Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Quorum Information Technologies, Inc. Q1 2021 Results Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions] Thank you. I would now like to hand the conference over to Maury Marks, President and CEO. Please go ahead.

[Maury R. Marks, Founder, President, CEO & Director]

Thank you, Hillary. Good morning, and thank you for attending Quorum Information Technologies Q1 2021 Results Conference Call and Concurrent Webcast. Quorum offers innovative and robust technology solutions and services to traditional and electric vehicle dealerships and original equipment manufacturers, or OEMs, across North America. Today, we will provide you with a financial and operational overview of our Q1 2021 results. After our presentation, we'll open the floor to your questions. Marilyn will now begin with our forward-looking information advisory and a financial overview of the quarter. Marilyn, please go ahead.

[Marilyn Bown, Chief Financial Officer]

Thank you, Maury, and good day, everyone. Thank you for being here with us today. I would like to remind everyone that certain statements in this presentation and on our call are forward-looking in nature. These include statements involving known and unknown risks, such as the continued risks related to COVID-19, uncertainties and other factors outside of management's control that could cause actual results to differ materially from those expressed in the forward-looking statements. Quorum does not assume any responsibility for the accuracy and completeness of the forward-looking statements and does not undertake any obligations to publicly revise these forward-looking statements to reflect subsequent events or circumstances. For additional information on possible risks, including risks related to COVID-19, please refer to our annual MD&A dated December 31, 2020, on the SEDAR website. Total revenue for Q1 2021 was $8.6 million as compared to $8.3 million in Q4 2020, a 3% quarter-over-quarter increase. For the revenue comparisons, I'm going to compare quarter-over-quarter metrics because this comparison better captures the momentum of the business and because COVID-19 had an unusual impact on our 2020 numbers. Q1 2021 was the highest SaaS revenue quarter in the corporation's history, even as SaaS growth for the quarter was partially restricted due to January 2021 COVID-19 lockdown restrictions in many Canadian provinces and for travel to the U.S. from Canada. These government restrictions limited our ability to install DMS software on-site and created a distraction for dealerships who needed to focus on safely operating their business due to the changes. Our SaaS revenue stream totaled $6.1 million, an increase of 1% from $6 million in Q4 2020, equating to a 4% annualized growth rate. The BDC revenue stream continued to grow throughout Q1 2021 and totaled $2.2 million, which was an increase of 12% from $2 million in Q4 2020, equating to a 48% annualized growth rate. Together, our SaaS and BDC revenues made up 97% of our Q1 revenue with SaaS representing 71% and BDC representing 26%.Gross margin in Q1 2021 increased slightly to $3.8 million or 44% of revenue in Q1 2021 as compared to $3.7 million or 44% of revenue in Q4 2020. SaaS gross margin decreased slightly to 65% in Q1 2021 as compared to 66% in Q4 2020. BDC gross margin increased to 10% in Q1 2021 as compared to 9% in Q4 2020.Additional financial highlights include the following: Adjusted EBITDA for Q1 2021 was $1.3 million as compared to $0.9 million for Q1 2020. This is an increase of $0.4 million or 46% from Q1 2020. Adjusted cash income for Q1 2021 was $0.6 million, an increase of $0.5 million as compared to Q1 2020. And subsequent to quarter's end, in April 2021, Quorum made a prepayment of $1.5 million in principal and interest on its BDC Capital facility. In Q4 2020, we reported record adjusted EBITDA of $1.5 million. And as of December 31, 2020, we reported a cash balance of $9.3 million. And with that, Quorum was in a strong financial position to start the process of paying down the BDC Capital facility. We have also expanded other credit facilities to provide Quorum with lower interest debt. At March 31, 2021, Quorum had a cash balance of $9.2 million, net working capital of $9.2 million and a current ratio of 3.2%. Long-term debt was $9.8 million, including the $8.7 million that we have drawn on our $15 million BDC Capital debt financing facility. With that, I'd like to pass it back to Maury.

