Quisitive Technology Solutions Inc.

Good afternoon and welcome to Quisitus' fourth quarter and full year 2023 earnings conference call. Joining us for today's call are Quisitus Chief Executive Officer Mike Reinhart and Chief Financial Officer Scott Merriweather. Following their remarks, we will open the call for your questions. Before we begin today, I'd like to remind everyone that during the conference call, management will be making statements that contain forward-looking statements within the meaning of applicable Canadian securities legislation. Please refer to the company's forward-looking information disclaimer statement, which can be found on the notice for this call, the website, and the fourth quarter and full year 2023 earnings release. Now, I will turn the call over to Mike Reinhart. Sir, please proceed.

Thank you, Operator, and good afternoon, everyone. We appreciate you taking the time to join our Q4 and full year 2023 earnings call. The latter half of 2023 and the beginning of 2024 marked a transformative time for our company. This period was defined by the divestiture of our payment segment, including the sale of PayIQ and BankCard, and more importantly, the strategic refocusing of Quisitive as a premier cloud and AI solutions provider. In 2023, we conducted a detailed assessment of Quisitive, including our payment segment, to reevaluate our mission and strategic direction. This comprehensive review made it clear which path we needed to follow to enhance shareholder value. Consequently, the rapid divestiture of PayIQ and BankCard was a strategic and essential move. This decision not only reduced risks, but also curtailed volatility and significantly boosted our balance sheet. I am pleased to announce that effective today, the company has successfully canceled 133.1 million shares following the sale of Bank Card. This reduces the total number of outstanding shares to 275.9 million, marking a 33% reduction. By making this strategic move, we can streamline our efforts, resources, and attention to our cloud and AI business, reinforcing our status as a leading provider of Microsoft solutions. This refocusing was essential for positioning the company as a leader during a significant transformation in the IT sector where AI plays a central role. Almost every company is now discussing, introducing, and integrating AI, viewing it as a catalyst for new investments, and it is becoming a vital driver for future IT services revenue growth. Microsoft is the clear leader in AI. Inquisitive's cloud offerings, including data, modern applications, and security are foundational to their AI strategy. Inquisitive, by returning to its roots as a dedicated cloud and AI solutions provider, is positioned to capitalize on its strong partnership with Microsoft, enabling comprehensive readiness, assessment, and deployment strategies for AI solutions, including capabilities with Copilot. Considerable investments have already been allocated, including the formation of a new AI-focused sales team, strategic senior hirings, and collaborative development of go-to-market strategies alongside Microsoft, to name a few. Quisitive is well-positioned to capitalize on this industry inflection point. with a promising growth outlook ahead as we leverage our core foundation and partnership with Microsoft. First, I will pass it to Scott to review our full year and Q4 2023 financial results. After his insights, I'll discuss the future trajectory of Quisitive and highlight the strategic actions we've implemented in the fourth quarter and recent months to set the stage for success. Scott?

