Quorum Information Technologies Inc

XTSX:QIS

Earnings Call Analysis

Quorum's Record Profits Highlight Cost Management and Strategic Growth Plans

In Q3 2024, Quorum achieved a record adjusted EBITDA of $2.3 million, up 15% year-over-year, with an EBITDA margin of 23%. Adjusted cash income rose 39% to $1.8 million, enhancing its capacity to pay down capital debts from $9 million to $4.5 million. Total revenue decreased 5% to $9.9 million, but SaaS revenue increased by 2% to $7.2 million, benefiting from cross-selling. Strong demand is expected in their service and parts sectors, while the overall demand remains robust. With a focus on strategic investments, Quorum plans to enhance marketing and pursue M&A opportunities to bolster growth.

A Strong Financial Performance

Quorum Information Technologies delivered a solid performance in Q3 2024, showcasing a record adjusted EBITDA of $2.3 million, a 15% increase from $2 million in the same quarter last year. This growth led to an adjusted EBITDA margin expansion from 19% to 23%, marking the fourth consecutive quarter with margins above 20%. The company's focus on cost management has notably increased its profitability, enabling a $4.5 million debt reduction from $9 million at the beginning of 2024.

Revenue Dynamics and Areas of Growth

Despite overall revenue declining by 5% to $9.9 million from $10.4 million, specific areas showed promise. Notably, SaaS revenue rose by 2% to $7.2 million, driven by cross-selling efforts and the acquisition of new customers. Conversely, BDC revenue fell by 11% to $2.5 million, though it has since rebounded in October 2024. Additionally, service and one-time revenue plummeted 54% due to project wind-downs, indicating a need for diversification.

Cost Management and Profitability Enhancements

Effective cost management strategies have resulted in operating expenses decreasing by 17% to $4.2 million. This efficiency contributed to a marked increase in adjusted cash income, which surged by 39% to $1.8 million, translating to an increased cash income margin of 18%. The gross margin also improved to 50% of revenue, with the SaaS segment achieving a gross margin of 68%.

Capital Structure Improvement

The strategic focus on profitability has aided Quorum in enhancing its balance sheet. Net debt has reduced significantly from $7 million at the end of 2023 to $3.7 million, leading to a healthier net debt-to-adjusted EBITDA ratio that has declined from 99% to a competitive 44%. This financial strength positions Quorum to explore future capital and investment opportunities, including potential mergers and acquisitions.

Focused Growth Strategies

Quorum is poised to exploit its growth potential by increasing sales and marketing efforts in both Canadian and U.S. markets. With existing products currently penetrating 40% of Canadian franchise dealerships, there remains significant opportunity for expansion. The company is simultaneously considering acquisitions to fill the remaining product categories necessary for a comprehensive software suite tailored to the automotive industry.

Embracing Innovation with AI

The commitment to innovation is evident in Quorum's investment in generative AI technologies that enhance operational efficiency. Recent improvements include a 14% rise in average maintenance sales per repair order through Service CRM AI functions. Future enhancements in 2025 will incorporate generative AI into additional product offerings, emphasizing a trend toward optimizing dealership operations through advanced analytics.

Looking Ahead: Guidance and Market Outlook

For the upcoming quarters, Quorum is optimistic about recovering its BDC revenue, which has already shown improvements, along with possible revenue stabilization across other segments. The focus remains on sustaining adjusted EBITDA margins while evaluating capital deployment options that promise robust returns. Overall, Quorum’s operational efficiency and strategic foresight indicate a positive trajectory for stakeholders.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, everyone. Thank you so much for waiting, and welcome to the Quorum Information Technologies Third Quarter 2024 Results Conference Call. Please note that this call is being recorded. [Operator Instructions] Thank you. I'd now like to hand the call over to Maury Marks. You may now begin.

[Maury Marks, executive]

Thank you, Ellie. Hello, everybody, and thank you for attending Quorum Information Technologies Q3 2024 Results Conference Call and concurrent webcast. Joining me is our Chief Financial Officer, Marilyn Bown. Quorum is a North American software and services company, providing essential enterprise solutions at 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 1,418 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 solution out of our 13 available solutions. That means we have a $54 million annual SaaS revenue cross-selling opportunity within our 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 Q3 2024 results.

