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Thank you for standing by. This is the conference operator. Welcome to the SEB Group of Companies Third Quarter 2021 Conference Call and Webcast. [Operator Instructions] and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Tim Beaulieu, Chief Financial Officer. Please go ahead.
Thank you, Ariel. Good afternoon, everyone, and welcome to the call to discuss SEB's Third Quarter Results for fiscal 2021. On behalf of SEB's Board of Directors, management and employees, I want to thank you for taking the time to participate in today's call. With me on the call is John McKimm, SEB's President, CEO and CIO. Before I turn it over to John, I would like to remind everyone that during this call, we will be discussing SEB's business outlook and making other forward-looking statements that reflect management's expectations regarding SEB's future growth, financial performance and business prospects and opportunities. All such statements are made pursuant to the safe harbor provisions of applicable Canadian securities legislation. These statements reflect current expectations of management regarding future events and operating performance as of the date of this conference call and as of the date of the respective state. Listeners to this call are cautioned that reliance on such information may not be appropriate for other purposes as by their very nature, forward-looking statements require management to make assumptions that are subject to inherent risks and uncertainties. A number of factors could cause actual future results, conditions, actions or events to differ materially from the targets of those expectations, goals, estimates or intentions expressed in the forward-looking statements. On that note, I thank you for your attention. I will now ask John to go ahead and read the call.
Thank you, Tim. So thank you, everyone, for joining the call. This is our results for our third quarter and fiscal year 2021. We're pleased to announce that we have now 6 consecutive quarters of positive EBITDA in the third quarter. The trading 12 months was a positive $1.639 million, and adjusted EBITDA was a positive $2.545 million for the same 9-month period. Continued positive results are targeted for the remainder of fiscal '21 and beyond into 2022 and so forth. EBITDA was, for the quarter was $469,000 versus the $491,000 in the same period in 2020, so relatively flat. Consolidated gross margins improved by 3.3% over the same 9-month period in fiscal 2020. Operating costs were up marginally for the quarter and the 9 months by $215,000. We have 2 revenue streams: software and solutions, and services. Both revenue streams recorded positive growth in the 9 months ending August 31. The positive EBITDA on the technology services revenue streams, the EBITDA was $2.814 million in the 9-month period for fiscal 2021, and $2.83 million in the same period the previous year. The benefit solutions stream recorded a positive $1.358 million EBITDA versus $1.149 million the previous of EBITDA versus a positive $854,000 the previous year. Over 60% of year-to-date revenues came from clients with more than 5-year histories with the company. Signed contracts based on 5-year time frame are valued over $400 million, of which over $100 million is benefit solutions' revenue streams. Approximately 80% of the 2021 consolidated revenue target is expected to be recurring over the next 4 years. We have recurring revenue going out as long as 9 years. And since November 30, 2020 or the last fiscal year-end 2020, the company has won approximately $76 million of net new contracts including option years, over 25% which are solutions-based. COVID-19 has led to increasing demand for our benefits services. As I said, the total contract values continues to grow and utilization of the contracts is gaining stronger traction as government and business put in place more streamlined COVID-19 operating business processes. The majority of the company's business is largely multiyear managed services driven recurring revenue contracts. We manage mission-critical systems and infrastructures for our clients. In the first 9 months of fiscal '21, we received approximately $817,000 of COVID relief funds. The consolidated sales pipeline is the strongest it has ever been. The cost savings initiatives taken over the past several years were largely experienced in 2020 with minimal improvements in 2021. We are anticipating continued positive performance in the 2021 fiscal year versus 2020, which is November 30. On a revenue basis, on the third quarter, consolidated revenues from continuing operations was $15.471 million versus $14.65 million the prior year. The company's growth focus is on the higher-margin solutions revenue, software and solutions revenue, although the services revenue streams is also experiencing stronger growth. Gross margin was 35.7% for the third quarter, down at just a bit from 36.2% in 