Q2 2024 Earnings Call Roundup: FiscalNote, Hyperfine, Marchex, and ePlus

FiscalNote Holdings, Inc. (NOTE) Q2 2024 Earnings Call Transcript

Bob Burrows - Western Avenue Advisers LLC Tim Hwang - Chairman, Chief Executive Officer and Co-Founder Jon Slabaugh - Chief Financial Officer and Chief Investment Officer Josh Resnik - President and Chief Operating Officer Good afternoon, ladies and gentlemen, and welcome to the FiscalNote Second Quarter 2024 Financial Results Conference Call. At this time, I would like to inform all participants that their lines will be in listen-only mode. After the speakers' remarks, there will be a question-and-answer session of the call. [Operator Instructions] I would now like to introduce your host for today's conference, Bob Burrows. Mr. Burrows. You may begin. Bob Burrows Good evening. My name is Bob Burrows. I'm with Western Avenue Advisers LLC, which was hired in April as an Investor Relations consultant to the company following Sara Buda's departure. I continue to act in that capacity and look forward to speaking to the company's investor stakeholders in the coming weeks and months ahead. Thank you for joining the call today as we discuss FiscalNote's second quarter 2024 financial results. With me on today's call with prepared comments are Tim Hwang, Chairman, CEO and Co-Founder; and Jon Slabaugh, CFO and Chief Investment Officer. Other members of the senior management team will be available during the Q&A session that will follow these prepared comments. Please note, copies of today's press release, the current report on Form 10-Q for the quarter as well as an updated version of the corporate overview presentation are all available on the company website. In terms of important housekeeping, it is important to mention the following: During this call, we may make certain statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance but rather, are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of the material risks and important factors that could affect our actual results as well as the risks and other important factors discussed in today's earnings release, please refer to our SEC filings, which are available either on our company website or the Securities and Exchange Commission's EDGAR system. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release or the updated version of the corporate overview presentation, both of which are available on the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. Finally, we use key performance indicators or KPIs in evaluating the performance of our business. These include run rate revenue or RRR, annual recurring revenue or ARR and net retention revenue. Again, please refer to the earnings release or the updated corporate deck for definitions of these important metrics. And with that, I'd like to turn the call over to FiscalNote's Chairman, CEO and Co-Founder, Tim Hwang. Tim? Tim Hwang Thank you, Bob, for that introduction, and thank you all for joining us this afternoon. It's good to be with you today to discuss our second quarter 2024 results and provide an update on the state of our overall business. I always look forward to these opportunities to connect with our shareholders and share with you the exciting developments here at FiscalNote. First, let me take a few moments to remind you of some of the core fundamentals of FiscalNote. As you've heard from me many times before, we're on a mission to help our customers make sense of the complicated and constantly changing world we live in by delivering a proprietary AI-enabled platform that aggregates and organizes regulatory, political and macroeconomic information and analyze the impacts on the organization overall. We are the market-leading AI platform for the regulatory legislative policy and geopolitical intelligence sectors, essentially the Bloomberg Terminal for regulatory and legislative and strategic risk, drawing upon a deep reservoir of technical expertise, proprietary data and analytical tools. Our proprietary high-quality and authoritative data on a range of aspects include international, federal, state and local legislation across 80,000 cities, all 50 states and every major federal regulatory agency as well as deep profiles of tens of thousands of policymakers, millions of legislative regulatory bodies and purpose-built analytical tools monitoring governments around the world that have enabled FiscalNote to build a market-leading position across thousands of customers. Many of our assets, including CQ, serve essentially at the Dow Jones of legislative and policy worlds, providing deep domain expertise with proprietary data. CQ, as an example, has been providing Washington with information about congressional votes, budgets and congressional information since 1945. We operate in a large and growing $40 billion addressable market driven by increasing global uncertainty as well as operational and regulatory complexity that impacts almost every organization, from governments and nonprofit organizations through large enterprises who operate in a highly regulated global environment. We have a strong and enduring competitive moat, underpinned by our decade-long investment in data, AI and human intelligence. Our broad AI leadership in both generative AI and domain-specific AI is supported by the deep patent portfolio and is recognized by the world's preeminent AI platforms from OpenAI to Microsoft and Google. We are passionate about our customer success. Thousands of organizations ranging from government agencies and public sector organizations to major corporate customers in the Fortune 500 rely on FiscalNote every day to help interpret the impact of policies, legislation, elections, global conflicts, macroeconomic shifts on their institutions and more importantly, to take actions to achieve their business objectives and minimize political, operational and economic risk. This forms the basis of our durable and long-term growth. We enjoy recurring compounding revenue streams of customers in the basis of annual subscription renewals, coupled with ongoing opportunities to upsell and cross-sell the same customers by offering incremental data sets, products and capabilities that enhance and expand their overall experience and, therefore, value. Our net dollar retention has stayed in the high 90s on a consistent basis, and our revenue stream is approximately 90% recurring in nature, which provides for a high degree of visibility. Driving our success as a management team with a strong record of innovation and product success, which, in turn, has enabled us to push the balance of the market and be innovative on behalf of our customers. We have relentlessly focus on capital allocation strategies that support our goal to build a durable, profitable compounding growth company that provides unique value to the world's most important decision-makers. As we scale the business, we expect to deliver long-term free cash flow margins in line with other information services leaders at scale. Just as S&P Global, IHS Markit, FactSet, Morningstar, CoStar and Avalara have innovated in their respective information fields, FiscalNote is forging a new path for global political, legislative and regulatory policy and market intelligence by delivering mission-critical information that has direct impact on our customers' operations. With our established AI pedigree and our vast array of validated trusted data, we are in a unique position to lead what is an entirely new category within the information services industry. We have a clear competitive advantage to deliver on this outcome. With that as a backdrop, let me turn to our current state of the company. We continue to see positive signs through the business despite macroeconomic headwinds. We have an increased focus towards higher returning segments of our business, where we have reallocated resources towards improving retention rates, margins and profitability. Although we have revised full year revenues, our adjusted EBITDA is still tracking to meet expectations for the year, which highlights our improved profitability and margin profile. This is a testament to our operational discipline, our streamlined product portfolio and our focus on ensuring that we continue to maintain and increase profitability regardless of circumstance. Ultimately, as we progress through 2025, we expect revenue growth to accelerate and more revenue to drop right to the bottom line as we improve operating leverage further. In regards to revenue, we also still see modest growth in our European market and incremental growth from our Dragonfly acquisition, focused on operational risk and security. We continue to build the foundation for higher growth in the future. We had many exciting product launches in the second quarter, including StressLens, which equips users with pioneering innovative new AI agent to help decode the human element of mission-critical calls, speeches, testimony and remarks given by policymakers, CEOs, regulators and other key decision makers. Copilot for Global Intelligence, which transforms policy, regulatory and legislative workflows, and Copilot for Policy, our second Copilot designed to enable increased efficiency and impact on policy and legislative workflows for government affairs professionals. We highlighted these new products at our AI Day in June, which was received positively by analysts and customers and drove a significant volume of new sign-ups for Copilot for Policy in particular. As we've noted on prior calls, this year, we are increasing the velocity of our product launches and enhancements as the foundation for an enduring and sustainable growth. We have made strong progress to date with the launches that I've already noted and we'll have more to announce later this year regarding our core offerings. We know that this is important to increasing client engagement retention overall. The enhancements we are bringing to market, which will take advantage of our industry lead in AI and data science will have a positive impact on retention and growth in the future as well. As I mentioned earlier, the changes to our forecast for calendar 2024 reflect the ongoing focus on higher returning business segments, where we have reallocated resources towards improving client retention rates, margins and profitability. We are focused on increasing efficiencies and productivity in our business in light of the challenging macroeconomic environment. In addition, we are focused on accelerating growth in future quarters through the product development efforts that I've discussed, which will further differentiate our product set and drive increased customer engagement. We are already seeing early indicators of this potential in our Copilot for Global Intelligence, which is driving new cross-sell leads. We have additional product development and enhancements on our road map for later this year, which will impact other areas of our portfolio. We expect these efforts to provide a tailwind to our revenue growth in 2025. To wrap up, we conclude by saying we remain excited about the current state of our business and look to continue to execute across second half 2024 and bridging into 2025. Our investments in AI, our focus on operational excellence and our commitment to customer success position us to capitalize on the vast opportunities ahead. I believe that the new AI-driven feature will mean that the old ways of analyzing legislative, regulatory and geopolitical risk will become obsolete and will drive enormous opportunities for FiscalNote. As I said on our first quarter call in May, and I'll say it again, as we move through 2024, we view it as the first step in a multiyear journey to earning our place in history books and become the dominant player in our industry. Our strategy is simple: deep and wide penetration across our core customer base with our core offerings, translating into higher revenues and accelerating adjusted EBITDA margins as we realize incremental operating leverage. It's a power formula and one that I believe will create significant value for all of our stakeholders in the years ahead. With that, I'll turn it over to Jon Slabaugh, our CFO, for a detailed review of our numbers. Jon? Jon Slabaugh Thank you, Tim. My comments this afternoon will be brief, so let me jump right in and walk through the numbers for Q2 2024, starting with the income statement. Total revenue for Q2 2024 was $29.2 million, lower than the prior year period due primarily to the divestiture of Board.org. While down period-to-period, subscription revenue remains the cornerstone of our business, accounting for 93% of total revenue this quarter, in line with the company's historical trends. Digging deeper into revenue, let's look at our key performance metrics. As of Q2 2024, run rate revenue was $121 million and annual recurring revenue was $109 million. On a pro forma basis, adjusting for the impact of the Board.org divestiture, current year run rate revenue was level with the prior year second quarter and ARR was slightly higher than the prior year quarter. And as of Q2 2024, net revenue retention was 98%, level to the prior year. Overall, on a true apples-to-apples basis, revenue performance for the current period was on par with last year, in line with our revised forecast and indicative of our existing operational capacity. Turning to expenses. Principal operating expenses in Q2 2024 continued the trend of year-over-year decreases, reflecting the impact of cost-savings initiatives instituted in 2023 as well as the impact of the sale of Board.org and sunset products. Specifically, the cost of revenues decreased by over $2.5 million or 28%. R&D decreased by $1.3 million or 29%. Sales and marketing decreased by approximately $2.6 million or 23% and G&A decreased by nearly $5 million or 30%. In aggregate, total operating expenses in Q2 2024 fell over $11 million versus the prior year or 25%. On a pro forma basis, excluding amortization expense, stock-based compensation and the impact of the sale of Board.org, OpEx decreased approximately $6 million or 16%. Looking at our profitability during the quarter, let's start above the line. Gross margins remained strong in the quarter with Q2 2024 coming in at 77% on a GAAP basis and 85% on an adjusted basis, both increases over the prior year period. These improvements primarily reflect our focus on consistent adjusted EBITDA growth and the impact of the sale of Board.org, sunset products and improved efficiencies. As we've said in past calls, we continue to pursue further incremental operating efficiencies. Transitioning to below the line. GAAP net loss for Q2 2024 was approximately $13 million, an improvement over the prior year period. EBITDA for Q2 2024 was negative $2 million, also an improvement versus the prior year. And adjusted EBITDA was a positive $2 million versus a negative $4 million for the prior year. With a positive adjusted EBITDA for the quarter, that brings FiscalNote to 4 consecutive quarters of positive performance for this key profitability metric, a total of approximately $7 million on a trailing four-quarter basis. Turning to the balance sheet. At quarter end, we had cash and cash equivalents of $38 million, which was bolstered by the sale of Board.org in March. Period-end cash also reflects the ongoing initiatives to improve efficiencies across the company and our continuing attention to prudently allocate capital to investments in the business with the highest potential for growth and positive return. Additionally, at quarter end, our total debt outstanding, including principal and accrued interest, stood at $172 million, sequentially lower than the end of the first quarter. Turning to guidance. Today, we raised and tightened our full year profitability forecast for adjusted EBITDA to approximately $8 million, reflecting continued operational efficiencies. At the same time, we lowered our full year revenue forecast for total revenues to approximately $121 million, reflecting the impact of the recently experienced higher rates of customer churn, driven by a number of factors, including macroeconomic headwinds and delays in the launch of certain product enhancements. The weaker client retention experienced in recent quarters has led to slower ARR growth. However, as we progress through the second half of 2024 and into 2025, our continued investments in product innovation and enhancements focused on improved customer experience, including those featured in our June AI Product Day, should drive higher customer engagement, retention rates and as a result, revenue growth and improved operating leverage. We also today provided our initial guidance for Q3 2024 total revenues of approximately $29 million and adjusted EBITDA of approximately $2 million, both reflecting trends we've experienced thus far this year. Finally, I wanted to note that the Board continues to review all strategic alternatives available to the company to maximize value for shareholders. As we stated before, we do not intend to provide updates on the outcome of this review until further disclosure is appropriate and required. Our business through the midpoint of the year remains well positioned to drive further impact and success. We continue to implement our product strategy while executing on the operational efficiency initiatives as we further solidify our position as a critical partner to a diverse global customer base. That concludes my prepared remarks. I'll turn it over to the operator to begin the question-and-answer session. Operator? Thank you. [Operator Instructions] And your first question comes from the line of Zach Cummins with B. Riley Securities. Please go ahead. Ethan Widell Hi, this is Ethan Widell calling in for Zach Cummins. Just one from my end. So can you maybe elaborate a little bit on the factors behind the revs guidance? Is it mostly just churn based on macros you were talking about? Or is there anything else in play there? Thank you. Josh Resnik Yes, this is Josh. I can address that. So in terms of what we're seeing there, there's certainly the macro in play. We're seeing some slower decision-making, some softness on renewals as a result of the macro. We are very focused on driving improvements through what we can do in terms of the product improvements that Tim spoke about, and we are very confident in our ability to have a positive impact on customer engagement and retention, but macro is definitely playing a factor. And we're doing other things, too, around operational as well as we have continued to do over time, look at things like customer scoring models and the like that we think will drive improvement there as well. Your next question comes from the line of Mike Latimore with Northland Capital Markets. Please go ahead. Unidentified Analyst Hi, this is Vijay Devar [ph] for Mike Latimore. Thanks for taking my questions. The first one is on the Board.org. You've got 7x revenue for that in terms of valuation. So wondering are there any other groups that could logically be independent. And if divestment strategies looked at for such groups, what valuations would be logical for those? Jon Slabaugh I'll take that. It's Jon Slabaugh. And I would say that we're not presently planning to make a divestiture that we were prepared to speak to at this time. And I think it's - I think we have a view of valuation in the underlying products that we own, and we think they're disconnected from where overall market value is, and we'll continue to explore ways to maximize shareholder value. But presently, nothing imminent. Unidentified Analyst All right. Got it. And secondly, on the majority of bookings tend to happen around the September-December time frame. So how are the leading indicators of bookings for that period? We talked about a little bit macro headwinds, but any commentary on the leading indicators for bookings? That will be helpful. Josh Resnik Sure. Yes, this is Josh. So I mean our forecast reflects what we expect to see from a bookings perspective for the second half. As I mentioned, we have seen some slowness from the macro, but we're taking steps that we need to do to address what we can control internally. We do have a healthy new logo pipeline. So we're feeling better about the second half. [Operator Instructions] There are no further questions. I will now turn the call back over to Bob Burrows for any closing remarks. Please go ahead. Bob Burrows Thank you, Angela. That concludes our call today. We appreciate everyone's participation on the call. And if there are any additional questions, obviously, feel free to reach out to any of us. Again, we really appreciate the time and thank you very much. We'll speak to you all soon. That concludes today's call. Thank you all for joining. You may now disconnect.

Earnings call: Hyperfine Inc. reports robust growth and FDA clearance By Investing.com

Hyperfine Inc. (ticker: HYFN), a pioneer in medical imaging technology, reported a record quarter in Q2 2024, with $3.6 million in total revenue, indicating robust growth in both the U.S. and international markets. The company's CEO, Maria Sainz, highlighted the strong performance in the neurology and stroke care sectors. With the FDA clearance of their AI-powered software and promising clinical study results, Hyperfine is poised for significant business acceleration, particularly with its Swoop system in the Alzheimer's care market. Hyperfine Inc. stands at the forefront of innovation in the medical imaging field, with its Swoop system gaining traction in clinical settings. The company's strategic focus on neurology and stroke care, coupled with its expansion plans into Alzheimer's care, positions it well for future growth. With a solid financial outlook and a commitment to innovation, Hyperfine Inc. is set to make a significant impact on healthcare delivery in the coming years. Hyperfine Inc. (HYFN) has shown a strong commitment to innovation in the medical imaging industry, and recent financial data from InvestingPro underscores the company's growth trajectory. With a market capitalization of $81.37 million, Hyperfine's revenue growth is noteworthy, having surged by 47.25% over the last twelve months as of Q1 2024. This is particularly impressive given the company's focus on the neurology and stroke care sectors, which have contributed to its record revenues in Q2 2024. InvestingPro Tips reveal that while Hyperfine holds more cash than debt on its balance sheet, it is quickly burning through cash, which aligns with the company's projection of approximately $40 million cash burn for 2024. The company's liquidity is further evidenced by its liquid assets exceeding short-term obligations, providing it with a cushion to support ongoing operations and investment in growth areas such as the Alzheimer's care market. Despite the challenges, Hyperfine has achieved a strong return over the last three months, with a 38.0% price total return, reflecting investor confidence in its strategic direction and market potential. It's also important to note that analysts have revised their earnings downwards for the upcoming period, and they do not anticipate the company will be profitable this year, which may be a point of consideration for investors. For those looking for more detailed analysis and additional insights, InvestingPro offers more tips on Hyperfine Inc., available at: https://www.investing.com/pro/HYFN. With these insights, investors can gain a deeper understanding of the company's financial health and make more informed decisions. Operator: Good afternoon, and welcome to Hyperfine's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Marissa Bych from Gilmartin Group for introductory disclosures. Marissa Bych: Thank you for joining today's call. Earlier today, Hyperfine Inc. released financial results for the quarter ended June 30, 2024. A copy of the press release is available on the company's website as well as sec.gov. Before we begin, I'd like to remind you that management make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, expense management, expectations for hiring, training and adoption, growth in our organization, market opportunity, commercial and international expansion, regulatory approvals, and product development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our latest periodic filings with the Securities and Exchange Commission. This conference call contains time-sensitive information that is accurate only as of the live broadcast today, August 8, 2024. Hyperfine Inc. disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Maria Sainz, President and Chief Executive Officer of Hyperfine. Maria Sainz: Good afternoon and thank you for joining us. On the call with me today is our Chief Administrative Officer and Chief Financial Officer, Brett Hale. Our strong performance in 2024 continued in Q2 with a record quarter at $3.6 million in total revenue and a balanced mix of U.S. and international deals. In the U.S., we continued adding flagship accounts to our ramp of early and enthusiastic users. And the pipeline is growing strong. International contributions to revenue were also very healthy in Q2. We are pleased with the engagement and performance of our distribution network. I would like to share that we conducted our first in-person service and product training session for our global partners early in the quarter. Beyond our strong commercial traction, we achieved several important milestones associated with our innovation and clinical programs. The recently announced clearance by the FDA of our ninth generation AI-powered software marks a critical step forward in the imaging capability of our unique ultra-low field portable brain MRI. We are now able to upgrade the image quality and reduce acquisition times, delivering higher overall clinical performance. Reducing scan times may help us speed up the diagnostic process in certain clinical circumstances like acute care settings, which can be crucial for time-sensitive medical conditions such as stroke where time is brain. Artificial intelligence remains a powerful engine behind our sequence development innovation, and it has been very rewarding to see how our total number of AI-powered marketing authorizations places our company in a leading position on the FDA's list of artificial intelligence and machine learning enabled medical devices recently published. On the clinical front, enrollment began in the CARE PMR study in Alzheimer's program, and it has been progressing well. We are now scanning for the detection of ARIA complications in patients who are taking amyloid-targeting therapy at 3 LEQEMBI infusion program and are in discussions with several other potential study sites. As a reminder, CARE PMR compares portable ultra-low-field brain MRI with a high-field convention MRI to assess the ability of the Swoop system to detect ARIA complications in patients taking amyloid-targeting therapies. And just last week, at the Alzheimer's Association International Conference, Washington University and Mass General Brigham presented very promising initial data on ARIA detection with Swoop as well as the use of Swoop for monitoring the progression of Alzheimer's. The first sponsor was presented by Dr. Okafor from Washington University and included the images of one of the first ARIA cases observed in the study on both a conventional 3 Tesla (NASDAQ:TSLA) scanner and the 2 ultra-low-field portable scan. The second hoster presented by Dr. Taylor Kimberly from Mass General Brigham, focused on the quantitative assessment of ultra low-field MRI images compared to conventional high-field MR images in evaluating brain morphometry in Alzheimer's patients and highlighted a strong agreement in volumes between conventional MR images and some imagers. The authors concluded, given its portability and low operational costs, low-field MRI folks promise as a valuable tool to diagnose Alzheimer's disease and monitor its progression. There are real workflow benefits to brining brain imaging closer to patients with Alzheimer's disease, their clinicians and care partners with the potential to have substantial impact in access, cost and equity in Alzheimer's care. We expect to significantly optimize workflow and ultimately open up the opportunity for more patients to be monitored and treated safely and efficiently at different types of care. In stroke, ACTION PMR is progressing well. This is a multi-sensory evaluation assessing the use of the Swoop system for the triage of acute ischemic stroke. The initial 100 patients have been enrolled to evaluate acute stroke detection with the Swoop system as compared to CT and conventional MRI. Recently, we announced the publication of our subset of data from this study, providing early evidence that the Swoop system is a promising tool for enabling critical stroke treatment choices in urgent care settings. The data is published in the August 2024 edition of Annals of Neurology and highlights also low field MRI's ability to be used as a tissue clock to characterize acute stroke. We look forward to having additional data shared later this year. We also plan to launch the workflow phase of our study to assess the efficiency and economic value of accessible-grade MRI and spoke studies to triage stroke. Now building on the momentum we have across all of our initiatives, I want to provide more detail on the acceleration we expect to see in our business as early as 2025. We have also detailed these catalysts on Slide 12 of our most recent investor presentation deck, which you can find on our Investor Relations site. As the field of Alzheimer's care continues to rapidly evolve, we are generating data to support the clinical utility and workflow benefits of the Swoop system for this patient population. We anticipate that we will be placing Swoop systems in neurology clinics, infusion centers and other Alzheimer's care programs commercially in the second half of 2025. The stroke opportunity will open up the placement of Swoop units in EDs and hub-and-spoke stroke networks. Stroke triage is creating significant challenges in EDs across the U.S., resulting in considerable clinical and economic burden. With the use of Swoop system provides a readily available MRI tool to triage stroke in EDs and spoke sites, positively impacting stroke care and costs. We anticipate EBIT placements to be incremental to critical care placements in the hospital setting, and we expect revenue contribution from this opportunity starting in the second half of 2025. We have also been pursuing opportunities outside of the hospital. I would like to now provide detail on our entrance into the neurology office setting as a new and additional business for Swoop system placement. Our initial step in our plan to enter neurology offices is obtaining accreditation. And we are pursuing expanded outdoor hospital and clinic setting accreditation through the Intersocietal Accreditation Commission, IAC, which we anticipate being completed by the end of this year. Additionally, the American College of Radiology Accreditation recently revised their safety manual to include new language regarding the safety profile and training requirements of low-field point-of-care MRI. We are pleased that major accreditation bodies are now formally acknowledging the importance and emergence of low-field point-of-care MRI. We are mobilizing resources to support this new opportunity for Hyperfine, and we expect to see revenue contributions from the new office business also in the second half of 2025. Furthermore, international expansion will be another growth driver in 2025 as we will have a full year of our international distribution network in place as well as a potential regulatory approval in India in the second half of the year. Clinical use internationally is similar to what we have seen and trying to do in the U.S., and we anticipate Swoop system placements in international markets across multiple types of care, including adult and pediatric care settings. The diverse Swoop system adoption expansion and growth opportunities ahead of us are all large and compelling. The fundamentals of our business are solid, built on our proprietary technology, our leadership position, our track record of innovation, our healthy gross margin profile and strong spending discipline. We have multiple large and near-term opportunities to grow from our strong foundation, and I am confident we will see significant business acceleration in 2025 and beyond. I would now like to turn the call over to Brett to review our performance in the quarter. Brett Hale: Thank you, Maria. Turning to our financial results for the second quarter of 2024. Revenue for the quarter ended June 30, 2024, was $3.6 million, up 7% compared to the second quarter of 2023 and up 10% compared to the first quarter of 2024. Gross profit for the second quarter of 2024 was $1.8 million compared to $1.4 million in the second quarter of 2023, resulting in a record gross margin of 50%. R&D expenses for the second quarter of 2024 were $5.9 million compared to $5.3 million in the second quarter of 2023. Sales, general and administrative expenses for the second quarter of 2024 were $6.7 million compared to $7.8 million in the second quarter of 2023. As outlined by Maria, we continue to invest in the areas of innovation and operate lean. Net loss for the second quarter of 2024 was $10.1 million, equating to a net loss of $0.14 per share as compared to a net loss of $10.6 million or a net loss of $0.15 per share for the same period of the prior year. The improvement in net loss was a result of our strong revenue, expanding gross margin and continued spending discipline and cost-saving initiatives implemented across the business over the past year. Our cash burn in the second quarter of 2024 was $9.4 million. And as of June 30, 2024, we had $53.8 million in cash and cash equivalents on our balance sheet. Turning to guidance. We are raising our revenue outlook for the full year 2024 to a range of $13 million to $16 million. We expect continued commercial progress in the second half of the year with the expectation of some summer seasonality impact, given our increased mix of international revenue. We are driving healthy margins even at small scale, and we were pleased to drive a record 50% gross margin in the second quarter of 2024. We have a differentiated and attractive profile among medical imaging companies and companies that are scale, and we are optimistic that we will surpass 50% gross margins comfortably and sustainably over time as we realize the commercial acceleration from our growth catalysts. For the full year 2024, we continue to expect gross margins to be in the range of 45% to 50%. We continue to anticipate total cash burn of approximately $40 million for the full year 2024. We expect our cash burn to be below 2023 levels, and we will execute this plan while sustaining investments in our key growth drivers. We also continue to see a cash runway for the business into early 2026, funding the commercial realization of the growth catalyst Maria mentioned previously. At this point, I'd like to turn the call back to Maria for closing comments. Maria Sainz: Thank you, Brett. I'm proud of the strong progress that Hyperfine team made in the second quarter and year-to-date. We're advancing our growth initiatives and delivering record revenue. I remain very optimistic in our ability to execute and deliver significant business acceleration in 2025 and beyond. Just last week, I was able to witness first hand the interest and see the outcome for what portable MRI can represent in Alzheimer's care. The Alzheimer's disease field is an area of huge unmet need with significant investment from the pharma industry, global policymakers and advocacy groups. It is rapidly evolving and the focus on access, equity and workflow simplification is often in the center of the debate, which reinforces how we assess the fifth and the potential for the Swoop systems. With that, I want to thank you for your time and open up the line for questions. Operator: Thank you. [Operator Instructions] Your first question comes from the line of Yuan Zhi from B. Riley. Please go ahead. Yuan Zhi: Hi, Maria, congrats on a very good quarter. And thank you for taking our questions. I got a couple of questions here. First, I would like to hear the reasons for you to update the guidance here. Was it driven by your U.S. sales force? Or was it kind of partly contributed by the international sales? And then if you can comment on your confidence reaching the guidance here, that would be great. Then I have another follow-up. Maria Sainz: Sure. Thank you, Yuan. So clearly, the first half has been a strong first half, and we're closing the first half with strong momentum across both our U.S. and our international channels. And that has gotten us to really raise the guidance with confidence that we can deliver a little bit more than we thought before in light of how well the international channel has responded with our support, but also the strength of the pipeline in the U.S., both in adult and pediatric hospitals, which we have been mentioning for the last few quarters. Yuan Zhi: Got it. Got it. So for - it was great to see the hoster presentation at AIC and I heard positive feedback on the product demonstration. I'm just curious, have you thought about the timeline to convert some of the leads from AIC into others? Maria Sainz: Great question. And yes, we were very, very pleased with the reception at AAIC of our technology, the image quality, the patient experience. We had over 300 of the participants who volunteered and waited in line to get scanned with our device to experience first hand what that would represent to their patients, and we had many of them also checking with Dr. Ngo, our Medical Officer, in our viewing station and look at the images and the quality of the images. It is a little early to know how quickly a lot of this interest will funnel into orders, but we definitely came home with a long list of follow-up items across a lot of interesting opportunities. Definitely, we uncover some of the larger LEQEMBI programs that are out there that would be great targets for us to continue to collect ARIA data. There was interest from some of the other industry players that we're following up on. There was renewed and continued interest from some of the ADRCs we had already contacted that are willing to go a little bit faster and getting involved with our technology. There was also interest around doing community-based screening using our device to keep filling the funnel of potential likely candidates for the ATT drug therapy. So we are anticipating, and we've chosen to add a slide to our investor deck that, really, the entry commercially into Alzheimer's is really right around the second half of next year. So we are really seeing it as a growth - as a revenue contributor starting about that time frame. Yuan Zhi: Got it. One last question before I jump back to the queue. I'm curious, any updates we should be watch at the CTAD clinical trial in Alzheimer's Disease Conference in Madrid at the end of October? Maria Sainz: Yes. Great question. And of course, that is our next very important Alzheimer's meeting, that is the CTAD, so Clinical Trials in Alzheimer's Disease, which, as you said, is at the end of October in Madrid. We will have additional data presented from the Washington University Group, which is the same one that presented on one of the very first ARIA cases on our technology side by side, really the same case on a 3T technology, which is the encouraging sort of token that starts pointing to the merit of our technology in detecting ARIA. So expect to see more data presented by Dr. Okafor again in Madrid late October. Yuan Zhi: Got it. Great. Thanks for taking our questions. And again congrats on a good quarter Maria Sainz: Excellent. Thank you very much. Operator: There are no more questions at this time. That concludes our Q&A session. I will now turn the call back over to Maria Sainz for closing remarks. Please go ahead. Maria Sainz: Thanks to all for joining us here today. We look forward to further updates from Hyperfine next quarter. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Hyperfine, Inc. (HYPR) Q2 2024 Earnings Call Transcript

Marissa Bych - Investor Relations Maria Sainz - President and Chief Executive Officer Brett Hale - Chief Administrative Officer and Chief Financial Officer Good afternoon, and welcome to Hyperfine's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Marissa Bych from Gilmartin Group for introductory disclosures. Marissa Bych Thank you for joining today's call. Earlier today, Hyperfine Inc. released financial results for the quarter ended June 30, 2024. A copy of the press release is available on the company's website as well as sec.gov. Before we begin, I'd like to remind you that management make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, expense management, expectations for hiring, training and adoption, growth in our organization, market opportunity, commercial and international expansion, regulatory approvals, and product development are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our latest periodic filings with the Securities and Exchange Commission. This conference call contains time-sensitive information that is accurate only as of the live broadcast today, August 8, 2024. Hyperfine Inc. disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Maria Sainz, President and Chief Executive Officer of Hyperfine. Maria Sainz Good afternoon and thank you for joining us. On the call with me today is our Chief Administrative Officer and Chief Financial Officer, Brett Hale. Our strong performance in 2024 continued in Q2 with a record quarter at $3.6 million in total revenue and a balanced mix of U.S. and international deals. In the U.S., we continued adding flagship accounts to our ramp of early and enthusiastic users. And the pipeline is growing strong. International contributions to revenue were also very healthy in Q2. We are pleased with the engagement and performance of our distribution network. I would like to share that we conducted our first in-person service and product training session for our global partners early in the quarter. Beyond our strong commercial traction, we achieved several important milestones associated with our innovation and clinical programs. The recently announced clearance by the FDA of our ninth generation AI-powered software marks a critical step forward in the imaging capability of our unique ultra-low field portable brain MRI. We are now able to upgrade the image quality and reduce acquisition times, delivering higher overall clinical performance. Reducing scan times may help us speed up the diagnostic process in certain clinical circumstances like acute care settings, which can be crucial for time-sensitive medical conditions such as stroke where time is brain. Artificial intelligence remains a powerful engine behind our sequence development innovation, and it has been very rewarding to see how our total number of AI-powered marketing authorizations places our company in a leading position on the FDA's list of artificial intelligence and machine learning enabled medical devices recently published. On the clinical front, enrollment began in the CARE PMR study in Alzheimer's program, and it has been progressing well. We are now scanning for the detection of ARIA complications in patients who are taking amyloid-targeting therapy at 3 LEQEMBI infusion program and are in discussions with several other potential study sites. As a reminder, CARE PMR compares portable ultra-low-field brain MRI with a high-field convention MRI to assess the ability of the Swoop system to detect ARIA complications in patients taking amyloid-targeting therapies. And just last week, at the Alzheimer's Association International Conference, Washington University and Mass General Brigham presented very promising initial data on ARIA detection with Swoop as well as the use of Swoop for monitoring the progression of Alzheimer's. The first sponsor was presented by Dr. Okafor from Washington University and included the images of one of the first ARIA cases observed in the study on both a conventional 3 Tesla scanner and the 2 ultra-low-field portable scan. The second hoster presented by Dr. Taylor Kimberly from Mass General Brigham, focused on the quantitative assessment of ultra low-field MRI images compared to conventional high-field MR images in evaluating brain morphometry in Alzheimer's patients and highlighted a strong agreement in volumes between conventional MR images and some imagers. The authors concluded, given its portability and low operational costs, low-field MRI folks promise as a valuable tool to diagnose Alzheimer's disease and monitor its progression. There are real workflow benefits to brining brain imaging closer to patients with Alzheimer's disease, their clinicians and care partners with the potential to have substantial impact in access, cost and equity in Alzheimer's care. We expect to significantly optimize workflow and ultimately open up the opportunity for more patients to be monitored and treated safely and efficiently at different types of care. In stroke, ACTION PMR is progressing well. This is a multi-sensory evaluation assessing the use of the Swoop system for the triage of acute ischemic stroke. The initial 100 patients have been enrolled to evaluate acute stroke detection with the Swoop system as compared to CT and conventional MRI. Recently, we announced the publication of our subset of data from this study, providing early evidence that the Swoop system is a promising tool for enabling critical stroke treatment choices in urgent care settings. The data is published in the August 2024 edition of Annals of Neurology and highlights also low field MRI's ability to be used as a tissue clock to characterize acute stroke. We look forward to having additional data shared later this year. We also plan to launch the workflow phase of our study to assess the efficiency and economic value of accessible-grade MRI and spoke studies to triage stroke. Now building on the momentum we have across all of our initiatives, I want to provide more detail on the acceleration we expect to see in our business as early as 2025. We have also detailed these catalysts on Slide 12 of our most recent investor presentation deck, which you can find on our Investor Relations site. As the field of Alzheimer's care continues to rapidly evolve, we are generating data to support the clinical utility and workflow benefits of the Swoop system for this patient population. We anticipate that we will be placing Swoop systems in neurology clinics, infusion centers and other Alzheimer's care programs commercially in the second half of 2025. The stroke opportunity will open up the placement of Swoop units in EDs and hub-and-spoke stroke networks. Stroke triage is creating significant challenges in EDs across the U.S., resulting in considerable clinical and economic burden. With the use of Swoop system provides a readily available MRI tool to triage stroke in EDs and spoke sites, positively impacting stroke care and costs. We anticipate EBIT placements to be incremental to critical care placements in the hospital setting, and we expect revenue contribution from this opportunity starting in the second half of 2025. We have also been pursuing opportunities outside of the hospital. I would like to now provide detail on our entrance into the neurology office setting as a new and additional business for Swoop system placement. Our initial step in our plan to enter neurology offices is obtaining accreditation. And we are pursuing expanded outdoor hospital and clinic setting accreditation through the Intersocietal Accreditation Commission, IAC, which we anticipate being completed by the end of this year. Additionally, the American College of Radiology Accreditation recently revised their safety manual to include new language regarding the safety profile and training requirements of low-field point-of-care MRI. We are pleased that major accreditation bodies are now formally acknowledging the importance and emergence of low-field point-of-care MRI. We are mobilizing resources to support this new opportunity for Hyperfine, and we expect to see revenue contributions from the new office business also in the second half of 2025. Furthermore, international expansion will be another growth driver in 2025 as we will have a full year of our international distribution network in place as well as a potential regulatory approval in India in the second half of the year. Clinical use internationally is similar to what we have seen and trying to do in the U.S., and we anticipate Swoop system placements in international markets across multiple types of care, including adult and pediatric care settings. The diverse Swoop system adoption expansion and growth opportunities ahead of us are all large and compelling. The fundamentals of our business are solid, built on our proprietary technology, our leadership position, our track record of innovation, our healthy gross margin profile and strong spending discipline. We have multiple large and near-term opportunities to grow from our strong foundation, and I am confident we will see significant business acceleration in 2025 and beyond. I would now like to turn the call over to Brett to review our performance in the quarter. Brett Hale Thank you, Maria. Turning to our financial results for the second quarter of 2024. Revenue for the quarter ended June 30, 2024, was $3.6 million, up 7% compared to the second quarter of 2023 and up 10% compared to the first quarter of 2024. Gross profit for the second quarter of 2024 was $1.8 million compared to $1.4 million in the second quarter of 2023, resulting in a record gross margin of 50%. R&D expenses for the second quarter of 2024 were $5.9 million compared to $5.3 million in the second quarter of 2023. Sales, general and administrative expenses for the second quarter of 2024 were $6.7 million compared to $7.8 million in the second quarter of 2023. As outlined by Maria, we continue to invest in the areas of innovation and operate lean. Net loss for the second quarter of 2024 was $10.1 million, equating to a net loss of $0.14 per share as compared to a net loss of $10.6 million or a net loss of $0.15 per share for the same period of the prior year. The improvement in net loss was a result of our strong revenue, expanding gross margin and continued spending discipline and cost-saving initiatives implemented across the business over the past year. Our cash burn in the second quarter of 2024 was $9.4 million. And as of June 30, 2024, we had $53.8 million in cash and cash equivalents on our balance sheet. Turning to guidance. We are raising our revenue outlook for the full year 2024 to a range of $13 million to $16 million. We expect continued commercial progress in the second half of the year with the expectation of some summer seasonality impact, given our increased mix of international revenue. We are driving healthy margins even at small scale, and we were pleased to drive a record 50% gross margin in the second quarter of 2024. We have a differentiated and attractive profile among medical imaging companies and companies that are scale, and we are optimistic that we will surpass 50% gross margins comfortably and sustainably over time as we realize the commercial acceleration from our growth catalysts. For the full year 2024, we continue to expect gross margins to be in the range of 45% to 50%. We continue to anticipate total cash burn of approximately $40 million for the full year 2024. We expect our cash burn to be below 2023 levels, and we will execute this plan while sustaining investments in our key growth drivers. We also continue to see a cash runway for the business into early 2026, funding the commercial realization of the growth catalyst Maria mentioned previously. At this point, I'd like to turn the call back to Maria for closing comments. Maria Sainz Thank you, Brett. I'm proud of the strong progress that Hyperfine team made in the second quarter and year-to-date. We're advancing our growth initiatives and delivering record revenue. I remain very optimistic in our ability to execute and deliver significant business acceleration in 2025 and beyond. Just last week, I was able to witness first hand the interest and see the outcome for what portable MRI can represent in Alzheimer's care. The Alzheimer's disease field is an area of huge unmet need with significant investment from the pharma industry, global policymakers and advocacy groups. It is rapidly evolving and the focus on access, equity and workflow simplification is often in the center of the debate, which reinforces how we assess the fifth and the potential for the Swoop systems. With that, I want to thank you for your time and open up the line for questions. Thank you. [Operator Instructions] Your first question comes from the line of Yuan Zhi from B. Riley. Please go ahead. Yuan Zhi Hi, Maria, congrats on a very good quarter. And thank you for taking our questions. I got a couple of questions here. First, I would like to hear the reasons for you to update the guidance here. Was it driven by your U.S. sales force? Or was it kind of partly contributed by the international sales? And then if you can comment on your confidence reaching the guidance here, that would be great. Then I have another follow-up. Maria Sainz Sure. Thank you, Yuan. So clearly, the first half has been a strong first half, and we're closing the first half with strong momentum across both our U.S. and our international channels. And that has gotten us to really raise the guidance with confidence that we can deliver a little bit more than we thought before in light of how well the international channel has responded with our support, but also the strength of the pipeline in the U.S., both in adult and pediatric hospitals, which we have been mentioning for the last few quarters. Yuan Zhi Got it. Got it. So for - it was great to see the hoster presentation at AIC and I heard positive feedback on the product demonstration. I'm just curious, have you thought about the timeline to convert some of the leads from AIC into others? Maria Sainz Great question. And yes, we were very, very pleased with the reception at AAIC of our technology, the image quality, the patient experience. We had over 300 of the participants who volunteered and waited in line to get scanned with our device to experience first hand what that would represent to their patients, and we had many of them also checking with Dr. Ngo, our Medical Officer, in our viewing station and look at the images and the quality of the images. It is a little early to know how quickly a lot of this interest will funnel into orders, but we definitely came home with a long list of follow-up items across a lot of interesting opportunities. Definitely, we uncover some of the larger LEQEMBI programs that are out there that would be great targets for us to continue to collect ARIA data. There was interest from some of the other industry players that we're following up on. There was renewed and continued interest from some of the ADRCs we had already contacted that are willing to go a little bit faster and getting involved with our technology. There was also interest around doing community-based screening using our device to keep filling the funnel of potential likely candidates for the ATT drug therapy. So we are anticipating, and we've chosen to add a slide to our investor deck that, really, the entry commercially into Alzheimer's is really right around the second half of next year. So we are really seeing it as a growth - as a revenue contributor starting about that time frame. Yuan Zhi Got it. One last question before I jump back to the queue. I'm curious, any updates we should be watch at the CTAD clinical trial in Alzheimer's Disease Conference in Madrid at the end of October? Maria Sainz Yes. Great question. And of course, that is our next very important Alzheimer's meeting, that is the CTAD, so Clinical Trials in Alzheimer's Disease, which, as you said, is at the end of October in Madrid. We will have additional data presented from the Washington University Group, which is the same one that presented on one of the very first ARIA cases on our technology side by side, really the same case on a 3T technology, which is the encouraging sort of token that starts pointing to the merit of our technology in detecting ARIA. So expect to see more data presented by Dr. Okafor again in Madrid late October. Yuan Zhi Got it. Great. Thanks for taking our questions. And again congrats on a good quarter There are no more questions at this time. That concludes our Q&A session. I will now turn the call back over to Maria Sainz for closing remarks. Please go ahead. Maria Sainz Thanks to all for joining us here today. We look forward to further updates from Hyperfine next quarter. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Marchex, Inc. (MCHX) Q2 2024 Earnings Call Transcript

