CloudMD Software & Services Inc. (DOCRF) Q3 2022 Earnings Call Transcript.
Source
https://seekingalpha.com/article/4558035-cloudmd-software-and-services-inc-docrf-q3-2022-earnings-call-transcript
Nov. 15, 2022 12:44 PM ET
Company Participants
Karen Adams - Chief Executive Officer
John Plunkett - Chief Financial Officer
Conference Call Participants
Scott Schoenhaus - KeyBank
Rob Goff - Echelon Partners
Gabriel Leung - Beacon Securities
Prasath Pandurangan - Bloom Burton
Operator
Good day and welcome to CloudMD Q3 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will a question-and-answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker [Mark Kuindersma] with Investor Relations. Please go ahead.
Unidentified Company Representative
Thank you and good morning everyone. Thank you for joining us for our third quarter 2022 conference call and webinar. We'll start the call with our CEO, Karen Adams, followed by CFO, John Plunkett, who will provide a recap of the Company's Q3 2022 financial results before opening up for a question-and-answer period with our covering analysts.
A friendly reminder, that today's discussion contains certain forward-looking information, which involves inherent risks and uncertainties and other factors that could cause actual results to differ materially from management's current expectations.
Forward-looking information should not be interpreted as assurances of future performance or results. The risks related to forward-looking information are described in the Company's MD&A, which is available on SEDAR. We encourage you to review our public disclosure in the context of all the forward-looking information that you may hear today during this earnings call.
Investors are cautioned not to place undue reliance on such forward-looking information, and that such information is considered reasonable based on information available to management as of today. However, the Company disclaims any intention or obligation to update or review any forward-looking information as a result of new information, future events, or for any other reason, except to the extent required by law.
With that, it is my pleasure to turn the call over to Karen Adams, CEO of CloudMD. Karen, the floor is yours.
Karen Adams
Thank you, Mark, and good morning everyone. Welcome to CloudMD Q3 2022 earnings call. We appreciate everyone being here today. In the last quarter, we focused on strengthening the business. We undertook a number of strategic priorities that are essential to execute. The execution is making us a stronger, more transparent organization. These priorities will improve the financial performance of the Company while creating sustainable growth.
Today, John and I will provide an update on the priorities of generating high quality organic growth, restructuring and cost efficiency, improved cash management, and our ability to surface value from the divestment of our clinics and pharmacies. This will enable us to focus on our employer Health Solutions Division and our Digital Health Solutions Division.
Collectively, we are making good progress. However, there is still a lot of work to be done in the next few quarters to see the results in top line revenue growth, margin improvement, EBITDA contribution and positive operating cash flow. The Company is in a stronger place today than it was six months ago from an operational financial and governance perspective.
As John will outline today, we have taken an analytical, disciplined approach to delivering organic growth and a path to profitability and resolving the identified challenges. Today, you will hear how the management team has worked hard to improve the balance sheet to reflect the current state of the Company. This is very important in order to be able to monitor our performance and deliver shareholder value.
This quarter, we announced $27.5 million in revenue, which does not include the revenue contributions from the entire clinics and pharmacy division or Cloud Practice which have either been sold or are in the process of being sold. The comparable revenue for last quarter would have been approximately 30 million.
The commercial team is replacing short-term non-recurring contracts with long-term recurring revenue base. While total revenue from continuing operation is down 2.5 million from Q2, this is due to two known factors. The first is the end of the ungated Ontario Health contract which ended in August and as we disclosed on our last conference call had a $1.5 million impact in the quarter.
The other declined was the loss of the COVID testing revenue, which had approximately a $900,000 impact in the third quarter compared to the second quarter of 2022. It is difficult to replace this large one-time revenue in a short period of time. These large one-time contracts ending overshadow the growth and momentum in recurring contracts being acquired in our other revenue streams. The sales closed year-to-date are indicative of an approximate 10% organic growth rate.
We have also executed on the previously identified 4 million of reductions and have identified a further 6 million to be fully executed by mid Q1, 2023. These reductions will be realized through integration of operations as we scale as well as costs associated with one-time mandate. John will go into more detail on the financial overview.
