Q4 Inc.

Good morning, everyone, and welcome to Q4's third quarter 2022 earnings call. My name is Sarah Pearson, and I'm Q4's Director of Investor Relations. I'm joined this morning by Daryl Heaps, our CEO, and Donna De Winter, our CFO and COO, to review our third quarter results. Please note a copy of today's presentation will be available on our website. Please be aware that today's prepared remarks are being hosted live. Following the prepared remarks, we will be looking forward to welcoming our research analysts on the call for a live video Q&A session. To those in our virtual audience, you can use the webcast Q&A button to submit questions in real time. We need to remind participants that certain information discussed on today's call may be forward-looking in nature. Such information reflects the company's views with respect to future events. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on the assumptions related to the forward-looking statements, please refer to Q4's public filings available on CDAR. During the call, we will be referencing certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, They are not recognized measures and do not have standardized use under IFRS. Please see our MD&A for additional information regarding our financial measures, including for reconciliation to the nearest IFRS measure. Please note that unless otherwise stated, all figures are in U.S. dollars. And with that, I'll pass it over to Daryl Heath. Daryl?

Wonderful. Thank you, Sarah. And good morning, everyone. Thanks for joining us here on our Q3 earnings call. Before Donna walks us through our Q3 financial performance, I wanted to take a few minutes to highlight the progress that we've been making against our strategic initiatives as we execute our profitable growth strategy. During our call last quarter, we outlined a number of initiatives that were focused on expanding operating leverage and accelerating our path to profitability. I'm pleased to let you know that since then, we've been able to deliver some solid growth as well as rapidly improving our gross margin, implementing our sales efficiency tactics, as well as opening our centers of excellence in Latin America. The rapid implementation of these initiatives is really helping us to insulate the business from the macro headwinds that we see out there in regards to inflation, as well as the challenging capital markets. As we continue to set the expectation of delivering positive cash and EBITDA results in H2 of 2023. The successful and rapid implementation of these initiatives is really a testament to our team's laser focus on operational excellence and reaching profitable growth in 2023. The team knows that every day that they can accelerate these initiatives only sets us up better for success. As a result of their hard work, we are already seeing a meaningful improvement in the business. from the size-adjusted sales and marketing teams to refining and prioritizing our R&D investments to focus on our most successful products, all without skipping a beat. In addition, we established our first Latin America Center of Excellence in Mexico. We've already ramped up technical roles with additional transitions continuing through year-end. We expect to realize the efficiency benefits and the margin expansion improvements from these efforts in the fourth quarter and throughout 2023. Despite these changes and the headwinds of market forces, we are displacing our competition more than ever. We are winning more and signing bigger and longer-term deals that will maintain our double-digit revenue growth and contribute to our profitability next year. With the heavy lifting now behind us, we are monitoring the trajectory of our expected benefits closely and look forward to demonstrating our progression as we exit 22 and are propelled to profitable growth in 23. One of the main reasons for our ability to pivot so successfully is our innovative Capital Connect platform and how we are delivering all of our products into a tightly integrated experience. Capital Connect is the platform we've been building since we went public. It is built on top of a unified data layer that connects all of our products and is the cornerstone of our ability to deliver unique and differentiated analytics. The value of Capital Connect increases as we add customers and those customers adopt additional products. This adoption increases the amount of interaction data flowing through our platform and enables us to deliver exponentially better insights and analytics to our customers. These improved products help us attract more customers, which in turn increases the data and improves the workflow insights and analytics. At the scale we are today and where we're headed, this is a very powerful driver. This is really our network effect and it will become the most valuable aspect of our business over the coming years. This is the one plus one equals three value proposition. Customers that use more than one product gets substantially more value from us. Those that use more than two receive even more. This is the unique and core value proposition that is driving our ability to displace our competitors and continue being the market leader. And what continues to be a challenging macro environment we are very pleased to see the traction that we are achieving during the back half of the quarter following the restructuring. In fact, September was our largest sales bookings month in our history, and we're very pleased to see a significant increase in average deal size, reflecting an increase in customer adoption of our Capital Connect platform and further reinforcing our core value proposition. Along with the encouraging trajectory in the third quarter, we continue to see strong performance in our expansion sales efforts, with current customers again focused on the value that we can provide through Capital Connect and the integration of all of our products. When we combine this with our 96% controllable retention rates, our rising ARPA, and the percentage of customers using two or more products, we are very pleased to be delivering