Marchex, Inc. (NASDAQ:MCHX) Q2 2024 Earnings Conference Call August 8, 2024 5:00 PM ET Company Participants Trevor Caldwell - Senior Vice President of Strategic Initiatives and Investor Relations Edwin Miller - Chief Executive Officer Holly Aglio - Chief Financial Officer Conference Call Participants Dillon Heslin - Roth Capital Partners Operator Hello, everyone. Thank you for attending today's Marchex Second Quarter 2024 Earnings Call. My name is Sierra, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Trevor Caldwell, Senior Vice President of Strategic Initiatives and Investor Relations. Please proceed. Trevor Caldwell Thanks, Sierra. Good afternoon, everyone, and welcome to Marchex's business update and second quarter 2024 conference call. Joining us today are Edwin Miller, our CEO; and Holly Aglio, our Chief Financial Officer. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements, including references to our financial and operational performance and actual results may differ materially from those contemplated by these forward-looking statements. Risks and uncertainties that could cause these results to differ materially are set forth in today's earnings press release and in our most recent annual and quarterly report filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we will undertake no obligation to update these statements for subsequent events. During this call, we will present both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. Earnings press release is available in the Investor Relations section of our website. At this time, I'd like to turn the call over to Edwin. Edwin Miller Thank you, Trevor, and good afternoon, everyone, and thank you for joining us today. Today, I will provide you an update on our progress in the second quarter, and on the initiatives that are forming the foundation for the future of Marchex. Marchex is transforming into a market-leading prescriptive analytics SaaS company, that harnesses the power of generative AI. We are focused on enabling our customers to achieve operational excellence by using our AI-powered products, to analyze and make business decisions leveraging their direct first-party conversational data. We aid multiple functions within a business, navigate risk and uncertainty, understand the performance of their distributed retail networks and demonstrate how to drive revenue. We are able to solve these complex problems for businesses by leveraging the vast amount of data we analyze on their behalf every day. This is achieved by our emerging SaaS data analytics platform. We have deep relationships with some of the largest Fortune 500 companies in our current vertical markets. These companies rely on Marchex to deliver critical, rich data analytic insights to drive positive business outcomes for their respective retail outlets. We believe the best is still to come as we accelerate product innovation, continue deepening our relationships and expand market opportunity. This includes continued expansion of our sales pipeline and positive execution of our gross margin and profitability goals. Our strategic vision is clear. We aim to be at the forefront of prescriptive analytics to drive operational excellence for Fortune 500 businesses, as a SaaS platform. This is why we have been transforming the company's technical foundation. One of the key pillars of our strategy is uniting our product platform and AI signals into OneStack. OneStack is fundamental to our innovation, and is a key step in allowing us to bring all of our conversational data into the cloud, and one centralized platform. This accelerates our leveraging generative AI to unlock powerful insights and develop new growth opportunities from our expanding data sets. We are on track with OneStack goals we laid out for 2024. I would like to take a minute to highlight our exceptional team. Their commitment to customer excellence and innovation, recently earned us the AI Breakthrough Award for Best Text Generative AI Solution, for our Call Summaries and Sentiment Suite. This award is a testament to our team's dedication with developing AI-powered solutions. I would also like to lift up our go-to-market teams, both for new business and the team supporting our current clients. We have tremendous leadership in these areas. Thank you to one Marchex for constantly improving our talent, as this has a direct impact on our client success, which then benefits our shareholders. As you can hopefully see, we are clearly both in strategic evolution and execution modes, and this is being reflected in our expanding sales pipeline. We continue to make progress adding new OEM and auto service customers during the quarter. In addition, the home services vertical is a bright spot for Marchex and is another area where we're expanding key relationships. There is significant untapped potential in our vertical markets and within our existing customer base. Additionally, we are winning more new customers. The combination of these factors is accelerating our business and growth opportunity. With that, I'll hand the call to Holly. Holly Aglio Thank you, Edwin. For the second quarter of 2024, revenue was $12.1 million versus $12.5 million for the same quarter last year, and up from first quarter 2024 revenue of $11.6 million. Revenue in the second quarter was up from the first quarter, in part, due to slightly improved conversation volumes and in part, from a developing pipeline of opportunities. We are seeing traction in the auto, auto services and home services verticals so far this year. On a year-over-year basis, we saw continued headwinds from certain customer segments like our small business resellers, though that seems a bit improved on a sequential basis. Turning to the P&L for the second quarter. Excluding stock-based compensation, amortization of intangible assets and acquisition and disposition-related costs, total operating costs for the second quarter of 2024 were $12.2 million compared to $14 million for the second quarter of 2023. Service costs were $4.2 million for the second quarter. We've seen significant progress on our service costs as a percentage of revenue so far this year. As we continue to make progress on our infrastructure initiatives and see increased sales of our conversational intelligence products and features, we believe we are well positioned for the second half of 2024 and beyond. Sales and marketing costs were approximately $2.7 million for the second quarter. This was up slightly from the second quarter of 2023. Product development costs were $3.2 million for the second quarter, as we continue to invest in leveraging AI to expand our product suite with new conversational intelligence capabilities. Moving to profitability measures. Adjusted EBITDA was approximately $300,000 for the second quarter of 2024, which is a significant improvement over the adjusted EBITDA loss of $1 million for the second quarter of 2023. GAAP net loss was $800,000 for the second quarter of 2024 or $0.02 per diluted share. This compares to a loss of $2.7 million or $0.06 per share - per diluted share for the second quarter of 2023. Adjusted non-GAAP loss was $0.01 per share for the second quarter of 2024 compared to a loss of $0.03 per share for the second quarter of 2023. Additionally, we ended the second quarter with approximately $12 million in cash on hand. Now turning to our outlook for the third quarter of 2024. First, let's discuss revenue. We anticipate third quarter 2024 revenue will increase to be in the range of $12.6 million or more. For adjusted EBITDA, in the third quarter, we anticipate adjusted EBITDA will be in the range of - or better than, our second quarter 2024 results. Two fundamental factors are driving our expectations for sequential growth. First, there is some improvement in overall conversation volume trends. Our verticals remain in a relatively steady state, and that is reflected in a more normalized seasonal pattern for verticals like home services. Second, we are pleased to see a developing pipeline of opportunities. As we onboard some of our recent new wins, we expect that to contribute to sequential growth, although most of the growth from those wins will happen in future months, as those customers ramp up. This progress, along with our progress on our infrastructure initiatives, I believe, puts us in a strong position to meet or exceed our original target for gross margin improvement and our profitability profile for 2024. With that, I'll hand the call back to Edwin. Edwin Miller Thank you, Holly. We are making meaningful progress in the business. To summarize and wrap things up, we are achieving many of this year's goals. We are on track with OneStack and progress with technical innovation. We are seeing growth with existing and new customers, and validation of our vertical market strategy. We continue to see sequential revenue growth with acceleration. We are delivering meaningful gross margin expansion. Adjusted EBITDA continues to trend positively. The commitment and talent level of our team continues to grow. I want to thank our employees for their continued dedication, and also our clients for their engagement and partnership with Marchex. We look forward to updating you again in the coming months. Operator, we are ready for questions. Question-and-Answer Session Operator We will now begin the Q&A session. [Operator Instructions] Our first question today comes from Darren Aftahi with Roth Capital Partners. Your line is now open. Dillon Heslin Hey, this is Dillon for Darren. Thanks for taking my questions. If I could start with OneStack. Like when you roll that out, like is there any adjustments you need to make, as you look across different customers? And then how do you sort of modulate that into some of the adjacent verticals you're talking about expanding to, beyond some of the core three years in now? Edwin Miller Okay. So I'll do adjustments first. Dillon, thanks for the question. I know we've met in person, but good to hear your voice. I think the adjustments we have to make, obviously, would be, we're moving clients into a single cloud instance, that's much more scalable with all of our signals, and a single sign-on and a single interface, et cetera, which is going to be awesome. And in that progress, the clients are excited about it. They get to consume more of their data, prescriptive analytics. They get to see things in a single place. So we've had nothing but really good conversations with clients. Now is there a change management that has to happen in terms of that with clients that need to move from different stacks? Yes. But we're partnering well with them. We've got a great customer success team that's lined up with our clients. Again, I probably - I don't know how many times I've been with our top 25 clients, a lot. And so I think we're a good fit there. Your second part of the question was, will it help us enter new verticals? It's kind of how I took that question, Dillon. The answer is, yes. It would be simpler for us to go into verticals. The signals and the business problems and the operational problems are the same, and a few other verticals, and we've got a few of those targeted. Dillon Heslin Got it. Thank you. Could you sort of comment at all on the feedback you're getting from customers sort of on a macro trend basis, as to sort of, what they're seeing in terms of call volumes and maybe why there's still a bit of a headwind in certain industries compared to others? Edwin Miller The large clients, I've got great feedback from. They're positive. Their companies are growing. We're exposing data that - out of our platform in a new way, they hadn't seen before, which is fantastic. They're excited about that. The - and that's where I spent the bulk of my time is on those top 25. So I don't see any headwinds from them. And I will say, it's about enabling the conversation, it's not just about the call. It could be data off the web. It could be data from an e-mail. It could be data from a text on a number. And everyone that I'm talking to is trying to bring that omni-channel approach, that conversational data together. So I'm enjoying being with their clients. Dillon Heslin Got it. If I could ask one more, just you're seeing the positive trends in adjusted EBITDA with sort of the rollout of OneStack? Is there anything in particular you need to invest in, or you think you have sort of the right mix of sales in R&D at the rate to go after those markets? Edwin Miller Well, we talked about gross margin lift. So as we move to OneStack, there will be more opportunity for more investment innovation and sales and marketing without having to use our cash, which is exciting for me, to kind of turn that corner. I'm going to go back and say, one of the things you asked and the last one is, because we get OneStack, we get to add more signals, we get deeper and deeper and deeper with our clients, which is awesome. So we are a prescriptive data analytics SaaS platform. They are seeing us that way. It's not just about the number, which is awesome. Because that's really sticky and it's powerful to control that conversation and how - and deliver value on top of that. But what they can see in their data is going to make the difference for them and their business outcomes, which will make the difference for my shareholders. Dillon Heslin Perfect. I'll pass it on. Thank you. Operator Thank you for your questions. There are no longer questions in queue. So I would like to turn the call back to the management team for any further or closing remarks. Edwin Miller Okay. Thank you, everyone, for dialing in. We're excited about the future of the company, and we look forward to the next check-in. Thank you. Operator That will conclude today's conference call. Thank you all for your participation. You may now disconnect your line.

ePlus inc. (PLUS) Q1 2025 Earnings Call Transcript

Margaret Nolan - William Blair Margaret Nolan - Sidoti & Company Matthew Sheerin - Stifel Good day, ladies and gentlemen. Welcome to the ePlus Earnings Results Conference Call. As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, Mr. Kleyton Parkhurst. Sir, you may begin. Kleyton Parkhurst Thank you for joining us today. On the call is Mark Marron, CEO and President; Darren Raiguel, COO and President of ePlus Technology; Elaine Marion, CFO; and Erica Stoecker, General Counsel. I want to take a moment to remind you that the statements we make this afternoon that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates and projections. Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed in the earnings release we issued this afternoon and our periodic filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, quarterly reports on Form 10-Q and in other documents that we may file with the SEC. Any forward-looking statement speaks only as of the date of which the statement is made, and the company undertakes no responsibility to update any of these forward-looking statements in light of new information, future events or otherwise. In addition, we will be using certain non-GAAP measures during the call. It included a GAAP financial reconciliation in our earnings release, which is posted on the Investor Information section of our website at www.eplus.com. Thank you, Kley, and good afternoon, everyone. Thank you for joining us to discuss our fiscal year 2025 first quarter results. I will recap our first quarter highlights and provide an update on our business, then Elaine will discuss our financial results in more detail. I will conclude our prepared remarks with a discussion of our outlook. After that, we'll open the call to your questions. We continue to execute on our strategic initiatives around AI, cloud security and the related advisory and annuity services. Coming into the quarter, we had a tough compare to last year, which resulted in a net sales decline of 5.2% for the first quarter fiscal year 2025 compared to last year. Last year's quarter had 25% net sales growth, including a nearly 30% increase in product sales in our technology business. Our gross billings and gross margins held essentially flat when compared to the prior year's quarter. We believe our gross billings are stabilizing now that supply chains are normalizing. A portion of the net sales decline this quarter reflects an increase in the netting of sales from gross to net, partially offset by increases in professional and managed services revenues. We believe our product revenues are down due to some customers implementing technology orders that were previously supply chain constrained over the last year. Both quarters were affected by the supply chain last year by an abrupt easing of the supply chain in this quarters as customers digested their prior purchases. Despite these timing differences, we believe we are focused on the necessary IT areas, which make us more resilient, reflected in our annual guidance. Our service revenues sustained solid growth with overall service revenues up 15.8%. Managed Services continue to build and were up 28% year-over-year. We also continued to see strong growth in our managed services bookings, which were up approximately 70% year-over-year. This bodes well for ePlus as these are recurring revenue streams that give us predictability and more consistent profitability in future years. Security was an area of strength for us, which continues to be over 20% of our gross billings in the trailing 12 months and was up over 9% quarter-over-quarter. Our Finance Segment performed well with revenue up 6.4% due to an increase in our portfolio earnings, resulting in a 24.3% increase in adjusted EBITDA for this segment. We continue to see strong customer interest for our AI Ignite program and discovery assessments. We have also rolled out a new storage as a service offering and an Azure recovery program. We believe these will continue to support the rapidly evolving needs of our customer base, both now and into the future. Many of our customers are in the formative phase of their AI journeys, contemplating how best to leverage AI. In many cases, customers do not have well-defined use cases, have too many data silos, a lack of data cleanly in this and immature or non-existing AI policies. We believe we are well positioned to help our customers capitalize on this opportunity through our AI Ignite program. We are seeing interest across various verticals, which presents a significant opportunity for us within our customer base and for net new customers. As a certified NVIDIA DGX managed service partner, we have had some wins with our AI support services in managing AI optimized infrastructure stacks. In the quarter, we experienced higher SG&A expenses primarily relating to head count from both organic hires to support our new solution areas and the Peak acquisition. We will continue to invest in customer-facing personnel in sales and engineering professionals with skills in the highest demand areas such as AI, security and services. In the quarter, we had some lag between the higher cost of these onboarded personnel and revenue generation. Although first quarter of 2025 experienced some revenue headwinds on a sequential basis, we were disciplined with our SG&A costs. Sequentially, this discipline and gross margin expansion of 120 basis points contributed to our operating income, which increased more than 20% and operating margin was up 130 basis points. Over time, we believe we will continue to benefit from operating leverage as we move forward with the investments we have made. Turning to our balance sheet. With supply chain easing, we've been able to deliver many delayed projects, which resulted in accelerating our cash conversion cycle and a cash balance of $350 million. With this capital, we have the funds to execute on strategic initiatives, judiciously invest in head count and support our share repurchase program. During the quarter, we repurchased 162,319 shares. This most recent share repurchase program further demonstrates our commitment to returning value to shareholders and our confidence in long-term growth potential. We will continue to evaluate opportunities to repurchase share based on investment opportunities to drive growth, our financial position and market conditions. On the growth front, we continue to identify both near-term and long-term organic and inorganic opportunities, and we have a healthy pipeline. Our balance sheet provides financial flexibilities to support future growth initiatives. The underlying strategic focus of our business is solid, and we believe we are well positioned to drive top line sales and profitable growth. I will now turn the call over to Elaine to discuss our financial results in more detail. Elaine? Elaine Marion Thank you, Mark, and thank you, everyone, for joining us today. I will provide additional details about our financial performance in the first quarter of fiscal 2025. First quarter consolidated net sales totaled $544.5 million, down from $574.2 million in last year's first quarter due to lower product sales in the technology business. As Mark noted, we faced a difficult year-over-year comparison as net sales were up 25% in the first quarter of fiscal 2024 due to easing supply chains, which allowed us to complete several previously delayed customer projects. Product revenue decreased 8.2% year-over-year, primarily due to lower sales of cloud and networking products -- the inventory flush in last year's first quarter primarily benefited from a 71.9% increase in sales of networking products. Our services business posted another quarter of double-digit top line growth with net sales up 15.8% to $78.2 million as ongoing demand for EMS, Cloud and Service Desk services drove 28% net sales growth in managed services. We also saw continued growth in professional services with net sales rising 4.8% year-over-year, primarily due to an increase in staff augmentation services. Sales within our technology business were broad-based. Our two largest verticals are telecom, media and entertainment and technology representing 24% and 19%, respectively, of our technology business net sales on a trailing 12-month basis. SLED, health care and financial services accounted for 15%, 12% and 11%, respectively, with the remaining 19% divided among other end markets. Moving to our financing segment. Net sales totaled $9 million, a 6.4% increase from $8.5 million in the prior year, primarily due to higher portfolio earnings. Although consolidated gross profit declined to $134.5 million from $142.3 million in last year's first quarter, gross margin declined only 10 basis points to 24.7%. The gross margin decline was primarily due to a 90 basis point decline in product margin in the Technology business, which was the result of a shift in customer mix. Partially offsetting this decline in gross margin was a 70 basis point expansion in managed services gross margin. Our managed services offerings continue to benefit from scale as we expand our offerings. Professional services gross margin rose 10 basis points to 41.5%. Sequentially, while net sales were down 1.8%, gross profit increased 3.2%, mainly driven by an increase in product gross margin to 21.5% versus 19.3% in the prior quarter. Consolidated operating expenses grew 3.2% year-over-year, primarily due to higher salaries and benefits from additional head count. At the end of the quarter, our head count was 1907, up 54% from a year ago, including 29 employees from the peak acquisition in January 2024. We remain focused on driving efficiencies across the business through disciplined expense management. These efforts yielded positive results in the quarter as operating expenses declined 2.3% sequentially, mainly driven by lower variable compensation and G&A. First quarter operating income was $35.5 million and earnings before taxes were $37.5 million, down from $46.3 million and $46.5 million, respectively, in the prior year due to lower gross profit in the technology business and a year-over-year increase in operating expenses. During the quarter, we had other income of $2.1 million, primarily driven by an increase in interest income of $2.6 million. The effective tax rate remained unchanged from last year's first quarter at 27.2%. Moving to the bottom line. Consolidated net earnings amounted to $27.3 million or $1.02 per diluted share in the first quarter, down from $33.8 million or $1.27 per diluted share reported in the year ago period. Non-GAAP diluted earnings per share were $1.13 versus $1.41 in the prior year. Our diluted share count at the end of the quarter was 26.8 million, modestly above the 26.6 million a year ago. On a sequential basis, both consolidated net earnings and diluted earnings per share increased 24.4%. Consolidated adjusted EBITDA totaled $43.1 million compared to $53.9 million in the first quarter of fiscal 2024. Shifting to our balance sheet. We ended the quarter with cash and cash equivalents of $350 million, up from $253 million at March 31, 2024. The increase was primarily due to improvements in working capital. The significant growth in our cash position was aided by a 36% sequential decline in inventories as supply chains have continued to normalize. We ended the quarter with $89.1 million in inventory, which is a 3-year low. Further, inventory turns continue to improve totaling 14 days, down from 23 days in the prior sequential quarter and 32 days in the prior year. Our cash conversion cycle was 37 days compared to 48 days in the prior year. During the quarter, we repurchased 162,319 shares, costing $11.9 million, 19,869 shares were from our share repurchase program announced in May 2024. Overall, we remain focused on investing in organic growth, seeking out accretive acquisitions to expand our geographic footprint and service offerings and returning value to the shareholders through share repurchases. With that, I will turn the call back over to Mark. Mark? Mark Marron Thank you, Elaine. With our diverse portfolio and focus on providing the strategic IT solutions and demand by our customers, we are well positioned in the marketplace. For the year, we expect positive comparisons for sales and earnings and are reiterating our full year financial outlook. Specifically, we are maintaining our fiscal 2025 guidance for net sales growth over the prior fiscal year of between 3% and 6% and adjusted EBITDA range of $200 million to $215 million. While we continue to review and prioritize our capital needs, we remain committed to making the required investments in our company to position us for long-term success. In addition to providing value to our shareholders through share repurchase programs, our strong balance sheet allows us to continue to invest in our business while maintaining flexibility to take advantage of attractive and accretive opportunities. Operator, let's open the line for questions. [Operator Instructions]. Our first question will come from the line of Maggie Nolan with William Blair. Please go ahead. Margaret Nolan Hi, thank you. So, I wanted to ask about the upcoming fiscal second quarter. Obviously, you have another tough year-over-year compare in the fiscal second quarter. But what can you share with us about how it's progressed so far, how you're thinking about it on a sequential basis and your confidence in that building in the second quarter to help you get to that full year guidance you laid out? Mark Marron Maggie, it's Mark. Great question. So right now, Q2 is in line with the expectations. Let me frame it a little bit too based on Q1 because Q2 is similar to Q1 in terms of being a tough compare. So, in Q1, net sales, as you know, was up 25%. Our product sales were up almost 30%. Our networking product sales were up over 70% -- that's for Q1. Now Q2, we have a similar compare where our net sales were up about 19%. But preliminary through the first 1.5 months of the quarter, pipeline back line, it's in line with expectations. We still believe in our guidance strongly that we're in line, but the first half were challenged just based on the IT environment and the tough compare that we have through the first half. Margaret Nolan Okay, thanks, Mark. And then you mentioned expecting to benefit from operating leverage over time, maybe to you or Elaine, how do you expect that to manifest over the next year or so? Mark Marron Well, a couple of different things. We already sourced some of that, Maggie. If you look at our quarter sequentially from Q4 to Q1, our operating income actually jumped 20%. Now what's happening in the OpEx base is some of the stuff that we've talked about over previous quarters. We're now in the process. We think we'll start to get more operating leverage. We're more opportunistic and measured hires, if you will. A lot of those take time. New hires take time to ramp up. Our investments in AI and services is more expense than revenue at this piece? And when I say that more the AI side, not so much the services side. The thing that we're excited that we think will start to get additional OpEx is last year -- last fiscal year, as you know, we added 300 customers. So, as we've added new sales reps and service personnel and we're building out our solution offerings going back into those new customers, we would expect that to drive our revenues up. We'd expect our OpEx to stay in line, and therefore, we'd get the operating leverage. Margaret Nolan Okay, thanks, Mark. And one quick housekeeping, if you have it, the organic growth in the quarter and embedded in the full year guide. Yes, the material amount of the change in year-over-year was from the organic business. Did you say material or immaterial, Elaine, I didn't quite hear you. Elaine Marion The majority of the change from quarter-over-quarter was from the organic business. Our next question will come from the line of Greg Burns with Sidoti & Company. Please go ahead. Gregory Burns Thanks. In regards to the customer product backlog that you mentioned may be impacting some sales this quarter. Where do you think the channel is or the customer base is in terms of digesting that backlog? Do you feel like it's been worked through and you get back to a more normal cadence of order flow going forward? Mark Marron Yes. I think it's already normalized, Greg. When we look at our gross billings. By the way, in this quarter, even though our net sales were down 5.2%, our gross billings were down just 1%, so essentially flat on a -- as we've talked about, I don't want to overkill it on a tough compare last year for this quarter. So, we do think that our gross billings have started to normalize. The supply chain has stabilized. So, I think we're more in a more normal run rate where we'll start to see the seasonality that we normally do in Q2 and Q3, and then we'll see where it goes from there. Gregory Burns Okay. And then is there anything you could share in terms of your AI business, whether it be growth pipeline opportunity, anything quantitative or qualitatively, you could add to give us a little bit better understanding of the opportunity there for you? Mark Marron Yes, sure. Greg, the other thing just if I can go back to it, I'm not sure if you were talking about some of the consumption of the technology that we talked about with customers in previous. So, I think a lot of that has happened. And we really see it. If you look at our services numbers, we were up 15.8% in our services overall, which means that, that technology is being consumed and we're implementing it with our PS, our professional services and advisory services. So, I'm not sure if the first part when I answered if it answered your question, but that should do it. As it relates to AI -- so here's the thing with AI. It's really interesting. There's not a customer we have that won't give us a meeting or listen to us as it relates to our AI Ignite program. So, everybody is looking at the same thing all customers. They have data silos on-prem in the cloud, so they got all these disparate data silos. They've got data security and privacy concerns there's no AI governance, at least in a lot of customers that are more in the, let's say, formative or curious stage, if you will. Their infrastructure is not ready, especially in the power and cooling space. There's a skills gap. And then there is an identification of use cases. That's probably the biggest thing that we're seeing with our customers. Now we've rolled out a bunch of envisioning sessions, data copilot readiness, and we're starting to see some real interest and pipeline build in that space. And that's why what I had mentioned earlier to Maggie, we've made the investment in the programs and the tools and the training for our team and head count and what have you, it's more expense than revenue, but that is really starting to build. Now here's the other reason we're excited about AI. If you think about AI, it goes across everything that ePlus does over the years from compute, networking, storage, all the things that go into that is things that we've done for years, so -- as well as security as well, which is probably one of the bigger pieces that people are trying to figure. So, it's early innings. We're getting a lot of interest in meetings with customers. We've done some nice services work with our customers. We -- the pipeline is building, and then we'll see as we move through the quarters how that really turns into revenue. Gregory Burns Okay. Great. And then lastly, just any negatives or benefits from the CrowdStrike -- issue? Mark Marron No negatives, to be honest, Greg. We did have a benefit. We had one customer that had some real problems with CrowdStrike that we got involved with early, and they were able to open up pretty much on time. And after that, they extended their service agreement with us for three years. So, we did see some benefit, but I don't want to overplay it. It was not too much in terms of, I'd say, revenue benefit more. I'd say customer set with how we helped our customers, then I could point to revenue. That's the only deal I've at least been notified that came out of some of the work that we did around CrowdStrike for our customers. [Operator Instructions]. Your next question will come from the line of Matt Sheerin with Stifel. Please go ahead. Matthew Sheerin Yes. Hey, good afternoon, everyone. I wanted to go back to Maggie's question about the outlook for Q2. You said in line with expectations in seasonal, but I'm not sure exactly what that meant because you talked about the backlog being down, is seasonal sort of flattish sequentially because, obviously, the last three years, there have been a lot of seasonality in your business with backlog. And so, are we to assume that this is going to be down year-over-year again and that growth that you're guiding to 3% to 6% is all going to come in the back half? Mark Marron Yes. I'd say, Matt, that's a fair statement. I think it will be in the back half. Once again, just to remind you, right, if you look at it, first quarter, we were up 25%. Second quarter, we were 19%. So those are some pretty tough compares. But we do feel positive about our strategy and our growth plans. I'd say it'd be more second half back ended, if you will. Q2 is still a positive quarter way to say it. Matthew Sheerin A positive quarter, meaning, I'm not sure what that meant? Okay, so flat year-over-year. Got it. Okay. So that means you're going to be five but -- Okay. Got it. Understood. And then in terms of cost, you talked about adding resources to professional resources, et cetera, but then you said that you think that you're going to get leverage on OpEx as volumes return. So, what's the right -- is this the right number to use around the low 90s in terms of OpEx over the next few quarters? Or is it different? Mark Marron I would say, yes, Matt. That's probably a fair assumption in terms of from a run rate, but realize what you've got that. But if I were looking at, I'll call it, the SNS G&A salaries, I think that would stay within line with where it is. I think what I'm also alluding to is Q4 to Q1, our operating income jumped 20%. Now that's just a quarter, so it's not a trend yet. But there are some things that we've done both from an expense standpoint and also from a training standpoint that we'd expect to get some improvements from our account executives and service reps as well as some expense savings that we've made. So, I'd expect operating leverage throughout the year. It's not going to jump, as you know, from quarter-to-quarter, but will grow throughout the year and into the following year. And that will conclude our question-and-answer session. I will now turn the call back over to Mark Marronfor any closing remarks. Mark Marron Okay. Thank you. I just want to thank everybody for joining us for our first quarter earnings call and wish you a happy and safe day and a long holiday for the Labor Day weekend even though I'm jumping the gun a little bit there. Take care, and have a good day. That will conclude today's call. Thank you all for joining, you may now disconnect.

Earnings call: Synaptics Inc. reports Q4 growth, eyes gradual recovery By Investing.com

