LifeSpeak Inc

TSX:LSPK

Earnings Call Transcript

[Operator]

Thank you for your patience, everyone. The LifeSpeak Inc. First Quarter 2024 Results Conference will begin shortly. [Operator Instructions]. Good morning, and welcome to the LifeSpeak First Quarter 2024 Results Conference Call. [Operator Instructions]. Before we start, we would like to remind you that all amounts discussed on this call are denominated in Canadian dollars, unless otherwise indicated. Please note that statements made during this call may include forward-looking statements and information and future-oriented financial information regarding LifeSpeak and its business, and disclosure regarding possible events, conditions or results that are based on information currently available to management, which indicate management's expectation of future growth, results of operations, business performance, and business prospects and opportunities. Such statements are made as of this date hereof, and LifeSpeak assumes no obligation to update or revise them to reflect the events, disclosures, or circumstances, except as required by applicable securities laws. Such statements involve significant risks and uncertainties and are not guarantees of future performance or results. A number of these risks and uncertainties could cause results to differ materially from the results discussed today. Given these risks and uncertainties, one should not place undue reliance on these statements and information. Please refer to the forward-looking statements and information and future-oriented financial information section of the company's public filings, which include, without limitation, LifeSpeak MD&A and its earnings press release issued today for additional information. At this time, I would like to turn the call over to Michael Held, Chief Executive Officer of LifeSpeak. Please go ahead, sir.

[Michael Held, executive]

Thank you, operator, and welcome, everyone, to the LifeSpeak First Quarter 2024 Results Conference Call. I am pleased to report that our first quarter featured consistent revenue of $12.4 million and adjusted EBITDA of $2.7 million. Our ability to add new customers and our ongoing focus on prudently managing our costs supported our consistent results. As demonstrated by the participation of our senior management team and Board members in our recent $5 million private placement, which closed in March, insider confidence in our business is strong as we pursue near-term and longer-term growth opportunities. Our confidence is attributable to the fact that we continue to see strong interest for our whole person digital welding services in our first quarter. And so far in the second quarter of 2024, because our clients value the tremendous support we provide for the mental health, physical well-being, and family needs. Customers also want all of these services from a single supplier, and we are able to deliver that. The areas we cover with our product suite have helped LifeSpeak and a reputation as a comprehensive service provider for organizations that need preventative digital education and human expertise to support their employees and end users. For our customers, this matters. It's efficient from a buyer's perspective, plus the integration of services comes from a single provider rather than a disparate collective of businesses providing one-off solutions. With this holistic approach, we were able to add a number of new customers in our first quarter, diversify our revenue base and deliver significant value for existing clients. Notable enterprise client additions for the first quarter included Accenture, netWell and Ascena Retail as new clients. Cross-selling initiatives progressed through the first quarter of 2024, highlighted with the successful cross-sell of our Torchlight product with existing clients, Amazon Canada. Overall, we are very excited about the opportunity that lies ahead of us and believe that we are making progress that will support our long-term growth. I will now pass the call to our Executive Chairman, Nolan Bederman, who will provide more color on the quarter. Nolan?

[Nolan Bederman, executive]

Thanks, Mike. We remain optimistic about LifeSpeak's position in the marketplace. On a quarter-to-quarter basis, our core business is progressing. But when we take a longer-term view of our prospects for growth, it energizes our entire company, from support staff to the sales team to senior management, we're excited about LifeSpeak's future, and we've never had a stronger team. While we're in a business environment where corporate spending has resulted in longer sales cycles, we believe there is significant interest in the high-value services we provide. For example, over the past 6 months, we've had more dialogue with potential direct and strategic clients about our services than we've had in the same period a year ago. While we're not closing deals as quickly as we'd like to, our pipeline and number of opportunities and size of partnerships remains compelling and continues to expand, and we're seeing more strategic potential in our embedded and adjacent revenue pipeline. Our sales and marketing teams are supported by a strong strategy, and our teams now have a much broader and diverse portfolio of products to offer new prospective customers. We're taking a longer-term approach to the success of our integrated business, and we believe we are well-positioned for growth in the near term when the market for our services solidifies. We're looking forward to updating you on their progress in the coming weeks and months. I'll now turn the call over to Mike McKenna, who will walk us through our detailed financials. Mike?

