Q2 2021 Gty Technology Holdings Inc Earnings Call
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Thank you for your patience with <unk> Technology Holdings incorporated quarter, 2.2021, and this call will begin shortly during the presentation. You will have the opportunity to ask a question press. The star followed by 1 on your telephone keypad, if you've changed your mind. Please press star followed by chip. Thank you for your patience.
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Thank you and good afternoon.
Everyone.
And John <unk>, CFO and then.
I'd like to welcome you to our second quarter 2021 earnings Conference call.
With me on today's call is T J, Paris <unk> CEO.
We will be presenting slides on todays call and encourage you to view the presentation found on our <unk>.
Web site at Www, GT wide technology Dot com.
Please note that our earnings release and also available on the GTI and web site and contains additional information about our financial results.
Thank you.
Any forward looking statements, we made and earnings release for any that we may make during this call are based upon information, 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 <unk>, including risks associated with COVID-19.
As you will hear and I'll comment the pandemic is impacting our business today, thanks, Brian undetermined time into the future.
During the call we may refer to non-GAAP financial measures. If we believe they are useful to investors. We believe it will help investors better understand our results or business trends.
You can see a reconciliation of our non-GAAP financial measures and their nearest comparable GAAP financial measure and exhibit 2.
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.
Afternoon, and thank you all for joining us.
For those that are needed <unk> tty provides cloud based platforms with government organizations transform the way they engage system and manage their operations.
While the calling from Stephens on government bikes behind private sector. <unk> was formed based on the foundry division and governments are starting to accelerate their digital transformation.
Even before the pandemic.
Governments are moving away from heavy monolithic on Prem solutions to modern cloud SaaS applications.
And this trend has gotten even stronger and the weak and the last year Steve.
State and local governments modernization and represents a massive opportunity for me to cloud and SaaS based platforms.
Here's how we're going about it.
We are providing our best of breed cloud technology is 2.5 product suites to cover the front and back offices of state and local governments.
Included in our primary target sectors are and municipalities and counties colleges and universities.
K 12 school districts.
Public health care agencies public utilities like water and power.
Transportation and transit.
Governments and federal agencies.
As of today, we have over 800 clients and over 370 employees across the business units with both of these numbers, increasing weekly and we start leading to growth.
To add some color to the size of our opportunity and 2021 state and local government and the U S. As we expected to spend just under a $120 billion and IP.
And that cents per ton higher than 2020, a healthy underlying growth rate.
As our customers are starting to modernize their infrastructure.
<unk> is well positioned to capture the opportunity that the transition to the cloud represents.
Let me unpack that a bit for you.
Before I described and the product suite themselves. It is important to understand the GT wide price of 3 broad characteristics that position us for success.
First they are cloud and largely SaaS. This means highly recurring revenue streams with a remarkably low churn on.
And with multiyear contracts and strong gross margins and predictable cash flows.
Second each of our product suite were created specifically for government and unique requirements.
And are considered leaders and their respective functional areas.
This leaves the high win rates against workout that competitors as well as against horizontal players on often struggle to meet compliance for government specific feature requirements.
Finally, combined our product suite allows us to access a full spectrum of sizes and segments of our customers from 10000 to $1 million and higher price points and across all 8 of those sectors from small municipalities all the way at the largely and government and federal agencies.
So last week and products and business units.
Vs Bond buyer on next generation sourcing and procurement platform.
Second and third base, our payment platform that how centralized with citizen and interface of a government agency.
<unk> <unk> provides the grant management platform that helps governments day on top of 1 of their most important sources of funding.
Fourth open counter and streamlining government permitting which is 1 of the major touch points with citizens.
And finally rounding out our product suites are our budgeting platform companies.
I can share, but which we collectively call <unk> budgeted.
Budgeting, the core and mission critical financial activity at all levels of government combined these product suites, and <unk> strong starting position to capture the opportunity ahead.
With that context for the newcomers and <unk>, let's turn to the Q2 <unk>.
<unk> reported another strong quarter with Q2 exceeding expectations across all key operating metrics.
