Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Quorum Information Technologies Inc. Q2 2021 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Maury Marks. Thank you. Please go ahead.

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

Thank you, Teresa. Good morning, and thank you for attending Quorum Information Technologies' Q2 2021 Results Conference Call and Concurrent Webcast. Quorum offers modern 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 Q2 2021 results. After our presentation, we will 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, 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, 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 these 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, 2020, on the SEDAR website. We are happy to report that our revenue figures were again the highest in Quorum's history. Total revenue for Q2 2021 was $9.1 million as compared to $8.6 million in Q1 2021, delivering 6% increase over Q1 2021 and 53% increase over Q2 2020. Our SaaS revenues were also a record better, reflecting the highest organic growth rate in our history. SaaS revenue totaled $6.4 million, an increase of 5% from $6.1 million in Q1 2021 and reflecting an annualized growth rate of 20%. Q2 2021 SaaS revenue was also an increase of 51% from $4.3 million in Q2 2020. BDC total revenue was $2.4 million, an increase of 9% from $2.2 million in Q1 2021 and reflecting an annualized growth rate of 36%. Q2 2021 BDC revenue was also an increase of 55% from $1.5 million in Q2 2020. Together, our SaaS and BDC revenues made up 97% of our Q2 revenue, with SaaS representing 71%; and BDC, 26% of total revenue. Our gross margin percentage remained consistent at 44%, totaling $4 million in Q2 2021 compared to $3.8 million in Q1 2021. SaaS gross margin was 65%, coming in at $4.2 million in Q2 2021 compared to 65% and $4 million in Q1 2021. BDC gross margin increased to 13% or $300,000 in Q2 2021 compared to 10% or $215,000 in Q1 2021. The 30% increase in our BDC gross margin percentage is due to the successful execution of our BDC gross margin improvement opportunities. Additional Q2 2021 financial highlights include the following: Adjusted EBITDA was $1.1 million, an increase of 4% as compared to $1.06 million in Q2 2020; Adjusted cash income was $0.45 million, a decrease of 31% as compared to $0.65 million in Q2 2020. And on April 26, Quorum made a prepayment of $1.5 million in principal and interest on its BDC capital loan facility. As of March 31, 2021, we reported a cash balance of $9.2 million, so we were 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 a quorum with lower interest debt. At June 30, 2021, Quorum had a cash balance of $7.2 million, net working capital of $7.8 million and a current ratio of 30. Long-term debt was $8.7 million, which included the $7.3 million secured portion drawn on our $15 million BDC capital debt financing facility and the $1.4 million unsecured with the Atlantic Canada Opportunities Agency. With that, I'd like to pass it back to Maury.

