Good morning, ladies and gentlemen, and welcome to Vitalhub's Q3 2022 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. I would now like to turn the conference over to Graham Farrell, Investor Relations Officer. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to Vitalhub's quarterly conference call to discuss the company's financial results for the third quarter of 2022. This call will cover Vitalhub's financial and operating results for the third quarter ended September 30th, 2022. Following our prepared remarks, we will open the conference call to a question-and-answer session. Our call today will be led by Vitalhub's Chief Executive Officer, Dan Matlow, along with the company's Chief Financial Officer, Brian Goffenberg. Before we begin our formal remarks, I would like to remind everyone that some of the statements on this conference call may be forward-looking statements. Forward-looking statements may include but are not necessarily limited to financial projections or other statements of the company's plans, objectives, expectations, or intentions. These matters involve certain risks and uncertainties.
Company's actual results may differ significantly from those projected or suggested by any forward-looking statements due to a variety of factors, which are discussed in detail in our SEDAR filings. I will now hand the call over to Brian Goffenberg. Please go ahead, Brian.
Thank you. Good morning, everybody, and thank you for taking the time out of your Friday morning to join us here today. Vitalhub is pleased to report another solid quarter as the company continues to hit its objectives for 2022. The business has maintained its trajectory that has been evident since the start of 2022, driven by both organic growth and accretive acquisitions. I'll now run through the highlights in the quarter before passing it over to Dan. Total revenue for Q3 2022 came in at CAD 9.8 million, compared to CAD 6.6 million in Q3 2021, an increase of CAD 3.2 million or 48%. Revenue for the nine months ended September 30th, 2022 was CAD 28.7 million as compared to CAD 17.7 million for the same period last year, an increase of almost CAD 11 million or 62%.
The company experienced a minor year-over-year foreign exchange headwind of approximately about CAD 265,000 in the quarter due to weaker British pound versus the Canadian dollar. Revenue from term licenses, maintenance, and support in Q3 2022 was CAD 7.7 million compared to CAD 5.5 million in Q3 2021, an increase of CAD 2.2 million or 40%. The increase in term license maintenance support revenue is primarily attributable to new customer contracts and acquisitions completed. For the nine-month period ended September 30th, 2022, total revenue from this segment was CAD 20.6 million compared to CAD 14 million, an increase of CAD 6.6 million or 48%. Revenue from perpetual software licenses in Q3 2022 was CAD 204,000 compared to CAD 328,000 in Q3 2021, a decrease of CAD 124,000 or 38%.
For the nine-month period ended September 30th, 2022, revenue was CAD 3.1 million compared to CAD 900 ,000 in the same period last year. This represents an increase of CAD 2.2 million or 244%. Revenue from professional services and hardware in Q3 2022 totaled CAD 1.9 million compared to CAD 800 ,000 in Q3 2021, an increase of 1.1 million or 132%. This increase is the result of timing differences in delivery of hardware and implementation of our software solutions. Revenue for the nine-month period ended September 30th, 2022, was CAD 4.9 million compared to the same period last year of 2.9 million, an increase of CAD 2.1 million or 72%.
Annual recurring revenue or ARR at the end of Q3 2022 was CAD 30.1 million, representing a decrease of CAD 252 ,000 on a quarter-over-quarter basis. The decrease was due to the currency headwind of CAD 1.1 million that the company experienced in the quarter. The company's true measure of ARR did organically increase by CAD 851,000 . Gross profit as a percentage of revenue in Q3 2022 was 80% compared to 82% in Q3 2021. For the nine months ended September 30th, 2022, gross profit as a percentage of revenue was 82% compared to 79% for the same period last year. Operating expenses in Q3 2022 totaled CAD 6.1 million compared to CAD 4.8 million in Q3 2021, an increase of CAD 1.3 million or 28%.
For the nine months period ended September 30th, 2022, operating expenses totaled CAD 17.8 million compared to CAD 12.2 million in the same period last year. This is an increase of CAD 5.6 million or 46%. The year-over-year increases are directly attributable to acquisitions made throughout 2022 while we continue to work through full-scale integration. Net income in Q3 2022 was CAD 41 ,000 compared to a net loss of CAD 576 ,000 in Q3 2021, an increase of CAD 617 ,000 or 107%.
