Q4 Inc.

Good morning, everyone, and welcome to Q4's fourth quarter and full year 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 DeWinter, our CFO and COO. Thank you for your interest in joining our fourth quarter call. 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 remarks, we will be looking forward to welcoming our research analysts onto 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 a question 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 out of way, I'll pass it over to Daryl Heats. Daryl?

Great. Thanks, Sarah. And good morning, everyone. Just a quick note. I just wanted to say also thank you to Donna. Donna was going to be here with me in person for the live video webcast. However, she is at home with COVID and on recovery. So thanks so much, Donna, for joining us via phone. And I look forward for you to join me next quarter back on the video. All right, so good stuff. So it's my pleasure to spend a few minutes here today talking about the progress that we made in 2022 and everything that we accomplished throughout the year. And while 22 was a challenging year for the capital markets and driving top-line growth, I'm extremely proud of how our team has been executing over the last couple of quarters as we've really been focused on profitable growth. We stayed focused on what we can control, on optimizing our operations, all while continuing to drive double-digit growth for the year. By executing our path to profitability plan, we have significantly improved efficiency across the business, putting us on track to deliver profitable growth in 2023. For today, I'm going to spend a few minutes touching on the progress that we made in 22, and then I'll focus on 23, which is all about profitable growth and being best positioned strategically, operationally, and financially to benefit from a market recovery, one which for early signs are starting to emerge. This year, we dramatically improved our efficiency while narrowing our focus onto our core products, our platform, data, and analytics, which are essential to our growth and success. We took steps to right-size our operating expenses, ensuring sustainable improvements to our bottom line, and progressing toward profitability later this year. In parallel to these initiatives, we also launched multiple new products, which are highly innovative and impactful to our clients, while also improving our efficiency and our margins. One of the things I'm most proud about 2022 is the gross margin expansion strategy that we committed to at our IPO with the objective of closing out this year with gross margins in the mid-60s. I'm super proud to share that we closed the fourth quarter at 63.7% gross margin. This accomplishment is due to our execution on our virtual events platform, our fixed data contracts, the adoption of our web management app on Capital Connect, and the buildup of our LATAM operations. These structural changes are permanent and sustainable and will have a lasting impact for continued margin expansion through 2023 to end this year in the mid-70s. If you've listened to prior calls, you know that I've always believed in the resiliency of this business and its ability to weather many storms. I do think that 2022 is a perfect example of that. In a market where we saw increases in uncontrollable churn due to canceled IPOs, M&A, and take privates, we were still able to achieve a 12% normalized growth for the year, while simultaneously increasing our average revenue per account to our highest level yet. Moving forward this year, we're really well positioned to continue capturing market share by expanding the value of our platform and the impact it can have for our customers. This is evident by some great brands that went live on Q4 during the last quarter, including Costco, Rite Aid, JetBlue, and Cardinal Health. From an overall market perspective, I would say that we are beginning to see things thaw. We've seen the market perform fairly well so far this quarter, along with an increase in backlog of confidential filings for IPOs with the SEC, as well as some new IPOs coming to market. Q4 is incredibly well positioned to benefit as the market recovers. We have the right products in place, the right team, and the right partnerships to drive growth during the recovery. The launch of Capital Connect platform in 2022 has been instrumental in driving scale and engagement, enabling us to deliver exceptional experiences to our clients without increasing our costs. We're seeing record levels of adoption with more than 1800 clients using the platform to engage and interact with us on a regular basis. As this adoption rises, it increases the amount of interaction data flowing through our platform and enables us to deliver exponentially better workflow, insights and analytics to our clients. Our platform approach gives us the ability to deliver a single user experience into all of our products and is a core element of our product-led growth strategy for 2023. We now have the ability to offer different levels of our products and utilize the power of the user experience to drive incentives related to add-ons, extensions, and new capabilities across all of our products. This product-led growth approach is starting to work as seen by our 9.2% increase in ARPA for the quarter, our highest sequential quarterly growth we've seen yet. On the product innovation front, we launched new features and product enhancements this past quarter that continue to provide value to our client base. One of the first apps we launched on Capital Connect was the web management app, which has really changed the game in terms of usability and reliability for our clients. Today, we are processing thousands of support requests weekly while maintaining a 90% plus five-star rating for all of these interactions. Since this app is incredibly sticky and used every day by most of our clients, it gives us the ability to execute on these product-led growth initiatives. Virtual events continues to be one of our fastest growing segments. With the advancements we made in customization capabilities and our industry-leading lower error rate of 1%, we are solidifying our position in the virtual events space. Some of the recent enhancements include the seamless integration of Zoom and MS Teams to more easily bring video content to earnings calls. Our strategy here has been working quite well. Just this quarter, we had some of the world's largest brands reporting on the platform, including both Meta and Amazon, who used Q4 for their