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

Thank you, Marilyn. As I had mentioned on our last earnings call, we began to see very positive SaaS revenue growth momentum in March, which in fact continued through Q2. The result is that Q2, we posted the highest quarter-over-quarter organic SaaS revenue growth in the company history at 5%, which represents annualized growth of 20%. BDC growth continued in Q2 as we posted 9% quarter-over-quarter growth, which represents annualized growth of 36%. Based on our Q2 2021 results, our recurring annual revenue run rates are $25.7 million of SaaS revenue and $9.5 million of BDC revenue. The combined reoccurring annual revenue run rate is now $35.3 million, which is 97% of our total revenue. Our revenue growth success in the quarter is a result of 4 key factors: Number one, during the quarter, we increased our dealership customer count from 1,010 to 1,025 rooftops, with 898 of those in Canada and 127 in the U.S. This represents over 27% market penetration in Canada and 0.6% penetration in the U.S. So we have a lot of total available market, or TAM, to continue to sell to; number two, our monthly reoccurring revenue per customer, or MRRPU, expanded to $2,091 in Q2 2021 from $2,013 in Q1 2021. We continue to focus on cross-selling our product suite to our existing customer base. The cross-selling opportunity that we have is $5,000 MRRPU, which is 2.4x our existing MRRPU of $2,091; number three, our consumer direct products saw increased market adoption in the quarter. As a reminder, our Consumer Direct products include both MyDeal, our digital retailing solution that allows a consumer to buy a vehicle online, and PowerLane, our service lane vehicle inspection tool that provides a touchless digital service experience; number four, in partnership with AutoCanada, during the quarter, we expanded our BDC services to include all of AutoCanada's collision centers. Michael Rawluk, AutoCanada's President stated that DealerMine has been instrumental in not only capturing more incoming leads, but also driving more bookings through outbound marketing. Quorum now sells our BDC services to other dealerships collision centers in both Canada and the U.S. Next, I'd like to talk about our product and operations related developments. Quorum's approach is to provide a frictionless workflow for dealerships combined with a digital retailing experience for consumers. This allows dealerships to provide a modernized consumer experience that also beautifully integrates to the in-dealership process. Quorum continues to innovate to provide solutions that both modernize dealerships as well as grow Quorum's future revenues. We have a number of product and operations-led innovations that should help meet both of these objectives. Let me discuss these opportunities. Number one, MyDeal. In Q2, we saw a strong adoption of the MyDeal digital retailing solution through Quorum sales channels. Additionally, we were excited to announce a partnership with EDealer in Q2. EDealer is the largest provider of franchise dealer websites. And under the partnership, EDealer will be selling the MyDeal and Autovance Desk products to their leadership customers. This provides a new sales channel for MyDeal and Desk that should start to generate sales in Q4 of this year; number two, PowerLane. After launching PowerLane late in 2020, we are starting to see some impressive metrics from our PowerLane dealership customers. For those dealerships that fully embrace the PowerLane process, they have seen a 25%-plus increase in hours per work order, which can increase revenue per work order by $50 to $100 or more. As always, the value and adoption of our products is determined by the ROI we generate for the dealerships; number three, QCloud. In partnership with Microsoft, we are now ready to deploy XSellerator DMS on the Microsoft Azure cloud platform under the brand name QCloud. We are actively marketing and selling QCloud to existing and prospective XSellerator DMS customers. When we sell QCloud, deployed on Azure, we replaced an on-premise server sale that generates onetime revenue with a QCloud sale that generates added SaaS revenue. With the QCloud sale, we will see incrementally higher Microsoft licensing costs. However, our overall SaaS gross margin should increase as compared to an on-premise server sale; number four, Azure Synapse. Once again, in partnership with Microsoft, we are consolidating our dealerships data across all our products into a data lake utilizing Microsoft Azure Synapse. This data can provide many insights to help our dealerships make better data-driven decisions and for Quorum to develop future machine learning applications for our dealerships. An exciting short-term opportunity is that by leveraging this data, we should be able to access a new licensing model with Microsoft to provide a more affordable Q Analytics pricing model to everyone in the dealership. Today, Q Analytics is only sold to dealership managers, which represents 10% to 15% of all XSellerator DMS users; number five, mobile sale CRM. Our development teams are ready to pilot a new mobile sales CRM application for the DealerMine sales CRM solution. This is exciting news because it dramatically increases the salability of our dealer line sales CRM solution. Later in 2021, we should be ready to actively sell this solution to our existing DealerMine customers and new prospects regardless of the DMS that they utilize. Currently, the DealerMine sales CRM penetration across the DealerMine customer base is approximately 15%. Additionally, we have integrated Autovance Desk menu and MyDeal into the DealerMine sales CRM solution. And consequently, we should see increased cross-sales opportunities of Autovance products to DealerMine customers. Quorum's commitment to a complete product suite that provides a digital retailing experience for consumers, and with our commitment to continued innovation and a focus on helping dealerships make more money is why O'Regan selected quorum in Q2 as their long-term partner for their primary sales, service and DMS software. Susan Johnston, the VP, Marketing and Communications at the O'Regan's Automotive Group has stated that Quorum's product suite and corporate vision have helped the O'Regan's Automotive Group grow its revenue over the last 4 years and that they look forward to working even closer with Quorum and utilizing our solutions to streamline and enhance their operations across all their locations. The company has worked hard to provide a product and services strategy that would resonate with dealer groups like O'Regan's. We would not have been able to achieve this without 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. We are looking forward to continued strong growth in both SaaS and BDC revenue through 2021 as auto dealerships continue to modernize their operations. Operator, I'd now like to open the conference to any questions from the audience.