For the nine-month period ended September 30th, 2022, net income was CAD 1.6 million compared to a net loss of CAD 1.3 million, an increase of CAD 2.9 million or 215%. EBITDA for Q3 2022 was CAD 1.4 million compared to EBITDA of CAD 189 ,000 in Q3 2021, an improvement of CAD 1.2 million or 635%. For the nine months ended September 30th, 2022, EBITDA was CAD 4.8 million as compared to CAD 645 ,000 for the same period last year, an increase of CAD 4.1 million or 641%, sorry. The increase is attributable to several factors, including an increase in revenues of 62% and continued synergies gained from acquisitions.
Adjusted EBITDA in Q3 2022 was CAD 2.2 million compared to CAD 1.3 million in Q3 2021, an increase of CAD 900 ,000 or 68%. For the nine months ended September 30th, 2022, adjusted EBITDA was CAD 7.1 million compared to CAD 3.2 million for the same period, an increase of CAD 3.8 million or 121%. Cash flow from operations before changes in working capital for the nine months September 30th, 2022 was CAD 5.3 million compared to CAD 1.4 million for the same period last year, an increase of CAD 3.9 million or 278%. Cash on hand at September 30th, 2022 was CAD 36 million compared to CAD 16.3 million at December 31, 2021.
The substantial increase in cash was primarily driven by a new revolving facility loan from Scotiabank and the proceeds from a bought deal in April 2022. With that, I'd like to hand the call over to Dan for an update on the business.
Thanks. Sorry. Thanks, Brian. Just a few comments to add to that. I think it's pretty self-explanatory. Our summer quarter, you know, is where healthcare IT selling to the government. Traditionally, it is our weakest quarter, although I think we performed pretty well in that quarter. I think as we explained, we had some lower one-time perpetual license deals in the quarter. They were definitely lower and as to be expected in our world. Corresponding with that would be the hardware that really comes from the Intouch platform. The services revenue helped alleviate some of that gap in the quarter, and that was primarily led by our Solicitor General project, which kicked off in the quarter.
We're starting to see services revenue, which we expect to continue in a pretty consistent basis for the next while off in that particular project. We're there. We also have the full quarter of Hicom in the quarter. It was almost full quarter. Last quarter was just a little light of that, but it was this quarter. As we mentioned, you know, some headwinds with our U.K. currency. I think we talked about that on our last call and so forth. We have a natural hedge for our U.K. currency with terms of cost. The real number to look at from our perspective is the adjusted EBITDA number, which added pretty nicely at CAD 2.2 million for the quarter and continues to grow with it. We also added nicely on our recurring revenue.
We consistently are hitting above the CAD 800,000 recurring level of new organic growth, and we did that again in Q3 with the addition of another CAD 850,000 recurring. We had some good uplifts from our transforming base product set in the U.K., which continues to add deals considerably, and we're expecting those deals to continue on a consistent fashion. We think, you know, we're sitting there at CAD 2.2 million of adjusted EBITDA. We don't have the CDS acquisition into the numbers yet. Those will come in next quarter. As we reported on that acquisition, that organization is pretty profitable, as it sits already, and we do expect those numbers to get added to our adjusted EBITDA on a go-forward basis.
The ADI acquisition we completed is a break-even based acquisition, a small acquisition, so we don't expect anything considerable to come out of that in the near future. We do view that as a solution or technology-based pretty strategic acquisition, and we do feel in the future that we will be able to sell that as part of our Intouch platform and other platforms on a go-forward basis. We were very excited to be able to get that technology set. It was something on our roadmap that we wanted to build, but we just accelerated that product set considerably with the ADI acquisition. The CDS acquisition, we think is already starting to bear fruit in the Australian marketplace.
