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spk01: Thank you for standing by. This is the conference operator. Welcome to the MDF Commerce Q2 Fiscal 2024 Financial Results Investor Conference Call. Today's call will provide information and commentary on the corporation with a focus on the financial results released yesterday after the markets closed. We will hear from Luke Filiatro, President and Chief Executive Officer, Deborah Dumoulin, Chief Financial Officer. If you have questions following the call, you can reach MDF Commerce at the address on 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. The call is being recorded, and we expect that the recording will be available on the MDF Commerce website later today. The information on today's remarks, including any forward-looking statements, has been prepared as of September 30th 2023, unless otherwise indicated. MDF Commerce assumes no obligation to update or revise the forward-looking statements to reflect any news 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 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 MDF Commerce's news release, which is on their website, and it has been filed on www.cidarplus.com. The company's actual performance could differ materially from these statements. I will now hand the call over to Mr. Filiacho. Please go ahead.
spk02: Good morning, everyone, and thanks for joining us for Q2 Fiscal 24 Financial Results Call.
spk03: Before turning to the financial results that we filed after the markets closed yesterday, I'll present an overview of the corporation's performance and an operational update. Beginning with a few Q2 fiscal 24 highlights, the revenues for fiscal 24 were $30.7 million, with recurring revenue now representing almost 80%, actually 79.2% of total revenues. Q2 year-over-year revenue grew by $1 million, or 3.2%, when we exclude the Q2 fiscal 23 revenue of $3.4 million from InterTrade Systems, a subsidiary that was sold on October 4, 2022. Profitability has improved significantly in year-to-date fiscal 24 compared to where we were at this time last year. We have been focused on operational efficiency which included various right-sizing measures that we took in the last half of fiscal 23 and in Q1 fiscal 24. We are now seeing the positive impact on that overall profitability in our Q2 results. Q2 fiscal 24 adjusted EBITDA was $4 million, and this marks the fifth sequential quarter with positive adjusted EBITDA. Adjusted EBITDA has improved significantly compared to Q2 fiscal 23 at 1.4 million and compared to Q1 fiscal 24 at 2.6 million. We're particularly excited that in Q2, we saw continued pipeline conversion for our comprehensive suite of eProcurement products. Delighted to announce that the State of Hawaii signed a multi-year agreement to use our advanced eProcurement technology suite of products. Our solutions will enable the state's digital transformation strategy by streamlining their end-to-end procurement process with our full suite of products, including our source, contract, procure, connect, and shopped modules. Hawaii is a transaction model agreement that we define as TRX, where funding will come from supplier-paid convenience fees. This model has proven to align well with the U.S. public sector context and needs. MDF Commerce is the only company that offers this unique transaction funding model option, which provides high gross margins on these long-term contracts. The State of Hawaii became the 10th state and or province to join the MDF Commerce eProcurement customer community. We also gained sorry, we also gain traction in pipeline conversion of our mid-market e-procurement customer strategy. We recently announced that the Texas Comptroller of Public Accounts will use our source-to-contract solution, and that the counties of Rockland, Chemung, Orange, and Ulster in New York State have signed a multi-year agreement to use our source-to-contract module and our innovative shop module, a marketplace to shop from available cooperative contracts. Our mid-market growth strategy, which we launched just a little more than six months ago in April 2023, has been gaining momentum and we've been successful so far this year. In the first half of the fiscal year, we won contracts for over 30 new buying agency customers, resulting in bookings with annual recurring revenue totaling over $2 million. This will have a positive impact on revenue growth over the next few quarters. This is a record number of new mid-market customer wins over a six-month period. We believe that this testaments to our strong competitive positioning for our e-procurement products, which are tailored made for government procurement. Our deep network of government agency customers and a comprehensive end-to-end suite of e-procurement solutions provides a strong competitive advantage. We expect an increased government's focus on digital transformation over the next few years and the prevailing macroeconomic landscape with government spending initiatives in the US are working in our favor and provide strong growth potential for our e-procurement solutions.
