mdf commerce inc.

Hello, thank you for standing by. This is the conference operator. Welcome to the MDF Commerce Q3 Fiscal 2022 Investor Conference Call. Today's call will provide information and commentary on the company with a focus on the financial results released yesterday after the market closed. We will hear from Luke Filiatro, President and Chief Executive Officer, and Deborah DeMoulin, Chief Financial Officer. If you have questions following the call, you can reach MDF Commerce at the address at their website, 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 December 31st, 2021, unless otherwise indicated. MDF Commerce assumes no obligation to update or revise the forward-looking statements to reflect any news, 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 measures and key performance indicators that are subject to important risk and uncertainties. For more information on these risk and uncertainty non-IFRS measures and key performance indicators, please refer to the reader advisory at the bottom of MDF Commerce's news release, which is on their website and which has been filed on CDAR at www.cdar.com. The company's actual performance could differ materially from these statements. I will now hand the call over to Mr. Filiatro. Please go ahead, sir.

Thank you, Josh. Good morning, everyone. I'm really happy to be with you this morning because I have some great stuff to show you. Very proud of what we accomplished over the last quarter. So just before, I want to tell you about who the MDF Commerce is and go to our state of operation. So we're a developer and operator of digital commerce platforms that facilitate billions of dollars a year of digital commerce transactions. for well over a half a million end-user companies, mostly in North America and a bit in Europe. December 31st, 2021 marks the first full quarter of company financial results with the addition of Periscope, a leading US-based e-procurement vendor, which the company acquired on August 31st, 2021. As a result, total revenue for the third quarter was a record high, of $30.7 million, representing a growth of 43% compared to $21.4 million in the third quarter of fiscal 2021. Deborah will explain in detail a bit later that these results were accomplished even though we could not recognize a total of $2.6 million in revenue in the quarter due to the IFRS rules on acquisition accounting. Without this accounting adjustment, our total revenue would have been higher, and that would have trickled down directly to our reported gross margins, earnings, adjusted EBITDA, and EPS. This acquisition accounting adjustment to deferred revenue is a temporary adjustment that will have a decreasing impact quarter over quarter until Q2 of fiscal 23. Our e-procurement platform has grown significantly since the acquisition of Periscope. It now represents 55% of total revenue for the third quarter of fiscal 22, and it's now the largest revenue stream for MDF Commerce. This acquisition of Periscope also contributed to accelerating growth in recurring revenue, which now represents 80% of total revenue for the third quarter, compared to 75% for the same quarter last year. Our focus is on integrating Periscope into our full procure-to-pay e-procurement offering, and our integration plan is on track. We are already benefiting from quick-win product integration that have led to new customer wins and new pipeline opportunities. The combined e-procurement leadership team is in place. They're focused on executing our product roadmap and growth strategies. The Periscope acquisition expanded both our geographical footprint and our technology offering for our e-procurement platform and positions us as a North American leader in government procurement. The acquisition accelerated our transformation to a high-growth, cloud-based SaaS commerce technology business. Unified Commerce, the second of our core platform, continues to perform well with high customer satisfaction. While transaction volumes have seen record high during various waves of the COVID pandemic, not unlike many other digital e-commerce companies, we have seen a slight post-pandemic decrease in number of orders when compared to orders during the height of those lockdown periods during the pandemic. This being said, happy to report that just a few weeks ago, we have served our two millionth order at Aldi in the UK. Our client is very happy about this rollout. More to come. As we navigate emerging macroeconomic trends, such as global supply chain issues, the war on talent, which is creating scarcity of resources in many sectors, rising costs of labor, we are leading with agility and flexibility. I cannot compliment our management team enough for the immense amount of work that they've done. We continue to invest in talent and in foundational upgrades as we aim to accelerate future growth, improve our scalability, and capitalize on emerging market conditions. Higher operating expenses in Q3 as compared to this time last year reflects an increase in salary-related costs that are required to both attract and retain talent in an environment where resources are scarce and competition for talent is fierce. The talent search is increasingly borderless due to the general success of work-from-home initiatives in the software sector, which was brought on by the pandemic. We've also seen an increase in hosting and license costs, which is directly related to the company's transition to a cloud-based strategy. Regarding the pandemic, the Omicron wave had an impact on our Q3 performance. A U.S. state deployment in our eProcurement platform was delayed beyond the end of the quarter due to simple absences and illness in the staff, both at our clients and in our own team, caused by the Omicron variant in the team. In general, effects of the pandemic on supply chains also had an impact on volume-based transaction growth in our unified commerce platform, specifically for e-commerce. Although there has been growth overall, supply chain issues affecting the e-grocery vertical reduced growth rates during the quarter. Until supply chains normalize, we anticipate that order-based transactions may continue to be impacted in the unified commerce platform. As we strengthen the market positions of our two core platforms, e-procurement and unified commerce, it is expected that overall our e-marketplaces revenue, representing less than 15% of total revenue in Q3, will continue to have less and less impact on the corporation's future performance. $30.7 million is the highest revenue reported in a single quarter in the company's history. We are pleased that the quarter's adjusted EBITDA is positive at $0.7 million, despite considerable macroeconomic challenges, including those caused by the Omicron wave of COVID-19. Don't forget that we could also think about that $2.6 million of deferred revenue here. And now, I will turn the call over to Deborah to discuss our Q3 fiscal 2022 financial results in more detail. Deborah, the floor is yours.