[Maury R. Marks, Founder, President, CEO & Director]

Thank you, Marilyn. As Marilyn mentioned, new COVID-19 lockdown restrictions contributed to our relatively flat January and February 2021 SaaS revenues compared to Q4 2020. However, our March 2021 revenue increased significantly. I'm going to discuss the March 2021 annual revenue run rate compared to Q4 2020 annual revenue run rate. I know this is a unique comparison. However, it is the best way that we can help investors understand the positive SaaS revenue momentum that we had at the end of Q1 that continues into Q2 2021. The SaaS revenue annual run rate based on March 2021 is $24.9 million, an increase over the $24.2 million SaaS annual run rate based on Q4 2020 or an increase of 3% or 12% annualized. Additionally, the corporation's strong March 2021 SaaS growth continued through to April 2021. And -- sorry, despite new April COVID-19 lockdown restrictions in Canada and for travel to the U.S. from Canada. Our BDC annual run rate based on March 2021 is $9.4 million compared to $7.8 million annual run rate based on Q4 2020 or an increase of 20%. Our BDC group and related revenue is becoming an exciting part of our business. In addition to the growth, our BDC management team have also identified a number of BDC gross margin expansion opportunities that we plan to execute on throughout 2021. The most exciting of these is an improved workforce management process, which increases the utilization of our existing BDC staff. Note that included in over 140 BDC dealership rooftop customers is AutoCanada, the largest dealer group in Canada. Quorum has a long-term partnership with AutoCanada to provide BDC services to their Canadian dealerships. The combined SaaS and BDC annual run rate based on March 2021 SaaS and BDC revenue is now $34.3 million. Adding in our services and onetime annual revenue run rate of approximately $1.2 million, our total annual revenue run rate based on March 2021 amounts to $35.5 million.At March 31, 2021, our dealership count was 1,010 rooftops with 882 of those in Canada and 128 in the U.S. This represents over 27% market penetration rate in Canada and 0.7% in the United States. Our total rooftop count decreased as compared to Q4 2020, primarily due to the retirement of 13 smaller Advantage rooftops that were using the legacy Oasis product. Thus far, in Q2 2021, we have seen an increase in our rooftop count. Our monthly recurring revenue per customer, or MRRPU, expanded to $2,013 in Q1 2021 from $1,971 in Q4 2020. We continue to focus on cross-selling our product suite to our existing customer base and the cross-selling opportunity that we have is $5,000 MRRPU, which is 2.5x our existing ARPU of $2,013.Next, I'd like to talk about the continuation of our product development success in Q1 2021. Here are some highlights from our product teams for Q1 2021. As discussed in previous calls, to meet the transformation changes that face automotive dealerships, we continue development on 2 key consumer direct applications as follows. Number one, MyDeal is our product that allows a dealership customer to buy a vehicle online. We're excited to have signed a recent agreement with EDealer, the largest supplier of franchise dealership websites in Canada to sell MyDeal to their customers. MyDeal has now been sold to 55 dealerships with over half of those sales in the last 2 months.Our MyDeal product has been expanded to allow customers to complete online payments for a vehicle deposit. Additionally, Autovance's comprehensive retailing platform has new integrations into both Dealertrack and RouteOne, the 2 key automotive industry credit portals and into First Canadian, a leading finance and insurance product company. Number two, PowerLane is our mobile service lane inspection tool that allows dealership customers to have a touchless self-service experience. Since its release in Q3 2020, PowerLane is now sold to a total of 37 dealerships. Metrics from these dealerships show that PowerLane can increase hours per work order by up to 25%. In Q1, we released new mobile check-in capability to allow for a touchless service experience, which complements the existing video and picture-enabled capability that allows dealership customers to review a video of any necessary repairs. We also improved our OEM integration to allow PowerLane to be available for Toyota, Chrysler and Ford dealerships. Where we're already GM certified for PowerLane, we are actively pursuing other OEM certifications. Additionally, in the quarter, we announced in partnership with Microsoft, number one, the replatforming of our data resources on Microsoft Azure Synapse to enable the future delivery of advanced analytics and machine learning applications. To date, we have consolidated data from over 400 dealerships into Azure, which represents over 2 billion records. Number two, we developed -- there is a deployment of accelerated dealerships on a new cloud offering on Microsoft Azure. Currently, we have over 30 dealerships transition to the Microsoft Azure cloud. The result is that Quorum can now provide its Accelerator DMS solution to its automotive dealership customers, leveraging the scalability and enterprise-grade reliability of Azure. There is the added benefit that the Azure solution will increase both our MRRPU and gross margins over time.While COVID-19 restrictions and shutdowns have continued, auto dealerships have had to adjust to a new normal in how they sell and service vehicles and also conduct their operations in the most efficient way they can. This has translated into continued growth for Quorum's integrated suite of software technology solutions as auto dealerships modernize their operations. We are looking forward to continued strong growth in both our SaaS and BDC revenue in Q2 and throughout 2021 as auto dealerships continue to modernize their operations. I'd like to thank our employees for their continued dedication, ensuring that Quorum has a product suite and supporting services for the future of automotive. I'd also like to thank our customers and our shareholders for your continued support.Operator, I'd now like to open the conference to any questions from our audience.