Synaptics Inc. (NASDAQ:SYNA), a leading developer of human interface solutions, has announced its fourth-quarter fiscal year 2024 financial results, reporting a revenue of $247.4 million, which is above the midpoint of their guidance. The company has seen a 9% increase in total revenues year-over-year (YoY) and a 4% rise sequentially. Non-GAAP net income for the quarter stood at $25.6 million, reflecting a 22% increase from the previous quarter and a 31% increase YoY. For the fiscal year 2024, the non-GAAP net income reached $89.4 million. Synaptics anticipates first-quarter revenues for 2025 to be around $255 million with a non-GAAP gross margin of 53.5% and net income per diluted share projected to be $0.75. In conclusion, Synaptics Inc. has demonstrated resilience in its fourth quarter, successfully navigating inventory challenges and showing growth in key product areas. The company remains cautious but optimistic about the future, with strategic partnerships and product mix improvements expected to drive growth and margin enhancement. Synaptics Inc. (SYNA) has recently shared its financial outcomes for the fourth quarter of the fiscal year 2024, revealing an impressive revenue surge and a robust non-GAAP net income. To add further context to these results and the company's financial health, here are some key InvestingPro Data metrics and InvestingPro Tips: For investors looking for a deeper dive into Synaptics' prospects and performance, there are 13 additional InvestingPro Tips available at https://www.investing.com/pro/SYNA. These tips provide a comprehensive view of the company's strategic moves, market position, and financial health, which can be valuable for making informed investment decisions. In light of the recent financial disclosures, these InvestingPro insights offer a nuanced view of Synaptics' market position and future outlook, enriching the understanding of the company's performance and potential trajectory. Operator: Good day, and thank you for standing by. Welcome to the Synaptics Inc. Fourth Quarter Fiscal Year 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Munjal Shah, Vice President of Investor Relations. Please go ahead. Munjal Shah: Thank you. Good afternoon, and thank you for joining us today on Synaptics' fourth quarter fiscal 2024 conference call. My name is Munjal Shah and I am the Head of Investor Relations. With me on today's call are Michael Hurlston, our President and CEO; Ken Rizvi, our CFO and Matt Padfield, our Vice President of Finance. This call is being broadcast live over the web and can be accessed from the Investor Relations section of the company's website at synaptics.com. In tradition to a supplemental slide presentation, we have also posted a copy of the prepared remarks on our investor relations website. In addition to the company's GAAP results, management will provide supplementary results on a non-GAAP basis, which excludes share-based compensation, acquisition related costs, and certain other non-cash, and recurring or non-recurring items. Please refer to the press release issued after market close today for a detailed reconciliation of GAAP and non-GAAP results, which can be accessed from the investor relations section of the company's website at synaptics.com. Additionally, we would like to remind you that during the course of this conference call, Synaptics will make forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. Although Synaptics believes that estimates and assumptions to be reasonable, they are subject to a number of risks and uncertainties beyond our control and may prove to be inaccurate. Synaptics cautions that actual results may differ materially from any future performance suggested in the company's forward-looking statements. We refer you to the company's current and periodic reports filed with the SEC, including our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q, for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. Synaptics expressly disclaims any obligation to update this forward-looking information. I will now turn the call over to Michael. Michael Hurlston: Thanks, Munjal. Well, I'd like to welcome everybody to today's call. We just closed our 2024 fiscal year, and while for the most part it didn't play out as we planned, we were able to accomplish some of our most important goals. During the year, we stabilized revenue and began to show incremental growth, though at a slower rate versus our prior expectations due to muted end-demand recovery. In addition, we were able to get largely clear of the inventory issues that plagued us for the last six quarters or so. Finally, Core IoT is on the right track, showing significant, albeit somewhat inconsistent, growth after bottoming in the fourth quarter of last year. As we enter fiscal 2025, we are in a better place overall to drive revenue and earnings growth. Moving to the June quarter, revenue was slightly above the midpoint of our guidance range with enterprise products incrementally above forecast. Non-GAAP gross margin came in at roughly the midpoint of our guidance, while non-GAAP OpEx was below target, resulting in non-GAAP EPS above the forecast provided in May. This quarter marked more success in our Core IoT products, which grew 63% year-over-year, primarily driven by wireless. We taped out our first broad-market device that features a more than 50% power reduction and a 40% decrease in die sizes compared to a similar high-performance device. Even with these advances, we maintain our overall throughput and interoperability advantages, thereby delivering the best overall solution in this product category. The chip is on track to sample to customers toward the end of the calendar year with revenue contribution expected to start in the middle of calendar 2025. Our first Wi-Fi 7 device is slightly ahead of schedule, and we expect to be sampling customers toward the end of this coming quarter. In addition, demand for our shipping Wi-Fi, Bluetooth combos, and GPS products continues to improve. Pre-production has started on several of our key design wins in product categories such as drones, sound systems, wearables, and OTT streamers. We have had success adding new module partners in Japan, Korea, and China, though progress to high-volume shipments has been slower than expected. We expect wireless revenue to continue to improve, and while quarter-over-quarter growth rates may vary, we continue to believe that double-digit increases will occur on a year-over-year basis. We are also making progress with our smart embedded processors. Following a successful launch last quarter, Astra, our embedded AI-enabled line of MPUs and MPCUs, has generated interest from a broad set of customers in product categories such as navigation devices, appliances, and security systems. Initial demand for Makina RDKs exceeded expectations, and we are ramping production for commercial availability. We made our software generally available, making it easier for customers to integrate, lowering barrier to adoption. Finally, we are building relationships with system integrators and system-on-module partners who enable us to scale significantly faster. In the quarter, we started sampling our SR series of smart MCUs for vision-based use cases. In addition, we are driving synergies in our compute and wireless portfolios and are sampling our first Astra-connected processor in a package, combining our Wi-Fi 660 device with our quad-core A55 processors. While Astra's customer traction is ahead of schedule, we haven't changed our outlook, and the products won't contribute materially until the second half of our fiscal 2026. While our smart embedded processors are the future, our operator solutions product family continues to generate revenue today. Our recently announced wins have started to ramp, and over the last quarter, we added new customers in Japan with production launches expected in calendar 2025. Moving to our enterprise and automotive products, revenue improved 7% on quarter, driven by improvement in our video interface and PC products. In PCs, we're gaining market share at multiple OEMs and driving higher content with larger touchpads and haptics technology. We do think that PC-TAM continues to grow as adoption of AI PCs and ARM-based platforms drives a refresh cycle. Our user presence detection solution has been awarded both mid-board and camera module platforms that are major customer, stepping up our share in model year 2025. We are working to sell these AI-based devices to additional customers and expect further adoption given the system's power savings they can deliver, translating to longer PC battery life. While we were able to grow enterprise product sales sequentially, we continue to be disappointed at the rate of recovery. IT spending on personal hardware remains well below historic norms as capital is being allocated toward AI infrastructure. In automotive, the overall market softness is slowing the adoption of new technology. This has been good for us as our existing TDI solutions are expected to remain in production longer. However, uptake of our new SmartBridge product is being pushed out, limiting our content gains near term. In addition, our legacy DDIC devices continue to moderate as production shifts away from older models. In mobile, our touch controllers are aligned with the high end of the Android market, which is seeing normal seasonal trends. We do see an opportunity for TAM expansion as flexible OLED displays come down in price and capture a higher percentage of the volume at a given OEM. Our technical advantages in extracting signal from a very noisy environment give us more than sufficient differentiation to garner high market share, both in China and Korea. We had multiple ramps and design wins across major Android smartphone OEMs this quarter. We remain confident in our market position and starting next year, we expect our mobile products to largely track the high end Android market. To conclude, we continue to be excited about our core IRT opportunity, particularly on processors and wireless. Through new product ramps and customer engagements, we have set ourselves up for a bright future. In addition, we have cleared most of the inventory problems that plagued our enterprise products for the last few quarters and positioned us for a steadier phase of growth. We have set the company up for earnings and cashflow growth in 2025 and beyond. Before I turn the call over to Matt for review of our fourth quarter financial results and our first quarter outlook, let me take a second to introduce our new CFO, Ken Rizvi. I'm pleased to have Ken join the team and I'm looking forward to getting his help in driving profitable growth for Synaptics. He's a seasoned finance and semiconductor executive having previously served as CFO of a public company. Ken, can you make a few comments? Ken Rizvi: Thanks, Michael, and good afternoon to everyone. Several of you know me from my previous roles and I'm excited to join Synaptics at this stage of the company. Michael and the team have done a phenomenal job transforming the company into a leading IoT player. I'm looking forward to build upon that foundation and help the company drive long-term growth. I look forward to meeting you all in the upcoming weeks and months. And as it's only been a few weeks since I've joined, I'll hand the call over to my colleague, Matt, to review our financials. Matt? Matt Padfield: Thanks, Ken, and good afternoon to everyone. I will focus my remarks primarily on our non-GAAP results which are reconciled to GAAP in the earnings release tables and in our investor materials on our website. Now let me turn to our financial results for fiscal 2024 and Q4. We completed our fiscal year 2024 with net revenue of $959 million, which was down 29% compared to $1.36 billion in the prior year, largely due to declines in our Core IoT and Enterprise & Automotive products, and partially offset by growth from our Mobile products. While demand in fiscal 2024 was soft across multiple end-markets, we were able to grow revenues into the second half of the year while also reducing channel inventories to near normal levels. Non-GAAP gross margin for fiscal 2024 came in at 53.0%. Non-GAAP net income for fiscal year 2024 was $89.4 million or $2.25 per diluted share. The company continues to be solidly cash flow positive generating $135.9 million in cash from operations in fiscal year 2024. Now let me turn to our Q4 results. Revenue for Q4 was $247.4 million, above the midpoint of our guidance, with sequential improvement in our Core IoT and Enterprise & Automotive products. Revenue from Core IoT, Enterprise & Automotive, and Mobile products were 22%, 58% and 20%, respectively. This was largely in line with our previous expectations, with Enterprise & Automotive products above our original forecast. Total Q4 revenues were up 9% on a year-over-year basis and benefitted from reduced inventory digestion and up 4% sequentially. In Q4, Core IoT product revenue was up 63% year-over-year due to reduced inventory digestion and up 15% sequentially reflecting a modest recovery in the wireless end-market. Enterprise & Automotive product revenue was up 2% year-over-year and up 7% sequentially. We saw our PC products improve seasonally on a sequential basis. While we expect the enterprise inventory correction to be largely behind us, end demand for these products continues to remain relatively soft. Mobile product revenue was down 6% year-over-year and 11% sequentially. The quarter-over-quarter performance was primarily due to seasonal trends and largely in line with our prior expectations. During the quarter, we had two customers greater than 10% of revenue, each at approximately 12%. Q4 non-GAAP gross margin was 53.4% and in-line with the mid-point of our guidance range. Our fourth quarter non-GAAP operating expense was $96.5 million and toward the low end of our guidance as we continue to maintain tight expense control. Non-GAAP net income in Q4 was $25.6 million, an increase of 22% from the prior quarter and a 31% increase from the same quarter a year ago. Non-GAAP EPS per diluted share of $0.64 was above the mid-point of our guidance range, helped in part by lower than anticipated operating expenses. Now turning to the balance sheet. We ended the quarter and fiscal year with $877 million of cash, cash equivalents, and short-term investments on hand; up $49 million from the preceding quarter. Cash flow from operations was $65 million. Capital expenditures were $7.7 million and depreciation for the quarter was $6.8 million. Receivables at the end of June were $142 million and days of sales outstanding were 52 days, down from 55 days last quarter. Our ending inventory balance was $114 million, flat compared to last quarter, as we continue to manage our inventory purchases. The calculated days of inventory on our balance sheet were 88. Our cash balance is at a healthy level with ample flexibility to navigate our capital deployment needs. We continue to prioritize our capital allocation between M&A, debt management and share repurchases. Now, let me turn to our first quarter of 2025 guidance. We expect revenues to be approximately $255 million at the mid-point, plus or minus $15 million. Our guidance for the first quarter reflects an expected revenue mix from Core IoT, Enterprise & Automotive, and Mobile products in the September quarter to be approximately 23%, 58% and 19%, respectively. We are seeing stabilization and return to normalcy in our business with order trends and pipeline starting to modestly improve. However, recovery continues to be slow and gradual in almost all our end markets. We expect non-GAAP gross margin to be 53.5% at the mid-point plus or minus 1%, consistent with the previous quarter. We expect non-GAAP operating expense in the September quarter to be $96 million at the mid-point plus or minus $2 million. Given the slower pace of recovery and continued macroeconomic uncertainties, we remain focused on managing our overall operating expenses. We expect non-GAAP net interest and other expense to be approximately $6.0 million in the September quarter. We recently completed a project that included the domestication of certain foreign subsidiaries and the onshoring of certain intellectual property. This is expected to reduce our non-GAAP tax rate to a range of 13-15%. Non-GAAP net income per diluted share is anticipated to be $0.75 per share at the mid-point plus or minus $0.20, on an estimated 40.3 million fully diluted shares. This wraps up our prepared remarks. I'd like to now turn the call over to the operator to start the Q&A session. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Kevin Cassidy with Rosenblatt Securities. The line is yours. Kevin Cassidy: Yes, thanks for taking my question and congratulations on the good results. And also welcome, Ken. Looking forward to working with you again. Ken Rizvi: Yes, thanks, Kevin. Kevin Cassidy: You mentioned that enterprise spending is down, but the inventory has been cleared out. I'm wondering if you're hearing of any spending coming up, maybe starting a new year, anything that would be related to the video interface revenue. It seems that was strong growth for a few years. And just like, I think that would be positive. Also, just make sure it would be positive for gross margin also. Michael Hurlston: Yes, Kevin. First, thanks for the question and good positive comments. We did see the video interface business come up a bit this quarter, which is encouraging. It's been probably six quarters or more of negative. So it was really good to see it come up, although off a much lower base. I think we would start seeing indications of buying patterns as IT budgets get reset in December, probably maybe late November, early December. Those are typically when things get reset. And I think we'd have a much better handle on how our back half looks then. But I think our -- to your point, I think our video interface business is probably finally bottomed. And I think we're expecting pretty decent year over year growth this year. Kevin Cassidy: Okay, great. Thanks for that answer. And also you mentioned that AIPC is being a growth driver. And just wonder if you have any more exposure between the ARM-based AIPCs or x86, or are you neutral on that? Michael Hurlston: Generally neutral. I'd say generally neutral. The one opportunity we're seeing on the ARM-based PCs is to add connectivity content. So generally we have zero connectivity content on the traditional PCs. We do think we have an opportunity to add connectivity on ARM-based PCs, particularly, non Qualcomm (NASDAQ:QCOM) ARM-based PCs who will bundle their own Wi-Fi, I would presume. But on the other platforms, we think there's a decent opportunity. But generally speaking, it's flat because our touchpad, fingerprint, the main content is neutral, Kevin, across the various platforms. Kevin Cassidy: Okay, great. I'll get back in the queue, thanks. Operator: Thank you for your question. Our next question comes from the line of Quinn Bolton of Needham, the line is yours. Quinn Bolton: Sorry guys, I was on mute. I was going to say, I just wanted to echo my congratulations, Michael, and welcome Ken to Synaptics. I guess, you guys have had some momentum on the Core IoT business, mostly driven by wireless. I think in the script, Michael, you said you expected that business to be lumpy, but to still grow double digits as you come into next year. I guess, looking at the ramp off the bottom, double digits could actually, if it's low double digits might actually, imply some declines on a sequential basis. And so wondering if you might be able to give us, some thoughts on sequential growth rates in that business. I know you said it's lumpy, but would you expect the trend still to be up generally on a quarter-over-quarter basis? Michael Hurlston: Yes, definitely. I'm sorry if we left you with that impression, Quinn, but I would say on a sequential basis, we'd expect strong growth. Obviously, we had a couple of quarters here on a backward looking basis that were really, really significant. As you correctly point out, it was off a low base, but, as we look forward, we would expect that growth to continue both on an annual and a sequential basis. Quinn Bolton: Got it, perfect. And then I guess maybe just following up on the last question about the enterprise, the video interface, the PC business, how important or, how significant of a driver do you think an AI PC upgrade cycle would be? Do you think that it would pull through a lot of the video interface? Do you think it would just be primarily on the PC side, the touchpads and fingerprint sensors? Just can you give us your latest thoughts on, how much you might benefit from an AI PC upgrade cycle? And I'm probably thinking that happens more next year than second half of calendar 24, but, would love your latest thoughts. Michael Hurlston: Yes, I think you sort of got the timing right. And if you remember in a last call, and you and I had this discussion, we have not yet seen ordering patterns that would be consistent with a big refresh cycle, whether that's AI PCs, whether that's ARM PCs, where that just has to do with sweating these PCs for a lot longer than they typically are. A typical refresh cycle is sort of three and a half to four years, and we're probably at, you know, four and a half to five at this point. So we would expect just a natural refresh happening there. But generally speaking, haven't seen it. It's a little bit early from our perspective to call it. The thing that you did hit on, which I would expect to be true, is that PC buying is going to pull through a lot of our other products. You typically see, and we saw it certainly during the pandemic, when PCs were going out the door at a relatively high rate, it was pulling through docking stations, it was pulling through headsets, it was pulling through monitors and other things that we have exposure to. So I think if it does happen, it's a nice tailwind for us, but we haven't seen it. We haven't seen the orders come in yet. We're seeing growth, but moderated growth. But we remain optimistic. We hear everybody else's calls talking about it, and we're certainly hopeful that that helps us in the ensuing quarters. Quinn Bolton: Great, thank you. Operator: Thank you for your question. Our next question comes from the line of Krish Sankar from TD Cowen. The line is yours. Unidentified Analyst: Hey guys, this is Eddie [ph] for Krish. Michael, you shared your expectation of Wi-Fi growing double digit. You also talked about sampling Wi-Fi 7, I had a schedule and some of the design wins there. So it feels like there are some good tailwinds, but I wonder if you guys have a growth range that you can share in mind. Like when you say double digit, are we talking about somewhere in the teens? Or is there a possible scenario where revenues can grow 20%, 30% for IoT in fiscal 25? Michael Hurlston: Okay, no, Eddie, thanks for the question. I think we've outlined generally speaking, we've outlined our sort of Core IoT growth rate at being double that of our normal growth rate. Our saying is a long-term forecast is sort of 10% to 12% on the top line. And we'd expect our Core IoT to be growing at twice that rate. So there's nothing that we've seen that would back us away from those comments and those projections that we outlined, a handful of quarters ago. In fact, our wireless business is doing better than that. Our processor business, as we said in the prepared remarks, kind of too early to tell, but we're seeing good early signs there. So, we feel like the wireless business is, 20 plus percent grower on aggregate. And again, nothing we've seen that would back us off of those projections. Unidentified Analyst: That's super helpful. And just to follow up, I think you mentioned as well, partnering with new system integrators and that would significantly impact your "growth rate". Maybe, Michael, can you talk a little bit about that? Like how big of a driver that can be and why these partnerships specifically can be significant to your growth rate going forward? Like are they focused on specific applications or geographies that you guys haven't had before? Just any color on that would be helpful. That's it for me. Thank you. Michael Hurlston: Yes, Eddie, again, I appreciate the question. A good one. Two things, right? You've heard me talk about in the wireless business, these module partners in the past that really help us bring wireless to market much more rapidly. We've had one really key partner in the module area for wireless. And we said in the prepared remarks, we've added a couple more. Those represent significant opportunities because they're helping us reach a much broader set of customers much more quickly. In wireless, you have a situation whereby there's a lot of components, RF components and power amplifiers and other things that go in those modules. And that time to market that the module folks enable is critical. The comment you're referring to is on the processor side. And it's a very similar thing where you have a guy that's going to aggregate a system with a processor, with wireless connectivity, with software. And those system integrators are then able to reach out to a number of different customers and tweak the platform slightly for a given application. So, while in wireless, we have a lot of experience and ability to go scale to these module folks, in processors, less so. But I'm very optimistic that the same model prevails, that these processor scaling partners help us reach a much broader set of customers much more quickly. We can go one to many in a much easier fashion than we can if we have to deal with all these customers by ourselves. Operator: Thanks for your question. One moment, please. Our next question comes from the line of Peter Peng from JPMorgan (NYSE:JPM). The line is yours. Peter Peng: Hey guys, thanks for taking my question and congrats on the results and welcome to the team, Ken. Michael Hurlston: Thank you. Peter Peng: Just on, you talked about that inventory digestion seems like it's kind of gone and inventory is quite clean. So, does that indicate that you're kind of shipping based on your guidance, you're shipping to end demand or do you still feel that we're still kind of shipping below end demand at this point? Michael Hurlston: Yes, Peter, again, good question. I do think we're shipping below end demand. I think you have a sellout that's clearly larger than the sell-in because we've cleared out quite a significant amount of inventory. I'd be hesitant to size that, but it's clear that we're under shipping, right? Because the inventory in the channel has been worked down during the course of the year and you can see the level of our shipment. So, I'd say that under shipment phenomenon is there. There still is pretty muted end demand. So, the thing that surprised us, and I think we've talked about this for the last handful of quarters, is we'd expected once inventory to clear out to get to a much higher level of shipment. We're not there because I think that on top of the inventory problem, there has been a demand issue that's been underlying it. But clearly, our ship-in is less than ship-out, so we're under shipping. And I think that as this demand profile recovers or the demand environment recovers, we'll see a kind of a second uptick. Peter Peng: Got it, thanks. And then this is kind of a gross margin trajectory. If I kind of look at your end market, it seems like you're most positive on the continual recovery in Core IT and enterprise and automotive and mobile may be kind of chugging along. So, I would think that there's going to be some product mix headwinds in your gross margin. So, can you just talk about how you think about gross margins over the next couple of quarters? Michael Hurlston: Yes, I think that's right. We've set aside a target of 57, and 57 is really based on that enterprise and automotive shipping at full throat. The enterprise and automotive is clearly well above 57 in a basket from where we stand. Processors and wireless are at or slightly below that 57 number and then mobile is quite a bit below. So, the aggregate says that when we're shipping it, kind of full tilt on enterprise and automotive, we would expect that the whole basket goes up to 57 as Core IoT continues to do well. In opposition to the enterprise and automotive, you're right, there's a little bit of a downdraft on the gross margin. Operator: Thank you for your question. [Operator Instructions] Our next question comes from the line of Jason Gitts [ph] from Munzo Securities. The line is yours. Unidentified Analyst: Hey guys, thanks for letting me ask the question. You mentioned on the IT budgets reset November and December, and those preliminary conversations you have with customers, just wondering what kind of impressions are you getting on those budgets for next year? Do you think that they could maybe be stretched to include some more enterprise spend or do we need to see a pullback in that AI spend before enterprise can return? Michael Hurlston: I mean, to the second part of the question, I don't think so. I mean, I think the two things have been very related that on more limited budgets, the allocation is very much going toward AI spend we would hope that generally you're going to be able to feed both sides of the equation as budgets get reset. But to the first part of your question, we really don't have visibility. We know our numbers internally and we're going through that budgeting cycle now with Ken and Matt, but we can't really tell what other companies are doing in that regard. Unidentified Analyst: Got it, thanks. And then maybe a little bit of a follow-up question on the gross margin side. I get that mix is a big piece of it, but as we are kind of getting back to that enterprise demand do you see any levers that are more in your control that can help get a little bit of improvement as you track towards that 57%? Maybe something like pricing or just some more costs can come out, anything that could create some upside there? Michael Hurlston: Yes, we're looking at all of that. I mean, I think that that's a fair point. We went through an environment of significant price ups during COVID. We've not seen a lot of revisions on the cost line from our Foundry and OSAT partners. But as we sort of look out and again, Ken coming on board, how we think about our pricing strategy, particularly in areas we have pricing power. I mean, if you remember, I've characterized the business as having a significant number of markets in which we play where we have sizable market share and the ability to command some level of pricing power. As we look out across the balance of this fiscal year, I think we're going to look at that a little more closely and see where we do have opportunity to potentially raise prices in markets where we have stronger positions. But all that's TBD. What I can tell you is I think on the cost line, marginally better, we're seeing marginally better pricing, but not enough to really favorably move the needle. Our number one needle mover, as we've talked about, is always mix. And then we may, if we don't see mix improving, we may look at pricing levers to see what we can do. Unidentified Analyst: Got it, thank you very much. Operator: Thank you for your question. At this time, I'm showing no further questions. This concludes the question-and-answer session. I would now like to turn it back to Michael Hurlston, Chief Executive Officer, for closing remarks. Michael Hurlston: I'd like to thank everybody for their questions and for joining this call. And we look forward to speaking to you at upcoming investor events throughout the quarter. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

TruBridge, Inc. (TBRG) Q2 2024 Earnings Call Transcript

Sarah James - Cantor Fitzgerald Jeff Garro - Stephens Stephanie Davis - Barclays George Hill - Deutsche Bank Thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to TruBridge Q2 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Dru Anderson. Dru, please go ahead. Dru Anderson Thank you. Good afternoon. And welcome to the TruBridge second quarter 2024 earnings conference call. Leading today's call are Chris Fowler, President and Chief Executive Officer; and Vinay Bassi, Chief Financial Officer. This call may include statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The company cautions you that any such forward-looking statements only reflect management expectations and predictions based upon currently available information and are not guarantees of future results or performance. Actual results might differ materially from those expressed or implied by such forward-looking statements as a result of known and unknown risks, uncertainties and other factors, including those described in public releases and reports filed with the Securities and Exchange Commission, including but not limited to the most recent annual report on Form 10-K. The company also cautions investors that the forward-looking information provided in this call represents their outlook only as of this date and they undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call. At this time, I will turn the call over to Mr. Chris Fowler, President and Chief Executive Officer. Please go ahead, sir. Chris Fowler Thank you, Dru, and thank you to everyone for joining us today. I'm pleased to report that our second quarter saw continued bookings momentum, strong revenue performance, EBITDA margin expansion, dramatic improvement in cash flow from operations. Our total bookings for the quarter came in at $23.3 million, marking the third straight quarter over $20 million. At the first of the year, we said that we were cautiously optimistic about our sales momentum, and that continues to be the case. We have also talked about the two-step process for selling our RCM services, the first being educating the client about the virtues of outsourcing, and secondly, selling TruBridge as the vendor. While still a bit anecdotal, we are seeing promising signs that the market is becoming more educated on outsourcing, thus allowing us to focus more on simply selling TruBridge as their future partner. Looking deeper at our bookings, our integrated nTrust solution is resonating in the market. In the first half of the year, we saw a 60% increase in the number of new nTrust clients compared to the first half of 2023. Our fully integrated solution is better for our clients as the shared risk SaaS model eliminates the need to budget for new products, price increases or ongoing maintenance payments, and is a benefit to TruBridge as those clients represent a higher lifetime value for us and tend to be stickier over time. Our cross-selling efforts are bearing fruit with $7 million signed in the quarter. Several enterprise clients expanded their relationship with TruBridge to include coding and additional billing and collecting opportunities, and current CBO clients added service lines like ambulatory billing, even in instances where they're not running our EHR. Importantly, at an increasing rate, our clients are turning to TruBridge as their sole revenue cycle partner, even when they're not yet ready to fully outsource. Last quarter, we spent time discussing the timing of our bookings-to-revenue conversion. While those larger deals can still take time to implement, we have seen the rate of conversion slightly decrease this quarter. We are laser-focused on accelerating the implementation of new contracts while being mindful of our customers' limitations and their time constraints. Much of the work Vinay and his team have done to increase visibility into how and when bookings convert to revenue has been a key piece in managing this figure. At this point in the year, we have over 90% of our projected 2024 revenue under contract, and based on our pipeline, we're optimistic the momentum in bookings will continue into the back half of the year. During the quarter, we also made progress on our offshoring initiative and saw early successes from our acquisition of Viewgol. We saw sequential improvement in EBITDA during the quarter and feel confident that Viewgol will achieve the $4.5 million adjusted EBITDA target for the year. At the end of Q2, 43% of our CBO and EVO operation is offshore, compared to 25% at the end of Q1. During the conversion, we are maintaining overlapping staff to ensure a smooth transformation of service. In addition, we tend to staff new opportunities ahead of the anticipated contracts and expect these savings to ramp over the next few quarters. For these reasons, we remain confident in our long-term margin expansion, but believe that will be muted in the near-term. As we stated last year, we did see some hiccups with our offshore partner, which spurred us on to the acquisition of our own captive offshore operation with Viewgol, but some of last year's challenges with that offshore partner has translated into slightly lower retention this year. To counter this, we're doubling down on our client retention efforts and being more proactive by leveraging Viewgol's extensive experience and best-in-class approach to customer management, specifically getting the domestic client management teams and offshore production teams aligned quickly and as smoothly as possible. We look to end the year on stable footing and continue to be optimistic about the delivery of the offshore staff. Vinay will provide an update on the progress he continues to make on our financial initiatives, but I would be remiss not to mention how pleased I am with the improvements he and his team have made thus far. Overall, this was a solid first half to our year and I believe we're delivering sustainable results. While our transformation is still underway, we are pleased with the progress we have made in both of our business units. The rural and community market is still our focus, and we will continue to advance our products and services to keep care local. Thank you, Chris, and thank you all for joining us today to discuss our second quarter results. In addition to the strong operational performance that Chris just highlighted, we also made improvements to our financial operations. As Chris mentioned, we are working diligently to enhance our financial quality controls and forecasting. In the second quarter, we saw some early indicators that our efforts are paying off. One of my first priorities was to improve our cash collection and management. To that end, as I mentioned last quarter, we added additional headcount and implemented a process of daily AR and weekly payables review. Although these are early results, the metrics are moving in the right direction. Accounts receivable is down 7.2% sequentially. Days sales outstanding are down approximately six days from Q1. At the same time, accounts payable increased just over $4 million, as we are becoming more regimented, aligning with the terms of the contract. The next priority was getting the business to free cash flow from operations positive. In the second quarter, we delivered positive $13.8 million of cash flow from operations, primarily from improved working capital management and improved profitability. Looking forward, it is our goal to remain free cash flow positive. On year-to-date, cash flow from operations is $11.7 million, compared to $10.2 million in corresponding six months in 2023. On the P&L, we are focused on identifying efficiencies in an effort to improve profitability. We are on track to deliver the $5 million cost savings mentioned in the last earnings call in the year. The majority of actions have been initiated. We are continuously looking for areas to drive more efficiency in operations. In terms of improving the quality of our reported earnings, the percent of capitalized software in the quarter was 5.2% of revenue and down 50 basis points from last quarter. You will also see on our cash flow statement that our investment in software development has come in $3 million lower in the first two quarters this year compared to 2023. We are investing wisely with an ROI focus and decline was primarily driven by sunsetting Centric and other low ROI projects. Lastly, looking forward, we are focused on improving our forecasting processes. We have been working to strengthen the partnership between the finance team and each business leader, and we have added a few experienced people to our FP&A team. We are building a monthly cadence of reviewing results, improving on key drivers for revenue and costs to help improving the forecasting process. I want to note that this won't be a quick fix, and I view it as an interactive multi-quarter journey. While all of these proof points are promising, there is still more room for improvement in these areas. Moving on to our second quarter results, starting from the top with bookings. Total bookings of $23.3 million in the second quarter was approximately 11% higher than last year, mainly from Viewgol and increases in EHR by slightly offset by RCM. In this quarter, RCM had bookings of $13.5 million, including Viewgol, with about 50% coming from our existing EHR install base, demonstrating the progress we are making on our cross-selling goal. EHR generated $9.8 million in bookings with over two-thirds coming from existing customers. We view this as a good sign that the customers are happy with the solution and are willing to buy more from us. Revenue of $84.7 in the quarter was essentially flat compared to last year. The divestiture of AHT in January of this year and impact from sunsetting Centric by year end was offset by the positive contributions from Viewgol, which we acquired in the fourth quarter of last year. RCM revenue of $54.1 million accounted for approximately 64% of total revenue. Viewgol performed in line with expectations. Total gross margin of 48.8% increased 100 basis points year-over-year. RCM gross margins of 44.1% in the quarter improved approximately 84 basis points compared to the prior year, primarily due to revenue seasonality and Viewgol. This margin expansion was partially muted by efforts to seamlessly transition to our global workforce. Additionally, EHR gross margins of 57.3% increased 350 basis points year-over-year driven by internal cost actions. Moving down the income statement, reported operating expenses represented 52.4% of total revenue in this quarter compared to 50.1% a year ago. While product development, sales and marketing and G&A are all down versus prior year, the increase in operating expense was primarily driven by an accelerated amortization of capitalized software costs associated with our financial management application product in EHR, which was shut down in Q2 as part of cost efficiency efforts. All of these items led to an adjusted EBITDA of $12.6 million in the quarter, a 12% increase year-over-year and 33% increase sequentially. Likewise, adjusted EBITDA margin of 14.8% in the quarter increased 150 basis points year-over-year and about 350 basis points sequentially. Some of the outperformance in the quarter can be attributed to revenue seasonality and timing of annual license revenue recognition. Sequentially, when combined, these factors accounted for about $2 million in revenue. Turning to the balance sheet. We ended the quarter with $7.7 million of cash and a net debt of $172.3 million. Operating cash flow was a positive $13.8 million in the quarter, compared to a positive $0.7 million last year and a loss of $2 million in the first quarter of this year. In the quarter, we also paid an incremental $4 million of principal on our debt, bringing our first half repayment to $17 million. We reiterate our goal of getting it down to a range of 2.5 times to 3 times, mainly from improving adjusted EBITDA and potential debt repayments. My final topic is guidance. We are providing our outlook for the third quarter and maintaining our full year ranges. For the third quarter, we expect revenue between $82 million and $85 million and adjusted EBITDA between $11.5 million to $13.5 million. I'd like to highlight that the third quarter adjusted EBITDA benefits from the additional cost savings and lower than expected annual conference costs mentioned in the last earnings call, offsets from some revenue seasonality and timing of license revenue recognition mentioned earlier. For the full year, we are reiterating our ranges and expect revenue to be between $330 million to $340 million and adjusted EBITDA to be between $45 million and $50 million. In conclusion, I'm pleased with our second quarter results and the progress we have made in the first half of this year, enhancing and improving our financial acumen. Based on the recent results, the improving quality of our financials and our pipeline, I feel increasingly confident that we have a clear line of sight to achieve our 2024 targets and return to growth in the out year. [Operator Instructions] Thank you. Your first question comes from the line of Sarah James with Cantor Fitzgerald. Sarah, your line is now open. Sarah James Thank you and congrats on a great quarter. It's nice to see the balance sheet improve on so many metrics. Can you talk a little bit about margin progression? So, if we look at the 3Q guide and the implied 4Q, it looks like your EBITDA margin is ticking up at about 20 basis points to 40 basis points a quarter. Is that a fair pacing of how we can think of improvement going forward or are there certain initiatives that could make it more lumpy as the company progresses towards their long-term guidance? Chris Fowler Yeah. Hey, Sarah. This is Chris. I'll start and let Vinay kind of fill in behind me. I think the big thing for us right now, and I called this out in my comments, was how we're thinking about the conversion to our offshore staff or our CBO operations and making sure that we are being very intentional to protect the service and keep our retention levels at or above where they need to be and so this year may see a little bit of a muted margin gain based on where we expect things to go forward. And with that, while we're pleased with what we're seeing, we still want to make sure that we're giving ourselves a little bit of grace to be able to get through the year to make sure that, again, customers are satisfied with this big step in our change and the way that we're delivering the service before we really kind of push the gas pedal on that. So I would say -- I would give us probably the next month or the next quarter or so to really kind of get a good sense of, as we see that continue to accelerate, what that's going to be. But, again, along with that, and Vinay can jump in here as well, there are the continued savings initiatives that we continue to see really paying off and making sure that we are intentional about every dollar that we spend in making sure that it's going to the betterment of our customers or the betterment of our employees. Vinay Bassi Yeah. And I would echo that, Sarah, and that's a great question. Especially, as I mentioned, there was some seasonality and timing between Q3 and -- Q2 and Q3, but by Q4, we expect margins to improve a little bit more with incremental revenues, which takes the benefit of last two, three quarters that has been great for us. But longer term, as Chris mentioned, once I have a few more quarters, understand the full drivers and have the process a little more, I do expect our margins to continue improving because that's our goal. And it's a very simple way for me, a very laser-focused, tighter control on cost, and giving all the support needed to generate the white space, as well as our home turf in rural healthcare to get increased bookings. So that benefit should start falling in. So my goal will be to once, like Chris said, have this quarter, one more quarter behind us, and start seeing the regular improvement in margins. Chris Fowler And I'll end with this, with that, Sarah. We have said in quarters past our expectation or desire to be back at a 20% plus margin from an EBITDA perspective, and I still think that that is well within striking distance and hopefully a waypoint, not a destination. Sarah James That's great. And one more, if I could. So we're starting to see a little bit of relief on hospital margins, and some of your peers have started talking about how that flows into the sales pipeline. Could you give us an update on the financial health of your customer base and how that translates into demand for product expansion next year? Chris Fowler Yeah. I would say our customer base is still a bit of a mixed bag, but has really felt the benefit, still kind of carried over from some of the COVID relief over the last several years and have given them the opportunity to really to store some cash on hand. I think for us, because the vast majority of our customers, especially on the EHR side, really have the full suite of products that we have delivered, whether that be through nTrust as they're going forward or through the past with meaningful use. And so what they're focused on right now is continued efficiency and operations, and I think that's where we're continuing to see the demand on the services side as much as we are from a product perspective. Your next question comes from the line of Jeff Garro with Stephens. Jeff, your line is now open. Jeff Garro Yeah. Good afternoon. Thanks for taking the questions. Looking at the bookings results year-to-date, we see momentum for both segments of the business. So I wanted to ask, as you look out on the pipeline for the second half, whether you see the expectations for continued momentum biased towards one segment or the other in the back half of the year? Chris Fowler Hey, Jeff. Thanks for the question. It's a great one and something we, obviously, pay a lot of attention to. And if you go back to the end of last year, first of this year, maybe even before that, and we talked about the RCM side of the house really being where we saw the opportunity for growth. But to your point, we're seeing a bit of a renaissance in the EHR opportunities. I think it might be a little early for us to say that we think that that's a trend, but we are seeing where there is opportunity, especially when we think about the nTrust, the ability to couple the EHR with the RCM service, and that being a differentiator that, there's still some disparate or not disparate, there's still some vendors out there that we feel like are primed for replacement on the EHR side. We continue to enhance the experience for our customers there and invest, as Vinay said. We're being smarter about how we're spending those dollars to make sure that our customers are really getting the outsized return for that and I think it's leading to some promising opportunities for us there. But going forward, I'd love to see both sides continue to compete for who's going to be the leader every quarter because I think that's just a good thing for us. I do think that the world of opportunity is much bigger on the RCM side. So I think for us it's about how we think about that continuing to expand while we're continuing to see the EHR come along nicely. Jeff Garro Excellent. Great to hear. Maybe to follow up a little bit on the momentum for nTrust, just curious if there's any particular driver you would call out there, whether it's recent regulatory rules being put out in the public domain or you alluded a little bit to a competitive dynamic. And then also whether there's any kind of tailwind from, call it the final leg of trying to convert your own legacy EHR platforms to your more modern platform. Chris Fowler Yeah. I think there's a little bit of everything in there. I think if you look at our existing customer base, so our customers that are already on the HER. I think the first thing is, is they have to believe that we're going to continue to be the right partner for them on the EHR. So it's super important for them to see the value in that, which really allows us to have a good seat at the table from an RCM standpoint. Even though, you know, they could look at us standalone if they were leaving us to go to another vendor, I do think that when they're -- at one -- however we want to look at it, we're all TruBridge, right? And so I think for that cohort, that cross-sell opportunity, them seeing the value in the EHR is super important and so our investment and delivery there is top of the house. When we're thinking about the net new market, so a replacement more than likely, I do think it is a differentiating value that we are the lone wolf out there that can provide both the EHR and the RCM service together. And I think the fact that it's all at a contingent based on, so their EHR is no longer a flat fee or a licensed purchase. It's based on the utilization at their hospital. It's based on our performance from a collection standpoint. So our initiatives are aligned, as well as they can possibly be and that our definitions of success match up. So I think, those are really the two biggest things that we're seeing. We're seeing that momentum on the EHR side with the continued investment in the product. We're seeing the ability to sell the two together to really kind of drive that opportunity for interest going forward. Jeff Garro Excellent. I appreciate those comments. And last one for me, I do want to make sure to hit the demand side a little bit more on RCM. Last quarter, you told a nice story of the combination with Viewgol being cited by one of the prospects that you were dialoguing with. So I'm curious whether that combination specifically or maybe your efforts on automation more generally are not just a margin driver, but are also helping fuel the pipeline for future demand on the RCM side. Chris Fowler There's no doubt that our ability to deliver the service at a lower price point is absolutely getting us more opportunities and also giving us a better right to win. We're just short of a 20% increase on our winning percentage year-over-year and I think that's directly attributable to our ability to be, while not every deal that we're in is competitive, when they are competitive, it helps for us to be able to be at or better than the competition from a price standpoint, knowing that our delivery is going to be there. So, yeah, I still continue to be very optimistic about what that means for us going forward. I think, we've talked about it in the past, we're just scratching the surface still on the automation and how that shows up and translates into margin expansion. I think the fact that we're delivering quality analytics and insights to our customers today gives them belief that we're going to be able to actually execute on meaningful leverage of the artificial intelligence. Jeff Garro Excellent. Great to hear that data point on the win rate. Thanks again for taking the questions. Your next question comes from the line of Stephanie Davis with Barclays. Stephanie, your line is now open. Stephanie Davis Hey, guys. Thanks for taking my question. Congrats on the quarter. So, first off, I was hoping you can tell us about some broader trends. We've seen a lot of movement in the revenue cycle space across the past few months with some IPOs, some takeouts. But I get you have a little bit of a different competitive backdrop. So, could you give us a refresh if you're seeing anything different or any changes on the backdrop and how it could be impacting us forward? Chris Fowler Thanks for joining. Thanks for the nice comments. I would say, and again said this in the remarks, what we're seeing is the market continuing to come closer to us, meaning that we're not having to knock the door down, for lack of a better term, when it relates to explaining why our hospitals need to be evaluating the outsource model. It -- we do have a different market. We are -- our customers are, if they're not the number one, they're in the top three employers in the community that they serve and so there are some dynamics from an employee headcount standpoint and economic development in the community, which has traditionally been a barrier for us. I would say that -- if there was one thing that I've watched in either the on-site meetings that I've gone to or as I watch our sales team and see the feedback that they're getting on the opportunities, it's that those barriers and the willingness for our customers to have meaningful conversations about moving to an outsource model just continue to grow. So I do think that, as the months and quarters go on, we're just going to continue to see that expand. And so for us, it's about how do we make sure that we're built in a manner to capture that demand as it comes along. But I think that's the big trend is, our hospitals, very similar to the larger market, is seeing this as a business decision that they've got to do so that they can be viable -- financially viable, keep the doors open and keep the care in their communities. Stephanie Davis So I guess a bit related one then for Vinay, because you are calling out kind of an improving demand and improving backdrop. When I think about this print and guidance versus the few -- first few out of the gate, how much of this positivity is a function of improving demand and improving macro versus improvement in execution and getting a better handle on numbers going forward? Vinay Bassi And Stephanie, thanks for giving me the question. I just wanted to make sure I understand... No, no. Just to make sure I answered it right. So your question is more about how does the strong momentum in bookings translate into guidance? Stephanie Davis Well, how has the strong momentum, how much of that is a function of an improving backdrop versus some of the actions you guys have taken? Vinay Bassi So I would say it's a function of both, because one is controllable, one is non-controllable. The controllable part that we have done is the focus on making sure the need from a customer delight, customer focus is there. And it is not about -- see growth for financial terms is not about just winning new bookings. It is stemming attrition. So it's that focus and making sure that touching the customer and especially when we are going through the global workforce thing is ensuring that that customer delight remains the focus. So that, to some extent, is factored, is also reflected in the revenues that we see. And the non-controllable of the market demand certainly is a tailwind that I expect to see in the near future and continue because, as you know, we win a booking in a certain quarter. And depending upon the complexities of the deal in the future quarters, I read those benefits. So that's why I'm more hopeful that whatever is in our controllable continue to make wise investments, whether it's in the sales, in marketing, and investments that can help us increase our customer delight and yield that benefit when the revenues show up in the coming quarters. Chris Fowler Yeah. And I'll give you a great example just from this week. So earlier this week, I was in Arizona and California at some sales opportunities. And the California site, the catalyst was less than stellar operations, but also some regulatory changes in California around wage increases and minimum wage and what the impact is going to be for them. But before we were there, before we had given them any customer reference, they had already unsolicitedly made three or four calls to our customers to see how we were doing. And so, to your point, our execution is always going to play a huge part in our ability to convert, because as great as we can sell and have the best story and marketing material and sales staff, if we're not executing, if we don't have a referenceable customer base, then they're going to go somewhere else. So I think it's a little bit of both. I think there are the factors in the macro that are driving people to the market, but I definitely think our performance is going to be the thing that determines whether they pick us or not. Stephanie Davis Looking forward to seeing the execution. Thanks, guys. Your next question comes from the line of George Hill with Deutsche Bank. George, your line is now open. George Hill Hey. Good evening, guys, and thanks for taking the question. I guess, Chris, on the EMR side of the business, I'd ask you quickly, like, how's the legacy base holding up? Because you talked about the sales pipeline, and to see growth there is interesting, but, like, I guess what I'm kind of interested in, and Vinay kind of made the comment on, like, holding on to the legacy base versus kind of what's new and available. I guess I would just like to hear you talk about the competitive environment and the base? And then a quick follow-up would just be, as it relates to the provider side of the business, we're seeing a lot of or the rev cycle side of the business, we're seeing a lot of growth in utilization in a lot of provider categories. Are you guys seeing the utilization strength flow through to both kind of volume and pricing growth on the RCM side of the business? Thanks. Chris Fowler Okay. Great. I'll try to -- I may have to ask you to help me come back to some of that, but let me start with the first one around the EHR business. I would say our retention, outside of the Centric customer base, we're very pleased with how our retention and our stickiness in our customer base is holding up. We continue to make investments into the product to keep those customers happy and on the EHR and also. So we are -- from a competitive standpoint, I think I've said this in calls past, it seems like there is still a bit of a hangover as it relates to EHR spend, especially in our end of the market. If it's not on fire, they're probably looking to invest that money elsewhere, whether it be the facility, whether it be in additional services or something there in the community. But we are -- there are drivers. HCI1 [ph] was something that we thought would be a catalyst for us in this year. It obviously got delayed into 2025. As there are regulatory impacts like that, we tend to see a pickup in our opportunities for EHR wins. So a couple of our retention rates that we've had this year with how we see kind of a favorable market going in next year, we continue to be optimistic about that part of the business. On the second side as it relates to, see if I make sure I get this right, the provider volumes and utilization going up. What I would say is that, we're seeing our hospitals that are thriving are really starting to expand the services that they're providing through their positions and seeing that utilization go up. I don't think it's any surprise to anybody that care is moving sort of outside of the four walls of the hospital. And so I think the smart hospitals are really making sure that they've got a strong physician network that's able to capture that, which again goes back to one of the rationales for us making the acquisition of Viewgol last year, was that we see the winds changing to where I think there's going to be a big market and opportunity for us in the RCM space there and we're seeing that kind of to play out through our customers today. There are no further questions at this time. I will now turn the conference back to Chris for closing remarks. Chris? Chris Fowler Thank you, Mark. And thanks again to everybody for joining today, and thanks for your continued interest in TruBridge. I'd also like to thank all of our employees who work hard every day to make our clients successful and deliver quality health care to our communities. It's our privilege to work with some really wonderful clients and the amazing things that they do in the challenging environments that they're in. Everybody have a great evening. Talk to everyone soon. Bye-bye. Gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Earnings call: Alarm.com sees growth in Q2 with strong SaaS revenue By Investing.com

