Q2 2020 Gty Technology Holdings Inc Earnings Call

Thank you for standing by and welcome to the G. T Y Technology Holdings, Inc. Q2, 2020 earnings call.

At this time all participants are in a listen only mode.

After the speakers presentation, there will be a question and answer session to ask a question during the session you'll need to press star one on your telephone if you require any further assistance. Please press star zero.

I'd now like to hand, the conference over to Mr., Jon Cohen CFO. Please go ahead.

Thank you good morning, everyone.

Im John Kernan, GT wide CFO and I'd like to welcome you to our second quarter earnings conference call for 2020.

With me on today's call is TJ, Paris, GT wife CEO.

We will be presenting to slide on todays call and encourage you to view the presentation found on our website at Www Dot G T Y technology Dot com.

The presentation is located on the filings and reports page under the Investor Relations section of our website.

[noise]. Please note that our earnings release in quarterly report on form 10-Q are available on the DTY website at Www Dot GP why technology Dot com both contain additional information about our financial results.

Any forward looking statements we made in the earnings release for any that we may make during this call are based upon information that we believed to be true as of today.

Things up and change however, and actual results may differ materially from those projected or anticipated.

Please refer to our cautionary statements in the earnings release under the heading forward looking statements you should also refer to our SEC filings, including our most recent form 10-K, and our subsequent SEC filings for list of risk factors applicable to G. T y.

Including risks associated with Covance 19.

As you will hear and our comments today, the pandemic is impacting our business today and for an undetermined time into the future.

During the call we may refer to non-GAAP financial measures. If we believe they are useful to investors or if we believe it will help investors better understand our results or business trends.

You can see a reconciliation of our non-GAAP financial measures to their nearest comparable GAAP financial measure in exhibit two of the earnings release.

With that I'll now turn the call over TJ.

Good morning, and thank you all for joining us.

We're incredibly proud of the hard work that are DTY team leadership and board have devoted during the past three months in adapting to both coated and our customers needs. During these difficult times.

Our team is geared up quickly to working from home and I'm inspired by their dedication to continue drive to help governments modernize.

More than ever governments are feeling the pressure to work provide citizens with easy to use tools.

Gee why was formed with you tend to bring the top cloud technologies, the state and local governments with a focus on improving says his experience and creating a more streamlined back office.

We offer five core product lines, our back office solutions focused on providing value inefficiency.

In the areas of grant management.

Budgeting planning procurement and payment transactions are front office solutions, which center our permits permit discovery.

In virtually all paving interactions focus on making this is experience move and easy to use.

Citizens are demanding modern ways to interact with their governments.

We have over 6800 customers, representing every state and province in North America.

Our leadership team and business Ceos averaged seven to 25 years of leadership experience in the public sector.

Let's go over some highlights in the quarter.

John will provide some more financial detail in a few minutes.

Got revenues increased 35% from Q2 2019 at 38% year to date.

Operations of DTY continue to be streamline through a number of initiatives that led to a more than 3 million in quarterly savings.

And we continue to focus our efforts on the overall efficiency of the organization.

In Q2, we had or second highest bookings quarter.

Our sales teams continued to be effective working in selling remotely.

Our implementation teams are fully able to complete projects without being on site.

Throughout this pandemic, we it's been a continuous communication with our customers as the adjusted in the reality I'm pleased to say our customer retention is that an all time high.

Our covered response program introduced last quarter was designed to help public sector move quickly on the GP why solutions with minimal delaying cost.

The more than 375 program participants some have already decided to move onto our full solutions before the end of the program.

We will have a better read a conversion rates as the program moves into this next phase and a few months.

In summary, we've been successful reducing cost and improving our bookings, while ensuring our customers get the high support level support they need.

As you recall DTY season excellent market opportunity in public sector.

However, cobot is impacting your market and some positive and negative ways.

Our customers are facing headwinds due to revenue shortfalls.

And as they work through their impacted budgets, they faced challenges and how to deliver the same quality of service with less resources.

Government employees are working from home and having to figure out how to keep the government running effectively and efficiently.

