Pivotree Inc.

Good morning, everyone, and welcome to Pivotree's first quarter 2023 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 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 for reconciliations to the nearest IFRS measures. Now I'd like to turn the call over to Pivotree CEO, Bill DiNardo.

Thank you, Dennis. Good morning, everyone. Thanks for joining us on our first quarter 2023 conference call. It seems like it wasn't that long ago we just did this. With me today is Mo, our Chief Financial Officer. Look, pretty straightforward quarter. First quarter went as planned and was in line with expectations. The one thing I'm excited about is that the pieces of our strategy are coming together. We're pleased with how the business units are progressing and we're really pleased with how our products are evolving and how customers are really taking an interest in those areas that we've been working on for practically well since the IPO. Now, again, I'm sure you're hearing it from everybody. There's the but on the economic climate. We'll talk a little bit about that. But overall, I feel pretty good about this quarter. So revenue of $25 million, that was up 2% from Q1 of last year. And last year, we had a really strong Q1. And that was on the back of record professional service bookings. Now, we've talked about this just recently. This year, we're also coming off record bookings in Q4. But as we said last quarter, A number of those bookings were much larger contracts than normal, and they're spread over multiple quarters. So these are, you know, four quarter, five quarter type deals. As a result, revenue growth is going to be modest despite the record bookings. But what we've got is better certainty on future. One of the things, again, we've talked about, I think we're seeing it, and in talking to our peers, we're also hearing consistency around this, just longer timelines to get signatures on new deals. We expected this going into 2023, and I think this is going to be the new normal this year. We remain on a critical path for many of our customers, and that has a lot to do with the systems that we implement for them and manage for them. It's really the backbone for their revenue and operations. Again, one of the great indicators our products are on the right track is our ARR grew 6% year over year. That's been pretty stable. We are transitioning project customers to recurring services. This also has a bit of an impact on signing timing. We can finish a project, we could initiate and start another project, but we have been having these conversations around converting from project basis to more of an outcome and recurring revenue orientation. And that automatically creates a little bit more selling time. But we're excited to see that transformation that's really been part of this transformation we've been expecting and planning for, which is that switch to more productization more outcome orientation and less of a project orientation. I think the other thing we're benefiting from, particularly in some of our legacy businesses, is longtime managed service customers have been delaying migrations from older systems to new. These tend to be bigger capital projects. And as we've talked about, those are under way more scrutiny than they used to be. And if you can find ways of saving folks some money in the short term, you can delay even further those migrations to new initiatives. So, overall, you know, when you look at stability on the ARR, you look at the conversations we're having with customers around converting to recurring revenue, and the larger multi quarter projects that we've booked it gives us confidence we're going to be able to execute on our profitability goal this year. And as we stated from day one, this year is about driving consistent repeatable EBITDA. So Q1 EBITDA adjusted was almost a million dollars. We had a 270 basis point improvement from last year and 300 percent growth year over year. So, again, we're we're really, really pleased with we're doing what we said we were going to do. We're focusing on the bottom line. We're stable, stabilizing and helping our existing customers in a way that our revenue retention was good as well. We're having a good start to the year. Now, I think one of the things I mentioned in my CEO letter that's worth talking about, and that's just bookings, because I think we refer to that quite often as a good leading indicator. And so it's helpful to explain this quarter's bookings. Last quarter, Q4, we had a record when we stated that that record was really based on a couple of very large multi-quarter contracts. So if you take out the large multi-quarter contracts, and they're still a bit of the anomaly. I think we're seeing more of them in our pipeline, but there's more volatility around the timing of closes on those. So we kind of think about those as spikes. If you look at our rolling four quarter average, somewhere between 16 and 17 million, particularly when you normalize out the big. So we're quite comfortable that this quarter was right about our average. If we want to start hitting some of those growth targets that we've talked about that we're aiming for, you know, over the next three years, then we need to do better than our rolling four quarter average. And I would tell you right now that better is going to come from the spikes. When those spikes become the new norm, I think you'll start to see us settle into the 20s. But I wouldn't say that the 20s right now are the norm. I'd say our 16 is our rolling four quarter average. Pipeline is great. It's healthy as it's ever been. In fact, it's the strongest it's ever been. But we are, again, seeing those delays. We're seeing more scrutiny, more CFOs, CEOs. And frankly, we've seen a couple now where private equity owners and major shareholders at board level are getting involved, particularly around capital decisions. So I expect continued volatility around bookings, but I think we've got a good, healthy pipeline. I think for us, we've just got to stay diligent and honest about the quality of