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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 fourth quarter of 2022.
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]
Before we jump into Q&A and to better frame the session, Cherif and Navaid will make a brief statement on our performance this past quarter. Cherif, please go ahead.
[Foreign Language] Thank you for joining us today. I'd like to first say a few words about the changes to our call format and to the way we publish our quarterly information. At the same time, as our press release that was issued yesterday, we also published our management commentary on the quarter and related investor presentation. We're doing this to provide analysts with more detail and more time to process our results before the quarterly call.
And although I know that some of you will certainly miss watching Navaid and I read a script for 30 minutes, this new approach should allow us to maximize the time spent answering questions. We will continue iterating on the format to make sure we maximize the value of these calls. So please don't be shy to give us feedback. With that said, here are my top 3 takeaways from the quarter. Number one, our core business, the Integrated Health Platform or IHP is growing quickly with ARR growth and revenue growth of 44% and 47% year-over-year, respectively.
Second, we continued to see solid win rates in competitive situations and added several blue-chip enterprise customers to our primary care and EAP services. And third, we exceeded $100 million in overall ARR, an important milestone that demonstrates our unrelenting focus on building a premium service that our members and clients appreciate.
And on a personal note, for my co-founders and I who started this business from zero 7 years ago, this is an especially meaningful milestone. Navaid, would you like to add anything to this?
Sure. Thank you, Cherif. [Foreign Language] Thank you all for joining us this morning. In addition to what Cherif mentioned, I would highlight the following 3 points from our fourth quarter financials.
First, our gross margin improved by 14 percentage points year-over-year, demonstrating the benefits of our virtual delivery model and service integration. Second, we showed strong cost discipline, maintaining operating expenses stable for the third consecutive quarter. We're seeing consistent operating leverage and expect to reach breakeven adjusted EBITDA by the end of this year.
Third, we ended the quarter with $62 million in cash on the balance sheet and will require between $5 million and $10 million to reach our breakeven target, putting us in a great position to navigate uncertain market conditions.
Thank you again. We'll now open the floor for questions. [Foreign Language]
Thank you, Navaid. The first question comes from Doug Taylor at Canaccord Genuity.
Yes. And I'll applaud you on the new format, very efficient. I'll start by asking about your sales momentum. You closed the year with a strong pace of new ARR build. We're about a week away from the close of Q1 here. Can you speak to your ability to sustain that sales momentum into 2023?
Yes, absolutely. I mean, as you know, you've been following us for a while now. Q4 has always been our strongest quarter. There are several reasons for that. So Q4, it would not be reasonable to expect the same ARR performance in Q4 than in other quarters. We always finished the year very strong, again, for a variety of reasons that we've touched on before.
So Q1 is always going to be not as strong. As you mentioned, we're 8 or 9 days away from the end of the quarter. And it's been a good quarter, again, not anywhere close to Q4, but I think we'll end where we were expecting to.
And as a -- maybe a follow-up question, maybe I'll ask you a little bit about M&A. You seem to be talking more constructively about the potential for further M&A, and you've gone to some lengths here to illustrate the amount of excess cash that you've got relative to what's required for your organic business. Given some of the noise we've seen created by some of the either the sale of the OHS or some of the legacy contract roll-offs you've seen with some of the other acquisitions you've made, are you approaching further M&A with any different objectives or anything else? Are you taking anything else from those previous deals into your future process?
Yes. That's a great question. Thanks, Doug. So when we bought the OHS business in Germany, that was before we landed on our IHP strategy, right? So at the time, we had a primary care business, we had a mental health business and we hadn't yet zeroed in this idea of the IHP.
And what we realized 2 years in is that we had a very well functioning and very well-received IHP in Canada, and we had a somewhat disconnected business in Germany. And we made the difficult decision to focus all of our efforts on the IHP. So going forward, obviously, we're going to learn from that and make sure that anything we buy will be perfectly integrated into IHP.
Again, we're not an aggregator of businesses. We're really a tight integrator, not just from a financial point of view, but from a product point of view, we want to have one app, one administration platform and everything working seamlessly together.
So as we think about the future, you've mentioned our strong balance sheet, we're going to have over $55 million in our balance sheet after we end our kind of cash burn phase. And that puts us in a really good position to strengthen our IHP when the right opportunity presents itself.
So we're very excited by that. We're very pleased to be in the strong position not everybody is fortunate to be in that position, and I think we'll be very aggressive on M&A when the right opportunity presents itself.