earnings calls with tens of thousands of attendees. As well, Rolls-Royce in the UK, who just reported just a few weeks ago. This business segment is an integral part of our margin expansion strategy. By the end of 2022, we had 97% of our event clients on our proprietary platform. This will continue to enhance our margin profile throughout 2023, as we will benefit from our entire event client base running on the platform. To further drive client satisfaction and adoption of multiple products, we continue to innovate and upgrade our current products, including our CRM. Recently, we released two upgrades to the CRM that I think are noteworthy. The first is an email management feature that gives clients the ability to distribute mass emails to investors via the CRM, while simultaneously tracking email engagement through our analytics. Additionally, we launched a new mobile app called Q4Go that includes a broad set of features to help IR teams manage their engagements while on the go. The timing of this is just great as so much of the world has returned back to meeting in person. One of our recently released products, Engagement Analytics, is one of the core areas of our R&D focus. where we just released benchmarking and investor targeting. Benchmarking aggregates the interaction data from millions of investor activities across the Q4 platform, including website visits, email alert opens, and event attendance. The ability to compare the level of investor engagement across companies is now possible because we have built our platform and the millions of interactions occurring on it each month. This truly innovative product gives our clients the ability to benchmark their IR program performance against peers in the industry and to target investors in an entirely new and effective way. We have a lot more to come from this part of the platform and an aggressive roadmap to continually expand these analytics. To continue enhancing the investor experience, Q4 Login enables investors to easily sign on to events without the need to re-register each time. At the end of 2022, there were 190,000 investors with Q4 login accounts. There's a lot that we plan to do with this feature, bringing new features to expand the investor experience across the platform and to make it easier for investors and corporate IR departments to connect directly. When combining features with our data analytics and generative AI, we plan to bring a lot of value to these millions of investors over the coming quarters. One of the things that you've heard a lot about recently I'm sure is generative AI, chat GPT among others. We've been paying very close attention to generative AI and we believe that we are at a transformational step in terms of what's happening with the web. I would say that this is similar to the impact that mobile had on the web experience. And the great news for us and how we think about it is that with each major disruption that occurs on the web, it's been an incredible accelerant to our business. Today, we're already using ChatGPT on an internal basis to improve efficiency in a number of roles from content creation to programming and advisory services. And I would expect us to continue to integrate generative AI features across our platform and products to both enhance functionality for all of our users while also increasing our efficiency and margins. Finally, on the partnership front, we continue to have strategic partnership discussions to expand our product solutions with complimentary offerings. Our existing partnership with the New York Stock Exchange puts us in a preferred position to capture new IPO opportunities as the market normalizes and provides NYSE corporate issuers with the flexibility to leverage the IR products and services that best fit their needs. In addition, we established new preferred relationships with the London Stock Exchange and OTC markets in the fourth quarter, enabling us to access clients in multiple geographic areas and validating our position as the leading investor relations partner. Moving forward, we will continue to remain focused on positioning our clients with access to the best quality products and services. And with that, I'll now pass it over to Donna to take us through the fourth quarter financial results. Over to you, Donna.

Thanks, Daryl. And good morning, everyone. As Daryl conveyed, our 2022 initiatives have made meaningful improvements to securing our profitable growth late in 2023. I will take this time to dive further into the fourth quarter and all of the 2022 results, following which Daryl will provide a perspective on the road ahead and 2023 initiatives. Please keep in mind all figures are in U.S. dollars. And now on to the financials. Let's start with revenue. Total revenue for the fourth quarter was $14.2 million, a 3.3% year-over-year increase compared to $13.8 million in the fourth quarter of the previous year. On 2022 as a whole, we saw $56.1 million in revenue, or 11.8% normalized growth, excluding 2021 BSM discontinued operations. Delivering double-digit growth in the tougher economic dynamics of 2022 demonstrates our core business durability, leaning on all our growth assets of new logo acquisition, sale of products to existing clients, success in customer product adoption, and client retention overall. In the fourth quarter, the capital markets platform revenue grew 1.8% to 13 million from the comparable quarter last year. Platform services expanded by 22.2% year over year to 1.2 million for the fourth quarter, driven in large part by increased demand for website services. Looking at the full year, capital markets platform revenue was 51.3 million, a 10% normalized growth over last year. Platform services increased by 37.4% to 4.7 million for the full year and remains a strong value added source of revenue. As committed, we executed our gross margin expansion strategy, targeting several initiatives, I am pleased to report that our gross margin for the fourth quarter was 63.7%, a 405 basis point expansion. Significant on its own, it also conveys the importance of the actions taken in 2022 to position ourselves for future profitable growth. The virtual events migration and creation of our Latin America operating center were the key pillars driving the fourth quarter gross margin improvements. The fourth quarter played out as expected, delivering the improvements from the reductions in cost and the efficiency gains. On the virtual events business, we are now running all earnings events on our proprietary