Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Quorum Information Technologies Inc. Second Quarter 2023 Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Maury Marks, President and CEO. Please go ahead.

[Maury Marks, executive]

Thank you, Regina. Hello, everybody, and thank you for attending Quorum Information Technologies Q2 2023 Results Conference Call and Concurrent Webcast today. Joining me on the call 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 5 strategic acquisitions in the last 6 years, including our latest acquisition of VINN Automotive Technology Limited on June 23. Quorum now has a uniquely integrated product suite of 13 essential software solutions that are used in whole or in part by 1,425 dealership customers across North America.

VINN, now being our 13th product solution, is an automotive marketplace that will complement Quorum's dealership vehicle sales solutions as we continue to build our product suite capability beyond the DMS solution. Now with 13 of the 25 most common categories of software that dealerships utilize, 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 experience increased synergy and value as added Quorum solutions are deployed to their dealership. Many of Quorum's customers only leverage 1 solution out of the 13 available Quorum solutions. The result is that Quorum has a $55 million annual SaaS revenue cross-selling opportunity across our existing customer base. That growth opportunity is approximately 2x our $28.3 million SaaS annual recurring revenue run rate, and that is just within our current customer base.

Note that since the acquisition of VINN closed in late Q2, we are still assessing and strategizing on the pricing of the VINN solution under Quorum and report both the number of net new acquired rooftops and the size of our additional cross-selling opportunity in our Q3 results. I will also speak to our strategy behind the acquisition in more detail later on this call. Well, not yet included -- including the VINN rooftops, at least One Quorum software solution is installed in 40% of the franchise automotive dealerships in Canada. And in the past 6 years, Quorum has added 1,043 of our 1,425 unique rooftops we have to date, primarily through acquisition, combined with some organic growth.

Switching to our results for Q2 2023, I'm excited to report that Quorum reached a $10 million revenue quarter. Additionally, our Q2 over Q1 SaaS revenue growth showed some signs of improvement has increased by 1.3% or 5% annualized. Quorum also posted a 17% EBITDA margin for Q2. And if you factor out the $0.3 million spend for NADA in Q1 2023, Quorum has posted 4 consecutive quarters of 16% to 17% EBITDA margins, and we are working to further improve these margins. The improvement in profitability over the last 4 quarters is from our more balanced profitable growth strategy we implemented in the second half of 2022. The strategy, including -- included incorporating a more efficient sales strategy by prioritizing cross-selling and a $2 million annual cost reduction plan to drive free cash flow.

Marilyn will now review our financial results in more detail, and I will follow with some additional comments on our results as well as our recent acquisition of VINN. 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 sedarplus.ca website.

As Maury mentioned, Quorum continued a disciplined approach to profitability in Q2 2023, delivering a year-over-year increase of 17% for adjusted EBITDA and 46% for adjusted cash income or ACI. Additional highlights of our second quarter 2023 results are; revenue increased by 2% to $10.0 million compared to $9.8 million in Q2 2022 and increased by 1.3% compared to $9.9 million in Q1 2023 for an annualized increase of 5%.

SaaS revenue increased by 1% to $7.1 million compared to $7.0 million in Q2 2022. BDC revenue increased by 3% to $2.8 million compared to $2.7 million in Q2 2022. Total annual recurring SaaS revenue was $28.3 million compared to $28.0 million in Q2 2022. Total annual recurring BDC revenue was $11.1 million compared to $10.7 million in Q2 2022. Gross margin increased by 30% and to $4.9 million compared to $4.7 million in Q2 2022.

Adjusted EBITDA increased by 17% to $1.7 million compared to $1.4 million in Q2 2022, and adjusted EBITDA margin increased by 3% to 17% compared to 14% in Q2 2022. Adjusted cash income was $1.0 million, an increase of $0.3 million over Q2 2022 or 46%. SaaS gross margin percentage remained consistent year-over-year at 68% of SaaS revenue.

