Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Transcript 2022-Q1

[Operator]

Thank you for standing by. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quorum Information Technologies Inc. Q1 2022 Results Conference Call. [Operator Instructions]. Maury Marks, President and CEO, you may begin your conference.

[Maury Marks, executive]

Thank you, Cheryl. Good morning, and thank you for attending Quorum Information Technologies Q1 2022 Quarterly Results Conference Call and concurrent webcast. Joining me on the call today is our Chief Financial Officer, Marilyn Bown.

Quorum is a SaaS software and services company that provides essential software to vehicle dealerships and original equipment manufacturers or OEMs throughout North America. Our clients rely on our software for their entire dealership operations, including vehicle sales and service. With the closing of the acquisition of accessible accessories subsequent to the end of the quarter, at least one of our software solutions is now deployed to 1,462 franchise dealerships across the continent.

In Canada, at least one of our solutions are in 42% of the franchise dealerships nationally. Since 2016, we have added 1,137 rooftops to our base with 945 of those rooftops added through acquisition. For Q1 2022, we posted record quarterly revenue of $9.3 million, an increase of 9% over Q1 2021. The 9% increase in revenue on a more modest 3% rooftop count growth, again demonstrates that our focused cross-selling activities are delivering results.

We measure cross-selling based on our monthly reoccurring revenue per rooftop or MRRPU. This quarter, our SaaS MRRPU was $2,124, an increase of 5% from $2,013 reported in Q1 last year. This implies that our current annual SaaS recurring revenue per rooftop is $25,488.

Recurring revenue in Q1 2022 again amounted to 98% of our total revenue. SaaS revenue represented 71% of our total revenue and recurring services revenue represented 27% of our total revenue. The recurring services revenue is from our BDC, a centralized call center that our customers rely on primarily to generate and manage service appointments.

The gross margin for our SaaS reoccurring revenue jumped to 67%, while the gross margin for BDC was 12%. Although the gross margins are thinner than in our SaaS revenue stream, BDC is an important service because it acts as a lead generator for selling our higher-margin SaaS software. Every dollar of BDC revenue generates an additional $0.37 of SaaS software revenue.

We are pleased that organic growth in our SaaS software business continued through Q1 2022, and we look forward to building on that growth. Marilyn will now review our financial results in a little more detail, and I will follow with some additional comments on our growth strategy and operational highlights from Q1 2022. After our prepared remarks, we will open the floor to your questions.

Marilyn, please go ahead.

[Marilyn Bown, executive]

Thank you, Maury. Hello, 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 obligation 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, 2021, on the SEDAR website.

We are happy to report that we again saw our quarterly revenue figures increase and set another record for Quorum. As Maury mentioned, total revenue for Q1 2022 was $9.3 million, a 9% increase compared to $8.6 million in Q1 2021.

Looking at our 2 reoccurring revenue streams, Q1 2022 was again the highest SaaS and BDC revenue quarter in the corporation's history. SaaS and BDC revenue increased by 9% and 14%, respectively, over Q1 2021.

SaaS revenue annual run rate based on Q1 2022 performance is $26.5 million compared to $24.4 million in Q1 2021. BDC revenue annual run rate based on Q1 2022 is $10 million compared to $8.8 million in Q1 2021.

Total recurring revenue represents 98% of total revenue and equates to an annual run rate of $36.5 million compared to $33.2 million for the same quarter last year. Gross margin increased by 17% to $4.4 million compared to $3.8 million reported in the same quarter last year. Gross margin expanded to 47% of revenue in Q1 2022 as compared to 44% of revenue in Q1 2021.

SaaS gross margin increased to 67% as compared to 65% in Q1 2021. BDC gross margin increased to 12% in Q1 2022 as compared to 10% in Q1 2021. Adjusted EBITDA for Q1 2022 decreased by 32% to $0.9 million as compared to Q1 2021. The decrease in adjusted EBITDA is primarily due to additional growth-related investments in the -- an in-person attendance at the 2022 National Automobile Dealers Association, NADA Convention during Q1 2022.