spk02: Our e-procurement platform revenue
spk03: grew by 4.8% compared to Q2 the prior year, with recurring revenue for that platform now reaching 88.4%. New customer wins, including those recently announced, will provide upside revenue growth over the next few quarters, since many of these contracts are not yet reflected in our Q2 fiscal 24 results. With a robust pipeline of opportunity, we believe that we are well positioned to capitalize on both larger state contracts and the mid-market opportunities that we believe lie ahead as public agencies digitized their procurement solutions. Now a few words on our e-commerce and e-marketplaces. The various offerings continue to perform well and the right sizing completed over the last few quarters now puts these in a positive contribution. Today, we announced that we will discontinue the operations of Réseau Contact and PowerSource Online at the end of November 2023. These were not underperforming businesses. However, investments would have been necessary to ensure that these platforms were compliant with new privacy legislation in Canada in regards to the protection of personal information, specifically with Quebec's Law 25. The decision to close these businesses is well aligned with our strategy to focus on our core platforms. And now, Debra will comment on the corporation's financial results.
spk00: Thanks, Luke, and good morning, everyone. I'd like to remind you you can find our Q2 financial results, including the press release, the MD&A, and our financial statements on www.cedarplus.com and on the corporation's websites. Q2 fiscal 2024 total revenues were $30.7 million. This represents a decrease of $2.5 million, or 7.4% compared to Q2 2023. However, this includes the decrease in revenues from the sale of InterTrade, which we sold just after the close of Q2 last year. Therefore, to provide total revenues on a more comparative basis, excluding InterTrade, The Q2 year-over-year represents an increase in total revenues of $1 million or 3.2%. We are pleased that recurring revenue continues to trend towards 80% of total revenue. Recurring revenue for Q2-24 was $24.4 million or 79.2% of revenues compared to 79.0% in Q2 of the prior year. Overall, our profitability measures have significantly improved in Q2 Adjusted net loss improved by $4 million compared to Q2 prior year. Adjusted net loss was $800,000 for Q2 this year, far better than the $4.8 million reported in Q2 of the prior year. As Luke mentioned earlier, Q2 marks the fifth consecutive quarter with positive adjusted EBITDA of $4 million. This is an increase of $2.6 million compared to Q2 prior year, which had an adjusted EBITDA loss of $1.4 million. This is also a significant sequential increase from Q1 2024, which had adjusted EBITDA of $2.6 million. I invite you to refer to Appendix A of the slide deck for the reconciliation of net earnings and loss to adjusted EBITDA and adjusted net earnings and loss. Our Q2 fiscal 2024 results show positive impacts of our focus on operational efficiency, profitability, and cash flows, with significant Q2 year-over-year improvements in net loss, adjusted net loss, and adjusted EBITDA. Further cost savings are expected in Q3 of this year, from office space reductions at our head office in Longueuil, Quebec, and some of our U.S.-based offices, and later in with the expected completion of our cloud migration strategy. The overall improvement in our cash flows from operations and a strong liquidity position led the corporation to make the decision to reduce the borrowing commitment available under our revolving facility from $50 million to $30 million. This lowers the total standby fees on the unused portion of the revolving facility and is well aligned to our focus on profitability and cost savings. At the same time, we extended the maturity date of the revolving facility for another 13 months from August 31, 2024 to October 1, 2025. Interest rates and other terms, including the financial covenants, remained substantially unchanged under this credit agreement amendment, which came into effect on September 9, 2023. At September 30, this year, the amount drawn on the revolving facility was $6 million, with cash on hand of $4.4 million, together representing a net debt position of $1.6 million compared to a net debt position at March 31, 2023 of $3.4 million. With the various initiatives that we've taken, we anticipate improvements in our cash flow from operations in fiscal 2024 compared to fiscal 2023, despite some levels of variability on the timing of working capital including the timing of collecting our e-business tax credits that are filed annually. Turning back to Q2 revenues for some additional commentary, our Q2 right of use, or call it subscription revenue, was stable compared to Q2 prior year at $24.3 million. Subscription revenue is typically recurring in nature. Our Q2 prior year had right of use revenue from intertrade of $2 million. So on a comparative basis, right of use increased for all of our platforms. For the e-procurement platform, it increased by $1.7 million compared to Q2 of prior year, while revenues for e-commerce and e-marketplaces platform increased by $200,000 and $100,000, respectively. We did benefit from other revenue of $300,000 in Q2 for the post-closing transition services that we've provided to the acquirer of inter-trade. And this is the last quarter that we'll see this other revenue. Our transaction fee revenue decreased by 1.6 million compared to Q2 prior year. 1.3 of that relates to the sale of Intratrade. And professional services decreased by 1.2 million compared to the prior year. And this is mainly from large deployments in our e-commerce platform that were completed in 2023. The e-procurement platform performed well. with revenues of $20.2 million, an increase of $4.8 million compared to $19.3 million in Q2 of last year. The U.S.-based procurement activities contributed positively to revenue growth, with an increase in revenues of 5% over the same quarter last year. Recurring revenue as a percentage of total revenue for e-procurement was 88.4% for Q2 compared to 86.3% for Q2 of the prior year. The e-commerce platform, which used to be called Unified Commerce before the sale of InterTrade and includes Orchestra and K-Commerce, together generated $5.8 million of revenue for Q2 this year, a decrease of $3.4 million compared to prior year, and that decrease is entirely related to the sale of InterTrade. For our e-marketplaces platform, revenue was $4.7 million for the quarter, unchanged compared to Q2 of last year. Recurring revenue as a percentage of revenue for e-marketplaces remains high at 81.4% of platform revenue. Our e-marketplaces platforms are well-established and mature. They have high margins and generate positive cash flow. Our objective is to continue to operate these platforms efficiently and profitably by maintaining competitive pricing and managing costs. Luc mentioned that we'll be closing Réseau Contact and PowerSource Online at the end of November 2023. With that, I'll turn the call back over to Luc.
