mdf commerce inc.

Q1 2022 Earnings Conference Call

8/11/2021

spk04: Thank you for standing by. This is the conference operator. Welcome to the MDF Commerce Q1 Fiscal 2022 Results Investor Conference Call. Today's call will provide information and commentary on the company with a focus on the financial results released today after the market closed. We will hear from Luke Filiatro, President and Chief Executive Officer, and Deborah Dumoulin, Chief Financial Officer. If you have questions following the call, you can reach MDF Commerce at the address at their website at www.mdfcommerce.com. First, here are a couple of housekeeping notices. All participants are in a listen-only mode for the duration of the call. This call is being recorded and we expect that the recording will be available on the MDF Commerce website later today. The information in today's remarks, including any forward-looking statements has been prepared as of June 30, 2021, unless otherwise indicated. MDF Commerce assumes no obligation to update or revise the forward-looking statements to reflect any new events or circumstances, except as may be required pursuant to securities law. We remind you that today's remarks will include forward-looking statements and non-IFRS financial measures and key performance indicators. that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reader advisory at the bottom of the MDF Commerce press release, which is on the website and has been filed on CDAR. The company's actual performance could differ materially from these statements. The terms and definitions associated with non-IFRS measures, as well as a reconciliation to the most comparable IFRS measures, and key performance indicators are presented in the section non-IFRS financial measures and key performance indicators. In management's discussion and analysis for the first quarter ended June 30, 2021. I will now hand the call over to Mr. Filiatro. Please go ahead, sir.
spk03: Well, good evening, everyone, and thanks for joining us on this call for our discussion about our Q1 fiscal 2022 results call. So we will review the results that we filed earlier this evening in a few minutes. But first, I want to take a bit of time to update you on MDF Commerce activities, more specifically the acquisition of Periscope Holding that we just announced a few minutes ago and that we've all been waiting for. So MDF is a developer and operator of digital commerce platforms. Once we complete this acquisition of Periscope, our various platforms will transact and facilitate billions of dollars a year of digital commerce transactions between B2B and B2G for well over one million end-user companies, mostly in North America. So if we turn to the page five of our presentation, today we announced this transformational acquisition of Periscope. That advances our strategy of becoming a leading player in the B2B and the B2G market with one highly strategic acquisition. The purchase price of $207.3 million is a compelling valuation considering the scale and capabilities that we will gain and positions MDF Commerce to achieve near-term profitable growth and generate significant value for our shareholders. Periscope is an impressive organization that has been on our radar for quite some time now. Periscope brings with it an impressive track record of growth and a strong team of industry professionals that combined with MDF Commerce's leadership and existing platforms is well positioned to capitalize on significant public sector procurement opportunities. Moving to slide six, we present the key highlights of this transaction. The acquisition of Periscope is highly strategic for MDF Commerce as it positions us as a leading public e-procurement provider creating many opportunities. First, it broadens our offering through a fully integrated end-to-end procurement solution coupled with an innovative self-funded transactional solution. Second, it builds on our U.S. market presence. immediately enhancing our scale and adding a strong, well-connected team that will enable us to efficiently serve the full spectrum of government agencies across North America. Third, it allows us to leverage Periscope's innovative transaction fee solution, which is expected to drive predictable and scalable revenues at attractive economics. Fourth, We expect this acquisition to be highly synergistic, both on the revenue and on the cost front. And lastly, Periscope enhances MDF Commerce's financial profile, both in terms of scale and growth. This acquisition is highly strategic, and it reinforces our relentless focus on value creation for our shareholders. And I know we've been waiting a long time to get it. So turning to page seven, here are the underlying themes that we find really attractive about the space in which Periscope operates and why now is the right time to complete this transformational acquisition. Number one, existing trends to modernize legacy government procurement systems were highlighted and accelerated by the pandemic. Number two, many governments have ramped up spending campaigns in an effort to stimulate the economy. Number three, government agencies are increasingly looking for a consumer-like shopping experience to acquire the various goods and services that they need. Just Monday, the U.S. Senate just approved Biden's U.S. $1.2 trillion infrastructure bill. We believe that this will be fueling a large increase in public spending that will mostly have to go through these types of platforms that we have. This being said, existing procurement solutions are not purpose-built to meet the needs of government and agencies. Most of them are fragmented, they lack functionality, and they rely on legacy technologies. Periscope, that's joining us today, has over 20 years of experience in this space and offers solutions that were specifically built for the public sector's evolving needs. Our combined platform is well positioned to capture significant market share, especially from a government procurement spend perspective. Now let's go to page eight. which provides an overview of Periscope's underlying business and why we believe that it's so complementary to ours. Periscope boasts a large network of government agencies and suppliers across the U.S. with little to no overlap with our own network. Periscope offers a fully integrated end-to-end procurement solution with a modular architecture that is highly configurable to clients' specific needs, adding to MDF Commerce's existing strategic sourcing capabilities. Periscope services larger government agencies, whereas MDF Commerce primarily caters to the middle market, the smaller government agencies. They recently rolled out a very innovative transaction fee solution, which accomplishes several things. It allows customers to utilize our e-procurement solutions