Pivotree Inc.

Good morning. Welcome everyone to Pivotree's second quarter 2023 conference call. 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 relating to the 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 use our MD&A for additional information regarding our non-IFRS financial measures, including for reconciliations to 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 second quarter 2023 conference call. With me today, as usual, is Mo Ashour, our Chief Financial Officer. As we normally do each quarter, we've published a CEO letter in conjunction with our earnings results that's available on our website, filed on CDAR. You'll find a lot of my comments today will be reflected in the CEO letter that I tend to circulate. I've also mentioned in the past the interim quarterly letters are going to be shorter than they have been historically, and our focus is really going to be on a larger annual assessment. But again, I give some insights and some color in some of these results. So, We delivered our third consecutive quarter of positive adjusted EBITDA in Q2, despite some of the revenue being down from the previous quarter. The team is highly focused on driving those operating efficiencies in the business, and we took some additional restructuring actions this quarter and identified an additional $10 million in annualized cost savings. To be clear, identified and took action on in Q2. This will give us some room to invest in our product initiatives while driving the additional operating efficiencies to come in Q3 and Q4. And again, we have stated this since mid last year that we remain committed to driving a model of sustained profitability as we exited last year and continue it into this year. And again, the key word there was sustained and we are delivering on that as expected. Our focus this year is to continue to adapt to these uncertain economic conditions, ensure that we're right-sized to remain on a path to sustain that profitability. But the other key factor we've articulated since the start of the year is being able to invest in the new products and the recurring revenue streams. Our ARR of 43 million makes up nearly half of our revenue. And because there's some seasonal consumption trends in our ARR, we also look at it on a trailing four-quarter or 12-month basis. And by that measure, it's the highest it's ever been at 45 million. We continue to work closely with our customers over periods that span years. And we've been transitioning our PS work that we do at the beginning of a relationship into ongoing managed services. And all of our processes and efforts this year in particular have shifted increasingly towards recurring and product-based revenue. But I've been consistent in my communication around the macroeconomic headings that we've seen. And in the second quarter, we saw this particularly impact the time to close new logos. Existing customers continue to form a really strong foundation, but particularly on the professional service side of the business, the new logo closings have continued to be delayed. Now, while professional service revenue in the second quarter is down from the record high in Q2 of last year, managed service revenue has grown in each of the last six quarters and was up 7% in the second quarter. Now, looking at our bookings, the areas that are showing signs of progress, again, are in the recurring revenue in the managed service. Our sales pipeline had the largest increase in MRR and product-based opportunities. And our ARR bookings of 1.9 million is the best quarter since Q4 of 2021. Now, this is being driven largely by supply chain managed services and the recent accelerated uptake of our control tower solution. A number of folks and some of our investors and analysts have been able to participate in our product days, and they can see the progress that's being made on this front. And we're starting to see that show up in both the pipeline and the bookings. What really pleases me is the demonstrated creativity in the go to market strategies with our teams. They are leveraging the existing customer base to introduce these products. And really what for us is an important factor isn't just the revenue, but the insights that come from customer driven roadmapping. And Control Tower is a great example of that. We've had some really quick uptake in our existing customer base. We just landed a brand new retail logo, a big global brand on managed service. And they've been consuming Control Tower and look like they're going to be a major part of roadmapping that product with some already really insightful initiatives that are coming out with that product. So, again, you can see the linkages between how we get a customer started with us and our ability to introduce the products and start to scale the products with them. The pipeline of qualified opportunities in this area doubled in data and supply chain between Q1 and Q2. And we expect Q3 and Q4 to continue the progress on AR bookings and product expansion. Now, on the professional services side of the house, we've seen continued impact with deal elongation, lengthier reviews, and new logo softness that's impacting the enterprise software and services industry. We've also seen a change in behavior around the procurement process. Again, we've been talking about these delays, but one of the things we've really seen, again, is this taking longer to sign contracts. They stay in or turn into an extended procurement decision. But also because we are trying to introduce product and recurring revenue into the mix, it's taking a little bit longer in the explanation and the contracting around those. Now, the other observation, and we had highlighted, I think in our record booking last year, a very large client that gave us four or five quarters of visibility on PS. At that time, we thought this might become a new trend. We're seeing in this environment, it's actually mostly the opposite. We're seeing our clients are breaking the projects up into smaller measurable projects, essentially following more of an agile development principle with a shorter time to benefit. So that, you know, Q4, very large PS bookings seem to be more of an anomaly than a trend. And the trend we're seeing now is more discovery phases, more proof of concepts, smaller chunks. And as a result, it's taking a little longer to get to the larger contracts. What I will tell you, though, is, you know, we did finally start to see some of the things this past quarter that had been in those discovery phases start to sign their larger contracts. So, you know, again, the trend we're seeing is seven figure contracts are being preceded by six figure discovery phases. Those are profitable phases. It's not that they're money losing, but they are smaller contracts initially and successful completion leads to the bigger contracts. We actually probably have our highest number of discovery phases and proof of concept phases going on right now than we've seen in our history. Again, I said this earlier, we're seeing our existing clients continue to do work with us, and this will set the stage and the foundation for a return to growth. Again, we link some of the new logo delays to, again, some of the market uncertainty. And as the market continues to regain confidence and budgets open up, we expect to see the new logo wins. It's not that there are no new logo wins. In fact, we had a terrific new logo in Q1. It's the quantum of new logos that has been down versus previous quarters. Again, I mentioned previously the number of proof of concept and discovery phases. We actually are embracing this process because we believe that it is the pattern of behavior that we will see as we make the shift towards product. There is very much a show me mentality when it comes to buying