BDC gross margin percentage decreased by 3% to 12% of BDC revenue. However, when compared to Q1 2023, 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 those initiatives are producing results. As a reminder of the revenue-generating leverage our BDC provides, roughly every $3 of BDC revenue generates $1 of SaaS revenue. Including cash of $4.9 million, total net working capital as of June 30, 2023, decreased by $0.6 million to $5.6 million as compared to December 31, 2022. This decrease is primarily due to an increase in contingent consideration related to the VINN acquisition, decreases in prepaid expenses and loan receivable, offset by an increase in accounts receivable.

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

[Maury Marks, executive]

I want to start by summarizing and updating some key points from our previous call last quarter. Number one, in 2022 and 2023, most dealership demand for our products was for our service and parts-related solutions, which include our DealerMine service CRAM, PowerLane, new Accessible Accessories, product and BDC services.

Number two, demand for our sales-related solutions was weaker. 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 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 our account management and sales teams handle and close leads. Additionally, we are reevaluating our products and product bundles to ensure that each helps specific value proposition or outcome that resonates with dealership management, and we are improving our product teams focused on delivering innovation that helps dealerships drive an increased ROI from our products. Some recent examples include, number one, by integrating accessible accessories into Autovance, MyDeal and Desk dealership 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. Number two, our DealerMine brand recently received our new mobile sales CRM app, and it is accessible in both the App Store and Google Play store. Additionally, we certified our sales CRM product with Hyundai Canada. Number three, Quorum received a new GM menu pricing certification in both Canada and the U.S. for our PowerLane product that now provides service advisers with GM's exact vehicle maintenance schedules and service recommendations for each vehicle. Number four, Quorum's DMS is getting new UI and UX changes where we are redesigning the flow usability and look and feel of key windows in our DMS. Additionally, the main navigation in our DMS will include a new ribbon control or menu, and we have built a new enhanced global search function for customers' vehicles or transactions. And then number five, we are working on new ML and AI projects for future release.

Turning to the VINN acquisition. VINN is a start-up version of AutoTrader with some clear product advantages that we believe we can improve on. The strategic reason we completed the acquisition were as follows; number one, VINN provides dealerships with valuable qualified sales leads, and Quorum's integrated sales tools will ensure dealerships achieve a high lead close percentage. Number two, Quorum's MyDeal product will transform VINN into a digital retailing marketplace. Three, VINN's 5-star concierge service can open up new revenue streams for both Quorum and the dealership such as reanimating dealership's old sales leads to close missed sales opportunities. And then number four, Quorum plans to leverage VINN's $9.6 million of noncapital tax loss carryforwards, which are also a good indication of the investment that is made in VINN and the VINN product prior to our acquisition.

Given the macro environment that includes vehicle inventory shortages, higher interest rates and a possible recession, which may reduce vehicle demand, we believe that we need to continue to improve Quorum's EBITDA and ACI margins. We are happy with the progress to date, where we, number one, as I mentioned, posted a 17% EBITDA margin for Q2. And if you factor out our NADA spend have now posted 4 consecutive quarters of 16% to 17% EBITDA margins. And number two, posted a $1 million ACI for Q2 2023, which is the third quarter in the last 4 where we reached the $1 million ACI figure. Two things to keep in mind in this macro environment are that; 98% of Quorum's revenue is reoccurring revenue and the second, the high-margin service and parts business on the dealership is resilient to recessions because vehicle owners continue to spend on their vehicle's maintenance and repairs.

Thank you again to our employees and customers who are the driving force behind our continued growth and drive to innovate to ensure that Quorum is 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 will come from the line of Gavin Fairweather with Cormark Securities.

[Gavin Fairweather, analyst]

I wanted to start out just on the sales environment and particularly for sales products next to hear a bit of a change in tone in your prepared remarks related to the environment there. So I was hoping you could just expand in terms of how the nature of conversations with customers are changing, whether you're seeing increased deals in the pipeline or deals moving in the pipeline? Any commentary there would be helpful.