I do want to take a moment before discussing the commercial update to address the economic and social environment. I have received lots of questions about these conditions and the growth potential of the Company. The past two years have shown a light on the importance of health risk management. COVID has altered the distribution of health expenditures over the past two years. The pandemic has revealed a weakness in crisis preparedness and access to care.
In the United States and Canada, healthcare spending is rising on both a per person basis and as a share of the GDP. A global healthcare survey conducted by Willis Towers Watson reveals that employer healthcare costs globally are expected to rise by 10% in 2023 and by 6.3% in Canada. The study identified poor health habits as one of the top reasons for rising costs.
These statistics reinforce the need for mental and physical health coaching, if people are at work off work or returning to work, which is why we believe there will be continued momentum in the adoption of our services. This is also true in our EHS division where focus on accessible healthcare through health and productivity tools will continue to be required as the focus on accessed care continues to evolve.
Within the current economic conditions, the demand for healthcare services will continue to rise. Employers will continue to invest in healthcare for their employees and healthcare providers are dependent on tools to improve productivity and access to care. This is a strong tailwind for years to come and we are well positioned to take full advantage.
Looking at our employer healthcare offering, we are seeing strong momentum. Year-to-date through the third quarter, we have added $8.8 million in annual reoccurring revenue contracts across all our operating divisions. We continue to focus on winning business and executing on our strong and diversified pipeline and are confident in our team's ability to win new business.
We are expecting to realize the full revenue list from contract signed in 2022 into 2023. Contract wins in the quarter represented small, medium, and large organizations. They included multi-product, multi-year, iCBT, Medical Second Opinion, Mental Health Coach, and Employee and Family Assistance programs.
One of our key differentiators within the mental health support solutions is that we have fully integrated our proprietary mental health assessment tool Snapclarity, as well as iCBT, EFAP and Mental Health Coach into the offering. This will enable us to broaden the access to care while improving health outcomes.
The combined offering will result in a better cost per case and leading to a higher growth margin. Within the quarter there were notable contract wins across multiple geographies including large unions, government organizations, industrial companies, and financial services. Our commercial team secured a significant win with the teacher association for our second medical opinion product.
In the quarter, we saw a 33% increase in the number of opportunities in the pipeline. We believe that the current pipeline is aligned with our revenue expectations. Sun Life was the early adopter of our mental health navigation service. The Mental Health Coach product is proving its value in producing measurable health outcomes including an average of 2.8 week improvement in short term disability length, 21% fewer casual absence hours, and higher return to work.
This directly translates into lower disability costs, more productivity and employee engagement. This program has been rolling out in a phased approach to Sun Life customers and will now be available in January, 2023, as an add-on to an existing group benefit contract. We are also taking important steps to improve the quality of our revenue and prioritize generating more meaningful higher margin revenue versus just adding to the top line.
In the last two quarters, we have integrated our sales team and created a focus on national accounts. In the last two quarters, 50% of the new contracts were employer direct. These contracts have lower churn and multiple services therefore a higher lifetime value. We've also taken a critical eye to our contracts and started to engage in some purposeful churn from legacy low margin contracts that don't meet our margin expectations.
I would like to spend the last few minutes on our Digital Health Solutions division, which we refer to as the health and productivity tools for providers. This division's growth strategy is being developed by new leadership under Nathan Lane. Nathan is focused on extracting value and growth from our offering.
As an example, we have identified additional growth market segments with an idea for which offers consulting and creates access to healthcare through connecting systems. This division has started to see significant pipeline growth outside of government agencies to hospitals, clinics and care organizations. This is a large new addressable customer base beyond our traditional work with various federal and municipal governments.
VisionPros, we are expanding the offering to our employer customers and embedding it into other programs. We are reducing direct marketing spend and investing in ensuring a high reoccurring customer model and distribution partners. Our distribution partnership team recently signed a marketing partnership with Neo Financial to distribute VisionPros' products.
With the VisionPros product, we expect lower direct marketing expense by using these distributors to grow the pipeline. We will be launching an innovative prescription renewal products and glasses in Q1 2023. Benchmark continues its steady progress and is growing its revenue.
We are executing on our priorities and the results are starting to be realized through our financials. The management teams have developed KPIs that are evolving in order to deploy a continuous improvement approach to sales and profitability.
