Pivotree Inc.

Participants are currently in listen only mode. Following the presentation, we will open the line for question and answer for the 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 can 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 for our third quarter 2023 conference call. With me today, as usual, is Mo Ashur, our Chief Financial Officer. and as we do normally each quarter we've published a ceo letter in conjunction with our earnings results that's available on our website and filed on cedar as i mentioned last year i was going to start shortening those uh interim the ceo letters uh focusing more on an annual uh longer assessment but each quarter we like to try to explain some things that might not be obvious in our financial statements so and you'll hear me talk about a lot of them today As I said in my CEO letter, we have two things that we need to do right now. One is run a profitable core business. And that means delivering great service to what is a terrific customer base. And that delivers the cash we need to invest in new products and services. The second thing we need to do is allocate that capital effectively to the new products and solutions as they demonstrate progress with customer adoption. And we're doing that as well. I'm proud of how our operating teams have executed to deliver a half million dollar increase in adjusted EBITDA this quarter, despite being down 1.6 million from the second quarter of revenue this year. Now, the steps we've taken to right-size the professional services team in light of the current economic environment has not hindered our progress in advancing our product initiatives, and the managed services side of our business has been strong. The steady growth we have had in managed services remains a consistent bright spot, and it's tangible evidence that our new product strategy is having a positive impact on our overall results. At $11 million in Q3, managed services grew 5% from the previous quarter, and it's up 9% year over year, with growth from new products and services overcoming the legacy churn impacts. Over the last six quarters, our non-Oracle and legacy-based managed services is up 50%. The bulk of our managed services revenue is, in fact, ARR, and it represents half of our revenues, which is providing stability in this environment as we position ourselves for consistent, profitable growth. And one of the things I tried to explain in my letter, and I'll explain it a bit more here as well, it's important to point out that the way we capture our total bookings, it's not really revealing the real state of our business. Because of how we record managed services revenue and in particular ARR bookings, we've classified consumption and transactional revenue in non-recurring. But these revenues and some of our new product offerings are the drivers behind the managed services growth. So this quarter alone, approximately 2.8 million of the total bookings falls into this category. Now that's up 55% from Q3 2022. And it speaks to the need for us to better define our revenue and booking lines to reflect the change in our business. We're aiming to correct this for 2024 to report with more clarity. Now, PS bookings were still soft carrying over from Q2 as we've seen some clients reduce spend or put projects on hold over the last few quarters, which was a very similar experience to the one we had during the COVID period. We also continue to see the extended processes for signing new contracts, and that's particularly true with net new clients. where we see some positive signs is that our active clients are maintaining their average monthly spend with us. I'm really also pleased to note that in this last quarter, we received a number of verbal approvals from new client prospects that appear to be well qualified and should close in Q4. Now, despite the PS revenue drag, we did modestly improve our gross margins and we continue to view our PS business as a source for client intimacy, contribution margin and the foundational skills that help drive our new products. So we continue to leverage PS. We will continue to leverage PS into the future. But again, it really is that combination of the skills and the customer insights and the client intimacy that make it a valuable part of our business. And when we run it properly, it produces the cash that lets us invest in our products. So again, lots of good things happening, but still some ground to make up on our PS revenue. Again, as I pointed out earlier, our managed services revenue in Q3 was quite strong. Now, candidly, managed services may not be the best name for this category anymore as our business has evolved. We have multiple revenue types in this category, including subscriptions, licenses, consumption, and transaction-based revenue and monthly service fees. There's frankly too many different revenue types to report all of them. So we have this catch-all category that we refer to as managed services. But we'll do a better job explaining it and probably renaming it in the new year. Again, we don't currently report our managed service bookings as part of our general metrics package, and we probably should, given how much it reflects the way our new products are currently getting bundled into the services and being consumed. And these bookings results perform very well for us as the quarter's managed services revenue climbs back to historical highs, despite the legacy revenue term. So turning to our new products and solutions, Our non-Oracle MS revenue is now the majority of our managed services and it grew over 50% since Q1 of 2022. Our data suite of automation tools like SKU Builder and Dive represents the most significant revenue increase and has the strongest revenue pipeline among our products. Control Tower has achieved 100% attach rate to all of our order management solution managed services. And we're now seeing increased requests for additional seat licenses and a growing list of new feature requirements being driven by client use cases. It has a low cost of entry and it's really easy to demonstrate value. So we expect to see this accelerate further in 2024 as we broaden both use cases within the order management systems and the platforms that we integrate it to. Now, WMS is a large and complex enterprise software sale, so the healthy top of funnel has been inspiring, but the pace of converting it to licensed signed licenses and implementation agreements is a longer selling cycle than the other ones. The upside in this category, of course, is this is a very sticky application. Once it's installed, clients don't tend to stop paying for the warehouse management systems. So this is, again, one we hold out a lot of optimism for in the long term, but it's going to take a little while to see it really impact short-term revenues. Over 10% of our active clients are leveraging Pivotree IP-based solutions, contributing to our managed service revenue growth. And again, we're seeing more and more of our strategic accounts starting to work with these new products. And again, as I mentioned before, we're starting to see additional seat licenses in some of these categories starting to climb within our existing customer base. Now, let me turn it over to Mo to take you through more of the financial details.