[Operator]

[Operator Instructions] The first question comes from David [ Echenberg ] with -- and he is a Private Investor.

[Unknown Attendee]

I have prepared 3 questions. Well, first of all, congrats on the quarter, actually, and congrats on more than fully recovering from Q2 of last year, which was actually a good achievement and also achieving organic growth and sequential growth on top of that, so congratulations on that. And well, so I have prepared 3 questions. First question. The first question has to do with the most recent press release you issued concerning the BDC expansion. Second question has to do with inflation. And the third question has to do with the rooftop metric. So let's go the first one. My question is -- yes, so you stated that you expanded the BDC services to -- so that it is with collision repair centers. And I was wondering if you could quantify in terms of incremental revenues and EBITDA, if possible, how -- what does it mean like 12 to [ 24 ] months forward?

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

Okay. Well, David, we don't provide future financial forecasts or forward-looking forecasts. But let me just try and put this in context for you. So -- right, we do provide BDC services too. It has traditionally been mechanical repair shops. Every franchise dealership will have one of those. And there they're typically -- they can range in size. They're often measured based on sort of number of technicians, but there's all kinds of ways to measure them. We see in the Canadian marketplace -- U.S. marketplace is a little bit different, but in the Canadian marketplace, we see dealerships with anywhere from 4 technicians and they can get as high as 40 or 40-plus technicians for very large shops. Probably the average out there is somewhere around that 16 mark. I'm shooting from the hip a little bit on that one. I don't have any sort of data right in front of me, but just based on my experience. Now not all dealerships -- so what you've seen traditionally out of us is our BDC services being applied or supplied to those particular dealerships as I described in terms of the number of technicians. What we're doing with collision centers is not all dealerships has a collision center. Once again, I'm going to estimate for you. I would say there's probably -- about 15% to 20% of the dealerships have a collision center. We traditionally not provide our BDC services, those closing centers in partnership with AutoCanada. That's where we worked on this project. and we're excited to now offer the services. So hence, the services only really apply to those dealerships that will have a collision center. A lot of those collision centers are typically larger. So they're usually in and about the same size as the average size that I talked about for mechanical repair facilities that, like I said, every single dealership has out there. So we view this as -- it's an opportunity that's likely 15% to 20% the size of the existing sort of BDC services that we offer. I'll just add one more comment in the mix, and that is that we continue to look for other ways that we can expand our BDC services. We have worked with AutoCanada in the past on things like electronic message queues and elements like that. And so you likely will see future announcements from us on other ways that we're expanding our BDC services.

[Unknown Attendee]

Thanks, Maury. That's helpful. And also, just related to that, when you add a collision center that's associated with a dealership, does that collision center count as one more rooftop? Or is it just included in the rooftop that the dealership was representing?

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

Yes, a very good question. So we would -- typically, we would add a rooftop count if we were providing our software to a franchise store and they had a significant separate BDC -- sorry, significant separate collision center. And with the AutoCanada BDC services that we supplied, we did not add in any rooftops related to that. So normally, we would. in this case, we didn't.

[Unknown Attendee]

Okay. That's interesting. So it's actually some kind of -- it's part of your cross-selling strategy actually.

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

Well, what we tend to do with BDC services as we're not adding rooftop counts based on BDC services into the mix. Our rooftop count is really more related to our SaaS revenue line.

