Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Quorum Information Technologies Q2 2022 Results Conference Call. [Operator Instructions]

Maury Marks, President and Chief Executive Officer, you may begin.

[Maury Marks, executive]

Thank you, Chris. Good morning, and thank you for attending Quorum Information Technologies Q2 2022 Quarterly Results Conference Call and Concurrent Webcast. Joining me on the call today is our Chief Financial Officer, Marilyn Bown.

Quorum is a North American SaaS, software and services company, providing essential enterprise solutions that automotive dealerships and original equipment manufacturers, or OEMs, rely on for their operations.

Our dealership clients rely on our software for their entire operations. A combination of purposeful product investment and 4 strategic acquisitions in the last 5 years has given Quorum a uniquely integrated product suite of 12 essential software solutions used in whole or in part by 1,459 dealership customers across North America.

Our latest acquisition in April 2022 was Accessible Accessories, which represents 688 rooftops, of which 423 were new to Quorum. Now at least one of Quorum software solutions is installed in 42% of the franchise automotive dealerships in Canada compared to 13% 5 years ago.

Over the last 5 years, Quorum has added 1,043 unique rooftops through acquisition and organic growth, and consequently, many customers only leverage 1 out of our 12 solutions. The result is that Quorum now has a $55 million annual SaaS revenue cross-selling opportunity across its existing customer base. That is a 2x growth opportunity based on Quorum's Q2 2022 $28 million annual SaaS revenue run rate, just within our current customer base.

The last 2 years have been spent integrating our acquisitions into Quorum, building integration between our core ERP product, our Accelerator DMS and our other 11 products, 6 of which were acquired. The last of this work will be completed in Q3 2022 when we will have a fully -- will have full integration not only amongst the products themselves, but an integrated go-to-market approach whereby our sales and marketing and account management teams are harmonized and fully incentivized to drive cross-sell.

Having integrated all 4 strategic acquisitions into a single Quorum team, we will be able to leverage the power and focus of our One Quorum team to accelerate our strategic plan. In other words, by Q4 2022, we'll be in a position to aggressively pursue this $55 million higher-margin, cross-selling opportunity.

Marilyn will now review our financial results in more detail, and I will follow with some additional comments on our strategy. After our prepared remarks, we will open the floor to your questions. Marilyn, please go ahead.

[Marilyn Bown, executive]

Thank you, Maury, and 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 supply chain 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 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, 2021, on the SEDAR website.

Total revenues hit another high mark for Quorum in Q2 2022, coming in at $9.8 million, which is an 8% increase over $9.1 million in Q2 2021. Looking at our 2 reoccurring revenue streams in Q2 2022, SaaS and BDC revenues came in at their highest in Quorum's history at $7 million and $2.7 million compared to $6.4 million and $2.4 million, an increase of 9% and 12% over Q2 2021, respectively.

The SaaS revenue increase is due to a combination of inorganic and organic growth. $0.37 million or 6% of the $0.6 million increase is attributable to inorganic growth with the remaining $0.23 million or 3% being attributable to organic growth. Inorganic growth is a net result of the Accessible acquisition and the wind-down of the Advantage division.

BDC's highest revenue quarter in history is attributable to the continued growth of the core BDC offering and the strategic partnership with AutoCanada. Reoccurring revenue in Q2 2022 remained at 98% of our total revenue.

SaaS revenue again represented 71% of our total revenue. And our reoccurring BDC services revenue represented 27% of our total revenue. The reoccurring services revenue is from our BDC, a centralized call center that our clients rely on primarily to generate and manage service appointments.

Our total gross margin increased by 18% to $4.7 million compared to $4 million in the same quarter last year. Gross margin expanded year-over-year by 4 percentage points to 48% of total revenue in Q2 2022 as compared to 44% of total revenue in Q2 2021.

SaaS gross margin increased by 3 percentage points to 68% as compared to 65% in Q2 2021. And BDC gross margin increased by 2 percentage points to 15% as compared to 13% in Q2 2021.

The increase in gross margin and gross margin percentage is primarily due to an increase in SaaS revenue and BDC revenue without a corresponding increase in cost as well as an increase in operational efficiencies for both SaaS and BDC cost structures as compared to Q2 2021.

Gross margins are lower in our BDC than in our SaaS revenue stream, but BDC is an important service as it acts as a lead generator for selling our higher-margin SaaS software. And as mentioned in past calls, every $1 of BDC revenue generates an additional $0.37 of SaaS software revenue.

