Q4 2021 CynergisTek Inc Earnings Call
[music].
Please standby.
Good day and welcome to the synergistic fourth quarter and full year 2021 earnings Conference call. Just a reminder, today's conference is being recorded at this time I'd like to turn the conference, which Brian Flynn Vice President of Investor Relations. Please go ahead Sir.
Welcome to synergistic fourth quarter and full year 2021 earnings call. Joining me today from the company are Mr. Mac, Mcmillan, President and Chief Executive Officer, and Mr. Paul Anthony Chief Financial Officer before we begin the formal presentation I'd like to remind everyone that some statements made on the call and webcast, including those regarding future financial results.
And industry prospects among others are forward looking these forward looking statements can be identified by the use of forward looking terminology such as believes expects anticipates would could intends may will or similar expressions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in.
This conference.
Certain of these risks and uncertainties are or will be described in greater detail in the company's SEC filings given the risks and uncertainties listeners should not place undue reliance on any forward looking statements and she recognized that the statements are predictions of future results, which may not occur as anticipated.
<unk> is under no obligation and expressly disclaims any such obligation to update or alter its forward looking statement, whether as a result of new information future events or otherwise at this time I'd like to turn the call over to Mac Mcmillan our CEO .
Brian . Thank you for getting a 30. This afternoon welcome all of you for joining us for todays earnings call and thank you for taking time out of your busy day to be here as well.
This marks the second earnings call since I returned last August even though we still have a long way to go our fourth quarter performance showed that elements of our strategy are working most notably our sales team, which just recently added its last the team member team turned in a solid performance better than expected and our other efforts to better manage call.
Costs and alignment of resources in the company had a positive impact as well as we head into the new year. We are watching very closely the impacts of the economy and the war in Europe , we're having on the market and our business. There are clients, who have already shared that with the COVID-19 federal relief dollars ending they are now facing reduced.
Operating margins from last year's losses.
Bind with this year's economy, but ciber remains a priority and a major concern for all of them.
So we remain focused on executing our plan, while working with our clients to work through these issues.
I am very pleased to share the business performance that led to a strong fourth quarter and year end. We saw continued demand for our services ending the year with 43, net new customers and improving the renewal rate of existing customers by nearly 30 points higher than it was in July .
Our customer expansions included a diverse portfolio of entities from large University medical centers and nationally recognized health systems to many in adjacent markets, including those in our CMC government offerings.
Our goal is to continue this momentum into 2022, we believe trends in the business will be the same this year as we have seen in previous years with the first half of the year, starting off somewhat slower, particularly with the economic pressures mentioned above and then ramping up as the year progresses.
This February marks an important milestone as we fleshed out our sales team with dedicated reps in each region across the U S. All had been on boarded have had initial orientation and training and our focus on pipeline growth and closing deals I'm happy to report that our efforts in marketing are also showing improvement.
Not only in managing cost, but more importantly in lead generation and marketing activity.
This quarter the marketing team developed an aggressive marketing plan for 2022, while preparing for the busiest period of the year and marketing activity with three of the largest annual events, we participate and happening in early spring.
We have also seen an uptick in the prospect client face to face meetings, which benefits sales opportunities. We continue to experience growth in our D. O D C MMC pipeline and we've actually been able to initiate several CMC projects.
Our progress remains slow as we all wait for EOD to issue its final guidance, which is expected by the end of this month organizations.
Organizations are expectedly reluctant to begin before D O D issues that guidance.
As a reminder, our focus through the end of last year was on four key areas.
First supporting sales and getting fully staffed enabled and aligned to effectively engage with market opportunities.
Expanding the mission of the delivery organization to go beyond project delivery and into driving new and expansion business.
They're reassessing and prioritizing those competencies needed to support growth of the business and fourth revisiting our long term strategy.
Addressing the first two items, we continued to add strength to the sales team throughout the last part of the year with our last salesperson selected just after the new year, even though most of this team arrived in late 2021 in early 2022, they managed to drive a 23% increase in bookings and.
Second half of the year when compared to the first half as several reps closed deals in their first quarter on border.
Our Q4 bookings of $5 8 million exceeded our expectations and added to our pre sold revenue, which has increased by 15% or roughly $20 million.
Q4 2021.
This improvement is a direct result of the reorganization and refocusing efforts, we initiated last fall along with the tremendous efforts by this new sales and delivery team to identify new opportunities within our existing client base and with new prospects.
Today, we have a sales team that consists of eight business development lease and inside sales reps, who with the aid of a reenergized marketing team and revived corporate sales culture culture have been able to generate and double the pipeline to date when compared to year end 2020.
