Q1 2021 Gty Technology Holdings Inc Earnings Call

Good day, Thank you for standing by and welcome to G. T Y Q1 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session for.

I ask a question during the session you will need the press star one of your telephone if you require any further assistance. Please press star zero.

I'll now hand, the conference over to Mr. John Curran G C Y C F O.

Thank you and good afternoon, everyone.

I'm, John Curran G T Y CFO and I'd like to welcome you to our first quarter 2021 earnings Conference call.

With me on today's call, it's T J, Paris G T Y C E O.

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

Please note that our earnings release is also available on the G. T Y website and contains.

Additional information about our financial results.

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

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

Please refer to our cautionary statements and 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 a list of risk factors applicable to G. T y.

<unk> risks associated with COVID-19.

And you will hear and our comments 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 for business trends.

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

With that I'll turn the call over to T J.

Thank you John Good afternoon, and thank you all for joining us for those that are new the G. T Y Tty provides cloud based platforms and how government organizations transform the way the engaged citizens and manage their operations.

While the common perception of the government lags behind private sector GQ I was for them based on the founders vision that governments are starting to accelerate the digital transformation.

And before the pandemic governments from moving away from heavy monolithic on Prem solutions to modern cloud and SaaS applications and this trend has gotten even stronger in the wake of last year.

State and local governments modernization represents a massive opportunity for natus cloud and SaaS based platforms.

Here's how we're going about it we're providing our best of breed cloud technologies through five product suites that cover the front and back offices of state and local governments.

Included in our primary target sectors, our missile policies and county colleges and universities and K 12 school districts public.

Public health care agencies public utilities, like water and power transportation and transit state governments and federal agencies.

Today, we have what I'd call a good start 1800 clients and over 360 employees across our business units with both of these numbers increasing weekly as we start leaning into growth.

To add some color to the size of our opportunity in 2020, one state and local government and the U S. As expected. The spent just under 120 billion and I T.

The 7% higher than 2020 of healthy underlying growth rate.

As our customers are starting to modernize their infrastructure G. T Y is well positioned to capture the opportunity that the transition to the cloud represents.

Let me unpack that a bit for you.

Before I describe the product suites and sells its important to understand the GT why products have three broad characteristics that position us for success for.

They are of cloud and largely SaaS. This means highly recurring revenue streams with the remarkably low churn.

After the multiyear contracts strong gross margins and predictable cash flows.

Second each of our product suites for created specifically for governments unique requirements and are considered leaders and their respective functional areas.

This leaves the high win rates against the older Gov Tech competitors as well as against horizontal players and often struggled to meet compliance for government specific feature requirements.

Finally combine our product suite and allow us to access the full spectrum of sizes and segments of our target customers from 10000 to $1 million and higher price points and across our eight sub sectors from small and the <unk> all the way up the large state governments and federal agencies.

So let's meet the products and business units first is bonfire and next generation sourcing and procurement platform.

Second is city base, our payment platform and the health centralize the citizen interface of a government agency.

And third E. Cydnus provides of grant management platform that helps governments the on top of one of the most important sources of funding.

Fourth open counter streamlines government permitting which is one of the major touch points with citizens and finally rounding out of product suites of our budgeting platform companies cost and Sherpa, which we collectively call G. T Y budget budgeting of the core and mission critical financial activity of all levels of government.

Combined these product suites Guild G T y and strong starting position to capture the opportunity ahead.

With that context for the newcomers and the G T Y let's turn to Q1.

2021 is off to a strong start as we delivered solid first quarter results that exceeded guidance, even as we navigate through a challenging economic environment first.

The first and most importantly, we saw strong are our and recurring growth rates, which shows the continued momentum and government transformation.

We added 65, new clients, which includes large customers like the state of North Dakota and wins across all eight of our target sectors.

In all this was one of our highest Q1 bookings to date, despite the pre stimulus uncertainty facing your customers with respect to their 2021 budgets.

As I'll touch on when I get to my outlook. There are several short and long term tailwind sorry of this market and we saw evidence of that already in Q1.

First our customer base Q1 churn rates remained low and happy and tie which arguably are the most important bellwethers for of SaaS company.

Second our expansion pipeline across our 800 clients and our new client pipeline are growing faster than anticipated, which gives us confidence and our projected performance the guidance for Q2 as John will share. Shortly finally, we are seeing a recurring revenue grow very well and payment and transaction volumes have recently started to improve additional positive.