Thanks, Mike. and thank you to all who are joining us for today's call. To reiterate Mike's message, we are proud of our recent strategic moves and the pace in which they were accomplished as we strengthen our position for the future. After experiencing professional services demand weakness through the first half of 23, our revenue within our cloud business has stabilized. We made appropriate changes to our cost structure to align to market demand, and our gross margin profile is well positioned for future growth and in comparison to our peers. Before we move into the financial results, I want to take a moment to discuss the changes in presentation to our financial statements. Resulting from our decision to divest our payment segment, we have presented all of our payment activities within discontinued operations and assets held for sale. The face of our income statement and our 1231.23 balance sheet now present only the activities for our cloud segment and corporate expenses as a continuing operation. There is no allocation of corporate expenses, interest, or other similar charges to the legacy payment segment. Consequently, all the corporate expenses that supported both our cloud and payment segments are presented within the continuing operation, and it is arguable that the historic cost structure is overburdened for the remaining cloud company. Our 2022 results have been restated to present the discontinued operation, and we have updated the quarterly tables within MD&A to present the discontinued operations. Given the strategic refocusing of the company and the accompanying presentation of the financials for the continuing operations, The remainder of the financial discussion will focus primarily on their continuing cloud operations, including comparisons to the prior year as restated. Revenue within the global cloud solutions was $28.4 million, or a 12% decrease from last year and a 7% decrease from Q3. In our last earnings call, we noted that cloud revenue had stabilized from Q2 to Q3 of 2023 and that we expected similar revenue trends in Q4 after adjusting to the normal holiday seasonality. Our cloud revenue expectation held true in Q4, and we are seeing similar revenue stabilization in Q1 of 2024. Year over year, cloud revenue was down 15% in Q2, 15% in Q3, and 12% in Q4. We expect the first half of 2024 to be relatively flat to the run rates at the end of 2023, with modest growth picking up in the back half of 2024 as AI-driven projects begin to ramp up. When compared to all other quarters during the year, Q4 revenue experiences the strongest seasonal impact, given the holidays. I noted that revenue decreased 7% from Q3 of 23 to Q4 of 23. Revenue experienced a similar drop in 2022, as we saw revenues decrease more than 10% from Q3 to Q4 in 2022. In Q4, we have less billing dates available, greater pay time off is taken, our customer availability is reduced, and there is general avoidance of new products archived by our customers during the holiday period. During the COVID pandemic, the historic trends of the seasonal decline were muted, but we have experienced a return to historic seasonality the last few years, and we can expect the seasonal trend to continue going forward. Although we experienced a weakened market demand for professional services revenue last year, we have seen continued growth and expansion within our recurring revenue. Recurring revenue for fiscal year 22 was 31% as a percentage of revenue. In fiscal year 23, recurring revenue increased to 38% of revenue, strengthening throughout the year. The increase has been driven by our expanding many services activity, as well as increased licensing revenue. Overall gross margin in Q4 of 23 was 12.1 million, which was down 0.7 million or 5% from 12.8 million in Q4 of 22. The most indicative financial metric that best depicts the progress made within cloud operations is our gross margin percentage when compared to revenue. Gross margin as a percentage of revenue increased to 42% from 39% in Q4 of 22. Gross margin increased to $25.2 billion or 43% of revenue in the second half of 23 from $23.6 million or 38% of revenue from the first half of 23. The share mining of our cost structure during fiscal year 23 and increased recurring revenues is seen in our gross margins. Adjusted EBITDA for our continuing operations was $2.8 million in Q4 of 23 down from $3.4 million in Q4 of 22. EBITDA margin decreased to 9.9% in Q4 of 23 from 10.4% in Q4 of 22. EBITDA margin increased to 7.7 million or 13.1% of revenue from H2 of 23. For H, for the second half of 23, EBITDA was 5.2 million in the first half of 23 or 8.4% of revenue. Given the significant cost reductions made within the continuing operations during 2023, Along with the impact going forward of the bank card and PIQ divestitures, the corporation believes pro forma adjusted EBITDA is a helpful measure to understand our run rate performance for 2023 and as a comparison measure for future periods. Pro forma adjusted EBITDA was $16.4 million, or 14% of revenue, for fiscal year 2023. Pro forma adjusted EBITDA further adjusts our adjusted EBITDA by adding back $0.4 million in certain cost savings, primarily corporate insurance, realized by the continuing operation following the divestiture to pay IQ and bank card. It also adds back $4.2 million of headcount reductions, as if the savings from those reductions had been realized as of January 1st of 23. Offset against these savings is the removal of the $1.2 million benefit of variable compensation and bonuses that were recognized during the year, which effectively reduces the pro forma adjusted EBITDA. In order to achieve our strategic goals, we need to further invest in our AI teams and our sales team expansion in fiscal year 24. As a result, we don't expect our margins to grow in fiscal year 24 from our current run rates. Quickly on payments, the payment segment had a weak fourth quarter. Payments contributed 11.1 million of revenue in the fourth quarter of 23, which was down 2.4 million or 18% from Q4 of 22. Revenue was sequentially down 2.6 million or 19% from Q3 of 2023. The payment segment contributed 1.9 million of EBITDA, its lowest total ever, as compared to 4.7 million in Q4 of 2022. Moving to the balance sheet, at December 31st, we had 7 million of cash on hand. Our term loans were 68.6 million. We amended and restated our credit agreement with the close of the bank card sale. As part of that transaction, we paid down our credit agreement to a new outstanding balance of 34 million. Our next quarterly pay down will be June 30th and will be a payment of $850,000. After the bank card transaction, our leverage ratio was approximately 2.1 times. All of our debt is classified as current at December 31st, as we were not in compliance with the financial covenants. Q4 is weaker seasonally for the cloud segment, and this was exacerbated by the weakness experience of the payment segment in Q4 that I previously noted. We also had excess operating expenses related to the divestitures. Any risks related to our credit facility status were remediated with the bank card sale and the amended credit agreement, and our financial position is significantly improved after the bank card divestiture. After the sale of PayIQ, our capital expenditure run rate dropped significantly. We expect capital expenditures will be approximately $3 billion annually for the continuing operation, and they will be relatively even every quarter. Due to the presentation of assets held for sale, we had a working capital surplus that was offset by the current presentation of the entire credit facility. After the bank card sale and amended credit facility, our debt will go back to its historical presentation and the outstanding earnouts will be settled. We've also paid the outstanding major earnouts at this time. Our working capital should be in a surplus position moving forward. One other note related to our credit facility, the current weighted average interest rate on our term loans is 7.96%. We are reiterating our guidance for fiscal year 2024 for the continuing operation. with fiscal year 2024 revenue being a low of $123 million and a high of $137 million, and fiscal year 2024 adjusted EBITDA with being a low of $15 million to a high of $18 million. This concludes the financial section of this call. With that, I'll turn the call back over to Mike for his discussion of our vision and strategy for 2024. Mike? Thanks, Scott.