July 30, 2019 – Mississauga, ON
Smart Employee Benefits Inc. (“SEB” or the “Company”) (TSXV: SEB) today reported its financial results for the three and six months ending May 31, 2019.
States John McKimm, President and CEO of Smart Employee Benefits Inc.:
“Revenue for the first half of 2019, while a decline from 2018, was ahead of budget. In 2018, in addition to managing its annual clientele’s needs, certain of SEB’s clients requested additional one-time services such as systems implementations, platform transitions and global event management. In 2019, SEB maintained its base revenue and continued to grow its contract portfolio. Over $53M of contracts (backlog, option years, evergreen) have been won or renewed since the beginning of Fiscal 2019. The sales pipeline and contracts are the strongest they have ever been, particularly in Benefit Division (“BD”).
The Company generated $11M in gross margin which was a decline from previous year; however, gross margin as a percent of revenue increased from 29.4% to 32.1%.
Delivering on the vision to be a leader in the group benefits marketplace required additional investment in the BD. This resulted in a negative EBITDA for the Division, which has impacted the consolidated results, but has allowed the BD to transition all clients to the cloud, decommission redundant platforms and expand both the FlexPlus platform and service offerings which will improve future earnings potential. The Technology Division (“TD”) profitability has remained healthy. In addition, the Company has implemented several cost saving initiatives and further plans on reducing operating costs by over $1.3M on an annualized basis. As a result, Management expects EBITDA to improve as the remainder of Fiscal 2019 unfolds.”
Key Developments During and Subsequent to the Quarter
Engagement of Scotia Capital to Review Strategic Alternatives
Scotia Capital Inc. was engaged in March 2019 to assist the Company in identifying and negotiating a transaction with a strategic investment partner. The SEB Board and Management believes this process will provide the optimal immediate value for shareholders, be operationally strategic to SEB, and provide the working capital to expedite the many growth opportunities. The review of strategic alternatives has moved to the second stage with multiple candidates.
Sale of Paradigm Consulting Group Inc. (“Paradigm”)
On July 3, 2019, the Company finalized the divestiture of 75% of the operating assets of Paradigm to a combination of Golden Opportunities Fund Inc. (“Golden”) and Paradigm’s senior management. The purchase price included a cash amount of $4.5M, cancellation of $3.0M of Paradigm preferred shares owned by Golden, which were convertible into SEB common shares, and a working capital and pre-closing earnings adjustment. In exchange for Golden relinquishing the convertibility and earnings bonus features of the preferred shares, the Company issued to Golden 1,000,000 warrants to acquire SEB shares at an exercise price of $0.30 per share for a period of four years following close of the transaction.
Paradigm was originally acquired in 2015 to facilitate a local footprint in Saskatchewan and Manitoba for multiple RFP bids, which Management believes can be achieved with a 25% equity interest. The proceeds from the sale have been used to reduce SEB’s debt and contribute to working capital.
Benefits Processing Business
The Company had expanded its benefits processing business through an acquisition on April 1, 2017. The transaction added over 250,000 plan members and 48 of Canada’s corporate elite as Benefits Processing clients. Key milestones since the acquisition include:
- Renewals – 23 of 24 contracts up for renewal were renewed.
- New Plan Members – approximately 60,000 net new plan members were added to the processing environment, utilizing one or more of SEB’s FlexPlus 19 benefit processing modules.
- FlexPlus Processing Modules – The “FlexPlus” processing environment has significantly increased its functionality and value add to clients with the addition of 15 new processing modules, many of which are unique in the marketplace and are a significant competitive advantage.
- New Revenue Models – The 19 FlexPlus modules can operate standalone or as an integrated “one processing environment”. They drive more than 20 unique benefit processing revenue models.
- Decommissioning Old Platforms – The April 2017 acquisition came with clients operating on seven technology platforms. Five of these platforms have been decommissioned with over 98% of our client base moved to the “FlexPlus” platform in 2018. The annual cost savings is over $1.0M.
- Transitioning to Azure – All FlexPlus environments have been transitioned to the Cloud. This minimizes capital expenditures, improves security and can be quickly and cost effectively deployed on a global basis. The annual cost savings is over $2M.
- Voluntary Products – The “Voluntary Products” module was launched in 2018 which allows the purchase of online insurance solutions in minutes versus days and weeks. The penetration results during initial enrolment has been over 30% versus less than 5% with manual processes. SEB has launched six voluntary product solutions in partnership with various insurers, including critical illness insurance, term life, Health and Wellness, an Employee Discount Program (i.e. Venngo), Virtual (online) medical care (i.e. Equinox) and expects to launch home, auto, pet, contents insurance and specialized travel insurance in 2019. Voluntary Products is a significant growth initiative going forward.