Not only did we achieve record adjusted EBITDA of $2.3 million and record adjusted cash income of $1.8 million in Q3 2024, but we also paid down $3 million on our BDC Capital debt facility. Our profitable growth strategy and better company-wide cost management has now delivered 4 consecutive quarters of adjusted EBITDA margin of 20% or higher. This improved profitability provides Quorum the latitude to accelerate the pay-down of our BDC Capital facility, which has been reduced in 2024 from $9 million to the current balance of $4.5 million. Our improved cash flow also better positions us to consider other future capital or strategic investment opportunities.

Marilyn will now review our Q3 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. 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 control that could cause actual results to differ 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, we are very excited about the stronger financial position we have achieved through our continued focus on both profitable growth and continued cost management. Our record level adjusted EBITDA in Q3 2024 increased by 15% to $2.3 million compared to $2 million in Q3 2023, representing an adjusted EBITDA margin expansion of 4% from 19% in Q3 2023 to 23% in Q3 2024. This was the fourth consecutive quarter in which we posted an adjusted EBITDA margin of 20% or higher. The increase in adjusted EBITDA is primarily attributable to our continued focus on cost management.

Our record level of adjusted cash income, or ACI, was $1.8 million in Q3 2024 compared to $1.3 million in Q3 2023, an increase of $0.5 million or 39%. This represents an adjusted cash income margin expansion of 6% from 12% in Q3 2023 to 18% in Q3 2024. Additional highlights of our Q3 2024 results as compared to Q3 2023 are as follows.

Total revenue decreased 5% to $9.9 million compared to $10.4 million. SaaS revenue was $7.2 million compared to $7.1 million, representing an increase of 2%. The increase in SaaS revenue as compared to the prior year was due to a combination of cross-selling and new customer revenue. BDC revenue was $2.5 million compared to $2.8 million, representing a decrease of 11%. However, BDC revenue has recovered in October 2024 and is comparable to BDC revenue in Q4 2023. Services and onetime revenue was $0.3 million compared to $0.6 million, representing a decrease of 54%. The decrease in services and onetime revenue as compared to the prior year was due to the wind-down of the Windows 2022 upgrade project.

Annual recurring revenue was $38.7 million compared to $39.3 million. This is comprised of annual recurring SaaS revenue of $28.9 million compared to $28.3 million, an annual reoccurring BDC revenue of $9.8 million compared to $11.1 million. Our monthly recurring revenue per customer, or MRRPU, increased to $1,698 in Q3 2024 from $1,651 in Q3 2023, mainly due to our focus on cross-selling.

Gross margin was $4.9 million or 50% of revenue compared to $4.9 million or 47% of revenue. SaaS gross margin increased slightly to 68% as compared to 67%. BDC gross margin also increased slightly to 21% as compared to 20%. As a result of our continued cost-cutting efforts, our total operating expenses decreased by 17% to $4.2 million from $5 million, and net income increased by $1.1 million to [ $0.8 million ], primarily due to an increase in adjusted EBITDA as well as a decrease in financing costs and deferred income tax expense.

As mentioned earlier, Quorum's improved profitability has provided us the latitude to accelerate the pay-down of both principal and interest on our BDC Capital loan facility through 2024.

Subsequent to Q3 2024, on October 30, Quorum made a prepayment of $0.5 million on our BDC Capital loan facility. In prepaying $4.4 million in principal interest through 2024 to date, our BDC Capital loan facility has now been reduced from $9 million at the start of 2024 to $4.5 million today, resulting in $0.4 million in annual interest expense savings. With that, I'd like to pass it back to Maury.

[Maury Marks, executive]

In this section, I want to discuss 2 key topics. The first is the impact our improved profitability has had both on our balance sheet but also on the future latitude it provides for the company. The second is our continued commitment to product innovation and some of the exciting innovations we have planned.

