Q3 2021 Gty Technology Holdings Inc Earnings Call
Yeah.
Hello, and welcome to the G. T Y Technology Holdings, Inc. Q3, 2021 earnings call. My name is Han and I'll be your operator today, there will be enough change you to ask questions at the end stays cool and if you do wish to ask a question. It simply stop followed by one on your passing keypad I will now hand over to you.
John Curran CFO to begin today's presentation.
Thank you and good afternoon, everyone.
I'm, John Curran G T Y CFO and I'd like to welcome you to our third quarter 2021 earnings Conference call.
With me on today's call T J, Paris G T Wise C E O.
We will be presenting slides on todays call and encourage you to view the presentation found on our website at Www Dot G. P Y technology Dot com.
Please note that our earnings release is also available on the G. T Y website. It contains additional information about our financial results.
Yeah.
Any forward looking statements we made in the earnings release.
Any 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 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 a list of risk factors applicable to G. T y.
Including risks associated with COVID-19.
As you'll hear in 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 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 the nearest comparable GAAP financial measure in exhibit two of the earnings release and in the appendix of the slide deck.
That I will turn the call over to T J.
Thank you John Good afternoon, and thank you all for joining us for those that are new that G. T y.
<unk> provides cloud based platforms that help government organizations transform the way they engage citizens manage our operations.
While the common perception is that government lagged behind private sector Gee why was four and based on the founders vision that 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 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 native cloud SaaS based platforms.
Here's how we're going about it we're providing our best of breed cloud technologies through five products suite that cover the front and back offices of state and local governments.
Included in our primary target sectors, our missile colleagues in counties colleges and universities.
K 12 school districts public.
Public health care agencies public.
Public utilities, like water and power transportation and transit.
State government and federal agencies.
As of today, we have over 850 clients and approximately 400 employees across the business yes.
Are these numbers increasing weekly as it relating into growth.
To add some color to the size of our opportunity in 2021 state local government in the U S is expected to spend just under $120 billion in it.
Total it spending is growing at a healthy 7% for state and local and within that cloud spending is growing at more than twice that rate as more organizations continue to shift workloads to the cloud.
As our customers are starting to modernize their infrastructure Gee why is well positioned to capture the opportunity that the transformation to the cloud represents.
Let me unpack that a bit for you.
Before I describe the product suites themselves. It is important to understand that <unk> products at the three broad characteristics that position us for success.
First they are cloud and largely SaaS. This.
This lean highly recurring revenue streams with remarkably low churn.
Often multiyear contracts strong gross margins and predictable cash flows.
Second each of our product suites were created specifically for governments unique requirements are considered leaders in their respective functional areas.
This leaves our high win rates against older Gov Tech competitors as well against horizontal players that often struggled to meet compliance or government specific feature requirements.
Finally combine our product suite to allow us to access the full spectrum of sizes segments from our customers from 10000 to $1 million and higher price points.
Across eight of our sub sectors with small bits of volume all the way up to large state government and federal agencies.
So, let's meet the products and business units.
First is bonfire and next generation sourcing and procurement platform.
Second the city based our payment platform that helps centralize a citizen interface of a government agency.
Third each of its provides a grant management platform that helps government stay on top of one of their most important sources of funding.
Fourth open counter streamlined government permitting which is one of the major touch points with citizens.
And finally rounding out our product suites, our budgeting platform companies quasi sherpa, which we collectively call <unk> budget.
Budgeting is a core and mission critical financial activity of all levels of government.
Combined these product suites, given <unk> strong starting position to capture the opportunity ahead.
With that context for the newcomers are <unk>, let's turn to Q3.
<unk> reported one of our best quarters as a public company highlighted by the large city based kiosk installation with a Detroit based diversified energy company DTE energy.
The rollout of these kiosks was completed ahead of schedule. We are excited about the momentum we are seeing in the market as the economic environment for our customers continues to improve despite challenges that persist from the new Delta variant of COVID-19.
A core strength of our business is our IRR, which remained robust in the quarter yet again.
Our <unk> growth rate of 25% in Q3 was slightly ahead of last quarter as well as Q3 of last year.
More importantly, we have been able to deliver consistently solid mid twenty's AOR growth for eight consecutive quarters.
Turning to bookings Q3 improved greatly from Q2 as we close all deals that slipped from Q2.
Year to date, our bookings are in line with expectations and we expect Q4 remain in line or better as we have stated in the past the exact timing of deals is somewhat hard to predict but we're seeing a strong pipeline of opportunities and a solid momentum in the market.
