Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Transcript 2024-Q1

[Operator]

Good day. My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Quorum Information Technologies First Quarter 2024 Results and Conference Call. [Operator Instructions] I'd now like to hand over to the President and CEO, Maury Marks. You may now begin the conference.

[Maury Marks, executive]

Thank you, Ellie. Hello, everybody, and thank you for attending Quorum Information Technologies Q1 2024 Results Conference Call and concurrent webcast today. Joining me 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 or OEMs rely on for their operations. Through a combination of purposeful product investment in 5 strategic acquisitions in the last 6 years, Quorum now has uniquely integrated product suite of 13 essential software solutions that are used in whole or in part by 1,417 leadership customers across North America.

Today, at least one of Quorum software solutions is installed in 40% of the franchise automotive dealerships in Canada. Dealerships typically use software from 25 different categories, and Quorum has 13 of the 25 most common categories of software that dealerships utilize. As a result, Quorum is well positioned to develop partner or acquire products for the remaining 12 categories.

Dealerships typically start with a single product from Quorum's product suite and experienced increased synergy and value as additional Quorum solutions are deployed to the dealerships. Many of Quorum's customers only leverage 1 solution out of our 13 available solutions. That means we have a $54 million annual SaaS revenue cross-selling opportunity, which is approximately 2x our $29 million SaaS annual recurring revenue run rate. And that is just within our current customer base.

Beginning in 2023 and continuing into 2024, Quorum has been focused on a more profitable growth strategy, emphasizing both cross-selling to existing customers and better company-wide cost management. This is a pivot from our past focus on growth through product development and new dealership acquisitions. Under our profitable growth strategy, we continue to pursue new dealership customers. However, we are focused on initially selling smaller, easier-to-sell products to a new dealership and then expanding our revenue by selling additional products to that dealership. Keeping in mind that most of Quorum's product suite is DMS and OEM-agnostic, meaning that our products can be sold to more of the available market.

In Q1, 2024, year-over-year total revenue in SaaS growth were a moderate 2% as we focused on implementing our cross-selling initiatives. Compared to Q4 2024, total revenue increased by 1% and SaaS revenue by 3%, with BDC revenue declining by 3% due to staffing shortages that Marilyn will explain in more detail. Our focus on cross-selling gained momentum in Q1 2024 as we grew out monthly reoccurring revenue per dealership to $1,693 across 1,417 customers, up from $1,634 across 1,433 customers in Q1 2023. The customers' rooftops very moderate 1% decline is primarily due to Quorum's profitable growth strategy, which emphasizes cross-selling over new dealership acquisitions.

Turning to profitability. Our company-wide cost management enabled us to deliver a record $2.1 million in adjusted EBITDA, an increase of 61% from Q1 2023. This also translated into strong adjusted cash income of $1.7 million, up from 189% in Q1 2023. Marilyn will now review our Q1 2024 financial results in more detail, and I will follow up with some additional comments. 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 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 is not assuming 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, please refer to our annual MD&A dated December 31, 2023, on the sedarplus.ca website.

As we have mentioned, in Q1 2024, Quorum continued with its focus on balanced profitable growth with a company-wide commitment to cost management. Adjusted EBITDA increased by 61% to $2.1 million compared to $1.3 million in Q1 2023. And adjusted EBITDA margin increased to 21% compared to 13% in Q1 2023. This was the second consecutive quarter in which we posted our highest quarterly adjusted EBITDA margin on record of 21%. Adjusted cash income, or ACI, increased by $189,000 to $1.7 million compared to $0.6 million in Q1 2023 and ACI margin increased to 17% in Q1 2024 compared to 6% in Q1 2023.

Additional highlights of our Q1 2024 results as compared to Q1 2023 are as follows. Total revenue increased by 2% to $10.1 million compared to $9.9 million in Q1 2023. SaaS revenue increased by 2% to $7.2 million compared to $7 million in Q1 2023. This increase was due to a combination of backlog installation, more comprehensive price increases and new customer revenue. Our SaaS annual run rate based on Q1 2024 is now $28.8 million, an increase over the Q1 2023 SaaS annual run rate of $28.1 million. Our BDC revenue decreased by 9% to $2.5 million compared to $2.8 million in Q1 2023. The decrease in BDC revenue was due to temporary staffing constraints late in Q1 2024, which we expect to be resolved in Q2 2024, and due to a reduction in BDC customers, which also resulted in improved BDC gross margin. The BDC annual run rate based on Q1 2024 is $10.1 million compared to $11.1 million based on Q1 2023. The combined recurring SaaS and BDC revenue in Q1 2024 equates to an annual run rate of $38.8 million and represents 96% of Quorum's revenue.