The economic environment for our customers continued to improve despite challenges that persist from the new Delta variant of COVID-19.
The core strength of our business unit is on <unk>, which will remain robust and the quarter, our <unk> growth rate of 24% and Q2 was slightly below both the prior quarter as well as Q2 of last year due to the timing of certain deals.
Turning to bookings Q.
Q2 wasn't as strong as Q1 due to some large deals that were pulled forward into Q1 and the.
Other Q2 deals that pushed out into Q3.
However, these pushed deals have already closed in Q3 and are good leading indicators Howard back half of the year shaping up.
While recurring revenues as a percentage of total revenue can move around based on the timing of hardware installations and on the services. They continue to grow at a faster rate and total revenue per.
For Q2 recurring revenues and 79% and total revenues a record high for us.
We added 86, new clients with wins across all 8 of our target sectors as well as many customer expansions.
Within our city based business, we are working with New York City to expand in Bruce and payments citywide and.
Casey water, we introduced new utility payment kiosks.
Another new city based customers and prominent energy provider and Michigan, who is improving the customers' payment processes with 43, new patent and kiosks, which will be installed starting in Q3.
Moreover, 2 prominent customers, we announced in the fall of 2019 with the December and the city of Austin have been implemented and are now processing payments.
Our cloud based funding tools question share, but have been selected by a wide range and organizations such as with Citi and Spokane and has to be a bellevue in Washington, as well as the state of North Dakota, and the Central Ohio Transit Authority.
Our grants management platform each business day.
As we move upmarket from small nonprofit 2 larger state and local governments.
1 recent example for ethos as a Florida League of cities. There are 410 incorporated cities throughout Florida, and we have signed up over 120 cities under the program, which includes all 3 of these with access to our research.
The new arrangement provides preferred pre negotiated pricing and to expand into all of our management products.
Furthermore, key state agencies responsible for ARPA funding had been promoting the each of this partnership and plan to rollout a program to execute those grants and the coming months.
While still very early and the process. We are pleased with the high level of engagement.
Additionally, our procurement platform bonfire, either as a new approval functionality and helps organizations track processes online.
And this feature and addition to the rich feature set and the bonfire platform supports a work from home reality.
Finally, we continue to invest and our leading cloud based sector solution suites.
And July we announced general availability of our next major release of our flagship budgeting solution <unk>.
<unk> budget was developed to reduce friction and faster and more collaborative experience throughout the public sector budgeting process and this new release includes major enhancements to our collaboration tools and overall user experience.
Turning to our financial position, our P&L continues to strengthen and and Q2, we saw strong year over year improvements and gross profit and operating loss.
John will provide more details on the financials and a few minutes, but I feel good about our progress to date and how we are positioned for the future turning to our outlook.
We believe there are several macro drivers that are providing tailwind for our business.
Our customers and prospects are becoming more comfortable with their budgets and their outlook.
On supporting US first and continued economic recovery is more Americans are vaccinated and the economy opens up.
Second budget for 'twenty, and 'twenty, 1 and 2022.
Our and less negatively impacted and initially feared.
And finally, the American Rescue plan Act of 2021 or ARPA includes provisions that will help state and local municipalities get more comfortable creating long term investment planning loan and additional funding will be there to support it.
And in response to the positive market dynamics increased sales productivity and expanding pipeline of opportunities, we are investing and our sales and marketing capacity as well as our recruitment engine.
The market for experienced salespeople and is very competitive compared to prior years and requires and enhanced recruitment and retention strategy.
We are already and the process of expanding our recruitment team to meet our goal of hiring at least 20, new sales and marketing staff and the second half of the year.
While our attrition is in line with other technology companies, we are striving to be better and are using this time to highlight our unique employer brand.
In conclusion, we are excited to have multiple tailwind supporting our business and look forward to executing on our growth initiatives.
Thank you John.
Thank you T J.
As TJ mentioned Q2 was another strong quarter highlighted by strong growth and recurring revenues and continued improvement on gross margins.
