Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, and welcome to Quorum Information Technology Inc.'s First Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, conference call is being recorded.

I would now like to turn the call over to Maury Marks, President and CEO. Thank you. Please go ahead, sir.

[Maury Marks, executive]

Thank you, Julian. Good day, everybody. Thank you for attending Quorum Information Technologies Q1 2023 Results Conference Call and Concurrent Webcast. Joining me on the call today is our Chief Financial Officer, Marilyn Bown. Quorum is a North American software and services company, providing essential enterprise solutions that automotive dealerships and original equipment manufacturers rely on for their operations.

Through a combination of purposeful product investment and 4 strategic acquisitions in the last 5 years, Quorum has a uniquely integrated product suite of 12 essential software solutions that are used in whole or in part by 1,433 dealership customers across North America. Quorum's product suite currently covers 12 of the 25 most common categories of software that dealerships utilize, and Quorum has the opportunity to develop, partner or acquire products for the remaining categories.

Dealerships typically start with a single product from Quorum's product suite and experience increased synergy and value as additional Quorum solutions are deployed to their dealerships. Currently, at least 1 of Quorum software solutions is installed in 41% of the franchise automotive dealerships in Canada compared to 13% 5 years ago.

In the last 5 years, Quorum has added 1,043 of our 1,433 unique rooftops we have to date, primarily through acquisition, combined with some organic growth. Many of Quorum's customers only leverage 1 solution out of our 12 available Quorum solutions. The result is that Quorum has a $55 million annual SaaS revenue cross-selling opportunity across the existing customer base. That growth opportunity is 2x our $28 million SaaS annual recurring revenue run rate, and that is just within our current customer base.

In 2020, we started our One Quorum journey to integrate our 4 acquired companies into a One Quorum team. The expectation at the time was that this journey would allow us to scale and grow more profitably. In the second half of 2022, we moved to a more balanced profitable growth strategy, which includes a more efficient sales strategy by prioritizing cross-selling and a $2 million annual cost-reduction plan to drive free cash flow.

In Q3 and Q4 2022, we had 17% and 16% EBITDA margins. And in Q1 2023, we recorded a 13% EBITDA margin. However, when you factor in the $0.3 million of spend associated with the once-a-year North American Dealers Association, or NADA, trade show, our EBITDA margin momentum would have continued sequentially at 16% in Q1 2023.

Marilyn will now review our financial results in more detail, and I will follow with some additional comments on our Q1 2023 results.

After our prepared remarks, we will open the floor to your questions. Marilyn, please go ahead.

[Marilyn Bown, executive]

Thank you, Maury, and hello, everybody. 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, 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, please refer to our annual MD&A dated December 31, 2022, on the SEDAR website.

Throughout Q1 2023, Quorum continued its disciplined approach to profitable growth, delivering a year-over-year increase in revenue of 7%, while also generating an increase of 51% to adjusted EBITDA and 277% to adjusted cash income, or ACI.

Additional highlights of our first quarter 2023 results are, adjusted EBITDA in Q1 2023 was $1.3 million, an increase of $0.5 million or 51% from $0.9 million in Q1 2022.

Adjusted EBITDA margin was 13% for Q1 2023 as compared to 9% for Q1 2022.

Adjusted cash income increased by 277%, or by $0.4 million to $0.6 million as compared to $0.2 million in Q1 2022.

Total revenue increased by 7% to $9.9 million in Q1 2023 compared to $9.3 million in Q1 2022.

Recurring SaaS revenue increased by 6% to $7 million in Q1 2023 compared to $6.6 million in Q1 2022.

Reoccurring BDC services revenue increased by 11% to $2.8 million in Q1 2023 compared to $2.5 million in Q1 2022.

Gross margin increased to $4.6 million and 47% of total revenue in Q1 2023 compared to $4.4 million and 47% of total revenue for Q1 2022. Gross margin increased by 5% as compared to Q1 2022.