Covance is challenged the public sector by highlighting the deficiencies that legacy systems facing they're not cloud enabled.

However, governments are expected to continue deliver services in this environment.

DTY brings together the leading solutions that will enable government technology into the club.

Gearing some examples of how our solutions are helping governments modernize.

GT wide budget solutions are being used to adjust budgets, the new reality of financial and resource shortages customers are looking for ways to make their budget process more nimble and transparent.

Issuing permits and making payments are very difficult for governments, who don't offer on file online solutions.

Our customers are quickly moving a permit crofters online while also providing multiple ways to pay for services through online payments or from kiosk that we deployed.

The service is working with our customers to provide enhanced grant tools that enable users to quickly find apply for him to see grant funding.

He said this is helping accelerate funding to those in the during the cold in 19 pandemic.

Government procurement teams are being asked to find savings anywhere they can and bonfires tools are being used to help our customers find savings in the sourcing process.

Just like in 2008, our customers are facing budget challenges in GT wise business solutions.

Focus on showing their customers the value of using our cloud solutions as they time and costs.

And now I'll turn it over to John to review our financial highlights.

Thanks TJ.

As.

TJ mentioned in his remarks.

We had a solid quarter and we believe we're on track for over 20% growth in 2020 as discussed in our last earnings call.

We experienced strong bookings in the quarter and believe we will continue to grow our business in this difficult environment.

We delivered over 3 million at quarterly cost reductions and reduced our cash for by more than 60% compared to Q1.

Okay.

Moving onto our financial results for the quarter.

Our GAAP revenue was 11.2 million in Q2 of 28, compared with 8.2 million in Q2 of 19 and increased 35%.

On a non-GAAP basis revenue was 11.3 million for Q2 of 20, compared with 9.9 million in Q2 of 19 and increased 14%.

A reconciliation between our GAAP and non-GAAP results is included in exhibit two of our press release.

We will provide a more detailed explanation of the change in revenue on a subsequent slot.

Turning to our operating expenses with our total non-GAAP operating expenses decreased by 3.2 million or 24% compared to Q1 to 20, driven primarily by the head count reductions, we announced last quarter.

We saw a decrease in sales and marketing expenses of 19% in the quarter largely due to lower travel expenses.

Our genie expenses decreased by 24% and our R&D expenses decreased by 31%.

Our second quarter 2020, GAAP operating loss narrowed to 7.8 million compared with 16.5 million in Q1 at 20.

Our second quarter non-GAAP operating loss decreased 2.8 million compared with 5.7 million in Q1 at 40 and improvement of 51% driven primarily by our restructuring efforts and cost reductions.

This quarter, we wanted to provide a little more color on the change in non-GAAP revenue.

As you can see in this chart.

Recurring revenue grew by 7% on a quarter over quarter basis.

And grew by 23% on a year over year basis.

Our service revenue can vary from quarter to quarter due to the timing of large projects and we expect professional services to decline as a percentage of revenue as our base of recurring revenue continues to grow.

Other revenue includes sale of kiosks and software license sales, which we also expect decline as a percentage of revenue overtime.

We expect to see our recurring revenue growing by nearly 30% for the year.

Sector services and other revenue will be essentially flat compared to 2019.

Our anticipated lower service and other revenue growth reflects our expectations of mix for services as we scale.

Our continued shift away from license sales and expect to delays in service delivery as a result at the pandemic.

Taking a look at our balance sheet. There are two areas I would like to discuss.

The first is the change in our receivables, which increased by 2.6 million this quarter driven by the timing of our renewal billing.

Which are higher in Q2 than in Q1.

We are experiencing some delays in collections due to the pandemic, but we don't see increased collection risk at this time.

The second area is a reduction of 1.2 million in our APN accruals in the quarter, which was primarily related to the payments we made against our restructuring accrual in Q2.

From a cash perspective, we started the quarter was 8.1 million in cash and ended with 6 million.

As announced last quarter, we received 3.1 million through the Paycheck protection program.

These funds allowed us to limit our headcount reductions and retaining more of a very talented workforce.

From an outflow perspective, our operating burn was roughly $2.4 million. We also paid out 1.4 million in severance.

