CTEK - Earnings call transcript Q2 2020

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Operator

Welcome to CynergisTek's 2020 Second Quarter Earnings Conference Call. Today's conference is being recorded.

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

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

William Barlow

Good afternoon, everyone.

defined impact And be business. and coronavirus quarter make providers industry care our continued to health specifically, the by the health more care up that to pandemic. the of the bulk This

in to prompted While the are patients, years from our financially. of shifts the still accelerating has curve customers our projections struggling how The pandemic months. term, providers drop business. many from our presold impact adoption approximately treat fundamental and immediate of In due in restructuring and to in new delays current in XX% a was customers shortfall a contracts for cancellations, net renewals our of revenues technology

along recovery. vendors and saw just telemedicine staff. issues security definitely with Remote and that quarter now, they or significant privacy off We furloughs are new office and third-party understand. not the now and here leveled that third the both anywhere as to own are long-term and starting with with consulting signs have market their professional to spending are things of come see was contract, beginning regulators believe to and services stay, to customers through also revenues effectively we reductions reduce pause Halfway back tied to a work

anticipate restaurant, bounce may our be Now also in eating school, be kids to we back favorite will the side crisis. will this back out once providers before than of slower on COVID-XX health hospitals bit we realize, get as of be have again, ICUs. and care all patients the that I well, other industries a other well in probably their

put perspective, that the indicated to hospitals Hospital they this of health to outpatient average to rest declines American return pre-pandemic are XXXX. the that and reporting And are of volume So hospitals in XX.X% inpatient Association many volumes levels do systems and XX.X%, relative for reporting expect not to volumes XXXX. in

to which care continue consolidation next space will Additionally, client XX base. health impact have on the we've to and within the our seen over see months, expect we anticipate an

capabilities we this our much fewer with are market and disruptive, past, capabilities can we our ensure incumbent today. that could consolidation, be practice our although the relevant our be offerings, to successful need team hospital believe but that with and it typically our we we strengths, to been with opportunities. to open can but dealing becomes this believe a moving it well, Now the forward. door in to larger leadership, may mean play we will a it to And have we serve on people, new resell in it much systems But than our larger

Now turning my commentary to the bad guys.

of know care the health to we to hit negative, continues continues While threat and the the to industries. evolve landscape hardest one be

industries. million. cost of of care in the cost double $X.X data is and New the IBM Ponemon last nearly cost year, data with is show an XX.X% from the Institute breach the the average from breach That average average up data health other of

health investing security, that enough XXXX U.S. the exposed, maturity alone, a single that keep behind had the with to not of attackers. stolen investing hospitals XX.X% mouse. falling be year. their research in disclosed and America's of of records the escalating at not population to In in is this in from know security game simply care the adversaries cat impermissibly our up or sophistication CynergisTek also they're of We published but are It's soon not hospitals own

to this quarter also team. approach. deals end We is Going face-to-face to we as leader continue up delivery and from catch started been close well, a X we And has and over, our the to increasing. least Clients from of at I days And continue of to risks. accelerated clients. on transition a adapt risky and sales fully out approach with that our our is what sales doctor customers, we all and they've between to go-to-market are our a included booked delayed become more our want This do, continued almost selling, cybersecurity employees. and they're crisis, make now last recognize which makes to hiring future. reengaging, be new the important clients our our pipeline the has for on leadership. refine year largely and of planned new calendar prior coming that and these quarters. incredibly to work perspective. Well, refine privacy the craft, there this the call We And that the for of a over the foreseeable the have

dedicated people understand and Our it. to mission, they're the

particular, very this organization. in in saw well, to, be has with time of the organization, proud delivery the sharpen make Our that leading ways used me

due search an networks launching to that customer for consolidation. AI-enabled that bring backed in adversarial health An gives platform incredibly as offer care new of months, VCs see we important to recent the coming compromise work of partnerships, remote some new coming like U.S., Awake the telemedicine, out identify the practices And ability and prepare security expansion going you're service privacy with the Security, largest help the to our better us understand a that forward announcement offerings larger We'll the of improve in by rapid market can that new you'll see us will implications and activity the the relevancy research Over crisis. of assessments. facilities. be

our time organization, time, sales targeting model project contacts the marketing efficient. a with summary, and the has this delivery same At new but that will amount delivery Our for We've more do. continuing and the more and And we environment. to delivery, remote new responsibly forward. while our like and team of relevant comes think effective our through In to we existing to moving sales much the spent process make challenges employees a by while efforts management a lot of incredibly improve and to more road ready the in market has the bumpy of we're completely will faced margins. identifying leaner, significant key implement enormous our efficiency are business a efficient resulting improved moving and through are our a clients worked managing what what the We're look they people and motivated work next. been moving forward. We're