I'm going to pass it to John to discuss the other half of the equation, cost optimization and then our Q3 results. John?
John Plunkett
Thank you, Karen, and good morning everyone. We're taking a disciplined approach to profitability and taking meaningful action steps. Over the past quarter, we've been focused on moving the business towards profitability, prudent cash management and divestment of our non-core assets. We continue to work hard to identify cost savings and cost optimization opportunities within the business. Since the start of the third quarter, we identified and acted on 4 million in annualized cost savings.
During the third quarter we saw a 1.4 million decline in quarterly operational expenses compared to the second quarter of 2022. This is directly related to our actions in consolidating shared services, removing redundant costs and improving efficiencies since the start of the year. Despite the revenue decline from the conclusion of the COVID-19 testing contracts and the changes to the Ontario Health contract and their associated gross profit contributions. We were able to improve our adjusted EBITDA slightly this quarter.
We are expecting to see the final reduction in revenue in the fourth quarter from Ontario Health of approximately 1.5 million. However, believe this is the last material headwind facing the business as it relates to our client base. We're in the process of completing an additional 6 million in annualized cost reductions that we expect to see a portion of the benefit in our financials in the fourth quarter of 2022 with a full impact in Q1 2023.
These savings continue to be primarily driven by the work our team is doing integrating back end services. The pathway to profitability is becoming clear. However, we still have work to do. We are going to reach it by continued focused on cost efficiencies and success selling our integrated Health Solutions. The success against some of our larger sales opportunities will impact the timing of when we reach this important milestone.
During the quarter, our use of cash was 2.2 million and normalized for non-recurring expenditures and favorable changes in working capital it was 4.5 million. In the near-term, it's the most important measure of our operating performance. Improving cash flows along with the divestitures gives us the flexibility to grow our core business and reach profitability. Over the past two quarters, we've been very focused on improving the balance sheet and being prudent with cash management.
Subsequent to the quarter, we announced the sale of our BC clinics and Cloud Practice and our two BC pharmacies. In addition, we're also pursuing the sale of our Rxi business. The divestitures represent over $9 million in transaction value and provide non-dilutive capital without impacting our profitability, cash flow or the long-term potential of the Company. These divestitures enable us to invest in our core business. It reduces distraction for the management team, and it creates more of a pure play investable company. Overall, we are executing against the strategic priorities we identified as a company.
Turning to the financial performance in Q3. The results of our work and executing on our strategic priorities are starting to show up in lower cash used and a small improvement in adjusted EBITDA. However, we are still being impacted by headwinds such as the changes to the Ontario Health contract. We generated total revenue of 27.5 million compared to 28.9 million in Q3 of 2021, which represents a 5% year-over-year decline. Sequentially, revenue was down 2.5 million from the second quarter.
Enterprise Health Solutions contributed revenues of 21.8 million compared to 24.5 million in Q2. As expected during the quarter, there was an impact of 1.5 million lower revenue from the Ontario Health contract and 900,000 lower revenues from COVID-19 testing contracts, which concluded in the second quarter. The increase in revenues from new contracts sold in 2022 provides us a lift of approximately 600,000 in the third quarter in our employer Health Solutions Division. This was offset by some lower fee for service revenue and our disability management and assessment business in part due to the summer months.
Looking ahead to the fourth quarter, the full impact of the Ontario Health contract will be realized which will result in a reduction of 1.5 million in revenue. We expect that this will be offset by return to run rate in our disability management and assessment businesses and the contribution from new revenue sold in year. In 2023, we expect to see low double-digit growth based on current contract sales pipeline and projected churn. Digital Health Solutions generated revenue of 5.7 million in the quarter comparable with Q2. VisionPros continues to trail its historical performance; however, we remain focused on driving profitable revenue and expect to see gradual improvement in top line revenue.
Gross profit in the quarter was 34.5%. The increase in margin is a result of classifying our clinics and pharmacies division and Cloud Practice as held for sale. As our core business drives organic growth, we will see continued margin improvement. In the near-term, we are targeting mid 30% gross margin with expansion coming as more revenue shifts to our faster growing and more profitable parts of our EHS and DHS businesses and integration of our higher margin offerings. Adjusted EBITDA in the quarter was negative 3 million compared to negative 3.2 million in Q2. The improvement is directly related to our work on cost control offset by lower revenues.
