Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Analysis

Quorum's Q3 2023 Earnings: Growth Amid Challenges

In the challenging economic landscape of Q3 2023, Quorum saw a revenue increase to $10.4 million, up by 6%, while SaaS revenue nudged up by 1% to $7.1 million. Their adjusted EBITDA margin reached a record 19%, a 2% improvement, with EBITDA hitting $2 million, 15% higher than the previous year, indicating efficient cost management. A significant step was the prepayment of $1.6 million of their BDC Capital loan, reducing the principal by $1.5 million, leading to interest savings. The company is focusing on a cross-selling sales strategy and AI projects, aiming to enhance product ROI for dealerships and cut costs, leveraging techniques like zero-based budgeting for better financial performance.

Financial Performance Summary

In the three months ended September 30, 2023, Quorum Information Technologies reported a solid 6% increase in total revenue, reaching $10.4 million compared to the same period in the prior year. This growth was contributed substantially by the company's Software as a Service (SaaS) and Business Development Centre (BDC) segments, highlighting a conducive environment for Quorum's product offerings despite the macroeconomic challenges. The company's focus on profitability has paid off with a record 19% adjusted EBITDA margin, a step up from the 17% mark of the previous year's corresponding quarter. The adjusted EBITDA itself saw an impressive leap of 15% year-over-year, amounting to $2 million, and the adjusted cash income increased modestly by $0.1 million, signifying efficient operational control in action.

Strategic Initiatives and Outlook

Quorum's strategic ripple effects were visible as they honed their sales strategy, targeting the rich vein of a $55 million annual SaaS revenue cross-selling opportunity within their current customer base. This endeavor marks a shift towards becoming a dealer performance company, a transition set to multiply synergies and unlock potential revenue streams across their product suite.

Product Suite and Market Presence

The enterprise solutions provider stands firmly with a broad suite of 13 essential software solutions, serving 1,428 dealership customers across North America. Capturing 40% of the franchise automotive dealerships in Canada signifies a strong market presence, and the management is optimistic about expanding their product range and deepening penetration within the current customer base.

Operational Excellence

Operational and cost efficiencies shine through Quorum's performance, with the BDC achieving a remarkable 20% gross margin due to leadership refinement, improved efficiency, and enhanced agent accountability. This cost discipline narrative continued with a comprehensive zero-based budgeting exercise contributing to the record margins observed in the quarter.

Capital Management

The company's prudent capital management is underscored by prepaying $1.6 million in principal and interest on their debt facility with BDC Capital post Q3. Additionally, Quorum retains access to $4 million in funding for potential strategic acquisitions, evidencing a balanced approach between debt reduction and opportunistic growth outlook.

Net Working Capital and Future Projects

As of September 30, 2023, Quorum reported a net working capital contraction of $0.6 million compared to the end of 2022. However, with cash reserves of $5.2 million, they stand ready to capitalize on impending initiatives, such as a generative AI project aimed at further boosting efficiency and performance across their product and service lines.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Quorum Information Technologies Inc. Q3 2023 Results Conference Call. [Operator Instructions] I would now like to turn the call over to Maury Marks, President and CEO. Please go ahead.

[Maury Marks, executive]

Thank you, Sheryl. Hello, everybody, and thank you for attending Quorum Information Technologies Q3 2023 results conference call and concurrent webcast today. Joining me on the call today 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 investments and 5 strategic acquisitions in the last 6 years, including our latest acquisition of VINN 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 1,428 dealership customers across North America.

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 additional Quorum solutions are deployed to their dealerships.

Many of Quorum's customers only leverage one solution out of the 13 available Quorum solution. 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 reoccurring revenue run rate, and that is just within our current customer base.

Today, at least one of Quorum's software solutions is installed in 40% of the franchise automotive dealerships in Canada. And in the past 6 years, Quorum has added 1,055 of the 1,428 unique rooftops we have today primarily through acquisition combined with some organic growth.

Moving on to our results for Q3 2023. Quorum posted total revenue of $10.4 million, a 6% increase over the same quarter last year. In Q3 2023, we also delivered a record 19% adjusted EBITDA margin, up 2% from the 17% we achieved in the same quarter last year.

