LifeSpeak Inc

TSX:LSPK

Earnings Call Transcript

[Operator]

Good morning, and welcome to the LifeSpeak Second Quarter 2023 Results Conference Call. [Operator Instructions]Before we start, we would like to remind you that all amounts discussed in 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 orientated 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 indicates management's expectation of future growth, results of operation, business performance, and business prospects and opportunities.Such statements are made of this date here off and LifeSpeak assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws.Such statements involve significant risks and uncertainties and are not a guarantee 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 the statements and information.Please refer to the forward-looking statements and information and future orientated financial information section of the company's public filings, which include without limitation, LifeSpeak's 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.

[Michael Held, executive]

Thank you, operator, and welcome everyone to the LifeSpeak second quarter 2023 results conference call. I am pleased to report that our second quarter marked another period of revenue in adjusted EBITDA growth and increasing adjusted EBITDA margins, all compared to the prior year period. Our leading physical well-being, caregiving and substance use tools, coupled with our digital mental health education platform, continue to effectively address the well-being needs of employers, health plans and other organizations on a global basis.Our holistic product suite has helped us evolve into a comprehensive service provider for organizations that need preventative digital education and human expertise to support their employees and end-users. With this effective and holistic approach, we were able to accrue new customers in our second quarter, diversify our revenue base and deliver great value for our existing clients globally.The operational excellence is reflected in a number of important business development achievements during our second quarter. Our total number of clients increased by 8% to 996 as of June 30, 2023, compared to 921 in the same period in 2022, and 990 in the first quarter of 2023.Within our core enterprise client base, select client wins in Q2 included Farm Credit Foundations, Nutrien and Skillsoft. Channel partnership growth continued through the second quarter as well as embedded client expansion, with the highlight being the closing of a U.S.-based transaction with Medikeeper, servicing Blue Cross Blue Shield of Massachusetts.During our second quarter, our overall cross-selling initiatives progressed with the successful closing of several cross-sale multi-product opportunities, including with Manitoba Blue Cross and Health Canada. The success was supported by the ramp-up of our Torchlight product into the Canadian market, an initiative that continues to gain traction. With these types of developments well underway, the company anticipates continued growth going forward, driven by net new clients with multi-product solutions, and as the current portfolio of client cross-sell opportunities continue to increase. Overall, we are very excited about the opportunity that lies ahead of us and believe that we are making significant progress.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 highly confident in our prospects for growth. We believe that, our core business remains strong, and while we are currently experiencing a business environment in which corporate spending has resulted in longer sales cycles, a strong market need continues to exist for the important services we provide.We have remained laser-focused on enhancing and strengthening our operations and the go-to-market teams, and over the quarter have completed the repositioning of internal resources for our sales and marketing teams. We believe that the teams are now more focused and efficient, and better positioned to build opportunities in the pipeline, and ultimately convert that pipeline, given our larger and more diverse suite of products.Importantly, we are very well positioned to capitalize as the environment improves. As an example of this progress, our sales teams are seeing increasingly large customer contract wins in the enterprise segment. This is both in general terms and on specific partnership opportunities.New multi-product sales are creating several opportunities that the company would not have been capable of closing prior to the completion and integration of our targeted M&A. The enterprise pipeline, in number of deals and size of partnerships, remains robust and continues to grow. We are also working on pathways to leverage artificial intelligence and large language models to further enhance and optimize our vast multimodal content library, which could provide additional opportunities for growth in the future. We're looking forward to demonstrating the value of our integrated platform going forward, and we'll update you on our 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. While our second quarter financial results are slightly behind expectations in some area, we believe the results continue to demonstrate the strong foundation of our business, and I look forward to sharing those results with you today.Our revenue for Q2 2023 increased by 8% to $13.2 million, that gain of 8% is compared to the same quarter of 2022. ARR, our annual recurring revenue, increased by 4% to $52.2 million, the gain again compared to the same quarter in 2022. Of our $52.2 million in ARR, approximately $44 million came from our 979 enterprise clients, while remaining $8.2 million came in the embedded and other verticals.With respect to the continued geographic diversification of the business, approximately 67% of ARR now originates from markets outside of