The signs that our clients and their constituents, maybe seeing the light at the end of the tunnel.

Turning to our financial position I am proud to say that our actions in 2020 to strengthen our financial base continue to provide lift and Q1, we saw strong year over year improvements and gross profit and operating loss and while Q1 was cash flow negative as expected. We believe our balance sheet is strong and provides a good base and wished increase of sales and.

<unk> and R&D investments.

Turning to our outlook.

As I mentioned earlier, we believe there of both short and long term factors that will provide tailwind for growth starting in the second half of 2021 and coming into the full effect in 2020 two.

Specifically, we're seeing momentum build as more Americans are vaccinated and the economy opens up.

Furthermore, the American rescue Pie and act of 'twenty 'twenty. One includes provision that will help state and local municipalities close a bunch of gaps as well as provide additional funds for investments and technologies that provide long term efficiencies.

On a longer timeframe government staff and Cio's are expecting some form of hybrid remote work to continue on a more or less permanent basis, which will provide a constant sense of urgency to transition platforms and applications into the cloud as much as possible.

In response to these trends, we intend to begin scaling our go to market teams and of targeted fashion to help us cash does anticipate of ryzen demand.

Additionally, we intend to increase R&D spend to bolster existing product leads in the marketplace and bring new innovations the bear during the time of rapid digital transformation.

In conclusion, we intend to transform into growth mode over the next few quarters as we continue to build our momentum.

Thank you back to you John.

Thank you T J.

T. J highlighted earlier Q1 was a strong start for the year and we are excited to have exceeded our revenue guidance for the quarter.

For Q1, our GAAP revenue increased 18% of $13 3 million compared with $11 3 million Q1 of 2020.

On the non-GAAP basis revenue was $13 4 million for Q1 of 2020, one compared with 11 6 million for Q1 of 2020 increase of 15%.

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

We will provide a more detailed explanation of the change and revenue on a subsequent slide.

Our first quarter 2020, one GAAP gross profit was $8 5 million or 64% margin.

Compared with $6 7 million and Q1 of 2020 or 60% margin.

Our first quarter non-GAAP gross profit increased to $8 9 million or 67% margin.

Compared with $7 3 million or 63% margin and Q1 of 2020.

Continued growth and our recurring revenue is driving the improvements and our gross margins.

Turning to our operating expenses.

We saw and 800000 dollar or 8% increase and our operating expenses in Q1 of 21 compared to Q4 of 'twenty.

We saw about 100000 of currency impact of $240000 of tax impact from ours, you're investing.

As of Q1, it's one of the majority of our equity best each year.

The remainder of the increase is related to additional head count and an increase and corporate costs.

First quarter 2021, GAAP operating loss was $8 1 million compared with the loss of $11 1 million and Q4 of 2020 and a loss of $16 5 million and Q1 of 2020.

Our first quarter non-GAAP operating loss increased to $1 5 million compared with $1 1 million and Q4 of 2020.

Driven primarily by an increase and our operating expenses.

Consistent with previous quarters, we wanted to provide a little more color on the change and non-GAAP revenue.

Additionally, we're providing detail on the recurring revenue from our payments business. The highlight the seasonal impact of this revenue stream.

On a year on year basis, our total non-GAAP revenue grew by 15% and that.

Chart on the left hand side shows for the growth by revenue type.

Professional services decreased by 13% as we had some large sharper projects conclude and Q1 of 'twenty that did not repeat and Q1 of 'twenty one.

Our recurring payments revenue grew by 13%, which is solid growth considering and we are comparing to a pre pandemic quarter.

Our recurring revenue excluding payments grew by 33% excellent performance given the difficult environment.

Turning to the quarter over quarter slide on the right hand side.

Professional services increased by 12% as our delivery normalized after a slow December of.

Our services backlog remains strong and we have.

Excellent visibility over the next couple of quarters.

Our recurring payments revenue declined by 21% driven by the timing of business tax and real estate tax payments, which are seasonally stronger and Q4.

We expect to see this bounce back from Q2, driven by seasonal real estate tax payments.

Recurring revenue excluding payments grew by 5%.

Our new subscription bookings in Q1 for a bit back and loaded which resulted in slightly lower recurring revenue earned in the quarter.

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 sales of kiosks and software license sales that we also expect to decline as a percentage of revenue over time.

We continue to expect recurring revenue grow and the mid to high 20% range for the year and.

I expect our services and other revenue will grow by roughly high single digits compared with 2020.

