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spk07: Good morning, everyone, and welcome to Q4's second quarter 2023 earnings call. My name is Edward Miller, and I am the head of investor relations at Q4. I'm joined this morning by Daryl Heaps, our CEO, and Donna DeWinter, our CFO, to review our second quarter results. Please note, a copy of today's presentation will be available on our website. Please be aware today's prepared remarks are being hosted live on Wednesday, August 9th, 2023 at 9.30 a.m. Following the prepared remarks, Daryl and Donna will host a live video Q&A session with the analysts. 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 SADAR. During the call, we will reference 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 reconciliations to the nearest IFRS measures. The information related to some of the forward-looking information presented today was sourced using generative AI. Please note that unless otherwise stated, all figures are in U.S. dollars. I will now pass it over to our CEO, Daryl Heaves.
spk11: Daryl?
spk06: Thank you, Ed, and good morning, everyone. Thank you for joining our Q2 2023 earnings call. To get started, I wanted to first congratulate the Q4 team on their execution this quarter. I'm extremely proud of how our team is performing across the business. In what remains a challenging macro environment, the team executed exceptionally well at expanding relationships with clients, driving platform adoption, and expanding average revenue per account. Combining this with our highly successful expansion strategy led us back to double digit growth this quarter. The structural changes we implemented to optimize costs also played a key role in enabling us to achieve exceptional gross margin expansion, reaching an impressive 68% at the end of Q2. Additionally, these changes brought about increased efficiency in our operating expenses, positioning us favorably for enhanced operating leverage in the latter half of this year. While overall capital markets activity remained low during the quarter, we continue to see improvements over prior quarters. Recent IPO listings increased with successful debuts by Q4 clients, including Kava, Savers Value Village, Fidelis, and Fina. We remain encouraged by this increase in IPO activity and look forward to seeing further momentum in the market over the second half of this year. This morning, I'd like to review where we are against our plan, demonstrating our progress by leveraging proof points from our Q2 results, as well as the future opportunities they're helping to create. Today, we are better positioned than ever in our history, strategically, operationally, and financially to capitalize on improving market conditions. But we are not dependent on this turn or waiting for it to happen. As always, our priority is supporting our clients' investor relations goals through our innovative technology, actionable insights, and steadfast commitment to their success. In the second quarter, we launched a new client testimonial program that we call This is How UI Are, which highlights the success we have helped enable for our clients. I want to take a moment to thank the clients that have participated in this campaign. This positive feedback reinforces our ongoing commitment to helping our clients win in the capital markets and delivering exceptional client experience at all touch points across our platform. We also value our clients perspective and appreciate the opportunity to hear their feedback on our platform products and service. It's through our partnership with our clients that we're able to learn, iterate and improve across the entire business. So a big thank you to all of our clients. Moving on to the product, if you've been following us for a while, you've heard us speak about the Q4 platform many times. It's what we've been focused on building for the last couple of years and is designed to transform the way issuers, investors, and the sell side effectively connect, communicate, and engage with one another. I'm pleased to report that we recently crossed over 2,000 clients actively using the Q4 platform to manage their IR communications and investor engagement. During the quarter, more than 50 million investors access investor websites, email alerts, and events across the platform. And with over 365,000 investor profiles, clients are able to not only communicate, but identify institutional investors across the platform. The Key4 platform is central to our growth strategy, and you will continue to see us expand our predictive workflow, data, and analytics over the coming quarters. We have an exciting roadmap ahead, and I can't wait for our clients to experience the benefits this will bring. Today, the Q4 platform drives thousands of our websites, earnings events, and related capital markets activities across our client base, serving over 15 million investors a month. The key differentiator in our platform strategy is that all of the data and analytics is unified across all of these capital markets experiences, which enables us to provide a set of workflow tools and analytics to help our clients manage all of their engagements with the streets. Across the bottom, you can see each of the products that run on the Q4 platform, including website management, earnings lifecycle, events management, engagement analytics, and IRCRM. These solutions help our clients in a number of ways, including how they use their investor website to communicate and engage with investors, delivering flawless earnings and related investor events, and finally, how to identify and target the right investors at the right time. All of these tools work together, driven by our unified data and analytics, helping to drive relative valuation for our clients. As I'll cover in a moment, AI is being infused across the platform and bringing new and exciting capabilities to further drive impact for our clients. I'll now take a few minutes to provide an update on some recent product innovations. We made