We are recreating the sales culture that built synergistic initially and together with the top down.
Together and together from the top down everyone. In the organization is working in lockstep to identify opportunities for growth as we continue to drive the company forward.
Before I talked about the second half of our focus growth and our long term strategy. It is probably appropriate to speak to the current cyber ecosystem.
Obviously that has become more interesting recently as a result of the conflict in Ukraine with Russia.
And as many in as many of you no doubt saw president Biogen as well as the season FBI issued warnings earlier this week that cyber attacks could be imminent and all critical infrastructure industries should prepare and be vigilant.
Certainly this could be a game changer in terms of the threat landscape and has caused organizations to become even more cautious.
Inventory landscape also changed in this last week as the omnibus funding Bill passed which had several pieces of legislation regarding cyber security.
Key among them was a universal breach reporting requirement for all critical industries.
In the event of a cyber attack they will have 72 hours to report to Caesar.
If they pay a ransom they will have 24 hours to report that this is the shortest timeline to date for breach reporting.
It will be some time before the implementing rules are written embedded and published that will make this requirement effective but this will give thousands of organizations of mandatory breach reporting requirement that are not subject to one today.
However, what is driving buying decisions today is more a factor of the actions of cyber insurance carriers, who are requiring very specific measures to avoid large increases in premiums and the overall threat and cost of breaches.
As health care landscape is evolving the global health care cyber security market is predicted to grow by 15% year over year over the next five years and reached 125 billion in cumulative spend from 2020 to 2025.
More than ever we are hearing clients and prospects say that they are interested in managed services.
Bad actors continue to target health care to disrupt business operations because of lack of financial and operational resources.
Focus on cyber security.
Today, with the expanding attack surface and exposure and exposure of protected health information through remote Workforces telehealth cloud services and an ever growing number of supply chain vendors cyber attacks are increasing in volume and sophistication and it can be a life and death situation for patients.
Cyber attacks on health care systems spiked during the pandemic, demonstrating how cyber criminals exploit opportunity and their total lack of regard for health care submission.
This fight is now threatening patient care as well as private data, while increasing operating costs.
Developing an effective response is not getting simpler either with over 3500, cyber security vendors, producing and selling thousands of solutions. It is difficult for hospitals to identify what tools should be a priority. Additionally.
Additionally, ransomware attacks alone cost health care organizations, 28 billion and downtime lawsuits ransoms paid lost revenue and fees to rebuild their business in 2020.
Double the amount of cost in 2019, according to a compare tech report.
Attacks continue to rise with more than 300000, new malware introduced on the web every day, resulting in a staggering increase in the number of incidents and the effects of those attacks have on business today, 93% of health care organizations have experienced at least one data breach and the past year in health care.
Accounts for more than half of the ransomware attacks experienced in the U S.
While attack methods evolve the nature of the threat has not changed it is still primarily about money.
It's possible organizations today must prioritize cyber security.
They want or intend to protect their business and their investments.
Business disruption as perhaps the number one business risk for health care patient safety and quality of care are still their highest priority.
In 2021, it became evident to patient safety and quality of care, we're also being directly impacted by disruptive attacks.
Things worse, a greater number of these attacks originated from other points across their expanding attack surface that now includes remote workforce members the internet of things supply chain vendors and business partners the.
The success of these attacks has also fueled an increase in their numbers environmental factors also contributed to an increase in the number of attacks experience like the number of ransomware attacks that grew exponentially during the pandemic.
Roughly going from one successful ransomware attack every 40 seconds in 2020 to every one every 14 seconds in 2021 and now expected to reach one in every 11 seconds by the end of this year.
That translates to approximately 7200 successful ransomware attacks a day in the U S.
This immediate threat that the emergency care Research Institute or equity to identify cyber security is the number one risk and their recently released report called top 10 health technology risks for 2022.
Both the financial and operational impacts of cyber attacks are increasing dramatically health carriers. Realizing this and looking at the cyber vendors, which have greater support and solutions as organizations start to increase spend to improve readiness build a greater resilience into their defenses and be more productive proactive was.
Securities, we want to be ready to support them.
To meet this need and answer the need for growth. We have added several new strategic vendor solutions and reenergized several others to enhance our service offerings and move towards being a managed service provider.
Our new solutions include advanced threat hunting incident response support managed continuous pen testing compromise assessments security controls validation in and Sox services.
Clients are becoming more and more aware of the threat and face they face and the need for more proactive security.
