mdf Commerce Inc
TSX:MDF
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mdf Commerce Inc
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Thank you for standing by. This is the conference operator. Welcome to the MDF Commerce First Quarter Fiscal 2024 Financial Results Investor Conference Call. Today's call will provide information and commentary on the corporation with a focus on the financial results released yesterday after the market closed. We will hear from Luc Filiatreault, President and Chief Executive Officer; Deborah Dumoulin, Chief Financial Officer. If you have questions following the call, you can reach MDF Commerce at the address on their website, www.mdfcommerce.com. First, here are a couple of housekeeping notices. All participants are in listen only mode for the duration of the call. This call is being recorded, and we accept that the recording will be available on the MDF Commerce website later today.
The information in today's remarks, including any forward-looking statements has been prepared as of June 30, 2023, unless otherwise indicated. MDF Commerce assumes no obligation to update or revise the forward-looking statements to reflect any new events or circumstances, except as may be required pursuant to securities law. We remind you that today's remarks will include forward-looking statements and non-IFRS measures that are subject to important risks and uncertainties. For more information on the risks and uncertainties, please see the reader advisory of the bottom of the MDF Commerce's new release, which is on their website and has been seen on www.sedarplus.com. The company's actual performance could differ materially from these statements. I will now hand the call over to Mr. Filiatreault.
Good morning, everyone, and thank you for joining us for our Q1 fiscal '24 financial results call. Before turning to the financial results that we filed after the market closed yesterday, I would like to provide an operational update. MDF is a developer and operator of digital commerce platforms that facilitate billions of dollars per year of digital commerce transactions for well over 550,000 end user companies, mostly in North America. Our mission is to enable the flow of commerce. I'll present an overview of our company's performance and outlook for the future, beginning with a few Q1 '24 financial highlights. Our revenue for the quarter were $31 million with recurring revenue now representing 79% of total revenue. We achieved positive adjusted EBITDA of $2.6 million in this last quarter, a significant improvement of $3.7 million from the adjusted EBITDA loss of negative $1.1 million in Q1 of fiscal '23 a year ago. In fact, this quarter marks the fourth sequential quarter with positive adjusted EBITDA.
This quarter has been exciting for us as we saw an acceleration of pipeline conversion for our comprehensive suite of products offered for e-procurement. I want to point out that e-procurement platform revenue grew by 13.5% year-over-year with recurring revenue for that platform now reaching 88.5%. We recently announced that Anoka County in Minnesota has chosen our full e-procurement solution. Pima County in Arizona chose our source to contract solution. We've also won awards in several U.S. cities and districts during the quarter. These agencies are joining over 6,500 public sector buying organizations in choosing MDF Commerce solutions. In addition, very pleased to say that the Commonwealth of Massachusetts, which has been the client of ours for over 10 years now, has renewed their contract for our full e-procurement suite for another 5 years, resulting in a 15-year relationship.
Maricopa County in Arizona upgraded its existing suite of MDF solutions to our full source to contract technology. Our opportunities pipeline reflects the growing demand for our integrated full Source-to-Pay integrated suites. These new wins and customer renewals are strong proof points to the value of our solution to states, counties, cities and municipalities to support their procurement and is a testament to the enduring trust of our customers. The sales cycles for public procurement is often long and over the past few quarters, we've been faced with a slower-than-anticipated conversion rate on new clients. In fact, many of our recent wins have come from proposals tendered as far back as 2021. It takes long to strike a deal but as we've seen with Massachusetts, this is a very sticky business, and customers often last for more than a decade. We're currently actively engaged in multiple opportunities to provide public agencies procurement systems. These are at various stages of the sales cycle, including the largest province in Canada as well as many of the largest states and counties in the U.S.
We believe that we are well positioned to capitalize both on the larger Tier 1 state contracts and on the mid-market opportunities that lie ahead as public agencies digitize their procurement solutions. We continue to further solidify our leadership position in the North American public procurement market. We define our Tier 1 market as states, provinces and large counties that have a population approximately above 2 million individuals, up to states like California, which has a population of approximately 40 million individuals. When Tier 1 customers use our full procurement solution suite, they can generate from approximately $0.5 million to several millions of dollars of annual recurring revenue plus the initial implementation services revenue. Our mid-market customers consists of these larger cities, midsized counties, certain districts, water, power, turn pipes and these customers typically generate from approximately 25,000 up to a few hundreds of thousands of dollars of annual recurring revenue for us, of course, plus the initial services required to implement the solutions.
