Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quorum Information Technologies Q2 2018 Earnings Results Conference Call.[Operator Instructions] We are also taking questions over the web. [Operator Instructions] Thank you.Mr. Maury Marks, you may begin your conference.

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

Thank you, Stephanie.Good morning, everybody, and thank you for attending Quorum Information Technologies' earnings release conference call in conjunction with the release of our Q2 2018 financial and operational results.Quorum is an information technology company that focuses on the automotive retail business. We develop, market, implement and support a proprietary software product called XSellerator and Autovance Desk and derive our revenues primarily from our reoccurring Software as a Service or SaaS support revenue stream.Assuming you've all read the press release we issued after markets closed yesterday, today on our call, I will take the opportunity to provide you with additional comments on those results and expand on how we are continuing to invest and position ourselves to grow our largest and reoccurring revenue stream. I'd also like to encourage you to ask questions at the end of our presentation as we appreciate the opportunity to provide you with additional information around our results. Please note, however, that we do not provide forward-looking information or guidance on our financial or operational metrics, except for estimates on our sales backlog.With that, I'll hand it over to Marilyn to deliver our forward-looking information advisory, after which I will proceed with our operational overview. We will then open the floor to your questions.Marilyn, please go ahead.

[Marilyn Bown, Chief Financial Officer]

Thank you, Maury. Good day, everyone. Thank you for being here with us today.Some of the statements we'll be making today may contain forward-looking information within the meaning of applicable securities laws. These statements and information reflect several material factors, expectations and assumptions; and are not guarantees of future performance; and should not be unduly relied upon. Such statements and information involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those projected in the forward-looking information or statements presented to you today. I would also like to refer you to our Q2 2018 SEDAR filing, where you'll find additional company disclosures and a list of business risks.I'd also like to advise listeners that our Q2 2018 financial statements have been prepared in accordance with International Financial Reporting Standards, IFRS. Certain supplementary information and measures not recognized under IFRS may also be provided in our presentation today as management believes they assist the reader in understanding Quorum's results. These measures are calculated by Quorum on a consistent basis unless otherwise specifically explained. You can find these measures listed and further explained in our corresponding Q2 2018 quarterly MD&A.So with that, I'd like to pass it back over to Maury.

