Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the G. T Y technology Holdings, saying Gee wage Q1 2020 earnings call.
At this time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
You asked a question. During this time you will need to press star one on your telephone keypad.
If you acquire any further assistance. Please press star zero. Thank you I would now like to hand, the conference over to your speaker today, John Kernan CFO of G. T Y Technology Holdings, Inc. Please go ahead Sir.
Thank you and good morning, everyone.
Incurred DTY CFO.
And I'd like to welcome you to our first quarter earnings conference call for 2020.
With me on today's call or TJ, Paris, citywide CEO and how are you GP wise Vice chairman.
Please note that our earnings release quarterly report on form 10-Q are available on the G. T y website.
Www Dot Gee why technology Dot com.
Oh contain additional information about our financial results.
During the call we may refer to non-GAAP financial measures. We believe they are useful to investors or if we believed to help investors better understand a result.
That's true.
You will find a reconciliation of these non-GAAP financial measures to the nearest.
GAAP measure exhibit to the earnings release.
Any forward looking statements, we made an earnings release or any of that we may make during this call based upon information we believed to be true as of today and should not be relied upon.
Any subsequent date.
These statements are subject to a variety of Brett.
Certainty and assumptions that may cause actual results could differ materially no stated or implied by the forward looking statement.
Please refer to our cautionary statements in the earnings release.
Heading forward looking statement.
You should also refer to our SEC filings, including our most recent form 10-K and form 10-Q.
Subsequent filings, we make with the FCC.
Information about the risk factors applicable to G T Y including risks associated with the covert 19 pandemic.
As you will hear in her comments this morning.
But 19 pandemic is impacting our business today.
And we expect it will.
Term in time into the future.
With that I'll now turn the call over the teacher.
Thank you John and thank you all for joining US. This morning, I hope everyone is safe and well.
Well that's changed significantly in the last few months DTY has moved to adapt to these changes quickly.
March Thirtyth I assumed the role as CEO.
Prior to that I was the C.O.G. wise margins revenue in either producing business class that got a company I found it over 20 years ago.
As head of Costco I valued a balanced approach the Soc consistent growth.
Profitability innovation.
The strong balance sheet within an environment that acknowledged the value of our greatest asset our team.
He's done a primary cornerstones I'm, bringing forward at that lead DTY.
Over the past year I've had the privilege to get to know the Ceos of our business units and we formed strong relationships I'm very pleased to have this experienced group of leaders as part of the team.
Is committed to working together.
Our Ceos average more than 15 years and the public sector and are passionate about the future G T y.
Craig Ross Euro Costco has been promoted the CEO about business.
We've also pointed dean apparel CEO Sherpa DTY COO.
Hi, Craig and David have more than 25 years of experience in the public sector in a long track record of running successful business operations.
We'd like to also recognize our board of directors and in particular, our founders no Green, Joe Tucci, and Harry you. This vision by six businesses units together over a year ago form G T y.
The board's many years of experience have provided us with wise counsel and they are in support of our cash focused business model.
As a brief primer GT why it was formed in February 29 team with the acquisition of six companies each with important cloud solutions for the public sector market.
These solutions include budgeting with Klaskin sure.
Ramps management with these seven.
Procurement management with bonfire, and permitting and permit discovery with open counter.
Did you watch product span across multiple verticals, including state local government.
Higher education.
He did well.
Care and not for profits.
The public sector is still behind on digital transformation and cloud technology adoption.
For me GT, why we saw great opportunity to provide cloud technology to this market.
By any measure the market is large and its early stages digital transformation and nothing has highlighted this more than covered 19.
And the preparedness of our customers.
Cloud based technologies are quick to deploy into high customer retention.
Our vision is to make GP wide the preeminent cloud vendor for the public sector.
I T T Y and within our business units are focused on adopting our offerings while simultaneously improving.
Our cash management.
Let's take a look at what's going on and then drilling to some of these stories.
For Q1, non-GAAP revenues were up 31% year over year to 11.6 million.