at no out-of-pocket cost and transforms MDF commerce from a vendor to a revenue-generating partner for these governments and agencies, thus saving taxpayers money. Once adopted at the state level, it opens up a B2G marketplace a business-to-government marketplace on which smaller agencies can piggyback on existing supplier agreements. It generates predictable revenues that scale with government procurement spending rather than only relying on annual subscription fees under a SaaS solution. Page 9 provides some insights into the recent performance of Periscope with everything I just described. As mentioned earlier, the business gained significant momentum in the first half of 2021 with a significant uptick in client onboarding and pipeline expansions, with the transaction fee solution being a notable driver behind this recent growth. Based on recent discussions with government agencies and suppliers, and given the great visibility we have on pipeline developments for 2021, we are confident this positive momentum will continue. We ourselves have seen significant growth in our U.S.-based strategic sourcing over the last few quarters, and we'll show you some numbers in our Q1 results later. So page 10 is a high-level transaction summary. The purchase price for Periscope is 207.25 million, including 200.8 of cash paid at closing, 3.3 million in rollover shares, and a 3.3 million retention bonus for employees of Periscope. The purchase price represents a multiple of 4.6 times Periscope's calendar year 2021 revenue including revenue synergies of 15 million, well below the 13x current average forward multiple for publicly listed procurement software suppliers. Financing is composed of 92 million of cash from our balance sheet, Canadian 92 million, Canadian 50 million of available liquidity from our amended and upsized credit facility, A 53 million private placement coming from Fonds de Solidarité and Investissement Québec, who are our current two largest investors and will remain our two largest investors. A Canadian $68 million bought deal public offering underwritten by Scotia Capital. And finally, 4 million in rollover shares, as well as the creation of a 4 million retention bonus for the Periscope folks. Existing cornerstone investors, FSTQ and IQ, account for nearly half of the equity proceeds, which we believe demonstrates the confidence that they have in us pursuing this transformational acquisition. The acquisition is expected to contribute positive cash flow on a per share basis, further highlighting the value it creates for our shareholders. As previously mentioned, the transaction is highly synergistic And we expect at least Canadian $15 million in revenue synergies and Canadian $5 million in cost synergies within three years. Subject to regulatory approvals, this transaction is expected to close in Q2 of fiscal 2022, which is September 30th in our case. Page 11 lists the key pillar underpinning the strategic rationale, which we will cover in more details over the next few pages. The key takeaway here is that the acquisition of Periscope transforms MDS Commerce into a leading North American e-procurement player. Page 12 illustrates the market's leading metrics of the combined company. As you can see, we will have an established presence in both Canada and in the U.S. with a prominent network of over 6,000 government agencies in states and provinces, and approximately a half a million active suppliers. We believe our combined network will build on the positive momentum as it provides scale and reinforces our leading position in the North American e-procurement market. Page 13 provides a high-level comparison of MDF Commerce and Periscope and really demonstrates how complementary those businesses are. As you can see, the acquisition broadens MDF's public sector offering into a fully integrated solution with modular capabilities, allowing us to service all types of government agencies and therefore expand our total addressable market over 100,000 government agencies across North America. Customers will be able to pick up the best-of-breed solution, I'm sorry, customers will be able to pick the best-of-breed solution to meet their specific needs, whether they're a large state, a small township, an urban school district, while maintaining total flexibility. We will be giving government officials consumer-like ability to transact online. Turning to page 14. Periscope currently offers both SaaS and transaction fee solutions. Under a transaction fee solution, state governments can self-fund their e-procurement system as they share transaction fees paid by suppliers rather than pay an annual SaaS subscription fee. Therefore, state customers become revenue-generating partners, creating incentives for them to onboard local government agencies to the statewide B2G marketplace and increase statewide transaction expense. Periscope is the first, the first public eProcurement provider to successfully implement a transaction fee solution at the U.S. state level, providing us with a valuable first mover advantage. This innovative solution generates highly predictable and scalable revenue with attractive economics and is a key driver behind Periscope's growth. On page 15, we highlight some of the key drivers of both revenue and cost synergy. As indicated previously, we expect this transaction to be highly synergistic with Canadian $15 million of annual revenue synergies and Canadian $5 million of annual cost synergies realized within the next three years. First, the revenue synergies resulting from the combination are primarily driven by the introduction of Periscope's ePro and Marketplace solution to MDS Commerce's network. We intend to leverage each other's customer base as well as key government relationships to sell ePro to additional U.S. states and Canadian provinces and federal governments. We also expect to offer Periscope's Marketplace solution to our existing network of over 3,500 government agencies and over 300,000 active suppliers. Think about this. It's almost like an Amazon Marketplace, but for government. Integrating the whole network together will offer more value to suppliers and broader access to government contracts, thus enabling additional revenue. Second, cost synergies are expected to be primarily driven by workforce-related initiatives alleviating the needs to hire additional talent for sales, product development, and other key functions. And we all know that talent right now is very important. rare, and difficult to get. Second, efficiencies gained through the harmonization of content aggregation systems and processes. And third, product integration eliminating reliance on third parties. I'll now pass it over to Debra, our CFO, to discuss the compelling combined company's financial profile on page 16.