Alarm.com (NASDAQ:ALRM) Holdings, Inc. (NASDAQ: ALRM), a leading platform for smart home and business security solutions, reported robust financial outcomes for the second quarter of 2024. The company's SaaS and license revenue showed significant growth, reaching $155.9 million. Alarm.com also achieved a notable adjusted EBITDA of $42.8 million. Despite experiencing a temporary setback due to a SaaS and license revenue outage, the company has raised its full-year revenue projections and is actively expanding its commercial capabilities and international presence. In summary, Alarm.com is navigating through its temporary challenges while capitalizing on opportunities for growth and international expansion. The company's leadership remains committed to supporting its service providers and investing in technologies that align with their mission to enhance safety and convenience in smart homes and businesses. Alarm.com Holdings , Inc. (NASDAQ: ALRM) has demonstrated a strong financial position with its recent earnings report, and an analysis of real-time data from InvestingPro provides additional context to the company's value and performance. Here are some key metrics and insights that may interest investors: For investors seeking more detailed analysis and additional InvestingPro Tips, there are currently 10 more tips available on https://www.investing.com/pro/ALRM. These tips can provide deeper insights into Alarm.com's financial stability, valuation metrics, and overall stock performance, aiding in making more informed investment decisions. Operator: Good day, and thank you for standing by. Welcome to the Alarm.com Second Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to the speaker today, Matthew Zartman, Vice President, Strategic Communications, Investor Relations. Please go ahead. Matthew Zartman: Thank you Kevin. Good afternoon everyone and welcome to Alarm.com's Second Quarter 2024 Earnings Conference Call. Please note that this call is being recorded. Joining us today are Steve Trundle, our CEO; and Steve Valenzuela, our CFO. During today's call, we will be making forward-looking statements, which are predictions, projections, estimates and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. We refer you to the risk factors discussed in our quarterly report on Form 10-Q and our Form 8-K which will be filed shortly with the SEC, along with the associated press release. The call is subject to these risk factors, and we encourage you to review them. Alarm.com assumes no obligation to update forward-looking statements or other information which speak as of their respective dates. In addition several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP to the non-GAAP measures can be found in today's press release on our Investor Relations website. I will now turn the call over to Steve Trundle. Steve? Stephen Trundle: Thank you, Matt. Good afternoon, and welcome to everyone. We're pleased to report financial results for the second quarter that exceeded our expectations. SaaS and license revenue in the second quarter grew to $155.9 million and adjusted EBITDA was $42.8 million. During the quarter, Alarm.com and our service provider partners continue to drive organic growth in the commercial, international and Energy Hub businesses. We also increased our balance sheet flexibility with a $500 million convertible notes offering. I want to thank our service provider partners and our employees for their contributions to our results. On today's call, I will cover recent developments in our residential and commercial businesses. In the second quarter, we continued to see that churn in the residential account base remained below the historical averages. This is consistent with our expectations and in-line with our experience in prior periods of economic softness. With mortgage rates remaining elevated, people are moving less. Instead, they are investing into their existing home and staying put. We believe that an additional factor contributing to lower residential churn in the last few quarters has been the fact that a higher percentage of systems today include a number of capabilities that are used routinely by the consumer. System engagement and the attachment of advanced devices or capabilities like video and video analytics, smart Alarm.com thermostats and smart locks significantly increase account survival and lifetime value over time. So we are pleased to see that the attachment rate of video services on new residential accounts nudged higher to 53% during the second quarter. This followed several quarters of the rate hovering around 50%. Since launching our video analytics solution in the fourth quarter of 2018, the video attachment to new accounts has increased more than 2.5 times. Several recent new products, including our 750 video doorbell and our new floodlight camera combined with our enhanced remote video monitoring central station integrations, appear to be well received by the residential markets we serve. To better service our partners who are delivering these more advanced systems to the market, we recently introduced a generative AI capability to our service provider support platform. We trained a large language model on our complete database of product information, support, installation and training content. The chat-based interface, we created is accessible to technicians in our mobile tech app. This allows technicians to seamlessly access synthesized information from all our support resources while they are in the field actively engaged in installations or supporting subscribers. Nearly 2,000 of our partners have adopted and used this capability since its release. Now let me shift to an update on our commercial business. We believe that the commercial market remains fragmented and is in the early stages of a significant transition to cloud-based solutions that are more capable across the enterprise, less expensive to maintain and easier to install and use. As this market shift unfolds, we're leveraging our competitive advantages in SaaS software, reliability and our service-oriented partner business model to capture share. Our commercial offering is a purpose-built, end-to-end solution that unifies intrusion, access control and video capabilities. We are also enabling integrated solutions for fleet management and active shooter response. I'm particularly pleased with the progress we have made with our Access Control solution which we brought to market several years ago. The team has worked closely with our partners to drive a steady cadence of enhancements like mobile credentials, which allow users to access a property using just their smartphone. We also added elevated enterprise management so that larger commercial customers can create and manage access plans that align with their more complex organizational structures. And we launched Cell Connector, so that our Access Control solution can operate without the challenges of deploying connected devices on the customer's IT network. This quarter, we also began to introduce elevator control with our Access Control solution. The steady work by our Access Control team has expanded our product debt and our partners have successfully introduced our solution in more sales cycles. As a result, we surpassed a few nice milestones in the second quarter. Our access control platform now powers over 100,000 doors and 2 million active user credentials. We've a diverse base of access control customers across approximately 30 different worldwide markets. They range from small businesses with two to three doors to large-scale enterprise customers with hundreds of doors to manage. One of our multi-location accounts includes nearly 1000 doors. Another commercial account manages over 15,000 employee access credentials through our service. We are pleased that our service provider partners and our platform can serve such a wide market and are excited to continue advancing our solution and driving growth in this area. Before I hand things over to Steve Valenzuela, I want to touch upon the convertible senior notes offering that we closed during the second quarter. We took advantage of what we felt was a strong convertible bond market to put more dry powder into our business, so that we can continue to be opportunistic in our corporate development initiatives. We are pleased with the strong market interest in our bond offering and the terms we secured, including the 2.25% interest rate. As I have indicated in the past, our corporate development strategy is to be deliberate in pursuing acquisitions that are consistent with their strategy and support our partners. The convertible bond transaction included a $75 million stock buyback and a cap call transaction to reduce future dilution. We anticipate continuing buyback activity from time-to-time, consistent with our Board's authorization. In summary, I'm pleased with our quarterly results and the growth we continue to see across the business. I want to thank our service provider partners and our team for their hard work and our investors for their continued trust in our business. With that, I'll hand things over to Steve Valenzuela to review our financials. Steve? Steve Valenzuela: Thanks, Steve. I'll begin with a review of our second quarter 2024 financial results and then provide our updated guidance before opening the call for questions. Second quarter SaaS and license revenue of $155.9 million grew 11% from the same quarter last year. Our SaaS and license revenue visibility remains high with a revenue renewal rate of 94% in the second quarter, at the higher end of our historical range. Hardware and other revenue in the second quarter was $77.9 million, up from $72.9 million in Q1 2024, mainly due to some strengthening in video camera sales. Total revenue of $233.8 million for the second quarter grew 4.4% year-over-year. SaaS and license gross margin for the second quarter was 85.8%, up about 120 basis points year-over-year. Hardware gross margin was 24% for the second quarter, up from 22.4% in the year ago quarter, mainly due to product mix with increased commercial hardware product contribution. Total gross margin was 65.2% for the second quarter, up from 61.4% for Q2 2023 due to increased SaaS and hardware margins and a higher mix of margin rich SaaS and license revenue. Turning to operating expenses. R&D expenses in the second quarter were $65.7 million compared to $60.9 million in the second quarter of 2023. We ended the second quarter with 1,155 employees in R&D, up from 1,053 employees in Q2 2023. Total headcount increased to 2,033 employees for the second quarter compared to 1,909 employees in the year ago quarter. Sales and marketing expenses in the second quarter were $27.8 million or 11.9% of total revenue, up from $23.8 million or 10.6% of revenue in the same quarter last year, mainly due to conference expenses and more marketing program spending. Our G&A expenses in the second quarter were $26.1 million, down from $28.8 million, mainly due to lower legal expenses. In the second quarter, GAAP net income was $33.5 million, up from GAAP net income of $15.8 million for Q2 2023. Non-GAAP adjusted EBITDA in the second quarter was $42.8 million up 17.8% from $36.4 million for Q2 2023. Non-GAAP adjusted net income was $32 million or $0.58 per diluted share in the second quarter compared to $26.6 million or $0.49 per share for the second quarter of 2023. Turning to our balance sheet. We ended the second quarter with $1.1 billion of cash and cash equivalents, up from $697 million at December 31, 2023. During the quarter, we issued $500 million in convertible notes that mature in June 2029. As part of the transaction, we used $75 million to repurchase 1.1 million shares of our common stock at $67.14. We also used $63 million to purchase cap calls to bid up the convertible bond conversion premium from 30% to 100% for an effective conversion price of $134.28. As a reminder, our original $500 million convertible bonds mature in January 2026. Turning to our financial outlook. For the third quarter of 2024, we expect SaaS and license revenue of $157.3 million to $157.5 million. Our third quarter guide includes a $1.25 million reduction in SaaS and license revenue resulting from the CrowdStrike outage that temporarily impacted some of our operations. For the full year of 2024, we're raising our expectations for SaaS and license revenue to be between $626.8 million to $627.2 million up from our prior guidance of $624.5 million to $625 million. We are projecting total revenue for 2024 of $920.8 million to $931.2 million increase from our prior guidance of $914.5 million to $931 million, which includes estimated hardware and other revenue of $294 million to $304 million. We estimate that adjusted EBITDA for 2024 will be between $165 million to $167 million up from our prior guidance of $164 million to $166 million. Non-GAAP net income for 2024 is projected to be $119.5 million to $120.5 million or $2.06 to $2.07 per diluted share compared to our prior guidance of $118.5 million to $119.5 million or $2.14 to $2.16 per diluted share. As a reminder, our new convertible bond issuance increased the total number of diluted shares outstanding. EPS is based on an estimate of 58.1 million weighted average diluted shares outstanding. We currently project our non-GAAP tax rate for 2024 to remain at 21% under current tax rules. We expect full year 2024 stock-based compensation expense of $51 million to $53 million. In summary, we are focused on executing on our business plan and investing in our long-term strategy while continuing to deliver profitable growth. And with that operator please open the call for Q&A. Operator: Thank you. [Operator Instructions] Our first question comes from Adam Tindle with Raymond James. Your line is open. Adam Tindle: Okay. Thanks good afternoon. Steve Trundle, I wanted to ask on the topic of Gen AI as you get more insight. You mentioned in your prepared remarks the concept of utilizing it for text, which makes a lot of sense. Just curious, is that something that you are monetizing separately? Or are you bundling that into the app? And then on a broader topic, as you kind of think about Gen AI, where does it go from here in areas that you think you could potentially monetize and how Alarm.com can differentiate? Thanks. Stephen Trundle: Adam. Good question. Yes, on the implementation that's there to support our technicians, that's bundled into the mobile tech application. And it is really intended to help them sort of while they're on the go, more quickly get answers to. At the moment, more routine types of questions, if someone's on a job site and they've got a super complicated issue, it's a technician. We'll still get on the phone and we often do and hold their hand for one or two hours sometimes to get them through a complex type of commercial installation. But for routine stuff, the large language model really helps them get sort of quick and easy expedited answers, and we've seen pretty good usage there. More generally, in the offering, I think where you'll see us go is tying the capabilities that are becoming available to what we are doing with video and specifically what we are doing with remote video monitoring. So you can imagine that a number of the operator actions, when I'm -- if I were an operator today, and I'm watching camera activity, at some point, I may need to speak to a potential perk or someone who is doing something that may not -- maybe shouldn't be do it or maybe I'm not sure you can imagine that we can leverage a lot of the work we're doing in this world to make that entire process more efficient for the operator in the central station, and that is where we're in -- one of the several areas where we're headed. Adam Tindle: Got it. Makes sense. And congrats on the convert, you're now flushed with cash. I think, near $1 billion even after some of the things that you had to do with the convert. So I wonder if you could maybe just in light of that, talk about priorities, and in particular, if we were to potentially even use that in one fell swoop for example, for a larger acquisition. As you kind of think through that potential, what would be the key criteria that you would need to look for? Or do you think it's more likely this would be kind of piecemeal and maybe do more tuck-in type? Thanks. Stephen Trundle: Well, we wanted to be in a position to do more than just tuck-ins. We have had, I think, a nice track record with some of the smaller -- by today's standards, some of the smaller acquisitions through time, like we did with ObjectVideo, like we did with Energy Hub and open I was a bit larger, but we want to be in a position to even potentially look at things that are still larger than those. So that's what we are doing. We are being optimistic. We're watching the market. We think that now it is a good time to have some cash available. We think we are probably the acquirer of choice in the security industry anyway. And the range of things we may look at are sort of any place in the IoT space, particularly if those IoT applications are consistent with their mission of providing people more safety and convenience in their everyday life. So we're looking at a lot of things. We're not ruling out larger opportunities. We'll continue to do a trickle of tuck-ins as the right opportunities present themselves. And I'd say the primary criteria I mean one that we are careful about is we attempt to look at things the way I as a shareholder would look at things and make sure that whatever we are doing is on a long-term basis, accretive to our shareholders and supportive of the metrics that we want to deliver. So that's a little bit of commentary there. I can't speak to any specific opportunity. But we're active, but opportunistic and deliberate in how we look at things. Adam Tindle: Yes. I think investors certainly appreciate that mindset. Thank you. Saket Kalia: Okay. Great. Hi guys. Thanks for taking my questions here. Steve Trundle, maybe just to start with you. I really appreciated the commentary just on commercial in your prepared remarks. Can you just maybe go one level deeper into what would a dealer have to rip and replace to bring their platform onto Alarm? And how do you sort of think about that can that you're going after? Stephen Trundle: Good question, Saket. So the amount of rip and replace is actually declining somewhat. The team we have at OpenEye has for a long time, supported a wide variety of cameras on the video side. Some of that supports enabled via a standard that is known as ONVIF. So we support a pretty wide range of cameras, not just our own. And what that enables is for us to go to a potential commercial customer and get them on platform, get them all the value of our cloud services without ripping out everything they have. Obviously, newer cameras and newer models enable more functionality. And especially on the analytics side, more of the analytics is being done on the edge, on the camera. So more capabilities are possible with newer equipment, but you want to sort of land and then expand, and that's what we're trying to do. We brought that capability back into the full Alarm.com platform, by the way meaning broader camera support. On the access side and I talked a little bit about the access control market. There, we are using fairly -- in most cases, we are leveraging what are fairly common market standard readers, which are the devices that you actually see next to a door that someone scans in or out with. So we can go in. In this case, I mean, of course, our service provider partner can go in and take over a lot of those existing readers and begin to deliver enhanced new services without a ton of rip and replace. We're increasingly trying to avoid having to always kind of especially the commercial customer and these bigger ones, we just can't go in with the rip and replace message and be successful very often. So try to avoid that as much as we can. To your comment about the TAM, I mean, I think -- we think we're sort of early days in our penetration of the TAM. The TAM is generally regarded as every small business or enterprise in North America, if we at least look at the North American TAM, number of sites there, I try to think do we have sizing for roughly 4.5 million, 5 million sites, we think are available, and we're sort of steadily chipping away at that. Saket Kalia: Got it. It makes a ton of sense. Steve Valenzuela, maybe for you, and apologies if I missed it in the prepared remarks, but did you sort of give an update just on sort of the mix of the business or of the SaaS business that comes from some of those higher growth areas like commercial, like video and international. That's always just a really useful sort of lens given the mix shift that's happening in that business. Steve Valenzuela: Sure, Saket. Yes, the growth initiatives continue to do very well. We've actually refined it a bit. We've looked at North American residential video and actually pull that out of the growth initiatives because it was actually understating North America. So if you look at the growth initiatives, which we include in commercial, international Energy Hub, those represent about 1/4 of our total SaaS and we are growing about 20% to 25% year-over-year. Saket Kalia: Very, helpful. Thanks guys. Operator: One moment for our next question. Our next question comes from Darren Aftahi with ROTH. Your line is open. Darren Aftahi: Hi, how are you? Thanks for taking my questions. Just two, if I may. On the Gen AI initiative, I'm curious if that's going to result in cost savings relative to some of the kind of help. You said you'd have to provide longer term? And then on international, I know you guys have made some acquisitions in the past and I'm kind of curious how those acquisitions kind of play into kind of manifesting some new international markets as we maybe go forward into 2025. Thanks. Stephen Trundle: Darren, sure. The Gen AI in theory, over time should drive some amount of reduction in in-person call volume. As I was mentioned on the prior question, what we are seeing right now are most of the calls that we can handle with AI. Those are fairly routine calls that might have taken us 1 or 2 minutes with a human support person otherwise. We do expect -- and one of the things we actually pride ourselves on is really laying out great support for our service provider partners so that they're confident in their development of new products or in their adoption of new products and technologies. So I don't think we're going to see a massive reduction in our capacity, the capacity we have to maintain to support our partners, but there's probably a bit of a positive tailwind there over time. With regard to international, yes you are referring back out to an acquisition we did 1.5 years or two years ago, which was EBS. And that we had a lot of work underway there for the last -- since the acquisition and we are just getting to the point where that product, which is a much lower cost communicator that will work with a wide variety of international panels is coming to market. So it's going to start showing up in the second half of this year, sort of just starting right now. So it's a good reminder, something we should probably watch and hopefully talk about an update further on towards the end of the year. But we are now beginning to get to market with the integrated version of that technology. Unidentified Analyst: Hi, guys. Thanks for the questions. For the first, can you provide us with some color on the macro front, maybe what you're seeing? I think existing home sales bonds got all-time lows. And then on the second, in your prepared remarks, you noted commercial contribution was greater on the hardware side, which led to the margin improvement. Can you maybe elaborate on whether you are seeing varying behavior from residential versus commercial customers on the hardware side? Thanks. Stephen Trundle: Yes. Sure. Good questions. On the macro side to us, things looked sort of as expected in the second quarter. As I noted in my prepared remarks, we are seeing higher revenue retention because we think there are fewer moves on the residential side, and certainly, your housing data supports that. So -- but those consumers who are buying in the second quarter anyway, we saw a little bit of a move back towards what we had planned in terms of the size of systems that they are purchasing and the amount of hardware going into each installation. Same thing on the commercial side, actually. If we go back in time, following our Q1 report, we indicated we had seen a little bit of softness on the commercial side and the SMB side. In the second quarter, we saw basically those installations right at plan. So a little bit of a recovery on the hardware side, a little bit more access control, more cameras going into the average install. So macros look to us on an overall basis to improve a tad on both the residential and the commercial side in the second quarter. Unidentified Analyst: That's helpful. Thanks. Operator: Our next question comes from Stephen Sheldon with William Blair. Your line is open. Stephen Sheldon: Hi, thanks for taking my questions. And just one for me. I just want -- if you guys think about Alarm.com's commercial capabilities, how should investors really think about the rank order of opportunities there that could really move the needle over the next two years to three years as you think about monetization, which applications, I guess, framed another way -- which applications are you the most optimistic about? Stephen Trundle: Hi, Stephen, I'd rank them video first and foremost including analytics, upside on the SaaS line with improvements constantly on the analytics level and then with remote video monitoring capabilities. So I'd rank that First, I would then rank in terms of our growth, access control as the second piece of commercial that is growing nicely, a little further down would be intrusion and then active shooting detection and fleet monitoring and all things that have promised. But I probably think the bigger drivers are really what we are doing with video and access control. And then over time, we may introduce additional products into that category. But the big two right now and the big one is really video. And then after that, a lot of the other pieces sort of support the video installation. Operator: And I'm not showing any further questions at this time. So this does conclude today's conference and presentation. You may now disconnect, and have a wonderful day.

System1, Inc. (SST) Q2 2024 Earnings Call Transcript

Kyle Ostgaard - Vice President of Finance Michael Blend - Co-Founder and CEO Tridivesh Kidambi - Chief Financial Officer Thank you for standing by. My name is Joe, and I will be your conference operator today. At this time, I would like to welcome everyone to the System1 Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Kyle Ostgaard, Vice President of Finance. You may begin. Kyle Ostgaard Thank you for standing by, and welcome to the second quarter 2024 conference call for System1. Joining me today to discuss System1's business and financial results are Co-Founder and CEO, Michael Blend; and our Chief Financial Officer, Tridivesh Kidambi. Recording of this conference call will be available on our Investor Relations website shortly after this call has ended. I'd like to take this opportunity to remind you that during the call, we will make certain forward-looking statements. This includes statements relating to the operating performance of our business, future financial results and guidance, strategy, long-term growth and overall future prospects. We may also make statements regarding regulatory or compliance matters. These statements are subject to known and unknown risks and uncertainties that could cause our actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors included in our annual report on Form 10-K for the fiscal year 2023 filed on March 15 as well as the current uncertainty and unpredictability in our business, the markets and the global economy generally. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on management's assumptions and beliefs as of the date hereof, and System1 disclaims any obligation to update any forward-looking statements, except as required by law. Our discussion today will include non-GAAP financial measures, including adjusted EBITDA and adjusted gross profit. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Historical performance and future estimates provided during this call exclude results from total security. Information regarding our non-GAAP financial measures, including a reconciliation of our non-GAAP financial measures to our most comparable historical GAAP financial measures may be found on our Investor Relations website. I would now like to turn the conference call over to System1's Co-Founder, Chief Executive Officer, Michael Blend. Michael Blend Thanks, Kyle. Good afternoon, everyone, and thanks for joining us on our Q2 2024 System1 Earnings Call. We have a positive update for you today. I'm happy to announce that System1 delivered financial results, which exceeded the high end of guidance across our key financial metrics. System1 delivered $95 million of revenue and $39 million of gross profit. Adjusted EBITDA was $9.9 million, which was 42% higher than the high end of our guidance range. These strong results were driven by the positive returns from the continued investment in our RAMP platform, very strong international growth, significant progress in our owned and operated products and a tight focus on reducing OpEx. Let's get into some of the financial details. I want to start with our owned and operated business. Total owned and operated revenue was $77 million, flat year-over-year and up 12% from last quarter. Adjusted gross profit was $27 million, up 22% from last quarter and flat year-over-year. Our quarterly growth was driven by 7% sequential growth in advertising spend as well as a 21% quarter-over-quarter uptick in revenue from our owned and operated products. We generated over 2 billion sessions on our owned and operated properties, 145% year-over-year increase and a 66% quarter-over-quarter increase. Spread was approximately $0.015 per session. Revenue per session was down nearly 60% year-over-year. The decline was driven by lower cost per click rates in the United States as well as a bigger mix shift towards international markets, which naturally have lower monetization rates in the United States. Now international growth continues to be a highlight with international revenue representing approximately 36% of owned and operated revenue. This is up from 29% in the first quarter. Our continued international growth demonstrates the power of RAMP's use of AI to very efficiently create content and advertising creatives in multiple languages. For example, when we're seeing an opportunity like engineering jobs in India or checking accounts in the U.K., we can very quickly move to capitalize on the opportunity. Our owned and operated products had another strong quarter with continued favorable organic traffic trends on both CouponFollow and MapQuest. In May, CouponFollow benefited from a Google search algorithm update. The update was aimed at eliminating spamming coupon and promo websites from Google Search results. This is not only a long overdue and welcome change, but was also great for consumers as the Google index was becoming polluted with copycat coupon-related sites. CouponFollow one of the most useful coupon websites, full of original content and thoroughly vetted promo codes and Google appropriately gave CouponFollow a positive boost. As a result, CouponFollow saw a significant increase in site traffic and corresponding revenue. June organic sessions were up nearly 80% year-over-year. And on some days, CouponFollow is the most traffic coupon site in the world. While MapQuest saw a similar story, although not as dramatic. Q2 organic visits were up 10% year-over-year. We've been very focused on improving the customer experience in both MapQuest and CouponFollow, and it's gratifying to see that we're paying dividends with increased users and revenue. Startpage, our private search engine also had a very productive quarter. We launched our private browser app and have seen over 50,000 downloads with significantly positive user feedback, including over 2,000 five-star ratings to date across our iOS and Android app users. We have high hopes for the browsers for our loyal Startpage users, and we also hope to be able to profitably market them to new users in the coming quarters. Now let's move on to our Partner Network business. Partner Network revenue was $17 million and adjusted gross profit was $13 million. Revenue decreased 12% year-over-year, but was up 8% sequentially. Adjusted gross profit decreased 9% year-over-year but was up 24% sequentially. Total sessions were $2 billion, up 203% year-over-year and up 33% sequentially as we continue to add partners to the network. Partner Network RPS declined 71% year-over-year and 19% quarter-over-quarter. The higher sessions and lower RPS were driven by the same trends that we saw in our owned and operated business, lower pricing in the United States and a bigger mix shift to international markets. Despite the decline in revenue, our Partner Network business continued to show solid demand from the market. In Q2, our total active partners grew 19% from the first quarter to almost 300 partners. Average revenue per partner decreased sequentially by 9% as new partners onboarded this quarter continue to scale up. At the end of Q2, we had 58 scale partners in line with the first quarter. As a reminder, we consider a platform customer to be a scale partner when they are generating at least $50,000 of revenue per quarter on RAMP. Before I hand things off to Tridi, I wanted to outline our key initiatives that we expect to drive System1's growth over the next few years. First, we are continuing to invest in our RAMP platform in 3 key areas. Buy-side efficiency is driven by AI, second is opening up our buy-side capabilities to our partners; and third is launching new products. Let me take this opportunity to walk you through each of these in more detail. First, let's talk about AI. As I mentioned in the last couple of quarters, we've been hard at work integrating AI capabilities into RAMP. AI enables us to create advertising campaigns and associated content at a scale, at least in order of magnitude greater than we could have in the past. This scale, combined with our improved bidding and optimization algorithms has enabled our owned and operated advertising business to reach a size only a handful of other companies can match. Maintaining RAMP and constantly adding improvement requires a large engineering and product team laser-focused on AI integration, machine learning optimizations and speed. Traditionally, our Network Partners who rely on System1 solely for sell-side monetization. They have their own buy site capabilities to purchase traffic, and they rely on System1 to monetize that traffic. This strategy works well for many partners after a certain level, but typically partners cap out in size as their own buy-side capabilities and technology hit certain limitations. Simply put, it is very difficult to buy traffic at the scale System1 does. It requires a sophisticated buy-side platform. And while our network partners are highly skilled at buying traffic, they typically just don't have a large enough team to scale beyond a certain point. By opening up the System1 buy-side platform for our partners, we expect to enable many of them to scale far beyond what they currently do. In addition to better buying capabilities, we also are integrating new monetization products into RAMP. Each of these products follows a similar pattern. We build a product feature or enhancement into RAMP. We utilize our owned and operated properties and our own team to figure out how to scale the product. And once we have all the teams worked out, we opened it up to partners. Over the last year, our focus has been on launching and scaling a new product offering by Google-related search on content. This product requires setting high-quality traffic to content very highly tailored to specific advertising verticals. Google advertising has been integrated directly into the content. While similar to Google-related products we have worked with in the past, the new product requires System1 to develop new technology to ensure we could scale it while maintaining very high quality. It took us some time, but now we're at the point where we are confident, we have the technology and processes in place to scale this new product. System1 is generating over seven figures of monthly revenue from the product, Google is very pleased with the results, and we now are in the process of rolling it out to partners. So we've done what we always do, use our owned and operated scale to explore and then scale a new market and then offer our new capabilities to our partners. The next two areas we are planning to invest in are two segments we currently are under-indexed, shopping and subscription products. Both of these areas are huge consumer markets where we currently are not scaled. We have slightly different approaches for each of them. For shopping, we likely will partner with large shopping focused advertising networks, similar to our current approach of partnering with Google being in Yahoo!. We are still exploring these partnerships, but we believe partnering with networks is a better option than attempting to build out our own direct advertising network in commerce. We might take a different approach with subscription. We already operate two successful subscription products associated with MapQuest, and we have shown in the past that we know had a scale subscription into the hundreds of million dollars of revenue. We also already operate businesses in some huge consumer categories that could be right for subscription. We operate search engines, we have browsers that we run. We have big mapping services, and we're also big in shopping. So while we will consider partnering with existing subscription businesses, we also are exploring and building out our own products. The good thing is that RAMP will support these efforts with only minimal increase in OpEx or R&D. We've built RAMP to be very flexible in supporting new buy-side and sell-side capabilities and plugging in these new products will be pretty straightforward. I also want to take a few minutes talking about our organic products specifically. We traditionally have focused our earnings comments on our marketing-driven businesses and our ability to scale our overall business by purchasing traffic. The marketing can drive very fast scale in our business, but as we saw in 2022 and parts of '23, it can also cause volatility. Now in contrast, our product businesses are comprised of utilities that consumers seek out and use every day. For example, CouponFollow helps people find promo codes that save them money when they're shopping. Startpage enables its users to search the web and privacy. MapQuest provides mapping for people who preferred over Google or Apple Maps, and RoadWarrior helps delivery drivers drop off packages more efficiently. And each one of these properties is supported by related products, whether it be our simply browser extension, which is part of CouponFollow, our Starpage private browsers or the MapQuest on RoadWarrior mobile apps. Because these products do not require marketing to generate usage, they are distinct from our marketing-driven business in two primary ways. First, their revenues are more consistent and less tied to shifts in the overall digital advertising market. Second, they are much higher margin businesses as we spend a much lower percentage of our revenues and marketing them. The dynamics of these product lines are different enough that we plan to begin presenting them independently from our marketing businesses. Tridi will go into more detail about this reporting change in his remarks. Overall, I am very pleased with our performance in the second quarter. Our System1 team has been executing very well over the last year and it's gratifying to see that execution starting to show up in our financial performance. We aren't yet where we want to be, but things are moving in the right direction. To close my section of our call, I would like to once again remind you that management is the largest shareholder group in System1 and our interests are very highly aligned with yours. We appreciate your overwhelming support of our new equity plan tied to hitting EBITDA targets, and we intend to hit those targets. As our business gets back into growth mode, we're excited to have you along for the ride. I'll now hand things off to Tridi to discuss our quarterly results in more detail as well as our Q3 guidance. Take it away, Tridi. Tridivesh Kidambi Thanks, Michael. We are pleased with our second quarter performance and sequential growth trends highlighted by quarter-over-quarter adjusted gross profit growth of 24% and $9.9 million of adjusted EBITDA versus $400,000 in Q1. While the year-over-year metrics remain challenged due to the sequential step downs we saw in overall advertising demand going from Q2 to Q3 of last year, we significantly narrowed our year-over-year declines across key financial metrics and even grew adjusted EBITDA, which was driven by our cost-cutting initiatives over the past several quarters with operating expenses down 16% year-over-year. Now on to our specific operating results. Q2 revenue was $94.6 million, representing a 2% year-over-year decline and sequential increase of 11%. Revenue was $4.6 million above the top end of our Q2 revenue guidance that we provided in May. Owned and operated revenue was $77.4 million, flat year-over-year and up 12% sequentially. Network revenue was $17.2 million, down 12% year-over-year, but up 8% sequentially. Adjusted gross profit was $38.8 million, down 4% year-over-year but up 24% sequentially. We significantly narrowed our year-over-year decline, which was 18% in Q1. Adjusted gross profit was above the high end of guidance by $3.8 million. Revenue less advertising spend for our owned and operated advertising segment grew 22% sequentially to $27.4 million Network revenue less agency fees was up 24% to $13.5 million versus the prior quarter. Owned and operated cost per session and revenue per session were both down $0.02 sequentially to $0.02 and $0.04, respectively. On the Network Advertising Business, RPS was $0.01 per session. Most importantly, total sessions processed by RAMP in the most recent quarter was $4.06 billion, up 47% sequentially and 171% year-over-year. As Michael mentioned during his remarks, these RPS and CPM trends were primarily driven by growth in lower RPS and CPS international traffic sources. I wanted to take some time here to focus on our owned and operated products, which today are primarily composed of our CouponFollow, MapQuest to Startpage businesses. A key feature of all these businesses is that they are not dependent on paid advertising to drive traffic and revenue and instead primarily rely on organic traffic, such as direct navigation, unpaid referrals and search engines. As a result, they provide some nice diversification versus our paid advertising business and the volatility that comes with it. Also, while they comprise a smaller portion of our revenue, 19% of total revenue and 23% of owned and operated revenue in Q2, they make up a more significant portion of our gross profit. 42% of total adjusted gross profit is 63% of owned and operated adjusted gross profit in Q2. For these businesses, revenue was up 17% and gross profit was up 18% year-over-year in Q2. Sequentially, revenue was up 21% and gross profit was up 26%. We recently reorganized our overall corporate structure to more easily report the performance of our products businesses. Please review the 10-Q filed earlier today for more information on this restructuring. Also, starting with our Q3 results, we will provide information on the current and historical performance of these businesses in our supplemental financials. On to operating expenses and adjusted EBITDA. In Q2, operating expenses net of add-backs was $28.9 million, down almost $2 million quarter-over-quarter and down 16% year-over-year. We have been working hard to rationalize our operating expense structure following the total security sale at the end of last year. And year-to-date, we've already reduced operating expenses by $10 million on an annualized basis versus 2023, and we expect to drive even more cost savings in the back half of the year heading into 2025 and beyond. Adjusted EBITDA was $9.9 million versus $6.1 million last year. Adjusted EBITDA came in above the high end of the Q2 guidance range by $2.9 million. With respect to liquidity, we ended the quarter with $75.7 million of unrestricted cash on our balance sheet and an outstanding balance of $290 million of term loan debt under our credit agreement. Our net leverage on a consolidated basis at quarter end was approximately 7.5 times. Although we have been executing well and haven't seen as much volatility as we saw earlier in the year, there is still quite a bit of uncertainty in the online advertising environment in which we operate. So we will continue to provide quarterly guidance. It is worth noting that historically, Q3 has been relatively flat to down versus Q2, while Q4 has typically benefited from seasonal trends, and we expect to see the same this year as well. We are estimating Q3 revenue to come in between $86 million and $88 million, roughly flat year-over-year at the midpoint. We are estimating adjusted gross profit to come in between $36 million and $38 million, also flat year-over-year at the midpoint, but also with 150 bps of gross margin expansion at the midpoint. We estimate Q3 adjusted EBITDA to come in between $8 million and $10 million, up 11% year-over-year at the midpoint. We remain bullish about our ability to execute against both near and outer opportunities and remain focused on delivering financial results that reflect that execution. Thank you for joining us today. Michael Blend Thank you, Tridi. We are now going to open the line for some questions. Thank you. The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Daniel Kurnos of Benchmark Company. Your line is open. Daniel Kurnos Thanks. Good afternoon, guys. Nice progress. There's actually a lot to unpack here, but maybe we'll just start with some simplistic questions and just ask Tridi following up on your commentary around historical seasonality. Are you guys seeing anything that's giving you pause in the marketplace as you look towards the forward guidance? And given all of the initiatives, Michael, that you outlined, what kind of contribution should we be expecting or over what time frame, whether it's back half of this year into '25, just help us at least get the framework of how you're thinking about some of the new initiatives contributing to the P&L. Tridivesh Kidambi Dan, this is Tridi. So yes, I get the easy question there. So short answer is no to your first question. So Q2 was in line with what we thought it would be. I think we mentioned in our last commentary back in May that we were seeing kind of the advertising markets behave as we would expect them to behave kind of sequentially coming off of Q1 that held through Q2 and knocking on with the first part of Q3 here. And we haven't seen anything that would give us pause or across any specific verticals or anything even given maybe the macro news that's kind of been around in the last week or so. Yes. Thanks, Dan. So in terms of the new initiatives, so first of all, when Tridi talks about our Q3 guidance and also expecting the seasonal uptick in Q4, that would anticipate no contribution or very de minimis contribution from any of our new efforts. In terms of opening up the buy side to our partners, that's really ongoing right now. And we're going to start lighting the first partners on kind of as we speak. We're not modeling in any significant contribution in 2024, but we are highly confident that our buy-side platform is an improvement over -- for most of our partners, if not all of them, and we'll let them scale substantially beyond where they are now. For shopping, again, we are just getting into market with one of our new partners there on the kind of commerce side and have really, really, really early results. We're not anticipating scale on that in the second half of the year. If we do see it in Q4, that would be some kind of unanticipated upside for us. And then subscription, we do anticipate having at least one product in market in Q4. One of them -- our first one is pretty close to being complete and ready for testing. Again, just to reiterate, not modeling in any substantial contributions on any of these, but we will be a market in all three of those initiatives in the back half of the year. Daniel Kurnos That is super helpful and comprehensive. I appreciate that. Maybe I'll just follow-up quickly. It's probably more of a fun question, Michael. But now that Google has decided not to deprecate third-party cookies anymore and they have really no alternative solution in place at this point. It feels like the whole industry, I guess, breathes a bit of a sigh relief. So I'm just kind of curious how you think that will impact sort of CPMs going forward, what reactions you've seen if it changes anything now that privacy sandbox is kind of on hold for the foreseeable future? Michael Blend Yes. So we're not anticipating much of a change. We were expecting that Q4, if they had fully rolled out the cookie deprecation the way they had talked about was going to be pretty volatile for a lot of people in market. Obviously, that's not going to happen now. But Dan, I know you and I talked about this in the past, we weren't really surprised to see Google take that stance and kind of indefinitely delay things. We've been hearing rumblings in the market. I've been hearing a lot of the testing that will be being done and they really simply hadn't been able to come up with a replacement that was that competitive with current cookie solutions. What we are hearing and what I think some of the testing is starting to show is that the solution that Google has come up with is starting to get fairly competitive on the monetization side. It's just technically pretty complex to implement. So again, like, I guess, it doesn't really affect our stance and what we think our business is going to do. We do think the industry as a whole, a lot of people were, I think, probably more concerned about the effects that they were letting on and I'm sure they're breathing like a bit of a sigh relief. Daniel Kurnos Last for me, Michael, I'll step aside. I always ask you about international, you always tell me it's on the come, and you highlighted it this quarter. So just love to hear if there's particular GEOS, you've been able to target particular verticals in international where you've had success. And how much you think that will be a contributing factor to what should be accelerating growth in the '25? Michael Blend We're pretty bullish right now on international. We've had a lot of success in programmatic markets over the last couple of quarters. We've been scaling up, in particular, our relationship with TikTok and Pengo. Pengo is their programmatic network that's attached to the TikTok overall business. And we're seeing that across almost all international markets. We're seeing it in Asia, South America, a bit in Europe as well. So I would say that if current trends continue, we're going to continue to see pretty rapid growth in our international business, continuing to take overall more and more of a contribution to our overall revenue. And right now, if you ask me, I don't think those trends are going to slow down. We've been tuning our platform to focus more international. There's a lot of idiosyncratic things you have to do to really attack the programmatic market, particularly internationally. But we think we've got those things figured out, and we see a lot of growth ahead of us, and it's starting to kick in already. So not on the comp anymore. We're actually seeing it. There are no further questions at this time. I will now turn the conference back over to Michael Blend for closing remarks. Michael Blend Okay. Great. Well, thanks, everybody, for joining us today. As we tried to make clear in our remarks today, things are really starting to move in the right direction here at System1. Overall, our team is executing really well. Our major customers are pleased both on our partner side and also on our revenue side. And overall, we're seeing some decent stability in the digital advertising market, which is what we've been looking for over here for the last 1.5 years. And some things are looking pretty good. We're looking forward to have you join us again for Q3 earnings, and we are definitely hoping out some good news to report for you then as well. So thank you for joining. This concludes today's conference call. You may now disconnect.