Our recurring revenue growth should continue to be higher and both percentage and dollar terms and service and other revenue as we continue to forecast growth and our base of subscription business.

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

The first is the change and our receivables, which increased by $750000 this quarter driven by strong bookings.

The second area is a decrease of $800000 and accounts payable and accruals and the quarter, primarily due to severance payments.

The third area is deferred revenue increased $1 7 million.

This increase represents the amount we of invoice and excess of the amount of revenue we earned in the quarter.

From a cash perspective, we started the quarter with.

$22 8 million and ended with $17 9 million and cash.

From an out flow perspective, our operating burn was roughly $1 $2 million this quarter and increased from $100000 and Q4.

We also paid out 700000, and and severance and 500000 and interest in the quarter and the change of working capital with an additional $1 million outflow.

Finally from a financing perspective, we generated a net outflow of $1 5 million that includes raising $6 8 million from new equity sales and paying 8 million to redeem shares.

Based on our current view of sales activities, our ability to implement our products low churn rates, we've experienced the date and our cost management efforts. We believe we have sufficient cash and carry us into 2020 two and beyond.

Turning to our outlook for the second quarter and full year 2021.

For the second quarter of 2021, we expect total revenue to be and the range of $13 5 million to 14 million for approximately 22% year over year growth.

For the full year, 2020, one and we expect total revenue to be and the range of 57 million, the $60 million or approximately 20% year over year growth.

A R. R is expected to grow faster than our overall revenue growth as we continue to build our base of recurring revenue.

As T. J mentioned, we're seeing some improvements and our market outlook and we anticipate a modest level of the increased investment and the coming quarters to support increasing demand.

However, given the ramp time for a new resources, we don't expect to see any material benefits to our topline in 2020 one.

Given these investments our operating expenses will be increasing as we move into the second half of the year The fund our 2022 growth initiatives.

Obviously this will affect our original cash forecast for 2021, which we now expect to be negative and the $1 million to $2 million range, depending on investment timing.

With that I'd like to turn things back the T J.

In summary, it was of great quarter, with GAAP revenues up 18% and the quarter and are growing 27% year over year as.

As we look forward, we believe G. T Y is well positioned to capitalize on the recovery trend and execute on our growth initiatives.

Thank you operator, please open up the line for questions.

And as a reminder to ask a question that star and one of your telephone keypad Starwood for asking the question.

And our first question comes from Joshua Reilly with Needham.

Hey, guys congrats on the strong quarter.

I wanted to start off asking about sales force productivity.

So how are you thinking about it now versus pre COVID-19 versus today, how did things trend and the quarter.

And then secondly, what do you what do you expect the go to market to look like in terms of of hybrid versus an in person model as we kind of exit COVID-19.

Hi, Josh the Jay here.

Thanks for the question so.

A year ago, when we reduced staff, we've kept our staff of generally at the same size keeping an eye on our quotas and as our sales teams are starting to increase their pipelines and of course.

And starting to get closer and we're starting now looking at increasing our overall sales and marketing spend which is inclusive of expanding our teams.

So we're working are watching that closely anything and we're working on now is in anticipation of six to 12 months down the road from now and we feel we're well position of the team we have the executing the year.

In terms of.

Sorry, I missed was the people the second part of your question Josh sorry.

The second part is if you look at kind of the post COVID-19 world that we're entering now late.

Pre COVID-19, obviously, you guys were heavy imports and sale lack of trade show and et cetera. What do you think the model is going to look like now in terms of hybrid or bigger.

Bigger mix of virtual sales or you know how are you thinking about that.

Yeah, I think I think 2021 and it can be a lot like 2020, we will continue a lot of our virtual selling.

No. One believes conferences are coming back a little bit back the traveling but the virtual side. We'll continue our business is really two halves. One half has always been virtual and that was generally speaking the deals we sell below the RFP values and for those that are tend to be more of what we sometimes Germans enterprise deals and.

As soon as travel comes back we'll get back on the road again, but we feel pretty effect of being remote.

Got it okay.

What are you seeing in terms of priorities for spending with customers now that they have better visibility and better visibility into the funds that theyre going to be getting from the cares Act and then what segments of your business do you expect and kind of maybe benefit the most given those priorities.

Well, there's a number of factors there Josh that I think are important.

One of them is the and.

And the news quite of bit now is cyber security and I think our customers and you're spending a lot of time around that where that peels off when it comes of the GT why is the movement towards the cloud technologies that are secure.

