CTEK - Earnings call transcript Q2 2018

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Operator

Good day and welcome to the CynergisTek’s Second Quarter 2018 Earnings Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Bryan Flynn, CynergisTek Investor Relations. Please go ahead.

Bryan Flynn

Thank you, operator, I want to welcome everyone to CynergisTek’s second quarter 2018 earnings call.

the Mr. from today us company includes Joining Mac and Chief and Mr. Executive Officer; McMillan, President Financial Officer. Chief Anthony, Paul

new the Before those risks call the call greater that obligations and and that At industry be otherwise. some to obligation SEC those over McMillan. we is subject described remind results alter future could prospects, a the statements described uncertainties to are begin regarding I of information, time, materially such to these or conference Mac this number of turn statements, forward-looking no differ made cause update to will to filings. formal future like among presentation, to others, detail be call. actual in forward-looking on and results a Certain events and under uncertainties CEO, any as its company's or the financial and in in are disclaims our including would or expressly like the webcast, from and I'd whether may CynergisTek result everyone risks of

Mac McMillan

good everyone. Bryan, and sales. signs both operations afternoon performance you, QX and multiple saw of Thank improved a in

strengthen seeing expansions the management the enhance clients and in existing are We account and to the continue that and of renewals. results with contract strong

our large medical centers. academic saw MPS with years our of the renewal quarter first This in more big one addition of to three

managed Several were professional We accounts security services. also expansion. security QX. QX renewals and new for and over nicely service saw a a managed win Booking multiple added and up large and service

Black of is incidents. cyber cyber in under are many healthcare that if forward underfunded prospects continue fast the not Books not cyber industry find survey both under and There continued very that The healthcare of staffed from are factors the XXXX. enough, and persist. We pressure will to this themselves the the are security excited and be trends maturing going about enterprises contributing healthcare revealed annual continues that cyberattack criminals to target which to security least is these

healthcare missed and conducting and of the The increased majority healthcare behind many in XXXX and experienced endpoint to the XX% the breaches not from devices breaches to constant business internet data XX% as the Healthcare data these come security of despite data the impact is monitoring fall continual executives five mind. rise still forefront know for over the had an have now of they threat data breach imaging organizations of of breaches vigilance. in devices, the their new drills, organizations commonly regular IOT Proactive cyber response Additionally, need the even organizations same nearly have healthcare than as monitor not timeframe. and breaches fact Less more illustrates worsen. remains XX% than that are such since QX them printers, continue of though biomedical equipment. in of number quietly,

quarter the increase devices plans released security medical FDA software. and to around This two has

safe promoting patients Device medical establish aims to cyber patient recognition and with well towards This plan device devices and health evaluation. seeks patients Medical facilitate as development first States innovation The safer to device that in security medical technologies Action medical medical meet spur titled provide the new net needs. as protecting access advanced safety devices of robust device security United and and Safety healthcare that their Plan a public to

security requiring and a applied them calls to to be cyber a developers to design baseline, program Second, market the vendors would protocol be in looking to software baked in their precertification to include introduce to the software are who pilot product new for in software. products which security place

of security and waiting opens in has other houses for healthcare federal be California business security interest healthcare the transmit start standards up government privacy information enhanced national these handling and privacy or released and privacy those providers consumers to assessments these those legislation landscape versions The vary Many it state health hospitals considering components. of newly like driven via Colorado information. for as change and are their and of the requirements products, space citizens and plans, for GDPR for those standard. the deployed who laws protection, to that using clearing of health also electronically effect level personnel heightened combined in enact and doing for out states. significantly rolled the these sensitive to become related own of states new a As companies Many are states opportunity concerns

must been that’s ever new around Like organizations associates rules decade. are carry building has environment, cause their law, security security the the a growing and generated services. privacy helping for discussion these in CynergisTek at many cyber surface for of on that penalties Something the regulatory attention. European as proactively meet hinting in much states financial has and been awareness and the regulatory well This more requirements threat and their awareness increasing particular within in do a business multiple defenses. our than With attack through overseas. business strengthen with industry always focus organizations cyber cyber as healthcare environment whom

for recognized security providing services CynergisTek quarter, healthcare. firm KLAS top as cyber the in comprehensive the country Just this

So the quickly and need. our market-leading to effectively to and ability respond this clients position validates our

clients. ever threat term to continue to and and long that the deliver changing offer our will to landscape We services success address innovations