In mid March very quickly North America moved to working from home and GT why was able to swiftly adopt working remotely.
We were focused on the health and safety of our staff, we continue to work with our teams on their work environment.
We've increased the number of virtual team meeting and overall connection in communication with our team.
We don't foresee trade shows and conferences returning in 2020.
And our sales and marketing teams have a johnson quickly to create virtual conferences and webinars with our prospects.
In fact, our webinars are busier than ever.
Our implementations are being done remotely and have continued without delay.
This has been an abrupt change and I want to take a moment. Thank the G. T Y family for adopting so quickly a new environment.
Our staff is going to use a service our customers are the same high level of quality you have come to expect I'm very proud of you I T.
As I've mentioned earlier government organizations and their technology, we're not prepared for the ship to remote work and we've seen a number of prospects and I realize you need to modernize and this is a cloud solutions.
In some cases their systems are not available remotely and others bandwidth requirements to their on premise solutions have critical infrastructure.
To help with that's all five DTY business units have launched the G. T Y Cobot Emergency response program, where a number of G.D. white products are offered free for a few months to allow our customers to move quickly to solve their infrastructure problems and prevent interruption the government services.
More than ever this crisis, clearly underscores the need for government to move their functions into the cloud.
In mid March we start to see some of our prospects delay certain projects.
We saw some of our Q1 opportunities push their decision dates out.
We didn't see any cancellations and we're pleased that most the opportunities that we that were delayed will close in Q2.
We've also seen a number of escalations among certain customers as they raised to Haynes stimulus grants and monologue different budget priorities.
Cloud based software will be invaluable from public sector in terms of efficiency security transparency and having more advanced lower touched software to help governments operate.
We expect government offices will have a greater appreciation for the value of cloud solutions.
And we'll move up the timeframe for their digital transformations as a result of the current prices.
Currently, but so far in Q2, we're seeing a mix of deal delays and some acceleration in our business units.
Oh sure. These dynamics with you as it's a great view into how missed the polys are dealing with the new cobot demand as well as illustrates how did you see why products are part of the only working for public sector.
These examples also illustrate difficulty of providing guidance at this point in time.
There are so many moving parts and little in terms of standardized protocols across North America.
With that are permitting software, which sold by open counter.
We'll see some slow down given the lack of government ability or priority to issue permits looking forward, we're seeing differing planning strategies by our customers.
Some cities are reaching I'm wanting more products to help move permitting services online and some cities are cutting not all non essential products and services to prioritize jobs.
Prepayment software, which is sold by city base.
Some of our revenue is transaction based and we'll see some impact.
Government payment transactions are temporarily down due to factors associated with shutdown.
For example, San Francisco has delayed business tax deadlines.
If youre tickets marquee violations and a decline in taxi revenue.
Means transaction revenue will be delayed or in some cases lower until everyone were turns back to work.
As a standard city transactions return.
So should the city based revenue.
For the evergreens and some payments such as taxes, which dropped to be paid city made offers an online payment function I missed the polys in a safe cash lease options using ATM like kiosks.
Interestingly.
Much of the population still pay the cash enhance the cashew account or staff member at the City Hall.
With cold, but there is less desire to have cash exchange hands and we've seen heightened interest in our outdoor kiosks for citizens payment Nestle bills.
Just taxes package.
During the shutdown, we've adapted to be able to remotely ship and install these external pima kiosks, which enables cities and towns to receive payments, but don't need to open up the counter City Hall.
Moving to our procurement platform, which sold by bonfire.
Bonfires revenues were up in Q1, but the pace of new bucking have slowed down.
Procurement teams that weren't prepared have realized they need to move to a cloud platform.
Our cobot emergency response program, which is offering bonfire free for 90 days.
Has already been committed to buy more than 40 agencies. This includes the agency.
<unk> government agencies, K 12 minutes about all these health care with many more in the pipeline.
These new clients are ramping up quickly thanks to self service Onboarding tools like bonfire, cotton, which trains new users by a video quizzes and interactive guide.
Average time to first project is now within a week of training.