significant enhancements to the web management application, providing a faster and more secure way for thousands of our clients to manage their IR website. In today's fast moving markets, we know that all IR teams need the ability to update their IR websites with speed and accuracy. During the quarter, we saw a 54% increase in the number of clients using the web management app from last quarter, and we experienced a 22% increase in actions executed by clients over Q1. It simply means that significantly more clients are using the app and these clients are doing much more through the app. This helps us deliver rapid and accurate service experience in one of the most important aspects of our relationships with our clients. We announced the launch of a new application called Earnings Lifecycle on the Q4 platform. This application aims to streamline the entire earnings process for IROs by providing enhanced visibility and a unified workflow. The Earnings Lifecycle application allows clients to make precisely timed and accurate earnings-related website updates in a secure and confidential environment. With this new offering, Q4 is redefining the earnings lifecycle by providing a centralized workflow that aligns with clients' busy earnings schedules. The highly secure experience ensures the confidentiality of material information shared on websites and provides accurate and timely management of all stages of the earnings process, including detailed reporting to leverage data and increase engagement among investors. Q4 launched engagement analytics earlier this year, designed to provide our clients with the ability to deeply understand their investors, their behavior, and that of their peers. This quarter, we announced enhancements to EA focused on institutional targeting. This new functionality allows IROs to gain insights into how specific institutions' interest in their company is changing over time and how it compares to peers in their sector or market cap. The proprietary data and access to thousands of global issuers provides IROs with the ability to evaluate the effectiveness of their targeting efforts and uncover untapped investor opportunities. These enhancements aim to help IROs connect with the right investors at the right time, ultimately driving increased levels of institutional awareness. Q4's commitment to leveraging industry-leading proprietary data and developing artificial intelligence offerings further strengthens our position as the leading capital markets access platform. We've already witnessed the positive impact that these enhancements are having on our clients' investor relations efforts and are eager to continue to expand upon these analytics to provide even more value to our clients. There have been 370,000 Q4 accounts created by investors over the past nine months. In Q2 alone, 85,000 accounts were created. This feature enables investors to easily sign into events without the need to register each time. Q4 Accounts improves the engagement experience between investors and corporate IR departments. We continue anticipating growth in Q4 Accounts throughout the remainder of 2023 and beyond. The Q4IR CRM continues to provide innovative solutions that drive satisfaction for our clients. In fact, we recently published two case studies with our clients, Revity and Zuora, that detail how CRM helped them to scale their team's time and impact and deliver solutions to support an active targeting program. Q4 Go, our mobile app that launched last quarter, has seen swift adoption with approximately 300% growth in app downloads and a 400% increase in sessions since inception. The mobile app delivers access to key CRM workflows that are fully integrated into the Q4 CRM, including identifying contacts, advanced search capabilities, and meeting management. It's built from the same unified data and insights found on the Q4 platform, ensuring its scalability in the future and the potential to interface with other critical workflows like events or analytics. We have made tremendous progress on pioneering generative AI tailored specifically for investor relations tasks. This will help IROs search, navigate, and summarize workflows and data more effectively. We look forward to sharing more details on this generative AI as it nears launch later this year. We have been showcasing the beta demo to several of our top clients, stakeholders, and members of the sales side, and the feedback has been extremely positive. In fact, the early drafts of this script we are using for today's call and our prep for analyst Q&A were generated by the Q4 AI, saving our IR team a huge amount of time in preparation. We are confident that we are able to continue to combine our proprietary data and product workflows. AI will give us the ability to both save our clients a significant amount of time while also enabling them new insights and recommendations on how to engage investors most effectively. We are super excited to bring these to market very soon. I'm pleased to announce the appointment of Tim Stahl as our new Chief Revenue Officer this quarter. Tim is a seasoned SaaS sales leader who will be invaluable in aligning our revenue-related functions, enhancing our go-to-market strategy, and maximizing sales performance. And we're just thrilled to have him on board. Both Tim and Keith Reed, who was appointed as COO in April, have made significant progress in our sales and operational efficiencies this quarter. We expect their contributions to accelerate cross-selling and upselling. At the end of Q2, more than two-thirds of our ARR is generated by clients using two or more products, and momentum continues into Q3. Additionally, Dorothy Arturi, our Chief People Officer, was recognized by the Globe and Mail with the Best Executive Award for her exceptional leadership. Dorothy is dedicated to building a supportive and inclusive culture at Q4, and I'm proud of her success. And with that, I'll now pass it over to Donna to take us through the Q2 financial results. Donna?