spk00: The combined company exhibits a strong, combined financial profile. Periscope increases our scale and enhances our growth significantly. MDF Commerce revenues for fiscal 2021 were $84.7 million, increasing 36.6% to create a combined revenue of Canadian $115 million. Year-over-year growth increases from 13% to 18% for the last six months of June 2021. MDF commerce percentage of recurring revenue increases from our consolidated 76% to 80%. Combined adjusted EBITDA increases by 44% from 5.7 million to 8.3 million. And this is on the historical numbers. Strategic sourcing and unified commerce will now account for 87% of the combined revenues emphasizing our focus on core platforms and delivering our vision to enable the flow of e-commerce for business and government.
spk03: So thanks, Deborah. As you can see, we're extremely excited by this transaction, and the numbers that you just heard, as Deborah mentioned, are historical, and they don't take into consideration the growth that we showed on previous slides, both on the Periscope side and particularly on the strategic sourcing portion of MDS stand-alone in the U.S. So now moving to slide 17. As mentioned earlier, our stat sourcing and unified commerce platforms will now make up approximately 87% of combined revenues. We're getting closer and closer to that one brand, one company vision that we laid out about a year and a half ago. That being said, we're still trading at a significant discount to public comparable companies, either in procurement software or in digital commerce. Now, just before concluding with the last slide on the Periscope presentation, I will ask Deborah to give us a brief overview of our Q1 fiscal 2022 results, which are in line with what we were expecting.
spk00: Thanks, Luke. So while we have an exciting transaction and we're very excited about it, we're also proud of our Q1 results, so we'd like to go through those. So let's talk about the highlights of Q1 fiscal 2022. So revenue for the quarter was $22.6 million, and that compares to $20.5 million in the first quarter of the prior year, representing 10% growth. During the quarter, we are also reporting for the first time constant currency basis revenues. which increased $2.5 million, or 12.5% compared to the first quarter of 2021. For the first quarter of 2021, U.S. denominated revenue totaled 45% of total revenue, and therefore we believe that the constant currency, a non-IFRS financial measure, is useful to compare the corporation's performance on a constant currency basis. And you can refer to our Q1 press release or the MD&A for more information on that. So turning to our two growth platforms, revenues from our strategic sourcing platform for Q1 were 8.9 million, representing a 14.8 increase compared to the 7.7 of the first quarter of 2021. Our U.S.-based strategic sourcing revenue grew by 32.3 year-over-year, including the acquisition of vendor registry, which we completed in November of 2021. Unified Commerce had a solid growth with revenues from our Unified Commerce platform, which, as you'll probably recall, includes e-commerce and supply chain collaboration, totaled $9.9 million compared to $9.1 million for Q1 of the previous year, representing an 8.7% increase. Focusing on our e-commerce solutions, which consists of Orchestra and K e-commerce, the Q1 revenue grew by 15.3% to $6.7 million compared to $5.8 million for Q1 of the previous year. Revenues from the supply chain collaboration in Q1 were stable at $3.2 million compared to $3.3 in fiscal 2021. In Q1 of prior year, total revenues was more positively impacted by volume-based increases due to a spike in online commerce, which started at the beginning of the pandemic and forced certain lockdowns at the beginning, more specifically in e-grocery. With deconfinement happening in certain countries during this period, we've seen, in the arrival of summer, we've seen a slower amount of transaction volumes on some platforms, which we believe will be temporary over time. Revenue from eMarketplace's platform was 3.8 million or 2.8% increase and compared to the 3.7 that we reported in the same quarter of fiscal 2021. Recurring revenue for the quarter, it was 16.4 million, 72.5 of total revenues compared to 15.8 and 77 of total revenues in the first quarter of the prior year. Recurring revenue for the quarter was 90% of total revenue for strategic sourcing and this is stable on a sequential basis and just down slightly from 94 of last year. Recurring revenue for unified commerce was 57%, stable from 59 in the prior year. Turning now to margins, operating expenses, and profitability, Q1 growth margin was 58.6 compared to 68% reported in Q1 of the prior year. As mentioned earlier, The change in gross margin is associated with service mix between right-of-use revenue and professional services and to the lower margin professional services revenue recognized on large deployments, especially in e-commerce. We anticipate that gross margins will remain compressed temporarily until the ongoing deployments in e-commerce are delivered. We believe that the foundational investments we are making now