As we continue to face a challenging economic environment that has slowed our revenue growth since Q2 2022, we have focused our attention on adjusted EBITDA margins. Our Q3 2023 record adjusted EBITDA margin improves the company's financial security and provides us the flexibility to start paying down some of our BDC Capital debt.

In fact, post Q3, on October 27, 2023, we made a prepayment of $1.6 million in principal and interest on our BDC Capital loan facility. We also continue to have access to $4 million additional funding through the BDC Capital facility for potential future acquisitions.

Marilyn will now review our financial results in more detail, and I will follow 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 [indiscernible] 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, 2022, on the sedarplus.ca website.

As Maury mentioned, we continued a disciplined approach to profitability in Q3 2023, delivering year-over-year increase of 15% for adjusted EBITDA and 13% for adjusted cash income or ACI. Additional highlights of our third quarter 2023 results are as follows. Total revenue increased by 6% to $10.4 million compared to $9.9 million in Q3 2022 and increased by 4% compared to $10 million in Q2 2023.

SaaS revenue increased by 1% to $7.1 million in Q3 2023 compared to $7 million in Q3 2022. BDC revenue increased by 6% to $2.8 million in Q3 2023 compared to $2.6 million in Q3 2022.

Gross margin came in at 47% compared to 49% in Q3 2022 mainly due to an increase in services and onetime revenue, which is lower gross margin revenue. SaaS gross margin decreased slightly to 67% in Q3 2023 as compared to 68% in Q3 2022. BDC gross margin increased to 20% in Q3 2023 as compared to 14% in Q3 2022 and as compared to 12% in Q2 2023 as Quorum continues to work on multiple initiatives to reduce the BDC cost structure.

Adjusted EBITDA margin increased by 2% to 19% in Q3 2023 compared to 17% in Q3 2022. Adjusted EBITDA increased by 15% to $2 million in Q3 2023 compared to $1.7 million for Q3 2022. The increase in adjusted EBITDA is primarily attributable to an increase in gross margin and decreases in sales and marketing and general and administrative expenses, offset by an increase in research and development expenses.

Adjusted cash income for Q3 2023 increased by $0.1 million as compared to Q3 2022 primarily due to the increase in adjusted EBITDA. Including cash of $5.2 million, total net working capital as of September 30, 2023, decreased by $0.6 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.

As Maury mentioned earlier, on October 27, 2023, Quorum made a prepayment of $1.6 million in principal and interest on its BDC Capital loan facility, which consisted of a $0.6 million prepayment on the mezzanine loan and a $1 million prepayment on the cash flow loan. As a result of this prepayment, loan [indiscernible] principal amount under the BDC Capital facility by $1.5 million from $10.7 million to $9.2 million, resulting in $0.2 million in annual interest expense savings.

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

[Maury Marks, executive]

Thank you, Marilyn. One of the statements I made in the Q3 press release was that our more efficient sales strategy that prioritizes cross-selling continues to drive growth and cost savings. Let me provide more background on that statement.

Starting late in 2022, we transitioned our sales strategy to improve our cross-selling to better capitalize on the $55 million annual SaaS cross-selling opportunity that I mentioned in my opening comments. The initial focus was to increase our cross-selling by harmonizing our sales strategy between our sales and our account management teams.

After having completed the key elements of our harmonizing initiative, we are now working on transforming our business to a dealer performance company. This requires ensuring all our products produce a positive ROI for our dealership customers and also requires increasing our dealerships' utilization of these products to help drive their results.

Another statement from our Q3 press release yesterday was our more efficient sales strategy, combined with our BDC gross margin expansion and a continued focus on company-wide cost savings, produced record adjusted EBITDA and ACI margins for the quarter. Let me provide more background on 2 key elements of that statement.

One, in the quarter, our BDC achieved 20% gross margin. This achievement was primarily due to new leadership, multiple projects to improve our BDC agents' efficiency and a focus on better accountability and performance across our agents. Going forward, we are working on generative AI project to further improve our efficiency in the BDC.

Two, we have had a long-term focus on company-wide cost savings. Recently, we went through a zero-based budgeting exercise to optimize our costs in all areas of the company. Most recently, to find additional cost savings, we compared our company to some of the best-of-class gross margin and cost ratios from other technology companies across North America. The results from the above is that we produced record adjusted EBITDA and ACI margins in Q3.

