Pivotree Inc.

Good morning and welcome to Pivotree's first quarter 2024 earnings call. All participants are currently in listen-only mode. Following the presentation, we will open the line for question and answer session for the analysts. To ask a question, we would ask the analysts to click on the icon to raise their hand. Before we begin, we would like to remind listeners that certain information 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 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-RFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they're not recognized measures that 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 Pivotry CEO, Bill DiNardo.

Thank you, Dennis. Good morning, everyone. Thanks for joining us for our first quarter 2024 conference call. With me today is Mo Ashour, our Chief Financial Officer. And as we normally do each quarter, we've published a CEO letter in conjunction with the earnings results that's available on our website and filed on CDAR. As always, let me just start with a couple of highlights. We carried forward the mandate from 2023 and will continue to focus on running a business to generate cash that will be invested in new products and services. These three metrics on the screen will be the ones that you hear me continue to reference as it relates to our progress of our investments in product and go-to-market. We have seen positive growth in our MIPS revenue. As we'll remind everyone, we introduced the concept last quarter just to separate legacy managed services from managed and IP solutions. And we kind of gave a bit of a range of where we thought we were at. So we've seen positive growth in MIPS revenue up to 4 million, close to 40% year over year lift, but we expect this to continue to be lumpy. And again, we talked about this last quarter until we begin to see a more consistent total contract value booking, which were 3 million in Q1 up over 100% versus a year ago. I'm pleased that the team has continued to drive opportunities to late stages. feel pretty good about what we should see in Q2. And again, we hope to see those bookings convert as planned. The team delivered 200,000 of adjusted EBITDA. And despite the seasonal sales and marketing programs that front-loaded government deductions happen, I mean, this is a good Q1 number. And that's a 1% adjusted EBITDA margin. We'll talk a little bit more about what's in the adjustments. The team delivered $20.7 million in total contract value bookings. We've talked a lot about this. This is the leading indicator of where we should start to see a turn happening is bookings. And obviously, we really monitor closely how pipeline is doing. We're just off the Q1 2023 mark of 21.3, but up 23% quarter over quarter. The professional services we do remain important to customer intimacy, cash production, and driving product development priorities. We're really pleased to see another quarter of $11 million in TCV PS bookings. Again, that was one of those areas you could see the first Q2, Q3 last year, our bookings in PS was down. That drove a lot of our revenue softness last year. So we're showing signs of recovering and trending back. Obviously, that target is right there, Q1, 2023, $14, $15 million dollars. That's where we're trying to get back to, and the team is seeing the green shoots that are helping give us confidence we're on the right track. The legacy managed services benefited from $3.5 million of seasonal renewals, as well as $2.8 million of cloud migration bookings as clients continue to transition out of our DCs. Again, the reason we continue to include this, even though we're moving to cloud, these are legacy platforms. These are the platforms we expect to see continue declining. So really all this is showing us is a continued, smooth, slow, steady decline. These bookings should not suggest to anybody that somehow we've had an inflection point or a turning point and LMS is going to start growing. Again, this is really all about how we manage that transformation over time. We continue to lead with IP in all of our key customer engagements. and have a late-stage pipeline to be converted into more consistent bookings for MIPS. So really, while it was down sequentially, it did sort of highlight where I thought we would be trending, and we're right in the midpoint of that. And again, we've got a really healthy pipeline. And all of our conversations, even many of our data PS conversations, involve our IP. So strongly connected. Again, I think the theme is we're using innovation to differentiate between We can see that show up in our MIPS line, but you're also going to see it show up influencing some of our PS as well. So we really think about how the business has changed. We used to report along business units. We're really focusing now more on breaking down the walls of the business units and thinking along the PS, professional services, managed IP, and legacy. PS is showing positive signs of returning. Like I described earlier, two consecutive quarters over 11. and the TCV bookings, 12% quarter-over-quarter revenue. Q1 certainly benefited from the strong Q4 new logos, and that really is another good leading indicator for us. New logos, we start off, but we build on top of that, and we're seeing lots of good extensions. Really, the core of our business is our core customers. We also saw many projects being extended during Q1, which contributed both to importer bookings and revenue, so good solid Q1 for us. There's no doubt that there's still work to do to get the business back to the 14. A lot of changes, as you know, we've hired a chief revenue officer, chief product officer, and we are seeing the benefits of having quality professionals leading those functions. Our managed and IP solutions, again, making progress. This is the future. We started breaking this out this last quarter. And as we had indicated last quarter, the growth in this category will be volatile for a period of time. And I did say last quarter, a normalized run rate should be three and a half to four million. And we landed towards the top end of my normalized range, which, as I said, is about four million a quarter. It's up 144% year over year. You know, still a small base, but it's becoming more material and it's obviously having a great effect on weighing and starting to outweigh some of the legacy lines in LMS. Again, I'll reiterate, we're really optimistic about the late stage pipeline we're seeing, the conversations we're having with our customers about SKU build, control tower, and our warehouse management solution, all positive conversations and all moving in a direction we've been hoping to see. Again, you'll start to see the indications in bookings. That's really your good leading indicator of when you should start seeing that MIPS grow. And again, really the goal of having a CPO now and having that kind of focus on exposing more features and functionality and capabilities, we're starting to see a real steady cadence on the sprints we're doing and the story points we're able to start producing now. quarter. So again, very excited about how we're seeing our product features evolving. On the legacy managed services, the trend of more sequential declines in revenue is obvious here now. And again, we started exposing that last quarter. It's going to continue into 2024 with a 12% revenue decline quarter over quarter and 33% year over year. Again, a Full disclosure, don't look at that bookings as reversing the decline trend. Just look at it as smoothing out the runoff on this category of ours. Again, good news is we've got great customers in this category, and they continue to do business with us even as they exit. So there is a method to the madness in maintaining this legacy and extending the lifetime of these customers' values. This quarter, you'll see a big spike in the TCV bookings. That's what I was describing earlier. A bunch of that spike actually comes from the fact we've had customers resign on three-year contracts. So just a reminder, it's a total contract value assessment. So a three-year contract would have an impact. It's not the same as what we would have reflected upon in the past. With our primarily PS bookings, we didn't put renewals in the bookings we were reporting. Now we do. Now you can see how this is going to extend the life of that element. So they will help to slow the decline and give us longer visibility, which also allows us to manage for better profitability coming off of it. So overall, I'm seeing really positive signs. I'm happy with the progress we're making. Obviously, it never goes as fast as I would like, but I expect this to continue to progress over 2024. And I'll pass it over to Mo to take you through some of our financial highlights.