For Q2, our GAAP revenue increased 28% to $14.3 million.
Compared with $11.2 million from Q2 of 2020.
On a non-GAAP basis revenue was $14.4 million for Q2, and 2021 compared with $11.3 million and Q2 of 2020 and increase of 28%.
A reconciliation between our GAAP and non-GAAP results is included and exhibit 2 of our press release and in the appendix of our slide deck.
We'll provide a more detailed explanation of the change in revenue on a subsequent slides.
Our second quarter 2021, GAAP gross profit was $9.1 million or 64% margin.
Paired with $6.8 million and Q2 of 2020 or 61% margin.
Our second quarter non-GAAP gross profit increased to $9.6 million or 66% margin compared with 7.
And our 62% margin and Q2 of 2020.
Continued growth and our recurring revenue is driving the improvements on our gross margins.
Turning to our operating expenses, we saw a $200000 or 2% increase and our operating expenses and Q2 of 'twenty, 1 compared with Q1 of Taiwan.
$150000 of currency impact per quarter, and if you recall, we had 240000 net taxes related to <unk> vesting in Q1.
Didn't repeat in Q2.
Excluding the impact of currency and <unk> taxes.
We had about $300000 of expense increases in the quarter related primarily to additional head count and corporate costs.
Our second quarter 2021, GAAP operating loss was $7.9 million compared with a loss of $8.1 million and Q1 of 2021 and a loss of $7.8 billion and Q2 of 2020.
Our second quarter non-GAAP operating loss decreased to $1.1 million compared with $1.5 million and Q1.2021, driven primarily by improvements in gross margins.
Consistent with prior quarters.
And to provide a little more color on the change and non-GAAP revenue.
And you can see on this chart our recurring revenue grew by 11% on a quarter over quarter basis and grew by 33% on a year over year basis.
Adjusting for seasonality and our payments business are quarter over quarter recurring revenue grew by 9%.
Services and other decreased by 4% on a quarter over quarter basis, but increased 90% from an abnormally low and services quarter and the year ago period.
And Q2 of 2020 service delivery was impacted by the early days of the pandemic and the transition to remote work by our customers.
Our current services backlog remained strong and we expect our services revenue to increase slightly and the second half of the year due to the delivery of large state deals for our budget and grants management business units.
Our service revenue and vary from quarter to quarter due to the timing of large projects.
And we continue and we expect professional services to decline as a percentage of revenue as our base of recurring revenue continued to growth.
Other revenue includes sales of kiosks and software license sales that we also expect to decline as a percentage of revenue over time.
Continue to expect recurring revenue to grow and the mid to high 20% range for the year and expect our services and other revenue will grow by roughly low double digits compared with 2020.
We will be delivering a large number of kiosks and the second half of the year, which will cause a temporary increase and our onetime revenue.
Our recurring revenue growth should continue to be higher and percentage and dollar channels and service and other revenue as we continue to forecast growth and our base of subscription business.
Taking a look on our balance sheet.
And there are 3 areas I would like to discuss.
First change and a receivable increased by $1.3 million this quarter, driven by higher renewables and boycott.
The second area is a decrease of $300000 and accounts payable and accruals and the quarter, primarily due to invoice timing.
The third area is deferred revenue, which increased $1.2 million also COVID-19 agreement will invoice timing.
This increase represents the amount, we invoice and excess of inbound revenue we earned in the quarter.
From a cash perspective started the quarter was $17.9 million and.
It was $15.4 million and cash.
From an outflow perspective, our operating burn was roughly $700000 this quarter.
$500000 decrease from 1.2 million and Q1 of 2021.
We also paid out $500000 interest and the quarter.
And the change on working capital with an additional $1.2 million outflow.
We completed the severance payments against our 2020 restructuring program last quarter. So that outflow is now behind us.
As you may recall during the second quarter of 2020, we received $3.1 million and loans as part of the Paycheck Protection program, that's announced at that time those funds allowed us to limit our head count reductions and and retain more of our very talented work force.