platforms. We anticipate additional margin improvements in 2023 as we benefit from a whole year of full client migration to our platform. Our Latin America operating center has surpassed all our expectations, giving us the ability to leverage a new, strong employee talent pool while maintaining anticipated cost improvements. Looking into 2023, we see all five gross margin pillars contributing to incremental improvements, as well as the benefits of the prior initiatives for a full year in operations. In the third quarter, we spoke of aligning our cost structure to our targeted strategies and profitable growth. We took action in the third and fourth quarter towards attaining expense levels that are appropriate, although the full benefit of our execution will only be experienced throughout 2023. In the fourth quarter, operating expenses excluding depreciation and amortization, foreign exchange loss, and other expenses totaled $14.1 million, down from $16.8 million in the last quarter. The actions taken drove annual cost reductions and efficiency gains of $10.8 million, a portion of this benefit reducing fourth quarter OPEX. Sales and marketing costs were $4.5 million or 31% of revenue, having a $1.2 million sequential quarter-over-quarter improvement. we expect it to remain in the low 30s as a percentage of revenue in the near term and decrease further as a percentage of revenue in H2 2023. Research and development was 4.2 million or 30% of revenue. In the quarter, we continue to invest in Capital Connect platform as the critical component of our strategy to connect all sides of the capital markets. Our R&D investments are aligned with our growth strategies, focusing on opportunities with a more targeted return. This will allow us to drive innovation and still attain normalized levels of R&D as a percentage of revenue in the low 20s as we accelerate profitable growth in 2023. G&A for the quarter was 5.4 million, or 38% of revenues. Our efforts will continue to reduce G&A, and we expect a gradual decrease as a percentage of revenues through 2023 to attain a mid-20s level. It is a balancing act to achieve top-line growth, gross profit growth, and OPEX reduction to produce positive EBITDA. Evidence that we have charted the course for the fourth quarter 2023 positive EBITDA is the drastic improvement in negative EBITDA for the fourth quarter 2022. Our adjusted EBITDA was negative $4.5 million for the quarter. Meaningful improvements in adjusted EBITDA represent the first full quarter of impact of the strategic initiatives taken throughout 2022 to be prudent with our balance sheet. This demonstrates our commitment to positioning our business to profitable growth. Earnings per share is negative 16 cents for the fourth quarter 2022 compared to negative 20 cents in the same quarter of 2021. On an adjusted EBITDA basis, earnings per share is negative 11 cents compared to negative 10 cents in the prior year. Critical to our revenue growth are the two components of ARR and ARPA. Our strategies are intended to grow our subscription revenue with priority, both with new clients and into our client base. ARR at end of 2022 was 55.5 million, a 6.8% year-over-year growth. ARR expansion was driven by new client growth this quarter with 62 new subscription clients, totaling 268 new subscription clients in 2022, as well as 141 existing Q4 clients who expanded their offering into CRM and analytics. With our large client base, one of the main ways to fuel ARR and revenue growth is sales of additional products into that base. The power of the platform is exponential when additional products are added. So our efforts to rent this revenue source is gaining momentum. Average revenue per account, or ARPA, was 19,821 at the end of 2022, a meaningful 9.2% increase from the prior year, driven primarily by upsell, pricing strategies, and new sales bundles at higher ARR values. In 2022, we delivered consistent quarterly ARPA expansion at an increasing rate per quarter. We expect to continue this trend in 2023 with our unique positioning of the Capital Connect platform, driving existing clients to adopt new products and new clients to join with product bundles. We focus with intent on value creation for our clients in the functionality of our platform to promote client retention and adoption. This quarter, we had 90 existing customers add to their subscriptions, bringing our customers list more than two products to 66.8% of our ARR. Steady growth over the course of 2022 and an even larger focus for us in 2023. The expansion sales growth initiative is a primary focus of our sales and client service teams. ensuring our clients understand how our offerings meet their IR needs, and that they understand the unique value proposition of Capital Connect to tie all of the functionality together. Adding ARR clients and adding ARR to existing clients works to grow revenue, but only in the presence of strong client retention. Controllable logo retention remains strong at 95% at the end of 2022. Softer than prior quarters in 2022, but consistent with historical rates. The pressure on the retention has squarely been on the uncontrollable churn, tied to M&A, delistings, and withdrawn IPOs. In the fourth quarter, we added 72 new clients on Capital Connect, of which 62 were subscribers. Our quarter ended with 2,662 clients on the platform. On to the balance sheet. As of December 31st, 2022, we had $29.1 million in cash, cash equivalents, and short-term investments. In the fourth quarter, we had negative operating cash flow of $7.6 million compared to $6.6 million in Q3. Although our P&L was positively impacted by the material changes to expenses, the positive impact on cash will lag by a quarter because of the overlapped expenses in the fourth quarter of building out the LATAM operating center. In the fourth quarter, the company took action to buy back our stock to be opportunistic on valuations. We assess this as a good use of our capital to create shareholder value. We plan to renew our NCID and merge to allow for future buyback efforts as we see fit. Our core working capital metrics remain strong, ending with a working capital balance of $25.2 million as of December 31st. As of the end of the year, we have no outstanding debt, with a $22.5 million revolving credit facility available if needed. And we remain committed to operating with a strong balance sheet and to be good stewards of your capital. And with that, I turn it over to Daryl for his closing remarks on our focus for 2023. Great. Thanks, Donna.