The next question is from Scott Fletcher at CIBC.
I'l echo Doug's comment and appreciate the format. I wanted to ask a question on some win rates. You mentioned in your prepared remarks that win rates were 50% overall of 65% of the enterprise segment. Can you just provide some color on how exactly you are approaching those competitive situations and what's leading to you winning 65% of deals in the large clients?
Yes, absolutely. I think the premium positioning that we've built and the reputation we've built over the last few years is really starting to pay off. And again, the integration between our services is our main competitive differentiator. As you know, there are others on the market that have grown by acquisition, and it will take them years to properly integrate if they do it at all.
And this very tightly integrated approach has been the killer on the market. It is very difficult to replicate. Again, you can't just buy a bunch of businesses and hope to integrate them. It is something that you need to build from the ground up, and it's been a place where we've invested a ton of energy and resources, and we can say today without a doubt that our IHP is the best on the market and our win rates clearly demonstrate that.
Okay. And I wanted to ask a second question about another comment to the layer that talked about new services, you've got some, it sounds like that are -- you're working on at the moment. I'm more interested in sort of the difference in time line between what it would take to develop some of those internally versus look external, which you talked about through M&A.? Can you maybe sort of -- I know there's different situations will be different time lines, but maybe like if you -- using ICBT as an example, like what the timeline difference would be on the build-to-build [indiscernible]
Yes, with pleasure. So let's take a very concrete example. So we closed our Tictrac acquisition in April of 2022, and we were able to make our first sales of our wellness solution that is perfectly integrated into the rest of our stack in November of the same year. So more or less 6 months from closing the acquisition to having a product that is, again, perfectly integrated with the rest, running on the same platform, running on the same back end using the same care teams.
And that is, I think 6 months is very quick, especially when you look at what else is being done in the market. So we're really proud of that. And again, it's a testament of the -- our product and technical teams who've done an amazing job building this platform that is very modular and can receive the products or services we buy.
So that's one example. ICBT, we had bought in the summer of 2021. And again, by the end of the year in 2021, it was perfectly integrated. So I would say that when we buy something, it's a good 2 quarters. When we build something, it really depends on the size of it.
So for example, in Q1, we've built new subservices of EAP. So for example, substance use and we were able to build them in one quarter internally. But of course, a bigger service like EAP took us maybe 9 months. I would say like the 6 to 12 months range is how you would -- that would really be the 2 bookends of how we can integrate something that we either buy or build internally.
The next question is from David Kwan at TD Securities.
I appreciate the format echoing my fellow's comments. Touching on, I guess, Doug's question on the M&A side. Looking at where the net cash position is right now and kind of another $5 million to $10 million get to breakeven, like how much of that remaining balance would you be comfortable in terms of spending on acquisition?
Because you've made some acquisitions that are quite small, but then some larger ones as well, like Tictrac, I think, probably the largest one. So just trying to get a sense of what you guys would feel comfortable with at this point?
Yes. I mean we would really be comfortable with a wider range. Obviously, at $100-plus million ARR, we need to do things that will move the needle and have an impact and have scale. So I think we're -- we've learned that a very small acquisition and a bigger acquisition take almost the same amount of time and management bandwidth.
So that is really a learning that we've integrated in our process looking forward. So I think we're really going to be looking at bigger acquisitions. Does that mean 1 big or 2 medium ones, like, again, it depends on the opportunities that come across the board but definitely, we're not going to be interested in small ones.
No, I appreciate the color, Cherif. Secondly, you've made some pretty good progress, I guess, in terms of diversifying your ARR base beyond the primary care service kind of core to your platform. And based on new customer wins, it seems like primary care is still, I think, the lead for probably a lot of these discussions with new customers, although it's nice to see the EAP also contributing quite solidly in recent quarters here.
I guess, how much more runway do you have there kind of the primary care side of things in terms of greenfield opportunities, particularly in the enterprise space -- this enterprise space that you target directly? And any thoughts you might have as it relates to kind of the SMB and mid-market where you rely more on your channel partners?
Yes. So you're absolutely right that primary care is still a very strong service. You're also very right that EAP was our fastest-growing service for the last couple of years, and we're really proud of how the modern EAP was received by the market. Look, we don't have very precise market data, but our internal estimates is that there's about -- in primary care, about 2/3 of Canadian companies that still don't have a primary care service.