We also offer our source module, which you may be familiar with MERX, BidNet and the Periscope S2G technology to a very large number of organizations for which the business model is a supplier-paid membership system that allows suppliers to access our database of published RFPs across our whole network. From a product perspective, our continuous efforts in integrating all of our different modules into a comprehensive e-procurement suite have garnered significant attention from large states and local governments. As you can see on Slide 5 of our presentation, we are powering the critical work of procurement by integrating our various procurement products offering in a common suite of products offered in the modules. We have a source module, a contract, procure, connect and shop. This shows the various brands. If you look at the bottom of that slide that you're all familiar with that translates into the 5 modules of our end-to-end integrated suite of products.
Not only will we have moved all of these to the cloud, but we are planning to complete most of this integration towards the end of the year. If you look at the slide, I'd like to put out a few comments. The 2 first modules are what we call our source-to-contract and the 3 modules on the right are the procure-to-pay. So source-to-contract is really a combination of BidNet, MERX and Periscope that offer similar functionality. The contract piece is what used to be our ASC contract life cycle management module. In terms of procure and connect, there are 2 products that we combine, Biznet Direct, which addresses more of the mid-market and the smaller customers, and there's a Periscope ePRO solution that addresses larger Tier 1 types of customers.
Finally, this allows us to offer the marketplace products, which allows workers from various public agencies and organizations to shop contract directly online. Now in terms of our e-commerce and e-marketplaces division, our various offerings continue to perform well and the rightsizing that we've completed over the last few quarters now put these in a positive contribution place. We continue to see demand from the B2B side of e-commerce, particularly from the Acumatica ERP clients. Now Deborah will comment on the corporation's financial results. Deborah, floor is yours.
Thanks, Luc, and good morning, everyone. I'd like to remind you that you can find our Q1 financial results, including our press release, the MD&A and our financial statements on our website or on www.sedarplus.com. Our Q1 2024 total revenues were $31 million, a decrease of 1.2% or 3.7% compared to Q1 of 2023. However, to provide the information on total revenues on a more comparative basis, and this is because we sold InterTrade subsidiary in October 2022. The Q1 year-over-year represents an increase in total revenues of $2.2 million or positive 7.7% when excluding InterTrade revenues from Q1 last year, which were $3.4 million. The company's recurring revenue continues to trend towards 80% of total revenue, with recurring revenue at Q1 of 79.2% of revenues compared to 77.8% of revenues for Q1 2023. You'll recall that InterTrade was in the prior year recurring revenues with recurring revenue about 90% of revenue. So we're pleased that recurring revenue is trending positively. We've had significant improvements in profitability, with our net loss improved by $1.2 million from $6.3 million loss in Q1 2023 to $5.1 million in Q1 of 2024.
As Luc mentioned earlier, Q1 marks the fourth consecutive quarter with a positive adjusted EBITDA and of $2.6 million. This is an increase of $3.7 million compared to the Q1 last year, which had an adjusted EBITDA loss of $1.1 million. Not only did we achieve positive adjusted EBITDA this quarter, but there have been increases over the last several quarters. If we compare adjusted EBITDA to Q4, which was $2.2 million, there's a sequential increase of $0.4 million. The workforce reductions, both in Q1 and in Q4 contributed to the improvement in profitability compared to Q4, highlighting certain variances between the sequential quarters, you'll recall that Q4 included a noncash gain on lease modification of $1.7 million, while Q1 includes a noncash impairment loss on a right-of-use asset and leasehold improvements totaling $0.7 million. Also, with respect to other revenue from the post-closing transition services to SBS related to the sale of Intertrade, those other revenues decreased from Q4 to Q1 by $0.3 million. Therefore, on a more comparative basis for Q4 versus Q1 by considering the variances that I just mentioned, the adjusted EBITDA increased sequentially by approximately $3.2 million since Q4.
