Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quorum Information Technologies Inc. Second Quarter 2024 Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Maury Marks, President and CEO. You may begin.

[Maury Marks, executive]

Thank you, Jeannie. Hello, everybody, and thank you for attending Quorum Information Technologies Q2 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.

Quorum has a uniquely integrated product suite of 13 essential software solutions that are used in whole or in part by 1,414 dealership customers across North America. At least one of Quorum's software solutions is installed in 40% of the franchise automotive dealerships in Canada. Quorum has 13 of the 25 most common categories of software solutions that automotive dealerships utilize. As a result, Quorum is well positioned to develop, partner or acquire products for the remaining 12 categories.

Many of Quorum's customers only leverage one of our 13 available solutions. That means that we have a $54 million annual SaaS revenue cross-selling opportunity within our existing customer base, which is approximately 2x our $29 million SaaS annual recurring revenue run rate. We are very pleased to present to you today our Q2 2024 results, which again reflect our focus on a more profitable growth strategy, emphasizing both cross-selling to existing customers and better company-wide cost management.

Our SaaS revenue in Q2 2024 grew by 2% compared to Q2 2023, with a total revenue remain -- with total revenue remaining steady at $10 million. We achieved adjusted EBITDA of $2 million, up 18% as compared to the prior year. We have now achieved 3 consecutive quarters of adjusted EBITDA margin of 20% or higher. Our improved profitability has enabled us to further pay down $3 million on our BDC Capital Facility in Q3 2024, reducing that debt facility balance from $8.3 million as of June 30, 2024, to $5.3 million today.

Marilyn will now review our Q2 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 Maury mentioned, in Q2 2024, we continued our focus on balanced profitable growth with a company-wide commitment to cost management. Adjusted EBITDA increased by 18% to $2 million compared to $1.7 million in Q2 2023, representing an adjusted EBITDA margin expansion of 3% from 17% in Q2 2023 to 20% in Q2 2024. This was the third consecutive quarter in which we posted an adjusted EBITDA margin of 20% or higher. The increase in adjusted EBITDA in Q2 2024 over the same period last year is due to improved gross margin as well as decreases in all our EBITDA-related operating expenses.

Adjusted cash income, or ACI, was $1.5 million in Q2 2024 compared to $1 million in Q2 2023, an increase of $0.4 million. This represented an adjusted cash income margin expansion from 10% in Q2 2023 to 15% in Q2 2024. The increase is attributable to the increase in adjusted EBITDA and a $0.1 million decrease in capitalized salaries and overhead. Additional highlights of our Q2 2024 results as compared to Q2 2023 are as follows: total revenue remained relatively consistent at $10 million. SaaS revenue was $7.2 million compared to $7.1 million, representing an increase of 2%.

While our customer rooftop count declined very marginally by 0.2% compared to the prior year, our MRRPU increased as a result of our cross-selling strategy. BDC revenue was $2.5 million compared to $2.8 million, representing a decrease of 11%. The decrease in BDC revenue is primarily due to temporary staffing constraints late in Q1 2024, which will resolve late in Q2 2024. Our annual recurring run rate was $38.8 million compared to $39.4 million and represents 97% of Quorum's total revenue run rate. This is comprised of annual recurring SaaS revenue of $28.9 million compared to $28.3 million, and annual recurring BDC revenue of $9.8 million compared to $11.1 million.

Gross margin increased to $9.9 million or 50% of revenue compared to $4.9 million or 48% of revenue. This is our second consecutive quarter of 50% or over total gross margin. The year-over-year increase in gross margin in Q2 2024 is primarily due to an increase in operational efficiencies for the BDC cost structure. SaaS gross margin decreased slightly to 67% as compared to 68%, and BDC gross margin increased to 20% as compared to 12% as Quorum continues to work on multiple initiatives to reduce the BDC cost structure.