This is twice as fast as usual, which is important since cobot sites have an urgent need to get up and running.
We're seeing many encouraging signs in the acceleration.
For its public sector digital transformation driven by the urgency for the government to act on elements, such as covert 19 ramp and the need for cloud based revised budgets.
He said that our grants management software there has been a market increase in demand.
These are communicating with urgency realizing it's on them as opposed to the federal government make decisions regarding their funding.
Notably hundreds of state or local entities have contacted us for east of the software under the Covina Mercy response program.
Here are few examples from within the east of this business.
In a memo from one of the largest cities in the U.S. to its county offices, you called out that its quote heritage captured leverage secure funding to combat the covert 19 prices and tracking and he said this help identify federal state and philanthropic ramp opportunities unquote.
There are unique service to track the name of the funding agency, whether the money isn't in advance or claim reimbursement and whether the funds are subject to federal single audit.
Two other large states are doing the same state wide.
One is striking all had dollars on these service another is working for a turnkey cobot funding package to all state entities receiving money from the state.
You saw a large increase in demos in the back part of April and some fast track request for proposals.
We're also receiving notable inbound requests a team up with G. T Y from March Tech companies offer east of the as their government customers are also expressing urgent need for grant software.
Support Cobot stimulus short run times.
Lastly.
Traffic on Easter. This is website in April which includes virtual presentations stimulus oriented blog posts have more than doubled from Q1 levels.
Email open rates are up.
Got type virtual beating attendance is way up.
Our budgeting software grew nicely on balance.
Our midmarket team, it's finding prospects more willing to talk and we're experiencing a significant increase in our Webinars program participation.
The market seems more engaged in general as they focus on cloud based budgeting. So they can model alternative coated scenarios.
Number one focus for budgeting unit is to help customers revamp their budgets.
I'd like to 2008 recession budgeting was critically important as everyone focused on creating multiple scenario plans.
In total we've adopted by doing sales webinars virtual focused programs remote demos and accommodating panel customers still dependent on cash transactions as I mentioned earlier.
We can now remote ship install external payment kiosks.
Having conversations with highly engaged prospects and experiencing some general urgency from certain government offices expect many of the deals that were pushed on end of March will close in Q2.
Another early indicator is that so far churn rates look about where they've been historically.
We're working to keep as many renewals going as possible.
Customer success these are being proactive with our customers knowing that in some cases customers may wish to delay renewals.
Let's switch over to the operations and cash flow side of the business.
There are four cash based priorities were hyper focused on right now.
They are as follows first revenues.
Our models contemplate that some Q1 bookings what pushed to Q2.
We've anticipated lower Q3 bookings as governments adopt the having lower budgets, which may delay some projects.
We expect some of our customers using cobot response offering will decide to move on to our full subscriptions in the second half 2020.
For service delivery, so far we see minimal delayed implementation and the good news is that we're able to complete all of our implementations remotely.
Our churn rates are consistent with historical averages.
I'll have John cover the cash management and collections in his section of the call.
As we saw the effects of covert 19 in mid March.
With fleet cost cutting action by the end of the month, including layoffs are doing everything we could the keep as many stop as possible.
Most of our leadership team has been through jolting economic changes in the past sessions, the dot com crash 911, and the 2008 recession.
We are aware, a swift and de changes aimed at lowering variable costs, while protecting and boosting financial flexibility our key actions to make.
At the same time, we're in the business for the long game, we are working to ensure that we uphold our values with all of our stakeholders.
We know the hardship on our staff from jobs are lost.
Value the knowledge and experience of our team.
We've got a lot of options at our disposal to further reduce costs also being appreciated how important it is that we take care of our team members.
Working with our business unit leaders, we will be creative in our task of retaining talent all being diligent with costs.
I believe these two objectives can be neck, and do not have to be at odds ultimately one of our top objectives is to get the cash flow breakeven as quickly as possible.
And we aim to do this while respecting the values that are people bring to our company.
As I shared in my opening profitability in a strong balance sheet are among my management cornerstone priorities.