1.1 million and Capex and software capitalization at $400000 interest in the quarter.

Based on our current view of sales activity, our ability to implement our products. The low churn rates, we have experienced to date and our cost reduction efforts. We believe we have sufficient cash carry us into 2021.

Turning to our 2020 outlook as I mentioned earlier, we still see the ability to grow by more than 20% 2020, as we discussed last quarter looking forward, we're seeing material reductions in the budget.

For our customers and as a result, we've adjusted our forecasted bookings accordingly in the second half of 2020.

We expect our revenue growth to be north of 20% for the year, but this reduction in our bookings forecast does reduce our cash inflows in the second half.

As a result, our cash flow expectations are closer to breakeven as we exit the year.

We remain focused on improving our operations, reducing our cash burn and driving profitable growth in the coming quarters.

I'd like to turn things back to TJ.

Thank you John.

Before we take your questions I want to give you some color from our business units.

We anticipate significant wins, particularly in our budgeting procurement and grants management solutions.

Bonfire, our procurement team had largest bookings quarter ever and added 42 new customers.

That will request in city base, keeping our payment solution are up 27% from the prior quarter.

And they've seen in over 1000 present increase in the use of their formed tools, which are being used for kobin related form requests like PB equipment.

The sales team at East business, our grants team has seen sales cycles improves to half their normal time.

Three times pipeline growth in the same period last year.

He said was welcome the number of new customers, including Calfire and expanded their relationship with the city of Los Angeles.

Other customers like the state of Arizona are now using Isa those products are rapidly deploy Colin funding.

Our budgeting team walk in a number of new customers such as the Metropolitan water District on Southern California.

In the city County, San Francisco.

Over the last quarter, we've seen significant part of our growth in the mid market due to our ability to rapidly deploy a number of our product solutions.

Governments are investing in GP, why cloud technologies to provide citizens with modern experiences and better back office solutions.

In summary, we posted 35% revenue growth hi bookings the new leadership team is making things happen.

Focused on profitable growth and efficient operations and customer retention and loyalty are at an all time high.

Could you I solutions had never been more valuable and on trend the climate remains difficult in forecasting cannot be precise although indicators point to revenue growth of over 20% and a continued movement towards cash flow positive.

I'd like to wrap up again by taking your customers our team and our board for their dedication as we roll up our sleeves and work our way through coated and economic impacts I couldn't ask for a better team.

Thank you and operator, please open the lines for questions.

I'd like to ask a question at this time. Please press star one on your telephone keypad. If you would like to draw your question Principality well pause for just a moment compiled acuity roster.

First question comes from Tyler Radke with Citi. Please go ahead.

Hey, Thanks, and good morning, guys hope you're doing well I wanted to just better understand kind of maybe some of that the dynamics from a you know quarterly progression and now that we're into August just what you're seeing.

In the demand environment, obviously, you know things of or not and that probably not quite open up as fast as you would have thought three months ago, but just curious from a demand perspective, and then maybe engagement level. If you notice any trends are signs of you know improving business activity.

As you exited Q2 and and headed into Q3.

Thanks, Tyler TJ here.

So we're keeping a close I was either a pipeline and activity like in our last slide but seems logical reason summary area.

We definitely are seeing are still a solid pipeline and activity going on out we don't think about the levels of would have been pretty Toby.

But I think the word we're using around Gd wise cautiously optimistic because we're seeing a enough activity and things going on that we feel pretty good and inbound and outbound or sales either really active we have seen quite a bit and increases in demo requests.

We're seeing I've been saying a lot of demos I've seen a lot of activity from our customers and interest in our products. So overall I'm feeling good about it.

But I would say I would continues we're cautiously optimistic.

Got it and then just on the cost side.

I I guess, obviously to you did talk about some cash headwinds is it related to weaker bookings in the second half.

But at the same time I'm sure you're trying to balance what remains a pretty interesting yeah.

Long term growth outlook on the health of this market. So what what are kind of the.

Signposts, so you're looking for a in terms of returning to maybe a more investment mode to God to hire more resources and really scale.

