Françoise De Bena, and I'm Head of Investor Relations for Mach7. Today, our CEO, Teri Thomas, and our CFO, Daniel Lee, will provide an overview of our Q2 FY26 result. We will then open it up for questions. If you have a question, please submit it via the Q&A text box at the bottom of the screen. I'll now hand over to Teri.
Thank you, Françoise. All right, before I speak about the quarter, I want to briefly ground everyone in who we are and what we do, particularly for those who are newer to Mach7. So, we complete the patient's picture with the patient's pictures. We get the right medical images to the right people in the right places at the right time. We do it fast and with diagnostic quality. We operate in a growing and important industry, and in my frequent conversations with our customers, I am reminded regularly just how mission-critical our work is. While the healthcare industry has seen pretty solid progress organizing text-based clinical data over the years, imaging data, which goes far beyond X-rays, remains quite fragmented. Many types of images are locked in proprietary systems, spread across multiple departments, stored in lots of different formats, and that causes fragmentation.
That fragmentation represents opportunity, and this opportunity Mach7 is well positioned to address. So, our ambition is for Mach7 to become the world's Imaging EMR. That ambition, big, it underpins our strategy of moving from Archive to Architecture, connecting imaging across the enterprise and enabling AI, improving interoperability with EMRs like Epic and Cerner, and closing the gaps that still exist to create comprehensive and unified patient records. Now, turning to what you all are looking for the quarter. So, today, Mach7 is providing a business update and quarterly cash flow report for the quarter ending 31 December 2025, our 4C. The quarter reflects continued and deliberate execution of the reset we outlined last quarter, sharpening our strategy, strengthening discipline, and aligning the organization for sustainable and profitable growth. The quarter marked an inflection point.
The strategy that we designed in September and October and we announced on Halloween is now in motion. This is no longer about planning. It is about execution. The reset has been comprehensive. We've taken a top-to-bottom look at our structure, our processes, our technology, our commercial model, our culture, and we've brought this together into a dynamic operating model that links strategy, execution, and accountability. This is hard work. As part of that work, we are taking a disciplined look across our customers, partners, and contracts to ensure they support long-term profitability and strategic alignment. That includes being more selective about who we work with and, in some cases, stepping back from low-revenue relationships that create competitive conflicts or long-term risk to our growth and profitability.
The outcome with the VHA, it was disappointing, but it also allows us to focus our resources on opportunities that better align with our core platform, our operating model, and path to sustainable profitability. The VHA program required a level of custom development and service intensity that would have continued to weigh on margins over time. Now, not all of these changes show up immediately in the numbers, but the foundations are now in place. We are building a performance-driven culture that values top talent, measurable outcomes, and disciplined execution while balancing innovation with rigorous cost management and a respect for shareholder capital. So, with that context, I'm going to hand it over to Dan, our CFO, to walk you through the financials for the quarter. Dan?
Thanks, Teri. Looking at our financials for a moment, the second quarter reflects continued execution against the reset strategy that we did outline last quarter, with improving discipline and operating performance. Our annual recurring revenue run rate was stable at AUD 23 million on a constant currency basis, reflecting the underlying resiliency of our subscription and maintenance revenues. Our contracted annual recurring revenue, or total CAR, closed at AUD 26.1 million, representing a net reduction of AUD 2.9 million over the quarter. This was primarily driven by the removal of the NTP project from our CAR backlog, partially offset by net new CAR from sales. Sales orders totaled AUD 6.8 million in the second quarter, including AUD 3.1 million of new sales, reflecting industry confidence in Mach7's value proposition and the effectiveness of our strategy to date. Operating cash flows improved significantly over the prior quarter.
Cash receipts from customers were AUD 7.9 million, reflecting a catch-up of the majority of timing-related renewals and invoices that were delayed into Q1, and driving positive operating cash flow for Q2. On the cost side, total payments were AUD 7.9 million, down 9% compared to the same quarter last year and 6% lower than the first quarter, reflecting the benefits of our efficiency and cost reduction initiatives. Advertising and marketing spend was AUD 0.4 million, consistent with the prior year, and higher than Q1 due to targeted investment in our primary marketing and lead generation event, RSNA. All other expense categories were on par or lower compared to both the prior quarter and prior year. We ended the quarter with AUD 18.5 million in cash and zero debt, maintaining a strong balance sheet that positions us well to continue executing on our strategy.
Overall, the fundamentals remain very sound, and we continue to operate efficiently as we move into the second half. With that, I will hand it back to you, Teri.
