GTY Technology Holdings Inc.
Q2 2021 Earnings Call Transcript

Published: 8 Aug 2021

[John Curran:]

Thank you, and good afternoon, everyone. I'm John Curran, GTY's CFO, and I'd like to welcome you to our second quarter 2021 earnings conference call. With me on today's call is TJ Parass, GTY's CEO. We will be presenting slides on today's call and encourage you to view the presentation found on our website at www.gtytechnology.com. Please note that our earnings release is also available on the GTY website and contains additional information about our financial results. Any forward-looking statements we made in the earnings release or 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 GTY, including risks associated with COVID-19. As you will 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 if 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 their nearest comparable GAAP financial measure and Exhibit 2 of the earnings release and in the Appendix of this slide deck. With that, I'll turn the call over to TJ.

[TJ Parass:]

Thank you, John. Good afternoon, and thank you all for joining us. For those that are new to GTY, GTY provides cloud-based platforms that help government organizations transform the way they engage systems and manage their operations. While the common perception is that government likes behind the private sector, GTY was formed based on the founder's vision that governments were started 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 in the wake of the last year. State and local governments modernization represent a massive opportunity for native cloud and SaaS-based platforms. Here's how we're going about it. We're providing our best-of-breed cloud technologies through five product suites that cover the front and back offices of state and local governments. Included in our primary target sectors are

[John Curran:]

Thank you, TJ. As TJ mentioned, Q2 was another strong quarter, highlighted by strong growth in recurring revenues and continued improvements in gross margins. For Q2, our GAAP revenue increased 28% to $14.3 million compared with $11.2 million in Q2 of 2020. On a non-GAAP basis, revenue was $14.4 million for Q2 of 2021 compared with $11.3 million in Q2 of 2020, an increase of 28%. A reconciliation between our GAAP and non-GAAP results is included in 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 the subsequent slides. Our second quarter 2021 GAAP gross profit was $9.1 million or a 64% margin compared with $6.8 million in Q2 of 2020 or a 61% margin. Our second quarter non-GAAP gross profit increased to $9.6 million or 66% margin compared with $7 million or 62% margin in Q2 of 2020. Continued growth in our recurring revenue is driving the improvements in our gross margins. Turning to our operating expenses. We saw a $200,000 or 2% increase in our operating expenses in Q2 of 2021 compared with Q1 of 2021. We saw about $150,000 of currency impact in the quarter. And if you recall, we had $240,000 of taxes related to RSU vesting in Q1 that didn't repeat in Q2. Excluding the impact of currency and RSU taxes, we had about $300,000 of expense increases in the quarter related primarily to additional headcount and corporate costs. Our second quarter 2021 GAAP operating loss was $7.9 million compared with a loss of $8.1 million in Q1 of 2021 and a loss of $7.8 million in Q2 of 2020. Our second quarter non-GAAP operating loss decreased to $1.1 million compared with $1.5 million in Q1 of 2021, driven primarily by improvements in gross margins. Consistent with prior 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 11% on a quarter-over-quarter basis and grew by 33% on a year-over-year basis. Adjusting for seasonality in our payments business, our quarter-over-quarter recurring revenue grew by 9%. Services and other decreased by 4% on a quarter-over-quarter basis, but increased 9% from an abnormally low services quarter in the year ago period. In 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 remains strong, and we expect our services revenue to increase slightly in 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 can 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 grow. Other revenue includes sales of kiosks and software license sales that we also expect to decline as a percentage of revenue over time. We continue to expect recurring revenue to grow in 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 in the second half of the year, which will cause a temporary increase in our onetime revenue. Our recurring revenue growth should continue to be higher in percentage and dollar terms than service and other revenue as we continue to forecast growth in our base of subscription business. Taking a look at our balance sheet. There are three areas we would like to discuss. First, change in our receivables increased by $1.3 million this quarter, driven by higher renewal invoicing. The second area is a decrease of $300,000 in accounts payable and accruals in the quarter primarily due to invoice timing. The third area is deferred revenue, which increased $1.2 million also due to renewal invoice timing. This increase represents the amount we've invoiced in excess of the amount of revenue we earned in the quarter. From a cash perspective, start of the quarter was $17.9 million and ended with $15.4 million in cash. From an outflow perspective, our operating burn was roughly $700,000 this quarter, a $500,000 decrease from $1.2 million in Q1 of 2021. We also paid out $500,000 of interest in the quarter and the change in working capital was 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 in loans as part of the Paycheck Protection Program. As announced at that time, those funds allowed us to limit our headcount reductions and retain more of our very talented workforce. We're pleased to report that we fulfill the terms of the program and our loans were forgiven. Based on our reduced burn rate 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 third quarter and full year 2021. For the third quarter of 2021, we expect total revenue to be in the range of $15 million to $15.5 million or approximately 20% year-over-year growth at the midpoint. For the full year 2021, we expect total revenue to be in the range of $59 million to $60.5 million or approximately 22% year-over-year growth. ARR is expected to grow faster than our overall revenue growth as we continue to build our base of recurring business. As TJ mentioned, we're seeing some improvements in the market outlook, and we anticipate a modest level of increased investment in the coming quarters to support increasing demand. However, given the ramp time for our 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 as we move into the second half of the year to fund our 2022 growth initiatives. Obviously, this will affect our operating cash flow forecast for 2021, which we now expect to be negative in the $1 million to $2 million range depending on investment timing. With that, I would like to turn things back to TJ.

