Pivotree Inc.

Good morning, everyone, and welcome to Pivotree's fourth quarter and year-end 2023 earnings call. All participants are currently in listen-only mode. Following the presentation, we will open the time for a question and answer period 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 reflected in 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 to our financial performance, They're not recognized measures and do not have standardized meetings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including our reconciliations to the nearest IFRS measures. Excuse me. Now I'd like to turn the call over to Pivotry CEO, Bill DiNardo.

Thank you, Dennis. Good morning, everyone. Thanks for joining us for our fourth quarter 2023 conference call. With me today is Moa Shore, our Chief Financial Officer, who I'm Pretty sure you're all used to seeing now. And as we normally do each quarter, I've published a CEO letter in conjunction with the earnings results that's available on our website, filed on CDAR. This is my annual view of our performance and includes some descriptions of some of the changes we've made to our reporting package. So I encourage everyone to read the letter. And you'll find a lot of what I'm going to talk about today is found in there as well. So start off with what I said a lot last year. 2023, really, the focus was running a profitable business. And that was really to generate capital to invest in new products and services. It's been, I think, for many companies, a careful balance of cash is critical and But growth remains important, especially when your revenue has good gross margins. You want to keep growing. So last year, we focused, though, on that EBITDA production. I'm really proud of the team. We were able to generate another $600,000 in Q4 and to bring the total up to 2.1. And that was on a smaller revenue base than the year before. Again, really, this was managed through cut, control, contain. These are the kind of levers that when you want to get there on an accelerated basis, we were able to do. And as a result, again, five straight quarters of adjusted EBITDA. A lot of those adjustments relate to some of the changes in our org structure and reduction in force. So again, adjusted mostly because of restructuring charges. I'm going to share with you some of the changes we've made to our reporting pack this quarter, really to help our readers understand our progress against our stated objectives. We've been out and had a number of conversations with folks, and one of the challenges we know everyone has had is trying to really discern what's growing. Everybody knows that there's a part of our business that's shrinking, and trying to separate those to make it easier for people to understand what we're investing in. So we've actually separated our legacy managed services. I do call that LMS. It's not terribly creative, but it's pretty accurate in its description. And that LMS business includes our Oracle ATG managed services, our data center hosting business, and some of the other similar types of managed services that are not really invested for growth. They're on end-of-life type platforms. And I've separated those from our newer growth area of managed and IP solutions, which are referred to as MIPS. And again, nothing creative, but an accurate description of these are managed and IP-based solutions. And that represented about $15 million of revenue in 2023, a strong fourth quarter. in that area as well. And we've also made changes to the way we will report bookings. So really standardizing on reporting on the total contract value of all bookings. A little bit different than the way we've historically done it, mostly because you weren't getting visibility into managed services contracts as they were getting booked if they were renewals. So you're now seeing total contract value, which again should make it easier for you to understand how much of our bookings will translate into go forward revenue. So, again, historically, the managed service bookings really only included new logos or where a renewal or extension was incremental to the original booking. Now you'll see the total value of booking. We've tried to help the transition by giving you visibility into both retrospectively so that you, again, can normalize for yourself how we're performing. So with that, you know, let's move on a bit forward into how we did. So as our business evolved, the old way in which we reported bookings wasn't really revealing the state of the business and how it intended to drive growth. And I think with this separation now, and you can see the LMS and the MIPS, you can see what's growing and what's shrinking. We do think that the total contract value better illustrates the extent of the shift, particularly around our management IP services. And again, you'll see the total previous in the purple is entirely from the value of renewals and extensions in MS. So you see the total now of 16.8 includes all the bookings in the quarter. Again, we're going to see the effects of seasonal demand for legacy services from our customers. And you can see that in the chart. But make no mistake, we're leading with IP in all of our key customer segments. So that's really what we're focusing on. You can see, again, even in Q3, we had a significant amount of LMS bookings. And that was a number of continued renewals and extensions on some of those platforms. But you will start to see that start to shrink. And you'll see that in some of our revenue slides. Professional services really remains important to customer intimacy. It funds and drives product development priorities. We gain a lot of insights from our professional service work. And our new product and services is the drive for greater lifetime value of customers. And it really is derived from the insights that we gain from our professional service business. We're also really good at what we do in the delivery of professional services, and we'll talk a little bit more about that in the next slides. So this chart really illustrates the shift in focus and considerable progress we've made as our managed and IP solutions grew from just 6% of our total contract value bookings in Q1 to 23% in Q4. We've also carried through this segmentation into our revenue reporting, and Mo will discuss that in further detail. So, again, really the point of separating this is to allow everyone to see there is a part of our business that's growing. It's growing at a very good pace. That's the area we're investing in. And a lot of that is what we've been talking about around our IP. So now you can see it and I'm sure you'll have some questions about it. So when we break it