Thank you very much, Dan. All right, I'll now share a little bit more progress about the progress we're making on executing on our strategy. So, first of all, commercial transformation, a big focus for me, it is well underway. During the quarter, we continued simplifying how we operate and lowering our cost base while selectively investing in areas that directly support commercial momentum and customer outcomes. A primary focus has been strengthening our commercial engine. Today, our sales organization has grown, is more focused, and is better supported than when I began six months ago, with clear ownership across new customer acquisition, expansions, partners, and services. We have re-energized the sales and marketing model, and we're strengthening our partner engagement through a more proactive and structured approach, including expanded partnerships with AWS, Dell, and Ingram.
Our new commercial leadership team is currently with me in California, translating strategy into execution plans across pipeline quality, revenue discipline, partner leverage, and demand generation. Now, RSNA 2025 was an important commercial activity for us. We showcased our move from archive to architecture with the launch of Flamingo, and we generated some high-quality sales leads through a more customer-grounded marketing approach, and we deepened engagement with more than a dozen partners, an increasingly important growth lever for us. We celebrated a significant product and commercial milestone this quarter with our first Flamingo architecture customer in Q2, fiscal year 2026. This was our first contract for the new product and our first brand new direct customer relationship since July 2023. It is an important signal that our refreshed commercial engine has begun executing.
Expanding our commercial opportunities, Flamingo is modular by design, allowing customers to adopt capabilities incrementally, whether for existing Mach7 customers or those entirely new to us. It can be deployed alongside our VNA, our eUnity viewer, with both or independently. Over time, we will continue to expand the capabilities under the Flamingo's wings, strengthening clinical impact, AI integration, EMR connectivity, and delivering seamless imaging access to complete the patient's record. While this extends beyond the quarter, January has been busy, and it represents a solid continuation of our execution. We achieved a key regulatory milestone with the eUnity viewer receiving a new CE certificate under the EU medical device regulations, supporting continued access to European and critical Middle Eastern markets.
We initiated platform expansion in Malaysia by hiring a developer, including also an experienced API integration developer, who's now fully onboarded and leading our first development work from that region. Development is underway, supporting our global customer base and strengthening Flamingo's integration capabilities. We've established an intern program in both North America and Malaysia for access to fresh graduates with fresh ideas. These new staff are part of a deliberate expansion of our Asia-based team, with plans to continue scaling as execution progresses. Operating discipline does remain a core focus. As Dan outlined, the organizational reshaping completed during the quarter delivered cost savings from reductions in IT, operating costs, and infrastructure changes, also licensing optimization and contract renegotiations. We're moving and shaking things in a good way. Execution quality with customers also improving.
Early gains in eUnity viewer KLAS scores reflect the initial benefits of our flywheel customer engagement operating model and a renewed focus on accountability, responsiveness, and consistency. This remains a top priority area as we continue to refine our model and raise that bar on the customer's experience. As we continue to shift from strategy definition into execution, leadership alignment continues to evolve. We've commenced a search for an experienced chief technology officer following the departure of the chief innovation officer in January. This reflects our focus on strengthening our engineering leadership, delivery of technology, platform scalability, and execution excellence. We're also recruiting additional sales staff across Asia and North America to support expected demand from our expanded marketing activity. But we are doing this selectively and in alignment with demand.
Looking ahead, Mach7 enters the second half of FY26 with a clearer strategy, stronger operational foundations, and improving commercial momentum. We remain focused on disciplined cost management while selectively investing in growth-critical capabilities across sales, product development, and platform scalability. As we shift away from the high-effort Veterans Health Administration teleradiology program, we're increasing our emphasis on capital deals in Asia and the Middle East. Over the past two weeks, I visited four customers across these regions, including one of our largest customers, and was encouraged by the innovation we are seeing with Mach7 in production overseas. A parallel focus is continuing to build our transformed commercial engine. Expanded marketing initiatives are in planning and officially launched in February. The industry will see us showing up differently, and we intend to get more visibility with our target customer types.
Now, I'd like you to know we are expanding our marketing capability in a disciplined way. Rather than materially increasing spend, we're partnering with an external marketing provider that brings stronger tools, deeper capabilities, and greater scale. This allows us to significantly expand our marketing output as well as our market presence and branding while keeping our investment essentially flat. The same approach applies to how we're expanding our development capability. By hiring developers in Malaysia, we can bring on 3-4 engineers for the market cost of one in the United States. Paired with our deeply knowledgeable engineering team on the ground in Malaysia, this approach allows us to expand our innovation capacity and accelerate the development of Flamingo as well as other innovations without a matching increase in our development cost base.
