Pivotree Inc.

Good morning, everyone, and welcome to Pivotree's fourth quarter and year-end 2022 earnings call. All participants are currently in listen-only mode. Following the presentation, we will open the line for a question and answer session for analysts. To ask a question, we would ask the analysts to click on the icon to raise their hand. Before we begin, Pivotree would like to remind listeners that certain information discussed today may be forward-looking in nature. Such forward-looking information reflects the company's current 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 risks, uncertainties, and assumptions related to these forward-looking statements, please refer to Pivotree's public filings, which are available on CDAR. 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're not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Now I'd like to turn the call over to Pivotry CEO, Bill DiNardo.

Thank you, Dennis, and good morning, everyone. Thanks for joining us on our fourth quarter 2022 conference call. With me today is Mo Ashur, our Chief Financial Officer. Let me start off by saying most of our Q4 results reflect the steady progress we've been demonstrating for many quarters. Overall, we are pleased with where we ended the year, and I want to thank all of our terrific employees for the work they did to deliver these results and help set us up for a solid start to 2023. The summary headlines are we had a really good quarter on revenue metrics and leading indicators like bookings. As you know, we pre-released what our bookings were, and they were among some of the strongest we've seen. We continued organic growth on the back of our acquired businesses and focused efforts on OpEx in Q3 led to the predictable outcome of positive EBITDA in Q4. That was a $1.7 million positive swing from Q3, and it resulted in an adjusted EBITDA margin of 5% for the quarter, which is pretty much where we had been indicating and committing to folks we would end the year. Now, industry tailwinds tell us we're in the right space. We're doing a lot of the right things, which will carry us well into the future. And economic headwinds are telling us to be very cautious and focus on the things we can control and not be careless when we are chasing growth. So while revenue and booking metrics were some of the strongest we have seen, I really want to focus people's attention on the EBITDA, which is a result of the combination of the revenue success we've been talking about and the steps we took in Q3 to bring our OpEx in line. Midway through 2022, we shared our expectations of exiting the year with Sustainable EBITDA, and a number of initiatives over the course of 2022 helped us to deliver on that promise. Those included some of the organizational changes we made, product rationalizations, tighter focus on utilization rates, and a modest increase in price in areas we haven't really changed in some time. And of course, the seasonal peak in Q4. We expect to maintain positive EBITDA moving forward. This really was step one. And although, again, most of our quarters were pretty close to that neutral, We had been very clear there was a number of one times and things that helped us achieve the first couple of quarters positive results. This is really about sustainable EBITDA, and I would say Q4 is a reflection of that sustainability. Now, I will say, you know, the extent to which we achieved that EBITDA in Q4 was a combination of things, including some very strong seasonal revenue performance and some revenue true ups in some of our PS project milestones. So the team has identified further efficiencies and cost savings that will continue along with a strong focus on bottom line production to produce EBITDA through 2023. That's really the storyline that we've been building towards that. And this is something that we think is really about controlling our destiny. Producing cash flow opens up a lot of other opportunities for us. I did spend some time in my CEO letter digging into a bit of this on our record bookings, and I think it warrants some explanation. Now, we've had record bookings in four or five quarters, and obviously that's very positive, and we're happy about that. And that, again, speaks to the notion that we're in the right space, doing the right things, and that our customers value these types of services and products that we're building. But I think it's also really important to note that through our analysis of these contracts, these are really increasingly bigger in size in the professional services in particular. And they are, in fact, converting to revenue over multiple quarters. In fact, just this week, we were doing a much deeper dive, analyzing the biggest contracts in more detail. And we observed many of them are stretching into four and five quarters of revenue. Now, this is good in terms of planning and predictability. I'm a really big believer in having that strong visibility, trying to extend those project-based revenues over longer periods of time because it allows us to staff properly. So there is some risk and some challenge to having that revenue spread over multiple quarters, but we ultimately believe this is a better way to run the business. And that includes, again, our ability to manage utilization rates and make sure we have visibility to what's coming in the coming quarters. So the short story there, though, is don't expect to see record revenue every quarter as a result of record bookings. But if we keep up this relative steady pace on these bookings, we should start to see the conversion of these stack over future quarters. So, again, these record quarter bookings over the last couple of quarters, the good news is it gives us visibility. It isn't leading and it's not going to lead every quarter to record revenue. But we, again, we believe it'll reduce some of the volatility over time. And look, the only other thing that I would flag, and I think it would be difficult for anybody to be overly optimistic in these current economic conditions, and we are seeing some market concerns. You know, we've seen customers in some of our areas like retail and B2B, they're closing geographies, they're closing unprofitable stores. Everybody is apparently focusing on bottom line. And I don't think we're any different. You've seen our own behavior. There's some consistency in the market today. And I think that consistency ranges from, you know, cautious pessimism to cautious optimism. And I'd say ultimately we are being cautious as we go forward. So overall, really pleased with all the results, pleased that we're doing and building the right kind of things for our customers and cautious about what the economic