And better than they run on premise the second tailwind that is becoming pretty prevalent right. Now is that there is a belief that the government work force won't return back to the offices fully and that it will be continued to be of hybrid and remote environment.

This means to us that some of the band AIDS that government put on their operations and the last year.

And to continue running their legacy applications.

Through virtual virtual technologies of virtual desktops, and theyre going to need to start making now longer term commitments towards technology. The cloud based and so those of the two big factors that we see are pushing things and then in terms of our.

The products.

No question EMEA payments permitting.

We're going to be big on the citizen front and.

Budgeting and procurement remained steady and strong and grants.

The big year with grants this year because of all of the grant money, that's flown and a lot of that grant money is focused on modernizing too.

Okay got it perfect and then maybe just one more for me.

And if you look at your updated guidance of kind of in line with with our prior estimates is this indicative of what you're seeing and the macro of customers willing to spend at this point of kind of what are the puts and takes around and your kind of updated guidance here and the quarter.

So I'll take that Josh it's John here.

We do we are seeing kind of the early stages as T. J mentioned, it's the number of tailwind and we're starting to see the first green shoots if you will.

We're not anticipating that that's going to have a tremendous impact on this current year, it's really going to be putting resources in place this year to drive benefits and 2022.

If we do see things accelerate will will certainly.

Update our guidance as we go through the year, but at this point, we're not anticipating seeing much.

Much benefit.

And 21.

Alright, great. Thanks, guys congrats.

Thanks, Josh.

Thanks, Josh.

And our next question comes from Jeff Van <unk> with the Craig Hallum capital.

Great. Thanks, guys. Thanks for taking my questions. A couple for me on the on the bail out or the or the rescue plan I guess, the 350 billion for state local.

Of trillion nine and I mean, some serious money coming just you put a little finer point on win.

Based on your understanding of the act you know that gets in the hands of the buyers and then how long of procurement cycles take before that shows up in bookings.

Yeah, we expect that the funds will start the flow as early as this month with the bulk of it happening and the second half and June and onwards.

And we as as we thought of the cares Act, we expect that our customers will be looking to modernize their technology and.

We'll be working with them as best as we can with that.

Is there anything different about this and the cares act in terms of the flexibility and the focus of the spend and being more or less seemed at your solutions are more flexibility to spend on your kind of solutions.

Jeff I don't have a specific answer for that I will tell you that with the cares Act what we found was over time.

Got better and better understood and we got to understand it better with our customers I think it's going to go through the same evolution here, it's not 100% cleared US right now although is in our opinion, it's better suited towards modernization of the even the cares Act was and we were able to work with our customers with the care of money when it came out.

Okay.

The spending front.

And obviously good to hear the the conviction around.

And putting some more money to work on the sales side, just talk a bit about the sales org the evolution, but maybe from the specific context of where is this extra cash going you know how many reps is this more focused on lead Gen marketing sort of just give a little more insight and to the evolution of the sales maturation and some numbers around what this is going to be spent on.

The question Yeah go ahead, John sorry.

So the Jeff.

Jeff it'll be.

And kind of across sales and marketing.

And as we've described.

All of their go to market motion, we do have the <unk>.

Decent investment and marketing and BD ours for the transaction based business.

And then a bit more investment and sales.

Mix of sales of the marketing more focus on sales and our enterprise motion.

We would anticipate.

Through the year, adding.

Probably 2025.

Heads and sales and marketing and that's really the bulk of where we'd be spending our money at this point and 2021.

Ah Okay.

That's helpful and then you know.

Just as it relates to bookings.

You mentioned it was it was one of the stronger quarters again, maybe I'll push it up a little bit to get a little more specific about that was it up sequentially was it up year over year can you put any numbers around it. So we can just get a sense of kind of how we're bouncing off the bottom or how aggressively we're coming out here.

Yes, so it would be.

Probably historically.

So the one of our top three of four quarters.

And.

Definitely up year on year.

The decent growth Q1 versus Q1.

Or a bit higher than Q4, but significant year on year growth with a decent quarter on quarter growth.

Mhm.

Got it okay I'll leave it there and nice quarter guys. Thanks.

Thanks, Jeff Thank you Kevin.

And as a reminder, that is star one to ask a question and star one.

And there are no further questions at this time did you have any final remarks.

I just wanted to say thank you everyone for joining us today, and well look forward talking and the next quarter.

And that does conclude today's conference call. Thank you for your participation you may now disconnect.

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