We expect a modest improvement in the fourth quarter of 2022 as a result of continued cost saving efforts. As we see organic growth over the coming quarters and continued cost savings, we expect adjusted EBITA to improve. During the quarter, one-time costs were primarily related to severance, the sales process of the clinics and pharmacies division and some remaining integration costs from past acquisitions. We expect these costs to be similar in the fourth quarter, but continue a downward trend in early 2023.
This quarter, we recorded a substantial impairment charge to our goodwill and long-lived assets of 83.9 million. These are non-cash charges that reflect the value of assets today with current market conditions and interest rates and not the price paid at a time when industry-wide valuations were much higher. We had a sustained disconnect between our market capitalization and the caring value of our net assets, which triggered the impairment review. The impairment does not reflect a change in our positive outlook or expectations for CloudMD. The forecast used reflects a sustained low double-digit growth and our core business with improving operating margins.
We had approximately 27.5 million in cash on hand at the end of the third quarter. Cash from divestitures is not in this number. Combined with an improving cash use profile and a clear path to profitability, we are beginning to engage in determining the most effective capital deployment strategy for 2023.
With that, I'll pass the call back over to Karen.
Karen Adams
Thank you, John. We are creating a more fundamentally transparent, profitable, focused and ultimately investible company. I want to take a moment and thank the leadership team for all the efforts they are putting into transforming this company.
Our employees across North America are passionate about empowering healthier lives. These employees are focused on the ability to deliver excellence with accountability, collaboration, connected communication, and a lens on gross margin improvement, innovation, profitability, and increased revenue. Their commitment to our clients in shareholders to these initiatives is why we are seeing the improvement.
Our annual general meeting has been called and is scheduled for December 15, 2022. The circular for the meeting, which includes the nominees for election as directors will be mailed to shareholders and posted on SEDAR by November 24, 2022. The circular will profile the slate that we will be asking shareholders to elect. There will be a new Chair to be elected profiled in the circular.
Transformation of a company takes time, but we will continue to make significant improvements that are flowing through the financials. As a result, the quality of our revenue today is higher, our profitability forecasts and margins are improving, and our balance sheet gives us the flexibility to capitalize on our offerings within the employer healthcare segment and our health and productivity tool.
With that, we'll open up the floor to questions.
Question-and-Answer Session
Operator
And today's first question will come from Scott Schoenhaus with KeyBank. Please go ahead.
Scott Schoenhaus
I just wanted to get more color into your U.S. expansion. What you're seeing from the employer markets here in the states? And what EHS solutions are you seeing interest in the American market?
Karen Adams
Thanks Scott. Nice to hear your voice. So, on the U.S. side of our business, one of the main drivers for us in the MindBeacon acquisition was the ability to take the iCBT product offer and span it and create access to care. It is a large issue in the U.S. being able to get access to mental healthcare. So, the iCBT product launching at the end of this year will be instrumental in our ability to grow our health coaching product in the United States.
We have a business as you're aware of Harmony that does the mental health interventions in the U.S. that business is growing, we have a number of new contracts coming on board for 2023 that we are excited about. So, the employer Health Solutions division in the U.S. is primarily focused on the mental health and coaching product and the traditional counseling product.
Then from the DHS business, I would say the growth in the market segments there is a realization that the product specifically an idea for have an opportunity to be extended outside the traditional government contracts that they have secured and starting to look at ways of using the Connected Care, the interoperability process that we bought the patented interoperability process, we bought through idea for to sell to hospitals and other care organizations that even as a byproduct of COVID, the realization of this interconnectivity is important.
So, Nathan really has grabbed onto the product and started to help the team create a go-to-market strategy to expand outside of more, less traditional government contracts and into more direct organization. So I hope that answered your question.
Scott Schoenhaus
Can I just kind of squeeze in one follow-up? It's very clear, on the gross margin side, DHS and EHS will help expand as you move and grow that business. Just on the 6 million in cost savings you outlined on an annual run rate. Can you just help us walk through what you're targeting there on those cost savings exactly? Thanks.
Karen Adams
John will do that.