Let performance. me now turn for CFO, Paul? the Anthony, discussion call our our over financial Paul a of to

Paul Anthony

started saw of I'd than for quarter. due he QX, when resulted first in Caleb's revenue respond, in into QX saw professional delays will contracts reduction late executed of a reduction the projections. revenue in but COVID, initiative we drop at We compared the to also and XX% some discussed approximately restructuring like Caleb. reduction end of of saw expense impact cancellations annualized presold disclosures. $X.X our gross our annualized summarize the to million in $X.X expense in standard consulting primarily a as The To year we services more that on We when in cost we prior to $X.X above. Thanks, with XX% in into reductions. from renewals, financial in million, HX permanent XXXX, and which reductions a margins then get and combined million translate approximately the

compensation. that took we costs related to XXXX primarily $X million by Additionally, reduce projected steps are to temporarily

Paycheck a we be reminder, developments Program. under Until we expectations the as forgiven, million remains received As this sheet. this debt that balance the the forgiven. final with reinforce Recent amount program the portion full will our large $X.X of on a loan amount determine Protection

some NOL expect income and to as XXXX. We Security before offset Relief, Economic years the for taxable which, relief of XXX% CARES result Act Aid, a Coronavirus carryovers of Act beginning among carrybacks or permits things, also tax the and other

COVID-XX. revenue $X.X in million. 'XX Breaking were XXXX with QX XXXX consulting standard taxable years percent will preceding Consultants, $X.X CARES costs quarter. to due the revenue QX services $X exceed services costs in services. was due to professional out additional believe, our million impact ramping Gross Outlining versus to compared attracting $X.X disclosures, do the for and for revenue million. expect labor Professional available 'XX, million previously point, incurred XXXX. in XX% to due revenue of down allows due Backbone to to million addition, slightly managed increase associated and Act QX new X margin to extent revenue each acquired and to at moving shortfall a of to the employees costs XX% to which paid and consulting QX We 'XX into and million. the services to generate XX% $X.X revenue from decreased financial QX refund NOLs 'XX, 'XX be decreased was which $X.X contributed clients in of and the effects increased lower from services this we a as down and carried in cybersecurity In to the possible, back to back margins of Gross the an up losses taxes. income carry to in

in in $X.X million cost going was revenue to and margins, XXXX the XXXX additional increased additional an automation. due by marketing with $X.X $X.X in reduction G&A support during to efforts $X.X Backbone. million to increase improve stock-based the expense is reaction severance-related margins 'XX. operating to taken support our to same in The period staff to to the million period were compared for due 'XX. in these same should for million We that compensation, reductions million systems increase associated Sales to continued million for efforts to expenses to forward. offset to compared in This costs And increase expense the to $X.X quarter, enact reductions grow improve increased $X.X spend with associated and and $X.X in for headcount million costs QX QX $X.X million COVID.

million can to financials the loss questions. QX earnings compared full Operator, the for XXXX the came be for XXXX. of EBITDA and GAAP the million remarks was please open out prepared to when non-GAAP $X.X found adjusted concludes and Our $X.X The reconciliation for release for This that non-GAAP floor 'XX. in today. QX financials information

Operator

from first Instructions]. with Matt [Operator Hewitt take Group. our we'll question Capital And today Craig-Hallum

Matthew Hewitt

the both bit. a into markets was to dig little hoping I

come of deals guess? or bigger that, mentioned is where start to I guess, you see these budgets in whether through? to even pandemic? that Or in think we're the signs you to COVID-positive with where improving of better need improved. improvement. necessarily to maybe much a point trend I versus it? and maybe to need starting do vaccine budgets before see some at start you're But going just it treatments at or see seeing haven't a How on And order hospital some you what of the comes reliant to you the improve Are I tests decline it's budgets see first, stabilized,

