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Good morning, everyone, and welcome to the Mach7 First Quarter FY '24 Business Update. My name is Françoise Dixon, and I'm Head of Executor Relations for Mach7 . Today, our CEO, Mike Lampron, will provide an overview of our first quarter results. We will then open up for questions, which will be answered by Mike and our CFO, Dyan O'Herne. If you have a question, please submit it by the Q&A text box at the bottom of the screen. Alternatively, you can email me at ir@max7.com. I'll now hand over to Mike for the Q1 update.
Thank you, Françoise, and welcome to everyone attending this morning's call. Q1 was a great start to what I think will be a pivotal year for Mach7 . As I've said in the past, I think sales orders are our biggest leading indicator for our success in showing both the stickiness of our installed 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 $33.5 million in sales orders. This has translated into further growth of our contracted annual recurring revenue, reaching $25.5 million or up 24% since the close of Q4. Following our CARR is our annual recurring revenue, reaching $25.5 million or -- I'm sorry, 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 in sales orders. The bulk of these orders were subscription-oriented, highlighting the ongoing transition from our buyers to a subscription revenue model versus a capital licenses that we had historically. In the past few years, we've mentioned that we have around a 60-40 split of subscription to capital licenses. This year, it does look like we'll see further step change in that mix. It's difficult for us to say exactly where the mix will end, 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 is the case with the Hospital Authority Hong Kong agreement. We have 500,000 in capital licenses around $4.4 million, $4.5 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 in that cash. We don't spend a lot of time talking about that on these calls. As a standard, we signed 5-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 a unique payment model. So it's hard to give a little of thumb on the translation of cash. But once a customer goes live, we'll then build and begin to recognize the revenue for annual support and maintenance components of a company 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 the 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 $12.5 million in new sales of $15.8 million in renewals, along with $5.3 million in add-ons and expansions. So a moment on that, the renewal is when one of these 5-year agreements has come to an end, and the 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 [Indiscernible] customer and they buy EUV 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 CARR was $25.5 million at the end of the quarter, an increase of 24% over 30 June. Our CARR consists of the $18.4 million of that 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, this gross productive use is still pending, as I discussed with the revenue conversation. We had a backlog of 3.6 at the end of June. I'd like to see a healthy gap between CARR 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 CARR over to cash. Cash receipts for the customers in Q1 amounted to $8.3 million compared to $2.6 million in Q1 FY '23. We were cash flow positive in Q1 by about $400,000 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 was followed by Q2, which has our second largest quarter from an expense perspective, that includes our marketing expenses for RSNA, which is the single largest marketing expense we have in the company. So that's an expensive quarter as well. We've 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. Mach7 has been undergoing a process of Board renewals for FY '24. Our Chairman, David Chambers announced his retirement after 5 years and our Non-Executive Director of Philippe Houssiau, also will be stepping down. We are fortunate to have recently announced that Rob Bazzani, who's been on the board for the past 3 years, and will stepping up as Chair. And Françoise Dixon will be coming on board as a Nonexecutive 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 at the upcoming AGM on the 16th of November. So in closing, just to give you the following as a sort of an outlook for Mach7. 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 to the year with Q1. We're cash flow positive heading into Q2, and we expect a return to positive operating cash flow in FY '24. The 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 we have to keep a close eye on our OpEx, and that's going to shift as our revenue profile shifts. So we want to 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 3 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 FY '24. So with that, Françoise, why don't I hand it back over to you and see what we have for questions.
Okay. I've got a few questions for Mike. The first one comes from [Indiscernible]. Will Mach7 complete the 12-month milestones through new VA contract and thus, qualify for future contracts?
Well, 2 things there. Just to clarify, first of all, yes, we are on track for the VA to go live in June of '24. That was when the government intends for that product to go live, still on track there. That being said, just for clarity, there are no contractual hurdles that have to be met before Phase II could begin. So Phase 2 of that contract could begin prior to first productive use of Phase I. It might not be likely, but it's certain -- but it could as well. I know we've had conversations. So I just want to want to point that out for clarity.
Thanks, Mike. Your second question comes from Iain Wilkie. You're already 70% of your way in the sales order growth through 1 quarter versus the bottom of your guidance. Obviously, the year started out very well, but how should we think about the rest of the year for sales orders? Is there more upside here?
Yes. Listen, there's always upside, right? And there should always be upside to guidance from my perspective. We know we have renewals coming through. We know we have new orders that will be coming through. So we know that we're on track for the $48 million. I will say there are things that are difficult for us to predict, so we don't forecast them. And that includes larger-sized contracts that you just can't predict because it will throw off the statistics. So we don't include that in the forecast. So there's certainly deals that could come through this fiscal year that would pop and bring that sales order number up without a doubt. But I would just reiterate that right now, we're very comfortable with the $48 million that we've guided to. And just now, there certainly is upside from there, for sure.
Our next question comes from Alex McClein. How much of a $7.1 million gap in CARR and ARR do you expect to convert into ARR by the end of FY '24?
Yes. The way to look at this is that it usually takes us around 12 months to convert, right, as a general rule of thumb. So a lot of that new $7.1 million came in through the VA or it came in through DIA, which are 2 of the larger subscription contracts that we signed in Q1. And it's not likely to start to begin to recognize revenue for those deals in the year that you sign them. So I would say that we would certainly not expect to convert the full 7. But I would say that we'd want to get to the point where we have around $20 million or so of annual recurring revenue by the end of the fiscal year.