spk01: Thanks, Daryl. And good morning, everyone. We made significant strides in Q2, delivering 10% revenue growth, year-over-year gross margin improvement of 1,180 basis points to 68.3%, and an ARPA expansion of 12%. The progress made by our team in Q2 represents another major step towards sustained profitable growth. Looking ahead to the second half of 2023, irrespective of broader capital markets activity, we expect continued revenue momentum and margin expansion. The deliberate actions we have taken to significantly lower our operating expenses are improving our visibility to both positive EBITDA and cash flow by the end of 2023. I will take this time to dive further into the second quarter results, following which Daryl will conclude on the future opportunities for the organization. And please keep in mind, all figures are in US dollars. So let's start with revenue. Total revenue for the second quarter was 15.1 million, a 10% year over year increase compared to 13.8 million in the second quarter of previous year. The accelerated growth can be primarily attributed to new and existing clients adopting the Q4 platform to utilize web management services, access engagement analytics, experience our events platform, and clients purchasing additional value added services. In the second quarter, the capital markets platform revenue grew 8% to 13.6 million from the comparable quarter last year. Platform services expanded by 27% year-over-year to 1.5 million for the second quarter, driven in large part by increased demand for website services. As committed, we continue to execute our gross margin expansion strategy targeting several initiatives. I am pleased to report that our gross margin for the second quarter was 68.3% and 1180 basis points expansion. This is the sixth sequential quarter of margin expansion with a strong trajectory tracking to reach mid 70s by year end. The compounding of revenue growth and gross margin expansion is delivering 32% year-over-year gross profit growth with our prior initiatives delivering two-thirds of the increase. Our Latin America operating center has surpassed our expectations, giving us the ability to leverage this strong talent pool while maintaining anticipated cost improvements. And we expect advancements in our platform technology to contribute equally to further margin expansion with automation of critical IR workflows. Along with expanding margins, we remain committed to delivering additional cost reductions to further strengthen adjusted EBITDA, leading to positive cash flow by year end. In the second quarter, adjusted operating expenses, excluding depreciation and amortization, foreign exchange loss, and other expenses totaled 14.1 million, down from 16.4 million year over year. Cost reduction initiatives executed in May had only a partial impact on Q2 operating expenses, but will more materially reduce the operating expenses in Q3 and Q4. Our sales and marketing costs were 4.6 million or 30% of revenue, down year over year from 6.3 million or 46% of revenue. The focus remains on sales efficiency in both new and expansion sales. Research and development was 4 million, or 27% of revenue. In the quarter, we continued to invest in the Q4 platform as the critical component of our strategy to connect all sides of the capital markets. We expect to attain normalized levels of R&D as a percentage of revenue in the mid-20s as a result of revenue growth. G&A for the quarter was 5.5 million, or 36% of revenue, down from over 38% a year ago. I would like to highlight that generated savings in this area were offset by the impact of 600,000 of non-run rate expenses stemming from bad debt expense as a result of bankruptcies in uncontrollable churn, prior period audit fees, and expenses associated with annual industry conferences. These will not repeat in Q3. We are making progress with G&A reductions and expect it to decrease gradually through 2023 to attain a targeted mid-20s level. An outcome of our trend of revenue and profit growth, coupled with decreasing OPEX, is an upwards trajectory towards positive EBITDA. Our adjusted EBITDA was negative 3.8 million for the quarter compared to negative 8.7 million in Q2 2022, a significant improvement of 56%. Earnings per share was negative 15 cents when compared to negative 29 cents in the second quarter of 2022. And on an adjusted EBITDA basis, earnings per share is negative 9 cents when compared to negative 22 cents in Q2 of 2022. ARR and ARPA are critical components to revenue growth. Our strategy is intended to grow new subscription revenue while expanding wallet share with our existing client base. ARR was up 4.5% year over year to 55.8 million, despite the impact of continued macroeconomic pressure driving uncontrollable churn. The growth has come from new logos, acquiring multiple offerings on the Q4 platform, as well as existing clients expanding their platform solutions. The power of the platform is exponential when additional products are added. So our efforts to ramp this revenue source are gaining momentum. Annual recurring revenue per account, or ARPA, was up 12% year over year to 20.9 thousand. driven primarily by 104 existing clients purchasing additional subscriptions. We are excited to be expanding our relationships with so many of our clients. We are focused on accelerating this upward trend in the second half of 2023 with the launch of new platform applications, which will drive increased adoption. And we are seeing increased adoption. This quarter, our clients with more than two products increased to 68.2% of our ARR. More clients who are maximizing the benefit of a unified platform and