Physitrack PLC

STO:PTRK

Earnings Call Transcript

[Henrik Molin, executive]

Good morning, everybody, and welcome to Physitrack's Q2 2023 Results webcast. I am Henrik Molin, CEO and Co-Founder of Physitrack, and I'm joined by Charlotte Goodwin, Physitrack's CFO. We're going to kick it off, and I am going to share my screen here, and then we can get on with the show.

All right. So just a few quick words on Q2, and I'll do a little business update from the 2 divisions. And I'll pass it over to Charlotte for the financial results with a deeper dive into that. We'll revisit the strategy and the outlook, and then we'll open up for Q&A. For the Q&A, use that Q&A function on your Zoom panel at the bottom. Post those questions and we'll read them out and then we'll answer them one by one as we get into that section, right?

Let's get going. Q2 in short. [indiscernible] starting in the middle, if you look at the organic growth year-to-date, 32%. It's in excess of our stated medium-term goals, which is great. We're in an environment of high demand for what we do. Sales is very strong, and this macro climate is something that is in our favor, given what we do, so we focus on the well-being of corporate and employees. A perfect example of that was Currys, one of the biggest electronic retailers in Europe and also in the world that rolled up Champion Health. And the -- on the Lifecare, obviously, with rehabilitation, taking care of people that might not be feeling so fantastic in this type of environment. So it's another strong quarter.

If you look on the right side there on the screen, we increased our year-to-date EBITDA to EUR 1.9 million. And actually, we passed a milestone in this quarter. We have, for the first time, EUR 1 million worth of EBITDA that we booked for the quarter, so this has been a really, really nice. In conjunction with managing the strong demand for our products, we're also looking at cost optimizations where we can. And we're actually being quite selective in terms of what commercial opportunities we pursue. It's very important for us that we do something that's actually accretive on a profitability level, on a cash flow basis. And therefore, we have had some really, really nice development in terms of the trends internally that we see for our margins. And this is obviously keeping the well-being of our teams and sustainability of our business in mind, but it's been a very, very nice quarter on all fronts in respect to that.

Moving into the different divisions. And first of all, a little overview on what the balance is between the two. So we're 63% now. Lifecare, which is where we -- we cater to health care professionals around the world in 15 languages with our Physitrack and Physiotools platforms. On the right side there, we cater to corporates and employees with the Champion Health platform. That's now 37% of the business today.

If we look at the Lifecare first. On the right side of the screen, it's very, very nice to see that our ecosystem and our subscriber base is very, very nice and strong, so 8% growth in license number within Lifecare, so more users using the Physitrack and Physiotools platform, which is fantastic. If you look at in the middle there, you have the churn number which remains around 1%, which is a great testament to what we've been doing with a data-led approach and enabled strategy to customer retention and also customer onboarding and lifting up the value of the platform and having that as people start to familiarize themselves for the platform. So a great, great work there from the customer value taskforce as we call that, [indiscernible] has really, really done a great job with building that alongside a lot of other members of the team.

Some highlights there. On the top left, as I mentioned in the introduction. So we're focused on revenue efficiencies. We focused on cost efficiency, optimizations, making sure we run a mean, lean [ backing ] commercial machine across the board, making sure we have the right people on the bus and some great, great people are with us now just to make sure that we can keep driving this thing into additional success.

Second bullet point there, which we are quite proud of. So the Physicourses platform has now gone live in the new take and we have some really, really exciting, well-renowned content providers that are providing courses on there, and this is something that is setting the scene for not only great revenue potential on a stand-alone basis with Physicourses, but also the ability to bundle this with the Physitrack platform to further enhance the revenue situation of this very, very strong ecosystem.

And on the bottom there, the third bullet point, Remote Therapeutic Monitoring remains a very interesting enterprise opportunity for us in the North American market, and this is something that we have spent quite a bit of time on in terms of our innovation and in terms of our commercial development. So there's more that's going to come out of that, which is very, very exciting. Of course, a lot of other things going on in the Lifecare side of things, but [indiscernible] are the main highlights.