During our quarterly business review I was extremely pleased with the sheer number of deals each business unit has close to many to this Scott. So I wanted to highlight some more of these impactful deals.
In total we added 74, new clients with wins across all eight of our target sectors as well as many customer expansions.
Additionally, the average <unk> per customer is consistently growing up 3% quarter over quarter and 13% from a year ago.
Our city based business unit continued to implement payment solutions with new customers as well as expand with current customers.
In Q1, we signed a large multimillion dollar deal with DTE energy that was roughly half kiosks have subscription revenue we have.
Originally expected the kiosk implementation to take place evenly over Q3 and Q4.
We're excited to report we were able to execute on those projects faster than expected essentially installations in Q3.
The key here was city based implementation team and I'm extremely proud of the job the team has done.
The team has been laser focused on gaining efficiencies during the implementation process and increasing customer satisfaction. The only downside is we pulled about 400000 of revenue from Q4.
In other city based news, we continue to expand with great customers like warrants, Indiana.
After introducing 24 by seven self service payment kiosks last year.
The city has also launched mobile friendly web payments, the finance and customer service. These are the city can research report reconciled transactions made online or via kiosk.
City based solutions provides a steady our centralized revenue management solution, which provides greater efficiencies and better customer service.
Our cloud based budgeting tools quest can share, but I have been selected by a wide range of organizations that went live in the quarter with the city and county of San Francisco.
State of New Mexico, and the state of Idaho.
<unk> partnered with the Washington School information processing cooperative or Ws IPC to offer a button solution. So they are more than 300 cooperative member districts Ws Itc's purchasing program.
An official RFP process award contracts, the technology vendors like quest ago, which enabled K 12 organizations, a streamlined purchasing process to modernize their school districts.
We are pleased to be supporting this organization and look forward to connecting with each member district, and solving their pain points and replacing legacy budgeting systems with watsco budget performance measurement and open bug transparency solutions.
Our grants management platform E service continues to move up market from small nonprofits to largest state and local governments.
During the quarter, we signed in the state of Rhode Island to a statewide branch management contract and expect to implement this over the coming quarters. A few other notable deals where King County, Washington, a few travel governments and the Alaska Department of transportation.
Additionally, we completed two major implementations one with the California Department of housing and community and the Georgia Department of community Affairs.
We are seeing each of those customers to use American rescue plan <unk> or ARPA funding.
Purchase our software as well to directly manage those filings.
To support our customers, we have added new functionality to automate and streamline ARPA grants management and compliance with the latest federal guidelines.
While it's still very early in the process. We are pleased with the high level of engagements.
Finally, our procurement platform Bonfire launched bonfire open access community projects.
This freely accessible tool will provide public procurement teams with access to an extensive database of public projects from across North America. The streamlined the RFID in RFP creation process.
During the quarter, we had a material expansion with eastern missile water district in California, and signed up the city of Scottsdale, Arizona and the city of Sioux Falls South Dakota.
Turning to our outlook.
The pipeline of opportunities in the market. We believe are being driven by several macro drivers that are providing tailwind for our business.
Our customers and prospects are becoming more comfortable with their budgets and their outlook.
First the continuing economic recovery is more Americans are vaccinated in the economy opens up.
Second budgets for 2021, and 2022 or less negatively impacted than initially feared.
And finally, the American rescue plant access point to anyone or ARPA includes provisions that will help state and local municipalities get more comfortable creating long term investment plan selling additional funding will be there to support it.
In response to the positive market dynamics increased sales productivity and an expanding pipeline of opportunities. We are investing in our sales and marketing capacity our development teams as well as our recruitment engine.
Since the pandemic there has been a well documented challenge facing all businesses when it comes to labor.
Great resignation as it's been called presents a challenge not only for our business, but also for our customers. Our customers generally have an older employee base is retiring in a greater volume and prior to the pandemic. The effect is that elongate the sales of implementation timelines in response to a more competitive hiring environment.
Banded our HR recruiting.
In place of increased presence our unique employer brand.
The result was a net gain of 22 staff, including 13 in sales and marketing.
We are excited about the quality of candidates in a number of exceptional staff that are joining <unk> and its business units.
While our attrition is in line with the tech industry average it remains elevated when compared to prior years, we have implemented a number of programs that have had the effect of lowering our attrition in the quarter.
In conclusion, we are excited to have multiple tailwind supporting our business and look forward to executing on our growth initiatives.
Thank you back to you John.
Thank you T J.
As T. J mentioned Q3 was another excellent quarter highlighted by revenue that exceeded guidance and continued improvements in our operating results.