[Maury Marks, executive]

Yes. So I think that we've talked about some of this in the past. But if you go back during COVID times and during -- especially during the key inventory shortages, dealerships move more to an environment where they are order takers and where they had multiple people lined up for every vehicle that they could get onto their lots. And so vehicle shortages really changed the whole dynamic. Now with vehicle inventory returning, dealerships are now having to sell vehicles again. And so that just changes the dynamic of how they think. They have to go back to what they're really good at, and that is selling vehicles, but they need tools to help them, right? Tools that can generate additional demand, tools that can manage all those particular prospects that they might have and make sure that they move those prospects down the sales funnel and close as many deals as possible. So it's just -- so in terms of the conversations with dealerships out there, they're recognizing that switches -- that transitions back. And it's not across all manufacturers, but because vehicle inventory is sort of returning at different levels at different rates for different manufacturers, but a lot of dealerships are realizing that they've got to get back to selling.

[Gavin Fairweather, analyst]

Good to hear. And then I noted some commentary in the MD&A around kind of DealerMine and certain customers looking for a unified sales and service CRM. So I was hoping if you could just expand on what you're seeing and perhaps any churn that you're seeing there and kind of what mitigation strategies you're taking?

[Maury Marks, executive]

Yes, you bet. I don't think this is a new trend. I just think it's becoming more prevalent. Dealerships are really looking to consolidate the number of providers that provide them solutions. And never has that been more true than in service CRM, which we already have with our DealerMine service CRM solution and sales CRM. I mean those are 2 solutions that are provided by dealerships typically by 2 different providers, and dealerships are really looking for a single provider. Where we've been strong is, of course, service CRM and where we haven't been as strong is our sales CRM solution. So the mitigation strategy for us is to continue to build out our sales CRM solution. A big, big element to that was the mobile sales CRM app that I mentioned in the prepared comments. And that has become -- now that we've completed that and rolled it out across our dealership customers, that's been a big win for us, and it demos very well in any demos that we're doing for prospects out there.

[Gavin Fairweather, analyst]

That's helpful. And then just on pricing. You've always priced your products and bundles at very attractive value compared to some of your competitors out there. Curious how you're thinking about pricing as a growth lever in this inflationary world and any specific opportunities you see across the portfolio?

[Maury Marks, executive]

So the first thing related to the bundles is with us having 13 different key solutions across these 13 different categories that I talked about, what we're really being conscious of and careful of is that we're bundling our products so that they deliver a very specific outcome for the dealership, whether that's drive more sales leads, improve the gross margin on a customer that's transacting with the dealership in sales or in service. And so our bundles always have a very particular purpose and a very particular ROI that we're trying to drive in for the dealership. In terms of how does that help us, how does that help the company from a SaaS growth perspective? Well, then what we're doing is when we're selling a bundle versus individual products, we have the opportunity to close higher SaaS deals each and every time that we close them out there. And if we can bundle these prices -- these products at an attractive price to the dealership and have price increasing escalators into them, then that builds in not only increased SaaS sales of upfront sales, but also increased SaaS revenue from later price increases.

[Gavin Fairweather, analyst]

Got it. Very helpful. And then just lastly for me. You mentioned in the prepared remarks your desire to drive margins higher in the current environment. So curious if you have any kind of medium-term targets in terms of where you think the business can get to? And curious whether you plan on getting there mostly through growth or if you see some other savings opportunities or some combination thereof?

[Maury Marks, executive]

Yes. So it's a combination of both. So for us, growth does factor into our EBITDA margin and ACI margin calculations. But we're trying to be cautious with what our forecasts are around growth. We are looking to still -- look for cost optimizations across the business. And as I had mentioned in previous calls, we went through that One Quorum exercise to bring all of our divisions together as 1 company. And now our divisions are our brands, but we are just organized a lot better as a company and a lot more efficiently. And so there's still some opportunities to capitalize on there, and we also know of other opportunities inside the organization that we can capitalize on, but might take a longer-term perspective and some development work. And so we're just -- we're going through and trying to identify the highest return projects that we can complete and pursue and just continue to have produced improved EBITDA margins.

[Operator]

[Operator Instructions] And we have no further questions at this time. I'll hand the call back over to you, Maury.

[Maury Marks, executive]

All right. Well, thanks, everybody, for joining our call today. We really appreciate you as investors in the company and look forward to talking to you again once our Q3 results come up. Thank you.

[Operator]

Everyone, that will conclude today's meeting. We thank you all for joining. You may now disconnect.