Canada. As a reminder, we report ARR on a constant currency basis, and we use a 1.3 million CAD to U.S. dollar exchange rate to calculate and compare this ARR. Given our exposure to the U.S. dollar, and as we have done now for a series of quarters, it is helpful to also report this number on a current basis for the reporting period. Using a 1.324 CAD to U.S. dollar exchange rate, a reported rate at the end of the reporting period, our ARR is approximately $52.8 million as at June 30, 2023.As mentioned, on a constant currency basis, ARR has grown by approximately 4% year-over-year, and enterprise ARR has grown by approximately 7%. We continue to maintain a very diverse customer base, with no single customer accounting for more than 5% of ARR as of June 30, 2023. Both our Q2 financial results press release and the Q2 MD&A provide further detail on the results of the quarter, and in comparison to previous periods.Moving on to adjusted EBITDA, our continued commitment to operational efficiencies and cost rationalization provided the company with a strong adjusted EBITDA of $3.3 million, which on a dollar basis is an increase of approximately 38% over the second quarter of 2022.Adjusted EBITDA margin for the quarter was 25%, which continues to be very strong, especially when considering the macroeconomic operating environment.Our adjusted EBITDA margin increased to 25% this quarter from 20% in Q2 2022. Again, dedicated to our efforts of operating the business with efficiency and the strong commitment to cost rationalization.As part of our continued focus on operational efficiencies during Q2 of 2023, we have further enacted approximately $1.3 million of additional annual synergies. This brings the total amount of annualized cost synergies realized since we announced our plan to rationalize costs following our acquisitions to approximately $12.4 million.Moving on to net income and net loss. For the second quarter of 2023, our net loss was $6.3 million, compared to a net loss of $6 million in the same quarter in 2022. This is largely due to accounting impacts of foreign exchange on non-cash items, offset by a decrease in our share-based compensation expense.In addition to the previously mentioned metrics, we also closely track other key performance indicators to help us evaluate the strength of our business. And these include gross profit margin. Our gross profit margin for the second quarter was 91%. This is consistent with the same period in 2022, and up from 90% in Q1 of 2023. On a dollar basis, gross profit for the second quarter of 2023 was $11.9 million.Consolidated net dollar retention, or NDR, provides a consolidated measure by which we can monitor the percentage of ARR retained from existing clients. NDR for Q2 of 2023 was 89%, compared to 76% in Q2 2022, with the large increase -- sorry, with the increase largely due to the reference period no longer being affected by the loss of the large embedded solutions customer that previously discontinued our partnership and has been discussed.Logo Retention Rate. Logo retention, which is measured on an LTM basis, was 82%, which is approximately 7% lower than reported at Q2 of 2022. Logo retention and the minimization of churn is a significant focus for the operating team. While logo loss remains an issue, an important trend that we continue to see in the Enterprise segment is the opportunity to replace lost logos with customers of increased size and breadth. This is a trend that we have noted for multiple consecutive quarters and does continue.Moving on to working capital and capital structure. With respect to our working capital and capital structure, as of June 30, 2023, the company was required to present all borrowings as current on the statement of financial position in accordance with the requirements of IAS 1, given a challenge in meeting a monthly ARR test for the month of June.The company was in compliance with lending covenants, but did need an amendment for the ARR test. Subsequent to June 30, 2023, the company and the lenders entered into an amending agreement that removed the requirement to test the covenant for the month of June 20, 2023 and July 2023.At no time was there an event of default as defined within the loan agreement, either on the convertible term loan or the agreement with the senior lenders, and the issue was only in reference to a June ARR test.Had the company not been required to present all borrowings as current in accordance with IAS 1, the entire outstanding balance of the convertible term loan and approximately $67.8 million of the senior lending facility would have been presented as non-current on the statement of financial position as of June 30, 2023.If measured at the time of filing of the Q2 2023 financial statement. The debt as outlined would be classified as non-current -- excuse me, with only $5.3 million classified as current.Moving on to the outlook for Q3 of 2023. We currently anticipate revenue, ARR, and adjusted EBITDA margin in the third quarter of 2023 to be generally in line with the results of Q2 2023. Overall, the outlook is slightly stronger in Q4 in terms of revenue growth, and we remain committed to operating the business in a fiscally responsible manner as we move forward.It should be noted that the business had positive cash flow from operations in Q2 of 2023 despite the revenue pressures. Cash balance also remains strong, given the decrease from Q1 2023 to Q2 2023 was less than the entirety of the settlement of the Wellbeats contingent consideration, which as has been previously noted, was done in a means that was very responsible for all stakeholders.With that, I would like to thank everyone for their participation today, and we will now open the call to questions. Operator?

[Operator]

[Operator Instructions] Our first question today goes to Jerome Dubreuil of Desjardins Capital.

