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GTY Technology Holdings Inc. (GTYH)
Q4 2019 Earnings Call
Mar 12, 2020, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by and welcome to the GTY Technology Holdings Q4 2019 Earnings Call. At this time, all participants are in a listen-only mode. And after the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I'd now like to hand the conference over to your speaker today, John Curran, CFO. Please, go ahead.

John Curran -- Chief Financial Officer

Thank you. Good morning, everyone. I'm John Curran, GTY's CFO. And I'd like to welcome you to our fourth 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 is available on the GTY website at www.gtytechnology.com, and contains additional 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 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 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

Thanks, John. Hi, everyone, and thanks for joining us this morning. In 2019, we executed our strategy and delivered strong results in the back half of the year. We believe we have momentum heading into 2020, and expect to accelerate topline growth this year.

As we completed the initial year of operations at GTY, I'd like to start with a review of our brief history, and highlight some of the things we've learned in that time. In February of 2019, GTY was formed with the acquisition of six companies, providing unique SaaS solutions for the public sector market. These solutions, listed by relative revenue contribution to GTY, include budgeting with Questica and Sherpa, payments with CityBase, grants management with eCivis, procurement with Bonfire, and permitting with OpenCounter.

As you may recall, the founders of GTY saw great opportunity to provide modern SaaS technology to the public sector customers of North America. By any measure, this market is large, and in the early stages of digital transformation. Our experience over the last year has confirmed that we're in the right market to support our growth plans. That experience also led us to three key findings. They include product-market fit, our go-to-market approach, and our back office efficiency opportunities.

GTY's six business units provide best-of-breed solutions, solving key pain points for public sector customers. The time I've spent with our customers, and our engineering teams, has clearly shown me that we have SaaS technology that our customers really value, and we have the engineering talent to continue innovating and expanding our product base. Our products are flexible, market relevant, and easy to deploy, accelerating our customers time to value. This combination allows us to win in this very fragmented marketplace.

Secondly, early in our journey, we found the six companies were at very different levels of go-to-market organization maturity. Some had established sales marketing organizations, while others had founder-led sales organizations. It was clear that we needed to invest in our internal sales and marketing resources, further develop our partner channels, and implement systems and processes to support our sales teams, so that all of the business units were operating at a high level.

Finally, our back office systems and processes for each of the six businesses, we saw a great opportunity to standardize on common systems and processes, so we can scale our businesses more effectively. These early findings, drove the development of our GTY business strategy. This strategy is comprised of four key drivers to help us rapidly grow our topline and enhance our operating performance.

I want to briefly touch on our performance against each of these four strategic drivers. One, customer success; two, go-to-market excellence; three, continuous innovation; and four, operational efficiency. First, we have an unwavering focus on customer success. We operate in a referral market and keeping our customers happy is paramount. We are also a SaaS business. So keeping our customers happy, keeps our churn low and our renewal base growing. The ultimate test of a happy customer is whether they will promote you with other potential customers.

We've got a number of examples on the GTY website and the individual BU websites of customers, who are willing to do more than just provide a reference. They're willing to invest their time in helping us create marketing collateral, like some of the great videos that we have on our websites. Customers like the City of Detroit, who maximize their grant funding through the use of eCivis or the Great Lakes Water Authority, who is managing $1.8 billion in procurement contracts with Bonfire.

Satisfied customers are also customers, who renew their contracts with us year-after-year. We've experienced low churn rates and negative net dollar churn for 2019. For those of you that are new to the SaaS business, negative net dollar churn is a good thing. These are good results, and yet 2019 marks only the beginning. We'll continue to focus and invest in customer success, customer support, and product development in an effort to delight our customers.

Our second strategic driver is anchored in the continued evolution of our go-to-market approach. We need to continue to mature our sales and marketing teams, and expand our channels to accelerate growth. To be very clear, go-to-market excellence is our mantra. Over the last year, we've been busy -- very busy in this area, and are proud of the progress we've made to date. Our efforts were focused in two areas. First, is the expansion and the development of our business unit sales and marketing teams. Secondly, expanding our partner ecosystem, including service partners, technology partners, and distribution partners.

As we discussed on our Q3 earnings call, we added 20 people to the sales and marketing team last year. In the fourth quarter, we added 22 more people to the team, bringing our six-month total to 42, almost 50% increase in our sales capacity. We've been working hard to onboard this talent, and we're starting to see the first part of the positive effects of these investments. We're seeing more leads being generated, resulting in a significantly larger pipeline for 2020.