OmniAb, Inc. (OABI) Q2 2024 Earnings Call Transcript

Kurt Gustafson - Chief Financial Officer Matt Foehr - President and Chief Executive Officer Good afternoon and welcome to OmniAb Incorporated 2024 Financial Results and Business Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Kurt Gustafson, Chief Financial Officer. You may begin. Kurt Gustafson Thank you, operator, and good afternoon, everyone. This is Kurt Gustafson, OmniAb's Chief Financial Officer, and thank you all for joining our second quarter 2024 financial results conference call. There are slides to accompany today's prepared remarks, and they're available on the Investors section of our website at omniab.com. Before we begin, as summarized on Slide 2, I would like to remind listeners that comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from any anticipated results. These forward-looking statements are qualified by the cautionary statements contained in today's press release and our SEC filings. Importantly, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast today, August 8, 2024. Except as required by law OmniAb undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Joining me on the call today is Matt Foehr, OmniAb's President and CEO. During today's call, Matt and I will provide highlights on the company's operations, partner and technology updates and our recent financial results. At the conclusion of our prepared remarks, we'll open the call to questions. Thanks, Kurt. Good afternoon, everyone, and thanks for joining us today on our Q2 conference call. I'll pick up the presentation this afternoon here on Slide #4. During the quarter, we continued to grow our business with the addition of new partnerships. Given the velocity of new deals and a growing book of business, this year has the potential to be our best year ever in new partners and licenses. In parallel, our existing partners continue to advance their programs in the clinic, thereby strengthening our pipeline this year and beyond. We're driving growth in the business with strong execution and we're doing that within an efficient operating structure and a highly scalable business model. We intend to create further visibility for our platform through publications and by advancing our technologies. Our scientists recently published an important peer-reviewed paper in the Journal of Immunology relating to our OmnidAb, a single-domain antibody technology, which we launched last November and is now driving a growing number of new partner programs. And I also note that in the second quarter, we successfully demonstrated the efficient multi-site deployability of a next-generation exploration instrument across our labs. I mentioned the exploration platform here as it has the potential to drive additional efficiencies for our partner programs and to further expand our position as an industry leader in speed, throughput, reliability, and ease of use for antibody discovery screening activities. We remain committed to the continuous improvement of our technology to meet the evolving and broadening needs of our partners and to retain a leading market position. I'm proud of the achievements of our team and feel confident in our ability to execute our strategy in order to maximize value for all of our stakeholders. Now, moving to Slide #5, I'll start to review some of our business metrics for the quarter. We finished Q2 with 83 active partners. This includes 2 new platform license agreements that we signed in the quarter. Those are with DAAN Bio and Topaz Therapeutics. Notably, Topaz is a company focused on radio conjugates, and they represent the first of what we expect to be multiple partners focused on this space. I note also that we mentioned in our earnings release that we issued this afternoon that we expanded our existing successful discovery relationship with HanAll Biopharma, and also recently completed new deals with 92Bio and the Memorial Sloan Kettering Cancer Center. As I mentioned, given the velocity of new deals and our growing book of business, this year has the potential to be our best year ever in new partner adds. Now, on Slide #6, you'll see that our partnership base has grown by 30% over the last 2 years. And these numbers, I note are net of attrition. The expansion in our partnership base has been driven primarily by the validation of our platform and by new technology launches, as well as much more recently by our expanded business development efforts. On the next slide, Slide #7, you can see the distribution of our partners on a geographic basis linked to the partner's headquarters location. Although I note that many of our partners' development programs are global in scope. Our partners are predominantly based here in the U.S. with roughly equal representation between Europe and Asia. And over the past year, we've expanded our business development presence outside the U.S. and we expect that will result in greater diversity within our partnership base. Slide 8 shows the number of active programs at quarter end net of attrition. With a number of active programs increasing to $333 million, this represents a net add of 6 programs on a sequential basis from Q1. During Q2, 1 program transitioned from discovery to the preclinical stage, 1 moved from preclinical to Phase 1 and a third program advanced from Phase 1 to Phase 3. Our partners continue to align and reprioritize their therapeutic programs and pipelines in their normal course of business. In our small molecule ion channel programs, during Q2, GSK realigned elements of its portfolio and decided to discontinue their work on the small molecule Nav1.1 sodium channel modulator program that was for rare epilepsies. GSK continues to advance a separate preclinical stage program with us for neurological diseases. And subsequent to the close of the second quarter, Roche elected to return its rights to a small molecule program targeting Kv7.2 following an additional internal portfolio review there. We continue to work with Roche on 2 additional small molecule ion channel programs for the potential treatment of CNS disorders. Consistent with our business model and our contractual terms in those deals, the Kv7.2 and Nav1.1 small molecule programs are assets that we can repartner with others in the CNS space. Now on Slide 9, you can see here the growth in our partners' preclinical and later-stage programs, which are some of the programs that we think can be important to near-term and mid-term value generation in our pipeline. We've experienced 39% growth in the number of these programs over the last 2 years, and currently, have reached a total of 50 programs at these stages. Our pipeline is robust and it's growing, and we look forward to our partners' progress as they advance programs into the later stages of clinical development towards the market. As you can see here now on Slide #10, as of June 30, we had 32 active clinical programs and approved products. During the quarter, Teva entered the clinic with TEV-56278, which is an OmniChicken-derived PD1 with IL-2 fusion. Last week, Teva publicly highlighted ex vivo data for this program on their earnings call. Those data showed encouraging antitumor T-cell activity, and they stated that they believe the program has potential to open up additional combo therapy approaches. Based on discussions with our partners and now with 1 already in the books, we continue to expect a total of 4 to 6 entries into clinical development for novel OmniAb-derived antibodies this year. This next slide, Slide #11, shows the wide and growing range of formats that our antibodies can support. And even though this list is quite broad as it currently stands, as we innovate around the platform and grow our partnership base, we continue to see the number of new formats expand. And although this slide is quite technical, it does really provide a nice illustration of the broad nature and the flexibility of our platform. The most recent new format at the clinical stage is the ATTENUKINE multi-specific with Teva that I just mentioned and that entered the clinic in Q2. It's shown here on the lower part of the center panel. Now, on Slide #12, I'll highlight a few key recent and Q2 partner updates. Genmab announced initial data from the Phase 2 trial evaluating acasunlimab as monotherapy and in combination with pembro in patients with PD-L1-positive metastatic non-small cell lung cancer. Data from this ongoing Phase 2 study informs their planned pivotal Phase 3 trial, which is expected to launch before the end of 2024. CStone recently announced European approval of sugemalimab in combination with chemo as first-line treatment for metastatic non-small cell lung cancer, which is one of the largest cancer indications and is also among the leading causes of cancer death. Also, CStone announced that it entered into a strategic commercial collaboration with Ewopharma. Under the terms of that agreement, Ewopharma has the commercial rights for sugemalimab in Switzerland and the 18 Central Eastern European Countries. Cessation presented preliminary data from its Phase 1a first-in-human study of CSX-1004, which is an investigational antibody for prophylaxis against fentanyl-related overdose, demonstrating that CSX-1004 is safe and well-tolerated under the conditions tested. In addition and importantly, the exposure data were predictive of efficacy for blocking fentanyl-induced respiratory depression as well. As the next step, Cessation is planning a Phase 2 proof-of-concept study. I mentioned Teva's work earlier and their clinical start is also highlighted here on this slide. And lastly, Tallac disclosed FDA clearance of its IND application for ALTA-002, which is a SIRP-alpha targeting toll-like receptor agonist antibody conjugate in patients with advanced solid tumors. As you can see here on Slide #13, we look forward to numerous catalysts occurring for the balance of the year and in 2025. This is a subset of publicly disclosed events, and it represents a mix of clinical readouts, clinical starts and regulatory events. And we continued to be excited about the progress that's being reported by our partners. And my last slide here, Slide #14, provides a current snapshot of the total milestone potential for our pipeline. And also calls out those 50 preclinical and later-stage programs in our pipeline that I highlighted earlier as near-term and mid-term value drivers. As shown here on the right side of this slide, those 50 programs at preclinical-stage and later have over $550 million in potential milestones to OmniAb. And overall, our active antibody programs have over $3 billion in potential milestones and currently the remaining active small molecule ion channel programs with Roche and GSK have approximately $700 million in remaining milestones. And with that, I will turn the call back over to Kurt for a discussion of our second quarter financial results. Kurt? Kurt Gustafson Thanks, Matt. So I'll provide a brief overview of our financial results for the second quarter and then we'll take some questions. On Slide 16 we have our income statement for the second quarter of 2024 versus the year ago period. Total revenue for the quarter was $7.6 million, compared with $6.9 million in the prior year quarter. This revenue was consistent with our expectations with the exception of higher service revenue. Matt mentioned the discontinuation of the GSK small molecule ion channel program, and this triggered an acceleration of $1.3 million in service revenue above and beyond what would have otherwise been recognized in the quarter. GSK had paid for the service fees upfront, which were recorded as deferred revenue and were being amortized over the life of the research term. The discontinuation resulted in the acceleration of this amortization, which would have otherwise been recognized mostly over the next 2 quarters. As I previously stated, we continue to project milestone payments to be weighted towards the second half of the year based on the information and statements made by our partners. In terms of expenses, our R&D expense was relatively unchanged versus the prior year. G&A expense was $8 million versus last year's $8.7 million, with the decrease primarily due to lower share-based compensation expense, as well as non-recurring costs in the prior year associated with our ERP system implementation. The amortization of intangibles in the second quarter was higher than our recent trend. The increase was due to a $1.2 million impairment related to assets associated with 2 legacy unpartnered Ab Initio programs. In addition, other operating income for the quarter included a $2.6 million reduction in contingent liabilities, primarily related to changes in the ion channel programs. We have CVR obligations that expire in 2027 from our acquisition of Icagen, and we accrue these CVR liabilities based on our projections of achieving various milestones. The recent notifications from GSK and Roche resulted in a decrease in our expected obligations for these CVRs, which was then recorded here in other operating income. Year-to-date, our operating expenses tracked relatively close to plan. However, we now expect total operating expenses in 2024 to be slightly less than total operating expenses in 2023. Turning to Slide 17. Here, you'll see our balance sheet as of June 30, 2024. We ended the second quarter with $57.2 million in cash and as we've discussed before, we expect the first half of '24 to have a higher burn relative to the second half of the year, partly due to the milestone revenue being weighted towards the second half of the year, and partly due to the timing of cash payments from certain operating expense items that occurred in the first quarter. Given that we are still tracking close to our original plans, our cash guidance remains unchanged. And with that, I'd like to open the call for questions. Operator? Thank you. [Operator Instructions] First question comes from Puneet Souda from Leerink Partners. Michael Sonntag Hi. You have Michael on for Puneet. Congrats on the quarter. I think for the first question I wanted to talk a little bit about the exploration platform. I know you mentioned a proof-of-concept study you've done. I was curious if you could talk about how this distributed format you're looking into fits into your overall offering. And if you could speak to sort of the confidence in the IP since there's been some litigation sort of the microfluidics single cell space recently? Matt Foehr Yes, Michael, thanks for the question. And yes, the exploration platform is one that's obviously been woven into our technology offering for quite a while, going back to acquiring it about 4 or 5 years ago. And it is a high throughput B cell screening platform that also has broad applicability to other areas as well. But we've focused really on B cell screening workflows. And it's one that's driven a lot of efficiencies within our business. And it's one where we've actually had some of our larger partners inquire with us about getting access to exploration instruments. And as we've invested in that platform to increase throughput and speed, we've come to realize that it's actually a form - it's something that creates a lot of leverage in the business. You mentioned the IP landscape, for us, this is a microcapillary platform. So, from the way in which the equipment is run, it is quite unique. And it actually, beyond being very efficient in screening, it leverage - it can be paired with deep learning and AI and other things that we've been doing for many years to really increase throughput. So, we're excited about the exploration platform. It's something we've obviously have invested in over the years and continue to leverage in a variety of ways for our partners. Michael Sonntag Okay, great. And then I was curious in conversations with new partners or existing partners, if you have any insights on, I guess, the appetite for discovery programs, given that the first half has been pretty good funding-wise. And then there's also a lot of talk about sort of the large pharma prioritization that's been happening. So, I wonder if you could offer some color there. Matt Foehr Yes, Michael, I can comment, and Kurt can add as needed. Yes, it's obviously - as students of the industry, it's clear that big pharma continues to go through prioritization exercises, which is natural. That's something that happens on a secular basis within the industry. But Q2 was quite strong for us in terms of new program starts, and we actually have quite a variety of partners, right. It's a mix of big pharmas and startups, as well as academic partnerships as well. If I look at the landscape now, as you compare it to about a year ago, you look at some of our newer partners who are quite well-funded. These are startups that have funding, solid VC funding, interesting biology, differentiated ideas, and they are coming to us to get access to our platform. And we are definitely seeing that at a higher rate than we saw, say, a year or even 2 years ago. So, that's generally good to see. And I think it is juxtaposed with prioritization exercises that go on at big pharma. But again, I think that's a natural part of the industry. The next question will come from Chad Wiatrowski from TD Cowen. Chad, go ahead. Chad Wiatrowski Hey guys. This is Chad on for Steve Mah. Just looking at the existing programs, there is sort of large downstream milestone potential. How much visibility do you have given the bolus of upcoming partner catalysts in the next 18 months? Kurt Gustafson Yes, I think it's kind of a combination of public and private information that we get in terms of our forecasts. A lot of our partners have made public statements about when they expect to start a Phase 2 or a Phase 3 program. So, obviously, you can observe that. And then in some cases the partners have provided us more detailed information of their plans. So, I would say that we have maybe a little bit more visibility than the outside world is based on some information that we get, although the information is not perfect, and we find out sometimes things change, right. Partners say that they are going to start something in the next quarter and that moves. But we do get some additional information other than what's in publicly. Matt Foehr And I will add just a little bit to that, Chad, as well, that generally speaking, as things enter the clinic, is when they start to become a lot more public and visible to investors. And I think this quarter the TEV-56278 is an example, right. That's a program for which there was not really public visibility until the program started and it was great to see last week to have a highlighting it on their earnings call. But again, that's a program that was probably under the radar from a public perspective. But generally, as things progress out of preclinical and into Phase 1 is when there starts to be a lot more visibility for the outside world on specific programs. Chad Wiatrowski Great. And yes, this is obviously a benefit of your business model today is like an R&D sharing platform. But regarding the exploration, would you ever sell instruments directly to partners, just given the majority of the R&D investment has already taken place? Matt Foehr Yes. Look, Chad, it's a great question. I think it's a topic that we would discuss - kind of discuss those plans transparently as they would form. We have been approached by people who would like exploration instruments. We know it's deployable. We know it has broad application. We know it drives efficiencies. So, those are all things that I think create optionality in the business and things we can think about in the future. The next question will be coming from Stephen Willey from Stifel. Stephen, go ahead. Stephen Willey Yes. Good afternoon guys. Thanks for taking the questions. I was just kind of wondering where the potential re-partnering of these CNS assets you are getting back from GSK and Roche fit within your current list of priorities. And were these development candidates that were in IND-enabling studies? Is that the right way to think about where they were from a development stage? And I know you mentioned that you maintain co-ownership of the IP associated with the Glaxo small molecule, but is that also the case for the Roche asset as well? Matt Foehr Yes. Steve, thanks for the question. I would characterize these from a stage perspective as kind of discovery plus preclinical, right. I mean especially in that small molecule space, they are being tested in animal models and that sort of thing. So, that's kind of how I would describe the stage. We now have the ability to re-partner them. Again, these are both in the CNS space. And that's certainly something we have done in the past. If you look at our history, obviously, our core focus is technology innovation and development and licensing our technologies. But often programs do come out of our technology development, and we have successfully licensed individual assets in the past. We have some assets now that are available for license for which we pursue that. And so, that's kind of a byproduct. We don't plan on developing assets ourselves. But we do see these as prime candidates for potential re-partnering. There is growing interest in some of these ion channel spaces. Obviously, we are more focused on the antibody side now, but there are folks who are focused on small molecules as well. So, yes, hopefully, that gives you a little more color. Stephen Willey Okay. And then maybe just kind of going back to the macro for a second, just kind of curious, I mean obviously, you talked about how some of these prioritization efforts within big pharma tend to be cyclical. There was obviously a large CRO out yesterday with some pretty cautious commentary around big pharma spending just on the discovery and outsourcing front. Do those happenings influence kind of where you spend your time from a BD perspective? Matt Foehr Interesting, it's an interesting question, Steve, and obviously, as I have said, we see these cycles. A lot of our BD efforts, right, are - I will kind of maybe answer it in two ways. A lot of our BD efforts are now - we are doing more and more outreach, but there is still a lot of inbound interest on our platform, which I think it says a lot about as we continue to expand the platform, as it becomes more validated, as we publish more papers and peer-reviewed journals, that tends to attract inbound interest. We have a nice mix in our portfolio now with our 83 partners of big pharmas, of startup companies, of academics. So, we kind of have an interesting vantage point on kind of where people are going. And so, the way I would answer it is, it not only informs - our relationships, not only inform the BD that we do, but the innovation that we do as well. And I think that drives interest. One of the reasons I think we have been able to grow the business, both from partners and programs net of attrition is because there is an understanding that we are continuing to innovate and that, I think attracts partners as well. So, our dialogue obviously is - there is a lot of forward-looking discussions with our partners, especially the larger ones. So - and they are kind of thinking downstream in a much more long-term discovery mindset, despite a firm that might be looking differently at its existing portfolio or reprioritizing it. Stephen Willey And then maybe just on the startup side, when you are engaging with these earlier stage companies, and perhaps these companies are even being formed around assets that are being discovered off your platform. How do you think about the economic return as it comes down to taking like a founder's stake in equity versus trying to maximize downstream economics, or do you feel like you can accomplish both of those things within a specific deal structure? Matt Foehr Yes, we do feel like we can accomplish both of those things. I will say, and as we commonly say, we have NPVs in mind for how we structure deals, but no two deals are alike, right. And so, we pride ourselves on finding flexible structures that work for us and our stakeholders, but also work for the partners as well. We are certainly open to things like taking equity stakes and those kinds of things. Certainly, I have had a history of that and in our past management team has. So, we are open to those sorts of things. But yes, we are excited about our mix of partners. I mean we have added some pretty exciting startup companies in recent months here who really have interesting ideas, novel biology, proven management teams. And so all of those things kind of inform how we are thinking as we are finalizing a deal with a partner, but we are open to multiple kinds of structures. I think there is a lot of different ways that we can create value in a model like ours. Then the last question is going to come from Conor McNamara from RBC Capital Markets. Conor, go ahead. Conor McNamara Great. Thanks for the questions guys. And just a question about 2025. In the press release, you talked about cash use going down significantly. How should we think about where the revenue step-up comes from? Is that going to be - do royalties start becoming more meaningful in 2025, or is it going to be a similar mix, which is more of the milestones coming through? Is there any comment you can make on how we should think about that in 2025? Kurt Gustafson Yes. So, there is two parts to that, Conor. The first is, as I have talked about the leverage that's built into this business. So, we have kind of built the business to where it needs to be. We are staffed where we need to be. And so, you won't see really any sort of increase in operating expense, barring inflation. In fact, this year based on our latest projections, operating expense will actually be down here in 2024 relative to 2023. But in terms of what drives a substantial drop in the cash burn, it's a function of revenue and more specifically milestone revenue. So, royalties, right now we are generating royalties from a couple of products over in China. We do note that one of the programs or one of those compounds just got approval in Europe. And so, there could be something that comes there. But our projection for kind of the change is really a function of increased milestones. As you think about those 50 things or so that Matt talked about that are currently in preclinical or clinical stages, as those move to the next stage, they will trigger milestones. And that's what we think will be the primary driver of that. Conor McNamara Great. And by the way - thanks for that. In the disclosure on the absolute dollar amount, I think this is the first time you have broken it out by stage, right? The $3 billion is broken out, so I think that's helpful, have you shown that data before? Kurt Gustafson No, this was the first time we put that out there. So, thanks for noticing. Conor McNamara Okay. That's really helpful. Thanks for the color. That's really helpful. And then just quickly, on the - you mentioned the European approval. Should we - I mean does that have any royalty revenue that flows through in 2024, or is that a smaller opportunity for you guys? Is there any way to quantify that? Kurt Gustafson It's hard to know right now. I mean sugemalimab, it carries a 3% royalty on worldwide sales. Right now that's - CStone says they are looking for a partner for, what I would sort of say, EU. They do have a partner for Switzerland and Central Eastern Europe in EwoPharma. They announced that. But they don't actually - they are not going to launch this themselves. They are looking for a partner and they said that, they would have updates soon. So, I don't know, Conor, in terms of - we will have to wait and see based on what partner they can line up. But I would say that, that could drive incremental royalty income, but that's not part of sort of what we are forecasting at this moment. Conor McNamara Great. Kurt, thanks for the questions. Appreciate it. Congrats on a solid quarter. Great. Thanks Conor. So, it looks like that's our last question, so I would like to thank everyone for participating on today's call and for your questions and engagement. We look forward to keeping you updated on our progress and speaking to you again in a few months. We will be at some upcoming conferences, including the H.C. Wainwright Conference in New York City next month, and look forward to seeing some of you then. So, thanks again for your interest in OmniAb, and have a great day. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Mastech Digital, Inc. (MHH) Q2 2024 Earnings Call Transcript

Jennifer Lacey - Manager of Legal Affairs Jack Cronin - Chief Financial Officer Vivek Gupta - Chief Executive Officer Greetings, and welcome to the Mastech Digital Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jenna Lacey, Manager of Legal Affairs. Thank you, Ms. Lacey, you may begin. Jennifer Lacey Thank you, operator, and welcome to Mastech Digital's Second Quarter 2024 Conference Call. If you have not yet received a copy of our earnings announcement, it can be obtained from our website at www.mastechdigital.com. With me on the call today are Vivek Gupta, Mastech Digital's Chief Executive Officer; and Jack Cronin, our Chief Financial Officer. I would like to remind everyone that statements made during this call that are not historical facts are forward-looking statements. These forward-looking statements include our financial growth and liquidity projections, as well as statements about our plans, strategies, intentions and beliefs concerning the business, cash flows, costs and the markets in which we operate. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify certain forward-looking statements. These statements are based on information currently available to us, and we assume no obligation to update these statements, as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements, including those listed in the company's 2023 annual report on Form 10-K filed with the Securities and Exchange Commission and available on its website at www.sec.gov. Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis. Specifically, we will provide non-GAAP net income and non-GAAP diluted earnings per share data, which we believe will provide greater transparency with respect to the key metrics used by management in operating the business. Reconciliations of these non-GAAP financial measures to their comparable GAAP measures are included in our earnings announcement, which can be obtained from our website at www.mastechdigital.com. As a reminder, we will not be providing guidance during this call - probably provide guidance in any subsequent one-on-one meetings or calls. I will now turn the call over to Jack for a review of our second quarter 2024 results. Jack Cronin Thanks, Jen, and good morning, everyone. Our second quarter 2024 financial results benefited from the continuation of positive market indicators that we were seeing in Q1. Higher activity levels, favorable client spending patterns and improvements in economic data around inflation and job growth. During the second quarter, we were able to add some positive company-specific factors to the mix. Namely a strong delivery performance and high resource utilization at our Data and Analytics operations, increased gross margins in our IT Staffing Services business, as well as a slight reduction in SG&A expenses during a quarter in which sequential revenues grew by 6%. Addressing our second quarter 2024 financial results. Consolidated revenues totaled $49.5 million compared to $52.2 million in the 2023 second quarter. While we continue to report negative revenue growth on a year-over-year basis, the percent of decline has consistently and progressively been reduced over the last several quarters. I'm happy to say that in Q3 2024, our year-over-year revenue growth will be positive. Our Data and Analytics Services segment reported revenue of $8.9 million in the second quarter of 2024 compared to $8.8 million in the 2023 second quarter. On a sequential quarterly basis, D&A revenues grew by 10%. Second quarter 2024 revenues in our IT Staffing Services segment totaled $40.7 million compared to $43.4 million in the second quarter of 2023. On a sequential quarterly basis, IT Staffing revenues grew by 5%. Consolidated gross profit dollars totaled $14 million in Q2 of 2024, which exceeded the corresponding quarter of 2023, despite 2024 revenues being lower. It's the result of higher overall gross margins. Consolidated gross margins in Q2 2024 improved to 28.2% compared to 26.1% in the second quarter of 2023, as both of our business segments contributed to the improvement. This gross margin performance of 28.2% set a new quarterly record for Mastech Digital. In our Data and Analytics Services segment, gross margins improved to 49.2% compared to 45.6% in the corresponding quarter of last year, largely due to higher project gross margins and higher resource utilization in the 2024 second quarter. In our IT Staffing Services segment, Q2 2024 gross margins improved to a company record 23.6% compared to 22.2% in the second quarter of 2023. This improvement reflected higher gross margins on new assignments in the 2024 period and lower employee benefit costs, due to favorable medical claims related to our self-insured health care program. GAAP net income in Q2 2024 was $1.4 million or $0.12 per diluted share compared to a net loss of $2.2 million or a $0.19 loss per diluted share in Q2 2023. Non-GAAP net income for 2023 second quarter, excuse me, 2024 second quarter was $2.2 million or $0.19 per diluted share, compared to $1.3 million or $0.11 per diluted share in the 2023 quarter. SG&A expense items not included in non-GAAP financial measures, net of tax benefits for all periods presented are detailed in our second quarter 2024 earnings release, which is available on our website. Addressing our financial position on June 30, 2024, we had $20.6 million of cash balances on hand, no bank debt outstanding and borrowing availability of $23.8 million under our revolving credit facility. Our Days Sales Outstanding measurement was 53 days at quarter end, which is soundly favorable to our target of 60 days. I'll now turn the call over to Vivek for his comments. Vivek Gupta Good morning, everyone. Thank you, Jack, for the detailed financial review of our operating results for Q2 2024. In last quarter's earnings call, I had said that we are feeling more positive about the macroeconomic environment, coupled with our clients showing more comfort with starting new assignments and addressing some of their pent-up IT needs after more than four quarters of reduced IT spending. As I speak to you today, one quarter later, my views have only strengthened even with the recent market jitters around job growth. During Q2 of 2024, we saw the continued positive economic environment, encouraging our customers in both business segments to increase their IT spending. In addition, we also achieved numerous organizational improvements such as improved project delivery, better resource utilization, tighter bench management and control of SG&A spend, all of which positively impacted our financial results for the quarter. Overall, I'm happy with the sequential revenue growth achieved by both the business segments, resulting in a 6% quarter-on-quarter growth over consolidated revenues in Q1 2024. The 10% sequential increase in revenue delivered by our Data and Analytics Services segment was a result of an expanded footprint in our existing client accounts, as well as from signing new logos. In our IT Staffing Services segment, the 5% sequential quarter-on-quarter revenue growth, which Jack referred to, came mostly from existing large clients increasing their contract spending. The pace of increase in our billable consultant headcount by two of our largest financial services clients has been a much needed shot in the arm for the company. After a billing consultant headcount increase of 58 in Q1, we were able to add another 31 billing consultants in IT Staffing Services segment during Q2, making it approximately a 10% total increase from our headcount at the end of 2023. I'm excited about these improved existing account expansions, and I believe that new client acquisitions should have a positive impact on future quarters' revenue potential for the company. Additionally, as Jack mentioned, we achieved record gross profit margins of 28.2% in Q2 of 2024. Both of our business segments contributed to these efforts. Our Data and Analytics Services segment had exceptional delivery metrics in Q2, including higher resource utilization and delivered one of the highest gross margin performances of 49.2%, and our IT Staffing Services segment reported a record 23.6% gross margin, riding on; one, gross margin expansion from new assignments during 2024; two, a higher average bill rate when compared to last year; and three, lower benefit costs due to favorable medical claim experience related to our self-insured health care program. During Q2 2024, we continue to closely manage our SG&A expenses, which as a percentage of revenue decreased to 24.8% compared to 25.6% in Q2 2023, and were also favorable to the 26.7% reported in Q1 of 2024. In closing, I believe that our financial results in the second quarter of 2024 highlight the intrinsic value potential of Mastech Digital's business models. During our last earnings call, I had said one positive quarter does not make a trend. Today, with continued positive performance in two consecutive quarters, I can say with confidence that we are off to a great start. Operator, this concludes our prepared remarks. We can take questions now. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question. Lisa Thompson Good morning, and great quarter. Nice to see profits coming back. I didn't quite scribble fast enough. What is the number of consultants you end the quarter with was what? Vivek Gupta So we added 31 consultants in the quarter. And as we speak, Jack is looking at what that total number is now, after adding 31. So just give us a second. We've only - we are barely, I guess, one week into the second month, but July was good. We had an increase in headcount. Lisa Thompson Okay. And you seemed to really tighten up spending. I don't know if it was a fluke in the quarter or it's something permanent that you've done. How much have these - of your new consultants done to change any operations? Or are they working on other things? Vivek Gupta I didn't quite get the last part of what you just - what you asked, Lisa, can you elaborate on that? Lisa Thompson Yes. So no, I was wondering if your consultants have anything to do with streamlining the business? Or are they working on other things? Vivek Gupta No. See, the SG&A expense is really not related to the consultants. This is more our sales, marketing, G&A. And we've looked at all elements of that. And as I mentioned, there was a higher percentage - SG&A as a percentage of revenue in Q1, and we felt that we needed to tighten that. So we've looked at all aspects of SG&A, and eliminated the ones which are not needed. We will add back SG&A as we grow, but our intention is not to grow at the same pace as revenue, which means that over a period of time, we like to show - we'd like to have the SG&A expense as a percentage of revenue coming down rather than going up. Lisa Thompson Okay. That sounds good. What's your feeling about gross margins going forward? Do they stay up here? Do they go back to historical highs? Vivek Gupta So our intention is to keep the gross margins at a level - at least the 28% level. There are two elements in that; one which we can't control as in the point that both, Jack and I touched upon, which is the medical claim experience. Now that varies from quarter-to-quarter, and you don't have control over that. And we've had a couple of bad quarters and this quarter has been a good quarter. So that part, you can't control. But what we can control - on that part, we are leaving no stone unturned. So our intention is to stay at that level, at the 28% level. And hopefully, a little bit of luck will also be on our side. Lisa Thompson You think D&A can get back over the 50% gross margin this year? Vivek Gupta Again, that's always the intention to get to that side of 50%. But I don't know, it's hard to predict that. We are pretty close right now at 49.2% is not too far away from 50%. Lisa Thompson Great. That's all my questions. Keep up the good work. Thank you. Our next question comes from the line of Marc Riddick with Sidoti. Please proceed with your question. Very good, very good. I wanted to sort of piggyback on the gross margin questions. I was sort of curious if you could talk a little bit about maybe the utilization rate improvement, that was mentioned in the press release, as well as maybe if you could talk about the revenue mix benefit and where that might be coming from? Vivek Gupta So Marc, the resource utilization is really all the people that we have billable on the Data Analytics side, trying to make sure that we have just the right number of resources needed to service those projects in that quarter. In the past, a year ago or two years ago, we ended up having a scenario where we had a large number of people on the bench, and there wasn't enough work in the immediate future to keep them busy. This time, I think we've been able to kind of change our processes and sharp them in a way that we have sort of resources ready when we need them, a better understanding of what's coming down the pipe and then having - preparing and training resources in time for that. And I think that has played an important role in this. And also how we are executing the projects, I talked about better project delivery and making the gross margins out of the projects which are under execution, are making sure that they are as high as we can take them. So it's bench management, resource utilization, better delivery, all of them kind of helped us in having a better gross margin outcome from the Data and Analytics business. Marc Riddick That's very encouraging. And then I was wondering if you could talk a little bit about maybe what you're seeing as far as client activity change? Are we seeing much in the way of differentiation and industry verticals or geographic footprint? Vivek Gupta Yes. Two aspects. One is how the clients are behaving at the moment. I mean, I think they are becoming more comfortable with the economic environment and they're beginning to losen their pulled strings, which is a great thing. In terms of differentiation, yes, definitely, we haven't formally verticalized our organization, but our solutions are fairly, what shall I say - industry focused. So if we've done a good job for one bank, then we have - we take the learnings from that to the next one. If we are working with one health care organization, we are able to take the learnings forward to the other one. So there is a bit of that differentiation, which our customers are beginning to see. They like the fact that we have progressed from being a very strong MDM-only company, master data management company into a broader data management - data modernization company. And I think that story is again being appreciated by customers. And there's a lot of AI, which is coming into our solutions and our offerings. We are also using it internally. That is also factoring in and the customers like the kind of the solutions with AI embedded in those solutions. So it's a bit of, I guess, all of the above, which have led to the customers feeling more comfortable with our offerings. Marc Riddick Okay. Great. And then the last one for me. The - you finished with a nice solid cash balance, as always, a very clean balance sheet. I was wondering if you could talk a little bit about - this will obviously be in the Q, but was there much in the way of share repurchase activity during the quarter and maybe what your thoughts are on uses of cash going forward? Thank you. Yes, sure. Yes, our cash balances at the end of the quarter were $20.6 million. It's slightly up from where we were at the end of first quarter. Unfortunately, in the second quarter, we bought back zero shares. We had an extended blackout period, actually still in a blackout period on a number of corporate matters that are confidential. So no repurchases in Q2. Marc Riddick Okay. And maybe just thoughts on going forward, as far as potential uses of cash? Jack Cronin I think we're very keen on the share repurchase program. It's just a matter of when we can start it, once we get through some of these confidential issues. But when we're out of a blackout period, we're hoping to take advantage of the current stock price and repurchase some shares. There are no further questions at this time. I'd like to turn the floor back over to management for closing remarks. Vivek Gupta Okay. Thank you, operator. If there are no further questions, I'd like to thank you for joining our call today, and we look forward to sharing our third quarter 2024 results with you in early November. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