double-digit growth during the quarter while also expanding gross margin and materially improving our operating leverage. I'll now take a few minutes to provide an update on a few of our products. Our web management app today is serving over 1,500 customers and provides an exceptional experience for how customers manage their websites and their most critical updates. We expect the adoption of this platform to continue to grow steadily, serving virtually all of our 2,600 plus customers during 2023. During the quarter, we expanded the coverage of this product to include all of our corporate website and multi-website clients, as well as all of our agency partners. All client types are now fully enabled to use Capital Connect to facilitate their engagements with us. The web management app is the cornerstone of how we are delivering on our commitment to provide the best customer experience in the industry, bar none, while allowing us to scale efficiently and expand gross margin. I'm thrilled to report that we continue to receive record levels of five-star ratings across all of our service interactions. We are very pleased with the performance of our teams and how well we're partnering with our clients. Engagement Analytics is our first product that is really leveraging the vast amount of interaction data that is generated from all of the behavior of investors across our platform. Keep in mind that we have more than 13 million investors a month hitting our network of investor websites and more than 400,000 investors joining live investor calls each quarter. Engagement Analytics is the first product that utilizes all of this behavior from all of these interactions and delivers a set of analytics designed to help IR teams understand those investors that are engaging and doing work and those that are not, helping them to prioritize their targeting and outreach efforts. Engagement analytics had some great sales tractions during the quarter, and we were really pleased with all the feedback that we received from our customers. Our roadmap is focused on continuing to evolve the analytics aligned with actual insights, benchmarking, and recommended next steps. The goal being to help IR teams prioritize investor engagement and ultimately to help drive premium valuation. If you recall from last quarter, we announced a new product called Q4 Login. You may have seen it as you registered for this call. Simply, it allows an investor to choose to create a Q4 account and then be automatically logged into any quarterly earnings call hosted by Q4 in the future. This is an important step as we begin to unify all the capital markets experiences for all types of investors, public companies, analysts, and advisors across the Capital Connect platform. I'm pleased to report that this product has continued to gain significant traction over the quarter, now counting over 114,000 investor accounts. To give you some perspective, we have maintained an investor database of around 350,000 profiles over the last couple of years, so we're very pleased to see the number of self-created Q4 login accounts growing consistently quarter over quarter. We're also really impressed with this number because it highlights the scale of investors engaged in our platform and reinforces our position of being a de facto source of investor information. As this number continues to grow and as we build out additional functionality, we'll be able to help all types of investors, retail and institutional, more effectively research and engage with public companies and IR teams. On the virtual events front, we've been continuing to innovate and evolve our virtual events platform, which is what we're using here today on our earnings call. We continue to see an increased demand from customers for video earnings calls and what we call non-conference call based earnings calls. This is an aspect of the capital markets that has not evolved in many years, and we are well positioned to bring a series of innovative features that will help issuers communicate more effectively over both audio and video. while also making the experience more engaging for all types of investors. As well, during the quarter, we continue to expand our virtual events platform to serve the sell side and corporate access customers, hosting a number of investor conferences and ESG events, along with onboarding new banking customers. As of today, our proprietary virtual events platform serves over 90% of our events client base. As we've rolled it out to our clients, we've been especially proud to reduce the incident rate from an industry standard of roughly 6% for earnings calls down to under 1% for all earnings calls hosted on Q4. This low incident rate in the investor relations space is unprecedented and is part of our commitment to delivering the best customer service to all of our clients. But having said that, the other key driver to our virtual events business has been the vertical integration and the removal of third parties in how we deliver this part of the business. This has been one of the primary drivers of our gross margin expansion strategy this year. And Donna will speak more about the progress we've been making with expanding gross margins, but in general, we're just really pleased to see the positive impact that this strategy has been having on the business. Finally, in regards to M&A, while we remain opportunistic with a healthy pipeline of potential acquisitions, we are primarily focused on delivering against our organic profitable growth plan. As well, in terms of deals that we are actively working on, the bar for acquisitions to make sense for us has increased over the last couple of quarters due to overall market conditions and our priority on profitability. Having said that, during the quarter, we did make the decision to exit an acquisition opportunity in the late stages of discussions, as we determined during diligence that it did not meet the thresholds we had in place to ensure that we are making the best use of our capital. And with that, I'll now pass things over to Donna to take us through the financial results.