Next, I want to provide an update on our VINN acquisition that was made late in Q2. As a reminder, VINN provides a premier automotive marketplace that streamlines the vehicle research and purchasing -- purchase process for vehicle shoppers while helping retailers sell more efficiently. We are currently working on combining the VINN Automotive marketplace with our MyDeal digital retailing solution to have an offering for both our dealer groups and individual dealerships.

In conclusion, I want to sincerely thank our dedicated employees and customers, who are the driving force behind our continued growth and drive to innovate to ensure Quorum continues to have 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] Your first question comes from the line of Gavin Fairweather with Cormark Securities.

[Graham Smith, analyst]

This is Graham on for Gavin. I just have a few quick ones. So just some of the impressive services gross margin, it's come up quite a bit faster than we expected. I was just kind of trying to understand like how high you guys think that you can sort of take that once you've sort of introduced this generative AI? Is it reasonable to say that you could bring it into the mid-20s? Or is it sort of in the near term while you develop that, is that going to stay in the kind of that 20% range?

[Maury Marks, executive]

And Graham, just to be clear, your question is about the BDC revenue, right?

[Graham Smith, analyst]

Yes, sorry, the BDC, yes.

[Maury Marks, executive]

Yes. Yes. So I mean, obviously, we're going to continue to work on different initiatives to improve BDC revenue and BDC margins. And we're pretty excited about the big jump in BDC margin, but it comes after a lot of hard work and a number of sort of frustrating quarters where we moved the needle a little bit at a time but not -- but we never really made substantive progress on it.

So we think we're now in a place where we can continue to make improvements in BDC gross margins. I'm not going to give you a target of where we think we can get to. But we're pretty excited that we can continue to work to move the needle on BDC gross margins.

[Graham Smith, analyst]

For sure. That's really helpful. And then you also mentioned that you sort of took out some of the costs in S&M and G&A that kind of increased [indiscernible]. Where are those sort of incremental R&D dollars going towards? Like what actual specific projects or initiatives? Any color on that would be helpful.

[Maury Marks, executive]

Yes. So there's a number of initiatives. So let me go across our product suite and call out maybe some key ones for you. On our DMS side of things, we delivered a new ribbon menu and a new omni search, and we've got a couple of other little things planned for our DMS customers.

On our DealerMine CRM products, we delivered a new mobile app. And we are in the process of looking at building out a dashboard for our sales CRM portion of that product and the service CRM side. We've got -- we're changing -- we're pursuing a digital-first strategy under our service CRM product that just allows a dealership to really customize how they reach out to their different customers and do it in multiple ways. So it gives them more flexibility around doing that.

We've got, of course, the AI, generative AI project that I mentioned on the BDC side. Autovance and VINN, we're doing work to integrate those 2 products for the marketplace. Those are few off the top of my head. So we have a lot going on, on the R&D side of things, a lot of innovative, creative stuff that really should help our customers.

[Graham Smith, analyst]

Okay. I appreciate that. That's helpful. And then just one on the sort of ARRPU and the rooftop dynamic. We kind of saw a little decline when there was a little bit of churn in Accessible Accessories and then one of the other products. And now we're kind of seeing that flatten now, but then there's a bit of a dip in ARRPU. I was just kind of wondering, is that sort of adding on locations that are at a lower ARRPU? And how do you kind of see that progressing going forward?

[Maury Marks, executive]

Yes. Yes, it is. So it's a result of adding on locations at a slightly lower ARRPU. We're always working to try, obviously, to increase our rooftop count and our MRRPU at the same time. So looking forward, that's our focus across the organization. Sorry, I'm just flipping to the chart as you're asking the question.

Yes. I mean MRRPU declined by $4 within the quarter. So it wasn't a -- from $1,655 to $1,651, just so all listeners are aware of the difference. So it was quite an immaterial difference, but it's not the direction we'd like to see it going. We'd like to see MRRPU increasing quarter-over-quarter.