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

Thank you, Marilyn.As a Software as a Service or SaaS company, we continue to focus on building a reoccurring support revenue stream. In Q2 2018, our support revenue base grew by 11% compared to Q2 2017. Quorum's annual SaaS support revenue run rate is now $11.3 million based on June 2018 support revenue of $945,000. In addition, support revenue continued to represent 79% of our total revenue in Q2 2018. New customer installations as well as sales of added Quorum-developed and strategic third-party products to our existing customer base contributed to the 11% growth in our support revenue stream year-over-year.During the second quarter of 2018, Quorum finished the installation of 3 new rooftops. Since not all dealership rooftops sold to the end of Q2 2018 were able to be installed, we now plan on the installation of 9 rooftops in Q3 2018. And we have sold another 8 rooftops that will be installed in future quarters.Regarding our rooftop losses or churn. For the past quarter, Quorum again had only one dealership loss, representing a quarterly churn of 0.3% and an annualized churn that is less than 2%.On this call, I'd like to speak again to our key growth initiatives. Our reoccurring SaaS support revenue is our most valuable revenue stream because it generates high-gross-margin revenue that is predictable with low churn. We have 3 ways we can grow our SaaS support revenue, and I'll discuss each one here today. First, we can grow our base of dealership rooftops. This is the most expensive but also the most valuable way of growing the business. It's the most expensive because new customers take time and resources to implement and onboard. The new manufacturers or OEMs take significant time and money to integrate with. Our annualized dealer churn of under 2% means the lifetime value of these customers is extremely high, making upfront investments worthwhile. These new dealerships also become more valuable as they mature and purchase additional products from Quorum. We have spent the last couple of years building out our implementation and training capacity and prebuilt out our staff to handle greater support requirements. We continue to believe there remains a material growth opportunity here in both Canada and the United States. At this point, our implementation capacity is adequate for the up and coming year. And we are working at growing our Canadian sales rate, and we have initiated a renewed focus on the U.S. market. As mentioned, we are installing 9 larger stores in Q3 2018, and we have another 8 sold rooftops into future quarters.Also critical to growing our dealership base is the pursuit of additional OEM integration opportunities both in Canada and the United States. Each time we integrate to an OEM, we materially increase our total addressable market or TAM. We are currently working with 2 OEMs to get certification for the U.S. market.The second way we grow our SaaS support revenue is that we upsell additional products to our existing dealerships or rooftop customers. This may come in 2 forms. Either we build the product then sell it to the customer, like our Communicator product; or we sign a partnership agreement with another trusted company like we originally did with Autovance. During Q2 2018, we entered into a partnership agreement with a company called Tire Storage Solutions, whereby Quorum has become a reseller of Tire Storage Solutions' seasonal tire storage management system. Entering into partnership resale agreements is a new initiative for Quorum as we continue to strive to become a one-stop IT shop for dealers, with our core dealership management system acting as the anchor product.We know that dealership customers want an integrated suite of software products instead of multiple disparate systems that they have today. Based on a review of 30 of Quorum's customers, those dealerships spend approximately $7,000 per month per store on third-party software. These third-party companies have no or limited integration. Based on an additional analysis of our existing customer base and the Quorum-developed and third-party products we represent today, we have a total addressable market or TAM in our current customer base of $600,000 per month or $1,700 per month per customer.Finally, the third way to grow SaaS revenue is that we can acquire. We believe the Canadian market in particular is quite fragmented with point solutions that, if acquired by Quorum, would be both accretive and strategic as they will increase dealer stickiness. Autovance, which was acquired in late 2017, was one great example of this, but we believe there are other similar opportunities out there. Any acquisition we target would need to be accretive to EBITDA over a 24-month period, and we would generally be looking for third-party point solutions that can be integrated and then sold into our existing customer base.So to summarize. The 3-legged stool of our growth opportunities can be described as: one, build the customer rooftop base; two, cross-sell into our existing rooftop base; three, strategically acquire. We believe between these 3 initiatives there remains a compelling opportunity for substantial SaaS revenue growth over the next few years for Quorum.And with that, I'd like to thank you all very much for your time today and your interest in Quorum.Operator, I will now open the conference to any questions from our audience.

[Operator]

[Operator Instructions] There are no questions -- I do apologize, you have a question from [ Douglas ].

[Unknown Analyst]

[ We want ] to ask about kind of the third-party products and features that you think are out there. What are -- the types of products or features are they? And what kind of characteristics do they have? And what would it take for you either to build them out on your own? Or do you potentially acquire them?

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

Right. So that was about 2 or 3 questions in there, so let me dice it. Let me split that apart into pieces. That's fine, no worries, but let me split that into pieces. So really, what you end up having to do is do an analysis by area of the dealership. So what we end up doing is we look at, for instance, the sales area of the dealership. And we go end to end on the business process inside the store and look at what we, Quorum, are providing to the dealership versus what other products that they might be buying from other companies. And a lot of times, what we do is we collect the information on this through going to the North American auto dealers association show or we collect the information by looking at what our customers are actually using in terms of third-party products. So when you get into sales categorically, right, you look at what are they using for website providers to sell cars online, what are they using for lead management tools, what are they using in showroom, what are they using for desk-ing, what are they using for menu-ing, what are they using for sales follow-up and multiple other sort of pieces in-between. We would take the same approach over to service, over to parts, over to accounting. So it'd take me a while to describe to you all of the different categories of different products. But just I wanted to give you a little bit of understanding of how we sort of go about looking at the marketplace.