will contribute to future improvement in gross margins. Total operating expenses for Q1 were $17.5 million compared to $14.7 in Q1 of the previous year. The key contributors to the increase are general admin expenses of about $1 million during the quarter, sales and marketing of about $1 million, and increased costs due to the investments in scaling for headcount and higher salary costs to attract and retain employees in a time of a scarce tech talent and higher professional services fees. Net loss was $4.3 million or $0.15 per share basic and diluted compared to a net loss of $1.2 or $0.08 basic and diluted in the previous Q1. Total adjusted EBITDA loss for the quarter was $1.1 million compared to the adjusted EBITDA of $2.1 million reported in Q1 of 2021. Adjusted EBITDA declined year over year. due to increased foundational investments in operations, sales and marketing, R&D and professional services, to accelerate sales growth and to support large deployment contracts. As deployments accelerate over the coming quarters, professional service expenses are expected to remain elevated and the company expects to continue to make foundational investments to improve scalability as the corporation grows. Tech talent remains a challenge, and we have implemented multiple strategies to address this, including market competitive salary increases, which began in Q1, to improve retention. We have new recruiting campaigns, established a development center in Ukraine to provide additional workforce, and this is going well. Our operational and infrastructure investments are focused on improving scalability and improving gross margins. As we move forward, our challenge will be to strike the right balance between the investments and their impact on margins, while staying in the race to capitalize on the opportunity brought on by this market acceleration. We believe that the investments in people and foundational infrastructure will help to capture the opportunities presented to us by this accelerated market and especially around the adoption of commerce, e-commerce, and strategic sourcing solutions. And we can convert these opportunities into future cash flows that offer compelling value to shareholders. On June 30th, the company had $110 million in cash on its balance sheet with net cash inflows, and now you know what we're going to do with that money. And with that, I turn you back to Luke.
spk03: Well, thanks, Deborah. Although I know all this, but listening to you, I'm out of breath thinking about everything we did. And I'd like to emphasize that, obviously, our growth platforms are really e-commerce and strategic sourcing. So be careful when you look at the overall. We still have some businesses that are less growing. So the average, unfortunately, is maybe not fully comparable to some of our peers. But when you look at what's really doing well, we're in the right spot. So to wrap up this presentation, I'd like to call your attention back to slide 18, which is titled Expecting Value Creation for All Stakeholders. I'd like to emphasize that this is a transformational acquisition. It's beneficial for our shareholders as well as for our broader stakeholders, namely our customers and employees. First, The strategic acquisition of Periscope creates significant value for shareholders, now positioning MDF Commerce as a leading e-procurement player. We are extremely excited about this transaction and the opportunities that it creates for us. I'd like to thank all of the shareholders for your continued support. Second, the acquisition broadens our product offering, allowing us to meet our customers' evolving procurement needs. Thank you. to all our customers and our partners for your continued trust. And I'd like to insist here that when we say that our mission is enabling the flow of commerce digitally, that's exactly what we're doing. Between B2B, B2G, and certain customers through various retailer websites. Third, this combination creates a new environment for all of our employees to thrive in, providing them with new opportunities to develop, and grow within a stronger organization. To the Periscope team who will be joining us, I want to extend a very warm welcome on behalf of the entire MDF Commerce team. We look forward to welcoming you into the MDF Commerce family. Your organization has had an amazing 20-year history and it shares our core values and drives for excellence. We recognize often where the Periscope head office is located, is a vibrant city where top tech talent and top universities are present, which will make us an even more attractive employer overall. To our people, thank you for all that hard work over these many months and years. We all know with transactions of this nature that the real work is only beginning. Without you, these opportunities would not be possible. Together, we're building a leading customer-focused platform in e-commerce and public procurement, delivering on our vision to enable the flow of commerce for businesses and governments worldwide. And with that, I'd like to hand over the call to the operator to open the line for questions. Thank you all.