Well, we go over to Wellness. And so the -- if you look at the revenue growth year-on-year, 99%, that's quite spectacular, and it's very much a sign that we're doing exactly the right thing for this challenging macro climate. And so we are really, really catering to the heart of corporates, which is their employees. So employees, they make sure that these businesses keep their lights on and they keep driving, even though things are quite difficult in a lot of our target markets. And so a nice sign there, there's no sign of things easing up in terms of the growth that now.

So if you look at the bullet point list there, going from strength to strength. We're having some interesting times there with our sales organizations and so the sales development representative and account executive setup, which is based on a lot of science and a lot of data. That's powered by Nick McClelland and his team. This is coming to fruition, and this is driving growth notably in the U.K. And we have a lot going on in the U.K. with big brands, big household names that are either in the process of acquiring the platform or have acquired the platform. Some we can speak about like Currys, most of we can't because Champion Health is a little bit of their secret source when it comes to employee well-being. But we'll release news about that as we can, but a lot, a lot of exciting things going on.

The bottom bullet there. Obviously, we are expanding the sales pipeline across all Champion territories, and this is paving the way for continued growth and success for the rest of 2023.

And that's it for me for the time being. I'm going to pass over to Charlotte for a deep dive in the financial results.

[Charlotte Goodwin, executive]

Thank you very much, Henrik. So I'll start off here with a brief overview of the key financials for the quarter ending June 2023. A quick note that we replaced the pro forma revenue metric with an organic growth revenue metric. This includes the impact of acquisitions as the previous metric did, but also takes into account the impact of foreign exchange year-on-year.

In the quarter, we delivered revenue of EUR 3.8 million, up 23% from EUR 3.1 million in the prior year. Year-to-date, on an organic basis, adjusted for acquisitions and the impact of foreign exchange, revenue increased 32%, which is ahead of our medium-term targets. In the quarter, Physitrack Group delivered adjusted EBITDA of EUR 1 million, up 6% from the prior year. And this resulted in adjusted EBITDA margins of 25% compared to 30% in the prior year. With respect to increasing [indiscernible] to exceed the EUR 1 million of adjusted EBITDA for the [indiscernible] this quarter. Total EBITDA has increased 168% from the prior period to EUR 0.7 million, as we incur less costs relating to M&A integration and operating cash flow remained broadly flat at EUR 1.2 million.

To the next slide. On to a closer look at revenue. On the left here, you can see group revenue by quarter, both on an organic and absolute basis. Total revenue in the quarter has grown by 23% year-on-year on an organic basis by 25% against the strong prior year competitor. On the right-hand side, we can see revenue split by Lifecare and Wellness. In Lifecare, growth in the quarter versus the prior year was 9%, driven micro [indiscernible] the ecosystem and continued upward pricing momentum offset by a fall in one-off build fees for branded apps. The Virtual Wellness division has experienced another strong quarter of organic revenue growth of 66%.

To the next slide, moving on to profit. On the left-hand side, we see the prior year figures. Last year's H1 EBITDA was EUR 0.5 million. With adjusting items of EUR 1.2 million stripped out, adjusted EBITDA was EUR 1.7 million. In the current year, EBITDA has risen to EUR 1.4 million, an increase of 170%. Within this, there are EUR 0.5 million of nonrecurring adjusting items relating to costs associated with the integration of acquisitions and the restructure of Champion Health Nordics previously Fysiotest. In the quarter, an agreement was signed with the previous management of Fysiotest. We no further deferred consideration will be paid out and EUR 1.7 million deferred consideration adjustment release was booked through adjusting items.

We formed an impairment test of the goodwill of Fysiotest and determined that more of the value now relates to assets created since acquisition and a goodwill impairment of EUR 1.7 million was booked also through adjusting items. These [indiscernible] adjusted EBITDA has increased by 14% to EUR 1.9 million. Adjusted EBITDA margins have fallen year-on-year 29% last year to 25% in the current due to the shift of the group towards Wellness revenues, which currently operates at a lower margin plus investments into future growth. Quarter-on-quarter, these margins are flat. Over the medium term, we expect it to rebound to our target EBITDA margins of 40% to 45%.