We got some great opportunities in Australia that we expect to continue in the next little while. You know, our adjusted EBITDA is running at a CAD 10 million-CAD 11 million clip right now, you know, when you add the CDS acquisition into the equation on a regular basis. We're continuing to do that. We're adding more recurring on a regular basis. We're trying to control costs. We think we're starting to get to the levels where we like to see where we're generating cash on a pretty consistent basis. I think I mentioned we're in our best position we've ever been from a cash generation perspective. We're starting to get to that level. We're still sitting on significant cash on hand.
We renegotiated our Bank of Nova Scotia line subsequently to the quarter, and we paid off that line subsequent to the quarter as you saw in the announcements to do that. That debt overhang isn't there anymore. We're still sitting on several cash. We're generating cash. We plan to continue to, you know, look at M&A. We still got opportunities that are there, although we're gonna be careful that on each one that we do on a pricing perspective to make sure we're being pretty careful with our cash at this point. That's where we're at. We would like to turn it over for any questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. If you would like to withdraw your request, please press star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any key. One moment please for your first question. Your first question comes from the line of Christian Sgro from Eight Capital. Please go ahead.
Hey, good morning, and thanks for taking my questions. The first question I wanted to ask. Hi, Dan, and hey, Brian. The first question, I'll dig into M&A, more backward-looking on this one, just the CDS acquisition in Australia, one of the larger acquisitions, you know, this past year. Could you just talk through, you unpacked a little bit of it, but some of the rationale there, you know, how that increases your footprint in Australia and then some of the cross-sell opportunities that you see in the region.
Yeah. It's primarily aligned to our TREAT product business, which is our go-to product in the community health agency space in Canada. We've researched that Australian marketplace pretty considerably, and there are some vendors that have a Canadian footprint that have gone into Australia recently, and we've been beating those vendors out on RFPs and tenders in the Canadian marketplace. Australia is a market that we think we can get into with that TREAT product set. The CDS product set is a lighter weight version of our community agency space, but it doesn't have the ability to go to those bigger base organizations where TREAT is predominantly set for. CDS brings us a whole team that understands that whole space, and they've been looking. They haven't been able to go upstream with something more powerful.
Now they have something more powerful. We know the competitive landscape there pretty well. It's a great acquisition for us. It gives us people. It gives us a great little business right there. We can still go after those smaller base organizations with their product. It's been continuously growing. It's a growing business, and it's producing some pretty good cash out of its operations right now. We got an operation in Australia out of the box for our, you know, our community agency business, which we like.
Okay. That's helpful. For my second question, I'll turn back to Canada, and the EHR solution and traction here. Sounds like the Solicitor General contract is moving well and on schedule. Maybe if there's any color you could share on progress there and how that's progressing into the new year. I'll also poke into Nova Scotia as well. I think the last update is that one's, you know, been slow to progress, but if we see any traction there and then anything else you share on Canada.
I'll talk about both of those projects. The SoGen product did get kicked off in the quarter and we did start to recognize a little bit of recurring, not much of it, but a little bit in the ARR number. It didn't come into the revenue number, but a little bit probably did. The ARR number, a little bit of that CAD 850 is SoGen. We still got the most, the lion's share of it, which will still come in in the first part, you know, the first half of next year or towards the maybe throughout the entire year, but I think in the early part, a big chunk of it. We did start generating professional services. There is a lot of product that we need to build or extension to get that working.
It is meant, it is positioned for the correctional services sector. That work has begun. We're getting paid for that work, and you'll see that coming through in our services number. On the Nova Scotia business, we're actively in build mode for what they call the My Account project, which is a portal which will allow income assistance residents of the province of Nova Scotia to apply for their income assistance and get their income assistance payments through the portal system. That's always been the bulk of that project. Our intent is to go live with that product Q1, Q2 of next year, where that revenue should start to come in on the ARR perspective. It stopped for a while during COVID.
It started before COVID, it stopped during COVID, and now it's back in pretty active mode, in high-profile mode. We're hoping that will lead to some significant revenue towards the middle-ish to end of next year and probably through the year after. That project is progressing.
Perfect. Thanks for the update, and I'll pass the line here. Thanks, guys.
All right. Thanks, Christian.
Thank you. Your next question comes from the line of Daniel Rosenberg from Paradigm Capital. Please go ahead.