One Stop Systems, Inc. (OSS) Q2 2024 Earnings Call Transcript

Mike Knowles - Chief Executive Officer John Morrison - Chief Financial Officer Good day, and. welcome to the One Stop Systems second quarter 2024 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later you will have opportunity to ask questions. During the question-and-answer session. As a reminder, this conference is being recorded. As part of the discussion today, the representatives of OSS will be making certain forward-looking statements regarding the company's future financial and operating results as well as their business plans, objectives and expectations. These statements are based on the company's current beliefs and expectations. And should not be regarded as a representation of OSS, that any of these plans or expectations will be achieved. Please be advised that these forward-looking statements are covered under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. And that OSS desires to avail itself to the protections of the safe harbor for these statements. Please also be advised that the actual results could differ materially from those stated or implied by the forward-looking statements due to certain risks and uncertainties including those described in the company's most recent annual report from Form 10-K, subsequent quarterly reports on Form 10-Q and the recent press releases. These three is reports and the future filings that OSS will be making with the SEC. OSS disclaims any duty to update or revise its forward-looking statements except as required by the applicable law. It is now my pleasure to turn the conference over to OSS President and CEO, Mr. Mike Knowles. Please go ahead, sir. Mike Knowles Thank you, John. Good afternoon, everyone, and thank you for joining today's call. I'm pleased with the progress we made during the 2024, second quarter as we continue transitioning our business to pursue emerging opportunities within large and growing defense and commercial markets. Second quarter performance was aligned with our plan as we continue to pursue opportunities in AI, machine learning and edge computing. Highlights for the 2024 second quarter include: Positive segment orders; which have outpaced quarterly revenue in three of the last four quarters; sequential revenue growth of 4.3%, expanded customer development revenue; and year-over-year OSS segment revenue growth of 8.3% as adjusted to exclude revenue attributable to a former media customer. We believe these favorable trends are positioning OSS for continued sequential revenue growth throughout the remainder of 2024. This year, we've been focused on two important objectives to take advantage of favorable market dynamics and the healthy pipeline we have developed. First, we are focused on converting our pipeline to orders in our OSS segment. And second, we are pursuing customer-funded development opportunities that we believe will establish OSS as an incumbent on platforms driving future multiyear production contracts. Across our global defense and commercial markets, customers are looking for technology partners like OSS to support their expanding needs for rugged enterprise-class compute solutions. Driving these trends are the emerging requirements for AI, machine learning, autonomy and sensor processing at the edge. The company's best-in-class hardware and software platforms bring the latest data center performance to harsh and challenging applications that we believe will allow OSS to take advantage of future -- current and future demand trends. Our underlying performance during the second quarter and first half of the year is aligned with our plan. We continue to believe 2024 is creating a strong foundation for sustainable year-over-year revenue growth and profitability in 2025. Even as we navigate growing economic uncertainty and continued weakness in our European markets through 2024, with expected recovery in 2025. So with this introduction, let's take a look at the progress we made during the second quarter in more detail, starting with our efforts to convert our pipeline to orders. Our unfactored pipeline at the end of the second quarter remained over $1 billion. Approximately 70% of our current pipeline is comprised of platform opportunities, which we believe will help drive predictable multiyear revenue and backlog to OSS. I'm pleased with the growth and transformation of our pipeline, reflecting the positive contribution of our sales organization, the strategic investments we are making in product development and the growing demand for our hardware and software platforms. As we continue pursuing opportunities to grow our pipeline, our operating plan in 2024 remains focused on increasing orders within our OSS segment. For the 2024, second quarter, we saw orders outpace revenue by over 20% for the second quarter in a row. Order growth over the past three months was driven by existing customers in the ground, intelligence, surveillance and reconnaissance market, known as the ISR market and from customers in the commercial aerospace market. In addition, we had new customer awards in the air ISR market. We expect many of these new engagements will evolve into multiyear follow-on revenue opportunities in future periods. Second important objective we are pursuing this year is focused on growing our presence on customer-funded development programs. As we mentioned on our first quarter call, we started to disclose separate revenue and cost lines in our financial results associated with customer-funded development projects to show our potential and track new wins. We have defined program-related development work as customer-funded development on our financial statements. Through customer-funded development programs, we are typically providing a more integrated solution compared to the company's historic offerings. In addition, it establishes OSS as a platform incumbent on what is almost always a follow-on production and multiyear support contract. As a result, we expect our business model to benefit from a higher mix of annual recurring revenue and contracted multiyear backlogs in the future. Development relationships are expected to take one to two years before leaving to production orders. So as business scales, we expect to benefit from steady quarter-over-quarter revenue growth while building a solid foundation of potential large-scale program opportunities. I'm pleased to report that customer-funded development revenue increased to $1.4 million in the 2024, second quarter compared to $365,000 just three months ago. This growth was driven principally by the expansion of an existing relationship with a commercial aerospace customer for fielding of a new product and follow-on production. As expected, we are seeing increased interest from customers to support their development programs, and we have multiple proposals currently submitted. As a result, we believe we will continue to experience sequential growth throughout the remainder of 2024 in customer-funded development revenue. We also have expanded our product development efforts this year and currently have five product efforts under development in the OSS segment focused on edge computing for both defense and commercial applications. We expect to announce and demonstrate these products in the second half of this year and the first half of 2025. Our second quarter results also reflect strategic investments we are making to support current and future growth. Over the past 12 months, we have added new program management personnel with experience managing large, complex development and production programs for government and defense customers. We believe their experience will allow us to pursue even larger programs for development and production in defense and commercial markets. As I mentioned last quarter, we are developing a new growth-focused multiyear strategic plan. Our markets are rapidly evolving, which has required additional time to finalize our three-year strategic plan. We expect to communicate the growth strategies we are pursuing in our presentation later this year. As we look to the remainder of 2024, I'm excited by the long-term strategies we are pursuing to scale our business and drive profitable growth. Though it has taken some time, I'm encouraged by the growing progress underway as we establish ourselves in our markets. We continue to execute against our near-term transformation plan as we focus on driving orders, building backlog, growing revenue and improving profitability. While the timing of orders will remain a factor as we get to scale, I'm confident we are building a strong foundation to achieve our long-term growth objectives. I want to thank our team for their continued hard work and dedication as we pursue compelling growth strategy aimed at building greater value for our shareholders. Looking forward, we anticipate consolidated revenue of approximately $13.3 million in the third quarter of 2024, which accounts for approximately $1.6 million of orders that we pushed to the fourth quarter. Our guidance for the third quarter of 2024 also includes expected OSS segment revenue of $6.3 million, representing 15% year-on-year growth in the OSS segment. partially offset by lower Bressner revenue due to continued softness in the company's European markets. While uncertain economic conditions and softness in Europe may negatively impact our consolidated second half performance, we believe our leading enterprise-class, compute solutions, strong balance sheet and committed team are well positioned to take advantage of positive fundamentals across global markets and create long-term value for shareholders. With this overview, I'd like to turn the call over to our CFO, John Morrison, to review our 2024, second quarter financial results in more detail. John, please go ahead. John Morrison Thank you, Mike, and good afternoon, everyone. Our 2024, second quarter results reflect the ongoing transformation of our business model and continued improvements in orders. As a reminder, the company is comprised of two operating segments. Our OSS segment operates in the United States that is primarily focused and involved in the design and manufacture of high-performance ruggedized edge processing, compute, storage and connectivity systems. Our Bressner segment operates throughout Europe and as a system integrator with standard and custom all-in-one hardware systems and components. Bressner also serves as a channel for OSS products to the European and Middle East markets. The following comments are based upon comparison of second quarter 2024 results to the second quarter of 2023. For the second quarter, we reported consolidated revenue of $13.2 million, which exceeds our guidance of $13 million. The 23.3% year-over-year decline in consolidated revenue was primarily attributable to a $3.2 million reduction in revenue related to our former media customer and a $1.3 million decline in Bressner revenue associated with slower economic activity in Europe. Lower second quarter revenue was partially offset by a new customer funded -- by new customer-funded development orders and revenue growth to new and existing customers. Looking at our OSS settlement and backing out the $3.2 million impact from a former media customer revenue at our OSS segment grew 8.3%, reflecting revenue growth from new and existing customers and the initial success adding new customer-funded development project. As Mike mentioned, in the first quarter of 2024, we started to separately disclose revenue and cost of sales line items associated with customer-funded development work in our financial statements. Customer-funded development typically represents non-reoccurring design and development work associated with the introduction of new products paid for by the customer, we expect customer funded development to grow throughout 2024. Consolidated gross profit in the second quarter was 25.2% compared to 27.9% for the same period last year. The decline in our consolidated gross margin was primarily attributable to our under-absorption of our OSS segment production capacity and additional inventory reserves. Total second quarter operating expenses decreased 31.9% to $5.6 million, which was attributable to the elimination of prior year costs associated with organizational restructuring and outside professional services, and these were partially offset by planned program management and investments made during the quarter. In addition, our financial results for the second quarter 2023 were impacted by a $2.7 million charge related to the impairment of goodwill and a $1.3 million charge related to the employee retention -- excuse me, $1.3 million benefit related to the employee retention tax credit. For the second quarter, the company reported a GAAP net loss of $2.3 million or $0.11 per share compared to a net loss of $2.4 million or $0.12 per share in the prior year. The company reported a non-GAAP net loss of $1.8 million or $0.09 per share compared to a non-GAAP net loss of $84,000 or $0 per share. Adjusted EBITDA, a non-GAAP metric, was a loss of $1.3 million compared to a positive adjusted EBITDA of $520,000 in the prior year second quarter. Now, looking at the balance sheet in more detail. As of June 30, 2024, OSS had total cash, cash equivalents and marketable securities of $11.8 million and total working capital of $32.6 million. This is compared to total cash, cash equivalents and marketable securities of $11.8 million and total working capital of $35.6 million at December 31, 2023. OSS had no borrowings outstanding on its $2 million line -- revolving line of credit on June 30, 2024, and December 31, 2023, respectively. The company's Bressner operations had a consolidated balance outstanding on its term loans at June 30, 2024, of $1.1 million, down from $2.1 million at December 31, 2023, and $3 million at June 30, 2023. For the six months ended June 30, 2024, OSS generated $1.2 million in cash from operating activities compared to $2 million for the six months ended June 30, 2023. This completes our financial review for the quarter. We would like to now turn -- open the call to questions. Operator, John? Yes, sir. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you for waiting. We now have our first question. And this comes from the line of Tony Felling from Lake Street Capital. Please go ahead. Your line is now open. Tony Felling Good afternoon, guys. This is Tony Felling filling in for Eric Martinuzzi. Appreciate the time for question. Yeah. So do we feel the company is properly staffed for a tighter focus on the defense customers? Mike Knowles Yeah, Tony, I do. And we've made some really, really good progress over the year to where we are. I think we're very well set to actually scale really well too with the people we have. So going back over the course of the year, just a quick summary. Of course, myself, joined the team, run commercial and defense, but defense background of 30-plus years. And then we brought on a VP of Sales and Marketing, Robert Kalebaugh. He and I worked for a decade together in the defense market. He has over 35 years' experience selling marketing into, not in the U.S. but global defense. And then as I mentioned in the script, we wanted to augment the team with experienced program managers who are used to running large-scale defense programs that have development, production, sustainment, fielding, et cetera. So we added two program managers to the staff. Each, who, in their own right, have experienced running $100 million-plus programs on the defense side. So we're really well situated there. In addition, as AS9100 certified company, and ISO 9001 certified. We're really well set in policy process quality, et cetera, to meet the standards required for defense and commercial. So I think we're in a really good place to execute against defense programs. Tony Felling That's great. And I mean, do you think there's any risk in terms of revenue concentration with more focus on the defense customers going forward? Or is that kind of where we're headed? Just revenue risk concentration -- with risk in terms of revenue concentration with more focus on defense customers? Mike Knowles Yeah, I don't think so. When I showed up to the company, we were primarily a larger value on the commercial side. So as we've kind of increased up to about a 50-50 ratio right now. As we're projecting and we're looking at our pipeline for the next three to five years, we see that same ratio in our pipeline. So I don't think we'll get a revenue concentration specifically that would become a risk. If anything, we've seen quite a deep success here in the first year in broadening out that revenue across more defense customers in addition to the commercial customers that we've had. So I don't see a risk in the concentration in defense. Tony Felling Appreciate you taking the question. I'll jump back. Thank you. And we now have our next question, and this comes from the line of Brian Kinstlinger from AGP. Your line is now open. Please go ahead. Brian Kinstlinger Great. Thanks so much. Can you speak to the government procurement environment? Are you seeing reasonable sales cycles? Are they still elongated? And then as we enter the new fiscal year for the federal government, which always brings a set of budget delays, what can the company do to ensure a steady flow of orders, if at all? Mike Knowles Yeah, Brian, the bane of existence, doing the business with the U.S. government and defense actually, it's the same in most global MODs also. So the interesting thing we've seen is the, I would say, the normal acquisition cycles from markets like I mentioned, the ISR market, their kind of technology road map time frames have generally been consistent. So not really concerned there in terms of where the markets are going, their needs. The biggest factor really has been -- and this has kind of been a trend over the last three to five years is, we're just seeing the procurement arms on the contract side, taking exorbitantly longer time to award and contract out the contracts that have already been selected as winners or awarded as sole source. And when I say extensions, right, it used to be, you might -- when a winner was selected or they're getting to the end of a procurement, it might be three to four weeks for them to process it's not uncommon now to see those sometimes take 12 to 14 weeks, which has really gotten a bigger impact now on timing. So we worked through some timing issues a little bit. That's probably our biggest risk. In terms of their demand, the market needs and the technology and the process they've gone through, those are still remain fairly consistent. And then as for next year, yes, we always get concerned about CRs. The benefit you get on winning programs the year prior is the CRs usually affect new starts. So the more we win this year, the more stability we have in business into next year. But we do keep an eye on the CRs. We work with customers, the best you can to plan for those. We did have two or three programs this year that were delayed close to seven months past when we thought they would hit just because of the longer CR we had this year and then the follow-on impact of them having to get the money appropriated. So the timing issues, definitely we have to deal with. Not much we can do rather than work closely with our customers, have things aligned and ready to go. We have seen some large primes. Have taking on considerations of funding smaller companies to protect schedules for awards they know they're going to get but are waiting on award. And then the last thing we've been doing is we use some of our lobbying efforts just to help facilitate programs and timing and movement. Ultimately, if it's a CR, right, there's not much we can do. But we do work through our lobbying office to help resolve our [Indiscernible] or put in place anything we can. Brian Kinstlinger Great. And then when you talk about customer funded development, I assume growth in these programs are leading indicators of larger awards? And if that's the case, how do you think about the average time of a government -- a customer-funded development program? And how long might it take or typically take until it turns into something that I might call production or I'm not sure how to describe it? Mike Knowles Yeah. No, Brian, I think what you could -- it's safe to say now for the kinds of programs that we're bidding and we've started to win. We'll generally see the NRE or the development period beyond the order of 6 to 12 or 18 months. So we're in that 6 to 18-month range depending on the size and scope of the development in the system we're developing. Usually, at the end of that 18 months, you have the first fieldings. Usually, that's the low risk -- the risk, the lower rate initial production. That's usually the first 4, 5 or 6 prototypes, that's usually delivered within the first, kind of, 3 to 6 months after that development period. And then you roll into production period. That can usually run anywhere from 1 to 2 to 3 to 5 years and then usually have a technology refresh cycle that rolls up on the back end of that. So a perfect example is the Raytheon P8 program we have. There is initial front-end development. We've been on that program for the better part of 7-8 years now. And we're on, I think, our second or third tech refresh. We're just finishing some development right now for the next technology refresh update for our system there. So that's the benefit of getting in on these front-end customer development programs. So a little bit of a long answer, but between 6 to 18 months depending on the scope is what I would say is average for us on those front-end development. Brian Kinstlinger Thank you. Last question I have, as we start to think about the revenue expectations that we like to think about from the OSS segment. Is there any way you can quantify either the first 6 months or the trailing 12 months book-to-bill? Mike Knowles Yeah. So we've been tracking this year. So the -- as I mentioned in the earnings call, right, the bookings have been outpacing revenue in that OSS segment by a little over 20%. Right? So that -- those would be like book-to-bill ratio -- So 1.2 maybe -- So maybe like 1.2 in this last quarter is kind of the initial valuation? Mike Knowles Yeah. For the trailing 6 months. For this year, we've been probably a little bit closer to 1.26. The last quarter here was a little bit stronger. We were upwards of a little over 1.3. So we're starting to see some pickup on the booking side from a lot of work we initiated last year. And then we're forecasting that to see that continued positive book-to-bill ratio greater than 1 through the next two quarters based on where we see things. The biggest impact would be timing on some, making sure the awards come in as planned. But based on where we're sitting, the majority of the pipeline that we have bid right now, we're waiting on awards, is either competitions we've won or sole-source work. So we're feeling pretty confident in the scope and the value that we could potentially pull through. We're working the timing, as I mentioned, on processing it through the systems. Brian Kinstlinger Let me squeeze one more in. Back to -- we're had to do the end of the government fiscal year, some businesses in the government obviously have a budget plus at the end of the year. Obviously, that also helps for the year after because you've had some budget this year and it protects you against CR. Do your business have a budget flush in September, generally, a benefit from that? Or is that not typically the case? Mike Knowles So not much last year. So generally, on the government side, when they get to year-end and they're trying to use up a budget at the end of the year. They will generally go for buying additional production buys or spare buys. So generally, if you're incumbent on a platform, you'll see a better return on those year-end sweep-up funds. So we've started to position ourselves in some of those programs, so we could start to take advantage of that. Because of some of the positioning work we did last year, the other way you can grab sweep up funds is, usually, if some labs or organizations are interested in some early technology fieldings so they can work them in their lab or try them in exercises. We can sometimes see those pickups. So we've expanded our relationships across the defense so that we try to pursue opportunities where we can for people who might want to buy something for their lab or for some experiment in anticipation of a program in the following year. So as we get a bigger market share in defense, sweep-up money will definitely be a lever that we can pull. We just need a little bit more penetration and incumbency across a few more platforms. And then we'll -- I think we'll start to see that really add more to our opportunities. Thank you. And there are no further questions at this time, sir. Please continue. Thank you. This concludes our conference for today. Thank you all for participating. You may now disconnect.

Earnings call: Rackspace Technology beats Q2 expectations, focuses on AI By Investing.com

Rackspace Technology, Inc. (NASDAQ:RXT) reported strong second-quarter earnings, surpassing its own revenue, profit, and earnings per share (EPS) guidance. The company is executing a strategic pivot towards hybrid cloud and AI solutions, with a particular emphasis on growing its services in regulated industries such as healthcare and finance. Despite a slight sequential decline in Private Cloud revenue, the overall demand for the company's data services is robust, and its Public Cloud segment has shown growth. Rackspace is also proactively managing its capital structure by repurchasing debt and is optimistic about generating positive cash flow for the remainder of the year. In conclusion, Rackspace Technology is demonstrating robust financial health and strategic growth in the cloud and AI sectors. The company's focus on serving regulated industries and expanding its AI capabilities, coupled with strong customer relationships and market recognition, positions it well for future growth. However, the slight downturn in Private Cloud revenue and gross margin serves as a reminder of the competitive and dynamic nature of the cloud services industry. Rackspace Technology, Inc. (RXT) has recently captured investor attention with its strategic pivot towards hybrid cloud and AI solutions, aiming to leverage its expertise in regulated industries. As RXT focuses on operational turnaround and optimizing its capital structure, here are some key insights from InvestingPro that may provide a deeper understanding of the company's financial health and market position: For those interested in a deeper dive into Rackspace's financials and future outlook, InvestingPro offers additional tips and metrics. Currently, there are 9 more InvestingPro Tips available for RXT, which can be found at https://www.investing.com/pro/RXT. These insights could be instrumental in making informed decisions, especially when considering the company's strategic initiatives in the fast-evolving cloud and AI landscapes. Operator: Thank you for standing by. My name is Prilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rackspace Technology's Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be question and answer session. [Operator Instructions] I would now like to turn the conference over to Sagar Hebbar, Head of Investor Relations. Please go ahead. Sagar Hebbar: Thank you, and welcome to Rackspace Technology's second quarter 2024 earnings conference call. I'm Sagar Hebbar, Head of Investor Relations. Joining me on today's call are Amar Maletira, our Chief Executive Officer; and Mark Marino, our Chief Financial Officer. As a reminder, certain comments we make on this call will be forward-looking. These statements involve risks and uncertainties, which could cause actual results to differ. A discussion of these risks and uncertainties is included in our SEC filings. Rackspace Technology assumes no obligation to update the information presented on the call, except as required by law. Our presentation includes certain non-GAAP financial measures and adjustments to these measures, which we believe provide useful information to our investors. In accordance with SEC rules, we have provided a reconciliation of these measures to their most directly comparable GAAP measures in the earnings press release and presentation, both of which are available on our Investor Relations website. I will now turn the call over to Amar for an update on the business. Amar Maletira: Thank you, Sagar, and welcome, everyone, to our earnings call. Results in the second quarter exceeded the high end of our guidance for revenue, profit and EPS. This marks the eighth consecutive quarter in which we have either met or exceeded our guidance. We continue to execute to our plan and focus on advancing our 3 strategic priorities. First, we are making steady progress on our operational turnaround. I will cover this in detail later in my prepared remarks. Second, we are repositioning Rackspace as a forward-leading innovative hybrid cloud and AI solutions company. We're now well placed to catch the next big secular waves of both hybrid cloud and AI. And third, we are rightsizing our capital structure to support long-term and sustainable profitable growth. We have ample liquidity and flexibility to focus on our operational priorities. We further improved our capital structure in the second quarter through opportunistic repurchases of our debt. Over the next 2 to 3 years, from a market perspective, we anticipate an acceleration in digital transformation spending, driven by the ongoing transition to hybrid cloud as well as AI. We see customers taking a more strategic approach to the use of both Public and Private Cloud with a notable shift towards a more hybrid environment. In development of AI, we are winning business and helping leading companies prepare for AI and GenAI applications. The first step to AI starts with data, and we are seeing strong demand in data services and solutions, partially driven by AI. Now let me get into our business performance, starting with Private Cloud. Private Cloud GAAP revenue of $260 million was down 3% sequentially in the quarter and within our guided range. We are working both to accelerate the pace of new wins and slow the rate of revenue runoff. Bookings were slightly down sequentially, driven by deal lumpiness. We see our new Private Cloud strategy gaining traction. Our pipeline was up over 35% year-over-year with strength across all regions. Within our pipeline, we are seeing large opportunities as enterprises develop a better understanding of which workloads fit in Private Cloud versus Public Cloud versus on-prem. While those larger deals typically have a longer sales cycle, they align with our key objective of building a solid book of business from long-term commits of high-quality recurring revenue. One of our marquee Private Cloud engagements is with Seattle Children's Hospital. Leveraging our Healthcare Cloud solution, we migrated their Epic Health Records platform onto Rackspace's fully managed private cloud. Additionally, Seattle Children's made strides in pediatric research with the launch of cutting-edge high-performance computing. Rackspace collaborated with Dell (NYSE:DELL) to design and implement this system that leverages the power of blazing-fast VIDIA A100 GPUs. Rackspace is hosting and managing this high-performance compute environment for the hospital. Another large U.S. health care payer awarded us similar Epic migrate and operate managed services contract that enables provider collaboration. I expect to see continued growth in health care. We are leading with Epic hosting as a service but building a foundation for customers to consolidate more of their data center footprint with Rackspace. We see similar opportunities in other regulated industry verticals. For example, we are also seeing traction in our banking, financial services and insurance vertical. In the December quarter last year, a large U.K. retail bank chose Rackspace's software-defined data center solution for their mission-critical banking applications. We're in the midst of this implementation, and our customer is already experiencing significant improvement in transaction response times for their ATM and point-of-sale applications. This is yet another good validation of our differentiated solutions in Private Cloud. From an offerings perspective, in Private Cloud, we launched 16 new and enhanced 17 other products and solutions in the quarter. Overall, Private Cloud is still navigating a challenging transition but our strategy is being increasingly validated through recent wins, a growing pipeline and positive customer feedback. We are positioning Private Cloud for durable and profitable growth in what we believe to be an underserved $50 billion total addressable market. Now moving to Public Cloud. Public Cloud GAAP revenue of $425 million was up 1% sequentially, exceeding the high end of our guided range due to better-than-expected performance in both services and infrastructure resale. Overall bookings grew double digits year-over-year and low single digits sequentially. I'm particularly pleased with our services bookings, which represented 70% of total Public Cloud bookings for the quarter, growing high single digits year-over-year and sequentially. I attribute that success to a shift in our go-to-market strategy of leading with services, combined with better execution. We are seeing particularly strong market demand for data services, specifically in data engineering, where bookings in the quarter more than doubled year-over-year. Our strategic positioning in data services driven by both digital transformation and AI is clearly paying off. Additionally, we have become much better in attaching services to our infrastructure resale deals. 85% of our largest infrastructure resale deals this quarter also had services attached. We also started offering Rackspace Elastic (NYSE:ESTC) engineering services through AWS Marketplace. Some notable customer wins demonstrate the progress of our go-to-market strategy of leading with services. For instance, we were selected to implement a digital transformation program for a large media company. We're writing a major customer-facing application and migrating it onto 1 of the hyperscalers. Rackspace is supporting the strategic multiyear effort with a skilled multidisciplinary team. From a major consumer web company, we are deeply engaged across several service offerings in professional services, platform support and security, driven by a strength in delivering full-stack services and our deep cloud expertise. I'm very encouraged by the success we have seen in Public Cloud and believe that the progress we have made across various initiatives will lead to even stronger performance going forward. We continue to target attractive opportunities with a winning mindset, positioning ourselves for ongoing success. Now when it comes to AI, we continue to take an optimistic long-term but realistic short-term approach. Our fare initiative is developing innovative new ways to help our customers on their AI journey with over 40 engagements. We are closely partnering with hyperscalers and we are 1 of the select few global AWS AR partners. As noted previously, we are driving strong growth in data services, helping customers take their first step towards leveraging AI. We are also planning for general availability of a private cloud AI offering called AI Anywhere. While our operational turnaround is not dependent on short-term benefits from the secular wave in AI, we are maintaining our strategy and approach of thoughtfully developing AI capabilities so we can become the partner of choice for organizations as they embark on their AI journey. We'll continue to do so without getting too far in front of the market. In summary, I'm pleased with the steady progress we have made despite a flat market. Our operational turnaround is focused on strengthening our pipeline and sales booking in both Private and Public Cloud, stabilizing and growing revenue and profit while continuing to drive cost efficiencies. Although there is still work to be done, we are building momentum for consistent and sustainable growth in revenue, profits and cash flows in the years to come. Before I wrap up, I'd like to thank our customers, partners and all our actors. I'm proud of all we achieved together already. I will now turn it over to Mark for an overview of our financial results and guidance. Mark Marino: Thank you, Amar. In the second quarter, total company GAAP revenue of $685 million exceeded the high end of our guidance, driven by strength in Public Cloud. Total non-GAAP net revenue was $380 million, down 1% sequentially due to a decline in Private Cloud. Non-GAAP gross profit margin was 20.3% of GAAP revenue, flat sequentially and 36.7% of non-GAAP net revenue also flat versus prior quarter. For the quarter, non-GAAP operating profit was $23 million, exceeding the high end of our guidance. This was primarily driven by better-than-expected performance in our Public Cloud segment and continued focus on cost management. Non-GAAP operating margin was 3.3% of GAAP revenue, up 1% sequentially and 6% of non-GAAP net revenue, up 1.8% sequentially. Non-GAAP loss per share was $0.08, which came in better than our guided range of a $0.09 to $0.11 loss per share. Cash flow from operations was $24 million, and free cash flow was negative $15 million in the second quarter. These amounts reflect the reclassification of a portion of our cash interest payments to financing cash flows as a result of the accounting treatment for the term loan we entered into as part of the Q1 debt refinancing. Moving forward, we will continue to reclassify a portion of the cash interest payments on this debt instrument plus the semiannual cash interest payments on our 3.5% senior secured notes to financing. For the balance of fiscal year 2024, we expect cash flow from operations to remain positive and free cash flow to be slightly negative, driven by success-based CapEx. Turning to our segment results. For Private Cloud, GAAP revenue for the second quarter was $260 million, within our guided range. This includes legacy OpenStack revenue of $25 million. Total Private Cloud revenue was down 3% sequentially due to customers rolling off older generation private cloud offerings. Private cloud gross margin was 37.4%, down 1.6% sequentially, primarily due to lower revenue. Segment operating margin was 26.8%, flat sequentially, driven by improved cost efficiencies and better asset utilization. In Public Cloud, GAAP revenue was $425 million exceeding the high end of our guidance and was up 1% sequentially due to consumption-driven growth on infrastructure resale volumes. Gross margin for our Public Cloud segment was 35.1% of non-GAAP net revenue, up 3.6 percentage points sequentially, driven by improved operational efficiency and higher utilization. Non-GAAP segment operating profit was 9.8% of non-GAAP net revenue, up 1.8 percentage points versus prior quarter. We believe there is opportunity to further improve utilization over the rest of the year. Now an update on our debt repurchase activity for the quarter. Before I begin, a quick recap. As announced on our Q1 earnings call, we closed the public debt exchange in April with over 96% of our secured creditors supporting the exchange transaction. We reduced our outstanding principal by over $300 million and lowered annual cash interest costs by more than $11 million. We also extended the maturities on the revolver and other participating senior debt facilities so that we now have no corporate maturities prior to 2028. During Q2, we continued to repurchase our debt. We deployed $29 million of cash to repurchase $68 million in aggregate principal amount of debt. Early in the third quarter, we also repurchased an additional $24 million of the FLSO term loan at an average price of $0.46 on the dollar. In the first half of 2024, we deployed a total of $62 million to opportunistically repurchase $137 million in aggregate principal amount of our debt. We will continue to monitor and assess further opportunities to improve our capital structure. Now on to guidance. We expect third quarter GAAP revenue to be approximately $668 million to $680 million, down 1% sequentially at the midpoint. Total non-GAAP operating profit is expected to be $29 million to $31 million, up 31% sequentially at the midpoint and non-GAAP loss is expected to be from $0.06 to $0.08 per share. From a segment perspective, we expect Private Cloud revenue of $255 million to $262 million and Public Cloud revenue of $414 million to $419 million. Our non-GAAP tax rate is expected to be 26%, and non-GAAP other expense is expected to be approximately $51 million to $55 million. The non-GAAP share count is expected to be around 231 million to 233 million shares. I will now turn the call over to Sagar. Sagar Hebbar: Thank you, Mark. Let us begin the question-and-answer session. [Operator Instructions]. Please go ahead. Operator: [Operator Instructions] And your first question comes from the line of Frank Louthan with Raymond James. Frank Louthan: If you can give us an idea of the outlook of kind of when we can expect getting back to positive top line growth and then some of the initiatives you've done will start to kick in there. And then can you give us an idea of what percentage of your bookings currently are AI related? Amar Maletira: Yes. Thank you. I will get started, and I'll take both the questions and Mark, please jump in, okay? So as we -- Frank, thank you very much for the question. As we indicated last quarter, we will see -- start seeing revenue stabilization in the second half. We already started seeing that in Q3. In fact, in Q2, when you look at our revenue beat, the revenue beat came from 2 sources. One was in infrastructure, resale volumes were up; and the second was from services. Now the services beat and higher than our own internal expectation was good news because we have started seeing some leading indicators with good bookings and services in the previous quarters, and we saw that in this quarter too. Where I'm going with this is, if you exclude that increase in infrastructure volume consumption, which is very hard to predict, Frank, because this is not something that we have complete visibility to. So if you exclude that, our revenue is roughly flat from -- going from Q2 to Q3. That's what our guidance is. So we started seeing the revenue stabilization, Frank. I feel good about the pipeline building. You saw both in private cloud as well as public cloud, the pipeline has grown significantly. In fact, in private cloud, it was up over 35% year-on-year. And when you go dig into that pipeline, the top of the funnel is growing very rapidly. In fact, in our health care business, our funnel was close to about $1.2 billion at the top of the funnel as compared to roughly $750-plus million just about 3 months ago. So good development of pipeline. We have to book convert that into bookings. Typically in private cloud, the sales cycles are a bit longer, as you know. We also -- when you look into our funnel, we see some large deals developing in the funnel. And that's quite encouraging for us. And there's always deal lumpiness into the Private Cloud business, as you are aware. So all leading indicators are good. We're also seeing revenue runoff, right? That's one of the challenges that we have faced with because the older generation products are running off. We also see some of our commercial customers, which is the customers with less than $300 million in revenue, their revenue, not our revenue, but their revenue. We are also seeing that long tail also running off. As we start building our pipeline and book of business more towards mid-market and enterprise customers. So I feel very good about those leading indicators. We will continue to work on the revenue runoff on the Private Cloud side. We have initiatives in place. We started seeing some improvements in revenue runoff, and we expect it to improve in the next few quarters. And we believe in the next couple of quarters or so, our bookings will outpace revenue. Having said that, the bookings to convert to revenue in Private Cloud takes about anywhere from 6 to 9 months. So we should expect the business to start stabilizing. That's what -- the first most important priority we had in the short term was the decline in private cloud, working towards that and then start growing. Now when it comes to Public Cloud, I think it's a different story. We already started seeing improvements there. Our bookings second quarter in row. Q1 as well as Q2, is we are reporting our fiscal Q2, we grew sequentially in bookings in both -- in Q1 as well as Q2. Now as I tell people internally, 1 quarter is just a point, 2 quarters, 2 points and make a line. We have to go and do it more than 2 quarters to really start seeing a trend. But we do when if we look at the funnel, we look at the conversion, I think we are doing quite well. So I expect services revenue also to start stabilizing in the next couple of quarters, as we indicated earlier. On the infrastructure side, as we have indicated to you earlier, that we will walk away from some low-margin infrastructure or nonprofitable infrastructure resale deals. And that might impact our revenue, but should not impact our profit as much. So just to summarize, we do expect stabilization in revenue -- overall revenue, barring us walking away from some of the low-margin infrastructure deals in both the businesses in the next couple of quarters. The second question, go ahead. Frank Louthan: Yes, just a follow-up on that. How do you -- how are you defining stabilization, stabilization relative to what relative to this year, Q2? How should we think about where it's going to kind of start to grow from? Amar Maletira: When we talk about stabilization, we do it on a sequential basis, right? When you take a look at our Private Cloud revenue, the last few quarters, we were declining anywhere from 4% to 6%, right? Now you start -- you're still seeing that decline significantly reduced in this quarter and next quarter. So it's gone to minus 3% to minus 1%. So for us, stabilization, Frank, is on a sequential basis, and then we start growing from thereon, on a sequential basis, which should land in the year-on-year growth. Is that helpful? . Frank Louthan: Yes. Amar Maletira: Now coming to AI. Now listen, I think, as I mentioned in my prepared remarks, we are long term very optimistic about AI and GenAI. We believe that it's going to impact all functions, all industries, and it's really a promising circular way. Having said that, in the near term, in the short term, we are very realistic in our approach. So when you talk about bookings, it's not a big portion of our bookings. I think -- and I will give you a little bit more color there on how we look at this opportunity. So it's not a big portion of our bookings, but we have 40-plus engagements through a fair initiative, and we are seeing a very good traction in AI. And some of this is also a follow-on on our data business. As I mentioned, our data services business which has data engineering, data migration and data modernization, all 3, that data services bookings 2 quarters in a row grew substantially, both year-on-year as well as sequentially. And that's getting customers ready for -- with the data lakes and rearchitecting the data architecture, et cetera, and that's the kind of work we are doing. So partially driven by AI and partially driven by the move to cloud itself. Now let me -- since I have this opportunity, let me just give you a little bit of more color on how we look at AI. So we believe that there are 2 types of spend happening out there, Frank, in AI. One is the spend in AI infrastructure, and that's a big spend happening today. And that's mainly for model training. And the model training is driven by hyperscalers, Meta (NASDAQ:META) as an example, OpenAI and many of the startups and to some extent, sovereign countries as well as maybe some of the enterprises where they're doing a very high-value research work. And this spend is going into GPUs, into building systems, into data center build-outs and so on and so forth. A lot of enterprises are not really participating in that infrastructure spend, so to speak, because the model training is usually happening on the hyperscalers. So we believe that where we will participate as an infrastructure as a service provider on the private cloud or hybrid side is mainly on the inferencing of the workload, the almost model training is done as it moves into inferencing that is the day 2 plus workload is a production workload that's very sticky. It's long term, and that's where we are building our private AI and hybrid AI architecture around it and launching a good solution around private AI, mainly around inferencing and some on model training. The second area that the spend is going, which is relatively smaller compared to the infra spend is on application and data, right? Enterprise is participating in this, but a very tactical approach to AI currently. So it's mainly an experimentation mode. And then we participate to a fair initiative. So all the bookings that you're seeing come in right now is through fair is helping customers develop, help them identify their use cases, help them train the models, and also industrialize them either on private or public. So that's where we are seeing traction, and it's a tip of this year kind of solution that we provide through fair and that will also help us to build our portfolio and solution as these workloads move more into inferencing and fine-tuning. That's where our hybrid AI with both private and public will come into play. Operator: And your next question comes from the line of Kevin McVeigh. Kevin McVeigh: Great. Congratulations on the results. Amar, your point kind of beaten or kind of coming at the high end of the range for 8 quarters. It looks like the revenue beat was about 2%. You've been pacing at, I think, about 1% or so, maybe a little less than that. So acceleration -- was that incremental kind of revenue beat, the infrastructure kind of step-up that you saw? Or would there been anything else to call out there? Amar Maletira: Yes. I think infrastructure consumption volume definitely is part of it, Kevin. And it is also services. Our services we also did very well in services, and it came in higher than what we expected in the quarter. And our services bookings is taking a little bit forward, right, which is a mainly leading indicator. Services bookings grew high single-digit both sequentially as well as year-on-year across all 3 cloud-related services that we offer, platform, which is infrastructure services; application, both migration and modernization; and data services that I talked about. In fact, our professional services in bookings grew double digits across the board. Kevin McVeigh: And I guess Amar and that will be my second question. Why are you seeing that now? Is that kind of just the monetization of the pivot in the sales force or the go-to-market? Because obviously, that's a really important part of the story, the incremental margins on professional services. So just why is it now? And again, it sounds like the attachment rates are much higher than where it's been historically as well. So maybe understand that a little bit. Amar Maletira: Yes. I think, Kevin, that's a good question. So I explained to you where it's happening, or let me explain why it is happening, right? It is mainly because of the foundation that we laid in the Public Cloud business in the second half of last year. If you recall, we [Indiscernible] out about 70% of our sales force. We hired and refreshed our sales organization in the second half, sales sellers with services skills. We also hired client principals. That is number one. Number two, we have been relentlessly driving sales enablement and training across all the 9 sales place that we have. And today, within our organization is a highly rated program. Number three, we also are supporting top of the funnel with specific demand generation activities, okay? We have sales and solutions campaigns that are working very well, and they are actually helping with the top of the funnel. And there's a major shift in how we are selling. Today, we are selling to a relationship, we do our power selling at the CXO level. So for example, let me give you another data point that might be of interest to you. More larger deal sizes are not showing up in the funnel as well as in bookings. 53% of our bookings came from top 20 customers in this quarter. And we were able to go sign 10 out of the 20 master service agreements with large enterprises. Now that's a big achievement. And now we have also hired client principals that are attached to these 10 large enterprises that we can start selling our value proposition and our services and solution to these customers. In fact, our largest go-to-market segment in the Americas exceeded target significantly 2 quarters in a row, which is also a very good proof point that we are executing quite well on the field. We were also included in Microsoft (NASDAQ:MSFT) managed partner list this quarter, which was a big achievement. And we are working with Microsoft on Azure as well as AWS very closely. And Kevin, 1 of the things as we pivoted to being a services-led organization in public cloud, we also are recognized by industry analysts like IDC, Everest, ISG, they ranked us as either leaders or major players. So that's what's actually driving our services business as we see growth in funnel good bookings conversion, so on and so forth. Similar story even on private cloud. So I think what we laid as a foundation has started working well. Operator: And your next question comes from the line of Ramsey El-Assal with Barclays (LON:BARC). Ryan Campbell: This is Ryan on for Ramsey. I was hoping to get an update on the competitive landscape. This quarter, you mentioned some success with mid-market and enterprise clients. I guess I was curious to see if you're coming up against any different competition than you did prior? And really what solutions are resonating the most with these clients at market? Amar Maletira: No, I think -- so the competition remains the same, Ryan. That's a very good question. The competitive landscape has not changed as much. One of the things, to Kevin's question earlier, we are playing in markets where the markets, for example, IDC said in cloud services, for the next 12 months, is the design migration modernization work on cloud, the budgets are going to go up by mid-single digits. So we are playing in markets that are growing even in this kind of macro environment, especially on the cloud side. And we see competition there, but our relationship with the hyperscalers and our differentiation when we go to market, we go not as a big SI. We go in with a labor minus [Indiscernible]. For example, if you think about data services, right, there are a lot of companies in data services. So where do we differentiate? It is our deep experience and talent in data engineering as an example. We're going with differentiated solutions with an IP wrapped around it. That's a labor minus model. And we have been executing very well from a go-to-market perspective. So our value proposition is resonating with the customers. We are showing up very well, and we are delivering to our commitments. Our NPS are pretty high, even in the -- even in and as we continue to grow our bookings and deliver. Operator: There are no further questions at this time. I would like to turn it back to Sagar Hebbar for closing remarks. Sagar Hebbar: Thank you, Prilla. Thanks, everyone, for joining us. If we did not get to your question or if you have a follow-up, please email us at [email protected]. Have a wonderful evening, everyone. Operator: Thank you. And this concludes today's conference call. Thank you all for participating. You may now disconnect.

