NowVertical Group Inc.

Good day and thank you for standing by. Welcome to the Now Vertical Group's 2022 fourth quarter and year-end conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will hear an automated message advising you that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Glenn Nelson. Please go ahead, sir.

Oh, thank you very much, and good morning, and welcome everyone to now Vertical Group's earnings call for our fourth quarter and full fiscal year 2022. My name is Glenn Nelson. I'm the Vice President of Investor Relations, and with me on the call today, we have Darren Trousdale, Chairman and Chief Executive Officer, Sasha Grudzic, our President, and Alim Varani, our Chief Financial Officer. After the market close yesterday we issued our Q4 employer results press release and supplemental slides to accompany this call all of which can be accessed on our investor relations section on our website at ir.nowvertical.com for those of you that have registered to participate to ask questions today you can follow along with the slides on our website at ir.nowvertical.com and that's on the news and events page and within short order Really on or before April 30th of this year, we will file our MD&A financial statements both on our website and it will be filed on CDAR. Just to let you all know, this call is being live broadcast. It's 9 a.m. today on April 20th, 2023, and a replay will be available following the call. During the call today, we'll make some statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views as of today and should not be regarded as representative of our views at any subsequent date. These statements may be subject to various risks and uncertainties and may differ material from expectations. Today, many of the figures we'll discuss are on a non-IFRS basis or otherwise noted, and also we will refer to specific nine non-IFRS financial measures. The reconciliation of those IFRS measures and non-IFRS measures are included in our press release. And finally, at times in our prepared marks or responses to your questions, we may discuss the incremental metrics to our usual presentation, to provide better insights into the dynamics of our business or our quarterly results please be advised that we may or may not continue to provide this um in the future so with that i'd like to turn the call over to darren thank you glenn and good morning everyone uh thank you thanks to everyone for being here um you know now vertical has come an exceptionally long way from a year ago

from Q4 2021, and we're really proud of the results we released last night. More importantly, the momentum we have going into 23 for this fiscal year. Our customers are facing a real urgency in their businesses, in their industries, in their economies to integrate data from multiple environments into a single intelligent operating model. And that's now a requirement from compliance and the needs of their customers. We've built our model to allow high-grade opportunities and effectively allocate our capital into a fragmented market in the big data AI space, and we've been executing upon that. Just a reminder that now Vertical is just a little over two years old, and in that timeframe, we've accomplished a lot. We've ramped our operations to build significant scale and position now to compete with some of the biggest and most well-known brands in our industry. And as that industry evolves to be much more AI-focused, we're well-positioned. We have built a business from 12 formative acquisitions that generate approximately $60 million in trailing 12-month performer revenue. We've done this with a single strong and dedicated leadership team that has internally sourced, pursued, and closed 12 acquisitions. now is becoming a powerhouse in delivery with 500-plus employees across the globe that can resource and deliver solutions to some of the world's most difficult problems across vibrant and growing industries. And I think the proof is in the results. Today, we have more than 250 customers on five continents, where now is delivering some of the most advanced and industry-specific AI solutions in the market. We are helping our key customers become vertically intelligent, which is what our core mission is. I will speak a little bit more to the real opportunity in front of us a little bit later, but I'm happy to report we are meeting our milestones, and I'm very proud of the team's focus on achieving break-even adjusted EBITDA in the quarter, which for us is a very large step towards validating the now model and setting up 2023 and our upcoming Q1 the way we've envisioned. With that, I'd like to pass the call over to Sasha Grudzicic, our president, to walk through the operations and explain a little more on how we're going to market. Sasha?

Thanks, Darren, and good morning, everyone. So when we think about the addressable market in which that we're working with our customers towards, the scale and the magnitude of the impacts cannot be understated. When you take a look at any of the research around the potential contributions of artificial intelligence in the way in which that will have on the global market, we're talking on the orders of trillions of dollars. Digging a little bit deeper, when you look at the geographies in the large and medium sized enterprises that are either deploying or exploring artificial intelligence in industry, you see a fairly uniform level of deployment and interest. But what's probably less stated and less understood is what does it actually mean to deliver these types of advanced technology and data solutions in industry. When we work with our customers and talk to them specifically about the areas in which that they struggle with, with regards to deployment of any type of advanced data or artificial intelligence solution, it really boils down to five key areas of issues in which that they face. The first is around lack of people with deep technical skills. There's lack of good quality data or understanding of where that data is and how to mobilize that data. The third is around really understanding the applicable use cases. What are the ways in which that we can generate maximal returns for these types of investments which aren't necessarily small? The fourth is around infrastructure and configurations. Many organizations are going through a modernization of their data and technology stacks. And this needs to be taken into consideration because generally available artificial intelligence solutions aren't built for specific vertical solutions. The final piece is around legal and risk. This has obviously been spoken about quite a bit in the kind of public conversations associated with artificial intelligence more generally. But this is a real area of concern for our customers around the risk associated with data, governance, the models themselves. And each of these five areas contribute to a huge opportunity in this emerging economy and this emerging market, which is how do you bring these solutions together to be able to deliver vertically intelligent solutions for our customers? So what do we mean by vertical intelligence? And how does that come together? And how are we uniquely placed in order to deliver that? Next slide, please.

