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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good morning, everyone. Thank you for standing by, and welcome to Dialogue Health Technologies web conference to discuss results for the first quarter of 2023. Listeners are reminded that portions of today's call may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on Dialogue's risks and uncertainties related to these forward-looking statements, please refer to the company's MD&A and annual information form dated March 21, 2023, both of which are posted on SEDAR.Today's webinar will be hosted by Cherif Habib, Chief Executive Officer; and by Navaid Mansuri, Chief Financial Officer. [Operator Instructions]Now before we jump into Q&A, Cherif will make a brief statement on our performance this past quarter, and Navaid will highlight some KPIs as well from the quarter. Cherif, please go ahead.
[Foreign Language] Thank you for joining us today. We received a lot of really good feedback in our new call format. So we will maintain it going forward. With that said, here are my top 3 takeaways from the past quarter. #1, our competitive positioning remains very strong. We added more than 150 new customers during the first quarter and are taking part in many sizable RFPs. We continue to have good success in the head-to-head situations winning nearly 60% of competitive deals overall and 75% of those in which we participated in the Enterprise segment. #2, our net retention rate over the last 12 months was very strong at 119%. Our customers are benefiting from our IHP by adding services and extending our platform to more of their employees and members. We did experience a nonrenewal from a single service customer during the first quarter. It was an isolated case related to structural changes within that organization and not due to a competitive churn. This customer, which represented less than 0.8% of our ARR did not leave Dialogue for an offer elsewhere, and we remain in contact to see how we can best support their employees in the future. Excluding this particular situation, overall churn remained at a historical level.And #3, but not least, we're tracking slightly ahead of our profitability plan. Everyone in the company is focused on making this happen, and we are finding efficiency gains in every corner of the business. We're very proud of this achievement, and we will invest this favorability in our growth, namely in developing more awareness of the Dialogue brand to help drive our pipeline. Navaid, would you like to add your thoughts?
Sure. Thank you, Cherif. [Foreign Language] Thank you all for joining us this morning. In addition to what Cherif mentioned, I would highlight the 3 following points from our first quarter financials. First, we're executing in line with our growth plan so far this year. Total revenue rose 26% year-over-year to $24.5 million, right at the top end of our guidance range. Importantly, our core digital services maintained their strong momentum and increased 43% year-over-year.Second, we continue to move along nicely on our path to reach EBITDA breakeven by the end of the year. We recorded a gross margin improvement of more than 16 percentage points year-over-year, and we clearly see the benefits of scale as we now have 3 services with at least $15 million of ARR.And third, we ended the quarter with just under $57 million in cash on the balance sheet. We continue to expect a cash burn of $5 million to $10 million for the full year, which implies that our use of cash will be more aligned with adjusted EBITDA throughout the remainder of the year and benefit from a positive EBITDA fourth quarter. As we reach our profitability target, we expect to end the year with more than $50 million in cash and short-term investments, putting us in a solid position to advance our strategy further.Thank you again. We'll now open the floor for questions. [Foreign Language]
Thank you, Navaid. The first question comes from Endri Leno at National Bank Financial.
Congrats on the quarter and on the progress that you're making. The first question I have is that on your prepared remarks that were posted online, you mentioned a couple of EBITDA margin targets, 15% to 20% in the next 5 years and then closer to 25%. I was wondering if you can talk a little bit about those? What assumptions are you using out there in terms of the revenue growth and expense growth to get to that margin?
Thanks, Endri. I'll start -- in terms of the assumptions we're making, we're projecting sort of revenue growing at a CAGR of about 20% over the next 5 years. And the range that we have put out is through 2027. In terms of gross margin, we expect modest improvement. So we had 57.4% for this quarter, and we expect that to grow incrementally to about 60% in that time period in 5 years. And then on the OpEx front, we forecast relatively stable OpEx as our large investments were made early in our growth. We do have a couple of areas like our service operations, which is our practitioner team and the administrative team image those as well as our customer success function are two areas that should continue to grow at a higher rate, more aligned with the revenue, not at the same rate of revenue, but more variability there. And then the remaining operating expenses are expected to grow at a rate that's closer to inflation and generally much lower than our revenue growth. So when you factor -- when you take the combination of those 3 elements, that gets us to an EBITDA margin of 15% to 20% in the midterm. And then from there, we can continue to mature towards 25% beyond that.
Great. Thank you, Navaid. I'll ask one more, then I'll jump in the queue. But in the announcement that you also in the quarter, you mentioned that you had appointed a Chief Information Security Officer as well. So a question I have is just what kind of prompted the appointment at this point, especially data privacy and sensitivity was always top of mind, if not a regulatory requirement for Dialogue?