Our next question comes from Arden Tamar and relates to the aging of trade receivables. He says, in 2022, 3 to 6 months -- 3 to 6 months in 2022 was $144,000, in 2023 was $2.4 million. Over 6 months is $461,000. Provision though is only $74,000 going forward. So are you expecting to receive the majority of the overdue gets?
Yes. So look, the -- we already did receive that. So we received that $2.5 million payment or thereabouts, that was for that outside overdue receivable, which is why we had every confidence that was going to come in, in FY '23, although it didn't. We did receive those receivables shortly after the end of the fiscal, which is included in our Q1 numbers. So currently, that gap has been closed. And from an outstanding AR perspective, we're in really good shape of that right now. We don't have a lot of outstanding AR, and we don't have provisions really for bad debt. I believe, and Dyan can correct me if I'm wrong, but we did last year have some write-off for bad debt, we actually ended up having to reverse it because we actually are getting paid for that. So really, we have very little to no bad debt on the book share.
I agree with that, Mike.
The second part of this question. So bad debt those in 2022 was $460,000. It raises a couple of questions. What was the bad debt write-off due to in 2022 and then it bad debt perhaps? Secondly, that $2.4 million aged 3 to 6 months are hospitals slow payers?
Sometimes hospitals are slow payers. The bad debt was associated to an outstanding contract with a partner through client outlook. So that was something that we sort of acquired through that acquisition. It's been dealt with. And like I said, we did collect that money for an outstanding hospital system and the tail end of that in regards to are they slow payers. Sometimes they are still payers, yes. And it seems like sometimes the larger the payer, the harder it is to get on a schedule and get things squared away. So occasionally, it's the case.
Our next question comes from Indie. The guidance of OpEx growth to be less than revenue growth. Is it based on what projected sales mix?
Yes. Look, this is why we're monitoring things, right? And we're trying to keep our OpEx as flat as we can at the moment in preparation for understanding what that looks like. I think the important thing to understand is that we don't get into the business model with our customers until the tail end of the sales cycle. And at the tail end of the sales cycle, we provide them with, generally speaking, if they ask for 2 different quotes or capital license and a subscription license and then they choose which business model they want to move forward. So we generally don't have visibility until the tail end of the sales cycle on that. So for now, the best we can do is for the first half of the year, we watch our OpEx as much as we can. It's highly driven by headcount, right? 75% of our total OpEx is people. So we don't have a lot of variable costs that we can't control. We can control people costs. We can control T&E. So those are the things that we will control while we get a handle on exactly what that revenue mix is going to look like and where things are going to end up for the first book.
We have a second question from Bhavan Pena. Is the step up in staff cost up? Anything to do with making sure the execution of the VA contract in the time frame is successful?
Not so much. Frankly, the step-up on personnel costs, if we go back to our acquisition of client outlook, we lost around 30% of our -- of the total people associated to that business over a period of time there during the early stages of that acquisition and integration. And those resources were not nearly as expensive as the replacement resources that we had to bring on. Those equation resources came at a bad time when we were sort of going through the great resignation and everybody was working from home and people were very demanding and employers were not in the best position to negotiate at the time. So some of that cost, it's not even necessarily an increase in headcount so much is replacement headcount being much more expensive than the original headcount.
Our next question comes from Paul Pecos. Why are we seeing big swings in the share price?
I wish I knew. I can't really answer to share price questions. The market can sometimes be a mystery to me. I'm not -- I can't really, really comment on that with any authority.
Our next question comes from Ian Wilke. On the sales mix and just to clarify, particularly in a high a year, an existing capital sales for the customer, how likely if would it be that they stay on the capital model rather than a shift to recurring?
Yes. So historically, I would have said almost always, we've only seen a couple of customers transition from capital to subscription. However, I'm not certain it's going to stay like that this year because we're seeing fundamental shifts in people's buying patterns and that we somewhat count on the fact that people are going to renew in the same way they originally contracted with us. But that's not a guarantee for sure. And we'll see as the year progresses if that changes. Historically, though, what's been pretty certain that they would renew with their original contracting methodology, but it's a little bit up in the air right now. To be clear, the Bombas comment on that is that, look, we don't push our clients into one methodology or another, right? We want to be flexible for our clients. We want to provide them with a business model that makes sense for them. So we're not driving that in our way, we're allowing our customers that flexibility and we're trying to be good business partners with them. So that's sort of where we are about.
We have another question from Stella Wang. It sounds like there are some bigger-than-usual contracts in the pipeline which did not include in the guidance. Are they from North America or Asia?
There's always big, big deals in the pipeline, unpredictable, perhaps, usually the bigger the be more unpredictable is on timing. We have very large deals in North America, and we also have deals that are very, very large in the APAC region, both regions are involved.
Okay. We have no further questions at this time. So I'll hand it back to you, Mike, for closing remarks.
Yes. Great. Thank you, Françoise. Thank you, everyone, for attending. I appreciate it. Thanks for listening to the Q1. If you have any further questions, please feel free to reach out to Francois. I'm sure she can help you get the answers that she needs, and we can always I look forward to being back on the call with everybody. We have RSNA coming up here in November, the biggest trade show of the year for us. So working hard for that and look forward to connecting with our shareholders at the end of Q2. So thanks, everyone, for attending.