As a result of our continued cost-cutting efforts, our total operating expenses decreased by 9% in Q2 2024 to $4.5 million from $4.9 million in Q2 2023, and we had improvements in the following categories. Research and development expenses for Q2 2024 were 8% of revenue compared to 10% of revenue for Q2 2023. Sales and marketing expenses for Q2 2024 were 5% of revenue compared to 6% of revenue for Q2 2023. And general and administrative expenses for Q2 2024 were 17% of revenue compared to 18% of revenue in Q2 2023.

The current quarter did include $0.1 million in onetime expenses and with those expenses removed, general and administrative expenses would have been 16% of revenue. Net income for Q2 2024 decreased by $1.8 million as compared to Q2 2023. The decrease in net income is due to a gain on bargain purchase of $1.8 million recognized in Q2 2023 related to the VINN acquisition. Adjusted net income increased slightly to $0.39 million in Q2 2024 as compared to $0.38 million in Q2 2023. Our continued focus on profitable growth has also resulted in an improved balance sheet as of June 30, 2024.

Cash and cash equivalents increased by $0.7 million as compared to December 31, 2023, and total debt as of June 30, 2024, decreased by $0.9 million to $9.6 million compared to $10.6 million at December 31, 2023. Our $9.6 million in debt is comprised of $8.3 million in BDC Capital debt and $1.3 million of unsecured 0% interest government debt.

As Maury mentioned earlier, subsequent to June 30, 2024, our improved profitability has enabled us to further pay down $3 million on our BDC Capital Facility. On July 12, Quorum made a prepayment of $2.5 million in principal and interest on its BDC Capital Facility. And on August 16, Quorum made an additional prepayment of $0.5 million on that same facility.

With these loan prepayments, Quorum has reduced the BDC Capital Facility balance from $8.3 million as of June 30, 2024, to $5.3 million today. With that, I will pass it to Maury.

[Maury Marks, executive]

Thank you, Marilyn. In this section, I want to further discuss some of the impacts of Quorum's profitable growth strategy, emphasizing both cross-selling to existing customers and better company-wide cost management. The key current impact of the profitable growth strategy is the achievement of 3 consecutive quarters of adjusted EBITDA margin of 20% or higher. As mentioned, this has provided us with the latitude to pay down our BDC Capital Facility and reduced that debt facility from $8.3 million as of June 30, 2024, to $5.3 million today.

This 36% reduction in our BDC Capital Facility translates into interest savings of approximately $300,000 per year. Given the current macroeconomic headwinds, it makes sense that we focus our profit -- put focus on profitability and improving Quorum's balance sheet to ensure a strong future for the company. The longer-term impact of our strategy is that our improved profitability, with the current focus on reducing our debt, will also provide us with significant latitude in allocating future capital generated by the business.

Some of the capital allocation options available to us include: number one, increasing our sales and marketing efforts to expand new dealership acquisitions in Canada and the U.S. market. We have strong brand awareness in Canada with at least one of our products in 40% of the Canadian dealerships but limited brand awareness in the U.S., where we have less than 1% of the market. We have growth opportunities in both markets.

Two, more aggressively pursuing M&A. Quorum has 13 of the 25 product categories in the market, and there are M&A opportunities in both Canada and the U.S. for the other 12 categories. As a reminder, Quorum has acquired 5 companies in the last 6 years and has become proficient at integrating acquired companies into our organization.

Number three, increasing our investment in product, especially in products that produce a significant internal rate of return or IRR. During the last conference call, I discussed key development projects that we are pursuing at our current investment levels to help increase our SaaS revenue growth and BDC gross margins. With increased investment, we could, for example, accelerate our AI project work that is currently focused on increasing our BDC gross margin and expand that work across our product suite to generate more SaaS revenue.

Number four, increasing our OEM certification investment. Keep in mind that OEM certifications are required to allow us to sell our DMS to franchise dealerships, and we are seeing an increased requirement by OEMs to certify other products like Service CRM, online scheduling, Sales CRM, digital retailing and more. By increasing our investment in this critical area, we can open up more available market. Although we are pleased with the progress we've made on profitability and debt reduction, we are excited about the future growth opportunities.