[Operator]

[Operator Instructions] Your first question comes from the line of Gavin Fairweather with Cormark.

[Gavin Fairweather, Analyst of Institutional Equity Research]

I wanted to start out on the core DMS. I mean, I've always thought about this as being kind of, call it, 5% mid-single digit growth business. I guess I'm curious if you're seeing that change at all. I mean, when I think about all the innovative products that you've been bringing to market in your bundle over the past year, the value that you're providing versus some of your competitors and some of those competitors having some challenges, are you seeing kind of an uptick or interest? Or would you say it's kind of steady state on that front?

[Maury R. Marks, Founder, President, CEO & Director]

Yes. So I'd say on the DMS side of things, it's steady state. I mean, Gavin, you know that, that piece of our business has always been a steady state growth, very low churn part of our business. What's exciting for us, of course, is our product suite. And because our products are producing such high ROI, we view the products around the DMS as all having great growth potential. and for us, that -- we're really trying to push that growth. We're not ignoring the DMS by any stretch, but we can't only grow that business -- or it takes a lot of investment to grow that business faster, whereas we can grow the rest of the business fairly quickly.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Yes. Just before we kind of move over to some of the adjacent products. You said something in your prepared remarks, which I thought was interesting just around the transition of some of your rooftops on to Azure and some of the ARPU and gross margin implications to that. Can you maybe just expand on that a little bit and help us understand that? And do you have kind of a migration plan for a wider portion of the dealers?

[Maury R. Marks, Founder, President, CEO & Director]

Yes. So we're fairly early into this. Hence, I can't really talk about the wider adoption yet. We should be able to in sort of future calls, but we do plan to continue with the adoption of Accelerator on Azure and we're pretty excited about that. The interesting piece to this particular model from a financial point of view is, traditionally, we sold on-prem servers to a dealership, which is onetime in services revenue to us. Under this particular model, we're going to put dealerships -- all new dealerships into the Azure cloud. And in doing that, of course, charge recurings for us. And the interesting -- another interesting piece to this is our cost structure, our costs from Microsoft don't change a whole lot under the on-prem model versus the Azure model. And hence, why we have opportunities to now increase our recurring revenue, but we also have opportunities for gross margin expansion.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Great. That's helpful. And then maybe just on MyDeal, I think you said 55 customers kind of signed up in the pipe. How does that break down between kind of new logos for Quorum versus kind of selling it into the base? I guess I'm trying to think about -- as your success with MyDeal builds, is it do you think it will be more one or the other or fairly kind of mix? I'm trying to think -- because obviously, if it's with an existing customer, it's more of an ARPU expansion versus with the new customers, you're building your number of rooftops that may be dilutive to your ARPU a bit.

[Maury R. Marks, Founder, President, CEO & Director]

Yes. So I'd say right now, the way you should think about it is it's likely about -- I mean I've to go back and get the exact numbers, the last sort of metrics that I saw it's likely about 75% existing customers with about 25% new customers. And I'll get that breakdown for our next call, so we have the exact numbers. I think that's going to change over time. And the reason that's going to change is due to our deal with EDealer. So once that -- once we start to see some traction under that EDealer agreement, then I think we'll see a lot more new customers from it.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Yes. I know, I mean, that was kind of my next point of discussion. I know we talked to them pretty recently, and I think that they were kind of preparing internally to start to make the push into their base. Is there any update there or...