On the channel front, we've been busy as well. Last quarter, we announced a new cooperative contract with the Texas Department of Information Resources for our Bonfire business. In Q4, we've seen five new customers added under that contract. Cooperative contract vehicles like this one, can greatly shorten our sales cycle, resulting in a lower cost of sales, and the rapid addition of new customers to GTY.

We're happy to announce that in the fourth quarter, we also signed a new relationship with Carahsoft, a trusted IT solutions provider, who has a number of cooperative contracts already in place, along with the sales and marketing resources focused on GTY. Right now, our eCivis grants management and OpenCounter permitting and licensing products are available through Carahsoft. And moving forward, we anticipate adding additional GTY products.

On the channel front, I'm excited to announce the signing of a joint marketing agreement with Grant Thornton, which will be working with our budgeting and grants management business units, as both an implementation partner and a reseller of our products.

Partners are a key component of our go-to market model, and I'm expecting them to play a bigger role in the future. For example, our partner Infor and our Questica team just closed the City of New Orleans, one of the Top 50 cities in the US. More details on both of these announcements will be coming out the next couple of days.

Finally, we're investing to reach more customers in both the middle-market and enterprise market. In Q4, we added 62 new customers, which compares to 72 new customers in Q3. Most notably, the 62 customers added this quarter, contributed higher subscription values in total than the customers added in Q3. We see this as early -- the early success of our strategy, and we increasingly closed business at the enterprise level. Some notable enterprise wins in the quarter include the City of San Jose, the US Virgin Islands, and the California Department of Housing and Community Development.

Our third strategic driver is continuous innovation to maintain our product leadership, and develop new technology to effectively serve our market. During Q4, we introduced a number of new offerings, including multi-step approvals and versioning for OpenCounter permitting and licensing, FundMAX grants management from eCivis, and CityBase's new user profile functionality. We also saw the first joint offering between CityBase payment functionality, and OpenCounter permitting and licensing, where we're providing a joint solution to a major US city.

In addition to the new technologies and offerings that are visible in the marketplace, our engineering teams are working diligently to improve the performance and security of our existing platforms, as well as working to make them easier to use and easier to implement. We believe our products are best of breed today, and we're committed to maintaining technology leadership.

Our fourth strategic driver is operational efficiency. Early in our journey, we observed a need to implement common technology and best practices across our business units to drive out redundant costs and allow our business units to focus on their customers. We've completed our implementation of NetSuite, so we now have a single ERP system for all of our business units. This should allow us to close our books faster and improve the visibility into our business operations. Now that we have our ERP in place, we can move on to other systems that will help us improve productivity, like the rollout of Concur for managing our travel and entertainment spend.

It's important to note that in 2020, we will be using our own Questica budgeting software to manage our forecasting and budgeting processes. With regard to our rollout of Salesforce.com, we expect to have our system fully operational in Q1. This is a critical tool for our sales teams and we're looking forward to having all of our sales data in one place.

In summary, I'm extremely pleased with our team's progress against our strategy. I'm accustomed to moving fast, and I would have liked to been further along on a few fronts. But that said, I see the visible impact our strategy is having on our business, and more importantly, on our many customers.

Now let me turn the call over, to John, who will talk about the effect our strategy is having on our Q4 an our annual financial results. John, over to you.

John Curran -- Chief Financial Officer

Thanks, Steve. Our product offerings are primarily cloud-based SaaS solutions, that generate a recurring revenue streams. As Steve mentioned earlier, we have high customer satisfaction, that results in the low customer churn and higher lifetime value. From a financial perspective, we believe this gives us a stable foundation for us to build on over time. While our recurring revenue represents the majority of our revenue today, we also have services revenue associated with the configuration or implementation of our solutions, with our customers, and this revenue can vary from quarter-to-quarter. Over time, as our subscription base growth, the mix of our revenue from services, should decline.

Moving on to our financial results for the quarter. Our GAAP revenue was $11.5 million in Q4 of '19, compared to $8.8 million in Q3 of '19, and $8.8 million in Q4 of '18. On a non-GAAP basis, revenue was $12 million for Q4 of '19, compared to $9.8 million in Q3 of '19, and $8.8 million in Q4 of '18. For the full-year 2019, GAAP revenues were $36.4 million, compared to $29.8 million in 2018, an increase of 22%. Full year non-GAAP revenues were $40.5 million, compared to $29.8 million for 2018. That's an increase of 36%. A reconciliations 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 37% for the fourth quarter, which is accelerated when compared to the 28% growth we reported in Q3. On a non-GAAP quarter-on-quarter basis, revenue grew by 23%.