spk02: Thank you, Deborah.
spk03: So in closing, I just want to mention that we're very satisfied with our latest quarterly results and pipeline conversion in our eProcurement platform. We are confident that we are at the right place to continue to gain momentum to solidify our position as the North American public procurement technology leader. We'd now like to open the line for questions. Danielle, could you take that, please?
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. The first question comes from Kevin Krishna Ratney from Scotiabank. Please go ahead.
spk04: Hey there. Good morning, team. Maybe first for Deborah, a couple of clarifications or thoughts on the cash flow. Cash from ops was negative one in Q2. How do we think about, you know, just going forward, you talked about working capital variations. You might also book some restructuring in Q3. So I'm just curious if we can How do we think about CFO over Q3 and Q4?
spk00: Yeah, thanks, Kevin. As you know, we don't give guidance, but in fact, the cash flow from operations overall will be expected to be positive going forward. But we do have different working capital timing. So whether it be the timing of our annual insurance renewal or other expenses, typically those variances are really working capital in nature.
spk04: Okay, appreciate it. Okay, maybe to Luke, Deborah as well. The procurement is doing well. Ever so slightly, though, if you go from Q1 to Q2, it was down just a smidge, right? 20.3 to 20.2. You know, just wondering what happened there. But more importantly, going forward, it looks like, you know, you talked about the 30 counties that are signed up, 2 million of ARR. If we just take that $2 million, you know, divide it by four of the quarter, do we see sort of the Q3 number go up by half a million? How do you think about that as a tailwind? And how do you think about, you know, the pipeline of similar opportunities going forward and how that might benefit the numbers, you know, sort of into Q4 and beyond?
spk03: Thanks, Kevin. So, as we mentioned, we're super happy about these bunch of contract signatures. There is a delay between the contract signature and the actual start of collecting the SAS fees, because depending on what is the situation at that particular agency, we need to onboard our technology, we need to connect it with the various other systems that it needs to be integrated with in order for the county, the city or whatever the agency is to operate the eProcurement platform. So you won't see all of that happen in one single quarter as we kind of stage these projects and we're careful about keeping aligned our professional services team with the amount of implementation services that we need to provide. So this is going to come gradually over time. And the state of our current pipeline, as we mentioned, is quite robust. And we're seeing more and more of these agencies, especially on the mid-market, basically contact us whenever they need to digitize their procurement function. As I mentioned, the leadership that we occupy in the market is making more and more noise into those customers, so it allows us to really be the party that's almost always into all of the requirements. So you will see continued improvement as we deploy these various customers. Of course, when we deploy or sign up large customers like we did with Hawaii, The delay there can be a little bit longer because it's much more work to integrate the platform to the existing customer systems. However, the bump that we will get in revenue once this is really ongoing will be a lot more substantial, obviously, as these contracts are generally significantly larger.
spk04: You talked about the 2 million ARR from multiple mid-market counties. Do we How does the Hawaii contract size relative to that 2 million over a bunch of counties?