For Q3, our GAAP revenue increased 29% to $16 3 million compared with $12 6 million in Q3 of 2020.
On a non-GAAP basis revenue was $16 4 million for Q3 of 2021 compared with $12 7 million in Q3 of 2020 increase of 29%.
A reconciliation between our GAAP and non-GAAP results is included in exhibit two of our press release and in the appendix of our slide deck.
We will provide a more detailed explanation of the change in revenue on a subsequent slide.
Our third quarter 2021, GAAP gross profit was $10 3 million or 64% margin.
Compared with $8 million in Q3 of 2020 or 63% margin.
Our third quarter non-GAAP gross profit increased $10 9 million or 67% margin compared with $8 3 million or 65% margin in Q3 of 2020.
Continued growth in our recurring revenue is driving the improvements in our gross margins.
Turning to our operating expenses, we saw a $400000 or 4% increase in our operating expenses in Q3 of 2021 compared to Q2 of 2021.
We saw about 150000 of currency impact in the quarter.
<unk> the impact of currency, we had about $550000 of expense increases in the quarter, primarily related to additional head count.
Our third quarter 2021, GAAP operating loss was $8 5 million compared with a loss of $7 9 million in Q2 of 2021 and a loss of $7 3 million in Q3 of 2020.
Our third quarter non-GAAP operating loss decreased to $100000 compared with $1 1 million in Q2 of 2021, driven primarily by growth in revenue and improvements in gross margins.
Consistent with previous quarters, we wanted to provide a little more color on the change in non-GAAP revenue.
As you can see in this chart, our recurring revenue grew by 3% on a quarter over quarter basis.
Crude by 29% on a year over year basis.
Adjusting for seasonality in our payments business are quarter over quarter recurring revenue grew by 7%.
Services and other increased by 55% on a quarter over quarter basis, and 28% from a year ago period.
In Q3 of 'twenty, one we recorded $1 2 million in kiosk revenue, primarily associated with the DTE energy installation, which provided a significant boost to our services and other revenue in the quarter.
Our current services backlog remains strong.
And we expect our services revenue in Q4 to be at similar levels compared to Q3.
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 expected to decline as a percentage of revenue over time.
We continue to expect recurring revenue to grow in the mid to high 20% range for the year and expect our services and other revenue will grow in the high teens compared with 2020.
Our recurring revenue growth should continue to be higher in percentage and dollar terms and service and other revenue as we continue to forecast growth in our base of subscription business.
Taking a look at our balance sheet.
There's only one material change that I would like to discuss.
This would be the change in our receivables decreased by roughly $1 million this quarter driven by strong collections.
From a cash perspective, we started the quarter with $15 4 million.
Ended with $15 3 million in cash.
From an inflow perspective, our cash from operations was approximately $900000 this quarter.
One $6 million increase from an operating burn of $700000 in Q2.
The change in working capital was an inflow of $700000, primarily driven by strong AR collections.
From an outflow perspective, we paid $500000 in interest and $800000 for royalty payments associated with the quest acquisition that occurred prior to the formation of G. T y.
This is the final installment of contingent consideration for that acquisition.
Based on a reduced burn rates and our current forecast. 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 for the fourth quarter and full year 2021.
For the fourth quarter of 2021, we expect total revenue to be in the range of $16 3 million to $16 8 million approximately 25% growth year over year at the midpoint.
For the full year 2021, we expect total revenue to be in the range of $60 5 million to $61 million or approximately 24% year over year growth at the midpoint.
From an operating loss perspective, we expect our loss to be in the range of 2 million to two and a half million dollars for the fourth quarter of 2021.
Full year, we expect our operating loss to be in the range of $4 7 million to $5 2 million.
As T. J mentioned, we're seeing improvements in our market outlook.
We anticipate increased investment in the fourth quarter to support increasing demand.
However, given the ramp time for a new resources, we don't expect to see any material benefits to our top line in 2021.
Given these investments our operating expenses will be increasing in the fourth quarter to fund our growth initiatives for 2022 and beyond obviously this will affect our operating cash flow forecast for the fourth quarter, which we now expect to be negative driven by our hiring plans.
With that I'd like to turn things back to Jay.
In summary, we are very pleased with our third quarter with GAAP revenues up 29% in the quarter and are growing 25% over a year.
As we enter the final quarter of the year and start planning for 2022, we're feeling good about our market opportunity and look forward to increasing our investments to meet the needs of our customers in 2022 and beyond.