software these days. And again, I think that show me mentality is also starting to happen in some of the PS work that we're doing. So again, this is not a bad thing for us. It's a bit of a transformation. It changes the way we manage our sales process and the way we demonstrate value faster. I think these are all good things for long-term health of both our business and our clients. But we are working with the right clients and getting the right initiatives. And we've seen this process play out over the last couple of quarters with some great extensions. Good example of that is our Psycho Bunny win last year. They started with a small project and since become one of our larger customers and are working with all three of our business units and leveraging a lot of the products that we've been talking about. This is a really good example of building deep relationships and intimacy on professional services and being able to use that to develop product roadmaps on how to best serve our customers beyond just the professional services. We saw this proof of concept, particularly in commerce, and we've highlighted, you know, that's one area that's been slow to recover for us. But that dynamic of POCs, I mean, they probably have the greatest number of discovery phases and POCs going on right now in the business. And a lot of their contracts really are these six figure discovery. Make sure the requirements are right phase. But they are linked to quite a large number of seven figure contracts to take these projects through completion. So there's a little bit of a pig in a python for our our commerce team. And it's been a number of these projects that have been sitting on the five yard line as we call that. As we start to see that open up, I think we're going to see the turnaround that we've been expecting in commerce. A number of these actually are also recurring revenue and next generation managed services. Again, I think you'll start to see over time some of the products that we've been building like Control Tower are finding their way into our broader managed services portfolio. In data management, we had four cross-sell wins in the quarter where we sold managed services to professional service customers. We also had sequential growth in data bookings, and it continues to be an area of relative strength for us. So, again, data is continuing to be a strong category for us. It's also the biggest category for using our enabling technologies. We've talked for some time about the importance of enabling tech, whether that's cloud, which has been on a rapid growth trajectory for many years, something we use extensively with our clients, machine learning and AI. Our data management team is probably the most advanced of the group using machine learning and generative AI in solving customer problems. So again, good progress, lots of promise in that category. Where we've seen the most recent momentum around product is really in supply chain. As I mentioned earlier, we had several ARR wins for our new control tower solution, and it was connected to a number of managed service wins. So again, there's real progress with supply chain on product. Folks who've been to our product day can see these are the traditional products you can touch feel. They look like enterprise software. They're not hard to communicate what it is that they do. And as a result, This team is having some great success. We're getting more at-bats and more opportunities to, again, evolve their roadmap to long-term success. And look, I think one of the things that folks have questioned for a while about, are we a PS business? Are we a managed service? Are we a product? We're really trying to demonstrate with clarity that the PS business is a critical part of our business. It drives revenue. It drives gross margin and contributes to our cash flow. But more importantly, it creates client intimacy and it gives us the information and the knowledge we need to affect our product roadmap. And so for us, it's critical that part of our business is healthy, but not the least of which is for the product insights we gain from our client intimacy and our client relationships. So again, this is important. We're going to continue to push for success in that business, but ultimately it's to drive our product wins and our product successes. And again, I think we're seeing the evidence that that is in fact working. Now, these two charts will point to the positive long-term progress that we've made with our strategy and how we intend to grow underlying value through the economic cycle. Our focus on gross profit and gross profit per share is a result of continued optimization on labor. And we've been setting a foundation to expand margins as our digital products gain traction. Again, a number of the changes that you saw us make in Q2, you will again see play out in our Q3 numbers, particularly around gross profit and obviously driving the EBITDA. Now, we've continued to maintain positive EBITDA for the past three quarters, and our commitment is to get a place of sustained profitable growth. The transformation we've been making on the way we operate, we believe is now reaching the more optimal level relative to the size of the business and the growth rate. The key now is to start to generate that growth in PS again as we're growing the product side. So you'll notice we had approximately $800,000 of restructuring charges impacting our reported EBITDA, but the annualized impact of that restructuring is closer to $10 million in annualized savings. One of the things I'm not going to do is give you guidance on just how much of that is going to stay the bottom line. Because again, our strategy is produce our own cash in order to invest in our products. And again, as our products are starting to gain traction, we are looking at investing more into them. We have much more control over the cash flow in that and the IRRs than, as you'll hear from my M&A update, than we can get from some of what we're seeing in the acquisition marketplace. So Mo will talk more about those financials in a moment. But again, this continued improvement for profitability is an absolute necessity of what we would consider the phase one to our phase two of product investment growth. I don't have a lot new to report for you on M&A. We continue to be active with a number of opportunities in the pipeline. I will tell you we've modified our M&A approach in order to help identify more closeable opportunities. So what I can share with you is it hasn't been for a lack of interest in the pipeline. We've had a number of deals that we've moved through various stages of diligence, but inevitably the gating hurdle that we keep getting caught at is getting to a valuation that makes sense for us. and for the counterparties. And so part of the shift is how we find the right deals that are closable. And we are modifying some of our tactics in that regard. M&A continues to be a key part of the mission and vision. We look at it as a way of filling strategic elements of our product offering set. I think you will see less of acquisitions in professional services that aren't specifically related to some of the product initiatives that are underway. Again, the key, though, is finding closable deals. The good news continues to be we have cash on our balance sheet. We have a great line of credit and a good relationship with our financial institutions that will see that maintained. And probably most importantly, articulated through the last couple of slides, EBITDA production is paramount to controlling our destiny in this regard. So, you know, continuing to produce EBITDA and cash flow makes acquisitions possible in the future. So with that, I'm going to turn it over to Mo to provide an overview of our financial performance.