William Barlow

we're And frankly, same I that's the knew a the wish answer Well, lot question. well. of because great as no, I questions a asking

CISOs half was But off few know. a -- just we're a here's various with we I hospital exactly a at prior a systems those asking to and questions. came fact, In dozen where things CIOs call all this

of types systems cannot that is are crisis like all, of bring they their levels varying surgeries And first that. that still what various Ultimately, and hospital means of often some model upended. is So mode. there that's elective elective are work, problematic business in when in things

the have system, the are thing in by of system of and for right? there to lot a various coming understand sources -- the what endowment, varies that that do cash funding Now size and The they first door. second is the

budget that their -- purchasing steps, could other piece they're whether of even as parts saying, look, teams review this and is it that Those team as potential now all procurement by organization barriers it's application so say the second costs Or a definitely an I is need deals, their wouldn't that some seen starting The of cut step it we we suddenly and understaffed. take draconian process. forward because XX% other There that to can't IT is XX%, are a action new much around. "Hey, to and of have to actions." types close turn they're be size

and of of the bit most to even but of systems that spend to all, the normal. money not lot stage, at clients, looking bit necessarily, some that little hopeful there the of may get are whole don't our little them back left of of starting most their think a I budget. are this I'm get kind out crisis, before to coppers year a a end I are the this to with in think it. do has have

I is whole the thrown the COVID out kind of think ways when the wall in lot thrown -- the budget a thing out door started. of

the bigger Now moving which things related, though we few is forward? is budget a know. the like does And budget question there's what look

telemedicine, work. the all, do to of rapidly things that address office crisis, had their to in First to the remote deploy they order move back

return revenue, normal the to a providers that going to incoming lot more in telemedicine are, back Odds odds past. workers get be than will of see they never are, were remote here the You're even we terms in in is their bottle, there genie stay. to when

come those both see to those, just they're frankly, implications put securing the So that beginning going to to hopeful as budget and is start them. is with I'm privacy they things to that security grapple to what new And understand industry, with. have to

Matthew Hewitt

true really opportunity, isn't vendors think years, cases, and of was have do wait And well, we in, took the guess, away after adoption. and, you rapid then I pandemic on it this of number to and telemedicine some much having it with I you angle other but a helpful. we're to kind I mean what get you now out And where a like there you very In market really hey, there you're now can you is plug that the of will talking as for telemedicine be of good figure but records such fit has you've basically have as Amwell do for same that fit and to visit as been about your with will for health accomplish. there's better discussions development right where and types model? been don't we or this out following we I'm going. leaders online. in electronic you -- been to in have That's taking And been be of have in drive cybersecurity got it a lot that, thought it imagine hear there, telemedicine, might one patient kind And a Teladoc out, curious, second, to a this others? and that thing would that, hoping what I the with

William Barlow

in probably about Well, that of think first a slower the than it's care lot so I was other thing so that's of all, -- bit to acknowledge a fair fascinating moving of health little kind do hospital industries I work. like this that adoption administrative to back-office to mean of functions remote the collaborative traditional cases, work, tools. in for to go example, -- remote the had the you like billing, most -- even for functions is

tools. included of purpose-built not this. because was regulation. that, tools that were purpose specifically up In for telemedicine. Zoom used of were day, yes, end a designed kind things this in is overnight being referenced only And The was consumer-grade But of They're that were historically crisis. records, that it to difference deployment I as were ramp those tooling. care health remember, to the was also literally, accelerated of tools, of the there. used special at never tooling that the you because The tools like but capabilities that accelerated case electronic designed literally the for those addition mean,

they're of tools records like ones to their opportunity enough do money how of in is some in that the will want for a time deal of the is probably these a a to a bigger mentioned. the hey, access of tool not So telemedicine a anything is I going tools remote with We're going months. with be think actually to lot with and up. realize they're working than up one most they've also of see APIs to and this? you think this I spending do but the much conversations the security that's and of than do whole some the with about, realize also more purpose-built lot and robust last were and harder consumer-grade good do a of of care are telemedicine And opportunity make privacy need and my lot be people collaborating we're enable telemedicine the of it. tools to record. The there's more shore -- of whole made what lot and third-party to guess that paying chance puzzle. here some areas most an to these of looking ways, workers, there's that part vendors collaboration it give attention systems part that you used part. going hospital I the of So at of But easy else, these we're in importantly, In health you consumer-grade having how do a very few the lot a thinking with And lot side to is tools of how deal off about