Adjusted EBITDA for Q2 2022 increased by $0.3 million to $1.4 million compared to $1.1 million for Q2 2021. Adjusted cash income for Q2 2022 also increased $0.3 million to $0.7 million compared to $0.4 million in Q2 2021. Capitalized salaries and overhead remain relatively consistent over the same period.

Including cash of $5.2 million, total net working capital as of June 30, 2022, decreased to $5.7 million from $7.6 million at December 31, 2021, a decrease of $1.9 million. This decrease is primarily due to the $1.1 million repayment of accrued interest on the BDC capital loan facility in February of 2022, and the $0.5 million of contingent consideration related to the acquisition of Accessible Accessories.

On February 8, 2022, Quorum restructured its credit facility with BDC Capital, Inc. The original loan was replaced with a mezzanine loan and a new proposed cash flow loan. The new facility reduces interest rates from a fixed rate of 11.7% to a variable rate, calculated as BDC Capital's floating rate which moves in conjunction with the Bank of Canada's overnight rate plus 3%, and extends the maturity date from January 15, 2025, to March 15, 2027.

As at June 30, 2022, the interest rate on the mezzanine loan was 9.3%. The cash flow loan is expected to be in place by the end of Q3 2022. And once the cash flow loan is in place, we will -- we plan to move approximately 2/3 of the mezzanine loan to the cash flow loan, which will result in lower interest expense.

As we announced earlier, on April 1, 2022, Quorum completed the acquisition of Accessible Accessories Ltd. Quorum paid $4.5 million in cash with a 10% holdback to be released September 30, 2022, pursuant to the terms of an earn-out structure. The corporation financed the transaction with a combination of cash on hand and its BDC capital facility.

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

[Maury Marks, executive]

Thank you, Marilyn. Quorum experienced continued positive revenue growth in both of its reoccurring revenue streams as dealerships maintain their spend on software products, focused on their service and maintenance related revenues.

Our completion of the Accessible Acquisition at the start of the second quarter, which is a company providing a digital retailing solution that provides web-based accessories websites to the Canadian automotive industry was the fourth acquisition for Quorum in the past 5 years.

As mentioned earlier in this call, by Q4, we should be in a position to aggressively pursue our $55 million high-margin cross-selling opportunity. We are focused on 3 key areas which provide the best path for Quorum for continued SaaS growth and margin expansion.

The areas are, number one, our $55 million cross-selling opportunity. The tactics to more aggressively pursue our cross-selling opportunity include: one, harmonizing sales and account management teams, which allows us to better leverage our account management team and their relationships with our customers to generate more leads for products; two, focusing more of our marketing efforts on cross-selling lead generation; three, utilizing our recent sales force deployment to enable sales and marketing teams to be more metrics driven; and four, leveraging Quorum solutions from our diverse product suite, which are designed to provide customers with improved efficiency through integration at a lower cost than competing solutions that are typically already part of the monthly dealership spend.

It should be noted the average customer currently spends $1,600 at Quorum. For context, a monthly revenue increase of $120 per customer equates to a 7.5% annual SaaS revenue growth for Quorum, delivering higher gross margin product sales or reflecting lower customer acquisition cost, or CAC.

The second key area is new customer growth. Our streamlined strategy for new customer growth is by landing and expanding at new dealerships, with a focus on initially selling high-demand vehicle service-related solutions, which are easier to sell in a market where dealerships typically have 1/3 of the regular vehicle inventory due to supply chain shortages.

As a note, most of our products are DMS agnostic, meaning we can land with a smaller product and then expand with the goal of moving that customer to our full DMS product.

Our third key area is gross and operating margins. Our strategy to utilize our large dealer base to cross-sell will allow us to grow more profitably than in the past when we spent more on new dealer acquisitions.

Cross-selling requires less upfront marketing, more focused and efficient sales activity and less expensive new implementations. Thus, we are engaging in a more balanced approach between growth and profitability.

We expect to see gross and operating leverage to be gained from a few sources. Number one, as mentioned, cross-sale of products generally comes at higher gross margins. Number two, ongoing cost efficiencies from a more streamlined strategy and a better company-wide cost management. And number three, company-wide price optimization strategy for key products priced below market along with contractual price escalators.

Quorum's successful history of organic growth and accretive M&A has led us to its position as a leading automotive SaaS platform in Canada with substantial growth runway across North America. And Quorum continues to work hard to provide a product and services strategy that resonates with dealerships.

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 as 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] First question is from Gavin Fairweather with Cormark.