Moving on to our gross margin performance for the latest quarter. In Q1 2024, our gross margin increased by 10% to $5.1 million compared to $4.6 million in Q1 2023 or 51% of total revenue in Q1 2024 versus 47% in Q1 2023. The increase in gross margin is primarily due to an increase in SaaS revenue as well as an increase in operational efficiencies for both the SaaS and BDC cost structures as compared to Q1 2023. SaaS gross margin increased to 68% as compared to 67% in Q1 2023. BDC gross margin increased to 20% in Q1 2024 as compared to 10% in Q1 2023 as Quorum continues to work on multiple initiatives to reduce the BDC cost structure. BDC gross margin did decrease as compared to Q4 2023 due to temporary staffing constraints, which resulted in a temporary decrease in revenue without a corresponding decrease in expenses.

As a result of our company-wide commitment to cost management, total operating expenses decreased by 14% to $4.3 million in Q1 2024 from $5 million in Q1 2023. Research and development expenses for Q1 2024 were 8% of revenue compared to 10% of revenue for Q1 2023. The decrease in research and development costs are due to improved processes and increased operational efficiencies. Sales and marketing expenses for Q1 2024 were 6% of revenue compared to 9% of revenue for Q1 2023. The decrease in total sales and marketing expenses as a percentage of revenue is primarily attributable to Quorum's focus on increasing customer share of wallet with cross-sales of Quorum's products, which results in a more streamlined and cost-effective sales strategy.

In Q1 2024, cost savings were also attributable to Quorum attending the annual NADA convention at a cost of $0.1 million as compared to $0.3 million in Q1 2023. General and administrative expenses for Q1 2024 were 15% of revenue compared to 18% of revenue in Q1 2023. The decrease in general and administrative expenses in Q1 2024 is primarily attributable to Quorum's focus on better company-wide cost management, which included implementing tighter controls on spending and negotiating better contracts with vendors.

Net income in Q1 2024 also increased, up $1.7 million to $1.1 million as compared to Q1 of 2023. [ Focus on ] profitable growth also resulted in an improved balance sheet with cash and cash equivalents having increased by $0.4 million at March 31, 2024, compared to December 31, 2023, and our total debt having decreased by $0.9 million at March 31, 2024, compared to December 31, 2023.

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

[Maury Marks, executive]

In this section, I want to cover more detail on SaaS and BDC revenue and our improved profitability. Starting with SaaS revenue in Q1 2024, we recorded $7.2 million for the quarter or $28.8 million in annual SaaS revenue, which was a 3% quarter-over-quarter growth. In 2024, we will continue to focus on delivering as a dealer performance company to drive even higher ROI from a product suite for our dealership customers to increase the value proposition of our products and our SaaS revenue. In 2024, to increase SaaS revenue, we have also several exciting product changes planned as follows.

Number one, our desking menu and MyDeal products, which are digital retailing tools for selling vehicles and related products will soon have select OEMs warranty programs to increase dealership's extended warranty sales. This should increase Q4 sales of our menu product to our existing customers and improve the value proposition for selling to new customers.

Number two, Quorum's Accessible Accessories solution, which is a digital retailing platform for selling vehicle accessories will have a tire offering in Q3 to help dealerships increase their tire sales. This is an add-on sale to our Accessible Accessories customers that will also help the sale of our complete solution to new dealerships.

Number three, our service CRM solution is receiving new generative AI capability to empower BDC or contact center agents by automating their communications with customers and providing the ability to upsell additional dealership services. This new capability generates more value in our product for our BDC, existing service CRM customers that have their own BDC and new dealership customers.

Number four, we are building a new dashboard and some AI functionality into our sales CRM tool, which will make the product easier to demo and adapt. Our initial market for sales CRM is our service CRM dealership customers that are looking for a single integrated CRM solution.

Number five, a project that will be delivered in 2025 as the refactoring of our PowerLane service lane solution to allow it to be DMS agnostic. Our dealership customers are also looking for a single integrated service CRM and service lane tool to both drive new service appointments and maximize the revenue opportunity from each appointment.

Number six, Quorum's DMS will continue to receive multiple new OEM integration certifications with existing OEM partners. We also continue to make significant improvements to our DMS to optimize the application for delivery through the Microsoft Azure cloud platform.

Turning to BDC revenue. In Q1 2024, we posted $2.5 million for the quarter, $10 million in annual BDC revenue, which was a 3% decline quarter-over-quarter. We provide BDC services to multiple large North American dealer groups, including AutoCanada, one of the largest dealer groups. In Q1, we are excited to have recently extended our strategic partnership with AutoCanada. And together, we are focused on improving the service and parts revenue our BDC can produce for their dealerships.

There is significant market demand for our BDC services. However, our BDC has historically been a 12% gross margin business. As a reminder of the revenue our BDC provides, roughly $3 of BDC revenue generates $1 of high-margin SaaS revenue.

Including Q1 2024, I'm happy to announce that our BDC team has been successful in posting 3 consecutive quarters of 20% or more gross margin. As Marilyn mentioned, in Q1 2024, BDC revenue declined slightly due to temporary staffing shortages, which resolved in May of Q2 2024. This should help improve revenue and gross margin as we incurred additional staff training costs in March and April of 2024.

