Q4 2021 Earnings Call Transcript

Published: 24 Mar 2022

[Operator:]

Please standby. Good day and welcome to the CynergisTek 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 over to Bryan Flynn, Vice President of Investor Relations. Please go ahead, sir.

[Bryan Flynn:]

Welcome to CynergisTek's 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 today's 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 should recognize that the statements are predictions of future results which may not occur as anticipated. CynergisTek is under no obligation and expressly disclaims any such obligation to update or alter its forward-looking statements, 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.

[Michael McMillan:]

Bryan, thank you for getting us started this afternoon. Welcome all of you for joining us for today's 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. And 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 team member, turned in a solid performance, better than expected and our other efforts to better manage 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 impact of the economy and the war in Europe are having on the market and our business. Several clients have already shared that with the COVID federal relief dollars ending, they are now facing reduced operating margins from last year's losses combined with this year's economy but cyber 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'm 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 expansion included a diverse portfolio of entities from large university and medical centers and nationally recognized health systems to many in adjacent markets, including those in our CMMC government offering. 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 marked an important milestone as we fleshed out our sales team with dedicated reps in each region across the U.S. All have been onboarded, have had initial orientation and training and are focused on pipeline growth and closing deals. I'm happy to report that our efforts in marketing are also showing improvement, not only in managing costs 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 in marketing activity with three of the largest annual events we participate in 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 DoD CMMC pipeline and we've actually been able to initiate several CMMC projects. However, progress remains slow as we all wait for DoD to issue its final guidance which is expected by the end of this month. Organizations are expectedly reluctant to begin before DoD issues that guidance. As a reminder, our focus through the end of last year was on four key areas

[Paul Anthony:]

Thanks, Mac. Bookings this year totaled $18.9 million compared to $17.7 million last year. As a result, our presold 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 of 2020. The decrease from prior year was due to lower revenue from managed services which was reduced by $0.5 million to $2.2 million due to the impact of COVID. Consulting and professional services revenue increased $0.2 million to $2.1 million when compared to Q4 of 2020 due to increased activity in the Backbone business unit. We've started to see sequential revenue growth in Q4, 16% over Q3 2021, with the majority of growth coming from an increase in consulting and professional services revenue, again, due to the Backbone rebounding, higher bookings in our traditional services as well as a seasonal increase we've 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 how modest growth allows for positive operating leverage in this business. SG&A expenses increased to $3.3 million for Q4 of 2021 compared to $2.2 million for the same period in 2020. This increase was primarily due to additional headcount, compensation-related expenses and additional costs as we reinstated benefits that were eliminated during COVID 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 $0.3 million last year due to this increase in SG&A we just highlighted. Full 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.

[Operator:]

And our first question will come from Matt Hewitt with Craig-Hallum Capital Group.

[Unidentified Analyst:]

Hi guys, this is Lucas on for Matt Hewitt. 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?

[Michael McMillan:]

Well, 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 requests from, I guess, across the board. A lot of it is being driven by what's going on overseas. A lot of it is being driven by just the threat that health care is dealing with, with respect to ransomware and other disruptive attacks that they're faced with. But we're also seeing a balance, if you will, in terms of cautiousness as a result of the economy, the same thing with what's going on overseas and inflation and rising interest rates that are absolutely affecting a lot of the hospital's operating margins.

[Unidentified Analyst:]

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 for those newer sales reps?

[Michael McMillan:]

I'd say for the newest ones, of course, that just came on, we're probably still a good two quarters before they're -- this quarter and next before they'll be probably fully functional. It is probably the 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 have actually started selling a lot faster than I expected, meaning, normally, when a sales guy comes on or gal, you expect them -- their first quarter to be one of orientation and building their pipeline and not necessarily closing deals, right, because of the sales cycles, et cetera. Second quarter, you expect them to start closing deals and by the 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 hit their number in their second quarter. So I don't want to predict that they're all going to be that fast or they're all going to be that efficient. But I'm very impressed with the sales guys that we've hired; they've all got great backgrounds in cyber and in selling IT. Almost every single one of them also has worked in an environment where they've sold not only into adjacent markets but into health care as well. And we're actually seeing the benefit of that, I think. And they're all -- they're very motivated. And obviously, they're being very driven right now in terms of what we need them to do. And the whole organization understands that sales is the name of the game.

[Unidentified Analyst:]

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?

[Michael McMillan:]

That's a good question. I think it depends on some of the newer services and relationships that we're 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 want to -- I don't know that we're going to do that yet but that is clearly something that might be a possibility.

