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GTY Technology Holdings Inc. (NASDAQ:GTYH)
Q3 2019 Earnings Call
Nov 7, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the GTY Third Quarter 2019 Earnings Call.

[Operator Instructions]

I will now turn the call over to John Curran, Chief Financial Officer of GTY. Mr. Curran, the floor is yours.

John Curran -- Chief Financial Officer

Thank you and good morning everyone. I'm John Curran, GTY's CFO. And I would like to welcome you to our third quarter earnings conference call for 2019. With me on today's call are Steve Rohleder, GTY's CEO and Chairman, and Harry You, GTY's Vice Chairman.

Please note that our earnings release and quarterly reports on Form 10-Q are available on the GTY website at www.gtytechnology.com, both contain highly detailed information about our financial results. During the call, we may use a non-GAAP financial measure, if we believe it is useful to investors or if we believe it will help investors better understand our results or business trends. You can see a reconciliation of certain items from GAAP to non-GAAP in Exhibit 2 of the earnings release.

Any forward-looking statements we made in the earnings release or any that we may make during this call are based on information that we believe to be true as of today. Things up and 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 prospectus on Form 424B4 filed on June 6, 2019, for a list of risk factors applicable to GTY.

With that, I will now turn the call over to Steve.

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Thank you, John. Good morning everyone and thanks for joining our call. As I've said in the past, our company's strategic objective is to build the preeminent public sector SaaS company. Full stop. We brought together six technology companies that have cutting-edge solutions focused on solving major pain points for our public sector clients. To realize our primary objective, we're focused on the following three areas. First, scaling our go-to-market team as well as expanding our technology and services alliance so we can grow our client portfolio. Second, continuing to develop new products and enhance our existing products to expand our market and keep our clients happy. And finally, standardizing to scale, or said another way, driving operational efficiency in our back office and support functions.

I'm going to walk you through our progress during the quarter for each of these three areas. We've made some very good progress with our efforts to build out our go-to-market team. As we discussed on last quarter's call, we plan to hire 20 new sales and marketing employees in Q3 and we were able to do slightly better than that. During the quarter, we hired over 20 new sales and marketing professionals to the team and we expect to add a similar number in Q4 as we build out our organization to support our 2020 growth plans. From an execution perspective, we saw a bit of a summer slowdown in the first half of the quarter, but the team rallied and we ended the quarter with excellent bookings performance and over 70 new customers.

During Q3, we announced a number of key customer wins including the State of Idaho and Sheridan College in Canada. We also entered into a cooperative agreement with the Texas Department of Information Resources, an arrangement that covers 40 states and makes it easier for government entities to procure our technology. These announcements represent a few of the significant transactions we closed in Q3 and we'll be announcing more in the coming weeks.

Turning now to partnerships and alliances. In July, we announced our partnership with Infor to deliver GTY's budgeting and transparency solutions, as well as our grants management solutions from eCivis. We've also added significant agreements with three top consulting firms. However, we're not able to share details at this time due to contractual and competitive reasons. We're already starting to see opportunities this quarter as a result of these relationships and we expect our partners to be significant drivers of our pipeline in 2020.

Before I wrap up my go-to-market comments, I'd like to talk a little bit about our cross-selling efforts. While we see opportunity in this space, it's going to take longer than what we originally expected. Our current activities are focused on what I call cross-referencing, where we leverage our strong customer relationships to influence other customers. A great example of this is our recent efforts at the ICMA Conference in Nashville earlier this month. We brought a number of city managers who are familiar with one of GTY businesses and introduced them to our other GTY businesses. It was tremendously successful and we came away with a significant number of new leads.

Our second area of focus is technology innovation. As a multi-tenant SaaS solution, we always aim to improve our technology offerings across our business units. Each of our business units have their engineering teams working on product road maps to enhance their existing products and develop new ones. There are two particular innovations, I would like to mention today.

The first is Bonfire's Premium Vendor offering, which is designed to support Bonfire's growing database of more than 100,000 vendors. Statistics show that the more vendors that participate in an RFP, the better the outcome. Our ability to more efficiently connect customers and suppliers is hugely valuable in the marketplace and is the centerpiece of this offering.

Another innovation I would like to cover is the new full-service offering from eCivis called Fund Maximization or Fund Max. This is a combination of our grants management technology with our cost allocation technology along with our expertise and professional services. This combination allows us to drive tangible value for our clients and create stronger relationships. We continue to invest in R&D to maintain our technology leadership and you'll see new announcements in the coming months, as we deliver new innovation to our clients.