Scale up to to to drive that future growth because I imagine you know well 20% growth it is.

It is.

Encouraging it it's probably not what you're targeting longer term.

Yeah feature ill take this one.

So right now given the current environment.

As we said, we see the opportunity Grove I'm north of 20%, our current sales capacity would support growth higher than that but not as high as our originally anticipated growth rates with north of 40%.

So we're going to keep our eyes on the economy as we move forward and or if we start seeing some improvements we'll be making rational improvements to increase our sales capacity at that time.

Got it and then finally I'm just I wanted to ask you about the the payments business.

You know I know historically that has had sims and you know pretty.

<unk>, a robust seasonality, there, but but obviously that yeah, there's a number dynamics in impacting that business going forward, but just how should we be thinking about kind of that the growth and margin assumptions in that business you know for in the near term.

So.

This would have been in one of the seasonal high points for our payments business, but what we've seen in the marketplace is if you read the news a number of jurisdictions have delayed.

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Tax payments, so we saw some of that activity push.

We're also seeing some transactional activities basically go away you know they collect fees for tax he's going to Chicago. The airport as an example that volumes way down just given nobody's traveling these days so there's a two pronged impact on.

The payments business, one being kind of transactions that have gone away and then the other being trained transactions that have been deferred.

Good news from that if they impact whose is minor.

No not overall material to the to the payments business, but their seasonal pick up has been blunted a little bit in Q2.

And we're expecting as I said those payments that get deferred will pick those up again later in the year.

So we're keeping an eye on our payments business, Oh, we're still expecting growth in that space. This year.

Todd I think I'd like to as to your here that the one thing also that our entire registry when there's not completely based on their transactional business, we're seeing a transition over.

To some more subscription type business or pro suppression services and our kiosks are not all necessarily tied into just transactional business.

Okay. Thanks, guys.

Okay.

Once again, if you'd like to ask a question. Please press star one on your telephone.

Next question comes from Scott Berg with Needham.

Okay.

Hi, everyone. Congrats on the good quarter, thanks for taking my questions.

I guess is like start off with the guidance.

On my math suggests that for you to attain your 20% revenue growth on a pro forma basis with the that includes the pre existing businesses before the transaction closed last year.

Hey implies that you just have to hold your second quarter revenues flat over Q3 and in Q4.

No I know, there's some nuances in the business between some license and subscription revenues, but that seems to indicate that you're not likely to sign much if any new business in the second now that the right way to do read your guidance or is it just more about being conservative at a macro that remains uncertain.

Yes, sure your math is close but not quite we do ask this show some improvement certainly in our recurring revenue streams in the third and fourth quarter.

So as I mentioned in my remarks, we do see.

A growth rate for our recurring business of 30% closer to 30% for for the year. So yeah, we do still need to to book New business in the second half for us to achieve that target.

Alright, great helpful. And then from a follow up perspective, all of your implementation capabilities kind of run during this call been environments. I know you. It sounds like you've been able to adjust from a work from home or pivot to work from home environment yourselves, well, but have your customers being able to do the same that Oh has allowed you to work through.

Projects at an appropriate kids.

Hi, Scott TJ yeah.

For sure it really in the March there.

Everybody went home slow down for sure beginning of April or really getting their home systems up and running we saw probably the second week of April things start to really start picking up again people get back to work as we've been watching the professional services teams are the hours were delivering in the revenues generating a it's been good it's a little bit less.

The more used in the past recall that but overall I'd say that really pleased with the adapt how our teams have adopted and enter customers have adopted to those I think if I should point out that.

For coal that probably about 85 nights December implementations are being done remotely anyways.

So this is a small adjustment, it's mostly in our customer standpoint, and they've been pretty good job moving over to it.

A very good very helpful. Thanks for taking my questions. Congrats again.

Thank you think.

Once again, if you'd like to ask a question. Please press star one on your telephone.

And we do not have any telephone questions. At this time I will turn the call over to the presenters.

Well I just want to say, thank you very much for joining us today and to have a fantastic date, and we'll talk to you guys very soon.

Thanks.

And this concludes today's conference call you may now disconnect.

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