Quorum Information Techs

Good day and thank you for standing by. Welcome to the Quorum Information Technologies fourth quarter and year-end 2024 results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during a session, you need to press star 101 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 101 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Maury Marks, President and CEO. Please go ahead.

Thank you, Victor. Hello, everybody, and thank you for attending Quorum Information Technologies Q4 and year-end 2024 Results Conference Call on Concurrent Webcast. Joining me is our Chief Financial Officer, Marilyn Baum. Quorum offers innovative and robust technology solutions and services to vehicle dealerships and original equipment manufacturers, or OEMs, across North America. Quorum has a uniquely integrated product suite of 13 essential software solutions that are used in whole or in part by over 1400 dealership customers across North America. At least one of Quorum's software solutions is installed in 40% of the franchise automotive dealerships in Canada. Offering 13 of the 25 most common categories of software solutions that automotive dealerships utilize, 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 Quorum has a $54 million annual SAS revenue cross-selling opportunity within our existing customer base, which is approximately two times our 2024 SAS revenue of $28.8 million. We are very pleased to present to you Today are 2024 Q4 and year-end results. As many of you know, Quorum commenced a profitable growth strategy in 2023, and we have delivered material improvements in our adjusted EBITDA and cash EBITDA margins. Our cash EBITDA was $5.5 million in 2024, an increase of 89% over 2023, and our adjusted EBITDA was $8.3 million, an increase of 18% over the prior year. We've also strengthened our balance sheet through significant repayments on our BDC capital loan facility. In 2024, we paid $5.1 million, reducing the balance from $9.1 million to $4 million at the end of 2024. Our improved profitability has not only allowed us to reduce our debt, but it also positions us to consider future strategic capital allocation opportunities. Merrill will now review our Q4 and year-end 2024 financial results in more detail, and I will follow up with some additional comments. After our prepared remarks, we'll open the floor to your questions. Marilyn, please go ahead.

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 materially from those expressed in the forward-looking statements. The form is not assuming responsibility for the accuracy and completeness of the four looking statements and does not undertake any obligation to publicly revise these four looking statements to reflect subsequent events or circumstances. For additional information on possible risks, please refer to our annual MD&A, dated December 31st, 2024, on the CDERplus.ca website. As Maureen mentioned, throughout 2023 and 2024, Quorum improved its financial position by focusing on profitable growth through cost management and a focus on cross-selling Quorum products to existing customers. The company is no longer reporting rooftop counts and reoccurring revenue per rooftop as these metrics became less relevant over time. Acquisitions of value-added but low price point solutions resulted in high rooftop counts and an average recurring revenue per rooftop, which was not representative of the underlying customer base. However, for this quarter only, we will disclose our rooftop count, which was 1,412, a decrease of six rooftops or 0.004% from Q3 2024. We are also introducing a new financial metric, cash EBITDA, which we defined as adjusted EBITDA, less stock-based compensation, one-time acquisition-related expense, repayment of lease liability, purchase of property and equipment, and software development costs, which reflects how much cash we are generating. With that, I'd like to review our Q4 2024 results, followed by a review of our full-year 2024 results. In the fourth quarter of 2024, as compared to the fourth quarter of 2023, total revenue increased by 1% to $10 million. SAS revenue increased by 2% to $7.2 million. The increase in SAS revenue is due to a combination of cross-selling and new customer revenue. BDC revenue decreased by 1% to $2.6 million. BDC revenue in Q4 2024, however, was the highest quarter of BDC revenue in 2024. SAS growth margin remained consistent at 67%. BDC growth margin of 17% decreased by five points from 22%. The decrease in BDC growth margin is primarily due to new hires that are less productive through their training period. Forum continues to work on multiple initiatives to reduce the BDC cost structure. Overall growth margin remained consistent at 4.8 million or 48% compared to 4.8 million or 49%. Adjusted EBITDA decreased by 5% to $2 million or a 20% margin compared to $2.1 million, a 21% margin. The year-over-year decrease for adjusted EBITDA is primarily due to the decrease in BDC growth margin. Cash EBITDA increased by 10% to $1.2 million or a 12% margin compared to $1.1 million or an 11% margin. For the full year, 2024, as compared to the full year, 2023, total revenue decreased by 1% to $40 million due to a decrease of $0.9 million in BDC revenue offset by an increase of $0.6 million in SAS revenue. SAS revenue increased by 2% to $28.8 million and was 72% of revenue for 2024 as compared to 70% for 2023. BDC revenue decreased by 8% to $10 million and was 25% of revenue for 2024 as compared to 27% in 2023. The decrease, as mentioned earlier, was primarily due to SAF constraints. Growth margin increased by 3% to $19.8 million, primarily due to an increase in SAF revenue as well as operational efficiencies for the SAF and BDC cost structures as compared to 2023. Adjusted EBITDA increased by 18% to $8.3 million due to an increase in growth margin, a decrease in research and development expenses, sales and marketing expenses, and general administrative expenses. Adjusted EBITDA margin increased by 4 points to 21% from 17%. Cash EBITDA increased by 89% to $5.5 million due to the adjusted EBITDA improvements mentioned and lower software development costs. Cash EBITDA margin doubled from 7% to 14%. As Maureen mentioned, in 2024, Quorum also paid down $5.1 million against its BDC capital loan facility, compared with $1.6 million paid down in 2023. This has reduced our BDC capital loan facility to $4 million at year-end 2024 from $9.1 million at year-end 2023. Quorum plans to pay down the BDC Capital cash flow loan balance of $1.2 million as of December 31, 2024, in full by the end of 2025. And we will continue to prepay 15% of the BDC Capital mezzanine loan balance of $2.8 million at December 31, 2024, on an annual basis until maturity in August 2027. that paying more than 15% on an annual basis would result in significant penalties to Quorum. As of December 31st, 2024, Quorum had a net working capital of 3.2 million and cash and cash equivalents of 2.2 million and total debt to cash EBITDA of one time compared to 3.7 times at December 31st, 2023 and 6.4 times at December 31st, 2022. With that, I'd like to pass it back to Maury.