John Plunkett
No problem, Scott. So in terms of the cost savings, right, the majority have been identified at this point in time, and we're executing against the reductions and a good portion are already done at this point in time. We're looking at -- it's a broad category of costs, a good majority of them are in the SG&A. So, as you look at our shared services, infrastructure, some of our marketing spend, looking at real estate footprint, et cetera. So, it's across a broad bucket of costs within our indirect cost structure.
Operator
Thank you. One moment for our next question and that will come from the line of Rob Goff with Echelon Capital Markets. Please go ahead.
Rob Goff
Thank you very much and congratulations on the hard work behind the teams here. I know it's difficult.
Karen Adams
Thank you, Rob.
Rob Goff
And Karen, you had mentioned with respect to your sales pipeline, I believe that figure of 33% increase. Can you talk to that sales pipeline any particular areas of strength?
Karen Adams
Yes. So, I think the difference is, we have a commercial leader who has been in the sales realm for a long time and has developed a more disciplined approach to prospecting and to increasing the pipeline. Very fortunately that pipeline has some large initiatives in it. And it has some -- we call them more medium initiatives in it. So, it's well dispersed in that it's not heavily weighted in one direction. It does cover, I would say, multiple types of clients, and they are all the majority of the business in there is multi service business selling more than one product.
So that the two indicators we look at is pipeline and conversion. So we look at the pipeline and the conversion rate to be able to look at forecasting revenue. So is the pipeline sufficient enough to support the revenue expectations that we have for the coming quarters? And I can confidently say it, it does. And the second piece is the ability to continue to add to that pipeline. And that increase is a good indicator for us of productivity of the sales team. That's good thought to cover that.
Rob Goff
That's pretty good. And the natural offshoot of those. Could you then address how the pipeline gives you confidence in the double-digit growth expectation, and if you could talk there to with respect to headwind, tailwind that you were seeing within that organic growth profile?
Karen Adams
Sure, so I think, with the organic growth we're seeing from a momentum basis, a lot of in our mental health support solutions. I would say that the largest percentage of the pipeline and the new ad is in the combined mental health support solutions. And I think that that is indicative of the unique approach we have to the health coaching perspective prior to somebody going to counseling.
So not everybody's ready to go directly into counseling, and we call those, the utilization rate is sometimes impacted by people calling and then not showing up for an appointment. So, we're finding the Mental Health Coach that you will remember, was really adopted out of a relationship with Sun Life, where they were the first customer of the Mental Health Coach.
I think that unique approach to getting people support, whether they're at work or off work is starting to translate into the pipeline opportunity. And I would say, the Mental Health Coach is now being used in disability cases where an employee may be on disability relating to mental health concerns, and that Mental Health Coach's ability to engage the person on disability and convince them to go to treatment is resulting in people returning to work as part of the treatment plan. So, we're really seeing a lot of opportunity there.
I think, as I mentioned, in the scripts or in the narrative is that, the thing we're faced with is trying to overcome these large one-time mandates that, on the one hand, we're really proud of that when these customers were faced with COVID related issues, they turn to CloudMD or one of their subsidiaries to deliver the service during a time of health risk management. And those customers are customers of ours in other products. So you want to be there to serve them in these times.
But then those that large revenue coming to an end and a long time commitment with the customer, on the other product is overshadowing the growth perspective. So, that's why we're faced with constantly reviewing it. We do have some large sales opportunities in the pipeline, but as you can imagine they have a longer sales cycle to them. So one of the headwinds we've got is longer sales cycles on larger opportunities that take us longer to really recognize and convert.
Operator
Thank you. One moment for our next question and that will come from the line of Gabriel Leung with Beacon Securities. Please go ahead.
Gabriel Leung
I got a couple of questions to ask around the pipeline. Karen, are you able to disclose to us the size of the pipeline just in terms of from an ARR perspective, first off? And are you able to talk about whether or not some of these pipeline opportunities have risen from life work to directly as it relates to take up by its health?
Karen Adams
Okay, so let me answer your first question, which is our pipeline currently stands in and around just north of 50 million. I'm not sure that's meaningful in and of itself other than the fact for us it's a substantial number. And when we talk about pipeline, we talk about qualified pipeline, meaning that we are engaging with the customer in some sort of dialogue of moving them to our products and services. And that's important because the real -- the other pipeline is much larger in the prospects and the people that we're trying to engage.