Let me start with the first of these 2 topics, our improved profitability. Given the current macroeconomic headwinds, it makes sense that we focus on profitability and improving Quorum's balance sheet to ensure a strong future for the company.

As mentioned, we reduced our BDC Capital debt facility in 2024 from $9 million to the current balance of $4.5 million. Our net debt, which is total debt less cash, has dropped from $7 million as of December 31, 2023, to $3.7 million. Our net debt to last 12 months adjusted EBITDA ratio has dropped from 99% to a strong 44%.

The result of the multiple improvements that I just listed is we're now positioned to start considering other future capital or strategic investment opportunities. We plan to carefully evaluate these opportunities based on the return they provide on invested capital.

Some of the future opportunities that we have available to us include: one, increasing our sales and marketing efforts to expand new dealership acquisitions in both Canada and the U.S. markets. With a Quorum product in at least 40% of the Canadian franchise dealerships and limited brand awareness in the U.S. market, we have growth opportunities in both markets.

Number 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 past 7 years and has become proficient at integrating acquired companies into our organization.

Number three, increasing our investment in product to help increase our SaaS revenue growth rate as -- or reduce our cost or improve our BDC gross margins.

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.

Turning to my second topic, which is our continued commitment to product innovation, I will talk about the following exciting innovations we have planned. Number one, our Service CRM solution has received 2 generative AI enhancements to empower BDC or contact center agents. The first enhancement has increased average BDC maintenance sales per repair order by an incredible 14%. The second enhancement, which was just released, should improve the dealership service appointment conversion rate from text messages sent to customers. We also have more generative AI enhancements coming in 2025.

In 2025 -- sorry, number 2. In 2025, our Sales CRM application is receiving a new dashboard, improvements to its mobile app, and some generative AI functionality. Our initial market for our Sales CRM application is our Service CRM dealership customers that are looking for a single integrated CRM solution.

Number three, our desking, menuing and MyDeal products, which are digital retailing tools for selling vehicles and related products, will include select OEM warranty programs to increase dealerships' extended warranty sales. This should improve 2025 sales of our Menu product to our existing customers and the value proposition for selling to new customers.

Number four, Quorum's DMS will continue to receive multiple new OEM integration certifications with existing OEM partners. Additionally, we are planning some AI enhancements later in 2025. A common theme is the integration of AI across multiple products in our suite.

I'd like to close our prepared remarks by sincerely expressing my appreciation to our employees. This commitment to Quorum was crucial to achieving our Q3 2024 plan and strong quarterly results. Their hard work is enhanced by our integrated suite of 13 essential software solutions and services. This product suite is fundamental to our profitable growth strategy as it facilitates product cross-selling and plays a vital role in driving the success of our dealerships, thereby increasing value for both Quorum and its 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 Gavin Fairweather from Cormark Securities Inc.

[Graham Smith, analyst]

Maury, this is Graham Smith on for Gavin Fairweather. On the rooftop count, so it looks like the churn has stabilized. You guys are kind of seeing that actually increase. Can you maybe just talk about what you're seeing with the growth in the rooftops? And then maybe how we can think about the ARPU trajectory? Are those new rooftops being -- that are being added? Maybe some of like the lower ARPU projects? Is there more up-sell opportunity in that? So any color on that would be great.

[Maury Marks, executive]

Yes. So my first comment is going to be, as we've talked in the past, and just to remind everybody, right, we're very focused on cross-selling to existing customers. So we have cut back on the investment that we've been making in the past on new dealership pursuits. That isn't to say we aren't pursuing new dealerships. We are. And so that's why you're sort of seeing limited growth, but you're seeing positive growth across our rooftop count.

What we tend to do is it's easier for us to go into new dealerships and sell some of our smaller products to them and then land and expand from there, which moves us into sort of the cross-selling motion. So what you're seeing is you're seeing an addition of some new rooftops. There is some churn of some rooftops as well, but our new rooftop logos are increasing beyond that. And then we've got our whole cross-selling motion. So all of those sort of factor into the MRRPU amount.