Endri, thanks for the question. My Co-Founder, Alexis Smirnov, the CTO of the company was -- and he's still in charge of everything around cyber. And obviously, it was taking more and more of his time, and we decided that it just made sense to have a dedicated person and for this accountability to roll up to Darryl who joins us from your organization, I think he spent a few years at National Bank. And so we know he's good. And so, what prompted it really is that we wanted to have a dedicated person who's obviously a team focusing on cybersecurity. And obviously, every single person in the company has been trained and has really good awareness, but we just felt that it was prudent to have somebody fully dedicated to that, and we're really happy and pleased to be able to attract somebody of the caliber of Darryl who joined us a couple of weeks ago.
Thank you, Endri. The next question is from Doug Miehm at RBC Capital Markets.
My question just has to do with the competitive marketplace and how it may have changed over the last, let's call it, 6 to 8 months since there was a significant acquisition out there. So I'm just wondering, you have continued success here. win rate is very high. And I'm just wondering if you've noticed anything in the Canadian marketplace with respect to that competition or other competition that has changed? And if not, do you expect it to change? And what the implications may be.
Doug, you are absolutely right. The competitive landscape has been changing for the last few years. I would say that when we started -- we started this business 7 years ago, and it's really been 6 years that we're in the market it took us to build the product. And in the beginning, I would say, we had about a dozen competitors, around dozen alternatives as [indiscernible] that people always had. And with time, the market consolidated, some folks went out of business, some folks were bought out, some folks failed to achieve scale. And today, it's really becoming a 2-player market. And I think that between the 2 of us, we probably have over 90% of the TAM. And so, in most competitive situations, we know who we're up against. And in the past, it was a handful or more of competitors in a situation. And today, it's really between us and them. So again, it's a market that is maturing between the 2 of us, we have a very large percentage of the digital health markets whether it's virtual care or mental health.So I don't know if you kind of had a more specific question around that, but that's really how we're seeing that evolve.
Okay. No, I think that's fine for now. The second question has to do with that longer-term growth as well. And I'm just wondering, how does the company see member service unit growth over that period? Are we looking at mid-single digit, just maybe some bookends around how that might look.
Yes. So I talked in my earlier comments, when we look at sort of our revenue CAGR of roughly 20% over the next 5 years. Obviously, the bulk of that is going to come from MSU growth. There will be some continued pricing as we maintain pace with inflationary pressures but the vast majority of that revenue growth will come as a result of MSU growth.
Thank you, Doug. We don't appear to have any other questions. Maybe I'll just -- okay, here we go. So the next question is from Salman at TD Securities.
Congrats on the quarter. Again, I'll stick to the 2 questions. First, can you talk about your capital allocation priorities? Now I know that M&A seems to be at the top of the list, but have you guys thought about share buybacks, especially given the gap you're sitting on?
I'll answer the cash buybacks question, and then maybe I'll pass it on to Navaid. We've, of course, thought about it. I think one of the challenges we have with our stock is the small float and the small liquidity. And we felt that although we think that the price is undervalued and it would be a great buy for us. We just felt that we would make the liquidity and the flow situation worse if we were to take shares off circulation. So that's really what drove the decision. We thought about it quite a bit, and we decided to -- we get a lot of feedback from investors that they want to get into the name. They want to build sizable positions, but there just isn't enough volume to make it happen, and we don't want to make it worse.
Yes. And then you mentioned it, Salman, around M&A. M&A has definitely been part of our strategy. It is not our only growth strategy, but it's more to supplement our organic growth, and we are continuing to be on the look for attractive targets that fit within our AHP that help us achieve our growth objectives. So, the cash, as I mentioned, we have just under $57 million. Now we expect to end the year with over $50 million. And that cash, we will continue to use towards attractive M&A opportunities. And then similar to what we're doing, where it makes sense, as we mentioned in our remarks, we are a little bit ahead of our profitability target. So when the right opportunity arises, we can look at investing further in building the brand and even looking at ways to accelerate our growth, if it makes sense.
Got it. And for my follow-on. Would it be fair to ask right now, like what kind of areas are you guys looking to expand in, for example, are you guys thinking of weight management or anything else through M&A or through your own organic efforts? Are there any specific areas you're looking into expanding? That's it.
Salman, did you say weight management?
Yes. That's just an example that came to the top of my head, but do you guys have any other focus areas you might be thinking of expanding in?
Yes, sure. So you have to remember that our clients are employers and insurance companies. And I think there's been a trend in the U.S. for some virtual care companies to get into weight management, either because they're direct-to-consumers or just because of the structure of the market in the U.S. is different and employers directly bear the cost of these drugs. So it made sense for some places to go there. In Canada, given the market structure, this is not a top priority for employers. The top priorities are really around mental health, wellness and return to work. Obviously, mental health and wellness is something that we've invested in quite a bit over the last couple of years and return to work is something that we're investing in now. We've been clear over the last couple of quarters that we're developing something there. We already have a return to work product line in our Optima division, and we've been working diligently on modernizing that and tech enabling that, and that's still going pretty well. So this is really where we're focusing on because once again, we serve employers and insurance companies, and these are their top priorities. So we're always working with our customers to develop things that they need and want.
