Good morning, everyone, and thank you for joining us today for our 2024 third quarter conference call. With me on the call today are VitalHub CEO Dan Matlow and CFO Brian Goffenberg. After our prepared remarks, we will open up the line to questions from analysts. Please press star one or use the raise hand function to indicate that you would like to ask a question. Now, before we begin, I will read our cautionary note regarding forward-looking information. Certain information to be discussed during this call contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in the earnings press release, as well as in our SEDAR filings. As well, our commentary today will include adjusted financial measures, which are non-IFRS measures.
These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the two can be found in our SEDAR filings. With that, I will hand the call over to our CFO, Brian Goffenberg, to go over financial highlights for the quarter. Over to you, Brian.
Good morning, everyone, and thank you for joining the call today. We're pleased to report our third quarter results, which highlight our continued momentum, growing our recurring revenue base and operating margin profile. We are driving positive change for healthcare systems, and our scale and reputation make us the platform of choice internationally.
We are proud of our portfolio and excited to have completed two acquisitions subsequent to the quarter, which are a natural fit to our patient flow suite. In a moment, Dan will discuss these transactions, as well as provide a high-level update of the business and outlook. First, I'm excited to share with you the financial milestones we achieved in this quarter. In Q3 2024, total revenue was CAD 16.5 million, an increase of 25% over the prior year period. Term license maintenance and support revenue was CAD 13.9 million, an increase of 28% over the prior year period.
This segment comprised 84% of total revenue and represents an important strategic source of revenue, given its predictability and recurring nature. Perpetual license revenue was CAD 300,000 in the quarter, an increase of CAD 100,000 over the prior year period. Our services, hardware, and other revenue was CAD 2.3 million, a decrease of 1% year over year. The slight decrease is primarily attributable to the deployment of new and ongoing customer projects, and the summer quarter is generally slower for services deployment.
At the end of Q3 2024, annual recurring revenue was CAD 53.5 million, an increase of 25% over the prior year. On a sequential basis, annual recurring revenue increased CAD 2.2 million, or 4% over June 2024. Organic growth comprised CAD 1.1 million of this increase, or 2%, in line with expectations and historical trends. In Q3 2024, gross margin was 81% of revenue, as compared to 82% in Q3 2023.
This is also in line with expectations and reflective of our model as a software business. Moving down the income statement, net income before taxes was CAD 2.4 million, and Adjusted EBITDA for the quarter was CAD 4.6 million. We're proud of our Q3 Adjusted EBITDA margin of 28%, which is a natural function of our increased recurring software revenue and operating discipline. As at September 30th, 2024, we have cash on hand of CAD 81.4 million and no debt. Before passing on the call to Dan, I'll discuss some of the financial metrics associated with our two acquisitions, which closed post-quarter end. On October the 4th, 2024, we closed the acquisition of MedCurrent for approximately CAD 8.3 million in cash, adding CAD 2.3 million in ARR to our patient flow suite. October 29th, 2024, we closed the acquisition of Strata Health, the largest transaction in our history.
Total consideration of CAD 32.3 million included CAD 18.6 million of cash upfront with a balance in shares. This adds CAD 12.3 million of ARR to our patient flow suite. On a pro forma basis, we have over CAD 50 million of cash to deploy and continue to generate cash every quarter. On a pro forma basis, inclusive of the acquisitions of MedCurrent and Strata, our annual recurring revenue is CAD 68 million. This is a substantial base that we're proud of and a key measure of success for us internally at VitalHub. With that, I'd like to hand the call over to Dan for an update on the business.
Thanks, Brian, and hello, everyone. We're proud of our Q3 or September quarter, and we continue to be busy, and we've done a lot of great things. So, scary to say, but we're up over 500 people, and we're closing in on CAD 70 million worth of revenue. We had a great planning session earlier in the month. We had all our UK people, our Australia people in town, and we continue to add structure and methods of collaboration more to drive focus and alignment within the acquisition. In terms of growth, our Q results, ARR and service work came in as expected, and we feel good heading into the end of the year. Q3 is always an interesting quarter for us, or we're always a little bit worried for it.
Government tends to slow down a lot in the Q3 world, but this is two years in a row that we've made it successfully through our Q3, and we're excited that we have enough momentum in the business to be able to support that. Our EHR solutions in Canada continue to be strong. Our deployments in Ontario and Nova Scotia are giving us visibility to recurring revenue. We have a huge backlog of services work from our Treat business that will continue all the way through 2025 into 2026, and we're seeing more tenders and other areas that are coming out that we think will be right up the Treat alley. In the U.K., our patient flow products continue to perform well, especially our SHREWD-based product.