While our industry sales cycles of 1-2 years mean it will take time for these initiatives to produce the expected growth and revenue, we are digging in, and we are doing the hard work with urgency and with focus, emphasizing not just growth of pipeline, but improved sales conversion rates. We expect Flamingo-related opportunities to begin contributing more meaningfully to our ARR in the second half of fiscal year 2026 and into fiscal year 2027. I will provide further updates at our half-year results, including additional insight into execution progress as we continue to build and gather momentum. Before I close, I want to thank our board for their guidance and support, our employees for embracing change with energy and optimism, and our shareholders for your patience and your continued belief in the company. And now, time for questions.
Thanks, Teri. We have received several questions via the live chat, and I'll commence with the first one from Max. He asks, "In dollar terms, what was the contribution to sales orders from renewals and separately add-on and expansions?
I'm happy to take that one, Teri.
That's the money man. Go, Dan.
Thanks, Teri. Thanks, Max, for that question. Renewals represented around 40% of our sales orders for the quarter. In dollar terms, that was AUD 2.9 million. Add-ons and expansions were just over AUD 0.9 million, or 14% of total sales orders.
Thanks, Dan. Our next question comes from Andrew Hewitt. I noted the comment of improvement in KLAS. Where do we sit at the moment?
The best-in-class results come out on February 4th. So I cannot tell you what they're going to look like. It's a few days away. I do look regularly at KLAS myself, as well as several of our other team members, and we put it on our corporate vital signs dashboards. Our eUnity numbers have been improving and looking great. They were tops. They went down. They're coming back up. Our VNA isn't where I want it to be quite yet. Even this morning, I got a very nice positive comment from one of our VNA customers. So the positive comments are starting to trickle in. However, it's going to take a while before we work through some of the comments that brought our score down over time. So we're targeting the VNA. KLAS is a little challenging because it is a lagging indicator.
So I see the VNA not where we want it to be yet, but we're systematically going through our customer base to engage with them in a different way than we've done before. We're executing a systematic engagement and assessment process, which will take several more months for us to complete. With the KLAS reporting lag, we expect it'll take up to a year to see the benefits come through fully. So while we've had some fantastic early comments and feedback, including the comments KLAS publishes, but also the direct engagement and feedback from the KLAS staff themselves. And in fact, by the way, I'm going to share one of the most recent comments. They said they are very pleased with the results of our restructure. They love having a cockpit of people, and they're finding those people to be responsive and knowledgeable.
The last part of the comment, "I feel extremely confident in their ability to fix problems, which I would not have said a year ago." That's the profile I want to see from all of our KLAS comments, but it will take a while for KLAS to get a hold of those people and also for us to orient those customers to the changes underway.
Thanks, Teri. We have another question from Max, who asks, "Can you expand on how some of these low-revenue relationships were creating competitive conflicts?
Yes. I'm not sure I'm comfortable sharing the actual names of the companies, as that could create some legal risks. Therefore, I'm not going to name any names. However, when we acquired eUnity, some of the eUnity customers had a competing VNA and used our viewer. And that's a delicate situation. Do you want to enable a competitor to better compete with you with your own technology? So we've gone through and prioritized our partnerships, and we've looked at them carefully based on how much revenue they currently bring in, but also how strategically are they aligned with our growth expectations and the quality of the relationships. And there are a small number of those relationships that essentially cost more to maintain than they bring in for revenue and also carry some business, probably not best practices. So we are doing a little bit of cleaning out the closets.
Thanks, Teri. We have another question from Max. What have you learned from customers around mission criticality?
Now, I've been in healthcare technology since 1989, and I'm a nurse. And so I understand the pain if a customer goes down or if the system isn't responsive. However, one thing I've learned is that I need the whole team to feel that pain, not just the flight crew, not just the support person. So one of the biggest things I've learned is how incredibly important it is to make sure that our staff really fully understand the impact on patients' lives and clinicians who are just trying to do their best work if our software isn't performing. And in fact, even this morning, I had a call with our team about a customer, and I said, "Forget the flow charts. If a customer's in trouble, you all get on the phone with them together right away.
If it means a developer's on, a developer's on." It's creating that strong understanding across all of the roles and living our culture code, which starts with "Customers drive all of our decisions." As a leader, I regularly prompt and ask the question, "How would this answer feel to the customer? What does this mean to the customer? And what is the impact to the customer?" and training our company to think about that, not just in the customer-facing part of the business, but also product management, development, and even the simple thing that we executed in our strategy, which is having someone answer the phones.