Thanks, Rick. Well, we've said it just a few times already that our Q3 revenue is $30.7 million, and that's a nice increase of 43.4% compared to $21 million in the same quarter of last year. I do want to point out that our results were impacted by this acquisition accounting entry that requires that Periscope deferred revenue be measured at fair value at the acquisition date and which ultimately reduced revenues for the quarter by $2.6 million. Periscope revenues standalone were $7.7 million, and again, impacted by the $2.6 million of deferred revenue adjustments that we've mentioned a couple of times now. So I'll take a moment to explain what this is, just because we've included it many times in our disclosures. Deferred revenue occurs when cash is collected in advance, but the service will be rendered over time, and therefore the revenue is also recognized over time. This is typical of a SAS revenue, which is collected up front at the beginning of a subscription period, which often spans over a 12-month period. So what happens to this deferred revenue on acquisition opening balance sheet? Well, IFRS requires that deferred revenue be measured at fair value. The fair value is typically less than the total subscription amount that was received in cash by the customer. When the deferred revenue is adjusted down in the acquisition accounting, there's essentially an amount of revenue that never gets recorded by the acquirer, which in this case is MDF Commerce. It's important that we mention this deferred revenue adjustment since subscription revenue is core to what we do and is a recurring revenue stream. Because of this adjustment, our revenues will be lower, lower that is than pre-acquisition revenues would have been, during approximately 12 months after the acquisition date or until the original customer subscription period is completed. To simplify that, on the next customer subscription renewal, the company will be able to recognize the full value of the subscription revenue and future revenue will therefore increase. While this deferred revenue adjustment reduces our post-acquisition revenue for Periscope in the short term, the adjustment will decrease month over month as customer contracts are renewed. And as these renewals occur, there will be a gradual and increasingly positive impact on our revenue that will trickle down to our gross margins, net loss, adjusted EBITDA margins, and earnings per share over the quarter. Hopefully that was helpful as this acquisition accounting often raises the question of how can buying a company actually cause us to have less revenue from operations if we hadn't actually bought the company? But anyway, back to our quarterly results. eProcurement platform had revenues of almost $17 million, an increase of $8.6 million, or 104% compared to the previous quarter. Our eProcurement platform now represents over 55% of total revenues for the quarter. If we were to exclude Periscope revenues, The platform grew organically by 11% compared to Q3 of the previous year. I'm also happy to report that our Canadian e-procurement operations, mainly Merck's, are seeing steady revenue increases and have actually registered record high monthly revenues compared to just a few quarters ago. This proves that the investments we're making in renovating the Merck's platform are starting to pay off. Our U.S. based e-procurement network, which does include Periscope revenues, contributed $8.2 million, a $203.5 million increase compared to the previous Q3. Revenues from Periscope were $7.7 million, again after this adjustment of $2.6 million in acquisition accounting deferred revenue. We are pleased with our e-procurement revenue growth. Liz mentioned earlier that some of our U.S. implementation activities for existing contracts were temporarily delayed in Q3, resulting in lower professional services revenue for the quarter. These delays were caused primarily by personal absences due in part to the Omicron virus, both at our clients and within our teams, and due to the holiday season. we've seen these conditions begin to normalize after the quarter end. On our unified commerce platform, which includes both e-commerce and supply chain solutions, revenue for the quarter was $9.8 million, an increase of 3.8% compared to 9.4% in Q3 of the previous year. Our e-marketplaces platform, which now represents less than 15% of our total revenue, had a 6.6% increase from Q3 of the prior year and now represents $4 million for Q3 of the current year. If I take a moment to highlight monthly recurring revenue for the quarter, total recurring revenue now represents 80% of total revenues for the Q3 of 2022. And this recurring revenue