up, you've heard us talk about business units in the past. We really have reorganized ourselves into the three business lines. We've changed, again, the way internally we're running the business. We have professional services, our legacy managed services, and our managed and IP solutions. There is some interaction between all three of these, but when we think about bookings, when we think about revenue efforts, and we think about the products, we do think about them in these three buckets. And we continue to deliver world-class outcomes for our customers in 2023. And you can see that in our professional services with the recognition we received from our strategic partners. We won a number of Partner of the Year awards, and that's up against some of the big five who competed with us in these categories. We were innovators in a number of categories as well. The thing that, again, I really want to reinforce, we've probably shied away from this in the past, but we are very good at the professional services work we do. In fact, we're world-class. We have to stay focused on delivering world-class in this category because it does lead to the managed services and the IP, and it wins the favor of customers. And we've got some great customers that keep coming back to us. Even our retention professional services is quite extensive. So again, the only thing I would say that we highlighted last year with some of the economic headwinds was we did see our professional services decline, not because we lost a lot of customers because their budgets shrunk because they took longer to get to the extensions. We found consistently we were pushing booking signings out a quarter as we saw executive teams spend more time scrutinizing the business cases on these things. Again, I think this is part of the course for many folks. I've heard this from many of our peers. It's the same sort of message, which is deals are getting done. They're just taking longer. Clients are buying smaller blocks, so they're not buying for 12 months. Or in the previous year, we saw folks even buying for 24 months on professional service. They're not doing that now. They're buying in quarters, thirds, six months. But the good news is we continue to bring on the extensions as those contracts wind down. The other good news is we saw some momentum pick back up in Q4 with almost 12 million of total contract value bookings in there. So, again, we're seeing some. We're not jumping up and down saying the world has returned to normal yet, but I think we're seeing some signs that customers are starting to open up their budgets again. On the legacy managed service, this revenue, again, includes our Oracle ATG, our data center, and the end-of-life businesses that we've talked about in the past. We are thrilled that our peak season in 2020 through was, again, a great success, seeing sizable increases in our customers' average daily order volume, and we experienced zero preventable outages. So, again, what our customers really want in that legacy managed service business is silence. They want it to work, which it's done for years. Many of them are going to move off. We've talked about this. They're going to move on to, quote, unquote, more modern platforms. But with the kind of customers we have here that do the kind of volume they do, it's a slow and gradual process. So, again, we see them continue to renew customers. Stuff we thought was going to turn off did not in 2023. We have started to see some of that turn off in 2024. It's built into our own forecast. But we've also had a couple of surprises where people we thought were going to go have signed again, some asking for 12 or 24 month contracts. So this really is an asymptotic curve. I guarantee at some point it will go to zero. I just can't tell you when. And we'll continue to manage it profitably while we do. The managed and IP solutions, this is the area that we're probably most excited to share the progress. We've had those questions. Where are you growing? And this is the area we're growing. And this really includes three core products, SKU Build, Control Tower, and WMS. We've talked about Connect in the past, which is our API as a service business. That business continues to do well, but candidly, it's probably really part of the Control Tower business now is what we've observed and the way it seems to get packaged. So again, we really talk about this managed IP solutions really as those three products right now, SKU Build, Control Power, WMS. We've had some good success in the total contract value bookings in a category that grew over 50% in 2023. Look, we expect to see some volatility in this segment, especially in the early days, particularly around consumption and transactional volume fluctuations. So, again, this is not necessarily SaaS. Some of it is. A lot of this right now is what we call transactional revenue. Even Connect is transactional revenue based on the number of transactions that are occurring over some IT infrastructure. In some respects, that's like almost CPU based licensing with transactional. SKU build is very much gravitating towards the sale of completed SKUs or enriched SKUs. So again, there's some volatility, but we're seeing growth in the area. We're seeing a lot of interest in the product and that is machine learning and AI assisted. So we do it better, cheaper and faster than the alternatives. And that's really playing out well in terms of the number of demos and POCs that we're running with customers right now. We're coming off a peak in Q4. Again, while we had a fantastic quarter, I think the run rate would suggest we're approaching 20 in that category. I would normalize that. There's some big chunks in there. There was some, what we'll call them, overruns in some areas, a lot of consumption. I'd think of this more as a 3.5 to 4 million run rate right now. and something we're building on top of. So again, a key message here, three different businesses, all of them important to us. Professional services, again, world-class at what we do. Customers that keep buying from us. Last year, smaller budgets. We saw the same thing in COVID. We saw a shrink in the PS during the COVID period and then a rebound. We expect a rebound in this category as well. Legacy managed services, we're going to see the legacy managed services with a continued decline, and the managed and IP solutions are the reason why our total managed services have been above flat in terms of growth. Again, when you break it down, managed IP solutions growing very well and working hard to make up for the declines in legacy managed service. So I'll pass it off to Mo to take you through some of the financial highlights.

