Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Quorum Information Technologies Inc. Third Quarter 2021 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Maury Marks, President and CEO. Please go ahead.

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

Thank you, Jerome. Good morning, and thank you for attending Quorum Information Technologies' Q3 2021 Results Conference Call and concurrent webcast. Joining me on the call today is our Chief Financial Officer, Marilyn Bown. Quorum is a SaaS software and services company that provides essential software to vehicle dealerships of all types and OEMs throughout North America. Our clients rely on our software for their operations from sales through to service. Our software is deployed to 1,032 dealerships across the continent, which is one of our KPIs. We refer to an individual dealership as a rooftop. This quarter, we have attained 1,032 rooftops, an increase of 2% over the total rooftops deployed in the third quarter last year. As of this quarter, approximately 97% of our total revenue is recurring revenue. This is up from 96% of total revenue last year.Another primary KPI is monthly recurring revenue per rooftop, or MRRPU. This quarter, our SaaS MRRPU was $2,116, an increase of 9% from $1,950 reported last year. This implies that our current annual SaaS recurring revenue per rooftop is approximately $25,400. For Quorum, recurring revenue comes from both software and services. Approximately 71% of recurring revenue is SaaS, while 26% of our revenue comes from services. The recurring services revenue is from our BDC, a centralized call center that our clients rely on to primarily generate and manage service appointments. The gross margin for our SaaS recurring revenue is approximately 65%, while the gross margin for BDC is around 13%. BDC is an important service, because it acts as a lead generator for our software. Every dollar of BDC revenue generates an additional $0.40 of software revenue.We are pleased that organic growth in our SaaS software business has remained strong year-to-date. In a few moments, when Marilyn reviews our quarter in detail, this trend will become clear in our gross margin percentages and gross margin totals. After our prepared remarks, we will open the floor to your questions. 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 contingent 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, 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 Q3 2021 was $9.2 million, a 14% increase compared to $8.1 million in Q3 2020. Our SaaS revenues were also a record, reflecting continued high organic growth rate in that segment. SaaS revenue totaled $6.6 million, an increase of 11% from $5.9 million in Q3 2020. Total recurring services revenue, which is our BDC segment, was $2.4 million, an increase of 30% from $1.9 million in Q3 2020. Together our SaaS and BDC recurring revenue streams made up 97% of our Q3 revenue, with SaaS representing 71% and BDC 26% of total revenue. Our gross margin percentage increased to 47%, up from 45% reported in Q3 2020. Gross margin total of $4.3 million in Q3 2021 increased by 16% compared to $3.7 million in Q3 2020.The increase in gross margin percentage and total gross margin was due to scaling the business and also due to the high organic growth rates in the SaaS software segment compared to services, which resulted in more favorable product mix towards SaaS revenue in the quarter. SaaS gross margin was 65%, coming in at $4.3 million in Q3 2021, compared to 62% and $3.7 million in Q3 2020. BDC gross margin decreased to 13% or $321,000 in Q3 2021, compared to 14% or $262,000 in Q3 2020.Additional Q3 2021 highlights include the following: Adjusted EBITDA was $1.5 million, consistent with $1.5 million in Q3 2020. We want to note that adjusted EBITDA in Q3 2020 was positively impacted by temporary pandemic-related government assistance benefits of $0.5 million. Adjusted cash income was $0.73 million, a decrease of 24% as compared to $0.96 million in Q3 2020. At September 30, 2021, Quorum had a cash balance of $7.5 million, net working capital of $7.6 million, and a current ratio of 2.7. Total debt was $8.9 million, which included the $7.4 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 mentioned in my earlier remarks, we are pleased with the progress that we are making in organic SaaS revenue growth. It is a balance between adding new rooftops and increasing monthly reoccurring revenue from the clients that we already have.Our ongoing focus on growth has 4 pillars: one, increasing rooftops. As mentioned, over the past year, we have increased our rooftop coverage to 1,032. With the pandemic receding, dealerships are now facing complex market conditions that makes our product suite appealing for dealers attempting to protect their competitive position and to maximize profits. We have 28% market penetration in Canada and 1% penetration in the U.S. We continue to allocate sales resources expanding our reach in both the Canadian market, where we have strong brand recognition, and in the U.S. market, where the TAM is large.Two, we have been gaining some momentum 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 $2,116. Three, from a product development perspective, we are introducing more capabilities to allow our clients to compete for customers in new digital channels. Our consumer direct digital products including both MyDeal and Power Lane are gaining interest among our client base. And number four, in partnership with AutoCanada, Quorum has entered the collision center market with our BDC services solution. We continue to look for new ways to leverage our BDC services to improve dealership lead generation and also help Quorum sell more SaaS solutions.Current market conditions are compelling dealers everywhere to modernize and streamline their operations to better compete in a dynamic marketplace. Quorum software and services has breadth and flexibility that allows our clients to thrive in these conditions. The four pillars of activity, I just outlined, combined with current market conditions should help to propel growth in the up and coming quarters. The company has worked hard to provide a product and services strategy that would resonate with dealer groups across North America. 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 our audience.