[Unknown Analyst]

This is Laurent speaking for Jerome. Maybe 2 quick ones here. In the last few quarters, you've been talking about having opportunities in the caregiving business. Do you have an update on your progression there? And then also, you've been showing strong cost control in the last few quarters. Have investments in content been constant recently?

[Michael Held, executive]

I'll take the first one, and then I'll pass it over to -- sorry, excuse me. I'll answer the second question first, and then I'll pass it over to Michael and Nolan to respond to the first question that you answered.The second question, just as it relates to content and the -- as it relates to the cost cutting. So, we have been very active in cost rationalization, and I think that is evident in the numbers.That said, you can also take a look at that sort of first cost line in the income statement, just as it relates to our cost of goods sold, right? That is where we expense the investment in content, and you can see that that's been pretty consistent quarter-to quarter, right? So, there are some inconsistencies maybe from quarter to quarter, with a slight amount of up or down, given some potential timing of investments in filming and the like. But the reality is, that's pretty consistent, because we want to still be consistently investing in the platform, despite trying to rationalize costs in other areas. So, that's an area we continue to invest in. Okay. So, maybe over to Mike and Nolan for the first one.

[Michael McKenna, executive]

Sure. This is Michael. Yes. No, we feel incredibly confident with the caregiving opportunities. A lot of time was actually spent Canadianizing, for lack of a better word, the offering to make sure it was relevant for the Canadian market.As we mentioned on the call, we had an extremely large cross-sell into our largest client, up towards a $1 million, just from that one sale. And we continue to see, we've had a particular initiative and blitz across our Canadian market, especially to existing clients, to cross-sell Torchlight into it, and we're seeing that pipeline grow significantly.So, we do expect to see the pipeline start to convert in the coming quarters. Feel very good about it. It's certainly a very, very timely topic in the market, and particularly in the Canadian market, we don't have competitors, certainly any material competitors in this space. So, remain very, very positive on that.

[Operator]

And the next question goes to Jeff Martin of ROTH MKM.

[Jeff Martin, analyst]

I wanted to drill down on the multiproduct opportunity, in terms of cross-selling. Just curious, #1, if you have an ARR figure for multiproduct? And then secondly, just help us characterize the sale on multiproduct. I assume that's a longer sales cycle. You've been at that for several quarters now. An update on progress there.And then secondly, tied to that, in terms of the reference to repositioning of internal resources, where is that most concentrated? And what are you specifically doing in terms of the sales team in terms of the go-to-market strategy?

[Michael Held, executive]

Jeff, there was a -- I didn't catch all the first question, but I think you were asking me if we're going to specifically report ARR on multiproduct.

[Jeff Martin, analyst]

Yes, I was just curious, I mean, not necessarily reporting it, but just curious how significant is the ARR on a multiproduct basis with clients? Or how many clients have taken on multiproduct at this point? Just some general reference to give a sense of magnitude.

[Michael Held, executive]

Yes, sure. It's a small percentage of clients overall of 1,000, but it's evolving on a much greater basis in terms of percentage overall ARR, and happy to follow-up with you and just even give you some further guidance on that.But it's still evolving, and I think I can turn it over to Michael and Nolan for a bit more granularity on the process and where people are focused. But it is certainly evolving, I think, more so from size and amount of ARR versus necessarily number of customers. That's okay, because the contribution is actually pretty significant. So, I'll follow-up with some specifics for you.

[Nolan Bederman, executive]

And just in terms of -- sorry.

[Michael McKenna, executive]

In terms of really -- sorry.

[Nolan Bederman, executive]

Oh, sorry. Go ahead..

[Michael McKenna, executive]

No, go ahead.

[Nolan Bederman, executive]