Finally, I want to discuss our improved profitability for Q1 2024 where we posted over $2.1 million in EBITDA at 21% EBITDA margin and posted a record $1.7 million of ACI at 17% ACI margin. Additionally, our net debt level dropped by $1.4 million or 20% from $7 million at the end of Q4 2023 to $5.6 million at the end of Q1 2024. Given the macro headwinds with the economy in our BDC capital debt that we incurred to complete our acquisitions, it makes sense that we focus on profitability and improve Quorum's balance sheet to ensure a strong future for the company. This will also provide us with operating flexibility in the future to invest as the economic situation improves.

I would like to sincerely thank our employees whose efforts were instrumental in delivering our Q1 2024 plan and strong quarterly results.

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

[Operator]

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

[Graham Smith, analyst]

Can you hear me okay?

[Maury Marks, executive]

We can, Graham.

[Graham Smith, analyst]

Okay. Perfect. On the staffing issues with BDC, when did those start in Q1?

[Maury Marks, executive]

Sorry, so when did they start? I think I mentioned in my comments in -- well, they started even a little bit earlier. They started earlier in the quarter. I mean, March was the month that we really felt the impact, but we -- the issue started sort of early February for us and then built up as the quarter went on.

[Graham Smith, analyst]

Okay. And then it's on the ARPU side, and kind of nice this quarter, but there's a little bit churn involved [indiscernible] Just trying to get an understanding of how much of that is because of the pricing and the cross-sell that's coming through? How much of that is just in churn and some lower ARPU [indiscernible] Any color on that dynamic would be helpful.

[Maury Marks, executive]

Yes, Graham. So it is a mix from our product suite. I can't say, hey, it's any one particular product. We've had different brands at different points in time over the last year. The slightly heavier churn, we've reacted to that and really tried to shore up that brand and deal with the issues that caused the churn. So it's a bit of a combination of, yes, a churn across our products, so you can't pinpoint it to any one particular brand.

[Graham Smith, analyst]

Okay. And then just on the -- I remember last quarter, you mentioned that you already started to do some pricing increases. And then, of course, you have this cross-sell strategy that you're now focusing on. So I guess that in combination is driving ARPU?

[Maury Marks, executive]

Yes. So without a doubt. We were just -- we were more comprehensive in how we did price increases. And so yes, without a doubt, that helped ARPU.

[Graham Smith, analyst]

Okay. Perfect. I guess then just one more for me on the churn. So as you kind of looked to focus on cross-sell, driving ARPU higher, I'm just trying to think how much decline are you guys kind of expecting to incur in the coming quarters in that rooftop count to focus on ARPU. If any color just on whether that's kind of slowing down, stabilizing? [indiscernible] keep the higher ARPU clients, any color would be helpful.

[Maury Marks, executive]

Yes. So Graham, I'm not going to give you a sort of a forward-looking perspective on that. I think that strategy-wise that as we mentioned in our prepared comments, right, we've made sort of a decision to really focus on cross-selling and to focus on improved profitability as an organization. I think we've done really well on those two initiatives. Yes, there's been a bit of a decline over the last 12 months in our rooftop. We wish we didn't have that as well. And certainly, for us to probably reverse that particular trend would require more investment on the sales side of things and stronger new logo, new dealership pursuits out in the marketplace. We're currently not planning that. And -- but we are watching the economy closely and watching dealer sentiment closely, and that may change for us -- yes, it may change for us very soon.

[Graham Smith, analyst]

Okay. Actually just one more. You're [indiscernible] gross margin. I remember you guys just hit the next leg up of that gross margin that could take you to over mid-20s. It's going to be coming from sort of degenerative AI and implementing that? Maybe just talk a bit about the progress that you're making on that initiative.

[Maury Marks, executive]

Yes. Yes. So I think for us, when we look at BDC gross margins, I think there's a few things. Generative AI is obviously very exciting and has lots of possibilities. And so -- but there are other initiatives that we are putting in place to try and continually sort of work on gross margins and improve them. So speaking back to generative AI, as is the case for many companies, right, this is new work, exciting work to build this into your -- into our product suite. And so we've built Phase 1 of our generative AI projects in, but what we also did was build the framework in place so that we can continue to put in, for lack of a better term, plug-ins into generative AI, plug-ins as we go along with each of them providing additional value. So some examples of some plug-ins are one that will provide a BDC agent with selling tips to help them sell additional services through to a dealership customer but also then tips on how to overcome objections. And then, of course, we'll help them in terms of if there's any written communication versus verbal, help them with that particular communication. That particular piece we are in pilot with. And so that's an exciting one for us. And then we have as the year unfolds -- this particular year unfolds, we have additional planned plug-ins, once again, for lack of a better word, planned plug-ins that we plan to roll out.

[Operator]

As of right now, we don't have any pending questions. I'd now like to hand back over to the management for remarks.

[Maury Marks, executive]

All right. Well, thanks, everybody, for attending this conference call. We have another one in 3 months. And then, of course, we'll have our AGM post that. So we appreciate your support. And we look forward to talking to you in the next conference call. Thank you.

[Operator]

Thank you for attending today's call. We hope you have a wonderful day. Stay safe, and you may now disconnect.