- Channel Partner Go-To-Market Business Model – SEB launched its Channel Partner go-to-market business model in 2018. A key element of this go-to-market model is the “White-Label TPA” infrastructure. The Channel Partner strategy turns cost centers to profit centers for Channel Partners. Agreements have been reached with some partners and negotiations are well advanced with other partners including benefit consultants, insurers, insurance brokers, TPAs, MGAs, insurance solution providers including virtual healthcare, wellness, disability managers and a global PBM. Certain Channel Partner relationships are in the process of being implemented with revenue expected to begin in the fourth quarter, 2019.
The Company has invested heavily in its Benefit Processing solutions, the majority of which has been expensed. This has historically penalized earnings and cash flow. The Benefits Processing group today manages over 300,000 plan members with hundreds of millions of premium dollars and the capability to service a global client base in multiple languages. The cost structure has been significantly streamlined and the primary focus has moved to new sales initiatives.
Comparative Results for the three and six months ended May 31, 2019
Reclassification of prior year results
Under IFRS accounting policies, when a material subsidiary is in the process of being sold at a reporting date, the financial reporting related to that subsidiary is segregated within the financial statements into single line items. At May 31, 2019 Paradigm was in the process of being sold, its income statement has been extracted from the consolidated statements and reported as ‘Discontinued operations’. For ease of comparability, the results of prior periods have been treated in a consistent manner.
For the three months ended May 31, 2019, consolidated revenues from continuing operations declined from the comparable period prior year by $2.3M ($6.3M for the six months). The TD declined by $2.0M ($5.7M YTD), while the BD declined by $0.3M ($0.6M YTD). The decline in the TD revenues is largely due to one-time contracts in 2018. The majority of this one-time revenue has been replaced with new multi-year contracts going live in Q4, 2019.
2) Gross Margins and Gross Margin %
Consolidated gross margin from continuing operations declined quarter over quarter by $0.5M ($1.0M YTD) primarily in the TD. Gross Margin % (“GM %”) for continuing operations was 30.8% in Q2/19 compared to 29.8% in Q2/18 (26.7% in Q2/17). GM% for the six months ended May 31, 2019 for continuing operations were 32.1% compared to 29.4% in 2018 (22.1% in 2017). Improved margins in the TD were the primary contributor of the overall increase (18.4% YTD Q2/19 vs 17.5% YTD Q2/18). The BD’s GM% remained relatively consistent hovering around 95% which is a significant increase compared to YTD Q2/17 when the BD’s GM% was 86.1%.
3) Operational Costs
- Salaries and other Compensation - salaries grew by $0.6M during the quarter ($0.8M for YTD) over the comparable periods prior year. The change is primarily attributable to the immediate expensing of development costs, as compared to their capitalization.
- Office and General Costs – Office and general costs decreased $34K in the quarter (increased $0.2M YTD) over the comparable periods prior year.
- Professional Fees – Professional fees decreased by $0.2M quarter over quarter ($0.3M decrease YTD). Professional fees vary with the amount of financing or acquisition/disposition activity during the period.
4) Non-Cash Expenses
Non-Cash expenses include amortization, depreciation and share-based (options) compensation remained relatively flat for the quarter and decreased $0.2M over the first six months prior year. The largest component is amortization of intangible assets (related to acquisitions), which was $1.7M YTD. These costs are expected to be largely amortized by fiscal 2020.
5) Interest and Financing Costs and Interest Accretion
Due to a reduction of debt, interest and financing costs improved both in the quarter and on a six-month basis by $0.3M.
SEB is a Business Process Automation and Outsourcing Technology Company providing software, solutions and services to a national and global client base. SEB has a specialty growth focus in cloud enabled SaaS processing solutions for managing employer and government sponsored benefit plans on a BPO (Business Processing Outsourcing) business model, globally. This is a major growth focus. SEB currently serves corporate and government clients across Canada and internationally. Over 80% of SEB’s revenues derive from government, insurance and healthcare organizations. SEB’s technology infrastructure of over 650 multi-certified technical professionals, across Canada and globally, is a critical competitive advantage in supporting the implementation and management of SEB’s Benefits Processing Solutions into client environments. SEB’s Benefits Processing Solutions can be game changing for SEB clients.
The core expertise of SEB is automating business processes utilizing SEB proprietary software solutions combined with solutions of third parties through joint ventures and partnerships. SEB’s client acquisition model in benefits processing is “Channel Partnerships” where SEB processing solutions both improve cost structures and enable new revenue models for Channel Partners and clients. All SEB solutions are cloud enabled and can be delivered on a SaaS platform. SEB solutions turn cost centers to profit centers for our Benefits Processing Channel Partners.
For further information about SEB, please visit www.seb-inc.com.
The forward-looking information contained in this release represents the Company’s current expectations and, accordingly, is subject to change. However, the Company expressly disclaims
any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable law.
All figures are in Canadian dollars unless otherwise stated.
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