Great, thanks, Bill. So, starting as always with revenue, as shown by the blue bars, and Bill referred to managed services revenue continues to deliver positive growth for us. During Q3, we experienced solid growth, increasing 5% sequentially and up 9% year over year. So the primary driver for growth, and Bill touched on some of this stuff, comes with some of the additional volume of SKUs that we were tasked to manage and deliver within our data business, and also the conversion of professional services customers to managed services. So this performance through those drivers both contributed to offset to more than offset the Oracle and legacy churn, which contributed to the 83.5% net revenue retention. the professional services business declined to 9.9 million in q3 this was driven by project completions and some temporary pauses on projects and lower overall professional services booking to replenish the backlog so we are now seeing some of those that pause work that temporary pause that i mentioned uh work start back up again in q4 While professional services decline had an impact on our overall revenue growth, we retained our relationship with our customers by converting professional services to managed services. Approximately 35% of the customers that consume professional services over the past 12 months are currently managed services customers. So overall, we are encouraged by the underlying growth trend we are seeing in managed services through new products and services and our continued relationship with our customers through the conversion to managed services. Now shifting to the profitability of the business, Q3 gross margins was up to 46.2% compared to prior years, 44.9%. The improvement in gross margin was driven by improved profitability within managed services. managed services growth managed services gross margins improved to 59 percent up from 50 percent of the same quarter last year so this improvement was largely attributed to what we mentioned through some of our revenue drivers the increased demand in our skew uh management and deliverables and skew builder which is a transactional based model as bill described earlier which is again with providing strong gross margins within our managed service business We also continue to focus on managing our costs around the legacy business to optimize profitability and still meet our commitments to our customers. Professional service margins declined to 32% versus 42% of the same quarter last year. This was driven by a professional service revenue resulting in lower utilization rates as we experienced a pause also on some of the engagements as mentioned. We'll continue to manage utilization and close alignment to our pipeline and the expected demand. so as bill mentioned and also through our cost discipline and also our commitment to the bottom line during the third quarter we took a restructuring charge of four hundred thousand dollars to drive further improvements on our overall structure to relative to the revenues operating expense at 11.5 million compared to 15.2 million of the same quarter last year these results are the outcome of some of those efforts with a gross margin and opex management we delivered another quarter of positive adjusted EBITDA We will remain focused on delivering overall positive EBITDA while also driving our product initiatives forward. With that focus, we will look to repurpose some of our spend to provide additional capacity and funding to support our product initiatives through development work and go-to-market. we believe the investments we are making in products will contribute to future growth in a very meaningful way in the meantime and as demonstrated in these results we remain committed and focused on managing a profitable business while we get to position to scale our priority products now moving on to the balance sheet we ended the quarter with cash inclusive of term deposits of 10.3 million In Q3, we generated $800,000 of positive cash flow, excluding the earnouts and NCIB. And then the main use of cash after the core business operation was to fund the final earnout payment for the bridge acquisition, which was completed in 2021, as well as the NCIB program. In the third quarter, we purchased $700,000 to acquire 308,000 shares under the NCIB. as mentioned the business is managing towards operating cash flow positive and we believe this will be accomplished while continuing to make the necessary investments into our products it's also worth noting that our credit agreement with bmo had expired and we are in active discussions to formalize new credit facility that should be in place jim i'm going to turn it back to bill now for a closing summary thanks mo