I would say that we are seeing people convert from a number -- the market in the mental health support is made up of a handful of brand name providers. And given the fact that I think the number is just north of 90% of all employers have a group benefit around mental health. Everybody in the pipeline is probably with somebody now. I can't point to one specific competitor over another. What I can tell you is that the reasons customers are moving from one provider to another is access to care and the ability to see a counselor face-to-face is important for the employer. Not everybody wants to go the telemedicine virtual route.
And the second is this innovation and disruptiveness around the assessment Mental Health Coach and Physical Health Coach. And being able to not have a siloed program where the employer can confidently provide the program and know that we're going to take care of the individual regardless of what their issue is. They don't have to think. Do I call this for mental? Do I call this for physical? It's integrated. So, we're seeing it from a wide variety of competitors. Yes. I don't think it's -- I can't say definitively today it's from any one particular one, Gabriel.
Gabriel Leung
Got it. That's really helpful. And just a point of clarification, that $50 million pipeline number you quoted, is that an ARR figure or is that a total contract value figure?
Karen Adams
That's an ARR figure.
Gabriel Leung
Got it. Okay. That's helpful. And I'm also curious just in terms of metrics, you noted that year-to-date you're over $8 million in new bookings. Are you able to provide us with kind of a closed rate successful close rate figure on deals that you've bid on?
Karen Adams
So, that numbers across the whole organization unfortunately different revenue streams have different closing rates. So, as an example, the idea for pipeline can have a longer closing rate than some of the other revenue streams. But I think if you were to take it across the whole organization, I'd look at a closing rate somewhere between 30% to 40% depending, that's how I would look at it because it's the entire organization.
Gabriel Leung
Got it. No that's super helpful. One last question, I guess either for Karen or John, since John, you did mention as part of your preamble, obviously, as the improvements that continue, there's going to be a deeper dive look into capital allocation with the war chest. Just curious, if you guys had any initial thoughts on where you would prioritize, use a cash to help drive the best shareholder value to the Company? Is it share buyback? Is it payment, the debt, M&A? I'm just curious what the initial thoughts there.
John Plunkett
It's a great question Gabriel. And it's certainly something that we're engaging with at this point in time. What I'm going to do is I want to reserve providing comments at this point in time. I think we're going to have a much more meaningful update at the end of our Q4. We're obviously been very much focused on taking the cost out of the business, pushing towards profitability, divesting of our non-core assets.
I feel like we're turning the corner. Obviously, profitability is a key step for us. Stabilization from a cash flow perspective is a key step for us. Now, we're starting to look forward in terms of how we're going to deploy the capital that we have in the balance sheet. So, I'm going to reserve providing any sort of any guidance on that right now; however, I'm hopeful that we're going to have a more meaningful view to share at the end of Q4.
Operator
Thank you. One moment for our next question and that will come from the line of Prasath Pandurangan with Bloom Burton. Please go ahead.
Prasath Pandurangan
First, could you discuss the revenue profile of the EHS business in terms of the split between subscription case based revenues and their relative importance and driving your growth assumptions?
Karen Adams
Yes. So, Prasath, in terms of the split, I would say, approximately 50/50 between a subscription PEPM and a fee-for-service type offering.
Prasath Pandurangan
And when you look at your growth assumptions for the business, what are they based on, would it, again, I know this continue to be 50/50?
Karen Adams
No, I think that the revenue profile, you will see going forward will be a shift more towards the PEPM. I think that we have -- when we look at our business now, when you look at the Enterprise Health Solutions division, you look at the assessment business, which is independent medical, but on per case be the disability on health. The growing factor, I think, is going to be and it's just a relative size as well. It's going to be the health coaching, which consists of all of the mental health support services and all of the physical health support services.
And I think by the sheer nature of the newness as a percentage of shift, they will naturally start to grow. And in the PEPM, which is the beautiful thing for us is, the reoccurring revenue is builds a better revenue profile for the organization. But all of those customers have to buy the per case fee. So what we're going to be watching is the ability to secure the PEPM revenue, which has a longer lifetime client value even by the nature that they're multiyear, and then being able to add the per case fee on top is going to be the building the actual value of the customer should grow. So, I'm also watching value per customer grow, right? The total sense and then that gives us the lifetime value of the customer. Does that make sense?