During the quarter, we increased our financial flexibility reduced fixed and variable expenses and strengthened our liquidity position.
As we look at our recurring revenue booking backlog and strength of our business units. We believe we're on solid footing for the year.
We believe revenue growth for GTT wise still likely even within those pandemics, albeit at lower levels than originally anticipated.
And with some level recovery factor into the back half of the year, you'll keep you updated throughout the year.
John will now review our cost reduction activity, our Q1 financials as well as our foreign planning assumptions onto you John.
Thanks TJ.
As TJ mentioned in his remarks, we're withdrawing our guidance for 2020 as a result of the uncertainties associated with cobot 19, and the resulting economic slowdown.
However, our current expectations are that we can continue to grow our business in this difficult environment.
Our models show revenue growth of 10% and our worst case scenario in greater than 20% and our current base scenario.
Combined with our recent cost reductions, we see significant improvement in our EBITDA and cash flow performance this year.
And our base scenario, we expect to achieve positive cash flow in the second half of the year, excluding severance costs.
Moving onto our financial results for the quarter.
Our GAAP revenue was 11.3 million in Q1 of 20, compared with 8 million in Q1 of 19.
Increase of 42%.
On a non-GAAP basis revenue was 11.6 million for Q1 of 20, compared with 8.8 million in Q1 of 19.
From a non-GAAP revenue perspective, we saw year over year revenue growth of 31% for the first quarter.
That's a slightly below our original expectations for the quarter as we did see some delays and deals closing and service delivery and the early days of the crisis.
Turning now to our operating expenses, we saw our total GAAP operating expenses and non-GAAP operating expenses decreased by 53% and increased by 2%, respectively compared to Q4 of 19.
Non-GAAP sales and marketing expenses were up by 19% driven by a full quarter impact of our investments and incremental sales and marketing resources that we added in Q4.
Our DNA expenses decreased by 6% and our R&D expenses decreased by 2%.
Our first quarter 2020, GAAP operating loss narrowed to 16.5 million compared with 42.6 million in Q4 2019.
Our first quarter non-GAAP operating loss increased slightly to 5.7 million compared with 5.4 million in Q4, 19, driven primarily by higher operating expenses.
As TJ referenced we took immediate actions to lower our cost base as a result of the pandemic.
Taking a look at our operating expenses are total GAAP operating expenses were 23.3 million for Q1 of 20 and included a restructuring charge of 3.5 million.
Restructuring charge is entirely people related costs associated with a 10% reduction in our workforce.
Of course, we reduced our discretionary spending wherever we could to minimize the impact on our employees.
However, given that salaries and benefits represent about 70% of our spend it was still a material impact on our employee base.
Going forward, we expect our total quarterly expenses to be lower by more than 3 million as a result of these changes.
From a cash perspective, we started the quarter with $8.4 million ended with 8.1 million in cash.
Announced during the quarter, we raised 11.5 million as a result of a new debt financing arrangement managed by you'd be S. O'connor LLC.
From a cash outflow perspective, total spend was $11.8 million with operating burn a $7 million onetime outflows of $3.3 million and outflows for capital and other of 1.5 million.
From a collection standpoint, we're seeing some delays associated with payment or we don't see increased risk associated with bad debts at this time.
In late April in early May we received 3.2 million in loans from the Paycheck protection program, which has allowed us to minimize the workforce reductions for a 181 U.S. employees.
In addition to these loans were looking into other stimulus programs in the U.S. and Canada as well as investigating other sources of liquidity to bolster our position.
Well provide updates on these efforts in the coming quarter.
Based on our current view of sales activity.
Our ability to implement our products remotely.
Low churn rates, we've experienced a day.
And our cost reduction efforts.
<unk> segment for us.
<unk> reported 4.1 million and non gap revenue, representing 26% growth year over year, and 5% quarter over quarter.
Sherpa are budgeting solution that specializes in large enterprise clients reported 1.7 million and non gap revenue for the first quarter.
Given the size and complexity of the deals for Sherpa revenue can vary from quarter to quarter due to service delivery timing.