Finally, I'd like to comment on our efforts to drive operational efficiencies across our business units and highlight a few projects we're working on to help the company standardize to scale. Our standardize to scale efforts are focused on standardizing key operating areas in an effort to help us quickly scale and improve productivity. One project in particular is our effort to standardize our financial and sales operations. First step in this project is to roll out a single ERP system and a single CRM system for all of the business units. We expect to be fully operational on our new NetSuite ERP system in Q4, which will help us close faster and provide key metrics and reporting to the businesses.

From a sales perspective, we'll be rolling out sales force across all of our business units in Q4. The broader sales force implementation is key as it gives us common CRM platforms across all of our businesses. As you can imagine, knowing that we have an existing customer relationship in a city or another entity, can be incredibly valuable even if we have different buyers.

I'd like to underscore that both of these systems projects are important as they allow us to more easily share information across the company, provide a more efficient foundation as we scale. With that I'd like to turn it back over to John to discuss our financials.

John Curran -- Chief Financial Officer

Thanks, Steve. Moving on to our financial results for the quarter. Our GAAP revenue was $8.8 million in Q3 of '19 compared to $8.2 million in Q2 of '19 and $7.6 million in Q3 of '18. On a non-GAAP basis, revenue was $9.8 million for Q3 of '19 compared to $9.9 million in Q2 of '19 and $7.6 million in Q3 of '18. A reconciliation between our GAAP and non-GAAP results is included in Exhibit 2 of our press release. From a non-GAAP revenue perspective, we saw year-on-year revenue growth of 28%, which is slowed when compared to our growth in Q2 of '19.

We experienced a bit of a summer slowdown in July, but business really picked up as we went through August and September. Our bookings activity for the quarter was strong with three out of six companies setting new booking records for the quarter. On a non-GAAP quarter-on-quarter basis, revenue declined by 2%. As I mentioned our Q3 business was a bit back-end loaded, which impacted the amount of revenue we could earn in quarter from new contracts.

We also had a tough compare with Q2 of '19 as a result of seasonality in our payments business. Our CityBase business experiences higher transaction volume in Q2 and Q4 as a result of certain payment streams that occur on an annual or semi-annual basis, such as real estate -- real estate tax payment. We expect the transaction seasonality in CityBase will become less material over time as we scale and continue to build out our subscription business. Taking a look at our operating expenses. Our total GAAP expenses were down 5% quarter-over-quarter. And our non-GAAP expenses were down by 11%. Sales and marketing expenses were up by 16%, due to our investments in incremental sales reps, which was more than offset by declines in our G&A expenses.

From a cash perspective, our balance decreased by $8.6 million to $16.9 million at the end of the quarter. A little more than half of this decrease was driven by one-time or deal-related payment. The remainder of the decrease was driven by operation.

Now let's take a quick review of our results for the business units. Budgeting continues to be a strong performing segment for us. Questica reported $3.5 million in non-GAAP revenue for the quarter, representing 43% growth year-on-year and 16% quarter-on-quarter.

Sherpa, our budgeting platform that specializes in large enterprise clients, reported $900,000 in non-GAAP revenue for Q3 of '19. Given the size and complexity of the deals for Sherpa, revenue can vary from quarter to quarter due to service delivery timing. Looking at it on a year-to-date basis, non-GAAP revenue for Sherpa was $3.3 million, representing 52% growth year-on-year.

Bonfire, our procurement platform, reported $1.3 million in non-GAAP revenue, representing growth of 55% year-on-year and 17% quarter-on-quarter. Continued strong performance in our procurement business in the marketplace.

eCivis, our grants management platform, reported $1.9 million in non-GAAP revenue, representing growth of 49% year-on-year and 23% quarter-on-quarter. We are seeing early success with our new Fund Max offering.

Open Counter, our permitting platform, reported $500,000 in non-GAAP revenue, representing growth of 35% year-on-year and a decline of 9% quarter-on-quarter. The decline from Q2 was related to the timing of professional services revenue delivery. The underlying subscription business is still growing nicely.

CityBase, our payments platform, reported $1.7 million in non-GAAP revenue, representing growth of 4% year-on-year and the decline of 26% quarter-on-quarter. As I noted earlier, there is some seasonal impact to CityBase's transactional revenue from Q2 to Q3.

Finally, I'd like to give you an update on guidance. We are currently in the middle of our 2020 budget process, and expect to wrap this up in December. We anticipate that we'll be ready to provide an update on guidance in the new year.

Operator, let's open it up for questions. And Steve will provide some closing comments after the Q&A.

Questions and Answers:

Operator

[Operator Instructions]

And your first question comes from Scott Berg with Needham & Company.