headwinds mean for everyone today. Thank you. So just explaining where some of these results are coming from, and I think you're used to hearing this narrative from us. A lot of those bookings in Q4 were driven by continued strong logo activity and data management. We did have a pickup in new logo activity in commerce, as well as continued renewal and expansion bookings in supply chain. The commerce and data management group successfully secured a multi-quarter new logo with a very large prominent homeware retailer. Now, what gets us excited about that in particular is the strategic benefits of a multi-BU contract right out of the gate. This really talks to the cross-business units capabilities of selling together and demonstrating value to our customers, again, in multiple BU's. At the end of the day, our customers participate in all the categories that we work in. They have varying degrees of challenges that sometimes start in one BU and then pollinate to another. What got us excited this quarter in particular, this is a very large retailer who is embracing multiple BU's right out of the gate. We're also investing to drive innovation at the BU levels. And again, you've heard me talk a lot about our focus on product. Our goal in 2023 is to expose and create more visibility to the revenues that are associated with that. So starting this year in our Q1 results. We will be laying out a little bit more of that visibility and clarity, but we continue to invest. We recently launched our own Pivotry corporate store, and that was for both employee use internally, but also for testing and for creating some of those applications that are going to drive frictionless. In fact, no surprise, one of those apps that we're currently integrating and testing is leveraging ChatGPT, and we're already starting to see some exciting results with this store and the ability to test new things. In supply chain, we are making progress in transitioning our warehouse management software to the new SaaS version 2.0. Again, what's exciting there is we have already over 500 warehouses currently supported on the older software. And we're seeing signs that our customers are embracing the new capabilities and the new features. And we expect to see more starting to convert to our SaaS model. And again, you should start seeing that evidence show up in the revenue. Now, this is a fairly large, when you buy all the modules, a fairly large package of software. What gets really exciting about this is the microservice nature of it, the modularity of it. It really does mean our customers can buy components and elements and start to advance and innovate on their warehouse management systems, allow them to start accessing things like robotic picking without having to rip and replace some of their pre-existing monolithic solutions. What this really does is it allows an easier migration from old to new. And again, we're starting to see partners and others get fairly excited about what this can mean in terms of being able to support their existing customer base. One of the other things that I'll flag, again, if you've been following our IP, we've talked about products like Dive, which is our own machine learning application. And actually, we did some benchmarking and compared it to Gains Chat GPT. And we're very excited about the results. I mean, frankly, contextually, with very specialized use and with the context we use to teach our machine learning modules, we've been able to demonstrate that our own machine learning is more accurate, faster, in today's terms versus something like a more generic and generalized chat GPT. What gets really exciting, though, is some of the advanced features that we can imagine now watching what chat GPT is capable of. And we've started integrating the two of them together. And there's some exciting results. You know, probably the last thing I'll leave you with on this front is our internally developed IP, including Natalie and Dive and Control Tower, is being leveraged into 22% of all of our data projects at the moment. And it's going to start taking a more prominent role in our reported revenue. That BU is very committed by the end of the year that the majority of our deals and projects will include our IP. And again, based on some of the preliminary results we're seeing on efficiencies, it really drives value to customer. I know you're all waiting for our next deal. And on the M&A front, we continue to have a healthy pipeline of opportunities. We've been nurturing a number of relationships for multiple quarters. Our key requirements remain unchanged, and we will continue to be patient, establishing good working relationships with the business leaders we're interested in, And as our interest gets closer to intersecting with each other, I'm confident we'll get some deals done. We have enough cash and are more comfortable using our credit facility now that we have positive cash flow and the ability to service that debt. So effectively, we have over $30 million available for M&A, but we're also happy with our organic growth and product development initiatives to wait for the right deals. There's a number of strategic opportunities out there with quality management teams that we're excited about. We'd like to do something with. Our biggest challenge, frankly, is, again, just the current level of our stock price and looking to do properly accretive deals. You know, again, if we can do all cash, it makes it easier. But we are observing that a number of the folks we're talking to like our stock price and would like more of our stock. So this becomes the balancing act that we're working through as we try to consummate some deals. So to put the last three quarters in perspective, and I think this end of year is a great time to do that. We thrived through COVID. Now that was despite a rocky start in 2020, but that COVID period really allowed us to accelerate and enable us to do a successful IPO. We raised a significant amount of money. And on the back of that, we acquired two material new businesses in 2021. We've been able to continue organically growing those businesses. They've been major strategic positives. And we completed the integration in 2022 and shifted the team's focus to accelerating a path to profit, which we exited 2022 with strong, sustainable EBITDA. So it's been a productive couple of years. And I think all of the key metrics and leading indicators, we've grown revenue 60% in that timeframe. Our annual bookings are up 174%. We acquired a number of new product initiatives and have been accelerating those. And we're going to start to see that MRR growth again. We've managed our capital very efficiently, and that's evidenced by a 