data and staying with us longer. Expansion sales are primary focus of our sales and client services teams, ensuring our clients understand how our offerings meet their IR needs and that they understand the unique value proposition of the Q4 platform to tie all of the functionality together. Client retention is critical to maintaining a growing ARR. Controllable logo retention remains strong at 93.5% at the end of Q2 2023. However, the ongoing pressure from uncontrollable churn continued in Q2 due to withdrawn IPOs, M&A activity, bankruptcies, and to a lesser degree, delistings. The number of clients exiting the public market has outpaced new clients added to the Q4 base. The extent of these exits is tied directly to the macroeconomic environment. For the six months ending on June 30th, there were 2,581 clients on our platform who are using more of our products and increasing spending on both subscriptions and value-added services. It is notable that since the beginning of 2023, we have seen 139 market exits and we have captured 149 new logos. Steady, controllable churn gives us confidence that the restoration of the market will lead us to historical levels of client growth. On the balance sheet, as of June 30th, 2023, we had $44.2 million in available liquidity, which included $21.7 million in cash and $22.5 million of availability in an undrawn credit facility and no debt on the balance sheet. Our core working capital metrics remain solid, ending with working capital balance of $17.9 million as of June 30th. we remain committed to operating with a strong balance sheet and to be good stewards of capital. And with that, I will turn it over to Daryl for his closing remarks on our focus for the remainder of 2023. Great.
spk06: Thanks, Donna. In conclusion, I'd like to emphasize the remarkable strides we have made in recent quarters with the Q4 platform and our ability to enhance our relationships, foster ARPA growth, and cultivate unwavering client loyalty. These efforts have laid a solid foundation for our expansion sales strategy, instilling confidence and providing clear visibility for future quarters, particularly for our valued investors. Moreover, the structural changes implemented over the past year have proven instrumental in achieving additional operating leverage, setting the stage for continued and sustainable gross margin expansion throughout the remainder of this year. Our focus remains on driving revenue growth through new products like our earnings lifecycle and events management application, while maximizing operating leverage. By harnessing our vast amounts of proprietary data, coupled with the power of generative AI, we are transforming the investor relations workflow and solidifying our position as the leading capital markets access platform. This is what differentiates the Q4 platform and delivers unmatched value to our clients. With our resilient business model and seasoned leadership team, we are well positioned to deliver on our financial goals. And with that, we want to thank all our shareholders, clients, and employees for their continued support and loyalty. Thank you, everyone, for listening on today's call. And let's go to the questions. Ed?
spk11: Thank you everyone, we will kick off our Q amp a session with questions from our live research analyst audience and based on time available, we will take a few submitted webcast questions with that the first question comes in from Christian scroll from a capital Christian.
spk10: hi good morning everyone. And thanks for taking my questions this morning. Where I'll start today is on the gross margin expansion story. And it was good to see the year-end targets reiterated there and on the EBITDA profile. You referenced automation and streamlining workflows as a key driver of the margin expansion through the year-end. Just hoping you could unpack where you see some of the costs coming out, the margin improving, what the impact is on your customers or business to drive that margin improvement.
spk01: Well, good morning, Christian, and welcome to Q4. It's nice to see you. On the margin expansion, when we think about the automation, the technology automation, Daryl spoke of some of it on the platform that's currently available, which is the web management app and the continued adoption of that. and workflow automations there around earnings, the earnings cycle management, events management that will also be on the platform. Each of these takes a critical workflow, an IR workflow, especially at those critical times in the earnings cycle. and automates that process and removes the back and forth, removes the doubt, and leaves the preview publish that is critical to IROs in the hands of the IROs and the IR teams. With that, we see two aspects. One, we will not have to add, as revenue is growing, we will not have to add the resources that we would have previously had on a proportional basis. So that is one area of the margin expansion. We also see with the unified data that data costs will go down in that same category. Through more adoption on the platform, we end up with a more powerful and proprietary data. And that too is helpful on the COGS side. And then additionally, what we see is adding new products onto the platform as well. and not having to add incremental resources into those. Engagement analytics would be a perfect example of that, where it's a pure SaaS offering that has high SaaS margins north of 90%. And so we see as those become part of the product mix going forward, a larger part of the product mix and similar applications coming out in the next 12 months, that we'll see the margin expand even further.