We are pleased to report and we fulfill the terms of the program and our loans with for David.
Based on our reduced burn rate and our current forecasts. We believe we have sufficient cash to support our growth initiatives as well as our ongoing operations through 2022 and beyond.
Turning to our outlook and the third quarter and full year 2021.
For the third quarter of 2021, we expect total revenue to be on the range of $15 million to $15.5 million on approximately 20% year over year growth at the midpoint.
For the full year 2021, we expect total revenue to be and a range of 59 to.
And at $60.5 million or.
Approximately 22% year over year growth.
<unk> is expected to grow faster and our overall revenue growth as we can.
Continue to build our base of recurring business.
As T. J mentioned, we're seeing some improvements and our market outlook and we anticipate a modest level of increased investment and the coming quarters to support increasing demand.
However, given the ramp time for revenue resources, we don't expect to see any material benefits towards top line and 2021.
Given these investments our operating expenses will be increasing as we move into the second half of the year.
And our 2022 growth initiatives.
Obviously this will affect our operating cash flow 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 would like to turn things back to T. J.
Thank you John.
In summary, we are very pleased with our second quarter with GAAP revenues up 28% and the quarter and <unk> growing 24% over a year.
As we enter the second half of the year, we are starting to feel a tailwind supporting our growth and look forward to increasing our investments to meet the needs of our customers and 2022 and beyond.
Thank you operator, please open the line for questions.
Thank you if you'd like to ask a question. Please press star followed by 1 on your telephone keypad now if you share.
And your mind. Please press star followed by 2 and prepare to ask your question. Please ensure your line is on the you said low to me.
Our first question comes from Joshua Ronnie from Needham and company. Joshua Your line is now away from please proceed with your question.
Hey, guys congrats on the strong quarter, thanks for taking my questions.
And maybe let's start with some more color on the push deals that you mentioned and into Q3, which business unit windows deal than maybe how many were there and what budget timing issue with closing the deals or was there some other factor.
Hi, Josh T. J here actually it really does boil down to 1 deal state level deal with each of us.
It was.
Well aligned for Q2, but the final contracting process and took a little longer than we anticipated and it.
And just pushed over into Q3, and fact that closed and the first couple of weeks of Q3.
Okay, great and that was only 1 deal and it didn't seem to impact the Q2 numbers fell.
Good.
What are you seeing in terms of that transaction and bouncing back from <unk> can that materially impact that growth and the second half either positively or negatively depending on what happens with the delta Barry here.
Okay.
Yes.
John Yes, we have.
Sin.
Some recovery and transaction volume and city base I think it's still early early days, but we have seen and improvement in Q2.
That's part a.
And kind of our stronger revenue story and the quarter.
And as long as things hold up with and.
And then Mike perspective, we anticipate that volumes will continue to recover and the second half.
Okay.
Okay, Great and then.
Maybe just 1 more.
Are you seeing any and return.
Based on selling events like trade shows and demos.
Our historically important to you guys before the pandemic.
And then second on that point, how can these impact your sales head count needs, giving you pare down maybe some of the personnel when the crisis started a couple of years ago or last year.
Okay.
Right.
Short answer to that Josh is that we're not seeing any significant return back to face to face certainly not in the conferences and those kind of and we have some business units or backhoe traveling we prefer to do as much of our.
Selling and we can debate.
And we're still being quite attractive.
Loans.
And in terms of next year, we expect a little bit of that to recover and get back to backfill that and more of that but in terms of our aes pretty effective.
Selling out of their offices and home office and so we're sticking with our plan for now.
Got it thanks I'll pass the Q here thanks, guys.
Thanks, Jeff and Joe.
Thank you on next question comes from Jeff Van <unk> from Craig Hallum Capital Group.
Jeff Your line is now live and please proceed with your question.
Great great. Thanks for taking my questions Hey, guys.
For me.
Maybe just on the bookings front with a 1 transaction push had it closed in Q2, and we've been up and bookings for Q2 over Q1.
We would.
Hey, Jeff.
Would have been.