great thanks bill now we'll go to the next slide so as we've introduced on this call and through our through our filings revenue standpoint is uh aligned in segmentation to simplify and focus on the categories that bill described legacy managed services managed ip solutions and professional services So you've got the granularity of managed services. What used to be reported as managed services to be now segmented and supplementary first to show legacy managed services from the managed and IP solutions. The investments we've made in new products and services are now a more material driver for us today. And I think we'll provide our shareholders a better understanding of our growth performance. And I'll be able to describe what's in legacy managed services and some of what's going a bit deeper. So managing IP solutions, what's included in there are transactional revenues, product subscriptions, and managed services on some of the more current technologies that we support. This segmentation, again, will provide visibility to how the growth in our managed and IP services offset the legacy services through 2023 to net out the year at overall growth for what we used to call managed services. So revenue from managing IP services was $4.6 million. It was an increase of nearly 80% year over year. We did benefit from a favorable spike in Q3 and Q4. And as the bill described, we normalized for it. We're probably more on a run rate of $3.5 to $4 million. But we're excited with the measurable progress we've made in 2023. And we do expect this to continue with the investments we're making into 2024. Now, for legacy managed services, if you may recall, during 2022, we benefited from the delayed churns as customers signed and re-signed and continued, especially the Oracle ATG most significantly. And during Q3 and Q4, you can see from these numbers that we've experienced some of the churn we've been referencing. And within this segment, as we've said, we continue to see a mixed bag of customers. There are still customers that are looking to renew and delay the transition. But as Bill said, it's going to go to zero. It's just a matter of when. But right now, we still see a mixed bag of customers looking to renew. Professional services delivered sequential growth increase. We did experience, sorry, we're still on the prior slide, though. Professional services delivered a sequential growth because we did experience a slight increase in demand. Our bookings represented in Q4 and in particular within some of our commerce solutions. And based on Q4 bookings, we expect some of that growth to contribute to Q1. So moving down the income statement on Q4 gross margins, it was 46.7 versus last year's 47.3. It has shown a steady improvement through 2023, as you can see. The improvement in gross margins was driven by a combination of our legacy and managed 9P solution growth. The gross margin in that segment has improved to 55.3% up from the 54.6% of the prior year. Professional services margins, they declined from the comparable period of last year, Q4, from 42% down to 38%. This was primarily driven by the revenue decline that we've seen in the professional services segment. Sequentially, we continue to see an improvement in professional services. It improved in Q4, it got closer to the 40% mark that we'd look to operate at or above. We will look to continue to manage utilization in close alignment to our bookings and the expected demand. Now, one highlight also on the right side, you see operating expense, 11.1 down from 12.8 million in the prior year and 11.5 in Q3 of 2023. This was an area that we focused on. We said it was part of our objective to obviously mitigate against the decline in revenue, but also to optimize for EBITDA and cash flow. You can see on the charts a significant decline since 2022, where we started to take some initiatives. We've reduced our cash operating expense about $3 million off of Q3 and Q2 levels of 2022, which contributed to the overall EBITDA results and the mitigation to the revenue decline. Obviously, in this environment, we'll continue to stay flexible and we'll adapt while we continue to drive and focus on sustainable, profitable growth. So despite the revenue decline, this was our fifth quarter of positive adjusted EBITDA, which also included investments we continue to make into our managing IP solutions. As we approach the start of 2024, we will be ramping up some of our sales and marketing and R&D spend in support of the overall growth objectives as we also look to accelerate our products. But through the course of the year, we'll remain focused on delivering overall positive data. We believe the investments we are making in our business will contribute to future growth in a very meaningful way. And through our new segmentation, it should be easier and more visible for our shareholders to see where and how we are delivering growth. Now turning to the balance sheet, we ended the quarter with cash inclusive of term deposits of over $10 million. In Q4, we generated 1.1 million positive cash flow from operations. Within there, a strong contributor was our working capital. We had really strong collections. that contribute to the overall results. We do expect seasonal outflows going into Q1 through working capital, and obviously we'll continue to manage and make sure we continue to stay on top of our collection, which the team has done a really good job on, and obviously a testament of the clients and the services we're delivering. In the fourth quarter, we allocated just slightly over $700,000 to acquire over 400,000 shares under the NCIB. We will continue to manage the buyback program with consideration of the cash we are generating from the business post our organic investments. As mentioned, the business is managing towards operating cash flow positive. We believe this will be accomplished while continuing to make the necessary investments to grow our product revenue. Also, we're pleased to announce that our new credit facility with National Bank of Canada of 12 million plus access to an additional 15 million accordion facility that has now been closed. This replaces the previous facility we had with Bank of Montreal. You can find additional information that has also been filed with CDAR. I'm going to turn it back to Bill now for a closing summary.