Throughout 2021 and into 2022, Quorum added new hires and made additional investments in technology as part of its one Quorum strategy to improve efficiency, consistency and scalability of the company. As well, during Q1 2022, Quorum attended the 2022 NADA Convention in person at a cost of $0.3 million, a $0.3 million increase as compared to Q1 2021 when the convention was held virtually.

Including cash of $5.8 million, total net working capital as of March 31, 2022, decreased to $6.2 million from $7.6 million as of December 31, 2021, a decrease of $1.4 million. This is primarily due to the $1.1 million repayment of the BDC Capital loan accrued interest in February 2022. In February 2022, Quorum restructured its credit facility with BDC Capital, the new facility significantly reduced interest rates and extends the maturity date of the loan.

As Maury mentioned earlier, on April 1, 2022, Quorum completed the acquisition of Accessible Accessories Limited. Quorum paid $4.5 million in cash with a 10% holdback to be released on September 30, 2022 pursuant to the terms of an earnout structure. The corporation financed the transaction with a combination of cash on hand and its BDC Capital facility. The acquisition added 423 net new rooftops and provides a significant cross-selling growth opportunity for the company.

With that, I'd like to pass it back to Maury.

[Maury Marks, executive]

Thank you, Marilyn. It was an exciting quarter for us as we not only again achieved positive overall revenue growth, as Marilyn outlined, but we also restructured our credit facility with BDC Capital; completed the acquisition of Accessible Accessories, which was announced on April 1, 2022; and we attended the first in-person National Automotive Dealers Association or NADA Convention in 2 years in Las Vegas.

Let me discuss these achievements. Number one, as Marilyn mentioned, the new BDC Capital facility significantly reduces the interest rate and extends the maturity date of the loan. The new facility will allow us more flexibility for future investments or acquisitions as we continue to look to expand with our solutions offering and rooftop count.

Number two, during the first quarter, we worked diligently to facilitate the acquisition of Accessible Accessories, a key acquisition for us as it not only adds another dealer solution to our offering, meaning another cross-selling opportunity but also adds a significant number of additional rooftops to Quorum's customer base.

Following this acquisition, we now have at least 1 Quorum product in 42% of the Canadian franchise dealerships, meaning Quorum now holds a leading position in the Canadian market with substantial profitable growth runway across North America.

Additionally, post the Accessible Accessories acquisition, the cross-selling opportunity that we have, if a client purchased all of our available solutions for their dealership is $4,747 of MRRPU, which is 3x our existing MRRPU of $1,595 which includes the Accessible Accessories rooftops we acquired.

There is an impressive $3,152 per rooftop cross-selling upside potential, a company record. Within our own footprint of franchise dealerships, the total cross-sell potential is approximately $55 million of annual reoccurring revenue.

Number three, after a 2-year long hiatus and with great anticipation, Quorum attended the NADA Convention in Las Vegas. We selected a 2-part smaller booth at the main entrance to the show, and we were rewarded as we were the first booth that NADA attendees saw as they entered the convention pavilion. The show produced 178 marketing qualified leads and 38 sales-qualified leads, which is better than our 2020 show, where we spent another 50% more than the $300,000 we spent this year.

The automotive market is presenting interesting opportunities and headwinds. Number one, dealers are compelled to modernize and streamline their operations to better compete in an increasingly digital marketplace. Quorum software and services has the breadth and flexibility that allows our clients to thrive in these conditions.

Number two, dealers are experiencing vehicle shortages due to computer chip shortages. Dealerships currently hold an average of 25% of their regular vehicle inventory. As a consequence, our sales-related solutions which represent 1/3 of our product offering are currently more challenging to sell to dealerships. Quorum's strategy is to leverage our current rooftop penetration to cross sell to our current clients and maximize the synergy and value that we can provide to the dealership.

Quorum solutions are designed to provide dealerships with escalating synergy and value as added solutions are deployed to the dealership. We will still grow new rooftops by landing and expanding within dealerships. However, more sales emphasis would place on our DMS and service-related solutions that are easier to sell in the current market. This strategy is Quorum's best path to profitable growth.