SaaS gross margin percentage remained consistent at 67% of SaaS revenue, and BDC gross margin percentage decreased by 2% to 10% of BDC revenue. BDC gross margin percentage was the only key metric that declined during Q1 2023. However, when compared to Q4 2022, BDC gross margin percentage improved by 2%.

Starting in late 2022, we began working on multiple initiatives to reduce the BDC cost structure to improve BDC gross margins in 2023. We are happy to see that these initiatives are producing results.

And as a reminder, roughly every $3 of BDC revenue does generate $1 of SaaS revenue.

Our ACI in Q1 2023 included $0.3 million in marketing spend for the annual North American Dealers Association Show, or NADA. Quorum's focus on profitable growth has also resulted in an increase in cash and cash equivalents, which was $5.1 million as of March 31, 2023, an increase of $0.2 million as compared to December 31, 2022, and total net working capital at March 31, 2023, was $6.2 million.

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

[Maury Marks, executive]

Thanks, Marilyn. As Marilyn mentioned, adjusted EBITDA increased by 51% as compared to the prior year and ACI increased by 277%. As mentioned in our April call, cash conversion is something we are very focused on, and we are pleased to produce significant adjusted EBITDA and ACI improvements. And as I mentioned in my opening remarks, when factoring in the spend on the NADA trade show, we now have had 3 consecutive quarters of 16% to 17% adjusted EBITDA margins, and we are working to improve these margins throughout 2023.

In 2022 and in Q1 2023, most leadership demand for our products was for service and parts related solutions, which include our DealerMine service CRM, PowerLane, new Accessible Accessories product and BDC services. Demand for our sales-related solutions was weaker as some dealerships continue to struggle with issues related to low vehicle inventories due to microchip shortages. However, as vehicle supply continues to recover through 2023, we believe the dealership's demand for our sales-related solutions will increase. We continue to focus on improving our sales growth rate. We are now focused on improving how both account management and sales teams handle and close leads.

Additionally, we are improving our product team's focused on innovation that helps leadership drive an increased ROI from our products, and reevaluating our product bundles to ensure that each bundle drives a specific value proposition or outcome that resonates with dealership management.

We have had some recent success driving increased ROI with our new digital retailing product integration. By integrating Accessible Accessories into Autovance MyDeal and Desk, dealership sales staff can easily access and sell available accessories on every vehicle sale. The outcome is dealerships with the integration are selling 80% more accessories than those dealerships without the integration.

Another initiative to improve sales growth is expanding on our product and services bundles like our current BDC service and DealerMine service CRM product bundle. This approach works if our services can drive an outcome or ROI for the dealership, and if they can include significant additional product sales to drive SaaS revenue. This approach is even more exciting if services are higher gross margin than our current BDC services today.

We are working on several initiatives to improve our BDC gross margins, as Marilyn mentioned, and we are really looking to see a step change in our BDC gross margins. Despite the dynamic macro environment, we continue to look for additional growth opportunities to capitalize on, including M&A opportunities. Our Quorum team remains focused on executing our profitable growth strategy throughout 2023. Two key things to keep in mind in this macro environment are that; one, 99% of Quorum's revenue is reoccurring revenue; and two, the high-margin service and parts business of a dealership is resilient to recessions because vehicle owners continue to spend on their vehicles' maintenance and repairs.

I would, again, today like to acknowledge our employees and customers who are the driving force behind our continued growth and drive to innovate to ensure Quorum has a product suite prepared for the future of automotive.

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

[Operator]

[Operator Instructions] Our first question comes from Graham Smith from Cormark Securities.

[Graham Smith, analyst]

Congrats on the quarter. I just had a question about Accessible Accessories and a bit of the churn that you guys experienced in the quarter. So in Q4, we saw some churn in rooftops between Accessible and Autovance because of the demand environment, and then we saw some further churn this quarter. So could you guys just provide a bit of color on when you expect that trend to slow? And then how the integration with Accessible and Autovance will reaccelerate rooftop growth?