As I noted on the call last quarter, we have some 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 a semi-annual basis, such as bi-annual real estate tax payment. Adjusting for this effect, we grew by mid-teens quarter-on-quarter.

Taking a look at our operating expenses, our total GAAP expenses were $49.2 million for Q4 of '19, and included a goodwill impairment charge of $32.2 million. Excluding the charge, our operating expenses increased 9% quarter-on-quarter. Our non-GAAP expenses also increased by 9%. Sales and marketing expenses were up by 13% with our investments in incremental sales and marketing resources, and represented roughly half of our overall increase in operating expenses.

The impairment charge for the quarter resulted from the year-end review of our intangibles. Based on this review, we identified four business units, which are performing below our original expectations, and we updated the valuations for these companies. Based on this analysis, we identified goodwill impairments for three business units, resulting in an $18 million charge for CityBase, a $13 million charge for Bonfire, and a $1 million charge for eCivis.

From a cash perspective, we ended the year with $8.4 million in cash. As announced during the quarter, we raised $12 million as a result of the new debt financing arrangement, managed by UBS O'Connor LLC. We also announced that we are reviewing a broad range of potential strategic alternatives to best position the Company for the future. We have not set a timetable for the conclusion of this review, nor have we made any decisions related to any potential strategic alternatives at this time.

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 $3.9 million in non-GAAP revenue, representing 55% growth year-on-year, and 13% growth quarter-on-quarter. Sherpa, our budgeting platform that specializes in large enterprise clients, reported $1.8 million in non-GAAP revenue for the fourth quarter. Given the size and complexity of the deal for Sherpa, revenue can vary from quarter-to-quarter, due to service delivery timing. For the full year, non-GAAP revenue for Sherpa was $5 million, representing 62% growth year-on-year.

Bonfire, our procurement platform, reported $1.5 million in non-GAAP revenue, representing growth of 65% year-on-year, and 18% quarter-on-quarter. Our procurement business has delivered another strong quarter.

ECivis, our grants management platform, reported $1.6 million in non-GAAP revenue, representing growth of 36% year-on-year, and a decrease of 12% quarter-on-quarter. We are seeing a early success with our new FundMAX offering.

OpenCounter, our permitting platform, reported $500,000 in non-GAAP revenue, representing growth of 4% year-on-year, and flat quarter-on-quarter. We brought on a brand new sales team for OpenCounter in Q4, and we've already seen them return to growth in Q1.

CityBase, our payments platform, reported $2.6 million in non-GAAP revenue, representing a decline of 2% year-on-year, and an increase of 54% quarter-on-quarter. As I noted earlier, there's seasonality to CityBase's transactional revenue, which is driving more than half of the CityBase's quarter-over-quarter growth.

Finally, as we noted in our press release on February 14, our non-GAAP revenue guidance for 2020 is between $57 million and $63 million for the year, representing 48% growth, at the midpoint of the range. We also expect increased operating leverage, as we scale, leading to improvements in EBITDA and free cash flow, as we move through the year.

I should note that our 2020 outlook does not take into account any potential impact from the coronavirus. While we have no revenue from countries outside of North America, our selling model, partly depends on event-based marketing and travel to client meetings. At this time, we are unable to quantify the effect of continued trends with travel and meeting cancellations, due to the virus. While our SaaS products generally allow for for work from home usage so the physical closure of offices due to coronavirus should not materially affect us, we are unable to know if outbreaks of coronavirus could affect budget sizes or budgeting priorities of our government clients going forward.

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

Questions and Answers:


[Operator Instructions] Our first question comes from the line of Joshua Reilly with Needham & Company. Go ahead, please. Your line is open. Joshua Reilly, your line is open. If you're on mute, please unmute your line.

Joshua Reilly -- Needham & Company -- Analyst

Can you hear me?

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Yeah, we do.

John Curran -- Chief Financial Officer


Joshua Reilly -- Needham & Company -- Analyst

Can you hear me, now? Okay. Sorry. So first off, congrats on the strong quarter. I think top of everyone's mind here is, you mentioned the impact from COVID-19, what have you seen specifically in the last couple of weeks? And then you mentioned the impact on conferences and sales people traveling. How much of your sales are done in person versus over the phone?