spk10: I'll sneak in for one more question before passing the line. The ARPA metrics are all well-defined and laid out, but in terms of the size of the customers, the new logos and some that are churning, is it fair to say that your average customer is larger through some of this motion? You're going to upmarket or a lot of medium-sized customers are leaving, a lot of medium-sized customers are joining. Are there any trends on the size of the customer that you're signing?
spk06: Maybe I'll take that one. I think in general, when we see the kind of market conditions that exist today, what you do see is that from an uncontrollable perspective, smaller companies getting taken out more frequently. So we are seeing the smaller companies there be impacted kind of to a larger degree in terms of uncontrollable churn. So whether that's through M&A or going private or to a lesser degree delisting, those would certainly be impacting smaller companies versus the, and when it was small, we'd say kind of the smaller end of small cap, whereas not as affected as much when you get into the kind of larger small cap into mid and large.
spk10: That'll make sense. Happy to be on board with the story. And thank you for taking my question this morning. Thanks, guys.
spk02: Thank you, Christian.
spk11: The next question will come from Stephanie Price at CIBC.
spk04: Thank you. Good morning. Donna, maybe this one's for you. I was hoping you could talk a little bit about your comfort in meeting the target of being adjusted to be positive by the end of the year. It does seem to imply a pretty significant ramp in the back half of the year. And I'm just curious how the puts and takes here. Yeah.
spk01: Thanks, Stephanie, and good morning. How I approach this by look at the Q2 results, we improved negative EBITDA by $700,000 in the quarter, and we had an additional $600,000 of expenses that are non-recurring and will not repeat in the third quarter. So I view that as a $1.3 million advancement in the EBITDA. And when you couple that with the fact that we did a $6 million adjustment in costs in May, of which we only experienced about five weeks of that savings. So when I couple the savings taken in May, the quarter over quarter improvement and the removal of the non-recurring, I feel quite confident still that we are on that path to positive adjusted EBITDA by year end.
spk04: Okay, that's a good color. And then Daryl, just on the AI offering, hoping you can talk a little bit about the expected pricing model and the competitive landscape that you see for the offering.
spk06: I would say we're pretty early on determining the pricing model associated to it. We do see benefits across many of the products of AI being like an efficiency layer, helping customers kind of do more and get more value more quickly. And in that light, we wouldn't see it as being kind of a separate offering, but more of an enhancement to existing products. Having said that, we do see applications of AI as standalone new products that could be brought to market. So we're still in the mode of working with clients, working with a tight group that's giving us very good feedback. And we're still figuring out what the impact of that will be from a pricing perspective throughout the balance of the year. And what was the second part of your question, Stephanie? I'm sorry.
spk04: Just around the competitive landscape that you see for the product.
spk06: I think what we're seeing across any business out there is looking for ways to integrate AI. I think what separates those that are able to really extract differentiated value, it relies on the data. And that's something that we feel very well positioned, that the investments that we've made from an infrastructure perspective and from our ability to consolidate all the data that is being generated across our entire platform, that asset clearly differentiates us and separates us from many of our competitors in terms of being able to leverage AI and truly provide differentiated and highly valuable kind of products and services to our clients based on AI.
spk02: Great. Thank you very much. Thanks, Steph.
spk11: The next question comes from Richard C. from National Bank Financial. Richard.
spk08: Yes, thank you. I also had a competitive question. I certainly appreciate the challenging backdrop, but why don't you maybe give us a sense of your win rates in the market today? And I'm not sure you sort of track yourselves against the market and the market share. Just want to kind of get an understanding of how you think you're progressing against the broader market.