2021. But year-to-date, consolidated gross margin experienced 3.3% growth over the same period last year. Our salaries increased by about $1 million in the third quarter, primarily due to a reduction in the COVID relief funding. Office and general costs decreased by about $321,000 during the third quarter year-over-year. Professional fees remained relatively flat. Noncash expenses, including amortization, depreciation and share-based compensation decreased by $388,000. These costs are largely -- are expected to be lower in fiscal 2021 versus 2020 as the significant amortization related to acquisition costs is becoming fully amortized. Interest and financing cost, interest accretion and transaction costs from continuing operations decreased by approximately $100,000 in the third quarter year-over-year. Relationships in business development, relationships have been consolidated and grown with multiple new business partners. The company's Channel Partner, White Label strategy has gained very strong traction with more than a dozen active negotiations with Channel Partner opportunities. Several LOIs and LOAs have been executed with revenue growth expected in 2022 and beyond. The company's RFP sales pipeline is the largest it has ever been, both corporate and government, for both the services driven and the solutions-driven revenue streams. To sum up, going forward, the capital expenditures are minimal. The cost structure from acquisitions and integrations has been largely realigned. Both the services revenue and the solutions revenue are anticipated to show strong growth and positive cash flow in 2022 and beyond. Today, approximately 80% of every new gross margin dollar will go to cash flow and EBITDA in both revenue streams. The contract values, including back-log and option years and evergreen remained strong and continually replaces the business from year-to-year. Over 98% of the 2021 targeted revenues are under contract today. Over 80% of 2021 revenues are under contract for the next 4 years. Revenues under contract go out as long as 9 years. The company has established strong traction in multiple new business initiatives and is well positioned to win new business going forward. As I noted before, the company has won over $76 million of net new business year-to-date and has expected that number to increase significantly by November 30, our fiscal year ending 2021. We're open to questions.
[Operator Instructions] Our first question comes from Edward Gilmore of Little Grapevine.
Just a couple of questions, and then I'll jump back in the queue. But back in April, shareholders had voted on and approved their share consolidation. And on the last earnings call, you mentioned that you expected that to be completed by now. And I just was curious what's blocking that from happening? And when maybe we can expect an update?
We have the approval from the Board to go ahead with that. And we are waiting for -- hopefully, for a very positive announcement prior to the execution. But we're looking at executing that prior to year-end.
Okay. And then just another follow-up question on the RSUs and options that were issued earlier in the quarter. That's just kind of gone up here at about $63 million, $64 million. And just curious with issuing those RSUs and options to employees and directors as a bonus, what's the criteria that you were using to make that decision? And how do you come about to those metrics?
The RSUs, virtually all of the RSUs were issued as retention. They vest over a 3-year time period. The vesting period is 10% every 6 months for the first 30 months, and then the other 50% at the end of 36 months. So that was primarily for retention purposes, targeted across a number of key people in the organization, which will be very difficult to replace. Today's labor markets is strong. There are many out there, many demands on staff. We have some very good staff and people. And at this stage, we would like them to participate in the growth and value of the company, given that they are a big part of creating that value. It's largely a retention...
[indiscernible] expectancy
Yes.
[Operator Instructions] Our next question comes from Maj Soueidan of GeoInvesting.
John, I had a quick question here on your margins. And I think you talked about your margin -- your gross margins particularly increasing over time. And then -- or actually, maybe not your gross margins, but your -- I guess, the amount of revenue you get per customer is going to be going up over time as you offer more services to see that. I guess maybe you can comment on both of those, your expectations for gross margins and your loss share from customers. And kind of like a time on how that's going to play out in your mind, like in terms of - obviously, you think they're going to -- those things are going to increase over time, but I was wondering maybe if you could give us a little kind of road map to how that plays out over time?