[Maury Marks, executive]

Yes. Sure, Graham, and good question. So a couple of thoughts, right? Dealers just buy Accessible Accessories for a couple of reasons. One reason they may buy it is they might buy it in their service and parts department, and the focus -- those departments are focused on selling more accessories to customers when they're in for a service visit. The other reason they may buy it is for their sales department and selling more accessories at the time of a car sale, or they might buy it for both groups and have a coordinated approach.

What we tend to see was we saw a churn on the sales side of the equation, so if dealerships were buying the product for sales reasons. If they're buying it for service and parts reasons, then typically, we didn't see some churn. So that was where the churn was coming from. Our focus has been to try and get this integration completed and out to our dealerships because we believe that it will -- and the numbers have proven out that it will help dealerships on the sales side of their business sell more accessories. And so we just finished the integration late in Q1. The numbers that I was quoting on this particular call where I was talking about how about the integration has helped dealerships sell 80% more accessories, are from April -- the month of April across, approximately, in total, about 300 dealerships.

So we're really pleased with the results. We just now got to get the message out, and we've got to get Accessible sold -- and Autovance sold into more stores.

[Graham Smith, analyst]

Okay. That's amazing. And then just on BDC, it performed quite well again this quarter, which is great to see. And so I'm just sort of curious thinking about sort of the cadence of it this year. So are you sort of expecting continued strength in BDC and then maybe that translate clearly to SaaS as sort of like that churn sort of stops hopefully, in the next sort of quarter or 2?

Is it like -- I guess, my question is, is the cadence sort of will continue sort of at this similar run rate? Is that what you guys are expecting given the macro backdrop?

[Maury Marks, executive]

So you're talking about BDC revenue specifically?

[Graham Smith, analyst]

Yes, exactly.

[Maury Marks, executive]

Yes. Yes. No. I mean BDC is -- our DealerMine service CRM and our BDC services are 1 of the products that we see demand for in the marketplace. So yes, we've had some good success on that side of our business, and we believe that, that will continue. Where -- what I was talking about was a couple of things. One was, we want our BDC gross margins to be a lot higher than what they are. And we really are making some significant changes to improve that. In the past, we've made some smaller changes, but now we're making some significant changes to improve those gross margins.

And then the other comment that I was making is that model has worked well for us in terms of driving revenue, that idea of us, not only supplying our software, but also the related services to dealerships. We would like to extend that model into some other areas of our business. And so we're going to try that and see if that can help us drive more services revenue, and more importantly, more SaaS revenue.

[Graham Smith, analyst]

Okay. That's great. And then just last 1 for me is, just on the M&A environment, have you guys seen sort of private valuations come down at all? Or has there been any sort of like attractive companies that you sort of come across recently?

[Maury Marks, executive]

Yes. I mean we have a few attractive companies. I think in the past when we've talked about M&A, I have mentioned that we've been on pause on the M&A side of things because we really wanted to see where the macro environment was going, and we wanted to understand what that meant to dealerships and dealership sentiment. I think we're starting to get a bit more comfortable that we can start looking at some M&A opportunities out there. My experience is that we have seen valuations come down. I don't know if I have enough sample size to be able to unequivocally state that across the environment, but I think that's probably true in the marketplace.

We've also seen some situations where there're some companies that are in a distressed situation as well. So that -- those are my insights on it.

[Graham Smith, analyst]

Perfect. I actually just have 1 more. Just on the cost-cutting and streamlining initiatives, it looks like you guys are having some success with those initiatives so far. Are you guys planning on sort of realizing any more cost-cutting, streamline initiatives through [ '23 ]? Or is there maybe like a lag on some of those initiatives that you guys have taken?

[Maury Marks, executive]

Yes. So we're very focused on cost management in our business and really trying to optimize our workflows and optimize our staffing levels as a result of that. So we will continue to work on those initiatives. And yes, we do believe that we will be able to make continued improvements in 2023.

[Operator]

We have no further questions in queue. I would like to turn the call back over to Maury Marks for closing remarks.

[Maury Marks, executive]

Well, thanks again, everybody, for joining us and for your continued support. And we look to -- look forward to talking to you again in the summer when our Q2 results come out. Thanks, everyone.

[Operator]

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