[Michael McKenna, executive]

Thank you, Nolan. Our revenue for Q1 2024 was moderately lower at $12.4 million when comparing to the same quarter in 2023. At the same time, our annual recurring revenue, or ARR, came in at $48.4 million. As a reminder, we report ARR on a constant currency basis for comparative purposes using a CAD 1.3 to U.S. dollar exchange rate. Given our overall exposure to the U.S. dollar and movement in rates through the quarter. We also think it's helpful to note that our ARR on a currency-adjusted basis was $49.8 million as of March 31, 2024. To provide a further breakdown of the base of $48 million of ARR, approximately $42 million came from our 902 enterprise clients, while the remainder came from the embedded and other verticals. As mentioned, the business is geographically diversified. This changed slightly as well during the quarter with now 67% of our ARR originating from markets outside of Canada. This metric will continue to have a positive impact on revenue with the continued strength of the U.S. dollar. Importantly, as we think further about our ARR, no clients account for more than 5% of the ARR as of March 31, 2024. Both our financial results press release and Q1 MD&A provide further detail on our ARR breakdown for the quarter, and on a historical basis for comparative purposes. Moving on to adjusted EBITDA. Our ongoing focus on operational efficiencies provided the company with an adjusted EBITDA of $2.7 million for the quarter. While this is lower on a comparative basis to the first quarter of 2023, it is important to note that this number is very much in line with our Q4 2023 EBITDA despite a decline in revenue. Our adjusted EBITDA and related margin are very important performance metrics for the business and highlight our operational efficiencies and commitment to cost rationalization. The highlighted commitment has allowed us to maintain a healthy adjusted EBITDA margin for the first quarter of 2024 at 22%. While this is a decrease compared to the Q1 2023 adjusted EBITDA margin, it is an improvement over our Q4 2023 adjusted EBITDA margin, which was 21%. In terms of net loss, for the first quarter, our net loss was $1.6 million. This compares to a net loss of $0.4 million for the same period in 2023. This was largely due to the decrease in revenue for the period. In addition to the previously mentioned financial metrics, as you know, we also track other KPIs that continue to help us evaluate our business. Consolidated net dollar retention, or NDR, provides a consolidated measure by which we can monitor the percentage of ARR retained from our existing client base. The NDR for Q1 of 2024 was 83%, which is approximately 4% lower when compared to Q1 of 2023. Logo retention rate, which is measured on an LTM basis was 76% for the quarter. This was approximately 7% lower than reported at Q1 of 2023. The decrease is predominantly due to a continued transformation of the go-to-market strategy to focus on larger customer opportunities given the potential for multiproduct sales, and a focus on higher-margin opportunities, given the cost to service customers is generally similar across the size spectrum. On to capital structure. And with respect to the current capital structure, as of March 31, 2024, the company had significant cash on hand at the end of the quarter and was in compliance with all debt covenants. The company continues to be in compliance with all covenants as of today and believes it is in a stronger financial position now due to the private placement, which was closed on March 14, 2024. The gross proceeds of the $5 million private placement went directly to repay the company's senior outstanding indebtedness. Following the completion of the private placement and debt repayment of $5 million, the company also made a scheduled amortization payment of $1.8 million. As we have previously noted, the company anticipates that the amortization of senior indebtedness will continue to be approximately $1.8 million per quarter through 2024. On to our outlook for Q2 of 2024. Based on the outlook that both Michael and Nolan referenced earlier in the call and the continued implementation of our business strategy, we expect our results for Q2 to be largely consistent with those of the first quarter of 2024. The theme of growth remains available to us and overall results will be in line with the viewpoint provided on the Q4 results call as well. And you can see the consistency in what we're trying to deliver from the perspective of cost management and margin profile. With that, I'd like to thank everyone for their participation in the call this morning. And while I believe we'll now open up the call to questions. Operator?

[Operator]

First question comes from Doug Taylor at Canaccord Genuity -- apologies, they have withdrawn. The first question comes from Michael Moriyama from RBC Capital Markets.