Just on the repositioning, I mean, it's fairly simple. That's the good thing about our business. We're certainly dealing with this macro environment, which has been a challenge, and I think the legwork of bringing 5 companies together with a lot, but I think we are well through that.So, tons of focus is really just on 3 things. Our go-to-market strategy is quite simple. We are looking at some longer-term initiatives relating to health plans that I think we feel are quite promising. But in the near future, everything is really just on focusing the messaging and people on employer sales, partners, and what is really new again is the cross-selling and up-selling.So, we only had 1 offering heading into the IPO, so we didn't have a highly evolved and intuitive and structured team and incentives relating to cross-selling. So, we put a ton of time and resources in that regard.We've also spent a ton of time and resources towards just the positioning of our offering and clear messaging and making sure that people understand, that we're not 1 -- we're not 5 separate solutions. It's one solution relating to education, arming people with information to give them agency to look after their health journey.So, it's really been about focusing and getting feet on the ground and working with partners to build that pipeline, which we're seeing actively now. So, it's not complicated. It's just after a lack of a better term, a bit of chaos bringing everyone together, it's really prioritizing and focused on those 3 avenues.And relating to the question about whether the sales are longer for multiproduct, I think, all sales are longer right now just due to the environment. It's been -- we are seeing signs of thawing, which I'm happy to chat about. But in this environment, everything is taking a little longer, so it's a little bit hard to discern.But when there's multi-solutions, sometimes it goes a little faster, because they're not trying to see where we fit in the market, if we can actually address 3 of their needs and not just 1.So, you're probably right that overall, their larger deals will take a little bit longer. But in other events, I think, it might speed things up as we are one vendor who can answer a bunch of issues until a bunch of gaps instead of just one.

[Jeff Martin, analyst]

And then, Mike McKenna maybe you can answer this one. In terms of the working capital cap structure, will there be a September test for ARR up against IAS 1?

[Michael McKenna, executive]

Yes, at this stage, we're in good shape for that, Jeff. Everything, as I mentioned in both the script and in the notes to the financials, is now at current. And so we're proceeding with that. So, it was a matter for June. We got it rectified. And looking out everything will be in order, or is, as I've noted in the notes and in my remarks.And maybe just to put a finer point on that, Jeff, if we did everything today, as I noted when I was in the prepared remarks, if we did everything today, it would be all classified as you'd expect in the current and non-current split.

[Operator]

And the next question goes to Paul Treiber of RBC.

[Paul Treiber, analyst]

Just hoping. Can you speak to your thoughts on the balance between driving higher cash flow here versus trying to continue to make new investments to try to drive growth?

[Nolan Bederman, executive]

Hey, Paul. It's Nolan. I can -- yes. Do you mind if you want me to go, yes. So…

[Michael McKenna, executive]

Nolan, I was going to suggest, turn it over to Nolan, so.

[Nolan Bederman, executive]

Oh, good. Okay, good. I didn't want to interrupt you. So, Paul, the way we think of that is, the answer is yes. So, we're taking a very measured approach. We think, obviously, we want to run the most profitable business we can. We believe we're also in an environment where there's a limit to how much you could profitably invest in growth, and we think we've got a pretty decent balance.So, when we think of how we streamline the business, what we've done is really focus on streamlining operations, also looking at process, workflow, how the products fit together, and then certainly redundancies.But we really have been pretty flexible in terms of building the sales team. So, we've actually upgraded and increased our capabilities there. This relates to a question we had earlier.Having folks with more experience selling multi-products has been a pretty big focus of ours in the first half of the year, and we've added some talent to the team there. So from -- and as Mike answered before, we're not curtailing our investment on product spending either and have a pretty focused roadmap to the future. There's a bunch of different things we can incorporate into our business and features we can incorporate within the teams that we have currently.So, I think we're trying to strike a pretty balanced approach between having the right growth team and running a super-efficient program.

[Paul Treiber, analyst]

And just elaborating a bit more on the efficiencies, you found some this past quarter with some additional synergies. Can you elaborate on like the what is sales and marketing spend? It's about $3 million a quarter. G&A is $6 million per quarter. Is there room, do you see longer-term room to slim down G&A spend?

[Michael McKenna, executive]

Yes, we do. I mean, I think obviously for us, the business is built to scale, and growing revenue is the most dramatic way to increase margin. But certainly, as we bring things together, there are more and more opportunities to do that. I think part of what we've tried to do is do that in a sequential approach so that we ensure that we put the customer first and make sure that the product is always being delivered well, and frankly, advance the product and sort of continue to be at the forefront of delivering the right products at the right time.But definitely, there are opportunities for further consolidation. I mean, if you think of it, we did bring 5 companies together with 5 different infrastructures. So that will continue. But I think for our view, the most dramatic way to increase that is obviously with the increase of sales. But absolutely, we're focused on continuing to look at all aspects of the business.

[Paul Treiber, analyst]

And then just lastly, just on the sales side, obviously macro is a challenging environment, but you are making the sales investments. How do we think about -- when -- like sales cycles? When do you sort of see some of these deals coming through? You mentioned Q4 as a pickup. How do we think about '24? Do you see that momentum that you expect Q4 picking up through '24?

[Michael McKenna, executive]

Held, do you want to give your best prognostication without prognosticating?

