Q3 conference call transcript - formal commentsThink Research Corporation
Third Quarter 2023 Results
Conference Call Transcript
Date: Monday, November 27, 2023
Time: 8:30 AM ET
Speakers: Sachin Aggarwal
Chief Executive Officer
John Hayes
Chief Financial Officer
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Operator:
Welcome to the Think Research Corporation Third Quarter 2023 Results Conference Call.
As a reminder, all participants are in listen-only mode and the conference is being recorded. After the
presentation, there will be an opportunity to ask questions. To join the question queue, you may press
star, then one on your telephone keypad. Should you need assistance during the conference call, you
may signal an Operator by pressing star, then zero.
I would now like to turn the conference over to Sachin Aggarwal, Chief Executive Officer of Think
Research. Please go ahead.
Sachin Aggarwal:
Thank you, Operator, and good day to everyone who’s joining us this morning. Also joining me on the
call is our CFO, John Hayes, who is going to review the financial results in more detail after I discuss
some operational achievements during the third quarter of 2023.
Strength in our software and data division delivered a solid 71% organic growth in ARR coming out of
our major platforms, which continues to be a really major focus of operations and now represents more
than 55% of total revenue. That being said, unusual and unexpected delays and cancellations within
the clinical research division have disrupted the rapid process improvements that we’d reported in the
previous three quarters and have set back this forward progress in the current period. We have acted
quickly to mitigate the impacts in these particular divisions while continuing to focus on growing our
high margin recurring revenue operations in order to regain our earnings momentum.
Now before I talk in more detail about our operational results, I just want to briefly touch base on what
we’re becoming and where we think we have some major long term opportunities.
With our ongoing product development, we have found ourselves very well positioned to help
constrained healthcare systems everywhere to improve patient access to high quality healthcare
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services where and when they’re needed. As an industry leader in delivering knowledge-based digital
health software and data solutions, our evidence-based healthcare solutions support clinical decision
making, improve access to services, enable practitioners to gain better capabilities and knowledge, and
help to standardize care in order to facilitate better healthcare outcomes. The Company has gathered a
significant amount of data by building its repository of knowledge through its digital solutions
platforms and group of companies. With this data, we strive to be more essential to our clients and
their clinicians every day. This is reflected in our recent performance in the software and data division,
in our pipeline and, I think more importantly, in the speed at which our pipeline is converted.
Our customer base typically includes enterprise clients, hospitals, large pharmacy networks, health
regions, healthcare professionals, right up to and including provincial or state governments. Think’s
data and software division licenses its solutions to around 16,000 facilities for more than 331,000
primary care, acute care and long term care doctors, nurses and pharmacists that rely on the software
content and data that we provide to support their practices. Over 55% of our software and data
revenue is recurring driven by an increasing level of SAAS licensing, especially over the past few
quarters.
We expect to recurring revenue to grow at a faster rate than total revenue for the foreseeable future.
For example, in Q3 our ARR grew organically by 71% compared to last year. The bottom line, at least
from Think’s perspective, is that over 3 million patients and residents annually receive better care due
to the essential data that Think produces, manages and delivers. Think also operates a clinical services
division which includes primary care clinics and medical clinics providing private pay elective surgeries.
In addition, the Company collects and manages pharmaceutical and clinical trials data in its clinical
research division. Although clinical research revenue is typically contracted and scheduled well in
advance, we sometimes suffer from individual study outcomes that are beyond our control, such as
when a study sponsor is not able to formulate their drug on the agreed timeline or a sponsor gathers
all the data they need from a smaller number of patients than originally planned.
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For Q3, we had a significant decline in revenue in this division caused by trial study delays and a few
cancellations. This surprised us. In response, during the quarter we rationalized our services by closing
our unprofitable St. Louis facility and are continuing to actively manage our expenses in this line of
business. Notwithstanding the results in Q3, we have a very strong backlog which continues to give us
confidence into the future.
In the first nine months of 2023, the key drivers of revenue growth were clinical software and a data
SAAS agreement with the Province of Nova Scotia, and midsized Pharmapod and LMS contracts. In
our clinical services division, we have focused on operational rationalization since the beginning of the
fiscal year to offset the impact of Ozempic on some of our revenue streams. During the reporting
quarter, we also began to rationalize clinical research operations by closing that facility in St. Louis.
We continue to leverage our talent and technology to deliver a robust and proven SAAS-based digital
front door solution to the market, as well as a new SAAS-based learning management system. We’re
also gaining significant market traction with our Pharmapod solution, which provides medication safety
to thousands of pharmacies and patients in North America. In addition, we’re beginning to make
progress towards bringing third party software providers and third party healthcare practitioners onto
our key platforms, and that came to fruition in Nova Scotia. We’ve also started to work in more
elements of artificial intelligence in all of our software and data offerings. We see these initiatives as
ways to extend the solution and add more value to our relationships. Our platform partners are very
eager to gain reach to over 331,000 clinicians.