I'm continuously amazed by the quality of the products, we bring to the public sector, our high NPS scores and loyal customers.
Personally I want to thank all of the staff of <unk> for their hard work and dedication to helping bring the public sector into the cloud.
With that I want to thank you all for your time today.
Operator would you please open up the line for questions.
Thank you Bye we have now reached the Q&A portion of today's call and if you do wish to register your question is simply staff by one on your telephone keypad.
Sure. If you are asking your question, but your line is not made lightly.
Who wish to ask a question we'll field. Your question has been sufficiently outfit it staff.
Okay.
Our first question today comes from Joshua Reilly of Needham. Your line is open. Please go ahead.
Alright, thanks, guys congrats on the strong quarter.
We can start off with getting a little more color on RFP activity.
Has it returned to kind of pre COVID-19 levels and Mimi.
The general level of confidence with customers at this point now versus <unk>.
Maybe like six months ago, and then secondarily, how should we expect the dispersal of these ARPA funds over the next year should we expect similar to like a steady spending or could there be an acceleration of opportunities next year.
Okay. Thanks, Thanks, Joshua for the question T.
T J here, so I'll answer the first part.
With the RFP activity and general activity has increased.
In the second half of the year compared to the middle of the year and certainly since last year.
<unk>.
I believe theres a number of factors that are fueling that so one of them is that our customers are increasingly we're starting to put first of all COVID-19 behind us I was.
Looking further further in the rearview mirror.
Looking further further in the rearview mirror.
We are seeing the funding is starting to flow. The cares act funding that started last year and now the ARPA funding.
Starting to flow.
Remind you also that the number of our deals are not necessarily going to RFP. So overall pipelines and transactions have been in terms of deals coming through have been steady.
We feel we're looking at that pipeline and see a growing that's a lot has to do that because they are funding.
And so looking at the next year to answer your question on the funding. The ARPA funding continues through the rest of the cares Act money being used and also the ARPA funding is starting to gain momentum now so.
Like all funding rounds, we've experienced in the past it takes a little while for our customers to figure out how to use it and it takes a little while for us to learn how to speak with our customers about it. We're just starting to see the first SKU deals coming through using ARPA funding.
Okay, Great and then.
I'm curious what are you seeing now in terms of payment volumes returning nationwide for city base and then maybe you can talk a little bit about how the implementations for the Denver and Austin deployments are going and then how many payment cases, you've got up and running in these locations and maybe how that could drive revenue over the next year.
I'll tackle the implementation question in terms of the transaction volume over to John.
We had a very.
Concerted effort with our city based that the team has come together really looking at honing down on how they go from contract to deployment.
Like like we mentioned in this call are excellent work by the team to really get Super focus on how they get from contract with two transactions happening I think six months.
For DTE energy are in rolling out that number of kiosks, which is significant amount was remarkable. So this is has to do with all that work with the CEO Mike Duffy.
It's also working with our COO and their implementation team and an excellent results.
And Josh this is John with regard to kind of transaction volumes were continuing to see.
If we kind of break it into two parts. The way you asked the question around activity with existing customers the ones that are.
No one fully implemented but the ones that are substantially implemented.
We are seeing volume improve they're not back to normal yet.
Still got a little room to go before we get back to normal.
We are continuing to see improvement in transaction volumes, there with regard to Denver and Austin.
We have both of those customers online so we've brought.
A number of their <unk>.
Scheduled payment streams online on schedule.
T J 's point about implementation.
Work with city base. The team there is doing an excellent job.
They've got a lot on their plate and they're hitting their milestones and deadlines.
That we're going after in terms of hiring in the fourth quarter.
And.
But.
We're happy with with the progress we've made in the third quarter. It does give us incremental capacity as we look forward to 2022.
Now and as you said the market environment is is really warming up we feel good about the market opportunity as we roll into 2022.
Yeah, I'd actually like to add to that is that we had discussed in the last quarter that our goal is at about 20, new people themselves Martin can.
And while we're behind on the whole amount of south of you want to add the that we made some good inroads on that 20 people who've done a 13 of them on board now.
Also can I just want to point out that we'd also brought on our first cross selling director start working on the cross selling efforts.
Great Congrats on the corner. Thanks. Thanks.
Thanks, Josh.
Thank you. Our next question comes from Rudy testing J F D. A David since your line is case and please continue.
Hey, guys. Thanks for taking my questions I want to kind of narrow in on the recurring revenue X payments. It was one of the weaker E sequential growth rates that we've seen is there anything in particular to call out there just in the quarter or something may be seasonal and then also.