Sherpa grew 89% year on year and decrease by 4% quarter on quarter.
Going forward, <unk> and sure, but together as our budgeting segment.
As we brought the two groups together and we're going to market in a holistic way.
Bonfire or procurement platform reported 1.7 million and non got revenue representing growth of 56% year on year.
Easter service or grants management platform report at 1.5 million and non gap revenue representing growth 17% year on year.
Open counter are permitting platform reported $600000 non gap revenue represented growth of 16% year on year.
We brought on a brand new sales team for open countering two four and as expected for seeing the business returned to growth this quarter.
City base or payments platform reported 2 million nongaap revenue representing growth of 11% year on year.
As I mentioned earlier, we still see the ability to grow and 2020.
But we are seeing our sales cycles and implementation timelines extend as a result of the pandemic.
Due to the economic and social effects of covert 19, any uncertainty on future demand.
Leave it's prudent to withdraw the 2020 financial guidance, we provided earlier in the first quarter.
We've provided some additional color on our current expectations for 2020 and will continue to update you as we move through the year.
Before we open up the call for questions I want a summarized key take away as from our call.
First off we performed well and Q1 with Nongaap revenue growth the 31%.
Secondly, given our news streamlined organization and other cost reduction efforts, we expect to be cash flow positive and the second half of 2020 based on our current base model excluding severance costs.
Given the nature of our business model, we have other levers available to us further reduce costs. If we see further revenue reductions in the coming months.
The challenges associated with working during the pandemic has highlighted some key strengths associated with our technology, including secure access from anywhere for our customers and the ability for our team to implement operate and maintain our solutions remotely.
It's also putting a spotlight on the value of our offerings for applications, such as budgeting grants management as well as efficiently and safely handling payments.
Or team of six founders is committed aligned and well experienced and periods of economic string.
Lastly, we worked to provide you with the data were operating with it this time and the factors leading us to withdraw our guidance.
At the same time, we've provided some additional color on our current expectations for 2020 and will continue to update you as we move through the year.
What's that operator, let's open up the line for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone keypad.
To withdraw your question press the pound are hash key your first question comes from Scott Berg from Nita.
Your line is open.
[noise], Hi, T.H. on and <unk> my questions and congratulated quarter.
I guess I have two or three here Gee, let's start with the emergency care program interesting like how you are giving away.
Product for free the short term, which doesn't get to be a good Legion school well what do you have for assumptions Rouse sticky this of these potential customers going forward.
Hey, Scott nice to join us they.
Yeah. That's a good question is.
ASCII each of the this this user I for this program.
As we are going through it the first and foremost I think we're highly focused on getting the 300 people signed up for it so far deployed.
Working on it and using the same process that we use were <unk> appliances, and making sure that we do a good job running providing value.
In terms of sticking this we've been modeling different numbers until the period comes up where the free period as it could be a little hard to predict that.
My husband and give the actual numbers, but we definitely expect a number of these will convert over.
Got it helpful. And then I don't know if T.J. or John wants to take this question, but in terms of the the the cost restructuring scan the operating model that will generate free cash flows from the second half excluding any restructuring costs.
Oh, you guys looking at kind of longer term growth in the business and the bit ability to invest properly.
I certainly understand the colder driven environment creates a kind of a wider growth rage here, we'll call tend to 20% or or or more but as you look out at 21 22 does that pretty much at all you know restrict your ability to accelerate that growth rate as the current macro issues subsides.
Yeah.
This is John.
Yeah, I would say given our current remote.
We should be able to grow faster than are expected 2028 k. freight.
You know.
When we're beyond code.
You know we have sufficient sales capacity.
We're kind of hair cutting productivity this year.
<unk>.
We have good team as sales people. So you can do.
Certainly more.
20, 25%.
In our case.
Got it helpful. And then last question for me is on Legion activity. I know this was a sector that there's a lotta Legion that's based off of different conferences and trade shows and T.J. you mentioned that a number of them have been cancelled this year.