spk04: Thank you, Mr. Filiatro. We will now open the line for questions. To ask a question, you will need to press star 1 on your telephone keypad. Again, that is star, then the number 1 on your telephone keypad. To withdraw your question, press the pound key. This standby will recompile the Q&A roster. And your first question will come from Nick Agostino with Laurentian Bank Securities. Your line is open.
spk05: Yes, good afternoon, and congrats on the transport transformative deal. I guess my first question is, obviously, some impressive growth that this acquisition is bringing when you look at 2020 versus 2021. So, Luke, can you maybe just talk about the history, maybe give us a sense of the historical CAGR growth, maybe a five-year growth rate? That would be helpful.
spk03: Thanks for that question, Nick. I'm looking out here to Deborah because I don't know that I have an answer for the five-year growth. What we do know is that, and I think we have a slide on that, is that on the H1 for this year, the growth was approximately 30, 30-some percent. And we anticipate that for the full year, the growth will approach 50%. with existing state contracts, particularly on that transactional model that I described. We'll be looking for a little bit of an older growth CAGR, but I don't have that off the top of my head right now.
spk05: Okay, yeah, when you have it, if you could either call it out or send me an email, that'd be great. Secondly, just trying to understand obviously some revenue synergies. I think you said $15 million. And if I understood the multiple paid 4.6 times, that includes the 15 million synergy, just to clarify?
spk03: Yes, it does.
spk05: Yeah, okay. So my question is, is there anything that, just to kind of wrap my head around the synergy gains, obviously cross-selling, they're more larger focus, you are more smaller market focus. Is there anything off their platform that, that you see as value add that you can turn around and offer to your clients and vice versa? In other words, anything that either party was doing that maybe offered a little bit of competitive advantage or value proposition that you don't currently have?
spk03: Well, totally, right? If you look at the slide on product, their ePro model, their marketplace for governments is something that we will turn around immediately and start to offer to our current 3,500 governments and agencies, both in the U.S. and in Canada. As we said, this is a first mover advantage, and it's quite transformational for governments as it turns something that is a cost into a revenue generating. So that's one aspect where we are already thinking about where to go and how to market that piece of product. Second, and you've heard me say this when we did the vendor registry acquisition about six months ago or seven months ago, it now combines two supplier networks in which there's about a million suppliers and about a half a million of those have been active in the last 12 months. That's an incredible large network. of suppliers that cater to now 6,000 governments and agencies, and that's going to continue to grow. And as I mentioned during the vendor registry, we're very good at turning these non-active customers into active customers that start to pay us a royalty to use the platform. And we're also very good at increasing the value that we bring to these suppliers because we suddenly basically doubled the number of opportunities that they're exposed to and we think that that's going to continue to grow. And not only can they simply be exposed to simple basic RFPs, we can put them in the marketplace so they can transact with governments as easily as you buy anything on Amazon. So clearly, there's an obvious amount of synergies in between and we put it at 15 million, obviously, because we're still in the first few phases of doing that. And as you know, we're announcing and signed the transaction today, but the close is expected in another few weeks. So there's a limited amount of work that we can do on how will we put this together, but the teams are ready on both sides to really make this an extremely compelling project digital procurement platform, which we have the intent of not only taking to North America, but worldwide.
spk05: Okay. But is there any product feature sets that they're bringing to the table that you currently don't have or vice versa?
spk03: Yes, the ePro. If you, you know, we could take you, I don't know if you can flip through the slides that we showed. but I don't remember the number of it. But if you go to slides on product, everything about ePro in Marketplace is a piece that they have and we don't. On our case, we don't have technology that they don't have because we were competitors on the basic, and that would be on slide 13 right there. You see that strap sourcing, supplier relationship, and contract lifecycle management is something we both have, But they bring requisition, purchase order management, invoice receipt processing, payment management, ePro, and marketplaces. So we're buying both a set of products and platforms that we don't yet have, plus a network of customers and revenue and profitability.
spk00: And then this transaction takes us into the entire eProcurement wheel, so that if we were to illustrate it in the wheel, it's from everything from beginning to when the cash goes out. So it's really a full process.
spk05: Okay. Now, when I look at the multiple paid, the 4.6 times, as you know, there was a transaction out in Europe that was done at a similar level as well. And I'm just wondering, was this particular transaction, was there any competition in getting this deal done?
spk03: Yes, totally. This was, and unfortunately, the... Periscope is owned by a private equity named Parthenon Capital. We have been in discussion with the company for quite some time, but they launched a very stringent competitive process. Obviously, we don't have the full details of who was there, but we certainly know or we can guess of certain parties. And, you know, based on how it was handled and, you know, the various discussions and the time that it took and everything else, I don't know how many parties, but it was a significant number. This is a company that's highly sought after. And when you think about the bill, the U.S. Senate that approved the Biden bill, you know, this is extremely timely right now.