[Maury R. Marks, Founder, President, CEO & Director]

Yes. So they're still working through that. It just takes time. And I think last time we talked was all of a month ago, right? So yes, ongoing, we're getting closer. And yes, we're excited about future sales traction with them.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. And then just lastly before I change the line, I was hoping you could just give us an update on kind of your One Quorum strategy. I think it's been, correct me if I'm wrong, about kind of 6 months or so since you have roughly kind of put the team together. How is that working in practice? And what kind of impact are you seeing on the business? Maybe just touch on kind of how Mike has been helping shift things internally within the organization?

[Maury R. Marks, Founder, President, CEO & Director]

Right, right. So Mike is still working through the operational side of that. He's getting closer to sort of finalizing the last of his changes on the operational side under the One Quorum strategy, but there's still a bit of work to do there. He is starting to uncover more and more cost savings on the operational side. In fact, I believe he's likely uncovered a good 75%, 80% of those, but time will tell, we'll see where that goes. Our next focus for us, I mean, we have talked about this in the past, we've One Quorumized, of course, corporate and found lots of savings there. We One Quorumized our marketing team, and we've really brought our sales team together we have worked to do to One Quorumize that a little bit more. And then the last group that we're working on as well is just our whole -- our product teams across the organization. And we're just getting started on that, and that will probably take us a couple of quarters before we work through that.

[Operator]

[Operator Instructions] Your next question comes from the line of Gabriel Leung with Beacon Securities.

[Gabriel Leung, Research Analyst of Technology]

Maury, I just want to talk about focus on the BDC side of the business for a minute. So you mentioned that you -- the company is working through a number of initiatives to help drive improve product -- I am sorry, profitability there. So I'm kind of curious where you think gross margins on the BDC side could go to based on the current revenue run rate post some of the initiatives that you're working on?

[Maury R. Marks, Founder, President, CEO & Director]

Right. Great. So I mean, Gabe, I think I've talked about this in the past, right? Like we would like to see gross margins north of 20%, but it will take us time to achieve those kind of levels. What's different for us now is we have a new BDC Director. Matt comes from a lot of call center experience and has walked into our BDC and taken over and really has now not only identified a lot of changes to improve gross margins, but has actually started to execute on some of those from a pilot perspective before we roll them to the broader team. And he's working through a plan to sort of execute that over the rest of 2021. And so our plan from this is that we should sort of see continued gross margin expansion on the BDC through Q2, Q3 and Q4.

[Gabriel Leung, Research Analyst of Technology]

And what is the main margin lever? Is this just to make every single employee a bit more productive? Or are there other things at play that could move that margin higher?

[Maury R. Marks, Founder, President, CEO & Director]

Yes. So the key one is the productivity side of things. The whole workflow scheduling and just managing that a lot tighter within the organization. There are other ones as well. So idea is like using part-time staff for high call volume times as opposed to full-time staff. So there's a combination of a number of things that can be done. But the main one is that workforce management.

[Gabriel Leung, Research Analyst of Technology]

Got you. So I think on a run rate basis, the BDC side is just shy of $9 million per year. So based on your current infrastructure, including the expansion that was announced last year, what is the -- what sort of revenue levels can you get to without having to add to the infrastructure costs, I guess, on the BDC side?

[Maury R. Marks, Founder, President, CEO & Director]

So that's a pretty tough question for me to answer quite yet, just given that we just sort of worked -- I mean Matt's come on board recently, identified these changes, is working through piloting them and executing them. So yes, I don't have the exact answer for you, Gabe.

[Gabriel Leung, Research Analyst of Technology]

Or maybe I will ask differently. Do you have a sense of what the current utilization rate is in BDC business? Is it 50%, 60%?

[Maury R. Marks, Founder, President, CEO & Director]

Yes. So we were able to -- based on the pilot work that we did, we were able to increase BDC utilization of staff by just below 50% to north of 80%.

[Operator]

And there are no other questions at this time.

[Maury R. Marks, Founder, President, CEO & Director]

Okay. Well, thank you so much for joining us today and we really appreciate your -- like I mentioned before, your continued support, and we look forward to providing you with our next update for Q2 results released in August. Thanks, everybody.

[Operator]

Thank you. This does conclude today's conference call. You may now disconnect.