[Unknown Analyst]

Okay. And is there any particular area that you think Quorum would be best or to spend most of their time looking at before other areas?

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

Yes. Well, from a dealership point of view, I mean, sales and service are always sort of front and center. They are the 2 areas that the dealership focuses -- the dealer principle will focus the most on. And I'm not saying that's a right or wrong approach. I'm just saying it's, based on our experience with dealers, that's the approach they take. So we tend to gravitate towards especially products that will help them sell more cars or service more cars and also help with customer satisfaction through the business process as well. Now you also asked -- sorry. Hey, just one more quick thing. You also asked a question in there about how do we decide whether we should go and acquire a product or whether we should build ourselves or even partnership with another -- via a partnership [ with a company ], yes. So each decision is made independently. Like when we do look at the marketplace, we'll look at a particular category. And then we'll take a look at what's in the market, what the price points are of that product in the market, what we think -- if we think they would be easy to integrate to or not and what it would cost us to develop something similar from a functionality point of view.

[Unknown Analyst]

Okay. My next question is about Autovance. It's been over a year since you acquired them. And I just wonder if you could provide a kind of general overview of how things have gone, what the reception has been with your own sales reps and with your own current and potential customers.

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

Right. I think we're very pleased with the Autovance acquisition overall. Customer-wise, we've grown the number of Autovance installations inside our customer base significantly since the time of acquisition. Autovance has continued to sell into the market beyond Quorum customers. And so those pieces -- and so revenue-wise, those pieces are moving ahead quite well. We're hitting sales targets, and we continue to sort of come up with new ways to sort of advance on the sales side of things. Strategically, what we're also looking at for Autovance is how we can leverage Autovance to help us grow in the U.S. marketplace but also looking at Autovance in terms of them adding to their product set in the Canadian marketplace. So we're looking down both of those paths. And we believe strategically they'll help us not only add more revenue from an Autovance product point of view but also help us strategically sell more Quorum dealership management systems as well.

[Unknown Analyst]

All right. Great. And finally, I know -- I fully appreciate how ironic this question might sound, but I'm just -- with Quorum being such a small company, I wonder about the utility of having these live quarterly conference calls. There are a few other Canadian companies that have recently canceled or modified how they communicate with their shareholders, Constellation Software being a very large example. They've moved away from live quarterly conference calls to accepting questions by e-mail and publishing them on a continuing basis. So if you could comment on that in any way, I would be appreciative.

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

Yes. Well, I mean that's an interesting approach, and obviously we would have very different perspectives across our shareholders. [indiscernible] I don't expect -- and the opposite perspectives. Yes, I mean, we'll take your comments under advisement. And if we deem it onerous to do these conference calls and costly to do these conference calls, yes, maybe we will take a Constellation approach, but right now, they don't seem to be that onerous to do in terms of the conference calls. It's a great chance for us to talk to investors and give investors thoughts, so I don't view them as a large cost expenditure, a large time expenditure right now.

[Marilyn Bown, Chief Financial Officer]

Maury, we do have a question through the webcast, just a question from Rob...

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

Yes.

[Marilyn Bown, Chief Financial Officer]

And it says, the question is how does the M&A pipeline look.

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

So [ Robert ], appreciate that question. I'm not going to give forward-looking guidance on our M&A pipeline. I will just make a couple of general comments. I mean completing the Autovance acquisition really made a statement out there that we were open for business when it comes to M&A transactions. So we got some interests from different companies from completing that particular acquisition. And then of course, we've talked about it in our investor calls. And it -- yes, we've got some interests from a few different companies out there due to those 2 particular steps.

[Operator]

[Operator Instructions] There are no further questions at this time.

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

Okay. Well, I appreciate everybody taking the time today to join us and appreciate the people that asked us some questions. We really do enjoy getting some questions and being able to have an opportunity to answer those. So thank you, everybody, for your time. And with that, we'll end today's conference call.

[Operator]

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