spk06: Sure. Yeah. Thanks, Richard. Maybe I'll take that one as well. I think the first off is that what we're seeing in the market is affecting all companies that serve the capital markets. So any businesses that are connected to capital markets activity, whether that be firms that exist within providing investor relations services or corporate access or deal management or investment banking, all are being impacted in the same way by the kind of muted levels of activity. um having said that we are certainly seeing that tide turn i think in uh in this quarter we did a similar amount of ipos that we did back in q2 sorry back in q1 and um we believe and when we see what's happening with ipos in general cava was a great uh a great kind of canary in the coal mine in terms of like really opening the door again and we're seeing that backlog of ipos kind of really starting to ramp up again there's a great article in the wall street journal this morning kind of talking about that So we think that that overall as a macro is beginning to be better. So we think that that will benefit us as well as all the participants in the capital markets. In terms of competitors, I think that we really track our win rates and we kind of target kind of a 30 to 40%, kind of not quite at 40, but kind of mid 30% closed one rate, like a win rate. And that's something that we really watch very carefully. Certainly pricing is a big impact on that. And we want to make sure that we are delivering the most value to clients as possible while also maintaining our pricing levels as much as possible. So we really look to kind of maintain that win rate. That's something that we've sustained throughout this entire downturn of the market. And what we've seen is that Our positioning and what really differentiates us from our competitors is our ability to unify all of these workflows. So things such as like an earnings lifecycle, that goes across many different traditional products. So that touches web, events, CRM, analytics, all of those together to help IROs really manage the entire earnings process. And that's something which is very unique that we're able to offer. So the value of our platform and how we're differentiated in terms of value we provide we think is going to serve us very well during this market as it has been, as you can see from the results, but also significantly as that IPO market starts to heat up again in the back half of this year, hopefully.
spk08: Okay, thanks. And then my other question has to do with the revenue base, and you've obviously made some efficiency gains on the cost side and It sounds like these enhancements have the potential to sort of help get increasing pricing down the road. So under the current cost structure, how much revenue would you be able to support?
spk01: Yeah. Good morning, Richard. Nice to see you again. And I'm trying to think of the best way to phrase this. What I believe is that this cost structure takes us all the way through 24 on the cog side in particular, because the automation is, the growth will consume capacity, labor capacity, and the automation will offset existing effort. and existing labor costs so i think it's a blended on the cog side throughout 2024 and uh then when i think about it on the opex side we are definitely on the sales efficiency side as i noted in the in the presentation there's still a i think there's still a little bit of room on the sales efficiency but i would expect that that would ratchet up with um with the markets opening up and entering any new markets that we may choose to and in 24 or 25. The G&A side is definitely needs to come down and then could support the company up into up into 24 and 25. It is not it is a stepwise and or step stepwise cost and not linear. And so I would expect the G&A to support the 2024 numbers as well. And then R&D, I've noted that this is critical to us, the differentiated story, the platform and our proprietary data around that platform. That I would expect to maintain at about 25% of revenue.
spk00: So that will move in linear fashion with the revenue. Okay.
spk02: All right. That's helpful. Thank you. Thanks, Richard. Great. Our next question is from Kevin McVeigh from Credit Suisse. Kevin?
spk05: Great. Thanks so much. And congratulations on the results. I guess, Daryl or Donna, I think if my math's right, this is the first revenue beat you've had in six quarters, which is terrific. Any thoughts on kind of the puts and takes on that? And then remind us of any seasonality as we think about Q4. No pun intended.
spk06: So thanks very much for the question, Kevin, and for the comment. I think getting back to double-digit revenue growth is something that we are really pleased with. And I think that that's coming from the, it really comes with our focus on serving our clients and providing this platform that really does deliver value to them. That's what's helping to drive the expansion selling. As I mentioned during my comments, we continue to see about two thirds of our new bookings coming from selling into the client base or expansion sales. And so that's something which is an element that we have a greater degree of control than kind of overall kind of new market demand. And so that's something that we feel good about our ability to continue driving revenue growth while we're in this kind of market condition. And and it really comes down to the execution. I think the changes that we made back in Q3 of 22, we started to see those really kind of pay dividends in the fourth quarter and in Q1. And we see that continue in the second quarter. So I think we just have really focusing on what it is we can control. And I think you're starting to see that in the results now.
spk05: And then Donna, just a quick follow up. The incremental 600,000, was that expected or unexpected? So said another way, you know, would the EBIT have been that much stronger or that was in the guidance already? And then, you know, if I look at the components of that, is that all truly one time or is this, you know, audit fees, things like that churn, you know, just how should we think about that? Because obviously really nice, even the leverage despite that, but just can you help us understand that a little bit more?