Now I’d like to invite John Hayes, our CFO, to review the financial results in detail for the quarter and
year-to-date. After reviewing the financials, I’m going to conclude with a bit of an outlook which offers
some thoughts on how we plan to evolve (inaudible 07:21) and data service for clinicians.
Over to you, John.
John Hayes:
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Thanks, Sachin. Today’s results, along with all of our risk disclosures, can be found in our MD&A and
financial statements, which we posted to SEDAR earlier this morning.
Before I outline our results, I’d like to address the covenant breaches that we noted in our MD&A,
financial statements and press release. We are actively addressing the breaches with our lenders and
they have been supportive. Our lending partners see that Think has shown strong earnings momentum
over the past several quarters and we’re making good progress towards our goal of consistent,
positive cash flows, and that the downturn in Q3 was concentrated primarily in our clinical research
business. Overall, we expect that our revenues will continue to grow, although not in a straight line, so
we don’t forecast that every quarter will be better than the one before, and as this revenue grows, we
expect that our cost base will grow at a slower rate, leading to increasing financial returns over time.
We also believe that the predictability of our revenue is likely to improve because a larger portion of
our data and software revenue will be recurring SAAS revenue, and that’s a lot easier to forecast.
Now let’s turn to our revenue and business line contributions. For Q3 2023, we reported revenue of
$19.2 million, an increase of $0.8 million or 4% compared to $18.4 million for the third quarter of
2022. Year-to-date revenue of $63.5 million was up $6.5 million or 11% from $57 million in the first
nine months of the prior year. The sequential $3.3 million or 15% decline in revenue for Q3 of this year
compared to $22.5 million in Q2 related to a $3.2 million decline in Think’s clinical research business,
which was the result of Think’s study sponsor clients rescheduling and cancelling contracts during the
quarter. These delays and cancellations reflect specific study decisions by the study sponsors and they
were not related to Think’s operations.
Let’s focus now on what Management believes is the key valuation driver for this business. Annual
recurring revenue reached $24.6 million at the end of September, representing growth of 71%
compared to $14.4 million at the end of September last year. This growth in ARR stemmed primarily
from signing the minimum five-year SAAS agreement with the Province of Nova Scotia along with a
steady stream of multi-year SAAS contracts. Think’s net retention rate for ARR, defined as the total of
retained revenue from existing customers over a one-year period, was 105% on September 30. We’re
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really encouraged that Think had essentially negative churn on a dollar comparison basis over the prior
year.
Gross profit of $8.7 million for Q3 was flat compared to $8.7 million in Q3 last year, while year-to-date
gross profit of $31.8 million represents an increase of $4.6 million or 17% compared to gross profit of
$27.2 million in the year-to-date in the prior year. Gross profit was down 26% compared to the $11.7
million recorded in the immediately preceding quarter. The flat year-over-year performance and the
quarter-over-quarter decline reflects the high fixed cost nature of cost of sales in Think’s clinical
research business.
Gross margin of 45% in Q3 represents a decrease from 47% in Q3 2022, again due to the high fixed
costs in the Company’s clinical research business. Gross margin was 50% year-to-date, an increase of
48% in the first nine months of 2022 due to stronger performance in the first six months of this year.
Turning now to expenses, operating expenses declined to $13.9 million in Q3 and $42.1 million in the
year-to-date this year, representing a decrease of 1% and 5% compared to the prior year periods. As a
percentage of revenue, operating expenses declined to 73% and 66% in the three and nine months
ended September 30 this year, compared to 77% and 78% in the prior year periods due primarily to
the cost optimization program executed by the Company, partially offset by additional investments in
the development and marketing of Think’s flagship DFD and LMS products.
One of the cost saving measures Think implemented this quarter was to forego a review of the
quarterly financial statements by Think’s auditors at EY. In the current capital markets environment,
this is a cost savings that some other TSXV companies use and it makes sense for Think to do so also.
We continue to work closely with EY on our disclosures and they’ve been very helpful to us as ongoing
audit clients, despite not being engaged to review the quarter.
Adjusted EBITDA declined to a loss of $1.5 million for Q3 compared to an Adjusted EBITDA loss of
$0.7 million for Q3 in the previous year. Adjusted EBITDA for the current year-to-date was $0.9
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million, an improvement of $3.5 million over the Adjusted EBITDA loss of $2.6 million in the
comparative year-to-date period last year. The quarterly decline compared to 2022 was primarily due
to the increased costs incurred in servicing new software and data services engagements while costs
associated with the clinical research line of business remained relatively level despite lower revenue.
The improvements compared to the prior year-to-date were due primarily to improvements in revenue
combined with operating cost reductions. The resulting EBITDA margin was a loss of 8% in Q3 and a
profit of 1% in the year-to-date this year, compared to losses of 4% in Q3 last year and 4% in the first
nine months of 2022.
Net loss was $3.8 million for Q3 and $9.7 million for year-to-date 2023, compared to $6.5 million and
$20.1 million for the comparable periods in the prior year. The decrease in net loss when compared to
last year is primarily due to a combination of higher revenue, lower operating costs, and lower
acquisition and restructuring costs partially offset by higher financing costs.