Great. Thanks, Bill. So I'll start with the revenue as usual. The blue bar shows the managed service revenue, which has shown steady progress with six consecutive year-on-year growth. It demonstrates the progress that we've made to offset some of the churn and melt that's illustrated with our 89% net revenue retention rate. It points to the solid underlying organic growth we have seen for new managed services and products and includes professional services that are now managed services, which is offsetting the declines of Oracle and Legacy that's still within our business. We are also pleased with the progress we're seeing, as Bill mentioned earlier, the pipeline that we're building in digital products and feel good about the foundation we're building for setting ourselves up for future ARR growth. You can see professional services in Q2 at 12 million, which is down in comparison to the record levels that we set in Q2 of 2022. Some of it is the results of projects being delayed, and some were put on pause to reevaluate some scope. And we also saw a reduced number of new customer, new logo wins, as Bill alluded to, which typically are there and important to replace some of natural ramp down on professional services. The volatility in this environment will likely persist for the second half of the year, as we've been describing. And as Bill said, the qualified sales pipeline remains strong for us. And we continue to remain focused on progressing and converting that pipeline to revenue in a manner that supports our customers in this environment. We go to the next time, P&L. Gross margins were 45.5%, an improvement from the 45% we delivered last year at Q2. Managed services contributed significantly to this, with gross profit margins improved to 56% in comparison to last year's 50%. And we continue to remain focused on optimizing costs and driving more profitable recurring business. Professional services growth margins declined to 36% versus last year's 41%, largely driven by the professional services revenue ramp down and decline, which is obviously resulting in lower utilization rates. With the restructuring and the actions that we've taken in Q2, we expect utilization rates to improve going into Q3 and improve our margins and get them back to the 40% range. Operating expenses were $12.9 million. As you can see on the slide, it includes $800,000 in restructuring, which is compared to a $14.7 million operating expense for the same quarter last year. This affects improvement of $1.8 million, which includes, again, the restructure charge as well. As Bill said, we've identified up to 10 million of annualized cost saving off of the levels we were running in Q1 through various initiatives. Some of that was realizing Q2 to deliver the results to help offset the revenue decline, and we expect additional benefits going into Q3 and Q4 through those initiatives. Adjusted EBITDA was a positive 37,000, which includes a $400,000 FX loss With that FX loss, it's still a year-on-year improvement of $150,000. So while revenue contracted, we have adjusted our costs in a timely manner to continue to deliver positive EBITDA results and the year-on-year improvement. We'll remain focused as Bill highlighted. It is critical for us to continue to manage our EBITDA and free cash flow. Starting with the balance sheet, the primary use of cash in Q2 was related to working capital charges, and there was some catch-up in seasonal payments that typically fall in Q1, but they did move in Q2. This is something we pointed out when we reported our Q1 results last quarter. Aside from this, cash used in operating activity was fairly neutral and includes the charges we took in the restructuring activity. We expect adjusted free cash flow to improve through the second half of the year. We ended the year with $11 million of cash. We have not tapped into our credit facility, and we do not plan to do so until the right assets become available, and we are comfortable generating positive free cash flow, which we believe we're on track to delivering. We are also in active discussions to highlight to renew the credit facility as it approaches maturity in Q4. While the right acquisition opportunities might have been hard to come by to deploy our capital, we believe our stock is trading at a significant discount to its intrinsic and future value. And those that have been following our filings and press releases would notice and would understand that we've been more aggressive in buying our own stock. We will continue to deploy our cash to NCIB at the right discount levels. Year to date, we've acquired over 230,000 shares at an average price of $2.47. So that's just over half a million of cash deployed to the NCIB this year. So I'll turn it back to Bill for a closing summary.