spk01: Yeah, absolutely, Kevin. On the audit fees, those were somewhat unique. I came into seat halfway through the year. The technology advancements on the platform, the web management app, and some of the advancements within the sites themselves and the building of the sites required a SAS revenue policy overhaul that I felt was fairly critical coming into 2023. and was most appropriate to match the technology advancements. And so really needed PwC to work with me on the bifurcation of what is the SaaS and subscription and what is the pro serve that follows on and the value added services that the clients engage on websites. That was incremental. It was somewhat expected, but in the guidance. But I pursued it to its fullest through the course of Q1 and Q2. And so that is non-recurring in nature and actually simplifies our revenue around that. and relating to website going forward. The IR conferences, the seasonal, it is the season for conferences nearing CERI, all of the European IR events and a host of other activities going on where IRs um, IROs tend to, um, gather and, and really what's, uh, first and foremost on their minds surfaces, um, and, and really helps us inform us on what they need from us going forward. And so that's recurring, but only on a Q2 basis. And it was anticipated, uh, as well. It was a little larger than anticipated because we had several of our own, uh, uh, Q4, uh, IR advisors end up with awards themselves in the US. And so we definitely celebrated their success in these conferences. And then lastly was the bad debt. And it was unusual. We had been carrying some of that in our aged IR in the hopes that we could work through proper channels and collect on those bankruptcy through the trustees. However, in Q2, I felt that it was prudent to actually take the bad debt expense and remove that. We'll continue to try to collect. But as you know, in bankruptcy, that's a lot of diminishing returns at this point with the passage of time. So non-recurring at that level. And it is over and above what we would normally accrue in a bad debt allowance. So it's definitely outside the norm.
spk02: Very helpful. Congrats again. Thanks. Thanks, Kevin.
spk11: Next question is from Maxim Matuszanski from RBC Dominion Securities. Maxim?
spk09: Yeah, hi, good morning. I just wanted to circle back on the competitive displacements. You mentioned that some of the growth in this quarter was from those displacements. Can you maybe provide a bit more color on that? Was there any action taken by a competitor to drive those displacements? Or was it a higher level of customer churn from those competitors compared to previous quarters? Or I guess what's driving that?
spk06: Sure. Thanks, Maxim. So I think in the prepared remarks, Donna took us through the client changes, and I believe the number over the first six months, 149 or so. So roughly about half of that came through in the second quarter in terms of those competitive displacements. So we're seeing that kind of 70-some-odd new logos won during the quarter. And what we have certainly seen, I mean, it comes back to the same thing. The folks that we're competing against are largely point solutions. So they are kind of like would provide one part of the product stack that we're competing against. And what we see is that competitors in this environment will focus on being aggressive on from the pricing side of things or looking for other ways in which to either retain or displace. And what we've seen increasingly been working well for us is the value of the platform. That as we bring all of those functions together, we're able to help our clients save time. And in many cases as well, we're also able to help them save money by consolidating their spend onto one platform. So that has been what we've been focused on as we've really built out this platform over the last couple of years. But that combined with our approach and our strategy in terms of how we're selling is helping us deliver these numbers. And we do think that as things kind of continue to improve, hopefully over the second half of the year and into 24, that strategy will continue to be effective for us.
spk01: The only thing I would add on that, Max, is that the 104 clients who bought additional subscriptions with us, and especially those that were in the events subscription base or in add-ons in web or CRM, if I think about those, those two are competitive displacements. Not full new logo to us, but they were using an existing provider. There was an incumbent and they have transferred to us and consolidated their solutions on our platform. So we tend not to speak about those as much, but I think they're as meaningful on the competitive displacement story.
spk06: Very good point.
spk01: Thanks, Donna.
spk09: Kaveh Khoshnood, Ghana that's helpful and just maybe on the gross margins, you mentioned, obviously we've been talking about them tracking to the mid 70s, is that an appropriate level. Kaveh Khoshnood, going forward on a steady state basis like I appreciate you'll let the drive more expansion from operational improvements but. I'm looking to get a sense for whether there's other levers you can pull. I know you mentioned maybe some of the new technology offerings that you're planning and maybe you can expand a bit on that and kind of where you see the steady state for gross margins going forward.