Thanks, Daryl, and good morning, everyone. Thank you for joining us. I'm pleased to share the results of our third quarter. A reminder before we get into the numbers that the restructuring and the cost reductions occurred late in Q3, and as such, they have a minimal impact on this quarter's results, but we anticipate a significant impact on the fourth quarter and future quarters. So looking at the results, Total revenue for the third quarter was $14.2 million, an 11% normalized year-over-year growth compared to normalized revenue of $12.7 million in 2021. This excludes one-time VSM revenue in the same quarter in 2021. Even before this adjustment, though, revenue growth exceeded 8%. This quarter's revenue growth can be attributed to the recovery of our new logo sales. our ability to displace competitors, and the continued strength of our expansion sales. New logo acquisition with higher ARR platform bundles coupled with strong value-added services into the client base resulted in September being our strongest booking month ever. Our capital markets platform revenue grew by 9.2%, excluding the VSM revenue from the comparable quarter last year. Platform revenue is important. As 94% of year-to-date capital markets platform revenue is recurring long-term customer contracts, providing more predictable revenue and expense management, as well as a strong client foundation into which we can offer additional platform subscriptions and services. Our platform services continue to expand noticeably, with 41.8% year-over-year growth driven by our clients' needs for value-added services, including website redesigns, accessibility, and ESG updates. We are pleased to see a strong improvement in ARR, ending Q3 at 54.7 million, an 8.7% year-over-year growth. ARR expansion was driven by existing customers embracing the value of aggregating all their IR needs with a single provider on our Capital Connect platform, and this integration equally resonating with new clients, driving bundled sales at higher value to the clients and higher ARR to us. Average revenue for the quarter, or ARPA, sorry, average revenue per account or ARPA was $19,154 at the end of the quarter. This represents a 5.7% increase over the prior year, driven in part by 96 existing customers adding to their subscription during the quarter. Consistent with our strategy, we have delivered steady quarterly ARPA expansion sequentially, with Q3 representing our largest increase since early 2020. We expect this trend to continue as we execute on our expansion strategy with both new and existing customers using more products on the Capital Connect platform. The trend for Capital Connect product adoption continues with customers leveraging two or more products. This quarter, 66.4% of our ARR was generated from these customers, up from 65.4% one quarter ago. As Daryl mentioned, our third product, Engagement Analytics, launched on Capital Connect, and our web management app and events platform expanded to all clients. We see clients spending more time on Capital Connect as we offer more valuable IR functionality to them on the platform. In the third quarter, we added 80 new clients on Capital Connect, of which 67 became subscribers. Our quarter ended with 2,679 customers on the platform. Uncontrollable churn tied to M&A in the public markets, along with withdrawn IPOs and delistings, continued to impact retention and the growth of our customer base. This trend continued from Q1 and Q2 and remains elevated due to overall macro conditions. However, we are pleased to see strong controllable logo retention at 96% again this quarter, demonstrating our ability to create value for our clients across all of their investor relations needs and to provide exceptional customer service in the delivery of our expertise. Pursuit of value creation for our large client base has the added benefit of reinforcing the durability of our core revenue base. Our gross margin for the quarter came in at 59%, expanding by 212 basis points sequentially. We are very pleased with this progress as it demonstrates that the gross margin expansion strategy we laid out during our IPO is working well. Broader deployment of our operating center of excellence in Mexico was deferred until the end of September to ensure the transition