[Gavin Fairweather, analyst]

I wanted to start out on kind of the cross-sell discussion. Just to be clear, so what are these changes taking place on the sales team? Have you started to put that in motion? And trying to get a better understanding of kind of how impactful some of the harmonization and integration of the sales teams could be. How are you feeling about that?

[Maury Marks, executive]

Yes. So we started to put some of the changes in place earlier this quarter being Q3. And we're -- like I mentioned in the prepared remarks, right, where we believe we'll be ready for Q4 to have our teams really working together well.

Keep in mind, there's quite a few changes that have to take place to harmonize these 2 teams. Obviously, we need a compensation plan that works -- a variable compensation plan that works well for -- and keeps everybody working together.

So it's a team sport for everything that we do. We need common systems, everybody trained on those systems. We need everybody trained across the products, on our -- everybody is saying the same things when it comes to how we're positioning the products from a sales perspective.

So there's a lot of pieces that we've been working on that will culminate in us being complete with them and our team ready to go in Q3 -- sorry, in Q4. Now that isn't to say we're not already cross-selling and harmonizing these teams, but we're just not finished all of the work to get them truly as efficient and as effective as we want them until the end of this quarter.

[Gavin Fairweather, analyst]

Got it. That makes sense. And then on the Accessible Accessories deal, understanding that the -- some of the changes on the sales team are kind of still early days, but curious what feedback you're hearing as you started to speak to those rooftops and which products you're really going to be kind of leaning in on as you look to upsell those rooftops.

[Maury Marks, executive]

Right. Yes. So you are correct. It is early days. Gavin, we took a different approach with Accessible Accessories. We put a very structured approach in place for integrating them into our One Quorum model, which I'm really happy it's gone very well for us. So now we have a templated model for how we can integrate companies.

When it comes to selling and cross-selling to Accessible customers, probably, the primary product that we're going to be focused on and we'll be able to do this once we complete some integration is between the Autovance Desk product and the Autovance MyDeal product. So what we're doing is we're building the Accessories' capability into our desking tool and into our MyDeal digital retailing tool.

If you think about it from a vehicle consumer, if you were on MyDeal and you were working on a transaction online to buy a car, you'll now be able to see when we're finished the integration, all of the accessories that are available for that particular vehicle.

And so we're pretty -- Accessories with related pricing. So we're pretty excited about having those 2 products integrated, and we think it will give a boost in sales to both of those products. Longer term, we're going to, of course, have it more tightly integrated into the dealership management system that once again will help with cross sales as well.

[Gavin Fairweather, analyst]

Got it. And then you mentioned some pricing actions on maybe some of your [ piece of ] software, which are below market and that makes a lot of sense in the inflationary environment. So can you just expand your thinking there? Certainly, there is a lot of value in your bundle versus some of the competing solutions on the market. Are you thinking about pushing price more fully on renewal? Maybe just expand on that point there.

[Maury Marks, executive]

Yes. So a few thoughts related to it. So what we're doing -- what we've been doing is going through and looking at the market price of some of our different products that we know are well -- I'm not -- I don't want to say well below market, but below market from a pricing perspective. And then we're considering what our price point should be for selling those particular products going forward. Also keeping in mind what you mentioned, the value that we bring from having them integrated. And then we're also taking a look at whether we should be doing a price increase for those across our customer base as well.

So we're just being very careful and thoughtful as we sort of work through that, but we recognize that we do have some products that probably have some upside pricing room.

[Gavin Fairweather, analyst]

Got it. And then just switching gears to the BDC, a nice uptick in the gross margins in revenue this quarter. Do you have kind of line of sight to moving those towards kind of the high teens, which is, I think, what you're targeting previously?

[Maury Marks, executive]

Yes. We were always wanting to continue to move our margins up. As we peel back the layers of the onion on the BDC, we find a few more headwinds. But that isn't to say that we aren't still committed to continuing to focus to move the margins up. Our team is firmly behind continuing to push margins higher on the BDC side of our business.

[Gavin Fairweather, analyst]

Then maybe lastly for me, it's been a couple of months since the CDK take out by Brookfield. Curious, if you've noticed any change in how they're going to market or any kind of change in how they're dealing with others in the software ecosystem there?

[Maury Marks, executive]

Yes, we haven't really noticed much of a change. At this point in time, we remain sort of diligent and really trying to pay attention to see if we see a change in how they're going to market, especially when we're competing against deals with them, but we haven't seen that to date.