[Unidentified Analyst:]

And then, I guess, if I could just squeeze in one final question here. For hospital CEOs specifically, have you seen any movement in terms of where cybersecurity falls within their priority list?

[Michael McMillan:]

So, if you look at most of the senior executive team's priority list for their hospitals today, you'll find cybersecurity is -- generally is one of the Top Three or Top Five priorities they have. Clearly, their number one priority right now is recovering from the financial losses that they took in 2020 and 2021 because of the pandemic and dealing with the financial pressure that they're experiencing now with the inflation and the interest rates, as I talked about and whatnot. But if you look at their IT priorities, in particular, cyber is definitely one of their top priorities.

[Unidentified Analyst:]

Okay. Thank you very much. That’s all I have.

[Operator:]

And our next question will come from Jerry , a private investor.

[Unidentified Analyst:]

Hi Mac and Paul, good to see you. Thanks for your hard work and efforts and accomplishments. I just had -- I wonder if you could give us a little update, probably maybe it's more of a Mac 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 gets stalled. But any update you can give us on that?

[Michael McMillan:]

Sure. So when I came back, the company was probably positioned as best it could possibly be in terms of executing on that work and that strategy. Clearly, we were ahead of everybody else as it related to our ability and -- to do that. And for a while there, it looked like -- actually looked like towards right at the end of the year that it was going to take off because we were really seeing an uptick in 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, DoD came out in November and kind of put the kibosh on a lot of things by totally revamping, restructuring the program and then saying they were going to have to go back through an entirely new process of getting it approved, et cetera, et cetera which was going to take several months. Then they came back after that and a couple of things. But make a long story short, we -- what it really did was it caused everybody to kind of take a step back and to say, "Well, we don't know that we want to move forward or we want to do this right now because what happens if DoD totally changes the requirement." I think they've gotten past that because I think the CMMC-AB has done a fairly decent job of working with the Undersecretary of Acquisition and getting the message out that the program isn't going to change demonstrably. And in fact, they've actually walked back some of the changes that they had suggested back in the fall. And DoD committed to putting out the final guidance, if you will, by the end of this month, March, with respect to the program. So the good news was probably in the February time frame, we began to see organizations reengaging and 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 number of proposals, so to speak, going out the door is continuing. And we do have several of the initial projects in flight now. And so we're all hoping that DoD 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 once we get past that and we have that final guidance and we're moving towards an update of the FAR that organizations will get more comfortable and start to move out again. And -- but clearly, DoD has -- we're all unfortunately at the mercy of waiting for DoD to approve the final program guidelines.

[Unidentified Analyst:]

Sure, appreciate it. So relating to your projections, if you will, of growing the business, there's not a lot of reliance on that business from the DoD. And so that would, in your mind, probably be an upside from what you're expecting? Would that be a fair statement, Mac?

[Michael McMillan:]

Well, we actually had some of that business obviously plugged into our projections for this year because at the time that we put together that budget last fall, 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 final guidance comes out at the end of this quarter, that there's still plenty of time for us to ramp to what I think we were going to try to achieve in the first place. So I'm going to still stay hopeful. But I'm going to -- I guess, I'm going to be guardedly hopeful, waiting to see what they do.

[Unidentified Analyst:]

Sure, makes sense. One last question and I'll leave, is relating to potential acquisitions. Obviously, your -- valuation on your company, in my opinion, is very low. And so it would seem as there'll be a challenge to try to get anything done on the acquisition side. It's -- can you speak to that a little bit on your -- what the plans would be relating to that?

[Michael McMillan:]

Yes. No, you're absolutely correct. I mean it's a very challenging 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 find the right acquisition that is complementary and increases revenues and customers and et cetera and then that can be accretive or if we can find the right acquisition from a technology perspective, that can enhance our ability 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, it has to be part of the -- part of our plan for growth because organic growth is going to continue to -- is 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 embrace acquisitions if we want to really accelerate growth.

[Unidentified Analyst:]

Okay. Well, thanks for all your hard work. Mac and Paul, I appreciate it. I am all done.

[Michael McMillan:]

Thanks.

[Operator:]

And that does conclude the question-and-answer session. I'll now turn the conference back over to Mac McMillan.

[Michael 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-plus business over the next few years through a mixture of organic and inorganic growth. That will require execution of the planned investment in the right strategic partners and acquisition. This will not be without challenges in the near term as clients and health care entities in 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 fuel. Despite all of these pressures, protecting data and systems is still a high priority and 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 their unique needs. We are making progress but are still rebuilding with the goal to be in a growth stage as we emerge from 2022. Again, I want to thank everyone for joining the call today and we will see you soon during our Q1 2022 earnings call. Thank you.

[Operator:]

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.