Quorum continues to work hard to provide a product and services strategy that resonates with dealer groups across North America. We are only able to achieve this with our amazing employees that are the driving force behind our strong results and their continued innovation which ensures Quorum has a product suite and services offering prepared for the future of automotive.

Operator, I'd now like to open the conference to any questions from our audience.

[Operator]

[Operator Instructions] Your first question is from Maxim Barron of Cormark Securities.

[Maxim Barron, analyst]

So the first question I had was with regards to the MRRPU expansion that you're seeing. So I was hoping you could share any color you had on whether that's coming primarily from cross-sell and how you're looking at pricing as another lever for growing MRRPU?

[Maury Marks, executive]

Yes. So the MRRPU expansion is from cross-selling. And it's for us, right, we're continually looking to improve upon that cross-sell, as I outlined sort of in our initial opening comments. In fact, we're leveraging a number of different ways in the organization to try and increase the cross-sell. I'll just maybe outline a couple of quick ones for you.

We're increasing the synergy between our sales team and our account management teams, we're harmonizing those groups to really try to work together as tightly as a team. We're redeploying some of our development spend to integrate our products even tighter and our reporting solutions. So there's a few things we're doing to really try and improve the velocity of our cross-sell.

When it comes to price increases, once again, we're looking across our entire product suite, and we are doing price increases. We're careful with regard to price increases across our dealerships, making sure that we're not increasing churn when we're doing those. So we just -- we're cautious about that and ensuring our -- but also ensuring that we maximize the opportunity.

[Maxim Barron, analyst]

Great. Yes, that's great color. And just on the R&D comment that you had there. So is it safe to assume that the uptick in R&D expense that we're seeing are primarily for improved integration between products? Or is this upcoming new products that you're working on?

[Maury Marks, executive]

Yes. It's a combination of both. So in some cases, we're improving integration. In other cases, we're working on new solutions. We've spent a lot of time and effort on our DealerMine sales, CRM solution as an example in a new -- we've built out a new mobile application. And we believe that not only will that help us with sales of our DealerMine service, CRM solution, but it will also help us with cross-sell sales.

So it's a -- that's a more brand new product, that will help us with new rooftops and cross-sell. And then, of course, we continue to be very committed to manufacturers in building out new integrations. And we're seeing manufacturers come out with more certifications across beyond just the DMS, across things, areas like sales CRM, service CRM, service lane, so on and so forth, and we continue to build out integration with our OEM partners.

[Maxim Barron, analyst]

Got you. Okay. That makes sense. And I just had a final question on the number of rooftops that you have in the U.S. So over the past couple of quarters, we've seen that moved down a little bit. And I was just wondering if you could provide any color there? And kind of what your expectations are on that side?

[Maury Marks, executive]

Yes, happy to provide some color. So in the U.S. marketplace, we're seeing increased competition, which shouldn't be a surprise to anybody. The U.S. is a more competitive environment. We have been working to broaden our account management model. So our account management model, we have coverage across most of our customer base, but there are some customers in the U.S. that we don't have coverage across. So we're working really quickly to try and put account management in place across all of our U.S. customers. When we don't -- what we find when we don't have account management, there's a couple of things. One is we find that we just -- we can raise the satisfaction level with account management, but we can also raise -- we can also get a broader footprint of our products into those stores, which raises the customer sat level as well.

So we have a plan to really make sure we're looking after existing customers. And then longer term, we are going to deploy more resources into the U.S. We are going to make more investments in the U.S. and grow. We will primarily be growing in Q3 and Q4 and focused initially on our DealerMine brand with growth in the U.S., but then later on our DMS as well.

[Operator]

There are no further questions at this time. I will now turn the call over to Maury Marks for closing remarks.

[Maury Marks, executive]

All right. Well, I appreciate everybody's interest in Quorum and continued support, and we look forward to continuing to deliver growth and especially profitable growth. And we look forward to talking to everybody next quarter. Thanks.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.