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Joshua, it's a good question. I'll kind of parse the answer into two pieces, because we -- most of our business is spread over both the middle-market and the enterprise market. So the answer to your question varies depending on the go-to-market strategy of the business unit. Those business units that are focused more on the middle market are somewhat relying on conferences. But frankly, do a direct sale -- have a direct sales motion to clients and potential clients. The enterprise market is more of a face-to-face market. And frankly, the sales cycle is longer there anyway. So it's impossible to tell whether they'll see any buying pattern shifts as a result of that.

And again, each business unit is different. You can look at the sales motion for Bonfire, which is kind of preliminary middle-market, done out of Toronto, done remotely. I can't anticipate any kind of impact there. But there isn't a big requirement for face-to-face selling. You go to the other end of the spectrum with CityBase, where they have more of an enterprise sales motion. While the government still issues RFPs and we propose remotely, you can never tell what their -- how their buying patterns are going to be impacted. So I guess, the short answer is, it varies by business unit, and by the market that they go after right now.

Joshua Reilly -- Needham & Company -- Analyst

Okay, great. And then, next question. How should we think about the scope of the strategic review process? Is It considering both internal operations, and a possible sale of the business? Or is there something else under review during the process that investors should be aware of?

John Curran -- Chief Financial Officer

Joshua, this is John. We can't really comment anymore than what we've already commented in our comments today, and then the release we sent out in February.

Joshua Reilly -- Needham & Company -- Analyst

Okay, no problem. And then you mentioned the four business units that you had to take a goodwill impairment charge on. What are you doing to improve their performance and operations here over the next 12 months to 18 months?

John Curran -- Chief Financial Officer

Sure. And I'll focus -- so, of the four really only two of them had a material impact, right, the CityBase and Bonfire. And we'll take those as really two different scenarios. So Bonfire they're -- as we've talked about in the quarter, they are growing well and our get well program for them is to support them, and help them to grow faster, right. They're behind our original expectations, but they're still doing very well. So the focus there is just to help them to continue to accelerate their growth patterns. I think that's pretty straightforward. Great business model, very profitable and their sales engine, just we need to give that a little bit more gas to help them to scale.

CityBase, much more complicated business there. They're, as Steve mentioned, more of an enterprise sales motion. There is an integration element to their product as they deploy it more complex, but a similar story. They were predominantly founder-led from a sales perspective, and we've invested in a sizable sales team for them. So part of the team is focused on the utilities and the other part of the team is focused on municipalities. But they really just got on the ground, right, in Q4. So there, it's about bringing these guys up to speed, making sure they're fully onboarded and enabled, so that they can get the productivity as quickly as possible. And so those are our actions. There'll be some -- there's already been some cost reduction activities undertaken by the team and we'll continue to make changes in that space as well as we move forward.

Joshua Reilly -- Needham & Company -- Analyst

Okay, great. And then last question for me. Given kind of where you're at with your opex trends here in 2020, how should we think about the pace of sales hires here in 2020 versus the pretty aggressive sales hiring you did in the back half of 2019? Thanks, guys.

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Sure. Yeah, I'll start, and John can draft in. I think our first priority, Joshua, is to get the existing sales and marketing team that we've hired productive. We've got the processes in place. We're giving in the tools to go to market. We're beginning to coordinate how we go to market consistently across the GTY enterprise. And frankly, we want to hit, we want to see that team hit stride. As we move through the year, we'll take note of the productivity gains, and we'll make decisions on whether we want to continue to expand that workforce and when we want to continue to expand it. So more to come on the decisions for expansion. But right now, our priority is getting this team productive.

John Curran -- Chief Financial Officer

Yeah. As Steve said, our expectations for 2020 are that we will add sales and marketing capacity during the year, but at a slower rate than we did in the back half of 2019. As you said, it's really a focus on getting the investments we've made productive before we really step on the gas from a hiring perspective. But our expectations are, these guys are going to come up to speed and we'll be putting more resources into sales and marketing as we move through the year.


[Operator Instructions] There are no further questions at this time. I turn the call back over to presenters.

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Okay. Thank you, operator. Just to close, in 2019, we executed our strategy and delivered strong results on the back half of the year. We have momentum heading into 2020, and expect to accelerate topline growth this year. I want to thank all of you for joining our call this morning. We appreciate your interest in GTY, and have a great day. Thank you.


[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

John Curran -- Chief Financial Officer

Stephen Rohleder -- Chief Executive Officer, Chairman & President

Joshua Reilly -- Needham & Company -- Analyst

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