spk06: So maybe i'll i'll take the first half that but if done if you wanted to to add on to it that we think the terminal gross margin that we're focused on on taking this business to is in the kind of high seventies low eighties, and the way that we get there, as Donna mentioned earlier, is through We refer to it as automation, but this is really about delivering products in a way that helps to automate much of the IRO's workflow and does so in a way that is highly efficient on our side. So that is leveraging our platform, our data, our proprietary data and the analytics, but then this also connects to AI. That as we have been working through and we've been able to take many folks kind of through the work that we're doing, we see a lot of opportunities to simply provide more value and do more for our clients and hence deliver more value and more price. But doing so with more and more of software and AI and our data. And so when we see that kind of coming through to year end, we feel very good about ending this year and kind of like the mid-70s. and and that trajectory continuing on into into 24 and i'll just remind all the listeners as well is that when we came public back in the fall of 21 we were about 58 gross margin and what we set the expectation then is we were going to end 22 in uh in the mid 60s which we achieved and now we're saying that we will end this year in the mid 70s which we are highly confident and so we believe that that trajectory will continue I don't know. Did you want to add anything to that? I don't have anything.
spk02: Okay.
spk06: All right. Great. Thanks.
spk02: Our next question is from David Pierce from Raymond James. David.
spk03: Good morning. I'm just going back to the bad debt. My understanding is that you build front for most of your products. So, you know, my thoughts would be that bad debts are pretty rare in your business. Can you just add some insight as to how that came about?
spk01: Yes, and good morning, David. And the bad debt would have been on renewals, not on new logos. So we would, you are correct, we do the majority of our businesses annual in advance. And then on the renewal, we would be issuing invoices somewhere around 60 days prior to the renewal period. It is in that cycle and with clients who are experiencing bankruptcy who would then be carrying it into the 30 days post, 60 days post. And as I said, at some point, we understand that they're in financial distress and then file for bankruptcy. and we go through the proper procedures to subsequently collect. However, the odds or the dollars, the cents on the dollars tend to be low on that front. We are... We have, you know, created more workflows around identifying the symptoms of this and getting out in front of it. And it is not to your earlier point of, we have a low bad debt experience we definitely do and our bad debt allowance does not capture events like this where you have where you have double digits uh per quarter or double digits over a half year of bankruptcies and and uh needing to take action on on all of those but it is on the renewal not on the um on the first invoice with a new with a client absolutely sorry just for my understanding
spk03: Sorry, go ahead. Apologies. Sorry. I muted myself there. So from my understanding, you know, this was maybe a multi-year contract and you build it up front and then, you know, there might be an annual payment and then another annual payment in the second year. And it was the second year, maybe that the payment defaulted. Is that, is that correct?
spk00: That would be correct.
spk01: Yeah. And we would carry them as long as we can. We recognize the sensitivity of being a public company and supporting them as they work through their process. However, as I said, we've amended our workflows to make sure that we identify early, work with the clients early on. to not leave them and their investors disrupted, however, that we don't experience a bad debt expense on the same front.
spk03: Thank you. If I just squeeze one more in. Quick question on headcount. I think when you went public, you're around 480. You're sitting at 500 today. Broadly speaking, With all the reductions that have gone on, I think you cut around 7% back in 3Q. You'd expect that to be flat to sort of down. Can you maybe just bridge that IPO level of headcount versus where we are today?
spk06: I think one way to understand it as well is that we look really at kind of like overall people cost versus headcount. And that's because of our strategy around building our teams in Latin America. really kind of it's important to understand because if you just look at kind of like a pure headcount number, that number may stay flat, but in certain parts of the business that the cost associated to it has come down. So I think kind of going forward, at least in the short term, you'd expect kind of the numbers to remain relatively similar. However, the cost basis is what we focus on in terms of from an OpEx perspective and gross margins.
spk01: And David also on with the IPO and the investment thesis at time of IPO, it was to ramp our sales and marketing and ramp product and R&D at an aggressive pace. on what was then the thesis for the three years at time of IPO. So we did add a number of bodies over November of 2021 through to July of 2022. And so the number went up considerably before it started to move back down and landed at flat. So what you're not seeing in the middle is that steep curve of adding sales marketing in all markets. And then we've retained the majority of the product of the R&D folks that have been added.
spk02: Perfect. Thank you very much. Thanks, David.
spk11: That concludes our question portion of today's call. Daryl, I'll let you conclude.
spk06: Thanks, Ed. And thank you to all of the attendees on the call today. Thanks for spending the morning with us. And thank you to our covering analysts for all the very thoughtful questions. If we are unable to answer a question, if you did submit it over the webcast, please give us a little bit of time. We'll get back to you on that. Or if you have any other questions, please contact our Investor Relations Group. You can get their information on the IR website or submit a request for meeting with management through the IR website. And we'd be happy to follow up with you directly. So thanks very much for your time and thank you, Donna, and have a wonderful day out there, everyone. Thank you.
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