[TJ Parass:]

Thank you, John. In summary, we are very pleased with our second quarter with GAAP revenues up 28% in the quarter and ARR growing 24% over the 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 in 2022 and beyond. Thank you. Operator, please open the line for questions.

[Operator:]

Thank you. Our first question comes from Joshua Reilly from Needham & Company is now open. Joshua, your line is now open. Please proceed with your question.

[Joshua Reilly:]

Hey, guys. Congrats on the strong quarter. Thanks for taking my questions. Maybe let's start with some more color on the push deals that you mentioned into Q3. Which business unit were those deals in? Maybe how many were there? And was budget timing issue with closing the deals? Or was there some other factor?

[TJ Parass:]

Hi, Josh. It's TJ here. Actually, it really does boil down to one deal, state-level deal with eCivis. It was well aligned for Q2, but the final contracting process has taken a little longer than we had anticipated. It just pushed over to Q3. In fact, it closed in the first couple of weeks of Q3.

[Joshua Reilly:]

Okay. Great. So, there's only one deal and it didn't seem to impact the Q2 numbers. So that's good. What are you seeing in terms of transactions bouncing back for CityBase? Can that materially impact growth in the second half, either positively or negatively depending on what happens with the delta variants here?

[John Curran:]

Josh, it's John. We have - we've seen some recovery in transaction volumes in CityBase. I think it's still early days, but we have seen an improvement in Q2. That's part of kind of our stronger revenue story in the quarter. And as long as things hold up with - from a pandemic perspective, we anticipate that that volumes will continue to recover in the second half.

[Joshua Reilly:]

Okay. Great. And then maybe just one more. Are you seeing any return of the face-to-face selling events like trade shows and demos, which I know are historically important to you guys before the pandemic? And then second on that point, how can these impact your sales headcount needs given you pare down maybe some of this personnel when the crisis started a couple years ago or last year?

[TJ Parass:]

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 things. We have some business units that are back out traveling. We prefer to do as much of our selling we can face to face. However, we're still being quite effective on the phones. And in terms of next year, we expect a little of that to recover and get back to a bit more of that. But in terms of our AEs, they're pretty effective selling out of their offices and homes officers. So, we're sticking with that plan for now.

[Joshua Reilly:]

Got it. Thanks. I'll pass the queue here. Thanks, guys.

[John Curran:]

Thanks, Josh.

[TJ Parass:]

Thank you, Josh.

[Operator:]

Thank you. Our next question comes from Jeff Van Rhee from Craig-Hallum Capital Group. Jeff, your line is now open. Please proceed with your question.

[Jeffrey Van Rhee:]

Great. Great. Thanks for taking the questions. Hey, guys. A couple for me. Maybe just on the bookings front, with that one transaction push, had it closed in Q2? Would we've been up in bookings for Q2 over Q1?

[John Curran:]

We would have - it's John. Hey, Jeff. We would have been, just to confirm, we still would have been a little behind Q1 had it closed in Q2. As we mentioned, we also saw Q1 was a good quarter because we saw North Dakota come forward into Q1. We're originally expecting that to close in Q2. So, it really made Q1 a tough compare. But with that deal that pushed into Q3, Q2 would be very consistent with our recent performance.

[Jeffrey Van Rhee:]

Yeah. You obviously messaged in a number of ways, strength and conviction about the second half outlook in particular. You said, I think, pipeline, I think the words you might have used were substantially increased. Can you put a little more precision around that? I mean, quantifiably anecdotal, anything you can give us a sense of what is this substantial? I mean, how much of a change is what you're seeing in the pipe for the second half versus maybe what you saw coming into, call it, the first half?

[A - John Curran:]

I'll take a crack at that, TJ. So, we're seeing in terms of our forecast or commits coming in from the sales teams, we're seeing that volume in the second half materially higher than the first half. Kind of a qualitative aspect of that, as you can imagine, again in our branch management business with this additional stimulus funding coming into view, there's a significant interest in grant management, right? So that inbound interest from customers that's one of those tailwinds that we've been talking about.