It is not enough to have good defenses any longer and sit and wait in a defensive posture for the adversary to attack.
We need to go on the offensive and build more resilience in our protections to better anticipate the threat and respond more effectively.
Health care has also faced with the daunting task in trying to build and maintain the cyber expertise they need to meet these challenges, making managed services all that more important and attractive.
As we look out over the next few years, we have four underlying pillars to our growth strategy.
Our near term.
Our tactical focus will be on driving revenue growth and margin expansion, we believe that the levers for accelerated revenue growth will be the organic growth through net new clients.
Further expansion of services into our current customer base and evaluation of M&A service opportunities.
Margin expansion will come from alignment with technology based strategic partners and the ability to scale and leverage our existing delivery team for greater revenue growth.
Our goal is to double the size of the business and transition from a primarily services company that we are today into a managed service provider or M. S. S. P.
We feel that we can achieve this through a mixture of organic growth strategic partnerships and an acquisition or merger that better positions us to be the partner of choice for customers.
Again, our near term focus in 2022 will be returning the company to two core business growth targeting four key metrics renewables customer penetration at new clients and average client spend.
Which will drive increased revenue and operating margin.
This past fall we saw growth in all four of these metrics client spend and improvement in our renewal rate and increase in our contract size and an increase in number of net new customers. This will continue to be our focus going forward right.
By targeting a greater than 85% renewal rate for managed service contracts, we will expand our pre sold revenue and maintain a strong foundation to build on as we grow the business going forward, we will focus on expansion in our current customers and target a 20% increase to our managed service contracts to date.
Secondarily, we intend to grow the number of clients with two or more managed services.
As we penetrate and add services to our managed service customers. We are targeting a 25% increase in average client spend giving us greater penetration and increasing client loyalty.
Achieving more managed service security sales, which are typically greater in size will help make this a reality.
And finally, we want to increase our net new clients by at least 20%. Currently we said we sit at approximately 200 plus clients and we look to drive that to 240 plus in 2022.
Concurrently, we will work to accelerate growth by evaluating M&A opportunities enhanced strategic partnerships and the integration of IP into our offerings.
On the M&A side, we will look for opportunities in the services M. S. S P and technology space that supports or complements our existing service offerings.
We plan to look at both equity and debt financing options to fund these acquisitions.
Long term 2020 for 2025, our goal is to transform into into an M. S. S. P generating opportunities to sell our own products drive additional growth or improving margins through implementation management and automation of technology income combination with our existing managed services.
I'll turn it over now to Paul to cover the financials and be back before we wrap up.
Thanks, Mac bookings this year totaled $18 9 million compared to $17 7 million last year.
As a result of pre sold revenue continues to grow increasing by an additional 2.8 million to $20 million.
This increase in bookings was a direct result of our investments in sales and marketing the increased demand for our services and the size of our contracts.
Addressing the Q4 standard financial disclosures revenue was $4 4 million compared to $4 7 million in Q4 2020.
The decrease from prior year was due to lower revenue from managed services, which was reduced by <unk> 5 million to $2 2 million due to the impact from Covid.
Consulting and professional services revenue increased <unk> 2 million to 2.1 million when compared to Q4 of 2020.
Due to increased activity in the backbone business unit.
Starting to see sequential revenue growth in Q4, 16% over Q3, 2021 the majority of growth coming from an increase in consulting and professional services revenue again due to the backbone rebounded higher bookings in our traditional services as well as the seasonal increase we have historically seen in Q4.
Gross margin increased 3% to 40% for Q4 2021 versus Q4 2020 and sequentially. We saw a 4% increase from Q3 to Q4 2021 after adjusting Q3 for the employee retention credits.
This increase was due to the increased revenue and again demonstrates our modest growth allows for positive operating leverage leverage in this business.
SG&A expenses increased to $3 3 million for Q4, 2021 compared to $2 2 million for the same period in 2020.
This increase was primarily due to additional head count and compensation related expenses and additional costs as we embrace reinstated benefits that were eliminated during COVID-19 .
And an increase in sales marketing and travel costs now that we have a full team and are back on the road driving growth.
non-GAAP adjusted EBITDA loss was $1 4 million for Q4 2021 compared to <unk> 3 million last year due to this increase in SG&A, we just highlighted.
Both financials and reconciliation of GAAP to non-GAAP information can be found in the earnings release that came out today.
This concludes the financials and the prepared remarks for Q4, operator, please open the floor for questions.
Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone.
Joining us today, you say speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Again that is star one for questions.
Okay.