Thanks. Good morning, Dan and Brian. My first question-
Morning.
Good morning.
Morning. Hello?
Presenters, I think we lost his line. Let's move on to the next question.
Sure.
Your next question comes from the line of Gavin Fairweather from Cormark. Please go ahead.
Wanted to start out just on the U.K. sales environment. Continued headlines around, you know, the operating metrics continuing to be, you know, challenged in that market. In the past, what's been a tailwind for you. Curious how, you know, you think this busier sales period is gonna shake out kind of across Q4 and Q1, and what you're hearing on kind of budgets and grants given that kind of backdrop for the NHS.
You know, we're going through our budget and our forecasting scenario with our U.K. group for next year. They still feel, you know, pretty bullish in terms of where their pipeline sits and where those things all come together. You know, we got a lot of different product sets in that particular market set, so if one group doesn't come through, others will. You know, we're starting to see, for example, we're starting to see uplift from our MCAP product, which we didn't do anything during the COVID version. We used to do a lot of work with audits in that product set before COVID, but we couldn't get into hospitals, but we're starting to see that particular product set starting to pick up in the U.K. marketplace.
We still feel, you know, pretty bullish, although we're, you know, gonna be selectively careful in that particular market. I think it's still bullish. You know, any sector healthcare is somewhat insulated from these macro-based worlds. There's still a lot of work that's needed to digitize, and there's still a huge backlog of work and patients in that market and across the world, to be exact. Healthcare is somewhat insulated from macro environments. Time will tell in terms of where those budgets sit, and Q1 will be a good indicator. You know, I don't think we will anticipate a Q1 like we had last year, but Q1 is still traditionally a pretty good quarter for us. We'll see what happens as we approach the year-end.
There, we know there's a lot of projects that people are trying to get over the finish line there, so.
That's great. Maybe just building on Christian's question around the Australia market, I mean, you touched on the potential for TREAT in that market. I'm curious how you view, you know, penetrating that market with some of your patient flow and operational visibility tools. Do you think you can, you know, kind of hire in sales and grow that organically? Or are you really out kind of shopping for, you know, some patient flow platforms in that market to be able to increase penetration there?
We already have about 10 or so implementations in Australia. Within those 10, Gavin, are some pretty high-profile implementations that have done it in a pretty significant fashion, you know.
Okay.
We have a deal cooking with a new build of a new hospital there, which we believe we're gonna get, although the revenue won't come in for a while 'cause they're building that hospital. They've gone, they're going through and it's part of the new build, and Intouch has traditionally done that in the patient flow world. Part of new builds will put the Intouch platform in along with it. We've got a good penetration level in Australia. We got really good references there. I think we do need some feet on the street there. We've been handling it through U.K., with people flying over there. There's a little bit of people there that we inherited through the Jayex, which we really support people.
Now that we have the CDS offices and a senior team there that also has some experience in terms of these guys have come from a bigger corporate background before, and we think they provide some pretty good leadership. We think we can, you know, we think with U.K. guidance, maybe add some people there or work with people in the future to do that. At least we have a footprint there to some degree to help us go forward with it.
That's helpful. Obviously it's been a busy year, you know, on the M&A front. Should we be expecting kind of a pause while you take some time and integrate? Or, you know, are you still continuing to see some pretty active results?
I'd like to think that we can still continue to do that. We've got some stuff on the go still. You know, it is. We do need a little bit of breathing room. We do some integration here. I think we've done 15-ish of these things and, you know, it's getting a little crazy. Although we've got a pretty good engine, and I think we've done a great job to go do it. We've got the facilities to do it. If there's a good deal out there, we're gonna do it. It needs to be a good deal. We're gonna, you know, we need to be careful, as we always have been. We'll. We're continuously looking, we're continuously doing things, and we'll do those deals.
You know, I think we're absorbing our acquisitions pretty good. We'd like to continue to do them. You know, we're a little bit more careful about what's going on here with us, but we're not stopping.