To the next slide. On the left here, we have adjusted EBITDA shown by quarter for the prior year and the current year-to-date. On the right, we have EBITDA by division. In Lifecare, which is the longest established division, EBITDA margins are at 48%, roughly in line with the prior year. In the Wellness division, margins are currently at 4% compared to breakeven in the prior year and we focus on margin expansion in this division. The gray bar represents costs such as board fees, listing fees and associated advisory fees, which is slightly down year-on-year due to cost efficiencies realized in head office.

To the next slide. Now looking at cash. We opened the year with a cash position of EUR 0.6 million. Adjusted EBITDA in the period generated EUR 1.9 million and was offset by a working capital movement of EUR 0.7 million and interest payments of EUR 0.1 million. The working capital impact was driven by proportionately less of our contracts being sold on a 12-month cash upfront basis. Intangible assets and fixed asset additions were EUR 1.7 million and consist of development of the Lifecare platform and investment into the Virtual Wellness ecosystem. As signaled, this continued to fall quarter-on-quarter as one-off projects relating to the integration of acquisitions all the way. They were deferred consideration payments in the period of EUR 1.6 million and related M&A and integration costs of EUR 0.4 million. We do not expect to pay any further deferred consideration in the current year.

In July 2022, we entered into a GBP 5 million revolving credit facility in the 3-year term. In the year, we drew down GBP 2.7 million of this facility. It leaves the group exiting the quarter with cash of EUR 0.7 million, plus remaining undrawn facility of EUR 2.1 million, giving us total available liquidity of EUR 2.8 million. We expect this liquidity to be sufficient for the group's requirements.

Move to the next slide. This slide shows the total free cash flow by quarter. Due to spend on M&A and integration costs recognized adjusting items in the P&L and investments in both the Lifecare and Wellness division, we've had a net cash burn in recent quarters. As these investments are completed and operating cash improved, we've seen the cash burn decrease. Year-on-year, the Q2 free cash flow burn decreased by 40% from EUR 1 million to EUR 0.6 million. Seasonality of large payments being that Q2 has seen a planned small increase in free cash flow burn on quarter-on-quarter. But overall, the path remains a downward trend and we're on track to reach net cash generation before the end of 2023.

Moving to the next slide. Now moving on to the group's balance sheet. The first line here includes the internally developed technology platform as well as intangible assets in goodwill arriving on acquisitions. The full represents the impairment of the Fysiotest goodwill already discussed. Cash and borrowings, we've already covered. Trading and other receivables and increase in line with the increase in revenue. Deferred revenue is primarily generated by Physiotools and Champion Health who bill upfront for 12 months or longer contracts. Deferred tax arriving on the intangible asset balance recognized on acquisition and online over the period of the amortization of these assets. Third consideration relates to the Champion Health Plus, [indiscernible] Rehab Plus [indiscernible] Champion Health acquisitions. As already outlined, all the first consideration related to Fysiotest has now been released following a signed agreement [ with for ] the management.

That's all for me. I will pass it back to Henrik.

[Henrik Molin, executive]

Thank you, Charlotte. Let me revisit the strategy of product market fit and then we'll take care of some questions. The -- just looking at this, the value proposition is very much in line with what's going on in the world. At the top there, people want a holistic offering with what they do. They don't want 4 or 5 apps to solve a range of problems. They want 1 place to go just to make things nice and simple. So we do this, we bundle this. We do this very nicely on both sides of our business. And this represents a true market -- product market fit and looking at what companies need, what consumers need, we're right in line with that despite a very challenging macro climate for a lot of our target markets. So we are in the right place at the right time, doing the right things.

And further to that, we are supported by this macro environment rather than prevented by it. We have some challenges in certain geos when it comes to payment speeds and larger, longer range agreements, for example, that we see in the U.K., there's nothing telling us that there's something in this environment that is not working in our playbook. As I said in the introduction, we're a little bit selective in terms of what opportunities we work with because we look at things like what the counterparty risks are, what the payment speeds are, what the margins are on these contracts and we do occasionally say no to things, and because we do want to remain with this profitable cash flow-generating growth that has been in the DNA of this company ever since its founding.

And at the bottom there, just to sum that up. This creates a balanced portfolio of revenue opportunities. It's an all-weather situation and it's an all-weather company, and this is something that's really paving the way for nice, stable lean growth going forward to fortify some great leaders and a great team throughout -- I think we're on 4 continents to 13 nationalities.