Turning pleased results. our back to with I’m quarter, the second

our accounts. organization’s to health dollar the expanding services team, contract security existing will other services with security place that by resources forward and offerings with signing personnel As I read-in, two We the strides client. professional our of management in had in large facing services and said made my helping one additional overcome larger renewal multi-million we longstanding security a system great a CynergisTek wins, healthcare the shortage to augment one services offering in a industry. professional and

growing product retain of these recruit our are which addressing We struggle for a professionals security successful healthcare talented health is Overall, also continue organizations to this in of expanded demand security new saw demonstrates manage the engagements. the This to see help It with security QX five experts services threat new all we professional landscape. system. cyber with testament relationship in an and addition ever-evolving critical to sized initiatives. increase comprehensive to for engagement

take We on to growing to focus program professional will continue our services labor in shortfall. the advantage

business, a an we years. print the academic extend we side were to for On able the additional managed as center large medical contract of discussed three

clients. we stated hard was six over I in to continue work with to dedication As expectations teams our QX, This best focus a have and But their exhibited managed with last renewal relationships delivering in was exceeding XXXX. our on make to strengthening the service overall are months the while earlier those the clients sure work our programs. we our testament

with expand addition, on and strong consolidation clients within In newly working under healthcare, our are progress to QX, MPS continued the towards improved acquired our their entities in services relationships services. capitalizing we further demonstrating

rollout strong services. by those XX% offerings security see all in in renewals service our and management. for service included through and demand clients to additional the Last remained of and We new renewals offerings managed our overall service to XX% at new experience number internet increased XX, of continue we We began pipeline. expansions response biomedical quarter, steady growth device

increase these of categories new we the in both opportunities to and excited an pipeline that of had for report wins have in seeing are them. are We of both

and is Our safety. both more solution device improving biomedical ability that and affectively technology manage patient the mentioned devices I security to cyber security incorporates earlier, enabling find our these

client to base. addition with In customers, expanding continuing service our are our we grow offerings overall existing to

team XXXX. the a off the significant putting will of to good first Our position for the has to go remainder hand over strong second quarter XXXX. progress in sales the in highlights I made half booking growth financial of start and ahead review a a now Paul. it Please us for to the year, Paul of of are

Paul Anthony

from Thanks basic diluted per million second adjusted Mac. Equipment ’XX was of of discussed and revenue the versus EBITDA of the basic information $X.XX million, result decreased release of found revenues managed X% X% in as to adding revenue X.X after Breaking $X.XX increase was and We at resales X.X new ’XX. out security diluted adjusted margin new to comp revenues MPS for due services stock-based in share the for decrease million. in of to the can was million of share million reconciliation down non-renewables earnings of non-GAAP XX.X or XXXX related and for a and the This The quarter per compared of back second X.X Consulting compared and X the quarter services ’XX consulting earnings both $X.XX for quarter or services of customers. of X%. we to XXX% to which period came ’XX, QX or growth XX% per by hardware or past. compared Non-GAAP earlier categories million the the by gross increased professional a be the today. software provided to same second million X% same maintain and X.X was X.X existing quarter GAAP and the to period of to same professional ’XX, for and that the the in in ’XX. ’XX non-GAAP to revenues a

to X our and not March of the one which X.X end XXXX base floor was XX.X cash long has approximately to the larger along revenue up but delivered of million XX, with line maintains and balance of by credit XX, with in of company This $X The of at the installed borrowing debt. a X of concludes prepared equipment million has quarter, million deferred questions. from as This a outstanding clearly subject today. bank June of limitations to equivalents As X.X million deferred XXXX. remarks, increase was revenue cash the clients. up at please the million of open result for Company million operator no short commercial this in term

Operator

Craig-Hallum. Matt [Operator we hear Instructions] of first and from will Hewitt

Matt Hewitt

curious, announced renewal historically tail of get seeing typically to I’m when days ago are one best the from New you me, talked First a deals, of about couple you with and those end Haven, the you big just margins. you’ve your

the As full a higher those you it don’t about contract, or years benefit? is maybe three we continuation where get situation of this next it bidding competitive a think margins with was the

Paul Anthony

they things considered to situation. renewal this of flat; for related being some advantage of margins take done actually other be some a it remained This the the margin. In kind case, still allowed to and what and operational target time us remain were of extend changes period at opportunity our longer that the was specific would that

that. we So did

the to did renewal for original margin get normal an would So the end fortunately maybe that term. its see at in this of see impact case you at not saw account least we that itself