And our first question will come from Matt Hewitt with Craig Hallum Capital Group.
Hi, guys. This is Lucas on for Matt Hewitt them, I guess to start it off.
In recent months, you've had a pretty steady cadence of customer wins and expansions are you seeing an increase in demand and if so what do you think is driving that.
Well, it's it's kind of a I'd say, it's kind of a mixed bag at the moment, we're seeing an increase in demand and we're seeing an increase in manual requests.
From a crop I guess across the board a lot of it is being driven by what's going on overseas.
A lot of it's being driven by just the threat that that health carriers is dealing with with respect to ransomware.
Other.
Disruptive attacks out there that they're faced with but we're also.
We're also seeing a balance if you will in terms of cautiousness as a result of the economy the.
The same.
Same thing with what with what's going on overseas.
And and inflation and rising interest rates that that are absolutely affecting a lot of the hospitals operating margins.
Thanks, that's helpful color and then I guess you also talked about how you now have a fully staffed sales team I guess, where would you say we're at in terms of the ramp further.
For those newer sales reps.
I'd say for the newest ones of course is just came on we're probably still a you know a good two quarters before they're going to this quarter and next.
Before there'll be you.
No probably fully.
Fully functional is probably up.
Best way to describe it.
But I have to admit that the sales reps that we've added in the last part of the year.
<unk> have actually started selling a lot faster than than I expected, meaning normally when a sales guy it comes on or Gal, you expect them to their first quarter to be one of orientation and building their pipeline and and and not necessarily closing deals right now because of the sales cycles et cetera.
Uh huh.
Second quarter, you expect them to start closing deals and by third quarter, you expect them to be hitting their number.
But we've actually seen.
I think just about every single one of our new salespeople.
Have actually started closing deals in their first quarter and a couple of them have actually.
<unk> hit their number and their second quarter. So you know I don't want I don't want to.
I don't want to.
Predict that theyre, all going to be that fast or they're all going to be that efficient, but but I'm very impressed with the sales guys that we've hired they've all got great backgrounds.
In cyber and in selling our I T. Almost every single one of them also has worked in an environment, where they've sold not only in two adjacent markets, but into health care as well.
And we're you know we're actually seeing the benefit of that I think.
And and there they're all there they are very motivated and obviously, they're being very driven right now in terms of in terms of what we need them to do.
And <unk> the organization understands that the sales is the name of the game.
Great and then finally I guess looking ahead to the rest of the year is there any chance that you would expand the sales team further.
And that's a good question I think it depends on some of the newer.
Services and relationships that were bringing.
Bringing on now it may be that at some point.
We expand to include things like sales engineers.
For some of the technology.
To in terms of selling that but I don't I don't want to add.
Don't know that we're going to do that yet, but that's clearly something that might be a possibility.
And then I guess, if I could just squeeze in one final question here for hospital C. E. O. Specifically have you seen any movement in terms of word cyber security falls within their priority list.
So if you look at if you look at most of our my senior executive team's priority list for their for their hospitals today Youll.
You'll find cyber security as it generally is one of the top three or top five priorities.
Priorities they have.
Clearly you know there are a number one priority right now is is.
Recovering from the financial losses that they took in 2020 in 2021 because of the pandemic and dealing with the financial pressure that they're they're experiencing now with with the with the inflation and the interest rates as I talked about.
And whatnot.
But but if you look at their it priorities in particular.
You know cyber is definitely one of their top priorities.
Okay. Thank you very much that's all I had.
Yes.
And our next question will come from Jerry well, a private investor.
I may I can Paul Hey, goodness here. Thanks for your hard work and effort. So a net accomplishments I just had a I wonder if you could give us a little update probably maybe it's warm a math question relating to the department of defense work that you had kind of get approved for.
A while back and I know it kind of got stalled, but any update you can give us on that.
Sure. So so you know when I came back the company was it was probably it.
Positioned as best they could it could possibly be in terms of.
Executing on that on that work in that strategy.
Clearly we were ahead of everybody else as it related to our ability in and to do that.
And and for a while there it looked like I actually look like towards right at the end of the year that it was it was going to take off because we were we were really seeing an uptick in the.
And the growth of the pipeline, we're actually seeing folks leaning forward in terms of wanting to get started with their projects and then of course D. O D came out.
In November and kind of put put the kibosh on a lot of things bye bye totally revamping our restructuring in the program.
And then saying they were going to have to go back through it in an entirely new process of getting it approved et cetera, et cetera, which is which was going to take a several months. Then they came back after that in a couple of things, but to make a long story short.