In closing, I want to express my sincere gratitude to our employees whose dedication was key to achieving our strategic plan and the strong quarterly results. Their hard work is enhanced by our integrated suite of 13 essential software solutions and services. This product suite is critical to our profitable growth strategy and it facilitates product cross-selling and plays a vital role in driving the success of our dealerships, thereby increasing value for both Quorum and our customers.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Gavin Fairweather with Cormark.

[Gavin Fairweather, analyst]

Maybe we could start out on the rooftop side. Canada has a nice bounce back quarter. Can you just discuss which products that was related to and maybe also touch on the pipeline for rooftops in Canada looking forward.

[Maury Marks, executive]

Canadian marketplace would have been a combination, Gavin, of all of our different brands. I know that Autovance, our Autovance brand during the quarter was in high demand, but it would have been a combination of all our brands. And then pipeline-wise, once again, I think our pipeline growth is spread across all our brands. Still a lot of demand we're seeing on both the Autovance brand. Probably more demand was seen on the Autovance brand and our DealerMine brand, just because both of them are really good at helping drive profitability for dealerships.

[Gavin Fairweather, analyst]

Okay. That's super helpful. And then maybe just on pricing, the MD&A referenced maybe an increased contribution from pricing changes. I know historically, you've always priced a lot of your products at lower ticket prices and where some of the competition is. So maybe you can just discuss your pricing strategy for the year and where you might be seeing opportunities to tweak things.

[Maury Marks, executive]

Yes. So few opportunities. So opportunity #1 for us was just being more complete in how we -- more complete and consistent in how we did price increases across our customer base and across all of our different brands. After acquiring different companies, we had different price increase policies and so we consolidated those. And just we're a lot more diligent about putting consistent price increases across our entire customer base across all our brands. So that was number one. Number two, on our DMS product, we've also been more consistent on moving our DMS customers to our per user MSRP pricing. So we've done that as part of the transition work that we've been doing throughout the season -- throughout this year. And yes, those are the 2 primary things.

[Gavin Fairweather, analyst]

Switching to DMS. Does that coincide with moving to cloud? Or is that separate?

[Maury Marks, executive]

It does coincide with moving to cloud, but it does -- it coincides with moving to cloud, but it also impacts dealerships that are transitioning to on-prem if they so choose to go that particular path. What we're doing is we have dealerships at different MSRPs across user licenses and so we're just making those consistent.

[Gavin Fairweather, analyst]

Yes. It's a nice dovetail because one of my later questions was just on how the cloud offering is being received and how much interest you're seeing in the base. And ultimately, what I'm trying to think about is how that will kind of change the economics for Quorum as more and more of the base moves over to the cloud.

[Maury Marks, executive]

Yes. I mean it helps us with economics-wise. And yes, I mean, I think we've talked about this in previous quarters. Our cloud implementation out there hasn't been without its bumps. And we've got a team that continues to improve our cloud offering and continues to stay really close to our customers, but it's a newer offering for us. And so it just has had some challenges over time. And we're getting better and better every single month, every single week, in fact, on our offering, but it's been a lot of work.

[Gavin Fairweather, analyst]

Are you getting a lot of pushback from the base? Or do you find that they are seeing the benefits of moving into the cloud? I'm just curious kind of as you work through some of these bumps along the road, do you think that ultimately, in a few years out, you're going to have a decent portion of the base running on a cloud product?

[Maury Marks, executive]

We do. We think over time, yes, we'll have a decent portion. In terms of pushback, I mean, it's very mixed, right? There are dealerships now that we're seeing that 3 and 5 years ago, they wouldn't really consider a cloud offering, whereas now they do. Now they're quite interested in it. In fact, they lead with it. So -- but there's also dealerships that are concerned about Internet accessibility, not so much accessibility, but more reliability in their particular areas. And they're interested in still going on-prem that alleviates a big piece of that. So I think it's a bit of a mix out there. We continue to offer both to a dealership. But yes, we do want to keep moving more of our base to our cloud offering.