[Operator]

[Operator Instructions] The next question is from Gabriel Leung with Beacon Securities.

[Gabriel Leung, analyst]

Congrats on the progress. Just a question on the profitability side. Your EBITDA margins, obviously, a nice little sequential lift in Q2. How are you guys as an organization thinking about the progression of EBITDA margins over the next 2 quarters, particularly as the sort of One Quorum sales team is introduced to the marketplace?

[Maury Marks, executive]

Yes. So we're a lot more diligent now on margin expansion, as I mentioned sort of in the prepared remarks, right? We really are -- in the past, like most technology companies out there, we pursued SaaS revenue growth very aggressively. Now we're balancing that and really trying to make sure that we're being a lot smarter from a profitability perspective and from a margin expansion perspective.

So for us, there's some natural things that will help with regard to the changes in our strategy with a larger focus on cross-selling, and I mentioned that already. But as well, what we're also going through the entire company and really making sure we're optimized as an organization. And of course, we would do that as part of One Quorum, but we needed to get everybody assembled under One Quorum before we get start through that process.

So I think we're just a lot more diligent about cost optimization as an organization now that we've completed most of the significant pieces are related to the One Quorum changes.

[Gabriel Leung, analyst]

Got you. And maybe you can offer some insights into the thinking of a dealer principal nowadays. So in your discussions and the sales pitch, whether it's to a new account or cross-sell or a displacement. So what are you hearing from the other side as it relates to where they're prioritizing discretionary spend at this point, number one?

And number two is, in situations where you do fail to close an opportunity, what is the usual or a typical pushback you get from the principal?

[Maury Marks, executive]

Great. Okay. I'll try and summarize a lot of different diverse comments that I've gotten from all my conversations with dealers out there.

I had mentioned before that where we see dealers focused as we see them focused on their -- if they're going to be buying solutions, we see them tend to be focusing on their service and parts operations, and which is good for us because we've got a fairly large footprint of products that can really help them with lead generation in the service and parts organization and also optimizing those particular operations and driving efficiencies in.

I've said in the past and sort of continue to say that it's challenging to sell dealerships sales-related, especially sales-related lead generation products because they've had typically more demand than they've had supply of vehicles. That is starting to change slowly.

So we're seeing some different dealerships that -- some different manufacturers that are starting to do a better job of getting more supply of vehicles to the dealerships. We're also starting to see with interest rates going up some of the edge come off, some of the demand as well for vehicles.

So I think we're going to move into, hopefully, in the back half of into Q4 and into Q1 and Q2 of 2023, we're going to move into a situation where products like Sales CRM and products that help with lead generation for sales are going to be more in demand for dealerships, which will also bring in more in demand our digital retailing tool or MyDeal digital retailing tool as well.

So we're hopeful that the problems get solved on the vehicle inventory side sooner rather than later. It's not a -- yes, it's sort of a win, and we're there to work with dealerships to sort of help them as soon as they're ready.

I think I answered all of your questions, but just maybe remind me if I missed a piece.

[Gabriel Leung, analyst]

Yes. No, that's super insightful. Thanks for all the feedback there. The last question I had was around OEM integration certification has always been a big part of the Quorum, I guess, the growth story, the product expansion story, OEM expansion story in the past. I'm curious where things are at on that front now? And what's the thought process there in terms of adding additional OEMs to the mix?

[Maury Marks, executive]

Yes. So we -- I generally split OEM integration and certification into 2 different conversations. One is the DMS side, which is what you're referring to, but there's also the non-DMS, right? The sales CRM, the digital retailing, the service CRM products, the service lane products. So we continue to do a lot of work on the non-DMS OEM integration with all of the different OEMs. And in fact, that work for us has accelerated over time, especially as our products have become more predominant in the marketplace.

On the DMS OEM integration side, we continue to push on the 4 that we really want to get completed in the Canadian marketplace. We've gotten confirmation from one that in 2023, we should be able to build integration with them. The other one for us is on hold until much longer than that.

And then the 2 others, in fact, I personally am working with them to try to move them forward to begin to build integration with us. And we've tried all kinds of different tactics to move them forward. And I remain diligent.

[Operator]

We have no further questions at this time. I'll turn it over to Mr. Marks for any closing remarks.

[Maury Marks, executive]

All right. Well, thank you so much for attending today's call. Hopefully, you found our prepared remarks insightful and the answers to the questions, insightful as well. And we appreciate your support, continued support. Thanks so much, everybody.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.