Next slide, please.

Thank you. What we mean specifically about vertical intelligence really is about industry-specific applications of AI solutions that are really targeting value for the modern enterprise. Sorry, one back. How we deliver these solutions really boils down to three key areas. Those areas are data governance, engineering and infrastructure, data science and analytics, and then machine learning and artificial intelligence. It's the combination of these three key ingredients which ultimately contribute to the delivery of vertically intelligent solutions. And we are uniquely placed in our global operating system and operating model with key technologies in order to deliver that. How we deliver that and where we deliver that kind of boils down to four key industry verticals. The first industry vertical is around industrials. So a variety of different automotive, transportation, energy and manufacturing companies, commercial services, right? So looking at things like financials, insurance, telecommunications companies, massive clients that we have relationships around the world. Public sector. So we are uniquely placed to deliver public sector solutions, not only in the United States with our cleared acquisition in Allegiant, but then also elsewhere around the world. And then consumer goods, really focusing in on ways in which that we can maximize acquisition, lifetime value, as well as kind of data migration and integration into advanced models. Next slide. The strategies for us and the growth in which that we're aiming to generate here is focused on two parts. The first is around inorganic or mergers and acquisitions. So really looking at opportunities for us to acquire companies at favorable economics that meet our strategic and technical and customer facing goals, but then also within a financial capacity that meets our kind of overall financial goals. And we have specific target criteria across geographies, capabilities, as well as financial criteria. I think more critically, if I could say that, is the work that we're doing on the organic side. So really driving how we're going to expand these relationships that we have with these customers in multiple markets around the world and consolidate a global go-to-market across the three key areas of capabilities in which that we're building. This enables us to be able to maximize the share of wallet across our global customers, in which Darren referenced. It enables us to be able to deliver solutions faster and generate value more quickly through an integrated service and delivery model. Next slide, please.

I'll just keep going.

The commercially focused operating model in which that we have been built, we've built over the past 12 months, is really positioned to be able to deliver maximal value to the organization and create positive returns for the investments that we're making at the group level. So when we acquire companies and integrate them into our operating model, there's kind of three key areas of focus that we have, which are all commercial and orientation. The first is around revenue enablement and margin improvement by standardization of platforms and technologies in which that they deliver back office functions. Our ability in which to do that across a very kind of lean but powerful team enables our organizations that are coming into now vertical to maximize the efficiencies in which they generate. The second area here in terms of commercial improvements come from direct revenue generation. So we focus on revenue generation across three key areas that enhance each of our acquired units that come into the operating model to benefit from a top-line perspective. The first is enhancements in their go-to-market, so expanding their capabilities by leveraging our global group of resources and technical skills. The second is cross-unit sales, so integrating the offering against existing customers. And the third is leveraging the economies of skills that we have out of channel partners. Bringing this together enables us to enhance the revenue performance for each of our acquired units and enable them to be able to scale and accelerate the way in which that they grow in our model. The final part of our commercial integration really focuses on efficiencies associated with gross profit. We have highly efficient and highly capable both delivery partners and in-source groups within very favorable rate models in highly efficient geographies like Latin America and delivery partners in the Middle East and in India. And all of those ways that we bring our operating model together enable us to be able to build scale in this highly fragmented market, generate value immediately for the units in which that we acquire, and bring a consolidated scale go-to-market in this highly fragmented but exciting space. With that, I'm going to turn it over to Alim to review the financials.