The next question is from Jerome Dubreuil with Desjardins Securities.
Yes. [Foreign Language] Congrats on the margins this quarter, higher than we thought. I want to talk a bit about the utilization rates a bit here. What have you seen in the quarter is just contributing to the higher margins? And then kind of sub questions on this one. With kind of the law of large numbers, as you're seeing your number of members growing. Is it easier now to kind of forecast the utilization rate and optimize the number of practitioners or it still depends really on how people use the product and still tough to forecast?
Jerome so in terms of utilization, to answer your first question, with the scale that we have now approaching 3 million members, our utilization rates are relatively stable. We haven't seen any significant movement in the overall level of utilization for several quarters now. There is -- as we've discussed in the past, there is seasonality in like in winter months, for example, we see slightly more in summer months, it's a little bit less. But other than that, it's very predictable, and we actually use that to model our practitioner scheduling and how many people we need on the schedule. So the favorability in gross margin is not coming as a result of any change in utilization. It's through process improvements that we've been making and investing in automation, investing in technology, better scheduling. The scaling of our EAP and mental health businesses over the past several quarters is definitely driving some efficiencies as well. So it's a function of those elements and not as a result of changes in utilization patterns and/or service levels at -- our service levels is a huge priority for us. We want to deliver optimum service levels in the most efficient way passable and that's what the team has been focused on.
Okay. Great. That's helpful. And then second question for me is what would be the kind of new vertical that you've been having success in recently? In the past, you've been surprising the market with new verticals that maybe we didn't see coming as much, sometimes with university unions. What's the kind of the new one that's driving some of the recent successes that maybe we didn't think about in the past?
Yes. In Q1, I think in the notes, we mentioned that we had a major [Foreign Language] Quebec who signed up for our service. So public sector is taking a bigger and bigger share of our customer base. And this has really been a little bit of a surprise for us because you'd think that public sector clients just because of the politics around it, maybe would be a little bit shier to take on our services. And what we've seen in the last couple of years, -- we've announced some major wins in the public sector that has been a very positive surprise for us and I think gives quite a bit of upside on our TAM. So that's the one that jumps to mind when you ask the question.
The next question is from Doug Taylor at Canaccord Genuity.
You speak to a 20% sustained top-line growth CAGR. You've also had almost 120% net retention rate reported over the last couple of quarters, presumably new customer growths in addition to that. So, I guess my question is, why not a higher growth rate? Is net retention rate punching higher right now than you think is sustainable, medium or long term or is there something about the new customer addition dynamics, either sales cycle, or otherwise that would lead to that? Is there another factor we should take into consideration or are you just being conservative with your outlook?
Thanks for the question, Doug. The short answer to your question is all of the above. So there's a couple of factors, you're right. We have a very strong net retention rate and maintaining and expanding our customer base is definitely a priority and we expect that to continue. The other thing I have to keep in mind is as the revenue base increases, the percentage growth like if you're delivering the same level of dollar growth, the percentage diminishes. So that's another factor. And then yes, we have been relatively conservative -- like we can throw number any set of numbers on the specie, but we wanted to look at sort of a conservative focus scenario to see what the business could look like with those assumptions. So it's a combination of all those factors. Is there upside to that? Definitely. And obviously, we'll take a value of it if we can, but we wanted to model out a more a scenario that is a bit more conservative.
I guess, as a follow-up then I'll ask about the new customer sales cycles right now, what you're observing in this market. Have you seen those slow down and your ability to get the pipeline to the point of signing?
Yes, I'll take that one. You've probably heard us talking about a shift in our customer base from SMB mid-market to enterprise to very large enterprise. And I think one side effect of that changing customer base is much longer sales cycles. So before we really had a very repeatable machine of like a lot of small customers coming online at a very predictable rate. And now our revenues is much lumpier, right? So it's a longer sales cycle, lumpier, and then sometimes one big deal can make or bring a quarter. So it's -- this is a change that was important to our business as we grow because the enterprise segment just takes more and more importance, but it comes with some of these downsides. Now in terms of thinking about the macro environment and how it's affecting our business, I think I've talked about this in several quarters now, like we're really we're really watching this very closely. We're obviously just as worried as everybody else about what's coming in the next couple of years in the economy. That being said, job numbers remain extremely strong. The April numbers just came in a historical low. We keep adding seasonal and non-seasonable jobs over the economy. The layoffs so far have been very, very targeted to a very small group of companies. So, so far, again, we're being very careful, and we're watching this intently, but we have not seen any real changes in the demand environment to speak of. So nothing to report yet, but of course, if it happens, we'll be very clear about it.