that pipeline. Because one of the things you will find in an economy like this is you have customers that have the propensity to tell you it's coming and then it just doesn't. This is where we're going to stay vigilant and make sure we look at the quality of that pipeline. Right now, we remain cautiously optimistic. Again, many of our service offerings present clients with cost savings opportunities while advancing their digital transformation journeys. So again, one of the things we're combing through our pipeline, looking at which of the initiatives and which of the opportunities actually represent cost savings for customers. We find those if they're in year, those move quicker to close. So again, Good start to the year. You know, good signs in our pipeline. Good quarter of bookings. But I think, you know, the tail of the tape is going to be this next two quarters on how this year is going to shape up. So again, we've talked about this repeatedly. We've got three business units. They've got full leadership teams. Admittedly, from an OPEX perspective, there could be some inefficiencies in running 3BUs. We think we're getting great efficiencies from attention to detail, M&A opportunities, and very specific product development initiatives that are coming from this. And we've also made them very accountable for their bottom lines. So these BUs are incentivized to find synergies, to find shared resources amongst them in order to increase their delivered EBITDA back to the company. So we're seeing good operating dynamics between them. And each of these quarters, you know, where we're consistently producing EBITDA, it's coming from this group operating well. We've had a couple of really good deals that have landed that are cross business unit. This really is the definition of the future of frictionless commerce. It's not so much a BU based approach, but more of an industry vertical approach where customers are buying a complete solution. We've had a couple now that are closed and working through, and we've got a few more very large ones in the pipeline where we're being asked to look at the entire ecosystem all at once. And again, that, you know, really bears fruit when these three business units behave as one with our customers. We did introduce the CAS offering, which is commerce as a service, which is timely right now. We are finding that customers are looking at, you know, the potential to take project plus integrating a number of different service providers and turning that into a monthly recurring service. That's a great way to convert capital intensive projects to a more spread out and a longer cycle for them, which which manages to their budget needs right now. So, again, CAS is getting some good traction. We're getting great conversations with customers on it. Data management continues to be a clear strength. If anybody watches our social media, we had an amazing couple of weeks recently at a number of our partner conferences, winning awards with Stebo and Informatica, being on stage and being able to present some of our product innovation, which is going over really well. We were really fortunate. A number of customers got on stage with us, including Psycho Bunny, Grainger, ABC Supply, all great brands and demonstrating the power of our dive machine learning platform. Generative AI, it's an extremely exciting technology and I hesitate because it feels like the entire planet is now talking about generative AI and ChatGPT in particular. What I'll tell you is we've practically applied it already now. It's in our workflows. We are using it for customer cases and we are finding great synergies with our other machine learning. I think the difference between us and maybe some of the other people who are talking about it, we've been talking to you and our customers about machine learning and its practical application in our workflows for a couple of years now. So this is just another tool to us. And it's a tool that's synergistic with our existing tool set and our existing workflow. And we're seeing immediate efficiencies. So we're actually really excited about the potential to work that into more of our workflows. We also have a team that knows how to use it. And I think that's another important factor. This is foundational. I mean, if you look at the kind of work and the automation and the amount of time savings, quality improvement and just overall acceleration, this is going to be game changing and certainly in the data industry. And I think really all that's happening right now is while we talked about it, it was hard to explain it or demonstrate it. Things like chat GPT are just making it more accessible to the common person to see what its potential is. But I think our technology providers and our business solution providers have been using tools that aren't dissimilar and getting these kind of efficiency gains. I think the whole world sees it now and wants to take advantage of it. In supply chain, we're seeing really strong interest with our WMS. So this is our warehouse management system and our control tower. We've completed 16 of the microservices and there's another seven coming online this year. So that product is getting really close to being fully complete. But the component parts are all sellable and we've had a number of customers now start to pilot it. along with the legacy customers. I think we've talked about this in the past. We're already running about 500 warehouses for customers. It's the new systems that we're getting more excited about the, again, the efficiencies that they can enable. We're actually going to be hosting a product day on May 23rd. We're excited to be sharing more of the developments in our IP across all of our business units and some of the interesting work we're doing with AI. So we're again, we're continuing to improve the way we talk about and we're really trying to shift away from tell about our products to actually be able to show them and demonstrate them. And I'm excited about the progress we've made since we did the same thing last year. So, overall, great