[Michael Moriyama, analyst]

Thank you, and good morning, everyone. It's Michael Moriyama on for Paul Treiber this morning. Just wondering if there are any parts of the 4 acquisitions you guys made historically that you might view now as noncore, and would potentially look to monetize through divestiture.

[Michael McKenna, executive]

No, I was going to say apologies for the slight technical difficulties, and I was going to suggest that that's a good question for Nolan to tackle, but the answer straight away would be no.

[Nolan Bederman, executive]

Yes. And maybe just to put a finer point on it, again, I agree with Mike, sorry for that bizarre, the awkward silence. I thought maybe we got cut off. We actually -- maybe unlike other strategies, we've pursued very much an integration strategy, so very core to our thesis. And I think one of the raise of like we've seen and are starting to see even more is that our product suite is the reason we're having some pretty interesting conversations with a large number of strategics. And importantly, the demand for the product is quite balanced and the coupling of the product is all over the place as well. We've integrated the teams. So, from our standpoint, it's not really something that would work well for our business nor are they really run as separate silos at this point. They're certainly offered a separate offerings, but the businesses have been integrated and the demand for each is sort of very much along the lines of what we -- the balance that we had sort of hoped. In fact, if anything, we're seeing more demand from places we might not have necessarily expected it. So, generally speaking, it would make -- we're not -- it would be negative value to remove any one feature.

[Michael Moriyama, analyst]

That's great. Yes, that makes sense. Yes, obviously, with that cross-sell deal, you guys closed I guess, can see the value of tapping them all together. And then just on the level of OpEx in this quarter. So, nice to see that it ticked down a little bit. Do you think this level is going to be sustainable going -- do you think you guys might be able to return to revenue or ARR growth at these levels going forward?

[Nolan Bederman, executive]

Maybe I'll start, and then Mike McKenna, kind you can add more detail if you think necessary. I'll just talk about it from a management standpoint. So, what we've tried to achieve as a management team is a balance between being fiscally prudent, which we try to be every day, and Mike can talk a little bit about some of our processes there, but also maintaining a growth infrastructure. We do believe -- again, I'm going to be very careful what I say on forward-looking statements, but generally speaking, I think most people in the industry would agree that the spending will return. We think we're better prepared than many to accept that spending, but we have maintained what we will call investment spending in both the product and the go-to-market teams. So, we actually believe that this isn't a handicapped investment level from our business, meaning we think it scales very well when growth returns. We always have room to cut costs, but we've tried to strike a balance between being as prudent as we can, producing the right -- as much profit as we can, but also not handicapping the future growth. So, we don't think we have lags in costs or big costs that we have to catch up later. We think we're doing all of those things and investing in the product. So, I think the best way to answer your question is, we believe we're very scalable from here. And as growth returns in this industry and we capture hopefully, more than our fair share of it. That should result in the numbers. Mike, anything you want to put a fine point on. So, I don't step in.

[Michael McKenna, executive]

Yes. I think the business is set up really well for -- to take advantage of the operating leverage that's created here. I think in the question sort of pointed out in terms of the numbers, I mean, the reality is in Q1 here of 2024 are OpEx, if you want to call it, sales and marketing, and G&A, it's very consistent with Q3, right? We signaled in Q3 of 2023 as we signaled that, that will be the case on the Q4 call. I think we're getting to a very consistent run rate of cost. There's always going to be a few things as we talked about in Q4 that are maybe potential sort of year-end adjustments that come through auto process and different things. But the reality is when you start thinking about the consistency sort of quarter-over-quarter, right, you can trace it back to Q3 of '23, you can go back to Q1 of '23, we're sort of $0.5 million ahead of where we were in Q1 of '23, right? So, we're not going to necessarily be sort of taking out $0.5 million a quarter. That's not the objective. But the reality is getting to a good consistent run rate, I think, is really important. And it sets up the business for really good operating leverage, and also, it's good, strong predictability on our side. With some of the investments Nolan mentioned, I think that's really important, right? We're trying to also make sure that as we rationalize costs in certain areas of the business, invest in others, right? And so, I think that we've done a good job of doing that and maintaining a very consistent cost base, which we endeavored 6 quarters ago to suggest we would.