It continues to add into all those areas, and we think those relationships are natural vehicles to help promote and upsell the Strata and the MedCurrent businesses as we continue to move. We're seeing regional planning across mental health forms, analytics forms, and cross-selling that creates value and makes our solutions more sticky in those environments. Just a little bit on the acquisitions, and I'm sure we'll get questions afterwards as well. But the two acquisitions that close at the end of the quarter, we're excited about. We think they're strategic, and we've really, pardon me, we've really come across some great people as well. There's some exciting experienced people that we think we're going to add to our team really nicely. Both of these companies we've known for a long time, not just from an M&A perspective, but from a partner perspective and from a professional relationships perspective.
The integration of this stuff on a personal basis is really going to be easy for us to do. MedCurrent, we announced a lot previously, but it's a great decision support-based clinical decision support system. It might take a little bit of time, but we do see a really nice pipeline in that product, and the users that love it on an international basis are liking it. It's a unique solution. It's not competitive, and we're proving viability for it by having sites across an international basis. We're looking forward to being able to expand that. It's a natural expansion for it. More recently, the Strata brings us into the referral management system, a key component of any type of patient flow-based arrangement. We like the Strata-based solution.
It's been around for a while, but the technology has completely gone through a rewrite-based scenario over the last four or five years, and it's extremely modern. It's extremely powerful, and the users love it, and it does a great job in its marketplace, and it's got great demonstration that it's viable from an international perspective with implementations in New Zealand, the U.S., the U.K., and in Canada. So we like what it does, and we think it's an opportunity for us to open doors for them and for them to open some doors for us. It's a natural fit in the U.K. marketplace with other patient flow solutions, and the teams have already worked together previously to now in the field a fair bit. So the natural extension is there to do that. Before I take questions, just a little bit on the financial outlook.
Brian already mentioned we still have well over CAD 50 million in cash that's ready to deploy. So as we continue to use our cash, we're generating cash as well. We still have an M&A pipeline that's being active, and we think we're in a great position to be patient, disciplined on our behalf of us and all of our shareholders when we add to our platform as much as we can. It's been a busy Q4 trying to integrate and working on integrating this. We fully expect that it could take some time to digest these acquisitions. It might be a little bit of a reset on our EBITDA margins as we continue to move forward over the next few quarters. But I'd like everyone to know you've seen how we integrate. You've seen how we operate.
We're happy with these two acquisitions, and we thought they're important to get done. And we're already in action mode to maintain those margins and those growth metrics that everyone's being accustomed to. So we're very cost-disciplined. Cash generation is the core of what we do. So we ultimately value free cash flow as an important metric, and we want to keep working forward to scale that up to get ourselves to a self-sustaining M&A strategy that we all have the goal of becoming into this. So we like to think we're getting there. So we're making ourselves a great financial strategic buyer and a choice internationally. And with that, we're happy to take some questions.
Thanks, Dan. We'll now open up the line to any questions from analysts. As a reminder, please press star one or use the raise hand function if you would like to ask a question. Today's first question comes from Gavin Fairweather of Cormark Securities. Gavin, please go ahead.
Hey, good morning. Thanks for taking my questions. Maybe just to start out on MedCurrent, obviously, there's a big earnout in place, and that reflected some of the growth expectations of the management team there. So now that that deal's closed and you've kind of taken a close look at the pipeline, maybe you can just discuss from a high level your sharpened expectations around the growth outlook for this asset and, in general, what kind of ARR growth you'd be happy with coming out of that asset going forward.
There's a significant pipeline that is associated with the MedCurrent product, and they've closed a fair amount of business already, and we expect it to continue to grow into 2025. I'm not going to give any numbers to you, Gavin, just so we don't do that. But there is money floating around in the U.K. and Australia for that solution. They've done a really good job of working with the Radiological Associations in both Australia and the U.K. to get this product sponsored and to unlock some funding for these projects through those organizations and helping them get to the provincial governments and the national government, in the case of the U.K., to give funding to those organizations that want to get it. So they're working their way through that. There's a lot of activity going on in the U.K. with other initiatives that it just becomes a timing issue.
It's not. Can they fit it in? Can you get the IT to fit in the project and trying to jam it into projects, but they've found they got great vehicles to get those projects done. It's just getting the timing and things worked out to it so we do expect it to continue to grow on a steady state and add impact into what we do.