CI Financial Corp. (CIXXF) Q2 2024 Earnings Call Transcript

Kurt MacAlpine - Chief Executive Officer Amit Muni - Executive Vice President and Chief Financial Officer Good morning, ladies and gentlemen. Thank you for joining today's CI Financial Q2 2024 Earnings Call. My name is Tia and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the call over to your host, Kurt MacAl, CEO of CI Financial. Please proceed. Kurt MacAlpine Good morning everyone, and welcome to CI Financial's second quarter earnings call. Joining me is our CFO, Amit Muni. Together we will cover the highlights of the quarter, a review of our financial performance during the quarter, including the impact of our capital allocation decisions, an update on Corient business performance and recent M&A activity, a discussion on the progress against our strategic priorities, then we will take your questions. This June marked the 30th anniversary of CI Financial's IPO. Known at the time as CI Fund Management, the firm managed just under 4 billion in assets across 13 mutual funds. In the three decades since, CI has grown into a large and leading diversified wealth and asset management company, ending July with over 500 billion of client assets, with more than 325 billion of that coming since we began executing our new strategy in 2020. Along with our 30th anniversary milestone, the second quarter produced a number of record financial results. Adjusted EPS of $0.90 is a quarterly record, up 5% from the first quarter, which was our previous quarterly record. Earnings growth reflected the continued strength in capital markets, expansion of the US business and the benefit of recent share repurchases. Adjusted EBITDA per share attributable to shareholders also increased 5% sequentially to a record of $1.68 per share. We generated free cash flow of $1.01 per share, reflecting the strong cash generation of our business. Capital allocation remained active during the quarter. We acquired two RIAs and settled deferred considerations. We retired greater than 860 million of bonds through a tender offer of our 2051 bonds and market repurchases of our 2030 and 2051 bonds, crystallizing a $280 million pretax gain for shareholders. Since April, we repurchased 9.9 million shares through two substantial issuer bids, one for 4.9 million shares in April and one for 5 million shares completed in July. Finally, we returned 30 million to shareholders through our dividend in the quarter. The Board also declared a dividend of $0.20 a share payable in January, reflecting the normal cadence of declaring dividends one quarter ahead. Our Canadian retail asset management business experienced 331 million in net redemptions in the quarter. While still negative on the quarter, this is a meaningful improvement from Q1. Our wealth businesses in both Canada and the US continue to generate strong net inflows in the second quarter. We executed well against our three strategic priorities to modernize asset management, expand wealth management and globalize the company. Investment performance across the business remains strong, with over 70% of our AUM outperforming our peers on a three year basis. The sustained strong performance highlights the impact that the transformation we made from a series of competing boutiques to an integrated global asset manager has had for our clients. Corient had another strong quarter, delivering adjusted EBITDA growth of 6% quarter-over-quarter. In May, Corient completed the acquisition of two RIAs and on July 31st we closed on the acquisitions of two more, adding a combined 14 billion of client assets across the four firms. I'll now turn the call over to Amit to discuss our financial results. Amit Muni Thank you, Kurt, and good morning everyone. Turning to slide four, our global assets ended the quarter up 3% to 489 billion, driven by positive markets across our three segments as well as net inflows into our US and Canadian Wealth segments. Turning to our financial results on the next slide, I'll focus my comments on our adjusted results. Adjusted net income was 136 million or $0.90 per share for the quarter. Adjusted EBITDA increased to 252 million for the quarter and our adjusted EBITDA margin was 40.1%. Turning to the next slide, I'll highlight the segment results and the key drivers of EBITDA and margins. Asset management EBITDA was relatively stable and came in at 159 million for the quarter. Margins were down due to seasonal compensation items which I'll go through later. Canada Wealth EBITDA was down slightly to 18 million for the quarter and margins were down due to our previously disclosed investments we are making into our custody platform. In the US, pre-NCI EBITDA increased to 115 million and margins were relatively flat at 42.6%. Compared to the second quarter of last year, EBITDA has increased 21%, which is greater than the investor group's preferred return. We have some variability in our US NCI this quarter due to the timing of expenses between quarters and whether the expenses were incurred within our Corient partnership or our US holding company which each have different levels of NCI ownership. A better go-forward number is looking at our first half NCI, which removes that variability. For purposes of modeling non-controlling interest of our US segment for future quarters, we estimate non-controlling interest of 37% of US adjusted EBITDA when calculating our US segment adjusted EBITDA and for purposes of modeling non controlling interest for our US segment's contribution to EPS, we estimate non-controlling interest of 30% of US segment adjusted EBITDA. Turning to the next slide, I'll walk through the changes in revenue. Revenues on a comparable basis increased 4% to 757 million. Asset management revenues were up 3 million due to positive markets which were partly offset by slightly lower fee capture and the effect of net outflows. Canada and US Wealth management fees increased due to higher asset levels from positive flows and positive markets. Acquisitions in the US added 2 million in revenue in the quarter. Turning to the next slide, we can review the major changes in expenses. On a comparable basis, total expenses increased about 8%. SG&A increased due to higher compensation-related expenses. In particular, we incurred the full quarter effect of merit increases and stock based compensation for awards granted in the first quarter in addition to higher headcount to support the build out of our custody platform, as we guided last quarter. We also had higher costs for investments in marketing and sales to support our three business segments and higher external professional fees. Advisor and dealer fees increased due to higher revenue earned in our Canada Wealth segment. Interest expense increased because of the new bond offering as well as borrowings to fund acquisition-related obligation payments and stock buybacks. Depreciation and amortization increased due to higher depreciation of hardware and computer equipment as part of integration and new lease office space at Corient, which we discussed on last quarter's call. Looking forward to the next few quarters, we anticipate interest and lease finance expenses to be in the range of 59 million to 60 million in the third quarter, primarily due to interest costs from our recent bond issuance and borrowings from our credit facility to settle acquisition obligations. Also, as a reminder from last quarter, we expect higher depreciation and amortization of 18 million to 21 million over the next few quarters, reflecting the impact from integration capital expenditures. This guidance is unchanged from last quarter. Turning to slide nine, we can review our debt and leverage. Our debt was relatively unchanged at 3.5 billion as the new bonds we raised in May were offset by a reduction in our long dated US dollar bonds which were tendered during the quarter and lower credit facility balance. FX headwinds increased debt by 24 million. Our net leverage was also unchanged at 3.5 times on a reported basis. Turning to slide ten, I'll review new information we are providing on the separation of debt and acquisition liabilities for Canada and the US. As we previously discussed, Canada and the US have different capital priorities. The table on the right of this slide reflects the cash, debt and M&A obligations for Canada and the US at the end of the quarter. The US has borrowed $154 million from Canada to primarily fund acquisitions. The US also has 151 million in contingent consideration obligations. Canada has 164 million remaining to pay for US acquisitions. These will be fully paid off by early next year, with a large portion running off in the third quarter. Canada also has 70 million in other Canadian acquisition obligations. We will update this information quarterly so you can track how we're using the respective cash flows of the businesses to pay down its obligations or deploy to other strategic priorities. Thanks, Amit. As discussed frequently we take a dynamic approach to our capital allocation priorities. The second quarter was very active on this front. In addition to share buybacks, M&A, and settling deferred considerations, one of the actions we took was to crystallize a $282 million pretax gain for our shareholders through a tender offer of our 2051 bonds along with open market purchases of our 2030 and 2051 bonds. We felt the second quarter with the opportune time to realize this large gain for our shareholders, as it is likely that any unrealized gains will be reduced as interest rates contract. Currently, additional opportunities exist for us to continue to achieve accelerated deleveraging through the repurchases of the remaining bonds that are trading at a discount bar. We continue to rapidly scale our US Wealth management business. Since the minority investment in Corient last May, the business has grown EBITDA at a 26% compound annual growth rate. EBITDA growth was driven primarily from a combination of organic growth and our integration efforts, as until recently, M&A activity was running below historical levels. As we discussed last quarter, we are nearing the completion of major real estate integrations. In May, we consolidated our New York City office footprint into new office space at 101 Park Avenue. In two weeks, we will move into new space in Boston, which will be followed by Chicago in September and Miami later this year. The consolidation of office space is important for elevating the client experience, driving collaboration, culture and unity across Corient. As mentioned earlier, we've supplemented our strong organic growth with the completion of four transactions in recent months, adding nearly $14 billion in client assets. In the second quarter, we closed on the acquisition of Fort Lauderdale based Socius Family Office, which specializes in serving NFL and NBA players. We also closed on the acquisition of Cleveland based multifamily office Paragon Advisors. Paragon focuses on ultra high net worth families with average assets of greater than 80 million. At the end of July, we closed on two additional acquisitions. Byron Financial is a Charlotte based high net worth RIA focused on comprehensive financial planning that will deepen our presence in North Carolina. Emerald is South Florida based and focuses on providing comprehensive wealth management services to families with greater than 200 million in net worth. All four of these acquisitions were fully integrated at the time of closing, driving immediate benefits for clients and synergies for our business. We continue to make progress executing against our strategic priorities. In asset management, we've been active on the product front, both streamlining our existing lineup and launching innovative new strategies, including the global AI ETF, which quickly scaled past 500 million in assets. Our private market solution continues to gain traction as it is addressing an unmet need in the marketplace, providing Canadians with access to the world's leading alternatives managers via a single solution. In addition, we maintain strong financial discipline with EBITDA margins essentially flat for the first half of the year, despite the cyclical pressure we've endured on fee rates, as a result of asset mix shift. In Canadian Wealth, we continue to have success recruiting advisors to both our Assante and Aligned Capital platforms. In aggregate, recruited assets are up over 75% in the first half of the year. We also continue to invest to further scale our custody business and leverage technology to provide a better client experience. We are working towards onboarding the remainder of our wealth assets and are having constructive conversations with a number of third parties. At Corient, we're making progress against our strategic plan and the investments we've made to scale and fully integrate our business are reflected in our financial results. Our EBITDA grew 6% quarter-over-quarter, our net flows remain strong, and our solutions and alternatives offerings are growing rapidly. Margins in the business are showing the benefit of our integration efforts, with adjusted EBITDA margins up 120 basis points in the first half of the year. As we discussed on the previous slide, we've accelerated growth with the acquisition and integration of four high quality firms so far in 2024. On the 30th anniversary of CI as a public company, we're incredibly proud of the success we've had since our inception and couldn't be more excited about how well diversified and how well positioned the firm is going forward. We thank you for your interest in CI and we'd be happy to take your questions. We will now begin the QA session. [Operator Instructions] First question comes from the line of Kyle Voigt with KBW. Please proceed. Kyle Voigt Hey, good morning everyone. Maybe just a two part question for me on the balance sheet strategy and then I'll hop back in the queue. So I really appreciate the updated disclosure on the segment balance sheet on slide ten. So, first question, you've noted in the past the importance of Corient to have access to issuing debt on a standalone basis. I know the business is now rated, but should we expect debt to actually be issued at the sub level near term? And any update on how we should think about leverage targets of that subsidiary? So that's the first question. Second part of the balance sheet question is really related to total company net leverage, relatively flat sequentially, despite some of the moves around retiring debt. I guess with the 3Q uses of capital between US Wealth acquisitions you've already announced, repurchases that have also been announced, and the M&A obligations that will also be paid out, it seems like we may see net leverage tick up again in 3Q. So is that of correct or should we expect further moves on the debt retirement to offset this, as you noted, was possible in the prepared remarks? Kurt MacAlpine Sure. So let me -- thanks, Kyle. I'll take them in order. So the first question, as it relates to, call it the separation of debt. So we feel we made considerable progress from when we took the initial minority investment about a year ago. At that point, all of our cash flows were effectively commingled. We had competing priorities across our Canadian business and our US business, and we've taken very considerable steps to effectively ready the businesses from a total separation standpoint. As I've touched on before, Corient has a separate Board, has a separate management team, separate equity, obviously, and now we've fully separated the debt. The disclosures that Amit had shared a few moments ago, we've effectively taken the debt and now fully assigned it to each of our respective businesses. In terms of the entity itself that ultimately issues the debt, I'd say over time it's wait and see. There's nothing kind of pressing that would cause us to go to markets right now from a Corient perspective, on a standalone basis. Even if we did, let's just say, go to market for something in the future, the question would be where is it more attractive for our shareholders and is that doing it from a perspective on a standalone basis, or would it be doing it at the CI level, with the debt fully attributed to Corient's, as we've disclosed in the new table. So we're ready to do it, I guess, to summarize, if that's something that we choose to pursue, but we have flexibility as to ensuring it's the most attractive financial for our shareholders with the debt fully assigned to each entity in the event of a separation in the future. As it relates to capital allocation, I'd say the easiest way to think of this, we're just maintaining a very dynamic approach. Last quarter was obviously a lot of different moving pieces. As you mentioned, we had a couple -- we bought 9.9 million shares back effectively since April, we pursued some M&A, we settled some deferred considerations as Canada's obligations to the US have runoff, and then we did the bond issuance and simultaneous bond tender, which was able to fund all of those priorities while keeping the aggregate leverage flat. So, you know, as we move forward, we're going to continue to look at what provides the best long-term value creation for our shareholders and what is the ideal sequencing for us to ultimately capture those actions, and we'll continue to monitor and communicate that what we've done on a quarterly basis. Thank you. The next question comes from the line of Graham Ryding with TD Securities. Please proceed. Graham Ryding Oh, hi. Good morning. Just wondering if you're obviously targeting a lot of share buybacks currently, would you consider at all paying off some of the preferred equity, just given it is a higher cost of capital as well, relative to some of your debt or other capital options? Kurt MacAlpine Sure. So the way we're thinking, similar to feedback, apologies for being a bit redundant with Kyle's question, but we're very dynamic with our capital allocation priorities. If we're asking and looking at the preferred, call it in the short quarter -- in the short term, over the next couple of quarters, the growth rate that we've been able to achieve is effectively double the expected return of the preferred. As I mentioned, until the end of May, we didn't close any acquisitions. The last acquisition we closed prior to that was October of 2023. And we have, call it, a huge outperformance relative to those expectations. So I would say in the short term, as it relates to capital priorities, that wouldn't be at the top of the list, but it would be something that we continue to monitor as we get closer to, call it, the third anniversary of that investment. Graham Ryding Okay, understood. The RIAs that you've bought year-to-date, how did you fund those? Did you use debt at CI level to fund those or have you actually allocated some debt to directly to Corient already? Amit Muni Hey, Graham, it's Amit. Yes, we -- as Kurt said, we borrow at the CI level and then we loan money down to the US business. And in that new segmented balance sheet, you can see how much of the borrowings US has taken from Canada to fund those acquisitions. So it comes from the Canadian business, borrowing on the credit facility, and then loading it down to the US business. Graham Ryding Okay, understood. Your non-controlling interest, I think it was down fairly notably versus your guidance last quarter. What drove that? And should we expect the guidance that you've given us here to be sort of a reasonable run rate going forward, or is this potentially going to move around? Kurt MacAlpine So, Graham, Amit had highlighted. Amit, what page was that on? Were you splits? Amit Muni Yeah, it was earlier in the presentation. Graham, we referred to it on slide six. Kurt MacAlpine So what you'll see. So, Graham, the guidance Amit gave in the prepared remarks was effectively, there's a lot of moving pieces as it relates to NCI, right. There's NCI to the already investors, then there's the partnership, NCI. We're settling earn out obligations in stock, which increases ownership in the partnership, plus expense attribution and other things. So the kind of the cleanest way that Amit had articulated in the remarks was to use the blend of the two and there's guidance that he's outlined on that page for modeling purposes. Graham Ryding Okay, understood. And then my last question, at 3.5 times leverage, are you comfortable at this level or would you consider pushing it higher if you found some further M&A that you wanted to pursue? Kurt MacAlpine Yeah, we're comfortable in the range that we're at. I mean, if you look at what our capital priorities are, they're distinct for Canada and for the US. Canada's priorities are our buybacks and deleveraging. We're not pursuing large scale M&A in the Canadian marketplace and then the US is either thoughtful M&A that aligns with our strategy, or the distribution of capital for the purposes of meeting Canadians -- up Canada's obligation. So it really depends upon what opportunities get presented to us and how we can best capitalize on them for long-term value creation for shareholders. So we're looking at it dynamically across the two, but very clear stated strategic priorities for each of the two businesses. Thank you. The next question comes from the line of Nik Priebe with CIBC. Please proceed. Nik Priebe Okay, thanks. I just wanted to ask what your take is on the emerging theme in the US around cash sweep for broker dealers? Like, do you foresee the focus ever shifting to anything that might impact the Corient business in the future, as it relates to the fee structure there? Kurt MacAlpine Yeah. So Corient is a fee only RIA. So we actually don't even have a broker dealer and we don't self custody. So 100% of our assets are fees on the assets that we manage on behalf of our clients. Part of the reason that we chose to pursue that business model in the US was that entire business is upheld to the fiduciary standard, which is the highest standard of care anywhere globally for the wealth management industry and there's never been a regulatory reform or change that is proposed pushing the standard of care beyond the one that we're already operating with. So without getting into opining on impacts for other businesses, it's really just not relevant for us because 100% of our revenue is driven on the fees that we generate from the assets we manage. Nik Priebe Yeah. Okay. No, fair enough. And then just in the context of the refinancing that you undertook in the quarter, I understand why you took out the longest dated piece of the debt stack because it had the largest embedded gain. But would you also consider refinancing any other series like the 2030 notes? Is that option on the table as well? Kurt MacAlpine Yeah, it certainly exists. I mean, if we look at what we were looking to do -- what we accomplished, I should say, in the second quarter, was we were able to crystallize or realize an unrealized gain that we had been communicating existed for a period of time. We anticipate that that gain will shrink as interest rates contract and we wanted to make sure that we were able to take advantage of as much of it as we possibly could. Obviously, we got the greatest on a per dollar basis, greatest bang for our buck focused on the 2051s, and we're able to retire a significant portion of those. That trade still does exist for us on the 2030 bonds as well, and it's something that we'll continue to monitor relative to other capital allocation priorities. Nik Priebe Got it. Okay. And then in the prepared remarks, you had alluded to the ongoing initiative to consolidate certain RIAs into regional offices. I noticed that CapEx is trending a bit higher than usual. Was that related to that specific project in the quarter? And for how long would you expect this higher level of spend to continue? Kurt MacAlpine So, yes, part of that was the upfront investment in the build out of the real estate expenses, which are effectively coming on online now. In some of those markets, we kind of have some excess capacity to facilitate the integration of future acquisitions. So in spaces like New York, as an example, we have some excess capacity that's fully built out and ready if we ultimately do other acquisitions in the marketplace. So you'll see, call it, a bit of a headwind. Well, the upfront expenses will run off as the space comes on. You'll see a bit of a headwind as it relates, call it, to the amortization of those expenses as the capacity goes from unfilled to filled over time. Thank you. The next question comes from the line of Tom MacKinnon with BMO Capital. Please proceed. Tom MacKinnon Yeah, thanks very much. Just a couple questions. First, on Canadian asset management continued kind of fee pressure here, asset mix shift related, we haven't seen anything changed in terms of net revenue there over the last several quarters, yet the assets are up. How should we be thinking about this going forward in terms of fee rates? Modest pressure, I assume, but can you help me figure that out? Thanks. Kurt MacAlpine Yeah, so there's really two parts to it, Tom, to think about. One is the, call it the cyclical factors, as people have taken a much more conservative stance to investing, allocating more to fixed income cash like products which come with lower fee capture. Some of that or a lot of that is cyclical. The second part of it is structural changes. New products that are typically launched in our industry, which is true for us as well, come at lower price points than products that were launched historically. So it's really just a combination of the cyclical, which has probably magnified it a little bit more given the market environment, plus some of the structural elements as well. One of the things we started to do a couple of quarters ago was to share our average fee capture for the business and disclose that with our quarter end results, just to provide visibility and ease of that information to all of you looking at. Tom MacKinnon Yeah, that's helpful. Thanks. And just help me understand with respect to a potential IPO of Corient, is that the intention to have debt reside at the Corient level? And as a follow up to that is, in terms of the minority investors, are they -- in terms of their liquidation preference, is that just strictly cash, or are they able to take any of this debt that's been lended down to the US side? Kurt MacAlpine Yeah. So the reason we've started to separate the debt is that the debt that's assigned to Corient in a separation of the businesses will ultimately travel with Corient. So whether that's via an IPO, whether that's via another call it form of exit, the debt is intended to ultimately travel. So what you'll see over time, just given our stated priorities for CI, CI's share of the debt will decline over time, and Corient's share of the debt, assuming we continue to do acquisitions, will grow and whatever portion is assigned to Corient at that point, will ultimately travel with the business. As it relates to, call it, next action for the business, the minority investors have the opportunity to participate or roll in the IPO and convert their shares into common equity shares in a publicly traded company as part of that exit. Tom MacKinnon Yeah. Now they have a liquidation preference that -- is that taken out in terms of cash when that happens? Kurt MacAlpine Well, it depends. I mean, if we took them out, we would settle in cash. If we took the company public, that would roll into ownership of the new public company. So we don't have to settle that. It's not debt. We own the equity, it travels, and that will either convert in a private sale, potentially get liquidated, or convert in a private sale, convert in an IPO, and it would settle in cash to the extent that we chose to just take them out. Thank you. The next question comes from Geoff Kwan with RBC Capital Markets. Please proceed. Geoffrey Kwan Hi. Good morning. First question I had was you had a good start with that new AI ETF. Just was wondering if there's anything share on potential and or kind of upcoming new product launches that you're working on. Kurt MacAlpine Yeah, we don't give a lot of, just given the competitive nature of product launches, we don't give a lot of visibility into kind of what's going to come. But hopefully people have seen we've demonstrated a strong skill or capability, product innovation, whether that's been thematic ETF's first mover advantage that we took in both liquid and illiquid alternatives, crypto, and obviously more recently our AI strategy. So we're constantly looking for opportunities to launch or bring strategies to market for Canadian investors that don't otherwise exist or exist and deliver it in a highly differentiated way. So it's a huge priority for us and something that you'll continue to see us push the envelope on as a theme. Geoffrey Kwan My second question was kind of, over the past decades, the company's bought back. I think it's roughly half the shares outstanding. As you look forward, and it seems like you're continuing to be quite active buying back stock. How do you think about that balance between the share liquidity versus the share buyback activity that you want to be doing? Kurt MacAlpine So, Jeff, we had a tough time hearing your question, so let me just try to replay it and you tell me if I'm captured it appropriately. Was your question, as we continue to buy back shares, how do we think about the liquidity in our stock relative to historical liquidity when we had a larger float? Was that the question? Geoffrey Kwan Yeah, exactly. Sorry. Not quite sure why. Yeah, but that's exactly what my question was. Kurt MacAlpine Okay, perfect. Yes. I mean, when you look at our stock today, I mean, it's still a very liquid stock, and that creates the two mechanisms by which we buy back stock. One is via substantial issue or bid. As part of the process for filing for the tender, we have to do various liquidity tests that we have to meet. We've comfortably cleared all those liquidity tests, which is just reflective of the volume that we've seen in the marketplace on a backward looking manner. We have a normal course issuer bid that we renewed a few weeks ago that obviously allows us to buy shares in the open marketplace. So to date, we haven't seen anything that has prevented us from getting access to the shares that we ultimately want. You know, if and when we get to a point where liquidity dries up, we can take a look at, at that point in time, but right now, we're just singularly focused on how well is the business performing operationally and how well is that reflected in our share price. And if those two things align, you won't see us buying a lot of shares. If there's a meaningful gap between those two things, you'll see us buying, and then liquidity will be assessed on an ongoing basis as that share count continues to reduce. Thank you. [Operator Instructions] There are no additional questions left at this time. I will now pass the call back to Kurt MacAlpine for closing remarks. Kurt MacAlpine Thanks, everyone, for your interest in CI, and we look forward to chatting with you next quarter. That concludes today's conference call. Thank you. You may now disconnect your line.

Heritage Global Inc. (HGBL) Q2 2024 Earnings Call Transcript

Heritage Global Inc. (NASDAQ:HGBL) Q2 2024 Earnings Call Transcript August 8, 2024 5:00 PM ET Company Participants John Nesbett - IR, IMS IR Ross Dove - CEO Brian Cobb - CFO Conference Call Participants Mark Argento - Lake Street Logan Lillehaug - Craig-Hallum Operator Good day, everyone, and welcome to the Heritage Global Inc. Second Quarter 2024 Earnings Call. At this time all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, today's call will be recorded and we will be standing by if you should need any assistance. It is now my pleasure to turn today's conference over to John Nesbett, President, IMS Investor Relations. Please go ahead. John Nesbett Thank you, and good afternoon, everyone. Before we begin, I'd like to remind everyone that this conference call contains forward-looking statements based on our current expectations and projections about future events and are subject to change based on various important factors. In light of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements, which speak only as of the date of this call. For more details on factors that could affect these expectations, please see our filings with the Securities and Exchange Commission. Now I'd like to turn the call over to Heritage Global's Chief Executive Officer, Mr. Ross Dove. Ross, please go ahead. Ross Dove Well, thank you, John. Good afternoon, everyone, and welcome to our call. Before I give the call over to Brian to go into all of the details of the call, I thought I'd just give you a couple of quick observations. Q2 was a really solid performance for us, primarily because it was across both Financial and Industrial, $3.5 million in consolidated operating income and $4 million in EBITDA was a big improvement over Q1 and bodes well for looking into where we're seeing ourselves going in Q3 and Q4, where we've had some accelerated client retention and the market is really strong. What I kind of leave you with before Brian is really just one thought. Sometimes you have a really solid quarter. And at the end of that quarter, you're left without a lot of prospects for the second quarter. That did not happen at all this time. We ended the quarter very strong with a robust pipeline. We've actually added new forward flow clients on both sides of the business, and we're rolling into Q3 with really a very, very solid, very bullish view on Q3 and Q4. So with that, I'll give it over to Brian to go through this quarter, to walk you through all of the businesses, to walk you through what we're doing to create some improvements in Heritage Global Capital, which has been the one part of our business that we need to get on a better track. Everything else is on the exact right track, and Brian will walk through what we're doing there along with everything else. So, Brian, go ahead and take it away. Brian Cobb Thank you, Ross. I'll begin by going over our divisional highlights before moving into our Financial results. Our Industrial Assets division continued to execute in the second quarter of 2024, reporting total divisional operating income of $2.1 million, an increase from $1.5 million in the prior year period. Our Auction business, in particular, had a strong quarter. Increased economic pressures continued to cause downsizing and office closures in a variety of businesses across the country, resulting in the sale of surplus industrial machinery and equipment. As previously disclosed, in conjunction with our partners, the division completed a transaction that involved the sale of equipment and a 10-year building lease on the recently acquired pharmaceutical plant in Fenton, Missouri. The lease was determined to be a sales type lease. And together with the sale of equipment, the company recorded a total of $1.3 million in earnings for its respective share in the second quarter. As we look to the back half of 2024, we have a strong auction pipeline in place and expect to see continued activity in the second half of the year. Our Financial Assets division performed consistently in the second quarter of 2024 compared to the prior year quarter with operating income of $2.7 million. Our brokerage business continues to perform well. We continue to see steady volumes of charge-off credit cards and nonperforming loans and are optimistic about the growth of this business moving forward. As of June 30, 2024, our total amortized cost basis of loans to buyers of charged off and nonperforming receivable portfolios was $35.2 million, classified on our balance sheet as both notes receivable and equity method investments. As previously noted, we are in an economic environment where consumers have less capacity to pay their debts, which results in lower collection rates industry-wide. As a result, the company's largest borrower has had continued difficulties meeting their obligations. This borrower continues to collect on the underlying portfolios and remit these collections to the company net of servicing fees. However, these net collections are currently not sufficient to satisfy all minimum required payments. Beginning in June 2024, after this borrower's June remittance fell short of the minimum amount due, the company placed the loans on nonaccrual status. The company's share of payments received on loans and nonaccrual status, including interest, will be applied against the outstanding balance. As of June 30, 2024, the amortized cost basis of loans and nonaccrual status was $24.6 million compared to no loans and nonaccrual status as of December 31, 2023, primarily due to the loss of interest income from the cost recovery accounting treatment. The default is currently expected to reduce the company's total 2024 operating income by approximately $1.6 million. It is important to reiterate that Heritage Global is a profitable, diversified business with multiple growth avenues going forward. Reflecting the strength of our cash flow and balance sheet, the company completely paid off the remaining principal balance outstanding under its 2023 credit facility with C3Bank, which was executed subsequent to the quarter and in advance of the loan's maturity date in 2028. Now turning to the Financial results. Consolidated operating income was $3.5 million in the second quarter of 2024 compared to $3.1 million in the second quarter of 2023. For the quarter, we reported adjusted EBITDA of $4 million compared to $3.5 million in the prior year period. Net income was $2.5 million or $0.07 per diluted share compared to net income of $2.8 million or $0.07 per diluted share in the second quarter of 2023. Our balance sheet remains strong with stockholders' equity of $65.8 million as of June 30, 2024, up from $61.1 million at December 31, 2023, and net working capital of $17.9 million. As we move through the second half of 2024, our core auction and brokerage segments are expected to produce continued strong operating results with an attractive pipeline of opportunities in the marketplace. We are steadfast in our mission to continue driving organic growth and profitability, while positioning the company to take advantage of M&A opportunities when they arise. And with that, I will turn the call back over to Ross. Ross Dove Thank you, Brian. So let me take a few minutes to tell you why we're actually very excited about both our organic growth and increased opportunities we're seeing in M&A across both sides of our business, the Financial Assets and the Industrial Assets. So let me kind of start with the Financial Assets. It's pretty clear right now that everyone can see that our pipeline is solid because of the macro economy and also all the efforts we're doing to garner new clients and win business and execute. But on the macro side, we're looking at consumer debt has been rising since 2021. Our revenue is rising along with it. We've now got household debt at $17.5 trillion, if you can imagine that, and up $200 billion in just one quarter. We're looking at credit card balances now of over $1 trillion, adding $50 billion this quarter. All of that just shows you that the volume is continuing to grow and grow. With that volume, the amount of charge-offs has to grow with it. And we think our business has solid growth for years organically. We're now looking on the credit cards at 49% of all credit cards basically going month-to-month on payments rather than paying them off at the end of the month, which is the first tell-tale sign into more growth in charge-offs. And we're now looking at 6% of credit card accounts being past due. Just two, three years ago, it was 4%. So is our business growing? Yes. Will our business continue to grow. If you say our business grows because supply grows, then there is clearly no argument our business won't grow. What that does is it gives us more and more cash flow and more and more strength in a position where we're stronger in the market to do M&A. There are now companies available in M&A that basically we're doing okay during a pandemic and have struggled afterwards, which is the opposite of NLEX, which is growing afterwards. So we see opportunities there for bolt-ons that we're aggressively looking at, and hopefully we can get something done, and within the next year, 1.5 years, that will be highly accretive. So we're solid there, we believe, in M&A opportunities, and we're solid there in we believe continued organic growth. Now I'll move on over to Industrial. If you're looking at Industrial right now, you are seeing that a lot of companies are doing well, but simultaneously, many companies are experiencing sluggish manufacturing right now. And you don't have to look too far to basically see every day, if you look at a Google announcement, you see another headcount reductions. As I said over and over again, these headcount reductions produce surplus assets and produce industrial auctions. They don't happen the day you notice that the headcount reduction has been announced. There's a period of three, four, five months where they have to basically execute on the headcount reduction, do the layoffs, and discover the surplus. That's happening now from the layoffs four, five and six months ago, but what bodes well for the future is there are still sectors of the economy where the manufacturing is sluggish and there's also sectors of the economy where the manufacturing is at heightened growth. But this heightened growth is adding AI in a lot of instances, which frees up surplus machinery. It's focusing on lean manufacturing, which also frees up surplus machinery. So the Institute of Supply Management is saying that there will be an increase in secondhand equipment on the market over the next one to two to three years. So we see organically our Industrial business being very bullish and prices holding up. The fact that we've had several years of inflation now has actually increased the value of used assets to let our auctions, we're actually getting very high prices for the equipment, and we think that will continue even if the economy and inflation softens. So we think organically, we're very, very solid there. There is the beginning of talks about roll-ups in the industry where we think will be a significant player in the fact that basically more and more of these sectors are coming together to where the guys that do pharma also have a great database for medical, et cetera, kind of across all the sectors. So we see that there will be a consolidation of industrial auctioneers that we believe we'll be one of the significant leaders in. That M&A should happen over the next two, three years. So we stand ready to grow both organically and through M&A. We're working through multiple issues with Heritage Global Capital. We've hired a special adviser to work with us. And I'm very excited because we see prospects there to really get that thing humming once again. There's been some difficulty in collections, but we think overall, Heritage Global is in a very solid position. So thank you all for sticking with us. Thank you all for hearing us out. We're open to any questions at any time and appreciate your interest very much. Thanks again. Question-and-Answer Session Operator [Operator Instructions] We'll take our first question from Mark Argento with Lake Street. Please go ahead. Your line is open. Mark Argento Hey, Brian. Hey, Ross. Just a few quick ones here. The impairment or the change in status in terms of the part of the loan book, what happens going forward? What should we be looking for in terms of seeing any improvement in the situation? It sounds like you've got something you're working with? Do you guys look to sell the book off? Maybe just walk us through at a high level what next steps are there? Ross Dove So I'll take it first, Brian. So we've hired an adviser to work with. There is, at this time, no announcement of selling a book, no announcement of any kind of change right now other than working very, very hard to enhance the collection efforts and to recover -- trying to recover 100% of the money. We don't anticipate at this time taking any further efforts than what we've announced. So we hope to get back as much, if not all of the money as we can. We took $1.5 million charge a while ago. We're not changing that at this point in time. We're getting collections on a monthly basis. We continue to get collections, albeit they've been a little bit short of the minimum payment, but they're coming in very steady, and we're going to continue monitoring them and working with them to try to do the best we can. There will be announcements in the future if we make any change. But at this time, we don't have one. I'll let Brian add to that. Brian, if you like. Brian Cobb Yeah. So the main thing that we've been working on in the finance group is really trying to figure out with our senior lenders how the structure of these specific loans can be changed in a way that can improve the collections. And really one way is to help the servicer of those collections or the manager or borrower collect in legal methods. And so we think that there might be some improvement there. But on the accounting side, the way I look at this is that we're taking a conservative position right now to allocate all of the collections or net collections to the principal balance. Until we see a lot of positive data or changes that could allow us to collect all principal and interest, I think that the nonaccrual status will remain in the short term. Mark Argento Got it. Then have you guys -- have you stopped any additional lending, putting any additional capital out with other customers at this point? Or what's the general... Ross Dove We're obviously not funding that customer at this point in time. And we have no plans to fund that customer until this is 100% accretive and straightened out and paying, and then we would make a decision there. There are some customers that we have funded that are highly performing customers. We're being very prudent, and we're being very careful only to fund the best of the best, but we are still looking at deals, albeit less aggressively, Mark -- or I should say, more aggressively. We're very, very particular about what we would fund. But we have a lot of free cash flow right now, and a lot of that free cash flow, maybe we're holding back as we're looking at M&A, et cetera, but we're in a very strong financial position. So if somebody came to us with a great loan, we're well capitalized to do it. Mark Argento Great. Just pivoting over to -- you had mentioned forward flows on both the Financial Asset and Industrial Asset businesses are robust. I know historically, we've talked a little bit about the Financial Asset forward flows. But on the Industrial Asset side, it's a little bit of newer concept. Maybe just walk us through what is the forward flow... Ross Dove Our largest forward flow is an existing client, which is Pfizer. So they do auctions with us every month. We're having our best year with them now, because they've been doing a lot of worldwide planning, recalibrating and restructuring, which has freed up more assets than last year. So the auctions are very good right now, the assets are very good, and we're getting very large crowds. We've added some other more regional clients on that end. And some of the clients that we've done past auctions for are now becoming repeat clients. So we're getting more repeat business. So it's not all brand-new one-offs, which is the most expensive business, as you know, to get, where you're making the presentations versus receiving the call in. So we're getting more repeat business on the Industrial side, and we're looking at a very strong Q3, Q4 with ongoing business there. On the Financial Assets side, there have been some new companies, both fintech companies and banks. And also, we've added more companies that have nonperforming real estate right now, which is a growing nonperforming sector, as you know. So we've added some forward flow clients on that side, too. And we're looking at a really solid -- Q3 and Q4 we think will beat the first half of the year on the Financial side at the Brokerage segment. Mark Argento Great. I'll hop back in the queue. Thanks, guys. Ross Dove Thank you, Mark. Operator We'll take our next question from George Sutton with Craig-Hallum. Please go ahead. Your line is open. Logan Lillehaug Hey, good afternoon, guys. This is actually Logan on for George today. Ross Dove Hi, Logan. Logan Lillehaug I'm wondering if I could just ask one on the borrower. Can you just walk us through kind of the underlying assumptions now you guys got to the determination that you didn't need to increase the credit loss reserve? And then maybe, do you guys have any insight into kind of the underlying portfolios, like where the weakness is coming through? I think there's like... Ross Dove Yeah. So we went out -- basically, it was a multiple tiered approach to decide if we needed to do anything further, and we're pretty convinced we don't need anything further after a real thorough amount of work that included advice from an independent adviser, who looked at it. It included talking with both senior lenders and getting their take in it, talking with the borrower, looking at the past collection rates and what's actually being collected, and looking at the accounts going forward, and looking at third-party advice. And all of that together led us to believe that we were comfortable that we were in the right position right now. We also have the collections going forward. And the collections going forward, although yes, they are short of the minimum payment, they're still substantial, and they're still coming in very regular, and there's still tens of thousands of accounts to collect on. So we feel comfortable with the position we've taken. I'll let Brian add to that if I missed anything. Brian Cobb The only thing I'll add real quick is from a numbers perspective, I look at it as, yes, the inherent risk is perceived to go up if a borrower has defaulted on the loan, so you would initially think that the reserve should go up along with that. But we're placing heavy reliance on the underlying collections on those portfolio assets. And also, all of the cash flows now are being applied to principal in that analysis. And that's all been taken into consideration. So the method of accounting is really more than offsetting the inherent risk. Logan Lillehaug Okay. Got it. And maybe just one other on the brokerage side. I mean, certainly, it seems like commentary from the big purchasers would indicate charge-offs kind of going up through the back half of this year and into next year. I think you guys have said that, too. If I can just double-click on that maybe. I think, Ross, in the past, you've talked about buy-now, pay-later. Anything you guys are seeing kind of from a competitive standpoint there kind of to be positioned? I think we've seen a few reports recently and volume seems to be up there. Ross Dove The volume is up there, and we were an early entry into selling the buy-now pay-later assets. Dave Ludwig and Tom Ludwig and the guys that run NLEX really kind of saw that kind of cutting edge in the very beginning, even before some of the companies were ready to sell assets. They were there early, explaining our process, explaining how we work, who we are, and what we've been able to do with very similar assets, whether it be credit cards or auto loans, et cetera, or other kinds of consumer loans. So we got in early, and we basically have built not just a cadre of sellers, but we built a list of people that buy the buy-now pay-later product. So as that grows, we should stay at the forefront as an industry leader. What's happening right now is overall, all of nonperforming loans seem to be a growth business right now. I mean, credit cards are part of it. The fintech stuff, the buy-now pay-later is part of it. Real estate loans are part of it. Across the board, there's a growing amount of product right now on the consumer end. So, we feel kind of bullish on the business over the next multiple years across all sectors. Logan Lillehaug Thanks for taking my questions. Ross Dove Thank you. Operator This does conclude the Q&A session. I will turn the program to Ross Dove for any closing or additional remarks. Ross Dove Thank you all very much for sticking with us. Thank you for listening. Thank you for paying attention. We're available for follow-ons at any time. Anybody is looking for any further information. The company is in a very strong position across the board. We have some work to do to get Heritage Global capital to exactly where we want. But keep in mind, what we're looking at there is equity. We didn't default on anybody, somebody defaulted on us. We're prepared for it. We're going to make the best of it. We're going to collect as much of the money as we can. As we move forward, we think we're looking at record years over the next two, three, four years, and we think this is a very, very strong dynamic growth company that we're proud to be a part of. And we're open to any question at any time and any kind of further discussion with any of you. And thank you all for your interest. Everybody, have a great day. Bye-bye. Operator This does conclude today's program. Thank you for your participation, and you may now disconnect.