Thank you, Sasha, and good morning, everyone. It seems like the slides are just lagging a little bit, but I will jump into the financials and hopefully the slides will just catch up shortly. Our team delivered a strong performance in 2022 and in the year with financial strength. After six months of CFO, I would just like to share a few key observations they've had. With the new acquisitions in fiscal year 2022, key focus area has been on obtaining better visibility and predictability into our financial data and operational efficiency. This will continue to be a focus as we integrate the Q1 acquisitions and execute on our fiscal year 2023 strategy. We plan to remain active in the M&A space and perfect our documented playbook for M&A sourcing, due diligence and integration. As Sasha alluded to earlier, Our efficient sales organization is better equipped and focused on gaining new logos, cross selling and expanding wallet share, which will be a key driver for organic growth. Lastly, the investments made early on in standing up the operator model that can support our growth trajectory today and for years to come is now substantially complete. We are well positioned to continue to scale without seeing these costs grow in proportion to revenue. So taking a look specifically at the four quarter results and looking at what we achieved in revenue, we generated adjusted revenue of 8.6 million, which is an increase of almost 470% year over year, which was primarily driven by the four acquisitions that have closed in fiscal year 2022. So moving on to our adjusted EBITDA and gross profit. As Darren mentioned, we achieved breakeven adjusted EBITDA in Q4, driven by strong performance in all verticals, but mainly in the public sector, which typically experiences revenue spikes in Q4. This significant improvement from comparable periods marks the first step towards profitability. We expect more metrics to further improve, create an enlightenment path to profitability in the coming quarters. As such, we plan to begin disclosing a broader set of metrics to measure our progress as the company matures into this next growth phase of our evolution. Our gross profit for fiscal year 2022 was $12.8 million, which marked a year-over-year improvement of $9.4 million, or almost 410%, due to the integration of recent acquisitions and the resultant higher value revenue mix. As Sasha mentioned, we have further expanded our global delivery network in Latin America and the Middle East in Q1, which will drive further improvement to gross margins in fiscal year 2023 and beyond. This is a core aspect of our integration strategy for new acquisitions, and we are excited to see the opportunities that this will create. We ended 2022 with $3.8 million in cash and cash equivalents on hand, This combined with new strategic partnerships with EDC and TD positions us extremely well to execute on our growth strategy. The next slide is a table that we presented which breaks out the performance of NOW's business units from the cost of the group's operating model. NOW's business units generated $1.4 million in adjusted adjusted EBITDA in fiscal year 2022, or 18%, both of which reflect significant improvements compared to the same period last year. We expect the cost associated with the operating model to decrease in fiscal year 2023 due to the transition of service providers to lower cost markets and efficiencies gained through restructuring efforts. We believe our operating model is currently right-sized for our growth trajectory and expect to realize scale and efficiencies as we continue to grow. With that, I'll turn it over to Darren to discuss our investment thesis and our current stock price.

Thanks, Aline. Just in closing, one of the key strengths we bring to the table as a business for now is our ability to harness data and deliver immediate ROI in time to value for our customers across multiple industries. Leading studies are pointing to three critical things buyers are looking for in an AI provider. I think first is compliance and all things privacy. Then it moves to intelligent automation. And third, they're seeking partners with industry expertise or vertical specific solutions. And as Sasha was pointing out, and I'll reiterate it, without an industry or domain expertise, AI doesn't work. And that's really important and one of our core differentiators. We act as an accelerator to helping our customers achieve true vertical intelligence that includes end-to-end digitization and data platform services through Understanding what your data is, where it is, ingesting, visualization, through to machine learning. With vertical intelligence, our customers have the opportunity to make evidence-based decisions and see where they can achieve greater opportunities, reducing risks and driving efficiency and differentiation. There are opportunities for now across every industry and sector, and I think that's the hallmark of our investment thesis. We have a track record of successful acquisitions. We have an experienced management team that not only has integrated 12 acquisitions in now, but has done this before in other industries. We're also working in a highly fragmented market and we're well positioned to continue to consolidate it. And we have a deep, deep pipeline of organic growth opportunities, not just on top line revenue, but within generating better margin profile. The company is still heavily insider owned after a couple of years and a few financings, which is a great point to be in in our company's kind of evolution still. And our share price today and our market cap today are what they are. And we believe the company is generating value and we believe that's going to translate into momentum with our stock price over time. And the team is going to continue to stay head down as we are well positioned to continue seizing opportunities with both consolidation of our sector and additional organic growth opportunities. Profitability is in our sights now, and we are convinced that making it a priority through 2023 will attract investor awareness globally as well as continue customer and employee loyalty. I want to end by personally thanking our customers, our team, and our investors for their confidence I'm extremely proud to represent our team, our customers, our investors, everybody on a daily basis. This is an opportunity of a lifetime. I want to thank everyone for their time today. And Glenn, let's go to questions.

Thank you. As a reminder, if you would like to ask a question on the phone lines, please press star 1-1. Wait until your name is announced. To withdraw your question, you may press star 11 again. We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile our Q&A roster. And our first question is from Rob Goff with Echelon. Your line is open. Please go ahead.

Thank you very much, and congratulations on the quarter, guys.

Thank you.