[Operator]

The next question is from Doug Taylor from Canaccord Genuity.

[Doug Taylor, analyst]

You had constructive things to say about the pipeline momentum, the customer engagement in your prepared remarks. Last quarter, you spoke to the idea of revenue inflection potentially in Q2 after Q1 being a more comparable quarter sequentially. Is that something you're still suggesting we should expect here? Or is the prospect of that given some of the slower sales cycles or further churn, is the prospect of that being pushed out here?

[Michael McKenna, executive]

It's Mike. Sorry, I was going to start with the numbers and then Michael, we can get into a bit more in the detail. And just quickly, Doug, to touch on sort of what we think -- and I've been pretty consistent with this in terms of the financial piece over the last couple of quarters, right? It's probably still another quarter of sort of being very much range balanced both on the revenue side and the EBITDA side. But I think the momentum in the pipeline is continuing to build. So, I'd let Michael and Nolan provide a bit more color on that. But from the numbers perspective, I think you can sort of see -- we try to be very consistent in the sort of signaling as to where we think things will be shaking out quarter-to-quarter.

[Michael Held, executive]

Mike, sorry for cutting you out there. I would reiterate that. Doug, we are -- and this reminds me very much of 2008, 2009 when we dealt with it, things are bleak until they're not. And so, we are seeing the pipeline moving along to contracting and some bigger opportunities too that will give some real juice to our growth in this latter half of the year. The other thing we're seeing, again, this reminds me of 2009 are some opportunities that we were flagging as great opportunities for sales towards the end of last year that really disappeared and we weren't sure if they were gone, they've been doing really well but have come back on the table. There's one in particular, without getting into too many details, less but just the concept of, I haven't heard anything for like 4 months and got a call last Thursday saying, we need to move fast to sign this up in Q2 so we can launch in Q3. So, let's make it happen, and we're putting all our resources towards it. But these are -- it's not just the pipelines growing, but things are moving into the commercials and contracting on a number of fronts in most excitingly in some of the adjacent. So, exactly what month is going to be, I don't know, but it's coming. And like we've definitely turned the corner on that front. There's less discussion about budget and pauses and we're waiting, like people are getting back to doing business. And I certainly believe we have the team to execute on it, and that's what we're focused on now.

[Doug Taylor, analyst]

Okay. So, I mean, in light of the prospect of potentially an uptick in revenue towards the end of this year, and Mike McKenna, you've been pretty clear on the cost expectations. So, I guess what I -- my question is, given that a lot of your debt commitments are now current, maybe I can ask you what tools you have at your disposal to help address that leverage here beyond issuing further equity as you did this last quarter. Can you maybe speak to the range of options at your disposal?

[Michael McKenna, executive]

Doug, it's Mike, I'll start, and then if Mike or Nolan want to add anything, they're obviously welcome to as well. But in terms of the context of the discussions with the lenders, they're very consistent, very ongoing, very much focused at this point on potential refinancing, right? That was noted in the Q4 financial statements as well, through the audit process, right? So, that obviously had to be vetted as part of that process, but those discussions were ongoing. And as they were consistently through Q1, part of the -- frankly, you need to classify the debt this quarter. It was a little bit of just an accounting guidance point. The leverage that we have, the commitment that we have outside of the bank debt. it's not in all the technicalities of the word current and we get into a big sort of accounting debate here about IFRS standards. But I think, importantly, we are ongoing in our discussions with Scotia. We noted in the press release also as well that we've repaid a pretty significant chunk of capital even just since December 31, right, with the amortization payment at the end of the month, at the end of Q4, excuse me. And then the scheduled amortization this quarter, along with the capital raise, right? So, that's a pretty decent amount of repayment, right? And at this point, we're looking at scheduled amortization payments through the balance of the year of $1.8 million per quarter, as I mentioned in my remarks. So, outside of that, there isn't an ask at this point for additional repayment. And as we noted, we're in line with our covenants, there was a little bit of an issue with the ARR test for the month of March. But in terms of the traditional bank covenants, we're on site. So, we're going to keep working to aim to get that debt refinanced on the senior side because that should be absolute top focus and part of our consistency on the cost side, and delivering good strong EBITDA and EBITDA margins quarter-over-quarter shows that there's cash flow in the business and can service the obligations that we have. And so, we're working to continue to do that. And so, I think the discussions for refinancing are ongoing. Obviously, they have to be. And at this stage, that's the focus.