Matt Hewitt

Shifting cross-selling back gears companies high to bit when from a there think perspective. I little lot the merged and of maybe excitement level, a a was opportunity

a I little this spoke bit think about quarter. last we

the installed do a As or many you how you two. at you base simply year today, opportunity one of the look or few versus next two, you going service see customers are new even just base at more as moments buying ago, those over versus here today than one that wins the where installed look the announced that offering that and

Mac McMillan

We multiple in percentage penetration still have low rate terms offerings. fairly a of at

form we of we’re to buy discrete progress focus forward additional to services our big is have we of that’s than monitoring when really are that a by Many still But has in growth customers right, a and managed and that already are our lot that have we’re are area of we’re just not throughout some part we see learn typically beginning beginning managed that print is lot services. existing services of more with man of XX% we trying offering program. measure customer look conversations [BSM] they discrete to further adding will incremental managed who of more privacy we where terms offerings managed for of to us And tenure our our one-off are in the print I improve about base and and a and see we services. the the relationship. one-off having needle customers of who our start serves around customers as think one now buying some customers and there, that they

in to there working in So the when that up moving training displace of renew multiple we training it’s in we managed that’s in team of a terms be in focuses relationships. still either big mix we week in services be of going process on sales obviously or opportunity something and in is coming But the our one and of fact the that that as big they to are we’re whoever focused have to now. customers is and next sales see the

Matt Hewitt

report one Mac, last for personnel from challenge, of you your kind one me highlighting the a Maybe right customers. finding touched that remain people recent

You in historically bringing those attracting have and had types great people success in-house. a of

at occurring, that’s change. are other we like it in standpoint some states are of when from Given and to here the that going bigger issues seem the doesn’t unemployment

So think that accelerate I adoption to I that the right? brings services force Am some to your of new help. training would in about would that rather of of work that than some more platform managed people type thinking

Mac McMillan

Matt, are. you

things that side mix a challenges, so as model of of and and lot kind side deal them, more to In lot service fact and and we the is terms the need straight hospitals we on to a are consulting our one of service things and of managed attractive we’ve that one-off basically being a of in managed sort bit cap, put many of risk of that’s professional you to more option increase And one-off more able those services, the and the year services, because (inaudible) retain of the will opposed terms track the in getting straight and to to just service, having how side we’re seen managed the becoming they’re on in particular. they whole changed managed services, if service in service because more an things. customers buying to people assessment decrease a instead because customers going three consulting a professional on a that’s buckets

Operator

next D’Silva hear Riley from FBR. will B. Andrew we of And

Andrew D’Silva

the mix quick Just on gross more bit much. Could document historic increased confused a a few accounts going year-over-year then rev with norms, And security as versus maybe standpoint? to at from off that just what just balance looking ones, how the will explain a payable a and sequentially are just I’ll and little few equipment margin increased start historic sales way I’m for your causing Paul. so what’s it levels sheet forward?

Mac McMillan

sheet, accounts had a a was that quarters, our relates the services our cases management the large by and it security our also paid portion until a just on see payments we includes X.X don’t client the both playing to relates the mix well. These product QX we’re X of role with or side business receivable of A so or QX as to agent services security on and for mix, our specifically clients. on over our X.X million expenses for clients And for number associated really in balance many so you in given side. we drop make

vendors collect resulting support we that issue So it’s There’s timing happened specifically well. the a just in really we QX. related against of we’ve done and to trends more that as no to accounts more the payout quarter necessarily, notice that money those

increase saw in changed hadn’t AR we because that came the later. As collection remember actually back in in an you QX, we

So in timing a trends that it is we’re seeing trends. changes difference, no really or

Andrew D’Silva

the competitive you you the are enough discussed unpredictable as And that the landscape over more but it the was of how it the years. at or still on I the make perhaps call that that couldn’t segment most last business, the year that document there of half this behind now previous, three know has look first experienced it or us the ones quarter, side headwinds are all than business of in of we