The next question is from Nick Agostino from Laurentian Bank Securities.
Just one quick question. Just can you talk a little bit about, I guess, what role AI or generative AI can play for your organization twofold, one on new product development to help drive revenue growth. And on the flip side, if there's any way that, that solution or that type of solution can be incorporated into the business to help drive EBITDA or margins expansion in general?
Yes. That's a really good question, Nick. Thanks for asking it. Look, I think the whole industry is going through a sea change right now. There's a lot happening in AI, large language models and all sorts of technologies that are coming up. The way we think about it is patient-facing and nonpatient facing, right? So in nonpatient-facing opportunities, we're really taking advantage of ChatGPT and others. So for example, our developers are using ChatGPT to help with code the use that GBT to do unit tests on code and to find solutions and answers to some of their problems. So that's been used quite a bit. We had a internal hackathon a couple of weeks ago. A lot of the ideas were around ChatGPT. So we think it's very, very exciting. Another place that's not patient-facing, we are kind of redoing how we do our provider scheduling. And we've used or we're using quite a bit of AI to optimize these schedules. Now when it comes to patient facing, I think there's a lot of excitement and a lot of hope on what ChatGPT can do. But we were -- we believe very strongly that the technology is not mature and safe enough to expose to patients. So we've all seen really good demos of asking ChatGPT medical questions where it works perfectly but we've also seen demos -- and we've also seen academic work around some of the errors that it can make. So I think we're still probably a couple of years away from exposing these technologies directly to patients.But again, kind of make it -- can it make dialogue more efficient? Can we save costs? Can we find all sorts of places in the business where AI can improve that is not patient-facing? Absolutely, yes. And we're definitely the advantage of those. My co-Founder, Alexis, our CTO, and his team are spending quite a bit of their time looking at that. So I think it's very exciting, but it's not yet ready to be patient-facing and who knows maybe the next conference call will be run completely by ChatGPT and Navaid and I will be out of a job, but that's not patient facing.
The next question is a follow-up from Endri Leno of National Bank Financial.
It's a bit of a follow-up in response to a couple of questions you gave, Cherif. But in one of them, you highlighted the differences in the U.S. and the Canadian market in terms of the employers. And my question is a bit related to that in that we have seen data that shows that the percent employees, at least in the U.S., offering EAP and mental health services has remained quite strong even in recessions, if not grown. I was wondering if you can talk a little bit about the Canadian marketplace. Do you see kind of similar trends or any kind of thoughts you can share on that?
Yes. So look, this is our -- the company is quite new. So this is really the first time that Dialogue is going into uncertain kind of economic cycles or you can call it a recession or whatever the technical place we are right now. So we don't have that institutional experience yet. However, what we do have, and I think there are some parallels that we've lived the beginning of COVID. And if you take back time to March of 2020, when it felt like the world is in floating and a lot of our customers were -- some of them were going into receivership or protection or really struggling. And we were really positively surprised and impressed that none of them canceled their service. And in fact, even when -- even at the height of the economic uncertainty end of March, beginning of April 2020, people continue to invest in the health and well-being of their employees. So again, it's not a 100% the same thing today but this is, I think, is a good hint of how employers think about our services. Mental health demand remains super high, EAP demand remains super high. So we've -- again, we've seen companies that are executing layoffs, but at the same time, upping their mental health and EAP services. So look, as I've answered another question like we're keeping a very, very close eye on it, but so far, we have not seen any worrying signs.
The next question is from Salman.
Just a quick follow-on. So you guys talked about the U.S. and the Canadian markets. Curious to have your thoughts on the U.K. market as well given you have your wellness solution. You recently launched your ICBT there as well. So thoughts on the dynamics going on there generally?
Yes. Great question. So look, it is very early innings for us in the U.K. We've only recently started going after the local employer market, and we have a sales director who hasn't even started yet. I think she's starting next -- yes, next Monday. So it is very, very early days for us. We're excited by the market. We think there's a good opportunity, but it's too early to talk about any success there. That being said, Tictrac continues to call on insurance carriers all over the world. And we're continuing to see good success there and really the bright spot that we've been really excited is really cross-selling wellness to our Canadian customer base we're really pleased with the progress there.
So these are all the questions we have for today. As a reminder, you can reach us at any time by e-mail at investors@dialogue.co. It will be a pleasure to answer any questions you may have. Cherif, the floor is here again to conclude today's call.
[Foreign Language] Jean-Marc, and thanks, everybody, for joining us today. We really enjoyed the questions as usual, and we're looking forward to seeing you in August for Q2 earnings. Have a great day, and see you soon.
Thank you.