[Operator]

The next question is from Salman Rana from TD Securities.

[Salman Zia Rana, analyst]

Yes. Good morning. This is Salman Rana on behalf of David Kwan. I hope you're all doing well. So, good to hear all the commentary around the pipeline. I believe Michael earlier on the call, he also spoke about seeing some potential on the embedded side. So, could you provide some more details like on how things are going there and whether we could see further like any new development from the front?

[Michael Held, executive]

This is Michael. Mike, you can add after, if you like. No, we've been working on this, as everyone knows, for a long time. The environment obviously hasn't helped. But it also circles back to the first question that as we've gone back to market on these embedded deals or these large adjacent deals, it's critical that we actually made all the acquisitions we made at the IPO. The fact is these large players are very attracted to working with one vendor who has top quality solutions across physical caregiving and mental health and substance use management. We are definitely seeing the pipeline in the large embedded and adjacent is growing particularly fast. They're very keen to get back to business. Many of them are fighting in commoditized worlds against each other and stripping clients from each other, and looking for ways to grow revenue and margin within their existing clientele, in particular, HCM and payroll and insurance and LMS and learning systems are the ones we're seeing the most traction with. And as I mentioned earlier, we've seen some opportunities that were seemingly off the table come back on, not unexpectedly in the sense that the conversations weren't going well, but they had disappeared and are coming back. So, I think the fact that some are coming back. The pipeline is growing, and we are seeing a number of these move into contracting now. So, it's not just happy talk. We're actually debating over numbers. And I don't think it'll be that long before we get there. And so, this is the element of the business that provides a lot of scale, a lot of torque from a margin perspective. We don't need to spend more to execute on these. So, it's very exciting, in spite of the environment we've gone through. And the last little bit, like, honestly, can't be more excited about where this is heading. But it's not -- just reiterating, it's tangible things. Meetings, proposals, long periods of discussions, creating work integration streams on the product side as well as commercial, and now moving into contracting. So, hopefully, that's helpful, but very, very tangible progress, sequential progress.

[Salman Zia Rana, analyst]

Yes. That's really helpful. I noticed in the MD&A, you decided that revenue was down because some entities were either repositioning their programs or were losing funding. But on the call, you've heard much -- I guess, much more positive commentary about your pipeline and so on. So, what are you hearing from clients in Q2 to date? Are you still seeing that some of your clients are, again, losing funding, they just don't have the budget anymore for this? Or are you seeing much more interest like, just like you said earlier on the call. So, how do you balance these two comments?

[Michael Held, executive]

Sorry, it's Michael again. Why don't I handle this? So, there's always a lag between when there's discussion on what is happening, but we're not hearing the same budget cuts. Over the course of the churn, which has been higher than usual and we're getting our hands around it. We're not seeing -- it's literally like just a handful across all of it, where we're losing business to another player, losing clients to another player. Like our offering is best-in-class and we're not seeing that. And so, it's been budget, budget, budget. And I would say not that we're not hearing it at all, but it's a lot less. And so, that's why we strongly -- and we've been through this before, having been in 20 years. That's why we're feeling very confident that not just on the new revenue, but on the churn front that we're that we're turning the corner. There still is some churn in the system. Some decisions have been made historically that are still being fleshed out of our system. But as we start to hear it, the commentary on budget, it's one of the first signs where this is really changing. And the one thing, absolutely, and everyone on this call knows for certain is that the underlying needs of what we're addressing around anxiety and depression and well-being and caregiving and dementia, and all the stuff that we cover, unfortunately, in this world is only increasing daily. So, the underlying needs of what we are providing is increasing daily. And thankfully, the spending environment is changing to match that, so that they can address those needs for their employees and members.