Prasath Pandurangan
And then, I wanted to talk about the Sun Life contract itself and how has it changed recently, and it's changing in terms of the positioning of our client base?
Karen Adams
Yes. So, you may recall, there was a long period of time where we talked about a pilot, the pilot was the Sun Life employees. And I think Sun Life did it right. They piloted it with their employees, we got the results off the base business, which their employee base was a significant with north of 10,000 employees. So, it was a significant group as a control group to be able to prove out the theory. Then what they did is they rolled it out to a group of clients, not an insignificant group for us, over the subsequent periods.
And now, they're in a position with the data from the employee group and their client group to roll it out to their other client base on a -- it's not being embedded, it has to be sold by the Sun Life account executives, but now being rolled out in the context of lowering disability rates and improving employee engagement. So, there's a theory directly tied to the renewal process, where people may be worried about their disability premiums rising, let's face it, there continues to be an increase in disability cases. Especially, we will see this in tough economic times where people will go on disability, so it becomes a significant tool.
Prasath Pandurangan
And then finally, just to confirm the 8.8 million ARR when they're all within the continuing operations, right?
Karen Adams
Yes, that's correct.
Operator
Thank you. One moment for our next and we do have a follow-up question from Rob Goff with Echelon Capital Markets. Please go ahead.
Rob Goff
You mentioned a focus on quality revenues and you also mentioned with respect to VisionPro working with distribution partners. Can you talk to any changes or modifications in the VisionPro plan? And when headwinds become tailwinds?
Karen Adams
Yes. So, I'll start in and maybe John can jump in. But I think on the VisionPros contact lens business, it's a direct-to-consumer business. It's a highly competitive business. It's a very transactional business. And decisions to buy are based on product costs. Fastest way to grow top line revenue is to discount the product and grow your top line revenue. I think we can all agree there was a time where that was rewarded in the marketplace.
We do not feel it is right time for us to be using cash flow to buy revenue so significantly discounting the product. So, our preference is to focus on those who have purchased in the past, engaging them and getting them to be recurring clients. So the marketing spend is more towards that group. That's the first thing I would say.
The second thing is we are -- every group benefit provider offers vision care as part of their group benefit plan. And so people, people like to buy things, it's in our human nature to want to buy things. So by integrating key into our -- by integrating VisionPros into the key platform, we're confident that people are going to come there as employees, looking for their educational resources, perhaps their EAP and have the ability to buy contact lenses.
That opens up what we call -- we have a partnership team now, who is responsible for going out and looking at non-traditional partnerships to have the distribution of the contact lenses through those partnerships. So that they are properly distributing other products, it's the marketplace concept you're seeing in a lot of different avenues, and then affording us the opportunity to lower our CAC costs because we're picking back on another partnership.
So, they have a longer sales cycle time to them, obviously. But we are seeing some traction in the interest level from some non-traditional partnerships. So, stay tuned for more on that. I would say in Q4. With the quality of revenue comment, I think that we want to maintain a gross margin that we're comfortable with and we want to maintain a overall contribution to profit that we're comfortable with.
And so that means making some choices on the especially in the contact lens business, the price is the price that we get from the distributor and then we then we sell to the consumer. We want to make some really good choices here about that, the acquisition cost of that customer and how we go about doing it.
And we're going to trade right now quality of revenue to become cash flow neutral in that business so that we are preserving our capital allocation for things that have overall higher momentum growth in the organization and can grow our growth margin and frankly translates into shareholder value.
Because of the transactional nature of VisionPros and the up and down of the sales, like in that business, there's a lot of what they term one and done. People come, they buy based on price and they go away and they never come back again. That's not the business that CloudMD is looking to acquire.
We're looking to build a relationship with individuals who engage in our service and have an ongoing relationship with that individual. And that's the premise in VisionPros we want to have an ongoing relationship with that person for their contact lenses, for their mental health, for their physical health. And when they go on disability, we'll help them there too. So it's more of a holistic way of servicing that individual.
So Rob, I think that was very long answer to your question.
Operator
Thank you. I'm showing no further questions at this time. Thank you all for participating. This concludes today's conference call. You may disconnect.
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