Okay.
Confirm.
We still would have been a little behind.
Q1, and it closed in Q2.
As we mentioned we also saw in Q1.
Good quarter, we thought and North Dakota come forward and Q1, we were originally expecting that the growth in Q2.
So it really made Q1 on a tough compare but with that deal that pushed into Q3 Q2 would be okay.
Very consistent with our recent performance.
Yes.
Obviously, messaged and a number of ways strength and conviction about the second half outlook and in particular you said.
I think pipeline I think the words you might have used for substantially increased can you put a little more.
Precision around that I mean, quantifiably anecdotally anything you can give a sense of what is the substantial and how much of a change is what youre seeing and the pipe for the second half versus maybe what you what you saw coming into call. It the first half.
I'll take a crack at that.
Seeing.
In terms of our forecast our commitment because again from the sales team.
Thinking about volume.
And the second half.
Materially higher than that and the first half.
Kind of.
The qualitative aspects of that as you can imagine.
And again, our grants management business.
With this additional.
<unk> and stimulus funding and coming into view.
EBITDA and interest.
Grants management, so that inbound interest from from customers.
1 of those tailwind that we.
We've been talking about.
Okay, and then on the employee churn I mean, obviously, it's tough.
And you get the messaging around going on a lot of sales and adding infrastructure to go recruit them and then I think you also referenced somewhat higher than than historical churn because of mobility and workforce is that.
The gross churn and hedge that you experienced.
Concentrated in any particular business segment.
We saw obviously, we have a couple of our different janssen on materially larger and the others.
Numbers basis.
Organization fee and kind of a higher impact.
But it's been.
Pretty EBIT between U S and Canada.
1 data point.
We've seen attrition and kind of across the business unit.
Yeah, Jeff.
And I would just on.
And the attrition is.
It's in line with what it needs to externally and the tech sector.
But we are attending to really closely and a lot of initiatives and our HR to keep bringing and nobody is unique.
Yes fair.
Fair enough and then just.
No go ahead John.
Yes, we did net increase on head count and the quarter and we added <unk>.
<unk>.
We're seeing good day, inbound interest and the ability to hire and bring and folk.
Which can really ramp up that effort.
Given this current market environment.
And to be able to drive growth and our head count.
Got it and then maybe just a very quick flyby of each of the businesses.
And those that sort of stand on I'm sure in any given quarter, you see some exceed and some either meter fall short of what you thought coming and maybe a little color along those lines.
Sure so.
Bonfire continues.
Kind of lead the pack.
Year over year growth was consistent from Q2 with.
We saw in Q1.
We have another question from John Van <unk> from what Craig had and capital group [laughter] Jeffy on line is now I feel the need to go ahead.
Yeah. There we go thanks, Yeah, I'll take another swing out and if nobody else is there you know and on the payment side.
It's interesting I think you mentioned to Austin and Denver.
You know you've made some bookings and and you got a super compelling roster of wins that you're waiting on adoption just talk about anything we can read into those 2 finally getting live and starting to ramp and volumes do you think the path from signing to actual ramping and usage and transactional volumes is that timeline.
Changing as your execution, changing and Oh, you're change and contract structure is trying to drive faster adoption just.
And a little more color, particularly on payments.
Hi, Def Yeah overall.
Looking at City Bay, and the work they've been doing on from signing and getting a customer's up and running has been improved and significantly.
Tightening up on how they build a savings of work clarity on the.
Various different pieces and but they're working on on boarding pieces upfront.
And then and continuing on book was trying to get all everything up and running at 1.
So.
Really good at it so overall, we're seeing them shortly and the cycle from sale.
2 up and running and it's hard to draw and overall conclusion, because each deal is different and the size of the all the different and amount of pieces that have but if we think about from that first sale to you. The first set of transactions or the flow through the last couple of that they've got a up and running here and and the 6 and 9 month rates, which is.
A significant improvement from the prior years.
Yep.
And then I guess just last from me that on the sales and sales execution side and no. It's something you watch and and work on a lot.