So there's a lot of greenfield. And we're obviously going very aggressively after that. We've mentioned in previous calls the dynamic that in primary care, most of the times when we're signing up a client, that client did not have primary care before, that dynamic remains true at a high level, but more and more just because the market is growing and there's more and more people who know this and want the service, so we start having more cases where we're replacing somebody else.
So for example, we talked about some of the very large wins we had in Q4 and actually either the biggest or the second biggest was a takeaway from one of our competitors in primary care. So that's something we're very pleased with. In EAP, I mean, EAP has an almost 100% penetration in the market across SMB, mid-market and enterprise, almost every single company in Canada has an EAP.
So essentially 99% of our new EAP cases are rip and replace from one of our competitors, and you can guess who these are, given the market positions.
The next question is from Douglas Miehm at RBC Capital Markets.
Yes. So my question has more to do with the patient access. And we've seen some of your competitors get into a little trouble recently with respect to out-of-pocket pay for access. And so my question has more to do with access.
And I know you're a B2B model as opposed to B2C, but some could argue that one step removed, you are improving access relative to other people or patients that may not have worked for a certain company or don't work for any company. Can you maybe give us your thoughts on that situation?
Yes, absolutely, Doug. Thanks for the question. So in Q4, October and November of last year, we saw a pretty historic situation in the health care system, health care professionals called the trifecta of pulmonary diseases. So that's RSV, COVID and the flu season kind of all hitting at the same time.
And what that did is, again, a historic amount of demand on the system. And there's a lot of talk in the media about the health care system collapsing, et cetera. I mean I think there has been a bit of an exaggeration, but that was very often in the news. And what that did is that it attracted a lot of political and media attention at the end of last year and the beginning of this year.
The spirit of the Canadian Healthcare Act is that no Canadian should be paying out of pocket for health -- for insured services. And we really believe in that. And that's why we've always respected not only the letter, but the spirit of the law.
And that's always why we stay as a B2B there and none of our members ever go into their pocket or use their credit card to pay for our services. That is an exception that has always been part of the regulation in every province. I think what gets lost a little bit in the media is people confuse different things.
And again, some of our competitors who are in the B2C space got a little heat, but you've noticed and we're very proud of the fact that we're never named in any of these reports. We have very good relationships with the regulators, especially on the provincial level, we're only starting kind of a relationship at the federal level.
They've only kind of started paying attention in the last few weeks, but it's a relationship that's starting. But again, very, very positive. And we're very, very confident in our regulatory positioning. We think we're a complement to the health care system and by not antagonizing them and always positioning ourselves as a friendly party who's trying to help access overall, we've been very well received. So I don't know if this -- hopefully, this answers your question.
But we've been working a lot with the regulators to make sure it will work. We'ill continue being constructive and helpful to the overall situation.
No, that's a really great response. Second question, just for you and Navaid, as it relates to the sizable Optima customer that you described in your release that's going up for the press for proposal this year. Am I correct in estimating, based on just some simple math, the size of this customer is around $5 million?
And as, I guess, a to that organic growth for primary mental health and wellness was what in the quarter? We didn't see it in your disclosures.
Thanks, Doug. I mean we provided updates on the major remaining customers at Optima. It is a shrinking portion of Dialogue for ARR. You're right, I mean we have a couple of large customers left. One, we have a relationship on the virtual side and in the process of migrating up. The other customer remains at Optima. They're under contract until the end of 2023. As we've talked about before, they are planning an RFP this year that will allow them to evaluate all options and that includes our virtual EAP, and we will be asked to participate.
The size of the customer, we haven't specifically disclosed what the size of that customer is. And I think the number you have is a little bit on the high side, but in the ballpark. I do want to point out that, I mean, Optima, as you know, is an already lower margin business and that's why we're migrating them to the virtual platform with much higher margins.
And this customer, particularly, also is within that same range. So if we -- I mean, obviously, we're going to try to -- try our best and to migrate the worth of virtual EAP, but in no worse case, the impact on our profitability because of the low margin will be -- if we were to lose it would be minimal.
And then there's also a third portion of Optima's ARR, which is rehab and disability management services, and we're currently working on also digitizing those services to further strengthen RFP.
The next question is from Endri Leno, National Bank Financial.
Yes, the new format is great as well, good echo everybody else. So a couple of questions for me. I just want to focus a little bit more in terms of the contracts that you're bidding on and -- if you can talk a little bit if you've seen any changes in the bidding universe in Canada? I mean has the size of the RFPs changed? The size or the makeup of company's enterprise values are the entities that they bring this RFPs of the market? Any kind of color you can provide there?
