're working our way through this. Nothing that's really staring me. It's nice having a base of 42 million recurring. One of these quarters, we're just not going to hit that organic number. I keep saying it, but we keep hitting it. You just don't know with government-funded healthcare, just procurements and stuff. Compliance is getting a little bit crazy. I think you guys saw a couple in the news. There's some ransomware going on in some of the Ontario hospitals and we're seeing that in UK concerns. So 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 or competitors are really going to struggle 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 compliance 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 improve the ability to have those in place prior to being able to implement at these customer sites.

Yeah, gotcha. Maybe just one 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 even a margin milestone of I don't know, maybe up to 30% now.

We believe in these markets and into the future, a company like ours, 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 we do selectively add into other markets and we do but I think at the end of the day my belief and you know our board and the shens and others we like seeing that cash balance grow on a quarter over quarter basis that's sort of what we're about gotcha that's helpful thanks for the rest of the quarter thank you thanks Gabe

Next question is from Richard Baldry of Roth Capital Partners. Please go ahead, Richard. Richard, your line is muted.

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, you know, sales capacity and productivity, whether, you know, with the existing group you've got, you can take that up to the next level or, you know, without stressing your EBITDA margins. Do you think near term, intermediate term, there's a sort of a step function increase to the sales to kind of bring that up more?

yeah you know i'm a conservative by nature richard i do think the pipeline would support that we could have quarters above that 1.5 million um in in the near horizon based on some activity that we got going on um but i'm always hesitant to do it uh because we could have some lower corners as well but i do think there there's there um we really need you know in order to in order to grow, you know, once you start seeing a little bit more evidence from our other geographies of 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 Mideast 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, to some of, uh, to some of the growth, um, and sort of, you know, we'll selectively add more, but, um, I think just based on the TAM of the markets and stuff, I think we're, we're, we're well suited with our investment in sales and marketing. And, um, we, we tend to upsell into our base. We'd rather, um, we'd rather make more acquisitions and get more products and get more growth. That's really where I think our focus is right now is we want to get some of these acquisitions over the finish line.

An extension of that, if you look at the defensibility of your space, it probably should be better in a macro sort of uncertain world. Inside your sales that you've closed or even the pipelines you look ahead, have you seen any changes to things like how much is coming from greenfield versus cross-sell, up-sell, retention rates, 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, yeah, is, NHS is sort of an entity and healthcare tends to buy in a herd mentality type of mode. So, you know, in the children's mental health, if we get one government agency or two, when that RFP comes out next, there's probably a pretty good chance if we've done a good work in the other ones that we're gonna 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 that's 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, good added to it. And we, we spend a fair amount of our money on what we call customer success, account management, retention aid to protect our recurring and D to add on new modules. There's a lot of work still to mine our customer base with add ons of products and existing stuff. It's still a big part of what our, our is, but we do, we get greenfield as well.

Great. Thanks. Congrats on a great quarter.

Thanks, Richard. Next question is from Daniel Rosenberg of Paradigm.

Please go ahead, Daniel. Good morning, 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 healthcare organizations to support budgets and grow them. I'm curious how you think about this trend in the next, you know, 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 still see budgets for digitization of systems. There's still a lot of work going on in healthcare to get it to the next level, right? It's somewhat insulated from this macro world. It depends on the markets, but NHS, you know, seems to continue to put out envelopes for strategic initiatives and 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 saw an offer COVID, like at least for our products. In UK, there's a little bit of craziness going on and spending. maybe not to the extent that it was before, but as you can see through this quarter and what we see, we're still seeing demand and capital for them to expand and grow their digitization. There's still a lot of work to go to move those places forward.

And then as a follow-on, so in the UK, could you categorize kind of what inning we're in as far as you know digitization getting it to like a global you know updated standard versus australia or the middle east or some of the other european markets market i think united states would be the gold standard i think that you would have and uk would probably be a four compared to where the u.s would be

Canada's probably a little further ahead because we're closer to the US, but they still got a ways to go.

Great. Congrats on another strong quarter. Appreciate the call. Yeah.

Thank you.

Thanks, Daniel.

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

Thanks, everyone, for your support. And again, articulate We think we've built a really strong foundation with our business model. As I've said before, we focus on three 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, you know, quarter over quarter. And we have the ability to move resources into our Sri Lankan based resource 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. all three of them seem to be working really well. We spent a lot of time at 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.