[Operator]

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

[Gavin Fairweather, Analyst of Institutional Equity Research]

I thought I'd start out on kind of the sales environment that you saw in the summer there. Obviously, we saw the SaaS ARR organic growth accelerate into the double digits this year on a year-over-year basis. I guess, sequentially, maybe it was a little bit of a slower sales quarter versus Q2. Do you tend to see some seasonality in that sales environment there? And was this year any different from maybe normal?

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

Yes. So we do see some seasonality. It's just a little harder in Q3 to get -- to be able to install products with vacations, and we tend to work around them. And as I think everybody realizes there was a lot of [indiscernible] demand there across almost every company. So it was -- maybe it was a little more challenging than we've seen in the past. But yes, there is a bit of seasonality to it.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Got. And then so obviously, you'll be in the busier kind of sales quarter now. So you're seeing that activity coming back and things moving nicely through kind of pipeline into contracting here in Q4.

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

Yes. So we are. We are seeing sales activity quite brisk. Do recognize that one of the headwinds that we're up against still in this market is just the lack of inventory for dealerships. And so where we see a lot of the sales demand for our products is more in the service and parts side of the business as opposed to the sales side. Now after having said that, I mean dealerships still realize that they have to modernize, they have to go to a digital retailing as well. So there's that element on the sales side that's weighing on them and we're trying to, of course, make sure that our products are front and center.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Right. So when you think about -- I mean when I think about the two kind of big organic growth products that you have in market right now, I mean, 1 of them will be MyDeal, one of them will be Power Lane. So maybe Power Lane is a little bit of an easier sell right now, but maybe you can give us a bit of an update on both.

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

Yes, that's correct. So Power Lane, our DealerMine service CRM products, our online scheduling, our product suite that's really focused on the service and parts operations, are all an easier sell at this moment. Our MyDeal, which is a digital retailing solution that you buy a car online, our desking menuing products, our sales CRM products on the sales side of the business are just a bit tougher of a sell right now. But with -- after having said that, right, digital retailing and MyDeal are where dealerships need to move to, and they know that. And so despite the fact that they might be -- they may be challenged in terms of having vehicle inventory, they still realize they need to make investments in the sales side.

[Gavin Fairweather, Analyst of Institutional Equity Research]

And then maybe just shifting gears to XSellerator. Obviously, you powered it on Azure. I guess a few questions on how that changes, the unit economics. Can you speak to if there's any notable difference in the cost to implement and whether that becomes a little bit easier in a pure SaaS world? And then maybe just touch on the gross margin impact as well.

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

Yes. So it does make things easier for us from an implementations perspective. It allows us to sort of reduce implementation cycles in terms of time duration to implement. It takes a fairly significant lift out of the equation in terms of getting infrastructure -- network infrastructure in place within the dealership. So it's helpful from that perspective. In addition to that, what we're also doing is we've just started going to our existing customers, who might be on servers that are end-of-life and talking to them about the move to Azure as well. And as we convert more of them longer term, that will help us with cost of goods sold, because it will just be a much slower support requirement for the organization.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Great. I mean I know historically, your strategy has been to not make money on implementation services, so that you can get the recurrent revenue. Does -- do you see that changing at all? Like maybe you'll be able to kind of break even on it going forward? Like how should we think about the gross margin...

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

I would think that we may be able to move the gross margin a little bit, but I don't think we'll get to a breakeven point. We're just finding in the marketplace as a whole that upfronts and training for us is -- it's an opportunity for us to negotiate on those and really try to accelerate our SaaS and BDC sales from doing that. So yes, we see a few points difference from services and onetime revenue in terms of a little bit less loss, we anticipate over time, we will. But yes, I don't believe we'll get to breakeven.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. And then maybe just lastly for me. I know you've been putting a lot of effort into BDC and installed some new leadership there. Can you just maybe provide us with a bit of an update on that business and how things are tracking? And how we should think about maybe the time line towards the gross margins maybe back towards 20% where they were historically?

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

You bet. So in the BDC, we did -- last time we talked, we did put new -- I did talk about new leadership and how we were focused on expanding our gross margins on the BDC business. Since that call, we've -- the leader that we put in place has left us, moved on to a different opportunity. We now have a new leader in place. So we still have -- so we've gone through a change there, which has delayed our gross margin expansion work that we were doing, but we're still very focused on that, and still want to continue to track to improve gross margins on the BDC and have a good plan for doing that. But the change in leadership caused us a little bit of a delay.