No, I wouldn't say that we've seen any notable trends in the last few quarters. I mean these are -- again, we look at the universe of our TAM as the SMB segment. This is very well served by our partners, whether that's Sun Life or Canada Life that have specific products for these folks as well as all of the broker community that serves the SMB market.
Mid-market and enterprise, again, this is where we really focus our direct efforts. We haven't seen much of a change. But I would say that, obviously, as our profile is raised in the market and as people see the benefits of our integrated approach, we're included in bigger and bigger RFPs just out of the virtue of being more known in the market. But I would say nothing notable or material.
Okay. That's great to hear. And the other one is a bit of a follow-up to an answer you gave Cherif to a prior question, but is that you kind of expanded recently talks or relationship or discussions that you've had with the federal government. And we've talked about this before in terms of potentially bidding for provincial or federal contracts.
I mean is there anything new you can disclose there? And if you can't disclose to what extent, what kind of discussions or the nature of your discussions you're happy with the federal government and any potential there?
Yes. So I think it's important to distinguish discussions like procurement discussions. So for example, if there's an arm -- a public sector organization or an arm of the government that is looking to provide EAP or mental health services to our employees, again, there's really no change. We participate in these RFPs. It's an area where we haven't put a lot of focus because traditionally, these RFPs have been -- or these contracts go to the lowest bidder, very narrow margins and the overall profitability -- I mean, nobody really makes money on this contract.
So from time to time, there's an opportunity where we feel the unit economics makes sense, but it's not -- I would say, in the majority of the cases, that's not the case.
And then the second part of that question or conversation is relationships with the government on a regulatory point of view. So this is, again, pushing our point of view, showing how we can help the system, showing that every console that happened on Dialogue saves money to the provincial payers and ultimately to the federal government indirectly.
And again, these conversations are very positive. We're very well received. These are things that take a long time. But again, we're very encouraged by this conversation. And I'll finally say that in Quebec, particularly, there are several state enterprises -- I mean, that are clients of ours. So these are parapublic or public companies that use either a primary care or EAP or mental health or a combination of the 3, and we've been very encouraged with that.
And again, if our relationship with the regulators was not positive, they would not be working with us so I think it is just a testament of that great relationship.
The next question is from Jerome Dubreuil at Desjardins Securities.
[Foreign Language] First question I have is you continue to guide the streets to you reaching EBITDA positive and free cash flow breakeven at some point later this year. Is there a shift in strategy we should anticipate when you reach that milestone? Obviously, the easy thing to talk about is M&A, but you've already discussed that a bit. Is there other changes that might be coming once you reach that milestone?
You want to start?
So I mean, Jerome, you're right, you're absolutely right. I mean achieving EBITDA positive by the end of this year has been our goal since we IPO-ed a couple of years ago, and then we're proud to say that we're on track for that.
I think as you know, our strategy -- our growth strategy is built on 3 pillars. One is continuing to add new customers in our existing markets. We've talked about the potential for growth in Canada, and that's going to remain our primary focus and growing in our existing markets, including the U.K.
So that's our first growth pillar. The second one is continuing to build on our IHP, whether it's adding features or capabilities to our existing services or adding new complementary services to our IHP based on feedback from our customers and our insurance partners. That's the second pillar.
And then the third one is, over time, once we're cash flow positive is also to look at international expansion. Our first step would be to launch our tech-enabled services such as Wellness and ICBT in markets like the U.K. and then eventually add to those and potentially add human lab services in those markets as well. So our growth pillars remain the same.
I think achieving EBITDA positive and cash flow positive will give us a bit more flexibility in terms of accelerating some of those growth pillars. But our overall strategy will not change, but it will give us a lot more flexibility to execute more effectively in some of these areas.
Okay. Great. And second question I have is well congrats for reaching the $100 million ARR milestone. Sometimes RFPs are only available for companies of a certain size depending on the industries.
Is this is something that matters in your industry? Is there a demand or a request from some of your potential clients that you need to be a certain size in order to be eligible? Or is that not something you've seen so far?
[Foreign Language] No, that is not a dynamic that we've seen at all. And again, our size is the size of leadership in the market. So again, if you wanted to go bigger than that, there's not so many other options. So I would say that, that has not stopped us from accessing any parts of the market.
The next question is from Daniel Rosenberg at Paradigm.
My first question was around competition. You had touched on some of the challenges that some competition is seeing, and we've seen some smaller companies have a tough time in this type of market. At the same time, we've seen some -- and I'm speaking to the U.S. some large cap mega tech companies make a push into the healthcare space.