Just lastly from me, you know, you've always been pretty conservative on the balance sheet. In your prepared remarks, though, you're talking about the expanded EBITDA base of the company. You know, you're now producing pretty meaningful and predictable kind of free cash flow. I guess I'm curious, you know, whether at the margin that's shifting your comfort level with leverage and using that sponsorship facility which you have in place.
It, we have it there, it's in place. We still think we're generating more than enough cash. It's nine-year amortization on that particular line. Yeah, the rates keep going up, but it's not gonna strangle us on covenants. We will have the ability to use it. Although that being said, you know, we still got significant cash and we're starting to get into being able to start producing off of our cash, along with our cash to do a fair amount of the acquisition. We'll see how it goes. It's there. If there's a really good synergistic deal that makes sense and we need to use it, we will. We're gonna be pretty careful with it, for sure.
That's it for me. Thanks so much.
Thanks.
Thank you. Your next question comes from the line of Gabriel Leung from Beacon Securities. Please go ahead.
Good morning, and, thanks for taking my questions. Two things-
Good morning.
Hi there. Dan, just going back to Australia for a second. Do you just based on sort of your pipeline of M&A that you've got in the region, you know, do you have that level of confidence that you might be able to achieve, you know, market share penetration in Australia similar to what you have in the U.K.? Organically, you know, do you get a sense in speaking with, you know, the potential customers out there that there's the same, you know, urgency to digitize, you know, healthcare operations in Australia as there is in the U.K.?
They're different markets, right? Australia has a little more similarity to the Canadian marketplace. It's provincially or state-based healthcare, so you need to go to that country as you would in Canada, province by province. There's different drivers in a province where U.K. has a national system with NHS, which creates a little bit of a different dynamic when you go into it. We don't see the penetration level of the patient flow type of products in Australia like we do in the U.K. There is opportunity there for sure. It's probably a little bit of a slower market in terms of adoption and how things work. I think that's just driven because of the provincial nature versus the national nature of what it does there. Yeah, we think we can be a player in Australia.
Will it grow at the same speed that the U.K. is? Probably not, but it doesn't need to. It just needs to add. We're not, you know, relative to what we're doing, if we can just keep moving in that marketplace, it will grow. We know in all of our marketplace that things start growing when you start getting customers and they start talking to each other and things start happening, and they tend to buy what their neighbors buy. That's our goal in Australia. We got a good opportunity. We got a footprint to do that. We're also starting to see some uptick in Canada finally on the U.K. product. Both those markets, I think Canada and Australia were affected by COVID way more than the U.K. was, in terms of buying things.
I think the U.K. bought more during COVID than Canada and Australia. That's what we're seeing. We are seeing those markets, starting to look at to buy things again with COVID behind us.
Gotcha. Thanks for that. Just one other thing. You know, are you know, I know you talked a bit about sort of prudent cost management in your preamble, but are you seeing any sort of wage inflation tailwinds that might impact your services margin line or any other operating expense lines on the P&L?
Yeah. The big chunk of our P&L is wages and, you know, yeah, I think there is inflationary pressure to some degree on wages increase. We're going through that scenario right now. We're also seeing in the backdrop of that, you know, less supply and demand in our sector with layoffs and so forth. I do think we got a very loyal, you know, staff in our organizations and, I think, you know, I think we offer pretty fair compensation and we'll continue to do that. It could be a little higher than normally, but not to the degree I think that other inflationary, you know, pressures would indicate there. There's some degree of that.
That's definitely offset by our strategy to, you know, use our offshore or Mumbai resources as effectively as we can. To do that, I do think the Mumbai scenario definitely offsets the other scenario, you know, by a large margin there.
As a follow-on, notwithstanding, you know, fluctuations on the perpetual license side, you know, how do we think about EBITDA margins progressing, call it over the next 12 months, 18 months? What's a good, I guess, mid-term target for us to think about?
You know, we're sitting at kind of 20%-22% on the quarter. We anticipate that number to increase. You know, we've got CDS to add to there and, you know, every time we add more recurring, you know, the gross margins there. We do anticipate that, you know, that should be growing on a little by little basis quarter-over-quarter. You know, that's what we're focused on, and that's what we're trying to do.