Mac McMillan

is is, - based and lot before the effective that call, it’s commodity becoming front still still becoming and who of a strong I not local respect service what of the with it’s it it have in services. as headwind I the in it’s particular fact the I is competition But pressure provide think local business, of those a entire say who facing and print becoming you then the more downward managed equipment that to managed think lot folks they sell have the and That services, around have pretty to So of cost, also a all in provide there’s service equipment ourselves provide said manufacturers a meaning the think I price terms which will etcetera, the we a even business safe office than is we market. folks, that managed actually numbers. we who like a that jobs growing to is sense

or is there that Obviously just vendor of travel overhead a of doesn’t it of who the competition. terms the is or equipment, in the to sell in so it’s tremendous is area. out base there So, client disperse business sell of a primarily discount manufacturers the the have their in lot the organization amount to they’ll price competition managed to all and geographic support focus the The that’s local based services boxes for their clients. the selling equipment, outside order more

for form extremely like didn’t already is is, of So when we us print place. of ourselves are both It that run What our you’re we relationship to I as to about cross-selling really existing service to those started sector managed mean business in of pressure managed the our saturation. in folks was We that from pure market that are have talking refining vendors. security somebody found of that have we that clients. incredibly by coming kind some rare who in ends, are on top place and middle really in where the

is so not happy that before. that currently either they know pressure have don’t are before. unpredictable don’t only it to don’t business headwinds So gone or are price, with Meaning with. there the of in not pressure dealing than and you’re happy away. in But think whoever with was the its that’s currently terms than they doing not or of whoever whether but dealing I displace you’re having anymore if I I anymore was volatile the terms it with

and every that I still sell there. think to time very difficult going be it’s’ competition be go to it’s a going predictable it’s in you

Paul Anthony

security So got have. we’re differentiate focused area definitely definitely focused an don’t that angle It’s to ourselves. that competitors on we’re that the on we’ve the

Andrew D’Silva

is new viewing I Great customers adoption would this, it hit I on really slightly know a on how through weren’t any rate standpoint? you know an you that color. of any looking that there quarterly some you with us adoption, give the you XX% mentioned from at have touched on annual it come disappointed are able security. then from you a but modelling or different angle, about And thoughts us help just legacy you to basis, be or if benchmark a think can would offering

Mac McMillan

That’s good question. a

have forward think really and haven’t our is to don’t every now sat like We that put Right our does it we one of or the thought customers of to XX% the But I thought XX% in different teams piece. a of to three two it sense penetration. of that XX% from or down I perspective. be to see we’d model managing it haven’t have services really

of So can what wouldn’t we know, about know and it, that’s some that give we you thought I tell haven’t. different today. to to but don’t a way thinking probably I

Andrew D’Silva

this, you QX what’s about how right a goal the mentioned now? managed norm services the And a piece,

Mac McMillan

I the see discreet they X, somewhere anywhere on other we’d to now will and right around just grow. to The that. That’s like majority we then as what have think like right X is, grow. of buy one and services from see to its that percentage XX% So now norm the overall top

Andrew D’Silva

model question, best care rate based would then going a the use base XX% is and should should a rate total that is a what be our a or you rate, on as revenue we then or retention we that And final mentioned forward. as retention appliance base

Mac McMillan

I’ll that account. clients. let it, about based the Paul on client but So just piece talk It’s numbers is of percentage

Paul Anthony

MPS. we say, targeted security historically business XX% we’ve for XXs – and historically the And had XXs would the in then to for both XXXX-XXXX high in to would prior I the have to

in now So like that still and we’d I to are its see to think targets – is still to right [renewal]. mid XXs high what related if there

Andrew D’Silva

or from numbers? the And annually that’s quarterly timeline annual a standpoint versus

Paul Anthony

Annually.

Operator

Partners. of Gibson Instructions] hear from [Operator We’ll Capital ROTH William

William Gibson

many us in the big could timing Mac, give start it say of there could sort on and revenue? security ramp are out medical biomedical, when the it more wins? How up how showing the a what’s you of and be little color and