71% revenue per share growth and an 84% gross profit per share growth from the low points in 2021 versus our Q4 performance. So, again, I think it's been a productive couple of years. Mo's going to take us through more of the financials. Again, I think we've been pretty clear EBITDA expansion is going to continue to be one of the key measures of success for the business overall and all the business units. The real test for Pivotry will be expanding our EBITDA while simultaneously increasing the investment dollars in our new product initiatives. We'll once again this year do a product day for analysts and those that are interested. But I think folks will understand why we're motivated to continue investing in these products as they really represent our future. And we're starting to see their penetration in our business today. This is also the stuff of frictionless comics. This is where our future is. We're driving to that eventual state. It's still many years out in front of us, but we want to make more advances with our products to help drive that faster. And I know that many folks, especially those that are paying attention, are asking for better visibility into seeing how those investments are paying off. 2023, we expect our reporting to expose more of those product metrics and make much clearer how those dollars are being spent. Obviously, we could be significantly more profitable or with higher EBITDA if we weren't making those investments, but we believe that's the balance that is the priority of a good leadership team is to look into the future and make the right investments today to get us there. When we analyze all of our deal metrics, we clearly see a path to 50% gross margin. Those two to three points of additional margin just to break through the 50% really revolve around utilization rates. And reducing overhead on managing projects. The real breakthrough, though, the stuff that gets us into the 60% plus, that's going to come from increasing our IP penetration into our deals. So, again, we're going to run the business better every day. We'll achieve better gross margins in the near term. But to really accelerate those, it's the product initiatives that are going to drive them. So we'll continue to be motivated to find operating efficiencies to fund those increased investments. Again, our view is we are responsible for generating the capital to make these investments. And that's why those two things go well together. We effectively, our goal is to double cash flow in order to double investments in new products over the next 24 months. So let me turn it over to Mo to give you a better view of our financial performance.

Great. Thanks, Bill. So if we can move to slide nine, Bill. Thank you. So as Bill noted, more than 85% of our revenues are U.S. dollar base. So we benefit from the currency failings. Revenue for the fourth quarter grew 18% year over year and 11% in constant currency. Total organic growth was 10%. Professional services grew 8% organically, while managed services grew 13% organically, as we added new services into managed services and increased demand over the peak holiday season. There's approximately $900,000 of seasonal consumption revenue in Q4 that will drop off in Q1, as we would expect. Net revenue retention was tracking close to 100% in Q4, benefiting from upsell and some of our key customers, while also benefiting from the seasonal demand that I just mentioned. We can still expect occasional bumps as the remaining Oracle MRR transitions off over time, but we are seeing less of an impact right now. As Bill mentioned, the multi-quarter nature of some of our larger professional services contracts, they give us better visibility towards our non-recurring revenue base into 2023 than we have had in prior years. Although we are planning for modest growth, organic growth in 2023 due to macroeconomic uncertainty, that added stability in our revenue will allow us to focus on improving our profitability profile. so moving on to the p l gross profit margin improved 47 percent from 44 percent last year q4 and 45 percent from the recent reported q3 the improvement in our gross profit margin is the result of higher managed service demand and revenue milestones the bill mentioned improving our overall margins total operating expense of 12.8 million That increased by 0.3 versus prior year period, and it was 2.4 million lower than the 15.2 million we reported in Q3 of 2022. The sequential reduction in operating expense was primarily a result of the realignment actions we announced back in October of 2022. These changes primarily impacted the various operating expense line items as we consolidated and centralized activities into the business units. We also benefited from the completion of some of the amortization on our intangibles. Adjusted EBITDA was a positive 1.3 million, representing 5% of revenue, and EBITDA was 1.1 million. Adjusted free cash flow improved by 1.3 million from prior year periods to 0.7 million. We expect to maintain positive EBITDA moving forward. But important to note that Q4 represents the combination of strong seasonal revenue performance and revenue true up on specific milestones, which do not carry into Q1 2023 results. The better than planned EBITDA production throughout the year resulted in positive adjusted EBITDA of $1 million for the full fiscal year. The team has identified further efficiencies and cost savings that will continue to be a focus for us in 2023 to produce EBITDA and also provide for investment capacity. We also benefited from the FX rate during the fiscal year and have taken steps to hedge our currency exposure into 2023. Reported fourth quarter net income of $1.5 million is a significant improvement from historical quarterly results. This improvement can be explained by the improved EBITDA and year-to-date tax provision adjustment of approximately $1.8 million favorable to reflect cost allocation in alignment to our transfer pricing requirements. A more normalized net income for Q4 would be closer to a negative $300,000. So turning now to the balance sheet, with positive adjusted EBITDA and adjusted free cash flow this quarter, we ended the quarter with cash increasing to $17.3 million, as we have yet to tap into our $25 million undrawn credit facility. As Bill mentioned, we are now more inclined to use this facility if the right assets become available, and we've got a healthy pipeline there, providing us with $42 million of total capital available. We think our patients will continue to pay off as we pick up transformational assets like we did in 2021 that delivered compelling returns. So I'll turn it back to Bill now for a closing summary. Bill, you're on mute.