Just reiterating there on the right side. Our financial goals remain in place, as you saw from the illustration of the profitability on the 2 divisions. You can see that we are very much have a history of clocking and with very high EBITDA margins on the Lifecare side of things. So this is built into the virtual world of the company and it's not something we plan on changing any time soon. So the financial goals in terms of top line growth and with margins, they remain in place. And there's obviously value of cash creation that puts us in a very comfortable position with the liquidity that we have and that will last us for the future and look at for cash flow positivity in Q4 because that remains a target for us.

Okay. That is it for our presentation. Happy now to take questions in the Q&A.

[Henrik Molin, executive]

We have a little Q&A function at the bottom. And I will now read these out loud, and then we'll answer those slides. Okay. First question here. Can you elaborate on the development in Lifecare's growth and what we can expect going forward? Will it continue to see more offset in one-off bill fees on the back of the profitability focus?

I'll answer the second part of that question first because the way that Remote Therapeutic Monitoring works and one of the integrations that we've seen with big EMR providers like Epic and also Salesforce, they have a big, big EMR focus that means that we do quite a lot of bespoke work just to set those ecosystems up to our customers. And so there is -- there will continue to be one-off revenue on that side of things, which is we [indiscernible] very nice with cash flow and it's highly accretive for the business. So there's really no paper there, and there's no clear trend there between the product mix where we might see a little bit less activity in our custom apps for medium-sized businesses. We're actually seeing that enterprises are stepping up the game, especially in the U.S. market, which is actually the first one of the global macro slam.

And -- so it is a mature ecosystem. It's a mature product. We continue to see nice high-margin growth across the board, you see the ecosystem is growing. You see a lot of the enterprise deals are moving. So there's really no change in the development of what we see there in terms of that growth. And yes, that's an answer. If you want a follow-up question to that, just feel free to drop that in the Q&A. All right.

Second question here. During the last quarters, we have seen an expansion of the cost base. Now in Q2 '23, it stabilized versus last quarter. How should we look at the cost base from now on, focusing on cost optimization initiatives as a backdrop and were there any seasonal effects in the cost base this quarter?

Well, I'll hand over to Charlotte for the seasonal effects in the cost base, we mentioned that Q2 is -- that is a heavy quarter, but we'll get some more details on that. We always cost optimize. One of our values is be a smart spender, not a big spender. It always was. So we always look at how to do things efficiently with the right size of team, making sure that we cut corners where we can without compromising the quality of the output or doing something that is detrimental to the well-being of our teams. And it's always been that way. And so we have some really, really smart engineers, for example, they wake up every single morning and think about how can we do this better and faster and more productive and to save costs and not to put money in the pockets of third parties or any other providers where it doesn't make sense. So we always have that mentality regardless of specific campaigns that we've done for cost savings.

We've stepped up a little bit. So we have reiterated that value be smart spender, not a big spender quite a lot in the last few months just to have people really think a little bit extra about cost optimizations. So it's really just tweaking up or increasing the temperature on that a little bit, but it's not a cost-cutting sort of initiative in that way. That's specific, we cutting costs now temporarily and then we're going to go back to basics. It's always been that way.

Handing over to Charlotte here for the seasonal effects on the cost base.

[Charlotte Goodwin, executive]

Yes. So as you see on the cash basis, there is -- Q2 is a heavy cost quarter. From a P&L basis, where those are spread over the year, there's no particular seasonality impact of Q2 and what you just see is the amount of revenue coming up, pulled our costs up in some of our revenue streams. There is a cost of delivery, but counteracting that, we're doing a lot of work on cost optimization. You'll see that in the P&L, you'll also see that in the balance sheet to capitalize costs. So those 2 opposing factors will continue to work against each other, the cost base.

[Henrik Molin, executive]

Thank you, Charlotte. What can we expect in terms of margin improvements from here? And I'm just going to reiterate where I said there is an ongoing effort, be smart spenders, not big spenders, also be selective by revenue opportunities. We are really, really pushing on the Wellness side of things, dealing with very high demand. Obviously, as you can see the acceleration in that side of the business is very strong. It's lower margin. So that's sort of creates a challenge for the optimization piece that we're doing, but we have absolutely turned the corner on that. It's absolutely in the mentality of all those great leaders that we have and the Wellness division to just really focusing on running businesses in a lean way, focusing on great growth, lean growth and just thinking about being smart spenders.