Thank you. Could you perhaps just give your view of the baseline organic growth and the impact of cross-selling on that organic growth?

Yeah, I'll give you kind of the strategy point and then, you know, maybe Sasha and Aleem can jump in with, you know, an example or some action point. But our strategy has always been to buy, integrate, and then expand share of wallet. And Sasha kind of touched on the strategy a bit. What that really means is, you know, we have a customer in a market or a customer using a specific product or service we offer. How do we get them to do more? And then I think as we've evolved and become larger, we also have a margin opportunity, as the operating model explained, that we can expand margin opportunities through our in-house delivery model. So, Sasha, maybe you can touch on the organic growth share, expansion of wallet in real time.

Yeah, so as Darren was mentioning, we have a multitude of different opportunities to grow across the different operating units by integrating managed service providers on top of technologies, deploying technologies within longstanding existing relationships on the services side. There's examples, and I'm not going to share names, but The large media and publishing companies based out of the UK that are looking at our technologies, following a longstanding relationship with our acquisitions, targeting lifetime value and acquisition of customers and minimization of churn and retention rates. So helping them with their modernization activities. Very well-known large telecommunications and media company, that one. There's another example out of the United States. We've got a longstanding relationship with a technology provider of which we've done a lot of work from a customer records management perspective and have begun to resource that through our Latin American delivery model. So the ability in which for us to expand across our existing customer set, that's just one facet of the integration of the sales side of things. What's really exciting for us is to be able to broaden the go-to-market for each of our acquired units by being able to service our existing customers and net new customers with new capabilities that exist around the world. So as we tried to illustrate earlier with kind of core competencies across the group, we're able to go in and service these very large enterprise customers and governments with these enhanced solutions. The final piece that's worth referencing here is also we've got a tremendous set of relationships across our technology partners. We're not exclusive to our own technologies. We work with large partners like Click, Amazon, Google, Microsoft, and in some merging relationships with companies like DataRobot, not only to service commercial customers, but then also government customers with highest levels of clearance in those respective geographies. So all of those form the foundation of the way in which that we drive organic growth against our acquired units and is part of the reason why so many companies are interested to join us from an acquisition perspective. And we aim to demonstrate that organic growth in an accelerated way this year.

Thank you. You talked about scaling and the platform model. Your corporate or platform expenses were, I think, $5.7 million annualized. How do you see those increasing as you go from baseline revenues of $60 million to $80 million to $100 million, just to give us an idea of the efficiencies that you might budget?

Yeah, I think, Alim, you touched on it in your part, and you may want to kind of go back and reference that on how the operating model is now optimized and doesn't scale proportionally with revenue. That's where the opportunity is.

Yeah. And in Q4, there were, I would say, changes that were made to the operating model more so to align it to the infrastructure needed to help scale the business. Those investments were made in Q4 as well as changes were made in Q1 to position us to have the the attributes needed to ensure you know or to execute on the growth strategy key aspects of that are the revenue operations focus that we have internally as well as the M&A function along with compliance costs needed to to run to run a public company so we feel that right now we do have the infrastructure needed to put us in a position to really help scale the organization. And the idea will be that as we grow in revenue, we do not see that the cost will grow at the same proportion.

Thank you. I'll jump back in queue then.

Thank you. And one moment for our next question. And our next question comes from the line of Gabriel Moon with Beacon Securities. Your line is open. Please go ahead.

Good morning. Thanks for taking my questions. A couple things. First, Darren or Alim, are you able to provide what some of your assumptions are around the Q1 guidance, specifically around sort of book-to-bill metrics, churn, pipeline conversion margins? And also, how do you see those assumptions changing

as you progress over the course of this calendar year uh especially around the second half so i'll uh you know i'll talk about what we put in the the press release here around you know giving a little view into what q1 will will be and aleem can kind of dig a little deeper but you know in terms of the revenue we post there are our guidance for revenue on q1 includes the three acquisitions we made in January and February, beginning of February, respectively. So it doesn't actually include the full three-month period because A-10 was acquired at the beginning of February or closed at the beginning of February. So, that is a view of what we believe the range of adjusted EBITDA could be in light of that. Aleem, if there's any other color you want to give on Gabriel's question on some of those other metrics that we're looking at.

Yeah, like one of the areas that we're really focusing on right now is with regards to organic growth for the Q1 acquisitions. And we're just in the process right now of really cleaning up the historical data for the same period to give us a lot more visibility just into actually what the achieved organic growth as well as churn metrics look like. So those are, as I alluded to in the presentation, these are metrics that we will start providing a lot more color to in future earnings calls.