spk03: I can't answer specifics on any given customer for obvious competitive reasons. What we've generally said to the market is small cities, counties, our contracts where they generate ARR of, you know, call it ARR, between 10 to 20,000 all the way up to 100,000 of ARR. Larger size counties, and I'm thinking about population being the, I'd say the best proxy for size, but when it starts to be in the range of about a million population, then the annual recurring revenue that we get from these customers can be multiple hundreds of thousands of dollars all the way up to maybe three quarters or so of a million. And larger state or province contract, again, are, you know, somewhat proportional to the population. And those can range from single, you know, one to one and a half million dollars a year, all the way up to multi-million dollars a year when the states or the provinces are very large. But we don't give, I would say, specific numbers, again, for obvious competitive reasons.
spk04: No worries. That is more than helpful. Thanks for that context, Luke. Just a couple more then. I may have misheard. Positive contributions for sure on the EBITDA and marketplaces. Did you say that e-commerce is also profitable? Can you just talk about maybe what the EBITDA margin profile? I know you did 13%-ish in the quarter overall, but any way to think about how each business line sort of is performing from a profitability perspective?
spk03: Um, I guess, uh, you know, the answer to that one, we don't disclose profitability by platform, but we did mention that our e-commerce platforms are now positively contributing to the EBITDA of the whole company.
spk04: Okay. Got it. So then just, just the last one for me then. Thanks for that. Um, so the strategy for e-comm like, how do you, how do you see it fitting into the overall strategy for MDF? I mean, it, it sounds certainly like all the real momentum is in e-procurement, but now. You know, if you've got e-commerce sort of stabilized from a profitability perspective, are you thinking about, you know, pushing a bit harder on that side of the business? How do you think about opportunities there? I'm just trying to really think about your view on e-commerce in the context of the broader MDF story. Thanks.
spk03: Our e-commerce properties cater to various B2B and large retail and a lot in grocery. And what we see right now are really, I'd say, macroeconomic trends where the customers that we were in discussions with, the customers that were in our pipeline, are basically pushing out their projects for implementation or changing their e-commerce packages simply because they're, I would say, still... No clear directions of the markets that consumers spend. So on our e-commerce, our strategy was to, as you just mentioned yourself, stabilize them, make them profitable, and make sure that we're there when those, I'd say, larger trends turn back in a better, positive fashion. We've recently launched a new website, which is Trio Hockey, under the Spa Expert Canadian Tire brand, but it's a relatively small property. We are continuing to serve our customers that we have in e-commerce, but the volumes of spend on our various e-commerce sites remain relatively low. compared to what they were in the past. So when we see that pickup, we'll be ready to push harder. But at this point in time, it would probably not make a lot of sense to try to spend a lot more to acquire customers. Customers are in a wait-and-see mode as far as we can tell.
spk02: Got it. Okay. Thanks for all that. Makes sense. I'll pass the line. Thanks, guys. Thanks, Kevin.
spk01: As a reminder, if you have a question, please press star one. The next question comes from Jesse Pitlack from Coremark. Please go ahead.
spk05: Hey, good morning. Kevin already touched on many of the things I wanted to ask about, but maybe we could talk a little bit more about the pipeline. You did have a lot of wins in the past two quarters. Can you just speak to your ability to refill it here? The $2 million that has come out, have you been able to backfill that with other engagements?
spk03: I'm not sure I catch your question, Jesse. Could you just repeat? The line just kind of made a beep or something.
spk05: Sure. Just on your pipeline, you've announced several wins this quarter and last quarter. As those kind of convert into contracts now, have you been able to refill your pipeline with new potential lines as well?
spk03: Oh, yes. Absolutely. Absolutely. I mean, yes. We launched our mid-market strategy in April or so and have reorganized our sales team to address this and we're very actively pursuing those markets. Same with what we call our tier ones, which are the large states and large counties and provinces where we're very active there on multiple opportunities. So, yes, absolutely. We're not seeing any decrease of the pipeline. On the contrary, we're seeing it continue to grow.
spk05: All right, wonderful. And then just a quick modeling question. Should we think about the lost revenue from the closure of those two marketplaces that you've spoken to?
spk03: Well, out of our five marketplaces, this was the smallest property. So we don't think it will have any material impact. And over the last few years, the revenue from these two properties were hovering around just about a million dollars. They were profitable, but like we said, the investments required to make them compliant would have not continued to be profitable there because they just weren't ready to take that.
spk02: Okay, I understand. That's all for me. Thank you. Thank you, Jesse.
spk01: This concludes the question and answer session. I would like to turn the conference back over to Luke Filiacho for closing remarks.
spk02: Well, thank you all this morning for participating to our investor call.
spk03: I hope you're as excited as we are, and we'll keep in touch.
spk02: Thank you very much, and have all a great day.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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