That's helpful. And then on Strata, I guess a bit of a similar question. I'm curious for your view of the funding environment for that product across different geographies. And you referenced working with them a little bit in the field. I suspect that that's on the Transform suite. Maybe you can discuss whether you view this as a strategic product fit to Transform.
Yeah. Referral management is the cornerstone of healthcare, for sure, is the electronic record and how those core and patient demographics work. But we all know in all healthcare markets, the passing of a patient from one health facility or one doctor or one organization to another and doing that in a seamless, well-orchestrated fashion is something that's high profile within healthcare systems. Strata was definitely an early adopter into that space and has extremely powerful and entrenched solutions running throughout Canada and the U.K. and in the U.S. that demonstrate what it can do. Our expectations are that as organizations wind down their EHR initiatives and those things, that they'll start looking on the peripheral for solutions. And that's what we offer our peripheral solutions, right? And referral management fits right in. In the U.K., they've recently set up these things called ICB, which are these regional-based groups.
That's the market that we've traditionally sold things like our SHREWD product sets and our S12 product sets into. It's not hospitals. It's not trusts. It's a government entity that monitors this stuff. Those ICBs will be responsible for connectivity within their regions. The SHREWD product already shows a connected view of those environments. We already have SHREWD data sitting within the Transform platform and many of our implementations. I'm sorry, Strata information in our SHREWD platform. In some of our implementations where Strata is installed in those areas, it's a great demonstration of what it can do. The two teams know each other, and our expectation is that we continue down that path, and it leads to revenue.
It will take us a little while to get all the dots connected and things working there, but our hope is that that leads to some growth, definitely in the U.K. marketplace as being an area where we think we still can get a lot of growth of the Strata solution. We still think there's growth in Canada as well. But U.K., I think, is a big area where we think we can get some good growth. Strata is a leading product in that area, and we still got a very small implementation base there.
Very helpful. And then lastly for me, perhaps, I mean, my understanding is that both of these acquisitions were running approximately around break-even, and you referenced that EBITDA margins could take a little bit of a dip as they kind of come in initially. Do you have a sense of an updated number in terms of the R&D synergies that can be realized, I guess, both from prior acquisitions before these two and then with these two in the fold?
We definitely think there's some R&D synergies that can be done. I'm not going to put any dollars on it. We've modeled it, but you never know until you actually get deep into it. They're still fresh. But we're working on how we get synergies into both of those product sets to do that. They're also natural growth products. So a lot of the growth will take care of the margins itself, I think, to some degrees, but we'll work on both sides of that equation to get them into the metrics. And we have plans for both of them to get there. So these things don't happen overnight there, but we wouldn't have done the acquisitions if we didn't think we could. And we're pretty comfortable we can. And it's not going to happen overnight, but it's not going to be a huge amount of time either.
Appreciate the color. I'll pass the line .
Thanks, Gavin. The next question comes from Doug Taylor of Canaccord Genuity. Doug, please go ahead.
Yes. Thank you. Good morning and congrats on another solid quarter. I'm going to follow up Gavin's questions with a couple more, maybe bigger picture questions, and I'll start with the overall growth rate. You've just now, with Strata and MedCurrent, added almost 30% to your ARR base. You've been very consistent in recent years of delivering kind of mid-teens, I'll say, organic ARR growth. Is there anything, as you fold these two acquisitions into the mix, is there anything preventing you from continuing to deliver organically at that level for the VitalHub organization at large?
Yeah. I think we've been pretty transparent that we always felt that we work on a Rule of 40 type of scenario. We always thought the top-line number would be difficult to sustain as we got bigger as an organization, but we thought the bottom line could increase. So I do think we are trending to a little bit more of these 12, 28 company or 10, 30 companies as we start getting approaching that 100 million revenue mark and our ARR gets towards that 100 million revenue mark. Some of our acquisitions aren't meant to grow and produce more on the bottom line, and it puts a lot more pressure on those growth assets to sustain that growth to cover for those other base markets. But we still think a 28, 12 is still a powerful, great company, and we're there.
But I think we've been pretty transparent to everyone all the way through there that we expected that to happen. And you'll probably see more is leaning towards that type of number.
Okay. And then, so focusing on the margin profile then, I mean, first of all, before I ask another question about MedCurrent and Strata, would you say that the organic business before that, you feel you had that optimized to your satisfaction delivering 28% EBITDA margin, or is there more work to do with the, I'll say, the organic business, but with the operations that you had before a couple of months ago?