Okay, thanks, Bill. You'll see here the revenue segmentations of the three categories that we've been referring to, managed and IP solutions, legacy managed services, and professional services. Revenue from the managed and IP solutions was $4 million, an increase of nearly 40% year-over-year, and as Bill mentioned, on the higher end of the normalized run rate range that we had suggested last quarter of $3.5 to $4 million. As a reminder, this segment includes revenues from our product license, SKU build transactions, and some of our application support outside of those legacy platforms and hosting services. Now, the legacy managed services, as we've been expecting, we continue to experience the churn within this segment down 33% and 12% sequentially. While we experienced churn within this segment, Bill just alluded to it, we continue to see a mixed bag of customers looking to renew and extend the life of their platform as demonstrated by the booking results. Professional services delivered sequential growth This was up 12% versus Q4 of 2023. Contributing to this is some of the new logos that Bill was referencing that came into in Q4 and the expansions that contributed starting with our Q4 bookings. This sequential revenue, which delivered contribution across our offerings of each commerce, data, and supply chain. Now, moving down the income statement, Q1 gross margins was 45.7 compared to prior year's 46.3. Our MIPS and LMS gross margins were reasonably similar to prior year, same quarter. PS had a slight decline. This was largely due to strong revenue performance during the prior year for professional services. Looking at the chart on the right, we present the adjusted OPEX trend, which reconciles to the reported adjusted EBITDA. Adjusted operating expense was $9.3 million, down from $10.7 million in the prior year period and slightly up from the $9.2 of Q4 of 2023, our most recent quarter. The sequential increase is attributed to the higher seasonal spend in Q1 that should normalize over the years, such as some of the government and social taxes we've got. You can see on the chart the significant decline since Q2 of 2022. Over time, we have incurred restructuring charges, which supported improving our OPEX run rate, while also creating capacity to reinvest. We're currently just shy of $3 million lower off that Q2 of 2022. This contributed to the overall EBITDA improvements while continuing to help mitigate against some of the revenue declines we've experienced. We'll continue to stay flexible in this environment and adapt while we drive the business towards sustainable, profitable growth. Despite the decline in revenues, this was our sixth quarter of positive adjusted EBITDA, which also included investments that we continue to make in our managed and IP solutions. Through 2024, we'll remain focused on delivering overall positive EBITDA while investing to grow and deliver on our overall business strategy. We'll turn to the balance sheet. We ended the quarter. It's inclusive of term deposits of $7.9 million. In Q1, we used about $1.3 million of operating cash flow. And let me break that down. Last quarter, we highlighted that we expect a working capital impact, and we see it here. It contributed $600,000 of cash outflow. Again, we expect this to normalize through the year. The remainder of the $700,000 cash outflow from operating activities negatively impacted by about $1 million, broken down into half a million of restructuring charges, which will contribute to future cost savings, and half a million of front-loaded social benefits and taxes as a seasonal event. On an adjusted basis, we generated $300,000 from core activities, excluding the mentioned seasonal items, restructure, and some of the social taxes. In Q1, we allocated $236,000 to acquire just shy of 142,000 shares under the NCIB. That's about an average of $1.67. We will continue to drive NCIV decisions using a balanced approach. We'll consider our future cash flow projections and available investment options, and through those, we'll consider what's best in returning the maximum value for our shareholders. 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 to grow our product revenue. As a reminder, in addition to the roughly $8 million of cash, we have access to up to $12 million through our credit facility that we closed with National Bank. Plus, we have access to an additional $15 million accordion to support any investment opportunities. I'll turn it back to Bill now for a closing summary.