[Michael Held, executive]

Yes. I'll predict the economy now. So I mean, the good or the bad news, I mean, I'm coming into my 20th year, so we've been through this before. So a couple of times, it's never fun. The good news is that it does end. And our biggest enemy isn't necessarily that all companies are struggling. It's that with uncertainty, everyone goes on pause, whether they have money or not. And then what happens is it thaws a bit, and the companies that make decisions, some will say no and some will say yes, but we're back in business and we start to grow.What we are seeing already, Paul, are things around, and they're the telltale signs. We're seeing the benefits consultants taking more meetings, putting together proposals, where if you look at the first half of the year, they were dormant. We're seeing small sales breaking through, just because smaller companies during these times are the first to be able to move, while some of the larger ones, as the thawing occurs, take a little bit longer. We're seeing a ton of activity, like proposals and pipelines, like an incredible growth in that regard.What we tend to see, like what we would hear in Q1, for example, Q1, Q2, was we're not even taking a meeting, we're not even looking, we're not doing anything. We're seeing people saying, okay, we're ready to have discussions. Not that, they'll all convert, but again, a telltale sign.The last thing, which we're investing a ton in, is with our partnerships. So this week, for example, we made a couple of sales from some of our key partners. So we're seeing that again. So it's on every front that we're looking for leading indicators. We're seeing it. Do I think the dam will break in the good way for us in October versus January? I don't know, but I believe it's coming. This time we have, compared to the last time it went through the recession, we have a much larger sales team with way more to offer, with way better marketing and way better partners to distribute. So we feel good. I think things are changing. We just need to stay focused and execute to make sure it turns into sales and cash. But it's coming.

[Operator]

And the next question goes to David Kwan of TD Securities.

[Salman Rana, analyst]

This is Salman Rana on behalf of David Kwan. So just 2 questions from my end. You guys spoke of using AI and large language models to optimize your library, but just wondering, could we foresee any possible additional cost savings as you guys potentially deploy AI in your cost space?

[Nolan Bederman, executive]

It's Nolan. Great question. So we're looking at -- so I'd say one caveat, obviously, we know what we do well. We know what we don't. We're not looking to become the bleeding edge of AI, but we do see a couple of things. So on the product side, obviously, we have a very, very, very large globally relevant, massively broad library of content in multimode format. So for us to be able to convert that into something that can progress and learn and add more value in multiple applications, that's sort of the focus there.On the cost side, we absolutely see in a few areas certain cost-saving opportunities, which we're already starting to implement. It goes a little to Paul's question as well earlier. There definitely are workflow things we can improve. I think companies have started to demonstrate that in the marketing side, they can leverage AI to streamline some of what they do or make it more impactful. There's a few other areas internally that we're exploring.So certainly, we are looking at it on both sides of the coin in terms of internal cost reduction, but also leverage internally. So whether it's straight-up cost reduction or productivity enhancement, it's a little bit of a combination. And then obviously, on the product side, the things we might be able to do with the vast amount of content and data that we have might really unlock extra value. It'll take a little bit of time to figure that out in a commercial context, but you see some pretty interesting opportunities there.

[Salman Rana, analyst]

That's good to hear. And just one more question. So as it regards to the enterprise clients, I was hoping you could give us some additional color, whether you're seeing any difference between enterprise clients in Canada and versus the U.S., like where you're seeing more receptiveness, I guess, whether that's coming more from the U.S. side or the Canadian side or whether it's uniform on both sides.

[Michael Held, executive]

I will -- sorry, I thought my battery was running out on my phone for a second. I'll take that one. I mean, we see so much more opportunity in the U.S. just due to the size and the evolution of the market. They've been buying in the well-being space for a longer period of time. So some of those conversations are easier because they have a history of seeing the value and investing in it. But at the same time, in Canada, we see there's less competition. It's not as crowded a space. And so we see -- I'd say it all balances out to equal opportunity across the 2 countries.In terms of the conversation with the actual buyer, the needs are the same. The buying discussion is the same. What we're solving is the same. So we don't see any difference from a receptivity of a need. It's more that the markets are slightly different, but both very promising, especially with what we've built since the IPO.

[Salman Rana, analyst]

Well, that's very helpful.

[Operator]

We have no further questions. I'll now hand back to Nolan for any closing comments.

[Nolan Bederman, executive]

Well, thanks, everybody, for joining us. We appreciate your time. We know it's a busy season, so thank you again and look forward to talking to you again soon.

[Operator]

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