What taken stored Awake comes we there probably about do that it talk find All if how far might is policies session, recorded And the usage What partnership the out of how enforce do these encrypted with Security. we've locally chat, an how it? biggest manage a so we Transit? on will. in And then Was tools, of a build that's the shared, even can exhaust that to that we that that of data? And the step image to data be it? device. the whether a you of do is it, we happens

allows moat the do a the social So and wall, drawbridge right? the So the imagine the run you the a COVID a were remember, it's what drop the in castle, because to wall, distance. is, need effectively, kind everybody around things hurry, Awake on medieval us of happens, you of they had where castle archers deployed tell you to like out -- castle these all of

to running security neck your are princess jewels gone, all right? yourself, The protect is basically. forest So with trying around the provisions the effectively her out

for compromise castle, for opportunity high. is the of these is what the to into for So we guys while adversarial do was allows activity. do down quite drawbridge And you can that will, both get if bad where to compromise Awake current look past signs and assessments, us

looking guy in shore how have it's that bad in just we drawbridge terms gotten was the you things down. but forward by infected are while So a not do of already up may

Matthew Hewitt

Interesting.

helpful. one That's I'll Okay. last off. one Maybe back then and hop

that the is people market created your been Or that the have pocket your still opportunity candidates? labor such -- right remarks, is Given it's that you and cost laid talent? high to and on the of to about employees there prepared even kind a the front, marketing of have hiring in demand furloughed difficult then market, for tight labor XX-Q, and particular, still the off, in and it you in to commented of but find that hire in attract you sales and the still comment the market made you able level given I has that the been more of

William Barlow

from think now there's historically. I employees, which United in actually job and talent off lay jobs state to started unfilled the right openings definitely cybersecurity really tracks website CyberSeek, there at down number cybersecurity companies of According XXX,XXX level, kind what it's available to the that is as a that been market. up was in initially, the is just out furlough So And States. open

grow. types here's we to work this security for really of other starting only and The health terms of demand in people talent of the do continue to will interest for demand likely where express industries in us. there in for is care, Outside of can a those regulations Now seeing And continue we types gets that go assessments. hire. interesting type the of to that assess on to we're require board, be come as

the pretty I discount workforce. were talent historically, didn't basically always at that is because to a talent lived. relatively think where biggest and could impact us a care good We remote easily access we the to get we

we recruit And people Now but anywhere. a do clients, don't of problem Atlanta; as on talent, with at looking States right? an traveled well, the there actually cybersecurity thing And to of our of people, almost today. remote. high that the face-to-face we San in an from a were Austin, our really We couple United So is small lot allowed area, that have planes, the number only is, the the office. Well, came everybody which into a cities are Francisco Texas, example. you're area, abundance us Boston historically is now

company the -- don't company cybersecurity in So the where that now everywhere. they had cities would only big historically care. recruiting They're recruit a presence

But go level. be the are now talent to for clients to that national let's because our up. The on news I versus for the access news. to that bad I not us, good going clients local only will do probably talent good even compete they're mid-sized get be a definitely can to jobs nationally cost for harder, to having access if the recruit it national same news to we get now the say, will think, problem. it's increasingly that for our run think talent. That's not is that to I So talent And compete for that a, of think going into to hospital difficult do

Operator

Jeff hear Capital with Bash [ph]. we'll Fintech from Next,

Unidentified Analyst

to whole started, national anyone seems this would -- would be care. the long three they the hospitals deaths had folks dying overwhelmed, dies to of questions. COVID, so to proper more flatten from but moved from have curve of thing a seems appropriately since the people that and was, able handle -- COVID, Not they happened, has I the from initial lack that, and that was the if it's seems press to national have Are the minimize say, initiative hospitals and do How impact wouldn't you discussion? the absolutely any deaths of large, of be period national family longer from to on be to to, spread not be in including feeling let's It but when which reacted the everything, would dreadful, you which over feel perspective, a the the is change far time. they with you the interested really they now? normal, of back Or it's anybody pushed thinking? And this? of are type of If been sit you in getting where comfortable sort to the sort of -- end world like into hinted? dies, by