Josh -- Needham & Company -- Analyst

Hey guys.

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Scott.

Josh -- Needham & Company -- Analyst

This is Josh [Phonetic] on for Scott. I know you mentioned 2020 there at the end, but I was wondering how should we think about revenue growth opportunities next year and your ability to have the sales force ramped in time to drive this growth?

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Yeah. So I'll start off and then I'll let let John comment. We're continuing, Josh, to invest in the expansion of the sales force. And I think the way you should think about this is the addition of resources now will have an impact, probably through -- starting in Q2 and then accelerating through the rest of next year.

I think it has taken a while for some of the sales professionals that we've hired in to begin to build pipeline. I'm really excited about the volume that we have right now. I commented a little bit on the services alliances as well, and I think the jump-start that we have with the new sales reps, is that we not only have a nice inventory of existing clients that we can begin to call up, but we also are beginning to see a pipeline from our services and alliance partners that these new sales rep can attack pretty quickly.

So, I expect the productivity to accelerate, to answer your question. John, you want to comment a little bit on the guidance?

John Curran -- Chief Financial Officer

Yeah, sure. So it's what I would say is that the incremental resources that we have, if you look at our current growth trajectory, obviously, adding in another 40 resources is going to increase our capacity for growth. So directionally, that is going to help us accelerate our bookings volume next year. That's on top of roughly 80 to 90 resources that we had coming into Q3.

Josh -- Needham & Company -- Analyst

Okay, great. And moving -- oh, sorry.

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Go ahead, Josh. No, go ahead.

Josh -- Needham & Company -- Analyst

So I was just going to move on to another question. So what's the initial reception from customers regarding your ability to offer multiple product lines? Since your products have different contract and pricing terms within the individual business units, how are you planning to manage customers that want to buy multiple products and possibly get a bundled discount?

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Yeah, I'd love to be able to have that issue to deal with. Right now, we're in the kind of the early stages of introducing -- as I said in my comments, introducing our clients to the GTY product suite. And as I mentioned, the early returns, at least from the discussions we've had with our clients, are really positive. I think what it's going to take is some work that we have under way to build up our GTY brand and establish GTY as a product suite company, and then publicize that into the marketplace. Once we have that I think introductions to our existing clients will accelerate. And -- and then we can cross that bridge of bundled pricing or bundled product offering.

At this point, we have seen evidence that we're beginning to submit joint proposals. We had one with CityBase and Open Counter that went in in Q3. So we're excited that the business units are actually working together to go to market together. I think it's going to take a little bit of work though to get the GTY name and brand out there so that clients understand the product suite that we're bringing to market. I don't think it's going to -- but you know, that it's not heavy lifting, so.

Josh -- Needham & Company -- Analyst

Okay, great. And then just one -- sorry, go ahead.

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Yeah, just one other comment I'd make is, our partners are also seeing our combining the products. So Infor, for example, with budgeting and grant management. So that's another way for us to kind of combine our products in the marketplace through our technology partners.

Josh -- Needham & Company -- Analyst

Okay, great. And then just one on the financial side, on expenses next year. While you're a growth company, how do you view cost controls next year? And any other synergies post acquisition that you can drive to manage the cash burn?

John Curran -- Chief Financial Officer

Yes, that obviously -- Josh, this is John. That's absolutely front of mind as we're planning for next year. We have to be creating operating leverage as we scale the business. So you'll absolutely see that taking place as we continue to grow our business next year. We still have a number of opportunities as we talked about in the call to improve our productivity. And the low-hanging fruit, as Steve mentioned in his part of the call, is in a lot of the back office areas where we can use technology and standard business processes to help really scale and deliver some G&A productivity in the coming quarters.

Josh -- Needham & Company -- Analyst

Okay, great. Thanks, guys.

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Thanks, Josh.

Operator

I would now like to turn the conference over to the presenters for any closing remarks or comments.

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Okay. I'd like to close with my view on the market and the GTY opportunities that we have in front of us.

Working with our business units to build out their respective sales platforms for the long run continues to reinforce the great market opportunity we have in front of us. The transition of the public sector to the cloud is under way, with key decision-makers overwhelmingly in support of the investment in their digital strategies and the improvement of the constituent experience. We've seen these trends through our client engagement and an increase in our pipeline, which our investment and sales capacity should help capture.

I'm extremely excited about both the near-term and long-term prospects of GTY as we deliver on our vision to be the preeminent public sector SaaS company. Thanks, everyone, and have a great morning.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

John Curran -- Chief Financial Officer

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Josh -- Needham & Company -- Analyst

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