Maybe just going back to that question then. So based on the current book of business of 60 million trailing revenues, you know, what sort of organic growth profile do you think the current book is capable of generating? And in your opinion, you know, what sort of margin profile could we sort of expect, you know, exiting this calendar year after, you know, sort of four quarters of integrations?

I think internally we have a growth target that we're working against and getting the data right now with our units to solidify that post Q1. I think we're going to be comfortable in sharing that alongside some other key metrics. So right now I think we believe there's clearly double-digit growth opportunity here in our organic business. That's critical for us. Where that will be, we'll answer that in short order.

The interesting aspect about the model is that if you're just looking at the Q4 and fiscal year 2022 highlights that we shared, we're obviously expecting growth both in revenue and EBITDA from the three acquisitions, but the goal will be to keep the operating the cost associated with the operating model fairly in line, if not a little lower than 2022, which will naturally create margin opportunities. So, again, this will be something that we provide more color into as we progress throughout the year.

Gotcha. I think earlier in the presentation, you had noted that there's about, I think it was 90 million of M&A revenue opportunities in the pipeline right now. Do you have a similar metric in terms of pipeline of organic revenue opportunities right now you'd be willing to share and sort of what you think the timeline of being able to capitalize on some of these pipeline opportunities might be?

Sasha, maybe give like a quick view on the revenue operations side and how we manage it and share any data that would be relevant.

Yeah, for sure. So one of the areas of critical investments that we've made over the past couple of months and into the last quarter is around standardization of pipeline evaluation metrics and really sanitizing the kind of inbound acquisitions from a pipeline sufficiency perspective. So I would say what we look to across our operating units is anywhere between three to four times I'd say two to four times pipeline sufficiency to meet our monthly goals from a revenue generation perspective. And part of the integration process is to standardize that across a single platform, which gives us that view. So the intention here is absolutely to standardize the way in which that we manage that pipeline sufficiency and give visibility across those key metrics. Again, those things will come in the following quarters as we continue to standardize that with our more recent acquisitions, which happened in Q1. So just stay tuned on those particular metrics.

Gotcha. I just got a couple of balance sheet questions. Alim, are you able to provide a snapshot of what the balance sheet looks like right now as it pertains to cash and debt?

So we've provided the view on cash, right, which is about you know, just under $4 million in cash, right, with the debt at about between $13 million to $15 million.

Gotcha. And then just lastly for me then, can you just summarize for us, I know there's been some changes as indicated in the press release, but just maybe summarize for us some of the expected cash deferral payments or contingent considerations that might be payable over the next 12 months And on top of that, do you anticipate any sort of material cash retraction charges over the course of the year as you integrate, you know, the numerous acquisitions you've made?

So just on the first question, you know, I think what we've done in terms of what we announced around Affinio is restructure the payment to connect it to, I think, a better a better payment schedule for the business. And it was just more of a kind of getting out in front of the year and trying to find a better path for that particular payment in relation to what that business unit does. Because in our model, you know, whether that's earnouts, deferred payments, whatever, our units, and as you can see in the table Aleem's presented, as you see in the table Aleem has presented, you know, our business units are driving profitability. So we're trying to map that to the business and how it operates. So I think the restructuring of that that we've announced is helping the company, helping kind of map it to our reality with that unit, which is great. And it was a good outcome. So we'll always be looking at opportunities to optimize the outflows in the business. And I think that's kind of smart of our leadership team getting out in front of that and a big high five to our Affinio shareholders who have worked with us really closely and are great partners. In terms of, Gabriel, what was your second question there?

I'm sorry, I was just asking what the, any anticipated sort of cash instruction charges over the course of the year as you do the integrations?

Yeah, Alim, do you have any highlights?

No, nothing specifically there. I think a lot of the opportunities that we're looking for around the integration relate more to organic growth and having these new companies tap into the internal network of customers that are available to them, right? So as I mentioned, this infrastructure is already built within the operating costs, so we don't anticipate any new incremental costs related to any of the specific acquisitions.

Gotcha. Thanks for that.

Thank you. And this does conclude the question and answer session portion of today's conference. I would like to turn the conference back over to Darren Tresdell for any further remarks.

No, I just would like to say thank you to everyone for joining. Thank you for everyone for their active participation. Now Vertical is a company and a public company that has very vocal investors, very helpful investors, very supportive investors, and we like that and want to continue our deep engagement there. So appreciate you spending the time, work with Glenn Nelson. If you want to have one-on-one meetings, we're available to do that and would love to catch up and dive into topics in more detail than here. I want to thank everybody who put this together today. I want to thank Sasha and Aleem for a job well done and explaining the story. And we'll talk to you very soon on Q1 coming up very soon.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.