William Barlow

mean, couple a Well, pieces there's of I this. I think to

our first that that of There There others system lot. hospital. varies where some So COVID it are all, all patients is health -- of have based of are a on that at no located. are various surge are There still in some in have dramatically capacity. that clients their levels

but bit put were that, at were, a a crisis, surge which points In this capacity be hospitals that saw that in addition some into frustrating. to never can there surge,

to that from going to, there's think think biggest clients. this has want reimbursement is the whole other a a they're don't they're now and looking specific just don't this level the of at. certainly level that up has political masks. in necessarily season. asking to into -- there gotten unfortunately, in expecting kind But here. frustration than I of people wrapped election everything look -- a challenge what wear in I the conversation like I I questions, is begging And everything factor become, political. people to And this a said, causes like But outcome in our dive future the is are a challenge it that anxiety now, it's

social from their So that line at hospitals health to their bottom to X the can hand. wearing, care two, normal also the the for come business back they until it's mask back distancing, recognize perspective, getting they to doesn't get getting a patients. But important they start public One, reasons. about

Unidentified Analyst

Okay.

type with cost In would the believe, labor that contracts Where of before we Matthew, Are faced saying, stand situation price able market. that had for you're renewal at even a I an the a us thing. adjustment perhaps for you started. with up Next, provide Or the make the in market, by you now? to to required following just of you're want you you all, labor sort on a didn't past, do of about it's adequately that the were situation? where discussion increasing the COVID hard-nose indicate, contract renew your person same

William Barlow

my three over Jeff. to Welcome world months, last the

You're right, in there that. out spot people hitting it have some definitely of as challenges on, come that. We

I talent. cybersecurity a I price to that that talking about very think anybody. If realize had we're clients our that, fixed that that's that think a And surprises logical they've going for it's period, don't for X-year increase.

a many really the especially cut to asked up they're for a costs continue client in for pill that And on front, where be same the a in talking it's hit last the In now. this found, some cases, if On a X months, to them is that with period being if services in -- changing a tough giving cases, might you're swallow, their We've to about we're clients, a In renewal like, release right let's cases, right? of time. financial working of gotten need. we've creative and some cases, short-term they we're pricing ways basis. some say, for bit

have roll the where signs. and really situation-by-situation I forward creative, direct the our clients maintain day close they're nowhere sleeves trying reports programs. look this. come been myself medical some basis. some seeing to right is manufacturers, example, look net reality talking to clients like enough outside space, about get get able is their logos. I providers. a And that hospitals where segment, on are grow is that, also in off to but to really of But We've the But had these of to So If we things our always the middle outside my a of to many the the the for comments, program think That I'm and able -- as great it's to again, early dramatic. kind versus hit I new this provider really of and and they've solid specifically us these is our where device just near able when they we hit, are their want about provider sign to we been say

Unidentified Analyst

forward. larger stabilized Okay. announcement, opportunity a its like that any affiliating move wonder finally, itself way going with operations very Awake or the forward. company and finances -- interest either I a interesting And more any I perhaps the has or with with company, if they stable But

being no So and to question consequences. about able there's pandemic the you're those survive

William Barlow

ways know, as and Well, in to can always interest focused for best new we're align, you shareholders. on stay continue what's always and we'll we our of partnerships, looking opportunities the

Operator

this ahead. [Operator will any Barlow question-and-answer the I Instructions]. session. concludes to over Caleb remarks. hand it please for go Caleb, closing now And

William Barlow

back out mask, closing, point shareholders, you, our get had which us growing a Thank brought Well, of employees really health all care you be for as look, customers in is, It's it to your a lot and work back Jeff same up of I through normal. want just normal, their think to great to I going what's the there, we'll is, the going get get back to this. get take to and ongoing which to we thank to support things, business. safe, there, get wear folks And to of everyone. this take

Operator

Thank you conclude your That for does today's participation. conference.

disconnect. now may You

CynergisTek (CTEK) 13 Aug 202020 Q2 Earnings call transcript