I agree very little if any will likely be held how do you replace that you talked about some of the virtual opportunities that you're having you think that can actually replaced the same number of opportunities that you look out over the next two to four quarters.
Yeah, that's I think bought them to be tracking those numbers are happening limiting over too. It's not just like a virtual webinars. You know, obviously are alright, <unk> or grants company's services.
Really busy right now so we're going to be deployed some of our sale stop over there to help them out. We are also rolled up products like apart from sales for us to do some.
I'm more improved e. marketing, so there's a quite a few things that we're putting it around to to say it'll completely replaced what's going on that's hard to tell you until we see the numbers come in I I will tell you the trade shows and conferences.
I've been traditionally a good source in place to meet people, but they don't a lot of opportunities are they're part of what feeds and.
Great. That's all I have Thanksgiving for taking my questions.
Hi, Scott Scott.
Again, if you like to ask a question. Please press Taiwan on your telephone keypad again.
Star one on your telephone Keypad next question comes from Tyler Rocky from City, you're line is helping.
Hey, Thanks, a lot and good morning, everybody, maybe we just start in trying to understand.
The the puts and takes around you know the base case, obviously I understand that you're removing guidance given given the uncertainty, but if we were just assume that that you were to a fall you know revenue growth was stuff onto that 10, 20% range <unk>, maybe help us understand what the the bigger drivers of that <unk>.
Shin from the initial range, whereas it is it projects that are getting pushed into next year is it you know maybe lower consumption revenue on us and things like you know payments are in in in the permitting business or is that you know or reduction in in some of the.
You know workforce that that you've done maybe just help us to understand what what the bigger factor in in driving that lower revisionists.
Yeah. So.
<unk> right now if we look at kind of our experience since the pandemic started.
We've got about.
Two two weeks of experience under our belt.
I'd say, though.
For the primary driver is.
Things stretching from fill cycle perspective, so we're we're experiencing things taking longer.
The good news is where we can still <unk> business right. So we're still booking deals, but the logistics of getting you have closed is taking longer.
So I would say that that would be.
One of the primary drivers.
You mentioned transaction part of our business, we are seeing lower volumes certainly during that time frame. That's also a factor take less material and kind of the the longer sales cycle on them on the new book.
I don't believe it kind of reductions are a major factor there was some impact on our sales and marketing teams.
<unk>.
But.
I still have sufficient sales capacity.
Freely the timing another factor we see <unk>.
A couple quarters potential impact on our customers budget.
So we're expecting.
Our customers be under some pressure they deal with.
Impact on their spending associated with with Cove, it as well as <unk>.
It was there differing tax payments in like so we're.
That's a pretty big variable in our mind.
Factored into our model later that year.
Great and then you mentioned you you did make some headcount adjustments to to lower your cost base. This this this quarter, what where where those headcount adjustments made and what's kinda. Your your revise hiring plan or you are going to move.
Back to to Onboarding people and next quarter or how how are you thinking about just the.
Ration of of hiring through the year.
Yeah. So that's the first party watching the headcount reductions were spread across the functions. If you will we had some in our cost to console sales and marketing R. and D. and D.N.A., it's pretty well distributed across functions.
Little heavier on some of the R. and D. rolls, but not materially different.
From our perspective, we have no hiring in our plans for the remainder of the year.
You know Oh, certainly revise that if we see better growth in the opportunity to put some more capacity in place from a sales marketing perspective.
Current plans are no higher.
Yeah, I think just add to that Tyler <unk>.
We're really focused on routine the stock we've got me a lot of amazing talent and we want to come through this with the stuff. We got right now so if for any reason we had to look at reducing some of our costs, we'd be looking at alternatives. The money people go.
So we aren't actually put together or something options, if that were to happen and.
We are we're currently modeling and we don't need to do anything further.
<unk>.
Fair enough further questions I'll tend to call back over to T.J.
He just wants to equip thank you everyone for joining us today, and I haven't break Dave's face safe talkie as soon.
[noise], ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now just connect.
Okay.
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Oh.
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