[Operator]

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

[Gabriel Leung, Research Analyst of Technology]

Congrats on the progress. Maury, I just want to follow up on -- I just want to follow up on the BDC question. You've obviously made a lot of investments in that area. I'm just curious. Where does that division stand now in terms of utilization rate? I'm just curious how much more revenue you can garner out of the existing infrastructure.

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

Yes. So I would say we're -- latest utilization rates were probably in the 70%-80% range. I don't know the 100% -- the exact number right off the top of my head. So -- but we're in that particular range, but we believe there's still opportunities to improve upon that. We've actually got a few opportunities, Gab. So that's one, I mean, we talked about in previous calls, workforce management and doing a better job of utilizing our team and improving their utilization. So that's one aspect for us. There's lots of other smaller opportunities. And then there's one more big one. And one of the big ones has to do with customers that were some of our first BDC customers. and really going back and working a new -- negotiating a new deal with them. And so we have that as an opportunity for us as well. And so it's a combination of those things that we believe will help propel our BDC gross margins up.

[Gabriel Leung, Research Analyst of Technology]

Right. So it sounds like it's really just trying to get more out of the existing crew versus not necessarily just signing more business to drive that gross margin higher, I guess.

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

Well, as new business comes in, that's going to help us with gross margins. I mean it's like any business, right. When you start and you do a bunch of deals with your first customers out there, there's all kinds of different deals [indiscernible] over time. You get smarter and smarter about how you should structure deals and how you should negotiate them. And so we've done the same thing with the BDC. So the deals that we would write today, and I'm not suggesting the deals we were write today were significantly higher gross margin deals, they're just structured better and structured smarter so that we don't have extra incurred costs that would eat into our gross margins that would be a surprise to us. So we've just gotten smarter over time on how we structure deals just to make sure that we get a better -- a reasonable gross margin out of those deals.

[Gabriel Leung, Research Analyst of Technology]

Got you. And sorry, I might have missed if this question was already asked, but just in terms of some of the overall inflation we're seeing. Obviously, it's on the pre-owned side. We're seeing some extraordinary prices in the preowned market for vehicles. I'm curious if you've seen any sort of inflation in terms of your own operating expense base and whether or not you expect some of that might translate into price increases with your customers over the next 12 to 24 months?

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

Yes. So we have. I did talk about this a little bit last time on the call. I mean obviously, with the market being a lot more global and especially in the North American market being -- there are just being a lot more opportunities with people working from home or working a hybrid model. There's opportunities for -- as we know, there's lots of transition that's going on out there. So different roles within Quorum. We've had to make some adjustments to those. From our perspective, to your point, we definitely translate that into what can we do from a price increase perspective, in terms of passing price increases through to our customer base. I think I've talked in the past about how we've done a reasonable job of that on the XSellerator side, and an okay job on the DealerMine side, and we haven't done much on the Autovance side. So we're looking at a much more comprehensive sort of price increase policy going across the company, and we plan to execute on that in 2022.

[Gabriel Leung, Research Analyst of Technology]

Got you. One last question, just following on sort of investments in the company. Obviously, there's been a lot of R&D initiatives conducted in [indiscernible] while. It's resulted in a number of new products for you. Just curious, looking over the next 12-24 months, where are the priorities from an R&D perspective? Is it maybe enhancing the existing platform? Is it maybe trying to get some more OEM integration in place?

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

Yes. Yes. So most of the investments are going to be made on our existing platform, and we would have a significant number of those investments on -- especially on our digital side of our platform. So the ---MyDeal, the Power Lane and any other elements where we can help dealerships compete in that digital world. So that would be a significant piece of our investments. And then to your other point, so -- that investment, as opposed to bringing new products into the product suite, we will have some smaller new products that we'll add to the product suite from an innovation perspective, but there will be a little less emphasis on that in 2022. And then, of course, the other emphasis that you mentioned on is just continued OEM integration. Not only OEM integration from the perspective of DMS integration, but the other one that has become quite significant for us is making sure that we're certifying products like MyDeal and Power Lane and our service CRM and our online scheduling and different tools like that and making sure they're certified with the OEMs as well.

[Operator]

[Operator Instructions] All right, we don't have any further questions on queue. I'll hand the call back to Maury Marks.

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

Well, thank you, everyone, for the call -- on the call today. We look forward to providing you with our next update, which will be our annual and Q4 2020 results that we'll release in April. And thanks once again for joining us today.

[Operator]

Thank you, and that concludes Quorum Information Technologies Inc. Third Quarter 2021 Results Conference Call. You may now disconnect.