number for the quarter stands at $26.7 million, That's a $10 million increase compared to the $16 million or 75% of total revenues that we had last year. This growth rate from $16 to $26 million represents 66.8% growth. And with this MRR, we're getting to the point where we're going to see MRR hit the three-digit numbers. We anticipate that recurring revenue should hover in the 80% range for the foreseeable future, give or take a few percentage points, depending on the timing of large deployments in both our e-procurement and the unified commerce platforms. Recurring revenue for the e-procurement platform represented 92% of revenues, and this is unchanged from the previous year. Recurring revenue for the unified commerce platform with 59% of platform revenues compared to 57% for Q3 of the previous year. We closed the quarter with a net loss of $4.7 million, $0.11 net loss per share, basic and diluted, and that compares to net loss of $2.9 or $0.14 loss per share, basic and diluted, in the previous year. Adjusted EBITDA was a positive $700,000 compared to $1 million, in Q3 of the previous year. We are pleased with the quarter having positive adjusted EBITDA. And even though the current supply chain challenges, labor scarcity and the rise of cost of labor have become macroeconomic trends that have added additional pressure to our margins in recent quarters, And while these are economic realities that the company will need to contend with, at least for the foreseeable future, I'd like to highlight the following. The e-procurement platform's innovative transaction fee model, which allows us to earn a percentage of revenue based on government agency spend on goods and services, has the potential to generate significant upside to our growth objectives and we expect there to be revenue and cost synergies over the next several years from the combined e-procurement businesses. I want to mention again that the fair value of deferred revenue adjustment of 2.6 for the third quarter and a total of 3.6 for the four months since the acquisition date has impacted our revenues and unfavorably impacted gross margins, net loss, adjusted EBITDA for these periods. The fair value adjustment applies only to a specific list of customers and until their respective next subscription cycle is renewed. We are also focused on operational efficiency and cost containment measures with the objective of partially offsetting these pressures on the company's profitability. You have, if you're following along on slide 5, some information on our year-to-date results. Most of the information, one more slide if you're following. Yeah, there we go. Total revenue is 78.3 year-to-date, a 24.9% increase for the first nine months compared to the previous year. The e-procurement platform saw a 54.2% increase with revenues moving from $13 million in prior year to $37 million for the quarter. Periscope contributed four months of revenue to the year-to-date results, amount of $10.1 million, which again was negatively impacted by this deferred revenue adjustment by $3.6 million for that four-month period. The Unified Commerce Platform saw a 7.7% increase compared to the prior year. and overall performance in unified commerce for fiscal year-to-date was impacted negatively by persistent supply chain disruptions and labor market challenges mainly caused by the pandemic. While our year-to-date loss was $15.3 million, or $0.43 per share, basic and diluted, compared to a net loss of $0.4 or $0.26, basic and diluted, A couple of factors contribute to this. Acquisition-related costs on the Periscope acquisition were $4.8 million. And as a result of bringing on acquired intangible assets from the Periscope acquisition, there is increased depreciation of $2.4 million. And there were also additional salary-related expenses, restructuring costs, and higher hosting costs as we transitioned to our cloud-based strategy. So these are the main reasons for the year-to-date increase. Total adjusted EBITDA was a loss of 1.2 million year-to-date compared to 5.5 for the first nine months of the previous year. A decline in nine-month adjusted EBITDA is related to the ongoing foundational investments in our scalability, growth in headcount, especially in revenue-generating positions and in sales and marketing to support our growth initiatives and professional services associated with our customer deployment. Finally, with respect to our balance sheet, as at December 31st, the company had $8.1 million in cash and cash equivalents on our balance sheet, had long-term debt in the form of a revolving facility and term facility in the amount of $47.4 million. With that, I'll turn the call back over to Luke.