spk05: Okay.
spk00: And my last question. I'm sorry. I was going to say the transaction model is really based on government spend. So as not only the seed procurement is becoming trendy, governments are digitalizing, et cetera, we're also at a time where government infrastructure spend is going to drive up some of those volumes into areas where we will really see a strategic side of growth, positive momentum, There's a strong pipeline and there's a lot of upside potential that we're not limited by just that SaaS revenue anymore, but rather transaction fees based on government spending. So a really interesting model here.
spk05: Okay. And my last question, just maybe shifting gears to discuss Aldi. I think during the course of the pandemic in the U.K., You guys called out a slowing of implementation because of COVID. Now we're clearly seeing the UK is reopening the economy and what have you. How is the implementation? Are you guys starting to see an acceleration as far as getting into the targeted 1,000 stores and any update on the timeline for getting that completed? I'll leave it there.
spk03: So ALI is progressing well, Nick. We're now just below 300 stores. We keep adding a couple every week. And certainly the client is very happy about the platform and we are deploying. ALPI is not at the speed at which we thought we would initially. And again, that's really based on a whole bunch of logistics issues, mostly on their front, on the physical side. So we are ready to deploy any time they tell us to go ahead. So we're fully active on the ALDI front, and everything is going as planned. The volumes, as Deborah mentioned, of orders, did reduce compared to the early days of the pandemic, right? Let's be honest. But we're still at a bit more than double and a half the volumes that we saw pre-pandemic, and that's pretty much across the board in all of our various e-commerce properties. So that's still going well, but there is something that I'd like to mention, is that we now are at the point where we have an incredible pipeline of very large grocers worldwide, that we're engaged in active discussion, demonstrations, pricing, et cetera, and we think that we are really in a good position to capture some other very significant market share in that space. So things are going slower than we expected initially, and I think that caught everybody by surprise, but the talent crunch did not help. We are now, I think, through that. In e-commerce particularly, we hired about 50 people since the beginning of the year. The Kiev Ukraine Center seems to be working well. So we're back to a pace of delivery that is what we need to have. But on the customer's side, they have the similar issues, right? They too are grasping for tech talent, and that seems to be on a worldwide scale right now. So we're adjusting to that. But if you look at the growth rates that we're having in e-commerce, we're still in the 15% range, which is quite good. Because don't forget that we're comparing this quarter with the incredible spikes that we had last same time last year in similar quarters, which were April, May, and June, which was at the heart and the start of the pandemic where everything was locked down. So we're very confident in our ability to continue to grow, capture market share in e-commerce, and bring that to profitability when we get to the scale that we need to have.
spk05: Okay, great. I'll pass the line. Thank you.
spk04: Your next question will come from Kevin Krishnaradne with HRDNs. Your line is open.
spk01: Hey there. Good afternoon. Congrats on a very intriguing acquisition. Just the first question just on the revenue and the cost synergies. If you can just help us understand how to think about how does that actually scale over the next three years? Is it more back-end loaded front-end or is it linear? Any of the thoughts there?
spk03: Like we mentioned, there's a large amount of cross-selling. There's a large amount of demand in government digitizing their procurement systems. Hard to say at this point how fast this will come. We basically looked at our existing database of customers and tried to figure out how much time needs to happen for this to materialize. So I think once we have the ability to fully get together with the targets and develop the go-to-market, the combined go-to-market plans, et cetera, we'll probably be able to update you with something a bit more precise. At this point, it's hard to say. On the cost synergies, that's a little bit easier, and it's pretty early on because there are some functions that are, I'd say, specifically in the content creation and aggregation where Periscope has developed technologies and platforms which we can use and retire certain platforms on other side. And one very, very quick win is we were on our end and on their end struggling to acquire additional resources which together now we have the ability to transfer resources and have people work on where it's most urgent and needed. So we are saving significantly on potential new hires that would have needed to be done. So that's how we came up with those numbers, and there are a multitude of other things that will show up also.
spk00: And perhaps on a shorter-term basis, the Periscope Marketplace solution is one that we'll be able to leverage with our existing customers. And really what that's allowing to happen is for agencies to shop off of existing supplier contracts. And so this one essentially opens up an entire marketplace where the government goes to an RFP process and now all of a sudden the local agencies can be buying off of that government contract. And so in addition to the transaction model, which is based on government spend, this transaction model will add volume right away. And that is one where our existing 3,500 government agencies and the 300,000 active suppliers can be connected quite easily from a technology perspective onto that e-marketplaces model. And that will bring on shorter-term revenues.