[Unknown Attendee]

Okay. So actually, since we're speaking about rooftop count, I'll skip right to my third question. So actually, you're sitting on a pretty nice like 1,000 or so -- 1,035 or something rooftop count, and that's a pretty respectable number, and it doesn't seem to go anywhere. So I mean, speaking of the downside, so it's pretty steady and it seems to have a low churn rate here. So congratulations on that. And my question is, how -- and how is it achievable for you to like expand or compound at a very high clip, the rooftop count? Like is this something achievable to say, well, in a certain amount of time, could achieve 200 more rooftop counts? Or how would that be organically achievable? Because I know that you have made some acquisitions in the past that have moved the rooftop count much higher. But is that something that can be done organically? Like how possible is it to, I don't know, displace an incumbent software provider in a large number of leaderships? I'd just like to know your comments on this question.

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

Yes, yes. Sure. No, I've got a number of comments on this one. So what we have to do is we're going to split -- keep in mind, right, we have a product suite of 11 different sort of core products. We have more than that in this week, but there's 11 core products, and we have 4 different partner products within the suite. So when we talk about growth of rooftops and organic growth of rooftops, what we need to do is we need to split the conversation in between some of the core pieces or core brands that we sell to the marketplace. I mean, obviously, everybody in the call, especially if you've been an investor with us for a period of time, you understand the XSellerator DMS. And so that's one of our core brands that we sell. In that particular case, we are displacing an incumbent in the dealership, and there's a lot of change management that we go through to switch a dealership over. A lot of times, we're restricted by the amount of staff that we have that can sort of help the dealerships manage through that change. Normally speaking, it takes us -- I'm just going to talk about our on-site effort. Normally speaking, it takes us over a 2-week period, we have approximately -- depending on the size of the dealership, approximately 6 people on site for that dealership over a 2-week period to get them switched over. Contrast that to DealerMine, so our DealerMine brand in the marketplace, which is a product that's focused on BDCs and helping dealerships drive more revenue, specifically into their service lines. but also into their collision center. That particular product, when we install it, we're typically doing a remote install. We can be on site in some cases, but we're typically doing a remote install. And that install can be anywhere from sort of 2 to 4 days of time whether it be, like I said, on-site or we dedicate the resources, and they work virtually with the dealership. And then our last brand that we have last sort of core brand that we have is our Autovance brand. our Autovance brand is the key product within it is Autovance desk, but now we've got new products that we're introducing, one of which, of course, is MyDeal. That particular brand, if we're installing Autovance Desk, we can do that remotely. And we're typically doing it through half a day of virtual session. I'm being conservative there. We can typically do it quicker than that. So my reason for talking you through that is different brands are more scalable for us as an organization than other brands. Obviously, if there's less work required to take a dealership live, then we can scale those particular brands quicker than other ones. Yes. And I'll just pause here and see if I've answered your question.

[Unknown Attendee]

Well, yes, that's really helpful. And also I had a sub-question with this. I've not noticed -- actually, my computer's battery ran out. So -- but does your -- the MD&A discuss your customer acquisition cost and lifetime customer value?

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

We do not discuss that in our MD&A. But I will take that under advisement as something that would be a good thing for us to add in the future for MD&A.

[Unknown Attendee]

That would be interesting. And just a last question for me. Everybody is speaking about installation. And obviously, you work in high tech, well, or tech growing SaaS business. So IT people are really sought after these days. And I guess salaries must be going up for finding quality people. So how do you view this kind of inflationary situation in regards to your business. So actually, my question -- I'm trying to figure out whether you have enough pricing power to counter impact potential inflationary pressure from workforce rising costs to protect your operating margin. So that's what I'm wondering. I don't know if my question was fair enough.