Thank you, Marilyn. A total debt to cash EBITDA of one times at the end of 2024 is impressive progress from 3.7 times at the end of 2023. I think this is even more impressive when you consider that our secured debt is 75% of our total debt. Our improved profitability and significantly reduced debt provides corn the latitude to make other future capital allocation decisions. We have multiple options, including one, organic sales growth investments to pursue more new dealerships or logos in Canada and or the U.S. market. Number two, inorganic growth through accretive acquisitions that add to our product suite and provide opportunities to improve our organic growth. And number three, other capital allocations such as normal course issuer bid to purchase back shares or payment of dividends. What makes Quorum's capital allocation decisions more difficult are the newly introduced automotive tariffs by both the US and then the Canadian governments. What the tariff levels will be and which vehicles and parts will be tariffed is currently very fluid. On the current path that the government is following, the tariffs will likely result in reductions in vehicle sales on both sides of the border, And dealerships and OEMs will be challenged with raising prices or possibly losing market share and or having their gross margins contract. What we do know is that our dealerships are resilient and creative and will look for ways to improve sales and find gross margin improvements in their operations. Keep in mind that the fixed operations business, the service and parts business, provides dealerships with a consistent and profitable revenue stream. and is even more critical if the dealership customers are keeping their vehicles longer. In recent years, Quorum and our dealerships have had to navigate the initial and subsequent outbreak of COVID and the resulting vehicle and parts shortages post-COVID. We are confident in our ability to navigate the tariff headwinds. Having a broad product suite with products that help dealerships, number one, drive in more sales demand in the form of vehicle sales appointments and service appointments, Number two, help dealerships with their closing percentages. And number three, help them improve their gross margins on both vehicle sales deals and service appointment visits. Allows us quorum to help dealerships meet the challenges that tariffs present. I'd like to close our prepared remarks by sincerely expressing my appreciation to our employees whose commitment to quorum was crucial to achieving our 2024 plan and strong quarterly and annual 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.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Gavin Fairweather from Cormark. Your line is open.

Oh, hey, Maury. Good morning. Good afternoon. Good morning. Thanks for taking my questions. Maybe just to start with, you touched on kind of the volatile end markets and some of the uncertainty that we've been seeing. I'm just curious how your conversations with customers are going. It sounds like you're leaning in both on the sales side and the service side in terms of new sales. How are those discussions going and to what extent are you finding that you're still able to get deals across the line in the current uncertainty?