Let's deal with gross margins first. We have some -- we have 2 revenue streams, services and solutions. The solutions are primarily driven around the benefit processing business, of which the services revenue comes from there as well. But the solutions revenue is largely software-driven with fairly high margins. And some of our gross margins are over 75% there. On the services revenue streams, the gross margins are in the 17%, 18%, 19%. So -- and that's the nature of the business -- of that type of business. So as the -- we're putting a focus on the growth of the solutions -- software solutions revenue. We're seeing some very good opportunities there. Our Channel Partner strategy, White Label Channel Partner strategy, is really driving some significant growth opportunities there, as well as our RFP wins. So we would expect -- if you look out over 3 years, we would expect to see continued growth in the consolidated gross margin, but particularly -- and we would like to think that over the next 36 months, we can move that gross margin range somewhere between 40% and 45% on a consolidated basis. And a big part of that is attributed to, as I say, the software and solutions revenue, the SaaS business, the stuff that we have for benefit processing, okay? With regard to our revenue per client, there's 2 -- on the services revenue, that's largely a managed services business. It's time and materials that has a fixed -- like a gross margin range based on the people. So we're not going to see -- that does not contribute to the revenue per plan member. On the solutions revenue, that's a long-term contracts on a per person, per month, per service, or per solution or per module, as you may say, that's contributing. In 2021 -- 2020, 2021, we will be somewhere around $45 to $46, $47 a person on that side of the business. In that side of the business, that solution side, the revenue that our solutions could capture is over $250 a person. Now this is money that our clients are already spending, okay? And so our task is to transition some of that spending onto our solutions versus other solutions they may use. So we have some significant examples of growth in that area. Like for example, with one client, we've gone from $800,000 in revenue to over $5 million. So that's a big growth area. And we have other clients now where cross-sells and upsells and that we're able to capture more and more of that revenue. So if you look at 36 months, and -- we would like to see if we can get that revenue somewhere over $100 per person per annum. And the majority of that -- if you look at that, that's over $50 per person per annum growth. We think we could do better, but we -- that would be a good target and the gross margin is on that $50 per person. And we currently manage, we have over 500,000 people under contract now, a portion of which is being transitioned still, about 140,000 still being transitioned to the platform. But if you look at that -- of that $50, $55 or more of additional revenue per plan member, the gross margins on that will be somewhere around $40. And of that $40, we would expect over $30 of that $40 to go to our bottom line. So there are some pretty significant growth opportunities in our bottom line because our infrastructure and our business is very scalable. So we have a high fixed cost at the front end. But as more and more utilization of our software and services, the margins can grow quite quickly. So does that answer your question, Maj?
Yes, yes. And then one more kind of question around that. So going from like 40 or 50 to a 100, that's your goals. I mean, does your backlog give you any insight into that possibility? Or is that, you got to go fish for that, pass [indiscernible] can set some color on that, too. I guess it depends on how much of a solutions service you get yourself...
No. Our backlog at the moment is primarily off our existing solutions, the services that we're providing today, okay? So to increase that revenue from 45 to over 100, that is additional sales efforts coming there. So -- and that is by way of new modules that add greater functionality to the processing environment for the client, voluntary products and things like that. But that is -- that growth from 45 to 100 is not in our current backlog.
Okay. And that usually -- when you have add these services, do you think that's going to go into like a backlog? Or is that going to be more of an added service pretty quickly as you start working with the customers?
Well, we're working with the customers. So if you take a customer that we're doing a complete mid environment and stuff for let's say, $45 a year. And we have over 20 modules, and that $45 is generated from about 4 or 5 of those modules, okay? So if we start adding modules, we already have the client. The client is already spending the money. So our job now is to transition or provide additional solutions and services to capture additional money that, that client is spending with other parties. And given that we are the nucleus of their administration business or managing, we have a much easier task of selling that than you would if we were just a one-off provider, because we're the nucleus that kind of sits in the middle. So that's where it is. So that is in 2022, 2023, that whole sales initiatives around growing that revenue per person, per annum, per month is one of our #1 priorities. So our 2 strategic initiatives that all of our business is targeted for is growing the number of plan members under administration and growing the revenue per plan member under administration. And so ever, our total strategies are targeting around those 2 initiatives.
Our next question is a follow-up from Edward Gilmore of Little Grapevine.
John, just a follow-up on the gross margins too that Maj was asking about. I saw on the management discussion and analysis, it mentioned that for benefits operations, the gross margins are dipped a little bit to about 76%, 77% from 84% last year. And it mentioned that this was due to a third-party supplier subscription fee. Could you elaborate on that, please? Is it something that you expect will go away?