Yeah. There's always work to do. If we get an asset that's producing one year but not producing another year and then not producing another year again, we've got to cover that off by moving people around or moving people out, right, or look at ways to cut some costs down on that scenario in those scenarios, right, but I still don't think we could fully have loaded up on those cost synergies. There's still some to make on those areas, and we continue to make it, so yeah, I wouldn't model this that it's just getting to our levels is just going to be based on Strata and MedCurrent alone. It's going to be a combination on how we share resources across the entire organization to get to these numbers, right, so it's sort of how we look at things.
And then one final question for me, just to put maybe a finer point on the discussion around the synergies, the cost synergies at least, but also the growth synergies around MedCurrent and Strata. Historically, you talked about a playbook that allowed you to get the assets that you were buying, regardless of their starting profitability profile, to 20% plus EBITDA margins over a period of 12 months or soon thereafter. Is there anything, as we think about Strata and MedCurrent, you think we should take into consideration or preventing you from delivering that kind of margin expansion in this scenario?
No. I think it meets our criteria, and we have plans based on forecasts and areas that we think, where we start crossing these companies into the rest of the organizations that we can get to those numbers.
Thank you very much.
Thanks, Doug. Next question today comes from Gabriel Leung of Beacon Securities. Gabriel, please go ahead.
Morning. Thanks for taking my questions. Just a couple of quick follow-ups. Dan, just given the size of Strata, and I guess you got MedCurrent in there as well, would you say that there might be a pause on some of the M&A activity as you integrate these two acquisitions into the businesses?
Yeah. It's going to be busy to go get these things going. But if there's an acquisition out there and it makes sense and it's a strategic fit, we're going to move on it, and there's still stuff in play. The worst case is we delay, depending on how it is, if it's making money already or break-even, we can just leave it standing for a little bit as we digest it. But we're not going to just move away and not get an acquisition that makes sense just because we're busy. So there's still stuff in play. There's going to be work on integrating these organizations. But we've known these two organizations for a long time. We're comfortable with them. They're both excited to be part of us from a management perspective. They were both mostly owned by outside investors.
We don't really have founder-based scenarios or so forth. The group is excited to be part of this team, and we really think these integrations will go fast and comfortable.
Gotcha. Thanks for that. And I know on the M&A pipeline, it's obviously still at record levels and full. Would you say there's been any change in terms of the asking valuations or the breadth of competitors buying for these acquisition targets? And then as a follow-up to that as well, the Strata acquisition, the seller took quite a bit of stock, at least relative to historical acquisitions you've done. I'm curious if on a go-forward basis, using your paper is one of the you'll be using your paper more, I guess, for future transactions.
Yeah. This is a scenario that their primary shareholder was a high-profile U.S.-based PE firm that really has strong ties to the healthcare market on an international basis, and it was a really knowledgeable PE firm, so it was a pleasure to deal with them. It was a group that I've known for a long time from a PE firm going back into my work in the Boston area going back into the early 2000s, so it had some visibility into it, and they wanted to become part of the ride here to a degree, right, so they looked at taking some of the paper as part of this. At least that's the way it was communicated to us, or they thought this thing was going to go up, but it was communicated to us the way that they would like to.
And the paper was available, and it was. I think they're a pretty good partner to have along here for future things. And they've already referred us to a couple of companies that they know of that we thought would be a good fit relative to other scenarios. So it's a good partnership, and we were happy to get them as a shareholder.
Gotcha. Thanks for that.
Thanks, Gabriel. Your next question comes from Adhir Kadve of Eight Capital . Adhir, please go ahead.
Hey, guys. Morning. This is Kiran on for Adhir. Thanks for taking my questions. I just wanted to unpack what you're seeing with pro services this quarter, Dan. It seems a little light. Just wanted to know what the go-forward is there?
Q3 is always a light quarter for services work. Our staff is on holidays, and our customer staffs are on holidays during the summer months. So trying to get volumes up during the summertime is often challenging, right? So especially in the international marketplace, they get lots of holiday seasons, and especially in the government like NHS. So trying to keep projects moving summertime and towards the end of December are very challenging in what we do. So it's more of a seasonal thing. And different product mixes produce different services mix. Some of our product sets don't necessarily have a big implementation cycle that goes with it and don't expect to get a lot. And other products do got a big implementation cycle. So services can always be a mixed that and perpetual licenses and hardware are the three areas that aren't as predictable as other things.
We know what our backlog of services is, but just depending on what the product mix is and what the capacity is, services will always have this variable of moving around quarter to quarter and definitely during the summer months. But it's definitely not as predictable as recurring revenue as you move ahead.