[Salman Zia Rana, analyst]

Okay. That's very helpful and good to hear. And my last question, I guess this one's for Mike. So, if I look at the consensus for fiscal '25 right now, it implies revenues of around $60 million for the full year. So, given that your cost base is pretty stable now, where do you think -- like what do you think the margin profile could look like in the next year?

[Michael McKenna, executive]

Yes. Look, I appreciate the question, right? I think we've not been giving formal annual guidance, right? I think if I look back over the last number of quarters, right? And if we had a 22% EBITDA margin this quarter, 21% in Q4, it was a little bit closer to 25% sort of in Q2 and Q3 of last year and about 27% in Q1 of last year, right? And revenue in Q1 was about $1 million higher, right, in the comparable period, right? So, if you think about that, right, and how much we've taken out of the expense line in that time, right? I think you get a pretty good sort of general thought process, right, around where the operating leverage can go. Because if we were to put $1 million back to the top line now per quarter, right, ultimately, that's going to going to be able to take that margin profile even higher, right, because of where we are on the cost side. So, again, we're staying away from providing formal annual guidance. I think I've been very consistent and clear, especially over the last sort of 3 quarterly calls with some quarter-to-quarter guidance. I don't think we did that again today or do that again today. But I think given where we are on the cost side, you can sort of pretty consistently see that we can get that margin profile heading in the right direction just as soon as revenue turns, right?

[Operator]

The next question is from Justin Keywood from Stifel.

[Justin Keywood, analyst]

I just had a broader strategic question around artificial intelligence. And is this something that LifeSpeak is looking into perhaps in driving some cost efficiency? Or are there other competing products out there that could be a potential threat in using AI?

[Michael McKenna, executive]

Justin, thanks for the question. No one has been spending time on that. So, why don't we give the floor to Nolan on that one.

[Nolan Bederman, executive]

Yes. Thanks, Justin. I'll give you a kind of -- there's two categories broadly that we're looking to employ, we'll call it AI into. One is just operational efficiencies. So, whether that's helping to manage clients more effectively and efficiently, whether that's additional help in building the actual product. We're looking at that both on, A, what can we do on our own and what other vendors can we leverage to do that. I think as people well know, there are 8 million companies out there trying to figure out how they can uniquely leverage AI, not actually sure a lot of these things are companies. Their activities. We spent some time making sure we know what's out there and where we can leverage it, where we can do that on our own. We think that there are some components of AI that are definitely helpful in the delivery of what you could call kind of this well-being care. The risk is, I think, you can over utilize that and have products that essentially are devoid of the human contact and human experience. And if anyone's used any of these tools, which I'm sure everyone on this call has, sometimes the responses are fantastic and very helpful in many ways. And sometimes the responses are terrifyingly unhelpful. We don't believe that the full solution for mental health and physical wellbeing is AI-based. Having said that, it's a great enabler in conjunction with what we do. So, do we ever think that we're going to replace our expert-led content with AI-generated content? We do not. Will we leverage AI in the production of that and in the tools and solutioning so that we can build a more robust experience? Definitely. So, I think that's how we think of AI. And again, whether we -- some of that, what we do in-house, some of that is leveraging partners who are trying to experiment with different uses of AI. But we definitely think it's important as a component. Again, we view it as something that can also help unlock extra utilization and used in conjunction with our existing products and product road map. We think you can just enhance both our efficiencies and how we get there, which speaks to a little bit the margin Mike's talking about, as well as the efficacy of our product. But I just caution folks, I think our view is to utilize AI as the core determinant of value in these sensitive spaces, probably not the right answer in the long run. So again, it's a tool and definitely helpful, but not the sole answer.

[Operator]

We currently have no further questions. I'd like to hand back to Nolan Bederman.

[Nolan Bederman, executive]

Well, thanks, everybody. We do appreciate your time. Sorry for the glitch in the middle, and we look forward to filling in on what we hope to be some progress as the markets continue to improve. So, thank you guys very much, and we look forward to talking to you again.

[Operator]

This concludes today's call. Thank you for joining. You may now disconnect your lines.