[Jeffrey Van Rhee:]

Okay. And then on the employee churn, I mean, obviously, it's tough to get the messaging around in a lot of sales head and adding infrastructure to go recruit. And then, I think you also referenced somewhat higher than historical churn because of mobility workforce. Is that the gross churn in heads that you experienced, was it concentrated in any particular business segment?

[John Curran:]

We thought - obviously, we have a couple of our business units that are materially larger than the others. So, obviously, on a numbers basis, the organization is seeing kind of a higher impact. But it's been pretty even between US and Canada is one data point. But we've seen attrition kind of across the business unit.

[TJ Parass:]

Jeff, I would add - sorry, I would just add, the attrition is up. It's in line with what being securely in the tech sector, but we're intending to do really close. A lot of initiatives in our HR to keep bringing in the bodies we need.

[Jeffrey Van Rhee:]

Yeah. Fair enough. And then just - no, go ahead, John.

[John Curran:]

Yeah. We did let increase our headcount in the quarter. We added 13 heads. So, we are seeing good inbound interest, the ability to hire and bring in folks, which is going to really ramp up that effort given this current market environment to be able to drive growth in our headcount.

[Jeffrey Van Rhee:]

Got it. And then maybe just a very quick flyby of each of the businesses. I mean, those that sort of stand out, I'm sure in any given quarter, you see some exceed and some either meet or fall short of what you thought coming in. Maybe a little color along those lines.

[John Curran:]

Sure. So, Bonfire continues to kind of lead the pack. The year-over-year growth was consistent in Q2 with what we saw in Q1. CityBase, as mentioned earlier, we're seeing their growth rate step up. There would be kind of second in terms of performance in the quarter, budget consistently strong, that group is doing very well. And grants, they're doing - they're improving. Every quarter, they're getting better, but they haven't jumped up into our top three at this point. Permitting is continuing to kind of languish, I guess. So, I would call it growing but slowly.

[Jeffrey Van Rhee:]

Yeah. Okay. Fair enough. I'll leave it there. Thanks for taking my questions, guys. I appreciate it.

[John Curran:]

Thanks, Jeff.

[TJ Parass:]

Thank you, Jeff.

[Operator:]

We have another question from Jeffrey Van Rhee from Craig-Hallum Capital Group. Jeff, your line is now open. Please go ahead.

[Jeffrey Van Rhee:]

Yeah, there we go. Thanks. Yeah, I'll take another swing at it if nobody else is there. On the payments side, it's interesting. I think you mentioned Austin and Denver. You've made some bookings and you got a super compelling roster of wins that you're waiting on adoption. Just talk about anything we can read into those two finally getting live and starting to ramp their volumes? Do you think the path from signing to actual ramping in usage and transactional volumes, is that timeline changing? Is your execution changing? I know you're changing contract structures, trying to drive faster adoption? Just maybe a little more color, particularly on payments.

[TJ Parass:]

Hi, Jeff. Yeah, overall, looking at CityBase and the work they've been doing on from signing to getting their customers up and running has been improving significantly. They're really tightening up on how the builder's statements of work, clarity on the various different pieces they have to output. They're working on onboarding pieces upfront and then continuing on versus trying to get everything up and running at once. So, be really good at it. So, overall, we're seeing them shortening the cycle from sale to up and running. It's hard to draw like overall conclusion because each deal is different and the size of the deals are different to the amount of people they have. But if we think about from that first sale to the first set of transactions starting to flow through, the last couple that they've got up and running here have been in the six to nine-month range, which is a significant improvement from the prior years.

[Jeffrey Van Rhee:]

Yeah. And then, I guess just last for me then on the sales and sales execution side. I know it's something you watch and work on a lot. How would you grade the execution here, progress areas that need work? Just put it in context how you feel about the sales and sales execution.

[TJ Parass:]

I think overall, we have work to be there, and there's always improvements. It's actually an area of focus as we've been working quite a bit in the last quarter on this analysis and preparing for 2022. A lot of this is building into our plans and how we're going to expand our sales and marketing function. So, we've done a lot of analysis on that. Without getting down to breaking it down, I think we still have areas that we can improve on significantly, but it's a big area of focus for us.

[Jeffrey Van Rhee:]

Yeah. I'll leave it there. Thanks, guys.

[John Curran:]

Thanks, Jeff.

[Operator:]

There is no further questions on the line. I'd now like to hand back to the host for any closing remarks.

[John Curran:]

Yeah. We'd like to thank everyone for joining us today, and have a great rest of your evening. Thank you very much.

[TJ Parass:]

Thank you, everyone. Take care.

[Operator:]

This concludes today's call. Thank you for joining. You may now disconnect your lines.