In Q1, we continued to make substantial progress in improving profitability and cash flows across all of our platforms. At the beginning of Q1, we rightsized operations and implemented global workforce reductions of approximately 40 people. We now have just under 650 employees as compared to 800 at this time last year. During the last few quarters, we further streamlined our operations by proactively deprioritizing certain projects, lowering operating expenses, including our office costs by reducing our global lease footprint. As Luc mentioned earlier, we have various product integration initiatives that are ongoing in e-procurement, and we plan to complete our cloud migration that is expected to generate additional savings by the end of fiscal 2024. We've seen an acceleration of e-procurement pipeline conversion, as Luc also mentioned, both in new contracts and significant contract renewals, and we believe that our opportunities pipeline provides confidence in a near to midterm upside for e-procurement solutions.
During the quarter, workforce-related savings were partially offset by restructuring costs mainly due to termination benefits. For other operational savings, including those relating to office reductions and the integration activities that we mentioned earlier, the full benefits of these, which include better positive cash look, from a more positive cash flow to come are not fully reflected in our Q1 results. The further office-based reductions will take effect at the maturity of our Longueuil head office lease at the beginning of Q3 and with other U.S.-based lease reductions under negotiation and also expected around the Q3 time frame. We expect to maintain a positive adjusted EBITDA on an increasing trajectory. Turning back to Q1 revenues. Our Q1 right-of-use revenues, so what we would call our SaaS subscription revenue increased by 5.3% from Q1 prior year, which is typically recurring in nature. We benefited from other revenue of $0.4 million in Q1 2024 for the post-closing transition services that we provided to the acquirer of InterTrade. Despite growth in our right-of-use revenues, we did see a decrease compared to Q1 last year of transaction fee revenue of $1.9 million compared to the prior year, but this is mainly relating to the sale of InterTrade. Professional services decreased by $0.8 million compared to Q1, and this was expected.
It's mainly from our e-commerce platform as large client deployments were completed and certain clients slowed down projects in 2023 and also as we near the completion of some large implementations on our U.S.-based e-procurement customers. Our e-procurement platform performed well with revenues of $20.3 million, representing an increase of 13.5% compared to $17.9 million in Q1 last year. Our U.S.-based e-procurement activities also contributed positively to revenue growth, with an increase in revenue of 17% over the same period prior year. Recurring revenue as a percentage of total revenue for the e-procurement platform was 88.5% for Q1 compared to 86.8% in Q1 of the previous year. For the e-commerce platform, which we used to call Unified Commerce before the sale of Intertrade, it generated revenues of $5.9 million for Q1 this year as compared to $3.8 million compared to Q1 prior year. There are 2 main reasons for the overall decrease in Unified Commerce. One is the sale of Intertrade, which as I mentioned earlier, accounts for $3.4 million of revenue decrease of the $3.8 million total and again, partly offset by the other revenue that I mentioned earlier, $0.4 million. E-commerce also had the lower professional services, mainly in Orchestra as a result of completing the customer deployments.
In our e-marketplaces platform, which generated $4.8 million for the quarter, that represents a 5.1% increase compared to Q1 of the previous year. Recurring revenue for e-marketplaces also increased from, sorry, 83.9% from 79.4% in Q1 2023. Our e-marketplace platforms are well established and mature, and our objective is to continue to operate them efficiently and profitably by maintaining competitive pricing and by managing our costs. I invite you to look at our appendix A in the slide deck for the reconciliation of net earnings and loss to adjusted EBITDA and adjusted net earnings. Finally, on a balance sheet position at June 30, 2023, the cash position, net of debt drawn on the revolving facility, which was $5.7 million less cash on hand, $6 million represents a net cash position of $0.3 million compared to a net debt position of $3.4 million in March of 2023. Restructuring costs that were paid in the quarter relating to reducing our workforce had an unfavorable impact on our closing Q1 cash position but with the various initiatives that we've taken, we anticipate improvements in our cash flow from operations in fiscal 2024 compared to '23 and despite some levels of variability based on timing of working capital, including the timing of collecting e-business tax credits that we file annually. So there we go. With that, over to you, Luc.
Thanks, Deborah. Quite impressive. Every KPI that we monitor has significantly bettered over the last few quarters. In closing, I'd like to emphasize that with the acceleration that we see in the conversion of our pipeline with the savings that we've made but are not yet fully reflected in the current quarter, I'm confident that we will continue to see significant improvements in our financial performance and cash flows over the quarters to come. I'd like to now open the floor for questions. Sabrina, would you take over?
[Operator Instructions]. The first question comes from Kevin Krishnaratne of Scotia Bank.