DarioHealth Corp. (DRIO) Q2 2024 Earnings Call Transcript

DarioHealth Corp. (NASDAQ:DRIO) Q2 2024 Results Conference Call August 8, 2024 8:30 AM ET Company Participants Kat Parrella - Investor Relations Manager Erez Raphael - Chief Executive Officer Steven Nelson - Chief Commercial Officer Conference Call Participants Lucas Romanski - TD Cowen Operator Good morning, ladies and gentlemen, and welcome to the DarioHealth Second Quarter 2024 Results Conference Call. At this time, all lines are in a listen-only mode. After the presentation we will conduct the question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Kat Parrella, Investor Relations Manager at Dario. Please go ahead. Kat Parrella Thank you, operator, and good morning, everyone. Thank you for joining us today for a discussion of DarioHealth's second quarter 2024 financial results. Leading the call today will be Erez Raphael, CEO of DarioHealth. He'll be joined by Steven Nelson, Chief Commercial Officer. An audio recording and webcast replay for today's call will also be available online as detailed in the press release invite for this call. For the benefit of those who may be listening to the replay or archived webcast, this call is being held on Thursday, August 8, 2024. This morning, we issued a press release announcing our financial results for the second quarter of 2024. A copy of the release can be found on the Investor Relations page of DarioHealth's website. Actual events or results may differ materially from those projected as a result of changing market trends, reduced demand or the competitive nature of DarioHealth's industry. Such forward-looking statements and their implications may involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. The forward-looking statements discussed on this call are subject to other risks and uncertainties, including those discussed in the Risk Factors section and elsewhere in the company's second quarter 2024 quarterly report on Form 10-K. Additional information concerning factors that could cause results to differ materially from our forward-looking statements are described in greater detail in the company's press release issued this morning and in the company's other filings with the SEC. In addition, certain non-GAAP financial measures may be discussed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results and evaluate the company's current performance. Management believes the presentation of these non-GAAP financial measures is useful for investors' understanding and assessment of the company's ongoing core operations and prospects for the future. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is included in this morning's press release. With that, I'd like to introduce Erez Raphael, Chief Executive Officer at DarioHealth. Erez Raphael Thank you, Kat, and thanks to all of you for joining our call this morning. Q2 2024 marked another step forward in our journey to profitability. Our core B2B2C business, the engine driving our recurring revenue from health plans and employers, has demonstrated continued growth with 60% sequential growth between Q1 to Q2. This represents 28% organic growth before factoring in the positive impact of the Twill acquisition. This channel remains our primary revenue driver, contributing approximately 75% of our total revenue with an annual run rate of $21.6 million. This high-margin business with SaaS-like characteristics is gaining traction demonstrated 82% non-GAAP gross margins in this quarter. Coupled with the aggressive cost reduction initiatives implemented post Twill merger, we are confident in our ability to achieve substantial 40% reduction in non-GAAP operating expenses from Q1 2024 to Q1 2025. On a pro forma base, we have already seen a reduction in OpEx from Q1 to Q2 of this year of approximately 10%. This financial discipline will be evident in our results over the next three quarters in a more intensive way. Our gross margins continued its upward trajectory toward 80% target by early next year. As mentioned, our B2B2C has already reached 82% non-GAAP gross margin. In addition, we anticipate a large reduction of over 70% in non-GAAP operating losses between Q1 of 2024 and Q1 of 2025. This progress aligns perfectly with our road map to profitability by the end of 2025. In the last few quarters, we made a series of strategic decisions in a very challenging market environment. We believe that those decisions positioned us as one of the strongest players in the digital health space with a stronger financial profile. We have built one of the most comprehensive platforms in the market covering 6 different conditions from diabetes to hypertension, prediabetes, musculoskeletal, well-being and behavioral health. Billions of data points collected through years of direct-to-consumer engagement have created substantial competitive advantage. This data-centric approach has produced a best-in-class solution, validated by real world evidence of improved health outcomes and reduced costs for employers and health plans. Beyond the financial results, we see a compelling evidence of our growth trajectory. Our combined product offering following the Twill acquisition is driving cross-selling success already, with a ton of Dario clients already adopting the Twill platform. Our GLP-1 product has seen a rapid adoption with 9 clients already on board. While GLP-1 is proven weight-loss medication, its potential is maximized when coupled with the behavioral support. By integrating Dario-Twill behavioral health capability, we have created a comprehensive solution to support GLP-1 adoption among employers and health plans. Our offering provides a streamlined approach to delivering GLP-1 therapy and driving optimized patient outcome. On the pharma channel side, we see that the pharmaceutical industry is undergoing a significant transformation. With many leading companies seeking direct-to-consumer member engagement solutions, we see a substantial opportunity to leverage our integrated offering to meet this growing demand. While past partnerships with Dario and Twill clients like Novartis, [Indiscernible], Merck and Sanofi generated mainly milestone-based revenues. We are focused on redefining our integrated offering to leverage on this market opportunity for direct patient engagement and transition our pharma business to a more stable and more recurring revenue base. To accelerate the shift, we made a strategic decision to issue a $1.1 million price concession impacting our top line for this quarter only, but position us for a long-term growth. We anticipate return to normal revenue pattern on the pharma channel toward the end of this year. While our product offering are strong and we boast to classic client base, including top S&P 500 companies, our revenue growth has not fully materialized to our expectations. To address this, we have undergone a strategic organizational transformation, including flattening our structure and appointing a seasoned Chief Commercial Officer. Our goal is to create a commercial organization focused on two key areas: first, keep focusing on acquiring new clients; and second, maximizing the growth of our existing customer base, where we see an opportunity to do much better. We believe this dual approach will accelerate revenue generation and better leverage our strong market position. I'm pleased to introduce Steven Nelson, our new Chief Commercial Officer. Steven will provide more details on our commercial strategy and steps we are taking to drive top line growth. I'll turn the call now to Steven. Steven Nelson Thank you, Erez. Good morning, everyone. I'm Steven Nelson. As many of you are aware, I started in June 2024 as Chief Commercial Officer at Dario. I have had the privilege of spending over 20 years in the payer industry with [Indiscernible] and Highmark Blue Cross Blue Shield and most recently led a direct employer company for 5 years named Contigo Health. Early in my career, I honed my B2C skills through experiences in packaged goods and retail. Today, I'm excited to share some context around my four key focus areas since my arrival and discuss some details on our Q2 2024 financial results. First, refining our strategy and operational processes. Our roots in B2C companies as well as the comprehensive multi-chronic condition product offering have built a solid and unique value proposition that most of our competitors lack, especially in this market environment where we see a consolidation of vendors. Dario has an impressive client base that is very unique in the market, and it is my belief that with a refined strategy and well-designed commercial operation, we can accelerate revenue growth. We have recently completed a detailed product market-fit strategy, providing us with focused insights to drive more credible revenue across all segments. With these insights, I have collaborated closely with our commercial team as well as others in key cross-functional roles throughout the company to implement a focused, scalable operating model within the commercial department. This model is meticulously designed to enhance operational efficiencies, streamline processes, and to Erez's point, strengthen both our pipeline for new clients, but even more important, ensure we accelerate revenues from existing clients. By understanding and anticipating our customers' needs and their mode of operation, we can focus on what we do best, enroll and engage with more members for every account that we serve. Second, we have and will continue to accelerate B2B2C growth. Our B2B2C channel is a powerhouse of potential, and we are determined to unlock its full value. While we have established a solid foundation, we recognize that there is much more to achieve, especially on how to extract revenues from our client base on a faster and larger scale. My goal is to accelerate growth in this channel by having specific focus and accountable resources allocated to existing clients as well as deepening existing strategic partnerships with the right strategy, leading to higher utilization of existing contracts in terms of member enrollment as well as expansion of our customer contracts with both expanded offering as well as access to a larger population. This will help us solidify a robust reoccurring revenue base that is crucial for long-term sustainability. We are leveraging our existing relationships and assets to drive more value from our B2B2C channel. This includes actively pursuing cross-selling and upselling opportunities with our current partnerships, targeting both employers and large health plan channels. Our GLP-1 product, for example, is gaining significant traction already implemented by 9 clients with several more in the pipeline. This product represents a rapidly growing segment that we are prioritizing in our client contracts. In the second quarter, our B2B2C channel was the primary driver of growth with a 315% year-over-year increase and a 60% sequential rise from Q1. Looking forward, we see a sizable opportunity among specific client segments, and I am confident in our ability to expand these relationships. For instance, health plans like Aetna are making timely progress. And with our focused approach to product set, they are poised for much higher growth given the potential size of business. We are initiating collaborative strategies for them to use our newly combined behavioral health platform to compete in a differentiated way with the market. Our large employers, including Amazon, Microsoft and Google and others have been very supportive in our current products and are open to exploring how our assets can further solve health problems. We must lead health plans through effective activation, engagement and reducing their cost to deliver health care with our SaaS-based digital health technologies and expert experience journeys. Worth noting, our cross-selling efforts are gaining momentum with at least 10 initial clients targeted for Twill platform or vice versa. Third, enhanced pharma collaborations. The pharma market is undergoing a significant transformation with companies increasingly seeking ways to engage consumers directly. This shift presents a huge opportunity for DarioHealth, one that is currently underutilized. Our integrated Dario-Twill top of funnel and navigation capabilities offer exactly what pharma companies need as demonstrated by successful projects with clients like Sanofi, Novartis, Merck and others. To capitalize on this opportunity, we are driving an innovative change in our business model, moving away from milestone-driven revenues to a more sustainable reoccurring revenue model. Our commercial pharma channel is a critical pillar of our growth strategy, but we believe this redesign is integral to maximizing its potential. This shift will lead to a temporary slowdown in revenues for this channel this year as we transition to a more stable and predictable revenue stream, an adjustment that is essential for creating long-term value and ensuring that we remain aligned with the pharma industry trends and positioned as a premier partner for companies considering or already executing direct-to-consumer models. The recent integration of Dario-Twill platform significantly enhances our offering, making it more attractive to pharma clients. We are engaged in promising discussions with key clients like Merck and Sanofi who are interested in how our SaaS-based consumer engagement capabilities can bolster their efforts. This technology, which has historically supported our pharma channels can now go further with our newly formed consumer hub model. Our decision to grant a onetime price concession of $1.1 million to a strategic partner underscores our commitment to balancing short-term adjustments with long-term growth prospects. This price concession accelerates the time line of this shift to a higher quality revenue supporting our highest objective of reaching profitability by the end of 2025. The future of our pharma collaborations is bright, and we are excited about the potential for growth in this area. Fourth, our comprehensive integrated product offering. We believe the combination of Twill's behavioral health expertise and Dario's cardiometabolic foundation creates a powerful platform that delivers exceptional value to employers and health plans. By integrating AI-driven navigation tools, we enable clients to optimize care delivery, improve member outcomes and achieve significant return on investment. Our platform's ability to match numbers with the right programs at the right time sets us apart. Behavioral health is a foundational component of managing any chronic condition, including metabolic disorders. Our platform seamlessly integrates behavioral health interventions with other therapeutic areas, providing a comprehensive and holistic approach to care. Finally, leverage our AI capabilities. We believe AI will be a meaningful change for DarioHealth as we proceed with our focused product and technology road map, integrating and updating aspects of AI that have already been deployed in the past and accelerating generative AI and micro services in a targeted way within product and/or technology can further revolutionize our industry-leading content, activation, engagement and personalization capabilities. Our proprietary data sets, especially within the B2C segment provide us with a unique advantage enabling both internal and external monetization in this rapidly evolving market. The future of AI in health care is incredibly promising, and we are at the forefront of this exciting transformation. Our AI capabilities will enable us to offer unparalleled value to our clients and drive our growth in new and innovative ways. In conclusion, DarioHealth is on a transformative journey, and I am incredibly optimistic about our future. The strategy we have developed underscores our commitment to sustainable growth and innovation. We are well positioned to continue our momentum with greater stride and deliver exceptional value to our stakeholders. Thank you for your trust and support as we embark on this exciting journey together. Erez, back to you. Erez Raphael Thank you, Steven. We have identified three key strategic areas that will help us accelerate growth and drive business to profitability. First, we will optimize our operations to increase revenue generation from existing employer and health plan clients. Expanding the adoption of GLP-1 offering is also a priority for us. Second, we will capitalize on the pharmaceutical industry shift toward direct-to-consumer models by leveraging our unique Twill-Dario solution. Our focus is transitioning from a milestone based to a recurring revenue stream in this specific sector. Lastly, we remain committed to regularize cost management. By aggressively controlling operating expenses, we expect to deliver tangible results in the coming quarters. As mentioned, we see our operating loss reducing by at least 70% by Q1 of 2025 on our way to profitability by the end of 2025. Question-and-Answer Session Operator Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Charles Rhyee from TD Cowen. Your line is now open. Please ask your question. Lucas Romanski Hey. This is Lucas on for Charles. Thanks for taking questions. I was wondering if I could ask about how your cross-selling efforts are progressing since the Twill acquisition as well as obviously some restructuring and you guys' commercial operations. And how that's trend -- just early reads on how it's translating into bookings. It appears that maybe X12 B2B2C growth was up mid-single digits in 2Q. Can you remind us what the target for B2B2C growth is for 2024 and kind of what your expectations are now for the second half? Erez Raphael Yeah, absolutely. So far just to answer your specific question about the cross-sell, as Steven and I mentioned on the call, we already have a ton of Dario clients that are -- that we cross-sell, and we sold them the Twill platform. This is relatively small clients, and we have a specific -- a few other specific opportunities for larger clients that are looking either Twill clients that are looking into Dario or Dario clients that are looking into Twill. As we mentioned on the call, the sequential growth, the organic part of the B2B2C between Q1 to Q2, just the organic was approximately 30% between Q1 to Q2. On an integrated base, for Twill it was 60%. That's the numbers that we have at the moment. We are anticipating that the overall growth of our revenues for B2B2C for the entire year is going to be larger year-over-year. It's going to be larger than 30%. It should be in the ranges of above 50%. That's the expectation. The other area where we see a cross-selling opportunity is the pharma. On the pharma side, both Dario and Twill had a business model that was very milestone driven, which created a lot of issues in the revenue recognition, some of it we saw now in the quarter when we had to provide a concession, and we did some changes. So we are trying to streamline this revenue stream in a way that it's going to be a recurring revenue also. We can do that because there is a specific opportunity in the market now when pharma is transforming to be much more direct to consumer, and we have the platform to help them go directly to patients. These capabilities is a result of the combination of the Twill platform, the Twill Care, which is the top of funnel capabilities with what Dario have. And this is why we see an opportunity also to do a transformation there. On the Twill side, the B2B2C, the employers and health plans was not going between Q4 to Q1 to Q2. This is due to the financial situation that will experience before we acquired them, and we anticipate that this is something that will be changed in the next two quarters and Twill are going to go back to growth once we are stabilizing the situation there. So that's on the revenue side. On the OpEx side and the operations side, as we mentioned on the script, we had two large risks: One at the beginning of May; the other one at the beginning of August where overall, we reduced the headcount and we reduced expenses that are also related to non-headcount. In this quarter, we have seen 10% reduction in the OpEx pro forma between Q1 to Q2, and we're going to see in Q3, 4 and 1, a significant reduction in the OpEx. So overall, the companies are managing much faster than what we anticipated in day one when we made the acquisition. We were thinking about 30% of the eight quarters. It's going to be something that is more like 40%, even more than 40% over three to four quarters. So that's from a merge standpoint. From an operation, we see a lot of synergies between the companies that are more synergies than what we anticipated from the first place, and this is the good news because we think that we can retain revenue, grow revenue. And in parallel, take the OpEx down. And this is why we are positive about our ability to reach cash flow positive by the end of next year. Lucas Romanski Got you. Thank you for color. I guess I want to dig in on the price concession that you provide to your preferred partner. In your 10-K, it says maybe related to suit. I guess, in terms of, one, I guess, what brought about this price concession, if I can ask. And then does it have any impact on the expected $6 million to $8 million in expected payments that we were expecting from this partner? I understand that you're talking about just converting maybe to more recurring revenue stream. Can you kind of give us more details on what kind of came about at this price concession? Erez Raphael Yeah. I'll start from the end. We're not going to see this kind of concession or something like that in the future. So this is onetime that appears in this quarter. It's related to recognition that we had in previous quarters. So it's a onetime. It's something don't going to repeat again. That's number one. Number two, I don't want to mention the name of the client, but we had a discussion with them about the transformation from one business model to another business model. One of the things that we are trying to do is to transform from Dario only or Twill only to something that is more combined. That's number one. And number two, we are trying to move into a recognition that is more recurring or revenue that is more recurring. As part of the conversations, we made a change to and work that -- or milestones that were already delivered. And eventually, we negotiated something in order to be able to look into the future and giving up something small in order to get something big in the future. So that's the way that we're thinking about it. It's more like balancing future growth versus the presence of the revenues that we have. I hope that I gave you enough color on that one. Lucas Romanski Yes, that's helpful. Erez Raphael Lucas? Lucas, I lost you. Okay. I think that we lost Lucas. I had to give it another 30 seconds to see if he is calling back. Lucas? Operator We're not hearing any response from him as of the moment. Erez Raphael Any other questions in queue. Operator We don't have any questions right now. Erez Raphael Okay. Operator Thank you. We don't have any questions right now. This concludes today's conference call. Thank you for your participation, and you may now disconnect.

Earnings call: NuScale highlights SMR tech in Q2 2024 financial results By Investing.com

NuScale Power (NYSE: SMR) provided insights into their second quarter 2024 financial performance and business developments, emphasizing the potential of their small modular reactor (SMR) technology to meet the growing demand for decarbonized energy. The company reported a net loss of $74.4 million for the quarter, which included a non-cash expense related to fair value warrants. Despite the loss, NuScale maintained a strong cash position of $136 million and highlighted the progression of the RoPower project and a new revenue-generating agreement in Romania. NuScale's technology remains the only SMR with design certification from the Nuclear Regulatory Commission (NRC), positioning the company as a leader in the nuclear energy sector. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights NuScale Power continues to navigate the complexities of the nuclear energy market with an emphasis on small modular reactor technology. As the company moves forward with the RoPower project and other initiatives, it remains focused on commercializing its SMR technology and maintaining financial prudence amidst a challenging economic environment. With strategic partnerships and a unique position in the market, NuScale is poised to play a significant role in the future of clean energy. InvestingPro Insights NuScale Power's financial performance in Q2 2024 reflects both the challenges and opportunities facing the company as it pioneers in the small modular reactor (SMR) space. With a reported net loss and a focus on advancing their technology, it's important for investors to consider various financial metrics and analyst expectations. InvestingPro Data indicates a market capitalization of approximately $2.09 billion, suggesting investor confidence in the company's potential despite current losses. The data also shows a negative P/E ratio, at -11.24, which is common for companies investing heavily in research and development before reaching profitability. Additionally, the company's revenue growth over the last twelve months stood at 25.7%, highlighting the progress NuScale is making in generating income from its operations. An InvestingPro Tip emphasizes that analysts anticipate sales growth in the current year, aligning with NuScale's own projections and the agreements it has secured, such as the one for the Doicesti Project in Romania. Another tip notes that the stock generally trades with high price volatility, which is important for investors to consider when evaluating the risk associated with NuScale's shares. For those seeking more in-depth analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/SMR, which can provide further insights into NuScale Power's financial health and market position. Full transcript - Nuscale Power Corp (NYSE:SMR) Q2 2024: Operator: Good afternoon and welcome to NuScale's Second Quarter 2024 Earnings Results Conference Call. Today's call is being recorded. All participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. [Operator Instructions] A replay of today's conference call will be available and accessible on NuScale's website at ir.nuscalepower.com. The web replay will be available for 30 days following the earnings call. At this time, for opening remarks, I'd like to turn the call over to Scott Kozak, Director of Investor Relations. Please go ahead, Mr. Kozak. Scott Kozak: Thank you, operator. Welcome to NuScale's second quarter 2024 earnings results conference call. With us today are John Hopkins, President and Chief Executive Officer, and Ramsey Hamady, Chief Financial Officer. On today's call, NuScale will provide an update on our business and discuss financial results. We will then open the phone lines for questions. This afternoon, we posted a set of supplemental slides on our Investor Relations website. As reflected in the Safe Harbor statements on Slide two, the information set forth in the presentation we discussed during the course of our remarks and the subsequent Q&A session includes forward-looking statements which reflect our current views of existing trends and are subject to a variety of risks and uncertainties. You can find a discussion of our risk factors which could potentially contribute to such differences in our SEC filings and Form 10-K for our fiscal year 2023 and in our prior SEC filings. I'll now turn the call over to John Hopkins, NuScale's President and Chief Executive Officer. John? John Hopkins: Thank you, Scott, and good afternoon, everyone. To begin, I'll give an update on recent developments with the RoPower project as outlined on Slide three. In mid-July, SNN and RoPower were authorized to proceed with Phase 2 front-end engineering design or FEED. Later that month, NuScale attended a RoPower Fluor signing ceremony in Romania to announce the authorization to proceed on the contracting of Phase 2 FEED with the Doicesti between Fluor and RoPower. Along with the representatives from SNN, the Romanian government, and the U.S. Secretary of Energy, Jennifer Granholm. We are working as a subcontractor under Fluor to provide NuScale SMR power modules. Next, let's consider the current nuclear landscape and why we believe SMRs, especially NuScale, are well-positioned. As depicted on Slide four, today's environment is experiencing a surge in electricity demand while companies and governments seek to mitigate the production of emissions contributing to climate change. Nuclear energy is increasingly considered a secure energy solution to meet growing demand and achieve ambitious climate goals. Companies are pressured to source reliable energy while fulfilling their commitments to reduce emissions. They are concerned with having the energy to power their facilities and where that energy comes from, placing greater emphasis on decarbonized baseload energy. For instance, last month, Google (NASDAQ:GOOGL) reported that increased electricity demand driven by AI in its growing fleet of data centers caused the company's greenhouse gas emissions to grow 48% above its 2019 baseline, posing a challenge in meeting its carbon neutrality goals by 2030. The U.S. Department of Energy aims to triple nuclear capacity, adding 200 gigawatts to meet net zero emission goals by 2050. Nuclear energy is a valuable asset in the context of the global energy transition because it is a sustainable solution that operates reliably. This combination does not exist with other current energy solutions like wind or solar, which are intermittent and weather dependent. NuScale's growth potential in the U.S. is significant as the need for nuclear energy transition becomes clearer. Another opportunity for advanced nuclear power is to decarbonize industrial processes. As you may recall, NuScale could provide process heat for industrial customers by offering a safe, clean, reliable baseload energy source with a limited land footprint. NuScale's compact emergency planning zone allows us to co-locate with production facilities. This positions us favorably when engaging with potential manufacturing customers, many of which are thriving due to onshoring trends in the U.S., and we are having numerous productive discussions in this area. The most exciting source of new demand is the rapid growth of data centers to support AI. These facilities are projected to consume more than 9% of domestic electricity by 2030. By producing uninterrupted power, advanced nuclear is the ideal solution to meet these energy needs. Slide five highlights the data center and AI landscape. Our developer partner, ENTRA1 Energy, is working diligently with us on deploying NuScale SMRs globally. With a combination of ENTRA1 Energy and NuScale, we have originated opportunities, projects, and relationships with numerous potential end users, including some of the world's largest tech companies. These tech companies' related opportunities emerged over the last several months, mainly driven by significant demand for hyperscale and AI infrastructure growth. Considering the evolution of tech companies' electricity needs, their current sense of urgency is justified. Data centers, AI, and cloud storage are 24-7 power consumers that require an uninterrupted, reliable power supply, and they are critical for many tech companies looking to compete in today's market. Goldman Sachs (NYSE:GS) forecasts a 15% compound annual growth rate and U.S. data center power demand through 2030. The speed of demand growth is evident in Virginia, for example, where data centers are consuming one-quarter of the state's electricity. Several of the country's most populous regions, including Dallas-Fort Worth, Silicon Valley, Chicago, New York, and Greater Atlanta, have construction activity projected to lead to a significant 50% or higher increase. This is where NuScale comes in. NuScale is an SMR technology provider and will grow by focusing solely on installing our technology inside power plant projects. Our SMR technology resonates strongly in areas seeking reliable decarbonized energy because our solution is clean and always on 24/7. Our SMRs are scalable, reliable, and near-term deployable, aligning with clean energy commitments. Our global development partner, ENTRA1 Energy, has creatively engineered a flexible and bespoke business model that provides utilities and commercial consumers with a solution to get SMR-generated energy offtake without the need to capitalize, own, or operate a nuclear energy power plant. On Slide six, we examine strong bipartisan support in the U.S. for advanced SMR and nuclear energy and NuScale technology specifically. In today's ever-changing political environment, the fact that both sides of the aisle agree on the importance of advanced nuclear is a testament to the unmet need for decarbonized baseload energy and the strength of our offering. Looking ahead, there are two new funding opportunities in the energy and water fiscal year 2024 appropriations that NuScale and its customers can pursue. The precise objectives of these appropriations are near-term deployability, building a fleet, and adding power generation. This includes $800 million through a competitive cost share award to support up to two near-term utility commercial deployments of light-water reactor SMR technology in the U.S. In addition, $100 million will be devoted to supporting grid-scale generation three-plus reactor design, licensing, supplier development, and site preparation to be deployed by 2030. The Department of Energy intends to announce final selections in mid-2025, and we believe NuScale is well-positioned for consideration to be a recipient or a recipient partner under both of these awards. In addition, the Bipartisan Advance Act was signed in July 2024, which seeks to streamline the nuclear energy regulatory process by allowing the U.S. Nuclear Regulatory Commission, or NRC, to hire more staff, reduce licensing fees, speed application processing, and ease the burden of environmental abuse. For example, the Act directs the NRC to complete reviews of combined license applications for new reactors at existing or adjacent sites on an expedited schedule, which should result in fewer delays and limit the cost of receiving a final decision on the license. The NRC was also directed to rely upon existing licensing information when a new reactor is built at an existing site, ensuring a more predictable and timely decision. The Act includes several crucial provisions that could have a significant impact for NuScale. One provision aims to streamline the conversion of retired fossil fuel plants into nuclear facilities, potentially reducing costs in bid-infinite regions of the United States that might otherwise struggle during the energy transition. Another provision seeks to encourage increased foreign investment in the American nuclear sector by removing restriction on foreign entities' ability to seek certain licenses, thus potentially attracting foreign capital to support the domestic deployment of NuScale. Additionally, the Act supports international harmonization efforts to enhance the global regulatory process and promote more efficient licensing approaches with international customers. The impact for NuScale could potentially facilitate NuScale's collaboration with international customers and partners, with strong backing from the U.S. State Department to ensure timely compliance with foreign regulations. Moving on to Slide seven, our readiness for deployment is far more advanced than our SMR technology peers, and the gap continues to widen. We are the only SMR technology with design certification from the NRC, while our SMR competitors remain early in the process of working towards approval. Our standard design approval application for a 77-megawatt uprate is scheduled to conclude by mid-2025. The design is based on our same fundamental safety case and features approved by the NRC in 2020. And we believe the 77-megawatt NuScale power module supports an even more comprehensive range of customers. We are also leading the path on the manufacturing side. Doosan, our SMR manufacturer, continues making progress in producing the first NuScale power modules, and all the forgings needed to support the start of fabrication for upper reactor pressure vessels. This continued work provides advantages to our next project deployment, shortening delivery significantly. When it comes to manufacturing our modules, NuScale's relationship with our long-term supply chain partners, many of which are strategic investors, one of our most significant sources of strength. Our robust supply chain has positioned NuScale as a clear manufacturing readiness leader in the SMR space. NuScale's ongoing efforts to cultivate these essential relationships set us apart from our peers. In June, we hosted our third annual supplier working group in Fort Worth, Texas, where we engaged with 43 representatives from 22 supplier organizations, sharing our significant accomplishments, providing updates on our deployment progress, and collaborating on supply readiness. These partnerships are crucial for the long-term delivery of high-quality, cost-competitive components. We remain devoted to working closely with our partners to develop a global supply chain that addresses the demand for NuScale's technology as it grows. I also want to touch on the request for proposal recently submitted by NuScale in ENTRA1 Energy to the Great British Nuclear SMR Competition. Given our regulatory head start and manufacturing readiness, we are uniquely prepared to deploy dependable, carbon-free nuclear power across the United Kingdom. Before I turn the call over to Ramsey, I want to acknowledge that 17 years ago, Chief Technology Officer and co-founder Dr. Jose Reyes' dream of designing a smaller, safer, and more cost-competitive alternative to conventional nuclear power became a reality as NuScale Power opened its doors. As we celebrate 17 years of memories, we remain committed to improving the quality of life for people worldwide through the advancement of SMR nuclear technology. I can say with confidence the exciting momentum building right now is remarkable. Whether it's industrial electrification, process heat, or the rapidly escalating demand of the data economy, NuScale's SMR technology is part of the energy solution for the future. Given our ability to produce clean, reliable energy, reach end-users, and help them achieve their sustainability goals, we maintain competitive advantages of technology, safety, manufacturing readiness, siting, and regulatory success, and are prepared to produce and deliver. So, as 2024 continues, we are pleased with where we are and look forward to updating you on our progress. Now I'll turn it over to Ramsey to provide our financial update. Ramsey? Ramsey Hamady: Thank you, John, and hello, everyone. Our financial results are available in our filings, so my focus will be on explaining major line items. Please Slide 8 for second quarter results and relevant factors impacting our financial position. All figures following are for Q2 2024, unless I say otherwise. NuScale's overall cash position was virtually unchanged during the period, ending the second quarter with cash and equivalents of $136 million, 5.1 of which is restricted, and no debt. This compares the cash and equivalents of $137.1 million, 5.1 of which was restricted, and no debt at the end of the prior quarter. For the quarter ending June 30, 2024, NuScale reported revenue of $1 million and a net loss of $74.4 million. This includes a non-cash expense of $36.7 million related to an increase in the fair value warrants outstanding. During the same period in the prior year, the company reported revenue of $5.8 million and a net loss of $29.7 million. During the current quarter, we reported an operating loss of $41.9 million, compared to an operating loss of $56.1 million in the second quarter of 2023. This year-over-year reduction in quarterly operating expense of $14.2 million reflects the company's successful efforts to reduce expenses and operate more efficiently. Subsequent to the second quarter of 2024, the company executed a revenue-generating agreement in relation to the advancement of the Doicesti Project, being Phase 2. Over the next 12 months, we anticipate additional revenue from Fluor Corporation (NYSE:FLR) in respect of our continued contributions towards this project. Looking forward, we continue to be focused on managing liquidity and risk and remaining good stewards of shareholder capital. I will conclude my remarks with a brief view of our capitalization summary on Slide 9. Additional information may be found in our SEC Form 10-Q and earnings release. With that, I'd like to thank you again for joining today and for your continued support of NuScale. We'll now take questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of George Gianarikas with Canaccord Genuity. Please go ahead. George Gianarikas: Maybe if you could provide us a little bit more color on your discussions with some of the data center companies, the hyperscalers. To the extent there are bottlenecks in the deployment of your reactors, is it possibly due to the fact that there aren't independent third parties who are willing to provide the risk capital and maybe own the reactor? To what extent can ENTRA1 play a role in helping to fill that void? Thank you. John Hopkins: This is John. I've often stated in your spot on in your comment, we have the technology, we have the capacity to execute. What's been missing in this industry is the so-called developer you just mentioned. We've been working close to two years now with ENTRA1 on the development of a model of how to approach customers that you commented on, like the AI centers and data centers and industrials. These particular industries, they need 24/7 clean energy. They just don't necessarily want to own the nuclear asset. What they would like to do is have somebody provide them a build-own transfer or a build-own model where they provide the long-term PPAs required and our global developer partner helps bring the financing and the ability to do that build-own or build-own transfer. George Gianarikas: Got it. Thank you. Maybe as a follow-up, can you maybe comment on any momentum? You did make some comments on what's happening in the U.K., but outside of the U.K., any highlights, any momentum maybe in other geographies in Europe and Asia? Thank you. John Hopkins: We're seeing significant interest. A lot of it in Central Eastern Europe is driven by energy security as well as climate disruption. Romania is a good case in point. The Romanian project, we've been working with the Romanian government for quite some time. As I commented, Fluor Corporation will be the prime contractor or the subcontractor for that project, which will bring in our power modules to the rural power project. That's the one that's most furthest along in Eastern Europe or Central Europe, but we're also in discussions with other countries because, again, it's the same comment as I said before. They need clean, 24/7 reliable energy. The whole market is starting to resonate after COP28, COP29 with the advanced act that we hear on urbanization. That's a very key piece because it allows a regulatory cooperation between a country's regulatory entity working with our NRC. We're pretty bullish on what we're seeing in the market overall. Thank you. Operator: [Operator Instructions] Your next question comes from the line of Mark Bianchi with TD Cowen. Please go ahead. Marc Bianchi: Thank you. A lot of talk about data centers the last couple of quarters here, not just from you guys, but we hear it everywhere you look in the market. What's the timeline to get a project announced? John Hopkins: Mark, this is John. We're working hard with both our customer and our developer. As you know, these are pretty complicated transactions and they just take time. We're in almost daily, not weekly, communications trying to drive closure to some of these projects. We're as anxious as you are. Marc Bianchi: Okay. On Romania, it's nice to see moving to Phase 2 FEED here. What's the timeline for that process? When will we expect to hear more about that? John Hopkins: We actually kick off our initial alignment section next week with the customer Fluor Corporation and NuScale to start the process, and, as you said, the scheduling of starting and commencing that. The overall effort for the FEED Phase 2 will take approximately 12 months to complete. We're really looking forward to working with both our customer in Fluor Corporation on advancing this project. Marc Bianchi: The revenue that you talked about in the slides and in the comments is related specifically to the Phase 2 FEED. It would seem that way if you're talking about the next 12 months. And then, any steer you can give us on the magnitude of opportunity there? Ramsey Hamady: Good. I'm very well, thanks. I'm glad you're asking about this because I remember back in, I think we first met in October last year and talked about during our Investor Day in New York and talked about the business model. I think what this highlights very importantly is that our business model, as we outlined it, included revenues from services and technology, pre-COD revenues, and not just from the hardware of the reactors. This is a great example of the fact that we're generating revenue pre-COD. I think that's important for us to note. In terms of the magnitude, Marc, I know it's been tough with me not providing guidance on earnings or on magnitude of revenues, and we're still not doing that yet. I think once we have a couple more projects in the pocket and we have more visibility, we're going to start doing that. For right now, we're going to stay away from providing guidance. Marc Bianchi: Yes. Okay. Maybe to ask you another number question. Can you say what cash from operations was in the quarter? I know we'll get it in the Q, but just so that we could frame a discussion about where that might go. Ramsey Hamady: Yes, absolutely. Look, I'll focus on OpEx. I'm going to go on a look-back basis, Marc, versus a look-forward basis. Here's some guidance I think I can offer. Over the three quarters, let's say Q2 '23 to Q4 '23, NuScale was averaging about, let's say, $74 million in OpEx. If I take out CFPP, it was probably around $56 million, $57 million. When we did our RIF back in January, we announced in a press release, we said we're realizing savings of $50 million , $60 million. I just had my team doing the analysis. And then, we started to realize those savings. So we've gone down from OpEx around $55 million to OpEx that averaged $43 million over the last two quarters. So I think that's a great achievement for us. That's delivering on what we said we were going to deliver, which is real prudence in terms of our expenses and cost savings to our shareholders. Operator: Your next question comes from the line of Ryan Pfingst with B. Riley Securities. Please go ahead. Ryan Pfingst: Just to follow up on RoPower, could you remind us what the next steps are beyond FEED Phase 2 and the potential timing around those next steps? John Hopkins: I'm sorry. I was on mute. This is John again. As I commented, we completed the preliminary FEED, and it was very successful. This next phase, as we said, is the front-end engineering design. The engineering design approach is to control our project expenses and go through this next year to finalize, to go into the final approval by the Romanian government for the next phase of the project, which would be to move forward on the complete project itself. So the FEED package for us and for Fluor Corporation, as we stated, we're providing the engineering deliverables for our piece of it to Fluor. Fluor is the designated EPC on the project, if that helps. Ryan Pfingst: Okay. Thanks, John. John Hopkins: The duration of this, we kick-off hopefully next week. It's about a 12-month program. Ryan Pfingst: Would you expect revenue to start contributing in 3Q related here? Ramsey Hamady: I'll answer that, Ryan. Yes. We signed a revenue-generating contract. I don't want to make any statements around GAAP revenue just in terms of recognition until we actually book that, but we did sign a revenue-generating contract. Ryan Pfingst: Okay. Thanks Ramsey. And then just one more, I guess. Can you talk about the competitive landscape today, not only on the SMR and nuclear side, but when you're talking to data center customers and others, are you also competing against other types of technologies? John Hopkins: The customers who we're talking with right now, some of them will probably put out an RFP that would involve other technologies. It depends on what they're asking for, but a lot of conversations that we are engaged with right now, it's really about, as I commented before, the ability to bring the BOT model and the BOO model. We've yet to see another developer of the magnitude that we're seeing here with the Tier-1 banks that we're working with coming forward with that similar type model. We hear discussion about it that at this point, the competition, as you know, as I commented before, we are going through our power upgrade, but we did get through the licensing process, and as far as I know, no other U.S.-based technology anyway has completed the design certification application for the Nuclear Regulatory Commission. Operator: Ladies and gentlemen, that completes the question-and-answer session. I'll now turn the call back over to NuScale CEO, John Hopkins for closing remarks. Please go ahead. John Hopkins: Thank you, operator. NuScale, again, with our strategic partner, ENTRA1 Energy, is executing, we believe, a very robust project development pipeline and are prepared to deliver with industry-leading manufacturing readiness. We believe we're well positioned to commercialize the NuScale SMR technology. We're very pleased with our progress and remain steadfastly focused on our goals. And I'd like to thank everybody for participating today. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.