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

Yes. So like every tech company, right, we're conscious of the fact that the development team, people and other teams as well are in high demand out there, and we're also conscious of the fact that the world has gone a lot more global when it comes to searching for these people. Traditionally, we've worked -- we've had our development centers and all of our staff in sort of smaller metro centers going across Canada. But because things are going global, it's changed the dynamic out there. So we're constantly working with our teams and making sure that we're competitive in the marketplace. So that's sort of comment number 1. Comment number 2 is we do have the ability across our whole product suite to do price increases with our customers. And so we -- and that -- the way we can do price increases varies a little bit based on brand. And we have traditionally not if you go back in time, we have not done price increases across all of our brands. We are, of course, changing that due to the inflationary demands as you talked about. And so we're broadening our price increase strategy as well.

[Unknown Attendee]

Okay. Well, that's nice and nice to see that you have some certain pricing power and that does not seem to affect your churn rate. So congratulations on that.

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

You bet.

[Operator]

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

[Gabriel Leung, Research Analyst of Technology]

Maury, so a bunch of the dealers that we've spoken to over the course of the last couple of months, certainly over the past year, the biggest issue right now is really just trying to get new and used cars in a lot. So I'm curious if this sort of inventory shortages helping to shorn the decision cycles for guys that are considering your -- I guess, specifically, your services-related products, BDC, DealerMine, that kind of stuff.

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

Well, it probably impacts our sales related products a bit more gape, right? Because just from the inventory perspective, I'm not selling as many cars but -- because I don't have the inventory, but the cars that I am selling, I'm selling at a higher gross. And then the actual fact, I'm probably selling out my inventory and really starting to sell out of my order bank, and we're seeing that across different dealerships. So our perspective -- well, and then another trend in the market is, of course, as a consumer, if you are going to buy a vehicle, a number of consumers out there would like to actually buy that vehicle online or at least do a big portion of the transaction online as opposed to coming into the dealership. And so I'll get back to the service side of the business in a second and make sure I'm answering all aspects of your question. So on the sales side of our business, the focus for us, especially with Autovance Desk and our Autovance Menu products is really a focus around ensuring that you're maximizing grosses from a dealerships point of view. I know as a consumer of vehicles, you don't want to hear that from a dealership's perspective, that is their focus. And those Autovance Desk and Menu are both selling tools. We've got lots of data that shows that they -- when you are more transparent with customers and you do a good job of presenting through a proper sales tool like Autovance Desk and Menu that consumers will actually buy more from that particular dealership, and as a consequence, the dealership will make higher grosses. Hence, what we tend to see when it comes to Autovance Desk is, as long as we position those products right in the marketplace, despite the vehicle inventory shortages, they are -- they remain in-demand products for us. And then on the digital retailing, because you need to, as a dealership these days, have some kind of digital retailing solution for your customers that hopefully is fully integrated to your in-house process, we see that drives the demand for us for MyDeal. Switching then topics over on the service side of the business, service and parts, the fixed operations side of the business. Then what dealerships tend to do is place more emphasis -- if they're not selling as much, they tend to place more emphasis on the fixed operations side because that business tends to be a really steady business for dealerships. And if you can grow that business i.e., a BDC can help you drive more customers into your service department. So if you can grow that business or increase your margins in that business, are you using something like PowerLane which, once again, provides a more transparent experience for the customer, but it also sells more at the same time, then that drives demand for those particular products. Did I -- I hope I answered your question.

[Gabriel Leung, Research Analyst of Technology]

No, that was really helpful. I appreciate that. And then just moving over to the operating expenses side of things. It was up a little bit quarter-over-quarter. I guess part of that was just less government subsidies. But you also mentioned the MD&A that you did make additional investments in the business. And I'm curious, over the remainder of this calendar year, whether we expect directionally for those investments to continue to accelerate? Yes.