spk01: Okay, awesome. Thanks for that. It's very helpful on those both questions there. Kind of related to my next question, if I think about looking here, the $23 million that Periscope did, you're guiding sort of $33 million. Just to clarify how to think about the transaction revenue versus SaaS, how do we think about how that has evolved, that mix, and obviously volumes driving the transaction, but just how do we think about the breakdown of that revenue?
spk00: Yeah, so the 2023 revenue is in U.S. dollars in the slide we presented. Sorry, 2023 million, sorry, is the historical 2021. Sorry, mixing up all day. I'm starting over. It's been a long few days. The U.S. $23 million that we're talking about in this slide is the historical December 2021 of Periscope. In looking at where we are at the June 30th period and contracts that have been signed and are committed, we believe quite strongly that the 33 million U.S. that we're presenting there is a solid number. While it is forward-looking and not guaranteed, It is, we believe, quite solid. The transaction fee model represents to Periscope approximately one-third of their revenue. That model is relatively new. It was introduced in 2019. So, you know, it's ramping up with different U.S. state clients being added to that model. So there is upside potential growth with respect to that.
spk01: Okay, got it. So if you're thinking about how you've got your thoughts on the guidance or the outlook for the $33 million, how do we think about that growth being driven from SaaS versus just pure volume? You did $20 billion worth of volume, I think. I saw that in the press release. Is that really the main driver?
spk00: In terms of the growth? Yeah, in terms of the growth, a lot of it does have to do with that transaction model, but there's also quite a bit of growth within the marketplaces that I mentioned. So it is also combined with existing... There is existing client increases, but it is a lot to do with the volume side on the marketplaces and, of course, the increase in government spend.
spk03: And they have added also a significant number of customers, you know, on the government and agency side over the last, you know, since the beginning of the pandemic. So there is also a significant amount of additional SaaS revenue because not everybody has converted to the transactional model.
spk01: Yeah. Okay. Got that. So that's sort of what I was looking for. The last is sort of a bigger picture question. I'm looking at your slide seven where you've got the North American business sort of U.S. government agency spend $1.8 trillion, U.S. $20 billion in spend. Can you talk about, you know, maybe the landscape, you know, competitive landscape? You also mentioned, you know, the increased government digitization. So maybe just help us understand, you know, what the landscape looks like now. You obviously have first mover advantage, as you've talked about, with the, you know, the B2G shopping experience that's provided. So, Any thoughts on how you're thinking about the landscape competitively and the opportunity, whether that's legacy switching over to digital platforms like yourself?
spk03: I'd say that from a competitive point of view, as we've often mentioned, it's a very highly fragmented market. With this transaction, we're clearly becoming the main guy in that area. How do governments do it today? A lot, you know, a significant amount is still just paper. Paper-based, fax, email, and even snail mail. We see sometimes some departments that are still, you know, receiving proposals by mail and opening them up and binding them in binders and comparing them, et cetera. So simple, I would say, manual processes are still very present, and we can easily, completely replace those processes because we offer a solution that does not cost anything to a government agency. And that's a big advantage because a lot of them are budget constrained. And, you know, yes, they are buying and investing money in the economy and all sorts of that, but they don't have the ability to buy fancy pieces of software. The ones that do have or went on to various procurement platforms will typically adopt a commercial procurement platform. Think about Ariba, think about some modules in SAP for the bigger guys. But they don't have anything to handle the public procurement piece. They don't have the security, the auditability of the processes And we come in and we offer all that at no cost. We actually have complete and full business cases that show them that they can actually start to make money right away because all we do is take a convenience fee out of the transaction from the winning party, which gets shared between us and that government agency. And once the government agency is on the platform, we can easily convince smaller guys, and I'm thinking like school districts, municipalities, et cetera, that can then piggyback off of those government contracts and then too can go and purchase whatever goods and services they need by using the pricing, the volume rebates that the whole state is benefiting from. So this creates a super compelling proposal that is quite easy to sell. So I truly think that the upside here is very significant. I hope I'm answering your question.
spk01: No, that's helpful, Luke. Thanks very much. Thanks for taking my questions. Very intriguing deal, and good luck. I'll pass the line. Thank you.
spk04: Our next question will come from Richard J. with National Bank Financials.
spk02: Yes, thank you. So congratulations, team, on pulling this together. It looks like a very long process. If you look at slide 14, I was wondering if you'd maybe just quickly walk through the broad economics of the two models, the ePro SaaS and the ePro transaction, just trying to understand maybe a very simplistic transaction and just get the flow of how the margins look on each of those respective models.