Gotcha. Thanks for the feedback and, congrats on the progress.
Thanks.
Thank you. Your next question comes from the line of Daniel Rosenberg from Paradigm Capital. Please go ahead.
Welcome back, Daniel.
Hi. Thanks. Can you hear me now okay?
Yeah, we do. We do.
Yes.
Okay, good. Just one quick follow-up on the cash flow. I was just wondering how you think about R&D and developing kind of more internal IP versus acquiring it. Now that you're just kind of running and self-sustaining and able to have the resources to do that if you choose. I'm just curious how you think about the balance of investing in new products, new features.
I think we have been, you know, on a somewhat basis, always, you know, building on our IP. Like, the TREAT product set is a good example of that. I think it we got a little bit more tenure with that. I guess we're, you know, six years into it. That product has evolved tremendously with it, and we've also taken functionalities and features from, you know, for example, our vCare and FQOD acquisitions that we made. I mean, we've taken workflow and functionality from that, and we've moved it into our TREAT-based product. There's work going on with the Hicom product set that we just took over. There's some really good clinical lab abilities, and there's an amazing form engine based facility.
There's work that's gonna be done in terms of integrating that into the TREAT product, and there's some other components that are there. We look at each one of those acquisitions, and we take components, and we accelerate development by bringing components out of there into other product sets that make necessary moves. We'd like customers to pay for some of that development all the way through there, but the products are definitely evolving and we're looking at doing the work that's necessary. All of our products have roadmaps. They're all working on roadmaps. There's innovation that's being worked on there. We got a pretty large R&D group, right? Our Colombo group is.
I was just out there last week or the week before, and, you know, we got 100-something people there, and there's some really bright technology people that are doing some really great work for us out there. You know, there's innovation going on in this company for sure.
Okay. Appreciate that. Just lastly on, you know, while small, the ADI Health acquisition struck me as quite interesting, you know, given the price, and it seemed like you got a lot of bang for your buck, given it's so complementary and comes with customers and technology. I was just wondering, you know, are you seeing more opportunities like this, or did this one just kind of maybe stand out from the current market in the type of valuations you're seeing?
I think ADI is a definite result of the, you know, where this sector is going, right? It was a high net worth VC-funded based business where the group didn't wanna go at it anymore. We said, "Hey, this is something we think we can take over, and we think we have the know-how and the development group to be able to do that." I don't think something like this would've came up probably a year and a half ago, in that economy. It's definitely corresponding to that. Are we looking for those initiatives? 100%. We'r
We'll do those type of initiatives if they make sense, and we're looking at those saying, you know, we'll see what happens as they go through. There are companies that are starting to get, you know, offside on their covenants and getting squeezed on financials, and there's not, you know, the cash isn't coming in there. If there's something there that is strategic, we don't wanna take over something that we're inheriting all those losses. We're really concentrated on that adjusted EBITDA number. Even though you might be able to get it for cheap, if it's gonna hit our P&L in- a negative fashion, that's not what we wanna do. We'll look at these things as they come at us, and if it's opportunistic we'll do it.
Okay, good to hear. Thanks for taking my questions.
Thank you.
Thank you. There are no further questions at this time. I'll be turning the call over back to Dan Matlow. Please proceed.
Yeah. I think, you know, we said everything, you know, that's there. As I said in our press release, we think we're in pretty good shape. The company, you know, we got ourselves into a good spot. We're generating cash. We're producing organic ARR. We're looking at some more M&A that comes in there, but we're just steady as she goes as we always have been here. We're just gonna just keep inching forward, and this is still a long-term game for us. We still think we got a lot of ways to go, and we're going through a pretty tough cycle on the stock right now. We think that the valuation right now, relatively even on an adjusted EBITDA or EBITDA perspective, it is, you know, not justifiable.
We're just keep on running the business as we always have, and we'll keep doing it. I'm always around if anyone has any questions afterwards, and we look forward. I guess we got a little bit of a break here till March, which we'll announce our year-end. You know, to everybody, get ready for the snow, and we'll speak to you later.
Thank you, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line. Have a great day.