Yeah, I mean, obviously in conversations with dealers, dealers are just concerned about the environment. I guess we've been through this, as I mentioned in the prepared remarks, we've been through this multiple times together, whether it was COVID or the resulting vehicle and parts shortages after COVID. And so everybody's confident in our ability to navigate. through through the tariffs but you know I think most of the concerns that I hear now are just people wanting clarity um around what's going to be in place and and what's not going to be in place and and it's the constant change that is probably the most difficult thing to sort of manage around um in terms of what we're seeing in the market today uh deals are still closing and um So that piece is positive, and from our perspective, as you alluded to, we're positioning both our service offerings to help dealerships in their service and parts departments drive more customers in and improve their gross margins, and our sales offerings, which obviously help them on the vehicle sales side, we're promoting both of those, and dealerships seem quite receptive to both.

That's great to hear. If I look back at your financials over the past couple of years, obviously a material step change in the profitability and cash flow coming out of the company with a relatively consistent top line, I'd say. How are you thinking about the path forward? Are you getting excited about driving some consolidated growth again, or do you think that we can expect profitability to kind of push higher? How are you thinking about the financial priorities in the year or two ahead?

Yeah, you know, I think top line growth wise, I'd be reasonably optimistic right now. If it weren't for tariffs, it's just so hard to predict. Right now, as I mentioned, right, we're finding that the deals are closing and dealers are still quite interested in our offering. So, you know, at this point in time, based on sort of how Q1 and Q2 have shaped up, we're, we're fairly optimistic, but I just don't, I don't know where the headwinds, the tariff headwinds will take us. So really hard for me to, to comment too much until we get more clarity on that side of things. Um, and then, uh, profitability wise, yeah, we've made a lot of improvements on the, as you mentioned on the profitability side of things. Um, You know, I think we're hitting sort of a reasonably consistent level and now finding additional ways to optimize in the business requires that we get more creative. And we will over time. But, yeah, I think it's sort of what you've seen from us in the past is how – what we're sort of expecting going forward, but we're always looking for ways to optimize revenue growth and EBITDA margins.

Got it. And then next for me, can you discuss the shift towards QCloud? I think that that was kind of on the docket for later this year to try and move more and more of the base to a true kind of cloud posture. Can you just provide us with an update on your rollout plans there and how you're thinking about the ARPU lift and how that might manifest itself in the financials of Quorum as we see that transition take place?

Yeah, so QCloud has had its challenges, I've got to tell you. We've got a team that has been working on it for quite a period of time. I sit in twice month on meetings on how we can continue to optimize it but one of our challenges has been is that it's a new environment for us so it's there's been a learning curve on our side and there were technical challenges getting our software to perform as reliably and as quickly as we wanted now we've overcome I would say a good 80% of the challenges we still have a few remaining and And, yeah, we've got a creative team working on it, and they're making lots of improvements. So it's hard for me to 100% predict, you know, what kind of impact it will have going forward. We do continue to move customers to our QCloud in general environment, but it's just we've slowed adoption until we are more confident in the environment.

Okay, and then lastly for me, maybe you can just touch on, you know, the M&A environment, whether you're seeing any movement in valuations and what would be, I guess, the priority of the different point solutions that a dealership would purchase, which you don't have in the fold today?

Yeah, so interesting enough, I mean, over the last few months, M&A activity and the number of deals we've been exposed to has increased. Unfortunately, it's tough to justify doing a U.S. market acquisition, a U.S.-based acquisition right now. We've looked at a few and been pretty excited about some of the opportunities, but we need a little bit more clarity about where the current administration is going in the U.S. marketplace before we're willing to pursue those. That's part one to your question. Part two is we're looking for probably a few different solutions that we've been fairly interested in. We've looked at solutions in the space of managing rental and fleet vehicles. We've looked at solutions in the space of tire storage management. We've looked at solutions in the category, not space, but in the category of of AI, both in the vehicle sales and service side. And we, of course, continue to build our own AI solutions as well. But we've also looked at other companies that have other unique takes on how to deploy AI into dealerships. So, I mean, those are some of the more recent common categories that we looked at.

Great. That's it for me. Thanks for the call.

Yeah. Thanks for the questions. Appreciate it.

Thank you. And as a reminder, that's star 11 for questions, star 11. One moment for any questions. I'm currently not showing any further questions at this time. I would now like to turn it back over to Maury for any closing remarks.

Well, I appreciate everybody's support and continued interest in Quorum. And thanks for attending our call today. And we will talk to you again in about five weeks when we release our Q1 results. Thanks, everybody.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.