Sorry, I joined the call a bit late, so I'm not sure if this question was asked but just in both of the Unified Commerce and Strategic Sourcing, did you see organic growth year-over-year? Or are you seeing the trend down year-over-year?
In e-procurement, Kevin, as we mentioned during the call, there was a 13.5% growth that is organic. In e-commerce, when you factor out the sale of InterTrade, there is a little bit of a reduction, mostly caused by the lowering of professional services for which various large implementation projects were completed. So the revenue from these professional services are no longer present.
The 13.5% in sourcing, does that account for, do you add back the deferred impact in Periscope in last Q1? Or is that what you're doing there?
No. So that's the GAAP number. That's the GAAP number, Kevin, so that if you go into the MD&A and you look at our e-procurement revenue, the numbers that we disclosed would be the 13.5% so it's the IFRS accounting. But you're correct that if you factor in the deferred revenue we would have been able to record last year had we not had that adjustment, that percentage would be a bit lower.
Will be lower. Then on both the segments then you talked about the pipeline conversion. If I look at your strategic sourcing, $20.3 million, do we expect that to accelerate into the coming quarters? Or is it more of a back half weighted dynamic? Just what are you seeing in terms of the ability for that pipeline to convert?
Well, as we mentioned, we've announced numerous contracts over the last quarter, last few months, I should say. Many of these tenders were actually presented shortly before we made the acquisition of Periscope or shortly after. We continued to present various proposals at various public organization during those times and it does seem like it's finally coming to fruition and the decisions are being made at our clients' level to go ahead and invest in these procurement systems. So yes, we expect to see a continued good news coming from various customers that are currently in our pipeline.
Then the same thing, again, looking at what you did in K-eCommerce and then Orchestra, do you see those steadily increasing over the coming quarters? It looks like at Orchestra, you were up from Q4 to Q1 at least.
In both our e-commerce property, these are highly sensitive to market conditions. So Orchestra tailors more to large retailers and we are not seeing an increase of volume nor, I would say, a numerous customers looking to either completely modernize their e-commerce platforms or solutions or add further functionalities. On the B2B side, where K-eCommerce specializes because we sell there an e-commerce system that is integrated with the ERPs of mid to small businesses. We see a continued influx of new customers. However, these customers are relatively small in nature, and it would take a volume of these customers in order to increase. We don't see multimillion dollar contracts in K-eCommerce. Those are significantly smaller but there is demand and especially since we launched our integration with Acumatica, we are building up a nice pipeline there.
Kevin, just to add that, I mean, you are correct that the revenues actually did increase from Q4. So we are up about almost 6% in that e-commerce platform from Q4.
Then maybe last one for me, probably for Deborah. The $1.4 million in restructuring that you booked in Q1, how do you think about where those are located in the various OpEx line items? I'm trying to get a sense of how to take the Q1 sales and marketing, R&D, G&A and think about the run rate heading into Q2, given you've done all the restructuring.
Yes. A large portion of that is relating to the salaries and termination benefits. So the answer would be it would follow the employees. So partially, partly in our cost of revenues and partly in G&A, sales and marketing and tax. So don't have a specific headcount to give you an allocation but let's say, I guess they were mostly cost of revenue and, I guess, tech some G&A really is across the 40 people that we did to lay off with really across the platform and in various areas. So it'd be hard for me to give you a split. You might want to divide it by 4 approximately.
Again, if I do the math here, your cost of sales as a percentage of revenue was almost 43%. That will come down because there is some restructuring booked in there, right?
Yes.
That will come down. Then if I look at your OpEx for Q1, it was in total $20.8 million. Now that will move down as well split and you're seeing just take that $1.4 million and split it 4 ways between those 4 buckets, the OpEx and the [indiscernible]
Yes, again, we don't give guidance on how many people were affected in each of the departments. I mean, we was really a generalized workforce reduction. So probably a fair assumption to me.
Are there any more restructuring expected in Q2 that will impact the adjusted EBITDA?
Nothing significant that we expect at this time.
[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Filiatreault for any closing remarks.
Well, thank you again, Sabrina. Thank you all for being with us this morning. We're quite excited about the results that we are showing to you this morning, and we will continue to work towards improving these in the coming weeks and months. Have a great end of summer and we'll be, I guess, speaking to you when we announced Q2, mid-November, I don't have the date in front of me. Speak to you soon. Thank you all.
Thank you for attending today's presentation. You may now disconnect. Thank you.