Looking now at our balance sheet, at the end of Q3 this year, the Company had a working capital
deficiency of $40.4 million as compared to a working capital deficiency of $39.3 million on December
31, 2022. Of this deficiency on September 30 this year, $27.8 million relates to current long term debt
owed to the Bank of Nova Scotia and BD-Capital that has a term ending in September 2024. Because
these balances become due in less than a year, they’re now classified as current rather than long term,
the same as our reporting in Q3 last year. Both the Bank of Nova Scotia and BD-Capital waived Think’s
covenant breaches up to the end of September.
Management expects that the Company will continue to have breaches of some of our covenants over
the short term, including in the month of October, and we’re going to continue to work with our
lenders to seek waivers for breaches in the normal course for future periods, if required, and we expect
our lenders to continue to be supportive of the Company. However, as a result of these covenant
concerns, the Company’s lenders have the option to demand repayment of their debt. Although
Management does not expect the Company’s lenders to take this action, this possibility raises doubt
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about the Company’s ability to continue as a going concern, but we have repeated that disclosure in
our financial statements and MD&A, as we did at the end of Q2.
To address these concerns, earlier this month on November 10, Think entered into an agreement with
BD-Capital to provide up to an additional $5 million of convertible debt under its $25 million facility.
Think is also actively engaging in discussions with our lenders regarding waivers for covenant
concerns, as well as amendments to future covenants and also maintaining focus on our previously
announced cost optimization program. Although we can’t guarantee a positive outcome, based on
preliminary conversations with Think’s lenders and past experience, Management is optimistic for a
successful resolution to these issues.
With that, I will turn the call back to Sachin.
Sachin Aggarwal:
All right, thank you, John.
Increasingly, Think’s software and data solutions are being seen as essential to constrained healthcare
systems to improve patient access to high quality health services where and when they’re needed. Our
pipeline is full of these types of opportunities and we are at late stages, in some cases very late stages,
of conversion on several. Our sales pipeline and backlog have never been stronger.
We’re very excited about the visibility into our software and data division revenue, which is currently
over 55% of total revenue. As we continue to scale this side of our business, we gain earnings leverage
because these are our highest margin revenue streams as well.
I’d like to just remind investors of what we’re focusing on and why we expect to gain more leverage in
our software and data business model. First, we’re adding more users to current licenses by promoting
adoption and usage. Year-to-date, we’ve increased our user base by more than 10%. There’s a lot of
room for us to increase users and usage of already deployed solutions, and as we add more users, our
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solutions become more essential to those licensees, which gives us pricing power and creates
switching barriers.
Here are some of the other things that are happening right now. Our new digital front door solutions
are solving urgent challenges for patient access to adequate health services, including primary care
and emergency care by health networks and governments. Our learning management systems are
being used to fill urgent knowledge and learning gaps through all lines of healthcare delivery, from
hospitals to pharmacies, and to help standardize care across delivery geographies for our clients. Our
connectivity solutions are helping patients get better referrals and practitioners to better manage their
practices. Pharmapod is adding hundreds of pharmacies quarterly to keep patients safe from
medication errors. Finally, with the user base now exceeding 331,000 clinicians, we believe that direct
user licensing could generate entirely new revenue streams.
We’re actively engaged with third party software and service providers to leverage our platform to add
valuable features to these 331,000 and growing clinicians. Third parties are going live on our platform
now and our pipeline of potential service and software partners is growing. You should expect some
forthcoming announcements that will really bring this to life.
As we transform into a solutions-based organization focused on essential clinician data, we are excited
with our annual growth rates and our path to profitability. Last quarter, we mentioned that due to the
nature of some of our lines of business, we expect quarterly variances in performance due to project
work that will show up in our results as delays or accelerations in programs. That did hit us in Q3.
We’re actively addressing these concerns and these occurrences and we’ve begun to rationalize lower
performing and lumpier, less predictable lines of business.
In response to the delays and cancellations in the clinical research line of business, we rationalized our
operations by closing a facility in St. Louis. Additionally in the clinical services line of business, we
closed a non-performing clinic and sold off another one. We didn’t announce that asset sale because,
frankly, it’s not meaningful enough to our operations.
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As a Management Team, we are committed to right-sizing our business, maximizing our margins,
optimizing our costs, and focusing on growing the highest quality revenue streams available where we
have competitive superiority. We have a track record of making hard decisions, and I’ll bring your
attention back to the time when we gained more than $11.3 million of synergies from acquisitions and
cost optimizations. This quarter, we also gained around $2 million of cost savings by closing our St.
Louis clinical research operation. We will continue to focus and optimize going forward, even as we
dramatically grow revenue streams in the software and data division.
To conclude, despite the lumpiness in revenue streams in our clinical research division, we’re extremely
excited about the prospects for Think over the coming quarters as we return to being a perpetually
Adjusted EBITDA-positive, high growth company driven primarily by both steady and step function
organic growth in our high margin recurring revenue software and data solutions division.
That concludes our prepared remarks, and Operator, please open up the line for questions.