I was wondering if you could just characterize the competitive environment as you see it? Whether there are more opportunities that you're seeing given the dynamic? Or is it the same as it ever would?
I would say there hasn't been a massive shift in the last couple of quarters. The Canadian market remains very difficult to access for U.S. players in the healthcare space. I think several have tried.
And unfortunately, for them, and fortunately for us, have not had much traction. And that is -- the healthcare is such a complex and local industry that even within Canada, we have 13 different jurisdictions, 13 different regulatory environments, et cetera. So it's very difficult for folks from outside of the country to make a meaningful change here.
Obviously, we're not sleeping on the switch, and we'll remain vigilant and we'll remain very competitive. I think the forces in Canada are the ones that we pay more attention to. Obviously, there's a big consolidation push. And again, that is, I think, an opportunity and a threat for us.
It's an opportunity because smaller companies that are subscale, I think they see that there's limited potential to compete with us and the other big player. And I think it will make some M&A discussions a little bit easier, but this is a market that's consolidating and it's going to be a 2- or 3-player market in the next few years as we see it evolving.
And then just switching gears. You had mentioned in the growth strategy, looking at products developing services that are complementary. I was wondering if you could just highlight areas that are of interest. What is most exciting to you, whether it be data or whatever else you're looking at?
Sure. So as I mentioned to a previous question, in Q1, we've really focused on 2 service extensions to our EAP product. And one of them is substance abuse counseling. This is something that our customers have been asking for quite a bit. And the other one is a workplace mental health referral program. These are not new services per se. These are kind of improvements or an evolution of our EAP solution. So this is really what we're shipping at the end of Q1.
Very excited about that, getting really good customer feedback. Return to work is another area that we've highlighted in the past and where we're going to be investing quite a bit going forward.
Again, the pull from the market for return to work solutions like the disability management that we have is very strong. So we'll focus on those going forward.
The next question is from Nick Agostino at Laurentian Bank Securities.
Just a couple of quick questions for me. Just recognized, course, you had a low churn in the quarter, so always good to see. Just wondering with this higher interest rate environment that we're operating in, lots of talk of a potential recession and obviously fears of higher unemployment. Have you guys gauged the pulse of your clients and your member base to see what their thoughts are when it comes to how they would treat other services that you guys provide in that environment?
And more importantly, have you stress tested your member base to see in a worst-case scenario under a recession how much risk there would be in your member base, if any, at all?
Yes. Thanks for the question. This is obviously something that keeps us up at night and something that we focus about on a lot. Look, the reality is unemployment is at an all-time low, jobs numbers come out on a regular basis, and they're always quite positive.
So the economy so far has been very resilient. We are seeing targeted, obviously, reductions in force mainly focus on technology, but it's such a small portion of our overall member base that it really doesn't move the needle.
Look, so far, we haven't seen any material changes in the demand environment. We haven't seen any RFPs or sales processes that were canceled or postponed. So we haven't really seen anything concrete. Again, sentiment matters and something that we're paying very close attention to.
But there's nothing concrete that we've seen so far, but we're going to keep our eyes on it and update you if ever that materializes.
Appreciate that. And then my second question, obviously, here in Ontario where lots of talk of privatization of some services started with imaging. Is there -- are you having any dialogue with governments as to services that maybe you think should be privatized that would be beneficial to your business and would be a catalyst for your business?
No, not really. I mean we're really focusing on the services that we provide today, and we feel that by being focused on these small handful of services and doing them really, really well and not getting too caught up in the noise outside is how we continue to grow. So we've really focused our conversations with the regulators on ensuring that our position in the market remains safe and grow, but we are not really looking at other kind of peripheral services that could be privatized.
Good. There are no more questions. So that's all we have for today. As a reminder, you can reach us at any time by e-mail at investors@dalogue.co and it will be our pleasure to answer any questions you may have. Before we end, I'm just going to pass it back off to Navaid. We have a clarification for one of Doug Miehm's question.
Yes. Sorry, Doug, I didn't answer the second part of your question. You asked about organic growth for our primary care, mental health and wellness segment. Organic growth on ARR was 33%. If you're looking for a recognized revenue, it's probably within that same range, but we can follow up with you directly on that.
Thanks, Navaid. Cherif, the floor is yours again to conclude the call.
[Foreign Language] Thanks, everybody. Always a pleasure to speak to you. And we will see you in a few weeks for our Q1 results. Have a great day.