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

Yes, I mean, as you would know all too well. From a technology company perspective, you're always making judgments as whether you make investments that are going to help you grow within a quarter, but more importantly, grow consistently quarter-over-quarter. So we -- if we think we can make investments that will help us with our especially SaaS growth rate, but also with our BDC growth rate, we're going to -- we're quite interested in those investments. So I can't say will we not make investments in the future. If we think it's going to help us grow, sure, we will. Within the quarter -- so within Q2, I mean, some of the investments that we made is we added a new marketing director, we added a new support director. We added new BDC Director with tons of experience that can really help us not only grow the BDC from a consistency perspective but also help us with some margin expansion. We put in place a continuous improvement team. So there was -- we made investments on the product side of things, things like we incurred higher Microsoft costs in some of the different product pieces that we were putting in place that I talked about before that will lead to future revenue opportunities for the organization. So an actual fact, if I were to back out the investments that we made within the quarter, we would have went up EBITDA. Our EBITDA would have increased quarter-over-quarter compared to Q1. But we felt these were important investments. We felt they would help us with growth. And we're happy to report, we had a fantastic quarter when it came to growth.

[Gabriel Leung, Research Analyst of Technology]

Yes. No, got you. One last thing for me. Can you just talk about how the -- I guess, the $700,000 additional from IRAP, how that's going to flow through to the P&L and [indiscernible] in the next couple of quarters.

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

Right. Yes. So in IRAP case, IRAP is a grant for us, and we're delighted to have this deal with our government partners. What we're -- so from a P&L perspective, they cover a percentage of our staff's salaries that would work on the project or new staff that we would add to that particular project. We do have some planned additions to help us with these particular projects, but we think that it will be -- it will not be a very large add to our financial statements from an additional cost, even though we're adding resources to the team. And then to my point about growth, we think with us applying machine learning across this incredible set of data that we have now across all of our dealership customers, we believe we have lots of future product opportunities that will come out of this that will help us, collectively, with continued SaaS growth in our business.

[Operator]

And your next question comes from [ Macksen Barow ] with Cormark Securities.

[Unknown Analyst]

So I have one question. And my question relates to migration on to Cloud. So I was just wondering if you guys have any specific targets for the number of migrations you want to do per quarter? And just any targets that you have in that sense?

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

So I won't -- I'm not going to share our internal targets, but I'll give you some context here. From the perspective of -- what we are looking for is we're looking for 100% adoption over time across our dealerships on to the Azure Cloud or QCloud as our brand name -- based on the brand name that we use. So that means that we're likely migrating 10,000-plus users across. Now we're -- it's not that we're not going to offer our other model with an on-premise server if dealerships want that. We can't -- there are a number of dealerships that really like that model, and we'll have that available. So we might not get to 100% adoption. And yes, I think it's -- we look at it as probably -- it's probably about a 3- to 4-year project for ourselves. We think we'll get a lot of demand initially and then that demand will slow maybe after the first year, but it's 3- to 4-year sort of complete conversion of our dealerships. Now we may be surprised. We might have find even more demand out of our stores, and we might be able to move our dealerships across quicker. We'll, obviously, be looking for creative ways to do that, but those are just sort of some high-level goalposts.

[Unknown Analyst]

Sure. You had some good color. And if I could just follow up on that. How do you anticipate it might change the economics for the company looking forward?

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

So I mentioned in the script, I talked about that. It will we won't have onetime revenue, so that's related to these. But what we will do is we will have an additional price per user. And so we'll have additional SaaS revenue. And then when we sell an on-premise server in the past, we've always had a Microsoft licensing component that hits our cost of goods sold. That won't change. So we'll still have a Microsoft licensing component. It will go up a little bit, but the amount that we're able to charge for QCloud will drive -- should drive gross margin expansion for us as a company.

[Operator]

There are no further questions. I will turn the call back to Maury.

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

All right. Well, thank you, operator. Thank you, everybody, on the call. Great questions today, and we look forward to providing our next update in our Q3 as our Q3 2021 results come out. Thanks again for your time today.

[Operator]

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