[Graham Smith, analyst]

Absolutely. Perfect. And then just one more for me. Maybe if you could just talk about the general macro backdrop in your different business lines, that would be great. What are you kind of seeing in the next couple of quarters?

[Maury Marks, executive]

So you're talking about the automotive dealerships background and -- or macro environment and what we're seeing. Yes. So if I think across the dealership, I mean, obviously, they have a sales department and a service and parts department. Service and parts together, we typically refer to as a fixed operations department.

When it comes to sales and sales of vehicles in the past, historically, vehicle inventory has been a real problem for dealerships. And I think as we all know, the price of vehicles went up pretty significantly, and it was really hard to find a vehicle.

We're seeing more and more inventory showing up at dealership lots, and that varies based on manufacturers. So some manufacturers are really doing a good job of getting inventory on the lots of dealerships out there.

Unfortunately, the timing is quite difficult because now dealerships are having to really sell cars again. And they've got the inventory, and so they've got to find buyers for those particular cars, but we're in an inflationary environment with high interest rates with prices of cars being at an all-time high.

So I think there's some caution across our dealerships in the sales departments out there. And I think there's still -- I go to a line that I heard from one of our dealer principals that was across -- that runs a large dealer group. And he said, right now, we're selling cars to people who need cars, not people who want cars. And so when we run out of customers that need cars and we're just to the ones that want them, it's going to be a difficult environment to sell into, given the high price and -- of cars and the high interest rate. So there's some caution on the sales side.

And then for us, for Quorum, what that translates into is it's a more difficult environment to sell our sales CRM solutions, our digital retailing solution, VINN, into. However, if we are helping the dealership drive more leads into their sales department, and those are good, solid, qualified leads, well, then those solutions can be very helpful to a store.

Then switching over to the fixed operations side, so the service and parts side of the business, that continues to be a real stabilizing force within the dealerships. That business continues to perform for most of our dealership customers out there. In recessionary times, that's an area of the business that dealerships can count on to sort of continue to generate positive revenue, positive revenue growth, positive net income for them. And it's sort of that stabilizing, reoccurring portion of a dealership's business.

So anything we can do across our service CRM products, our BDC services, our PowerLane product, which is a digital solution for their service lane across those products that help the dealership with throughput in their service and parts department, with increasing the amount of revenue per customer are all products that are quite welcome to dealerships. But dealerships are, to my overlying comment about the macroeconomics, they're just -- they're cautious. It's a cautious time for most people running any business out there. So hopefully, that helps.

[Operator]

The next question comes from the line of Mitchell McQuiggin from Leede Jones Gable.

[Mitchell McQuiggin, analyst]

Maury, I just had a few questions on the integration of the VINN acquisition. I'm just wondering how that's coming along and if any new dealers have been brought on?

[Maury Marks, executive]

Yes. So we are working through it, Mitchell. It's going to take us a little bit more work than we originally sort of scoped it out to be. So it's going to -- we're going to be into the new year before we're ready to start rolling that out to dealerships.

So as a consequence, we haven't brought any new dealerships on. We wanted to finish that integration first. We have some interesting perspectives on it. So not only are we integrating the MyDeal digital retailing product into the VINN solution, but we also want to be able to take the VINN solution for dealer groups and have a separate instance of it that we can sell to dealer groups so that, that could be their primary group website that their customers could go to and search across that website to find vehicles across all their different dealership rooftops.

So we're sort of expanding how we're looking at it. But we're pretty excited about getting that done and getting it rolled out to market.

[Operator]

The next question comes from the line of William Koenig with Leede Jones Gable.

[William Koenig, analyst]

Quick question on your U.S. growth from rooftops. Is that related to AutoCanada? Or is this a whole new dealership that you're getting or these dealerships that you're getting?

[Maury Marks, executive]

Yes. So those -- so it's not AutoCan. It is related to new dealerships, and there's a mix of DealerMine and DMS in there.

[Operator]

At this time, there are no further questions. I would now like to turn the call back over to Maury Marks, President and CEO.

[Maury Marks, executive]

All right. Well, thanks, everybody, for your continued support of Quorum and your continued interest in Quorum. And yes, we look forward to talking to you again when we release our annual results. With that, we'll conclude today's call.

[Operator]

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.