Okay. No, we have 2 -- in our solutions business, we have 2 revenue streams there. One is the software -- the service fees from our software, which is a pretty high-margin business. It's 70%, 75%, 80%, 85% gross margin, depending on the particular module. And that is our, let's call that our processing business. Now the additional revenue that's on that side of the business is our voluntary products revenue, okay? So part of that gross margin, voluntary products are solutions that we source from other suppliers. So if you take online medical care, if you take critical illness, insurance solutions, that insurance, we have a number of them, okay? Depending on how the contract is structured with the client, we recognize the full revenue on our books. However, a portion of that revenue has to flow back to the supplier of the service. So once we -- and when that does, then that's what reduces our margin, our gross margin. Now our profitability on our net revenue is very high, okay? Because once it's on our platform, it's like a SaaS solution. It's a pretty high, high margin. But the net revenue is where we make our margin off because a portion of that gross revenue flows back to the third-party supplier. So the more voluntary products that we put across our platform, that may affect our gross margins a little bit that way.
Okay. And then on the -- if my math is right on the managed numbers, I think you've transitioned since January about 40,000 over to being managed up to about 370,000 now. For the remaining 140,000 or so, what's the time line to transition those over? Is it 40,000 a year seems about right? Or how should we model that?
No, it's not -- we should be able to transition those by the end of 2022. And we're not the roadblock in transitioning. We really need to work with our clients, our Channel Partners and -- because we can transition plan members very quickly. Once the environment is planned up, we can move very, very quickly on it. It just takes a little bit of time working with our Channel Partners' infrastructure, okay? Because different Channel Partners have different levels of -- different types of technology and different levels of sophistication and so forth. And sometimes, we need to update some of that infrastructure prior to an implementation. We also need to have the Channel Partners dedicate some employees and resources to working with us on the transition. So the physical task of transitioning, we can execute very quickly. It's really the access to the resources of our Channel Partner to work with us on that transition, that's what takes the time.
Okay, thanks for the clarification. And then I think at the top, I heard you kind of mentioned that November 30 or so, there's -- you're expecting a contract. And I guess, the question is, we've heard from the management team in the past year that the strongest the pipeline has ever been, several LOIs and LOAs have been executed. Could you give us any more color or quantify that, please?
Yes, we have a huge pipeline. And we're expecting some RFPs and stuff that we put out and arrangements, we're expecting some feedback on those this month. And so -- but we've been waiting for that for a while. So they've been a little bit delayed. We're confident on the wins, but we still need to -- sometimes decisions or the process just takes longer. So we were hoping that we would have some of those announcements prior to year-end. But we have several of them that are substantial. So let's see what -- let's see how quickly they come in, but we're -- our fingers are crossed that we can have them before year-end. Either way, I think we have to look at moving ahead on the consolidation. So I mean, that's a big initiative this month as well.
[Operator Instructions] Our next question comes from Andy Wilks, Private Investor.
John, Andy Wilks. It's been a couple of years because of the pandemic since we've gotten together or spoken. My question is -- well, first, I must say, you've made great progress. So as you know, I have quite a bit of experience in transaction processing and I see good value moving forward. So congratulations to the team. My question is around U.S. business. What percent of the business, if any, is done in the United States or for U.S. customers?
There is very little, Andy. We had a few million dollars in shorts business that was a onetime project in 2017, '18, little bit into '19. But right now, the majority of our business is all Canada and our focus is Canada. Our solutions are applicable into the U.S. and international markets, but we're not going into those markets and investing big dollars. We may white label or license our solutions into Channel Partners in different marketplaces, but not if it requires large investment from us, because our Canadian market is very large and our quest to take our plan member revenue from 45 to 100 is a huge growth opportunity for us, and just with our existing client base. So I think the leadership think that the most -- the quickest and the most effective growth strategy is to stay focused on the market that we have. Having said that, we are -- we have been approached by several U.S. organizations who are -- we're in discussions with on licensing or partnering with them on some basis where they put up all the capital, so they literally become a Channel Partner. That would be a profitable relationship. It's not a relationship that we would have to invest hard dollars in.
Maybe we could talk further off-line at some point, so.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. McKimm for any closing remarks.
We'd like to thank everyone for being on the call, we -- and I appreciate the questions. Hopefully, we've given you answers that helps you understand a little bit better. So we're looking for a good fourth quarter. We're looking for some, I think, some pretty good wins here in the next little while. And I think 2022 will be a much better year than 2021. So although we're not totally unhappy with 2021, it was a growth year for us and will be a growth year in the fourth quarter. But we think 2022 will be a much stronger growth year. So thank you very much for being on the call, and you all have our contacts. So feel free to reach out if you have any additional questions. Thank you very much.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.