spk00: Okay, so maybe I can just explain it briefly. So what you see on the left is E-Pro SAS, is what you would know as the typical subscription fee paid by the agency to customers based on size. So it's not, you know, various size of governments will pay a different amount of subscription fee in terms of revenue. On the E-Pro transaction model, The revenue recognition is really based on the government spend. So as Luke explained a couple of minutes ago, the percentage of the spend is what gets recognized. They're typically long-term contracts, in this case, of large U.S. states. essentially there's a lot of growth in the ePro transactions. So when you're in the ePro size, you have to win new work, new size contracts, whereas in the ePro transaction model, the spend with existing U.S. customer base can increase quite significantly. From a margin perspective, we've never been a company that's provided guidance on margins, so we've We knew we needed to do some guidance, especially around revenue, but we can tell you that we believe that our EBITDA margins, as we showed on the first slide, will improve. To combine companies definitely brings on to improved margins, and so we expect to see that increasing over time.
spk03: Okay. Richard, thanks for your question, and I know you and I talked often, and I know you had some, you were looking forward for us to execute on a transaction, and obviously every time we spoke, well, I could not tell you about this, but it was and has been in the works, so hopefully you understand why sometimes I was a bit vague and not directly answering.
spk00: And perhaps what you can see on the slide we did present is that the historical margin has been around 8% from an EBITDA margin perspective for Periscope, and I think it's from there that we think the significant opportunity is really on expanding the margins from there.
spk02: Yeah, no, I appreciate that, and thanks, Lou. In terms of slide 8, you know, you show these sort of agency solutions, and I'm just kind of curious to see, you know, from a product set perspective, what that mix is, is sort of proportionately leaning towards one or the other and whether you can kind of share us at a high level what the mix of revenue may be.
spk00: So for sure, the ePro solution is representing about one-third of the revenue. And then after that, I don't have a specific breakdown in front of me. but it would be the marketplace that's really driving probably the second largest stream of revenue, and then things like CLM, which is their contract management system. It's smaller in terms of revenue, and then there's a few legacy platforms in there. I don't know if there's anything you want to add in terms of by nature of product. I think certainly the growth areas are around the Periscope marketplace, and the Periscope Pro, which is the transaction model that we refer to. And the rest are really providing all the services of the procurement wheel.
spk03: Yeah. I mean, it's similar to us, right? The various modules that they have are also supplier-based. And, you know, a lot of suppliers pay small amounts to be on those networks. But once you get something that interests the large agencies to come on and offers them significant savings, well, obviously, you can get some pretty significant savings from that.
spk00: And I think that modular concept is what's really solid about the solution that Periscope has because it allows the client to pick what they're ready for and to grow over time on the various modules that are very interconnected and flexible. that are very complementary to each other so you don't need to go full scope everything you can buy this and purchase the solution in modules or implement it if you're on this transaction while you're not paying for it okay and this is the last one for me um if you sort of look at uh let's say the immediate addressable market that you think you can pursue like you know what sort of the uh
spk02: market share environment looks like? You know, what's sort of your share and, you know, maybe what's the share of some of your, maybe the top two other competitors in the marketplace?
spk03: The easiest way to describe this at this point is, you know, we estimate approximately 100,000 agencies and governments across North America. We currently have about 6,000 of those on our networks. And we only have, you know, eight states on the Periscope platform. So that gives you a view of how much room there is to grow there. Obviously, not all of those agencies are large enough to represent a big bump in revenue. If you look at it from the transactional piece of the revenue, Right now, you know, between us and Periscope, we probably are, and we don't have any transactional revenue, but I know how much we sort of service, and that's probably around the $30, $35 billion out of, you know, North America is probably, when you add the stimulus there, we're probably getting close to potentially $3 trillion. So we're at, you know, one-ish percent of market share. And we are the leader in public fee procurement. So lots of room to grow. And again, insist on that first mover advantage. As far as we understand, we're the first company to be able to offer this type of transactional revenue with a revenue generating model for the actual government body that's issuing those contracts.
spk02: Okay, that's great. Congrats on pulling off this big deal.
spk00: Thank you.
spk04: And there are no further questions. I will now hand the call back to Mr. Filiatro. Go ahead, sir.
spk03: Well, guys, thank you very much for your insightful questions. I know it's been long in the making, and this started already a few months back, and we did everything we could to make it happen as fast as possible, and my whole team is absolutely exhausted today. I'm told I'm running them to the ground now. So very happy to have you on the line, and I'm sure we'll talk some more in the next few days. As you know, there is some financing going on, so we'll take further calls with some of you as we go. So thank you very much for your attention.
spk00: Thank you.
spk04: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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