We've if it did what it really did was it caused everybody to kind of take a step back end to end and to say well you know we don't know that we want to move forward or we want to do this right now because what happens in D O D totally changes the requirement.
I think they've gotten past that because I think the C. M C. A b.
A fairly decent job of.
Working with wood with the under Secretary of acquisition in and put in getting the message out that.
The program isn't going to change demonstrably and in fact, they've actually walked back some of the some of the changes that they had suggested back in the fall and D. O D committed to putting out the final.
Guidance, if you will by the end of this month.
With respect to the program.
So the good news was probably in the February timeframe, we began to see organizations.
<unk>, you know re engaging and in the pipeline started moving again.
The good news is right now the pipeline is continuing for US is continuing to grow the number of prospects is continuing to grow.
The the number of our proposal so to speak going out the door as is continuing and.
And we do have several.
Several of the initial projects in flight now.
And so we're all open the D O D will keep to its word and initial that final guidance in March and hopefully it won't be.
Anything that surprises anyone and if it isn't then I'm hopeful that that once we get past that.
And we have that final guidance and we're moving towards an update of the of the the far that organizations will get more comfortable and start to move out again.
And but but clearly you know D O D has has.
We're all we're all unfortunately at the at the Mercy of waiting for D. O D to approve the final.
Program guidelines.
Sure appreciate it Joe.
Relating to your projections, if you will of growing the business, there's not a lot of reliance on that business from the D. O D and so that would in your mind, probably be an upside from what youre expecting as that be a fair statement or Mac.
Well, we we actually had some of that business obviously.
Plugged into R. R <unk>.
Projections for this year, because if you go to at the time that we put together the budget last fall things were.
Things were moving steadily in that direction.
We've kind of backed that down as a result.
But like I said I'm hopeful that if the if the if the final guidance comes out at the end of this this quarter that there's still plenty of time for us to ramp to what to what I think we were going to try to achieve in the first place.
Okay, I'm going to I'm going to still stay hopeful, but but but I'm gonna I'm Gonna I guess I'm gonna be guardedly hopeful you know waiting just waiting to see what they do.
Sure makes sense, one last question and I'll leave as relate into potential acquisitions, you know obviously your valuation your company in my opinion is very low.
And so it would seem is there'll be a challenge to try to get anything done on an acquisition side.
You know, it's can you speak to that a little bit on on your what the plans would be relating to that.
Yeah, No you're absolutely correct I mean, it's a it's a very challenging.
Hum.
Part of the plan if you will.
But I think it's a very important part of it in the sense that if we can.
If we can find the right acquisition that that is complementary and and increases our revenues and customers and et cetera, and it in and then.
Then that can be accretive or if we can find the right acquisition.
From a technology perspective that can that can.
Enhance our ability to to be more efficient in how we deliver and increase margins and whatnot.
The bottom line is is that you're right in terms of raising capital to do it right now is very difficult because of where our valuation is but.
To me if it has to be part of the part of the.
The part of our plan for growth because.
Organic growth is going to continue to is he's going to get us somewhere, but it's not going to get us I think where we want to be.
And at some point, we're going to have to.
Have to embrace.
Acquisitions, if we want to really accelerate growth.
Okay.
Well thanks for all your hard work Mac and Paul appreciate it and.
I appreciate everything you do that I'm all done thanks.
Thanks Jerry.
Yeah.
Thank you and that does conclude the question and answer session I will now turn the conference back over to Mac Mcmillan.
Thank you operator.
To summarize we're working to achieve an increased enterprise value as we implement and execute our plan. We believe we can drive growth in the business to achieve great detail, we see a path to grow this company to a 50 million dollar plus business over the next few years through a mixture of organic and inorganic growth that will be.
Require execution of the plan investment and the right strategic partners and acquisition.
This will not be without challenges in the near term as clients and health care entities, and particular grapple with inflation rising interest rates shrinking operating margins and as federal Covid subsidies dry up and the uncertainty of the world situation and the associated price increases for critical essentials, such as field.
Fight all these pressures protecting data and systems is still a high priority and important in an important need for businesses and they will seek to balance. These two issues. We will continue to help them to do that by increasing and adapting the services we provide to the to their unique needs. We are making progress but are still rebuilding with the goal.
To be in a growth stage as we emerged from 2022.
Again, I want to thank everyone for joining the call today and we will see you soon during our Q1 'twenty two 2022 earnings call. Thank you.
Thank you that does conclude today's conference. We do thank you for your participation have an excellent day.
Uh huh.
Okay.
Yes.