They look to queue for just no if I assume kind of the maybe a bit more muted seasonal jumping the payments revenue, but also like you said sort of similar levels Uhm services. Another that also implies kind of another week sequential Q3, two four in the recurring revenue X payments is there anything to call out there that.
No it was contributing to that southern growth.
So.
If if we.
Two Q3 is seasonal low point, great. So the quarter over quarter, if we adjust for the seasonality and payments are recurring revenue grew 7%.
So a quarter on quarter growth rate is.
Solid.
And on track or aligned with our year over year growth rate and a recurring business of.
29% so.
We're happy with the.
Shortly trajectory on the recurring park.
So and looking forward to queue for.
We do see anticipate seeing that typical seasonal bump.
Payment as you point out.
Muted by the by the pandemic, but we will see a step function increase in the payments business from Q treated Q4.
The cute for related volume.
<unk>.
So for our expectations for the year.
Are in line with where we wanted to be from a recurring perspective.
Hi, 20th and growth on the recurring.
Right.
Got it on the the sales edition T. J I want to make sure I'm clear I think it said previously you were looking to do a 20% increase in sales capacity and anything you just said a moment ago. This 20 heads and maybe they're they're they're both true but you know is that you should be thinking that is you know those 13 head's been.
Representing a 13% increase in sales capacity or just trying to get clarity on that.
Yeah, that's that you gotta budget exactly right. So we're looking at about 20 people, which represents about 20 per cent increase in ourselves kubacki sales and marketing capacity.
Okay guidance, that's how we got to be done by the end of those 20th on board now.
Got it.
And then the the cross sell director that you just brought in.
You know what kind of your expectation I guess, both you know near term and longer term I mean, what's what's kind of his you know the goal for him over the next six months, what kind of cross the emotions are you looking to establish which kind of products do you think fit best together for joint sales motions, just kind of give me the overview of what your plans are for.
Him near and I guess more longer term too.
Right Yeah. So Julie joined US has done this before and got Tech sector has a very prescribed way that she wants to approach. This but if you asked me, where we will probably see some natural fit there's no question, there budgeting and grants Ah companies will work together.
They already have a combined salesforce and settled with the same department were also seen some opportunities between open counter and city based on the payments and then permitting cause permitting off the means of payments.
Working together and and and I think it was julie's like the facilitator of the brings those two together working with the sales team. So it's a little early to necessarily talk about what our.
But this is going to do for the company, we want to kind of walk it through the first few months and then when we started talking about it some more later.
Got it and then just lastly, if that's to Squeak one last one in on the ARPA funding you said, it's been used you know the purchase the first couple deals has it been used to purchase anything outside of of you said this yet or has it been isolated to just you said the sale so far.
So far the one I the ones I'm directly or wherever he service the speaking with our cero earlier today and said that there are a number of deals in the pipeline that are outside of your service that have ARPA funding possibilities with them.
Awesome. Thanks, that's helpful. And then one other one I don't want to beat a dead horse here on the ARPA funding, but any sense you know as far as.
Any kind of concern or anything you're seeing with with customers. You know a lot I know, there's a lot of confusion kind of lack of clarity about what ARPA funding can be used for are you seeing any of that play through and in conversations that sales teams are having and then kind of what's your your take on the potential risk of you know maybe are.
Funding not coming through the way that people are expecting.
Yeah Okay.
Okay.
That's right.
Gotcha, Okay start I think there's a couple of dimensions to look at that and answer for that and I think this is very.
Typically what you see when funding comes out like this you know back to O eight when the cares Act was out and then the last cares act them out ARPA. It takes time for the government to figure out how to use it I always start with the cares Act funding for instance was supposed to be largely to help with COVID-19 that some of our customers. They will start using it for here.
Because that helps us with hands free transactions.
And so I think the what you'll find is with ARPA, which actually is a little bit more open and how you can use that our customers will figure that out the second dimension I would say on this answer is that even if they're not directly allocated towards us or allocating some but there are some of their spend towards something else that help them free up some of their budget to look at our projects.
So I think it works two ways for us.
We are seeing.
Significant infrastructure Bill.
Working its way through the federal government.
Those are also incremental funds. So ultimately when those start trickling down they will trickle down in the form of grants and well.
Sure.
More focused on hard infrastructure there is still.
Grants benefit from any of these.
Funds coming through the federal government.
Got you very helpful. That's it for me.
Thanks, Eric Thank you.
The question.
Any thoughts at Star followed by one thank you Pat.
We have no further questions on the line, so I'll hand back over to management for any final remarks.