I appreciate that. And that's my second here. I just wanted to touch on the size of Innovation Labs in Sri Lanka. Now, the team is growing rapidly. Are they taking on new functions as these acquisitions get larger? And maybe you can comment on the talent pool as well. Thanks. I'll leave it there.
Again, close to about 180 people there at this stage, and I do think we're getting to the level of where that will be a couple hundred people. Yeah. We're always adding new functions there, and one of the areas that we're actually doing some work on is in the finance area now where we're starting to be able to do some of the work in that geography, right? So we're seeing what we can do in those areas and have a little bit of some trials and experiments going there, that's going extremely well. So we're going to increase that up a little bit. So it's a good asset for us. They're really good. It's a great organization and always new function. And if you look at LinkedIn, you'll see that our VitalHub women's team won a very big rugby tournament, cricket tournament in the UK.
So if you ever go on LinkedIn and cover our VitalHub UK Sri Lanka-based organization and see their posts, you can get a feel for the culture and what that's all about. And we're proud of what they do and what they do for us and what they also do for the community in Sri Lanka. It brings a lot of smile to the rest of the VitalHub organization in terms of what their spirit and what their culture is about. And it's fun having them around.
Thanks very much, Kiran. The next question comes from Richard Baldry of Roth Capital. Richard, please go ahead.
Thanks. If you look sort of back two years into what your near-term run rate will be, it looks like you'll step up fairly shortly to sort of a CAD 80 million top line, CAD 20 million-CAD 25 million run rate Adjusted EBITDA. So almost a doubling of the business or better. Do you think in terms of structuring M&A going forward, now that the EBITDA is that high on a pretty recurring revenue base, you'd be more willing to use debt as one of the leverage functions for earnings?
Yeah, I think so. We're not a big fan of debt, but rates are coming down, and we're working to get that facility bigger. So yeah, we're not opposed to it. We've analyzed it, and we know where it sits, but we're also pretty careful at the same time, Rich. So yeah, we're definitely not against it.
Last for me, your Adjusted EBITDA margins are approaching 30%, so very healthy. It's sort of unusual to see a software company with sales and marketing in a single-digit %. You've gotten a lot of leverage there. To what degree, if you spent more on that, do you think you could push organic growth, or do you feel like there's just a natural adoption curve and that would be pushing on a string to make that number go higher?
It's one of the good things and one of the bad things of dealing in government healthcare is, yeah, it's not like it's this huge TAM and throw more salespeople, throw more marketing, and you got this whizbang that's going to go sell a ton more. It's relationships. It's getting into the fabric of government. It's getting into the fabric of an area, and it's getting them to believe in something and moving things around. I do think we can push the envelope a little bit more on marketing and sales and just branding of what our offering is done, and it's conversations I've had with our sales teams and our market teams in the last few days with Strata and MedCurrent and adding that to everybody else.
We've really accumulated a very comprehensive suite of solutions that we think are over and beyond what a lot of internationally based organizations have in one single entity. And how do we bring that all together from a narrative a little bit more effectively? And how do we brand that offering as a VitalHub brand and move that forward? So that's some stuff that you could see coming in the not-too-distant future in terms of how we go to market and what we do. And we are adding a little bit more into the sales and marketing leverage-based world, but we don't think it needs a ton of more people in that market. It maybe needs a little bit more education, more branding, and more of some of the other stuff, but not that.
Great. Thanks.
Thanks very much, Richard. There are no further questions at this time. I'll hand the call back to you, Dan, for your closing remarks.
Yeah. Thanks for joining, guys. And hey, we are where we are now, and we're continuing to keep moving forward in all of our different directions. And we're busy absorbing MedCurrent and Strata at this point, but we're excited by those two acquisitions and excited what that does to add to our engine. And the engine keeps going. And again, it's just having the belief that we're taking these two organizations and, as we've done before, is getting them into the fabric of what we're all about and to the metrics of what we're about. So that's really where our focus is. And I think our focus is for the quarter, and we're looking forward to getting the year-end behind us and getting these two companies into our financials that you'll see early next year and see what the impact is of those companies into what we're doing.
But in the meantime, I know the analysts and a lot of the larger fund managers reach out to us on a regular basis, and we're always around. And we plan to do some face-to-face over the next little while, and we're looking forward to seeing some of you. And that's it.
Thanks, everyone. That now concludes today's earnings conference call. Have a great day.
Thank you.