Thanks, Teri. Our next question comes from Daren, who asked, "If you could only focus on one weakness at Mach7 as a business right now, what would it be? And how would Mach7 fix it?
Wow, that's a tough one. I do regularly sit back and think, "What is the most important thing for us to do?" And I actually have a meeting next week to get alignment on big, hairy, audacious goals for the quarter because I do believe that can be an effective approach to rally our customers or rally our staff around our customers. That's actually the theme of what we're talking about. So I think that last question is actually the answer to this next question. I think somehow Mach7, over time, did a good job with taking care of its staff, organizing the business, but stepped away from that deep understanding of the customer's world, and we need to build that back. So in a great intentioned way, let's protect developer time, for example. Developers stopped engaging with customers.
They started operating on specifications that might have come from a customer to a support person to a product person to a development ops person to a developer. It's a little bit like the phone game. You actually need to get people on the phone talking directly to be effective and not only do better quality development, but also it teaches people to really care. It's a different level of caring when you talk to the customer than you're writing to a spec. So if I would say biggest weakness, that's the one we are attacking most heavily that I think will have the most profound impact on the work that we do as a company from top to bottom.
Thanks, Teri. Our next question comes from Scott Power, who asks, "Can you expand on your plans for Southeast Asia and the Middle East?
Sure. Yeah, I had a whirlwind tour there last week. We have a fantastic team on the ground in Malaysia and Singapore. They're deeply knowledgeable. They actually don't have that Mach7 weakness in that they're really closely connected to the customers there, good understanding of the products. And the customers are really happy. They were proud to show off what they're doing with our software. I visited three hospitals in Hong Kong, and I was amazed. They were telling me they were doing things that I heard from the North American team we couldn't do. And I'm like, "Whoa, are you doing this with our software?" And I validated that, yes, in fact, they are. And so I thought, "Build on where you've got success." And so my first visit there, I was impressed. This last visit there, I was even more impressed.
That's part of why I brought our founder, Ravi, back into the business. He lives in Singapore. He sees Mach7 kind of like a child of his. He wants us to grow up and be all we can be. So he has this infectious enthusiasm and this energy and this just deep caring about the technology itself that carries a massive amount of credibility in Asia, a high-context culture that really values founders. And between the new sales hire that we've got, another person that we're looking to hire, Ravi, and that really strong technical team on the ground, we have several prospects in the pipeline that I think we have a great chance of closing, as well as some expansion opportunities with our current customers, primarily in Qatar, in Hong Kong, but also even in Malaysia. People like to see their software being used in their country.
And so it's not super high profit compared to other areas, but they're right there and makes a lot of sense. So we haven't done a lot of work on prospecting and trying to build the pipeline deliberately yet, but that will be one of the first things for both the new hire that just began and the open position that we hope to fill soon. So it's a great team. It's happy customers. That's a great recipe for that sales marketing flywheel. So I want to get that thing rolling.
Thanks, Teri. Our next question from Max is actually for Dan. Dan, what attracted you to the opportunity?
Oh, yeah. Thanks again, Max. Well, I was drawn to the opportunity because really a combination of the company's reset mission, the stage of growth that the company was currently in, and the mission to turn around the culture of the leadership team. The company had a very strong balance sheet. Fundamentals looked very sound. And truthfully, it just felt like the kind of environment where I could make the most meaningful contributions and impact, as well as continue to grow professionally.
We have no further questions on the chat, but I'll just pause a moment in case there are any final questions that crop up. Last chance for people. No, nothing's come through. I'll hand you back to you, Teri, for closing remarks.
All right. I do believe in setting expectations correctly and then delivering, whether it's with customers, staff, or even our investors. So with that in mind, I'm going to close by noting that we are driving a fundamental change in culture, in operating model, and in execution. That kind of change does not happen overnight. While we're pushing hard to accelerate sales cycles, the reality is the full impact on revenue and, as we mentioned, the KLAS scores will likely take 12-24 months to be fully visible in the form of our growth of ARR. Progress will be steady, but that kind of transformation and that acceleration of growth and profitability will take time. I'm very proud of the progress we've made, and I'm super excited by the opportunities ahead of us. I'm confident in where we're headed. Our strategy is pretty clear.
The market opportunity is very real, and our balance sheet is strong. Delivery is what matters now. I appreciate your patience as Mach7 evolves. It changes for the better, and we realize our immense potential. With that, I thank you, and I look forward to sharing more with you soon. Thanks for joining us.