[Graham Smith, analyst]

That's great. And just my second one is on the BDC gross margins. They were quite strong in the quarter. You guys have made a ton of progress since the low point in Q4 2022. So maybe if you can just give an update on the generative AI that you guys are kind of thinking about investing in and plug-in initiatives, and whether you guys should keep expanding that? Maybe give a bit more color on the trajectory of those margins.

[Maury Marks, executive]

Yes. Yes. So as you mentioned, right, our BDC gross margins have grown sort of year-over-year and we keep making improvements. But we really haven't introduced a lot of generative AI into our efforts to improve gross margins. Most of the generative AI that we've introduced today is to help our agents sell more to our existing dealership customers. And that's been incredibly successful for us.

How we look at this is we are really looking at generative AI as a tool to help us with outreach, so that our agents aren't having to do a lot of the outreach. So we can do it with generative AI and be very custom to that particular customer and that customer's needs. And then our agents would then deal with actually booking the service appointment with the customer or up-selling to that customer additional services. And we want our agents to really be that specialist at doing that. And generative AI could handle a lot of the typical outreach that we would have out there or even maybe some incoming calls or incoming connections as well and qualify those and then, of course, hand it off to the agent.

So with that particular model in mind, our agents become specialists in the sort of the center of all the different communications that are going on, and we just make them a lot more efficient and also very valuable to the process. So I'm not going to give some guidance on BDC gross margins and where can we take these, but we're pretty excited about the possibility of moving up our BDC gross margins.

[Graham Smith, analyst]

That's great. And then just one more for me, then I'll pass the line. So you guys laid out like a bunch of capital allocation, strategic investment opportunities that you have. Maybe if you could just give some more detail on the priorities or if those are all being kind of equally looked at, at the same time. And then as well, if you're thinking about increasing sales and marketing in Canada? In the U.S., for example, are you guys seeing like the market opportunity, like the demand environment, I guess, to support that increased investment? Maybe more color again on like M&A. Like are you guys seeing the pipeline building? So again, if you could just give some order to those sort of capital allocation priorities and then maybe a bit more detail on why you're making those decisions, that would be very helpful.

[Maury Marks, executive]

Yes. So we are in the process of starting to evaluate the different options. And every single option that we look at will be looked at through the lens of what is the return that's going to provide on the invested capital. So hence, we really want to -- the plan is to evaluate a number of different options and then pick the ones that, of course, have the highest return. So that's really the perspective that we're taking.

In terms of the market in general and sales of our different products in our product suite, we continue to see strong demand on the fixed operations, so the service and parts side of the business. That area has always been, even right -- going right back into COVID and post-COVID and to today, that's been the sort of the anchor inside the dealership. It's the most profitable area of the dealership. It has been strong from a market demand for us. We haven't seen any wanes in that demand. So products like our Service CRM solution, our BDC services, our PowerLane solution, which is a service lane tool, our online service scheduling, our accessible accessories, accessory sales solution, all of those are really focused on that market. And it remains strong, and we really realistically could add more sales and marketing investment to go after that.

The sales side of the business, the vehicle sales side of the business, has had its ups and downs over the last number of years. But we do see that it has returned fairly strong. And to the point that dealerships are now having to make that transition from really, in the past, having more buyers than they had vehicles on the lot to now having more vehicles and having to sell again. And so tools like our Autovance suite, our Sales CRM solution, once again, our accessory sales solution, all of those are becoming more and more in market demand as that -- as the demand sort of transitions. So I think I answered your questions, but let me know if I missed anything.

[Graham Smith, analyst]

No, that's great. Thanks, Maury. And I'll pass the line.

[Operator]

As of right now, we don't have any pending questions. I'd now like to hand back over to the management for the final remarks.

[Maury Marks, executive]

Sure. No, I appreciate, as always, everybody's interest in Quorum and your support. And we're glad you could join us today. We look forward to updating you again in April 2025 with our 2024 full year results. Thanks, everybody.

[Operator]

Thank you for attending today's call. You may now disconnect. Have a wonderful day.