was seamless to our clients. Our focus on ramping up the center will continue to be accretive to gross margin as additional resources are onboarded. We expect to see the benefit of $4 million in annual cost reductions starting in the fourth quarter, contributing to margins that will exceed 60% next quarter and exit 2023 above 70%. We remain focused on all five gross margin pillars, expecting incremental improvements on a continuous basis as we operationalize each of these strategies. In the third quarter, Operating expenses excluding depreciation and amortization, foreign exchange loss and other expenses totaled 16.8 million, down from 17.3 million last quarter. The actions taken in Q3 drove marginal improvements to our operating expenses in the quarter, but these cost reductions and efficiency gains will be fully realized in future quarters. Overall, the initiatives should result in savings to the ongoing operating expenses of 9 million annually. Sales and marketing costs were 5.6 million or 40% of revenue. Compared to this quarter last year, sales and marketing increased by 1.1 million, primarily from higher employee expenses and an expanded product marketing function. The majority of the August 23rd restructuring addressed the size of our sales and marketing team in the context of growth expectations and increasing sales efficiency. We expect sales and marketing as a percentage of revenue to settle in the low 30s in the near term and decrease further as a percentage of revenue in H2 2023. Research and development was 4.9 million. or 34% of revenue. This was a 2.3 million increase from this time last year. This quarter's R&D costs continue to include investment in Capital Connect and the development of new product offerings. The reduction in force in R&D was the outcome of a strategic assessment of all product offerings with the conclusion that certain initiatives did not contribute meaningfully to the 2023 strategy and a reduction could be made. We are targeting normalized level of R&D as a percentage of revenue in the low 20s as we accelerate profitable growth. G&A for the quarter was 6.2 million or 44% of revenue for the quarter. The increase of 2.5 million from the comparable period in the prior year related to 900,000 of one-time expenses with the balance of expenses associated with operating as a public company. Our efforts will continue to reduce G&A and we expect a gradual decrease as a percentage of revenue through 2023 to attain a mid-20s level. Our adjusted EBITDA was negative 7.5 million or negative 53% of revenue for the quarter. Execution of the growth in gross profit, as well as reductions in all operating expense lines, drives profitable growth in the coming quarters, resulting in positive EBITDA late in 2023. Earnings per share is negative 30 cents for Q3 2022 compared to negative 43 cents in the same quarter of 2021. On an adjusted EBITDA basis, EPS would be negative 19 cents and negative 30 cents respectively. At the end of the quarter, we had 37.6 million in cash and short-term investments. net of negative operating cash flow of 6.6 million. Operating cash flow will be positively impacted by the material changes to our expenses and is expected to follow the same trajectory as adjusted EBITDA. The strength of our balance sheet is a critical component of our success. The aging of our current assets and liabilities is healthy, reflecting discipline in these accounting functions. and our core working capital metrics remain strong, ending with a working capital balance of 31.1 million. Additionally, as of September 30th, we had no outstanding debt, with a 22.5 million revolving credit facility fully available as needed to support profitable growth. The macro environment remains challenging. requiring us to provide for growth in a disciplined way. We have taken the steps necessary to fund our strategy at an investment level that still delivers our financial targets. The majority of these investments to increase gross profit and decrease operating expenses have been executed, but are yet to be realized in our operating results. We are committed to profitable growth and maintain our view that we will be cash flow and EBITDA positive in the late quarters of 2023. And with that, we will switch over to the Q&A session.