quarter really excited about what the team's doing on product, and you know just cautiously optimistic I think anybody that is overly optimistic in the face of this economy would be naive so we're trying to balance our enthusiasm and our optimism with what we think is going to be a little bit of turbulence over the next three quarters. With that, I will, you know what, I'll spend one minute on EBITDA. I think this is one last important topic because we've talked about this for a year. We produced our first solid quarter in Q1 and sort of Q4, and now we're doing it again in Q1. So from a capital allocation, from the work we've done over the last couple of years, you know we've added great businesses. We've done M&A well. That's converted into good revenue growth. And most importantly, that's got business units that are all contributing EBITDA. And you can kind of see the pattern, right? We bought them, we integrated them, and now we're focused on more profitability. We're going to continue to maintain our discipline around M&A because we've seen what we can do with companies to produce EBITDA. We're being really cautious about acquiring anything that would be a drag on EBITDA. And so, you know, part of the challenge in this kind of economy as well with lower valuations, if you're producing cash, you're not in a rush to sell. It's about trying to find the right balance, finding good companies, either profitable close to cashflow positive or cashflow positive that we think under our guidance can shift and start contributing to what is our growing bottom line. So I think we've positioned ourself well for organic growth. We've got cash on the balance sheet that will allow us to buy with the EBITDA. We've also created that, you know, Again, confidence. If we need to tap into our credit line, we will. But again, only for EBITDA positive or very soon to be EBITDA positive businesses. And I think this chart really demonstrates what we've been able to do over the last couple of years. So for us, it's about creating long term shareholder value, be managing those KPIs to consistently grow this and continue to improve our gross margins and not take on undue risk. I think this year is about the year of who blinks first. We're not going to be the ones to blink. I think we're in a great spot. We're going to do our best to take advantage of this year. You know, despite all the challenges, I think those challenges are going to represent opportunities for us. So I'll pass it over to Mo.

Great, thanks, Bill. So first quarter of 2023 revenue was seasonally down from Q4 as we expected and we've communicated in our previous call, but the impact wasn't as pronounced. We were able to offset the seasonal impact we expected by extending some of that spend to get part of the quarter. Professional services revenue declined by 4.3% year over year for the reasons that Bill mentioned in relation to bookings and conversion of our pipeline, which has taken a form of longer cycles now. So although we're seeing some of the project revenue come to an end, we are seeing our managed services continue to extend and expand overall across our existing and new customers, which contributed to the 12% year-on-year growth. Oracle churn was less apparent in our numbers and in some cases continues to extend its life. That's contributed positively to our results. There were some customers coming off legacy platforms, but it is more than offset by some of the growth we were able to deliver in managed services. Net revenue retention was 95%, and greater stability in this metric is again a reflection of less legacy revenue churn and improved stability and growth we are seeing on the managed service revenue line. On to the next slide, Bill. So on to the P&L, gross profit margins improved to 46.3% from last year's 42.6%. Managed service growth was 53% and up from 52% in the most recent quarter. So improvements on our margin across the quarter and the year-on-year on our overall business. Professional services gross profit margin was 41% versus 40% in the most recent quarter. We tracked much higher than other PS-based businesses. A key factor in our gross margin to provide room for further upside is our investment in bench capacity and also the use of Pivotry IP to further drive down the dependency on labor. Over 20% of our data projects are leveraging Pivotry IP, including those that you've heard of, Dive, Natalie, Control Tower. As we continue to leverage more of our automated products and tools and manage the utilization rate and investment in Bench, we see a path to improving gross margins to 50% and beyond. Our operating expense was at $12.8 million, similar to that of the most recent fourth quarter of 2022, and we plan on continuing to manage our all effects to drive our commitment to positive EBITDA trajectory. Adjusted EBITDA was 0.8 million, improved by 270 basis points from prior year and grew more than 300%. Our adjusted free cash flow was positive 300,000 and our net loss improved by 1.9 million year-on-year. Moving on to the balance sheet and cash, the primary use of cash in Q1 was related to the working capital charges changes. that are seasonal in nature and came in better than typical for the first quarter of the year. We had better working capital results as certain payments shifted to the second quarter. For comparison, typically in Q1, we see a $4 million negative working capital impact, and we saw an improvement of over $1.5 million in Q1. So with a positive EBITDA and operating cash flow improvements that you've seen, we ended the quarter with $15.8 million in cash and we have not tapped into our $25 million credit facility. So as Bill mentioned, with improved cash flow performance and continued focus to optimize it, we are now more than inclined to leverage our credit facility if the right asset becomes available, providing us with over $40 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 and deliver compelling results and appreciation to the bottom line. I'm going to turn it back to Bill now for a closing summary.