[Gavin Fairweather, analyst]

Okay. That's great to hear. And then cyber has certainly been an interesting topic in your space recently with CDK and then also AutoCanada with some news recently. Can you just maybe discuss how and what protections you're putting in place to make sure that no one nefarious is coming in through your software products? And also maybe just touch on whether you are going to be seeing any impact on your business, maybe the BDC revenue from the AutoCanada like this instance.

[Maury Marks, executive]

Yes. So let me touch on the CDK outage first. I mean, for us, 2 of the sort of immediate opportunities were that both our DealerMine product and our Autovance product rely on CDK integration. And so our development teams made a quick fix and our support teams were involved. Actually, it was a company-wide thing where we really made sure our tools were available to CDK dealerships without the integration, so they could continue to book service appointments and they could continue to sell vehicles. And so we spent a lot of effort helping dealerships sort of through that, including AutoCan.

And so we were able to not only keep -- when it comes to service appointments, we were able to keep dealership BDCs operating and booking service payments, but also our own BDC operating and booking service appointments. So it was a lot of quick changes that we made, but I think it was really well received by our customer base.

And then when it comes to our own security, we have made a ton of changes internally within the organization to harden our security posture. I mean, this is -- so much of this is, yes, there's a whole bunch of things that you need to do on the cybersecurity front. And we've had outside experts come in and help us with that, and we continually do testing to try and ensure that we're -- we have as strong a security posture as possible.

But a big piece of this as well is just internally, across your staff, making it for sure everybody is a lot more aware and ensuring they don't do things like click on a hyperlink that they're not aware -- they don't really -- don't absolutely know the sender. And so we spend a lot of time on employee education and really tracking incoming messages and making sure that we're not introducing any possible breaches as well. So it has been a lot of extra work inside the organization and it continues to be, but it's also a big education exercise, a continual education exercise, because you need everybody in your organization to be vigilant.

[Gavin Fairweather, analyst]

Okay. And then maybe just lastly, on the BDC. Reading through the MD&A, I mean it sounds like some of the staffing shortages, which in Q1 persisted a little bit through Q2, despite that, the margin looked pretty good. Maybe just discuss kind of your expectations for that business into the back half of the year from a top line and margin perspective.

[Maury Marks, executive]

Yes, yes. So margin wise, we've been reasonably consistent. I guess what we're missing out on by not having staffing is we're missing out on revenue opportunities. Our contracts that we have with customers are based on so many contacts, but we have the ability to actually burst beyond that number of contacts that we make for dealerships, especially if they have additional customers in their database that we can still keep contacting and keep driving in service appointments. So we're just -- we're meeting our contractual commitments, but we're just not taking advantage of added opportunities on those -- in those contracts by just not being where we need to be staffing wise.

But as a consequence, to your point, right, we're still achieving the margins that we've traditionally achieved. We could just be achieving those same margins on a higher revenue number as we solve our staffing issues. And then another aspect in here is something that I've talked about in the past. I mentioned in our prerecorded remarks here was -- or not prerecorded, but our opening remarks, was the idea that we are undertaking a number of AI projects specifically focused right now on the BDC. We want to expand that over time to utilize AI through a lot of our different products out there.

But our initial projects are on the BDC and with the intent of these projects really helping increase the efficiency and effectiveness of our staff and taking away a lot of the work that they might do in pursuing possible connections with dealership customers out there and utilizing their staff more that once we actually have a connection, making sure that we then put that dealership customer in front of a BDC agent and let them have all the tools they need to book the service appointment, but also maximizing the number of services they sell. So we believe with AI, we can over time continually improve the efficiency of that team, which ultimately should mean improving gross margins.

[Gavin Fairweather, analyst]

Any early guesses on how much to gain?

[Maury Marks, executive]

Too early, buddy.

[Gavin Fairweather, analyst]

I thought I'd ask.

[Maury Marks, executive]

Yes, yes. Fair enough.

[Operator]

And there are no further questions at this time. Therefore, this concludes our Q&A session. I will now turn the conference back over to Maury Marks for closing remarks.

[Maury Marks, executive]

Well, thank you, everybody, for attending our call today. We really appreciate your support, and we look forward to updating you again in November with our Q3 2024 results. Thanks again.

[Operator]

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