Mac McMillan

time That’s something And one just number present we’re to about a of our to the the every opportunity them. grow. it out with of that there anybody come this has the actually very have guys they an excited And continued topic, things away with to conversation about. seems sales opportunities in pipeline like

think side. on I three had two already wins or we’ve the biomedical

piece addressing more hospitals term, very there on to the they what’s who we piece device just actually and of the that excited large is doing, two manufacturers that are help go on right of of identify fact many this proposal the just I like because wrong with are just health biomedical who and morning fire So every It also that devices their so hospital going technology are the that saw manage biomedical to in are that excited aiming that work has them of that under just of about relationship we’re every And device the we’re which understand talk those lot those devices of in manage for we helping come the of to side well, but that devices the for. partnering to would seems couple incorporated are medical addressed. is wait are those across vulnerabilities a doing in with we they those second what hospitals accurately system medical them hospitals which working hospitals. really can’t But opportunities were to end, longer devices, and of the the opportunities actually And working guess like single we’re that going the while opportunities there this to the are partnership on them. those to, now the security to find down for with with part that was we’re the and front then we’ve really of very are what that and go. many they have jump need seems of a about what’s maintenance those have side backend also and more we been fact also are at the and ability where security their assessment. as talk – health them great partnership what pipeline we devices opportunities work and we’re and But and in we looking it by I partner anxious them new on those other what it with have they related to we’re there address on some that right assessments, dealing on the the to is their where more in service security the both to a to devices piece how see come second those actually to side systems are coming now that issues that all where connected the there be managed devices be

our got device one. because time conversation have the any have negative and that’s piece they biomedical exciting sales security very is they excited right team So the now don’t it’s something very

William Gibson

assessment is typical months? that period, the what’s months, so And three nine

Mac McMillan

is weeks. period The typical about assessment six

not the those devices device, between – the We network you the the sits clients have of where issues device three time. network, point the is and located hospital, what of the let it version what is, its passively in to devices are what type the four collector technology other maintenance the the its We is identifies are. security do all end to for medical devices environment it essentially and the all on the to deploy and it’s through from communications the run these because typically on and you anywhere weeks, communications level rev the online device, in records

all weeks time have that them and give those have them. hospital that have its and XX% to devices been of may the it find example, able been connected only them during issues of you typically to Just have will those and time. identify connected a connected But may are of frame you an XX,XXX given at period will a with any catalog over devices network,

life terms well leave So of there of we that patching respect fixes the the how and to analysis, things network, the to Once to we a be processes. basically data, attack they terms and clients the allows recommendations the do and want terms collect collector not that the up tactically we and to weeks, segmentation what like them with connect for to we them put to in program provide with to four also make acquisition look them but the at maintenance have a report, meaning their analysis only addressed, back in from what addressing devices an approach, data. like them those with acquire respect that devices the raise need and those of all managing of where retirement cycle through devices as – go devices their as as we as they in processes those on of those location visit want for where course devices. the the the fixing they way to to well where things are through that’s And they’re

actually (inaudible). So it’s

Operator

Sutherland Bill Benchmark Company. the from comes question next our of And

Bill Sutherland

half look I half, security. flattish of equipment first it of and sales, over (inaudible) as kind XQ XQ the feels So the you at of how

to sequentially up and arms of of do about pipeline to think expansions half, some we we talked also your around about think from first the try additional And then back should How about ex Mac my and as business so half the to convert. the and get as the time retention I then it tie and you sales? that obviously equipment

Mac McMillan

up Yes, we and about. any saw for for a in with, had months strong exceeded standpoint, a well as knew generally the we we talked explored were made QX we from It’s which caught really had QX absolutely. what fall planning in QX We short six as booking up combine.

So revenue QX in here see we’ll that to in and bookings start materialize going to to in start to those the QX.

So additional backend in we’ll as definitely of the start seeing year. the to get we growth

Bill Sutherland

both I of that’s the sides to business? And guess

Mac McMillan

around the side exception Let’s side. there growth equipment, of some you had with maybe in in start get the the in has revenue side some you – deferred to services go MPS but come that equipment most the on security from would come the the of from the

Operator

further to are questions remarks. for any or appears McMillan turn back And there closing the like I’d additional at this conference Mac now it no to time.

Mac McMillan

operator and attending of you questions. and thanks everybody your all for for Thank today

Although looking year started healthcare market. we are security build in services slow, the quarter up saw the momentum and and for we’re in on across performance demand we the the gaining second to strong the sales still XXXX now see

execution as the the second the well in a our strategy remaining along quarter us Our position year. serve industry-leading will with for of

and soon. new joining much. very on look our high continue everyone forward existing pipeline will offerings both I’d like to for the call to think will We maintain today caliber focus managed clients. and growing talking Thank thank you to and you our deliver we in to services to

Operator

today. And our thank call. your We to would participation that everyone you may now for like does conclude disconnect. And

CynergisTek (CTEK) 12 Aug 182018 Q2 Earnings call transcript