Charlotte, do you have something more in terms of the outlook on margin improvements and cash flow positivity, that would be great.

[Charlotte Goodwin, executive]

Yes. Well, of course, on an absolute basis, we expect EBITDA to continue to grow. And we always have this sort of factor of the quicker Wellness grows, the more the margin depression sort of aspect hits. So exactly when that trough will turn the corner and start raising could be quarter 2 or 3. But the absolute margin -- the absolute EBITDA will continue to grow, and we're also focusing on costs on a whole. So we will continue to [indiscernible] We capitalized costs as well.

[Henrik Molin, executive]

Thank you, Charlotte. Question here. Can you share any insights on the Champion Health product-led growth launch and progress? And just to summarize, that's created an interesting route in -- for small to medium-sized companies to get in touch with Champion Health and the team and to get onboarded on something that was more of an enterprise solution earlier. So it's performing according to plan.

And yes, we expect some really, really nice things out of that because after all, like in terms of the number of companies out in the world, 99% of companies are small to midsize. And so 1% of companies out in the world are enterprises and it can get pretty crowded being a provider into enterprises. And so it's really a competitive advantage to be able to cater to both which if you read the history on Physitrack and LifeCare, this is exactly what we did. We did enterprise and multi midsized companies with product-led growth and sales-led growth. So yes, it's very promising, very exciting to have that in place.

What are the next steps countries to launch for Champion Health? Well, the next launch is going to be the U.S. market, and this is what we're working on very closely. Of course, the Anglo markets are open or because of the language situation, they are open for business development. We don't have any active campaigns going on in other deals besides the U.K. We're working multinationals like business exposure to a lot of deals at the same time, but the U.S. is very much the priority in terms of new markets. It's an ongoing process. I can't give you a time line at the moment, but that's an exciting opportunity for us for sure.

Next question. Have former Fysiotest now Champion Health Nordic -- thank you for noticing, great rebrand, by the way -- have they managed to reverse the negative growth trend? Yes, they have. And this is very, very nice to see. Big kudos to Christopher and Alexander for solidifying the market presence, for securing existing contracts and continuing to grow with new and exciting companies and also with tenders and that's so very, very nice development of that entity and [indiscernible] pure entrepreneurs look not only at the revenue situation, they've looked at the cost base and look at optimization. So they're very much taken that [ prestruck ] DNA and they built that into the world of Champion Health Nordic. It looks that page beautiful rebrand project that was done in conjunction with the Champion Health guys in the U.K., a perfect example of cross-group synergies.

What are our expectations for Champion Health? I expect them to knock it out of the park, client by client. We don't have any forecast on the revenue streams, but so far, so good at what they have done. And hopefully, they can return to net double-digit growth over time and nice profitability. And I have all the confidence in the world with those guys to [ Sweden ].

We have a question here on the -- how do you feel about the 0.4% sequential Q1 to Q2 growth, was that expected? Yes, it was pretty much expected. You had some seasonality in our book of business. You have -- with how the world works when things get a little bit warmer with the summer months and the way that people run with their tenders, you tend to have a taper when you come closer to the end of Q2. And a lot of tenders are -- started at the beginning of the year from what we do, you go in and you pitch them towards midyear people take a summer holiday, they come back in the fall, which is why you have that seasonality. It's less of a seasonality effect than it used to be. We used to have a pretty big drop off when you came into Q2, Q3 for us, and then you have a really, really big swing up in Q4 as people find less tenders and they have to invest money that they might have in the budget. So yes, long story short, it was expected. And so yes, nothing there that has any cause for concern for us.

All right, I will give it another 5 seconds. If anybody wants to ask a question, pop it in the chat. Otherwise, I just wanted to thank everybody. Thank you, Charlotte. Thank you to the amazing teams of Physitrack, Physiotools, Champion Health. Well [ now ] and all those guys for really delivering in our view, a very, very nice quarter.

Thank you very much, everybody, and we'll see you again soon. Take care.