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.

Thanks, Paul. The team continues to find ways to operate more efficiently. And we're seeing good meeting indicators that our new solutions are really starting to drive that future growth. And I just want to thank everyone, as always, for taking the time to attend the call. I look forward to updating you on our progress on the next call. And we'll open it up to our analysts for questions.

Thanks, Bill. Our first question comes from Max Ingram at Canagore Genuity. Please go ahead, Max.

Hey, can you hear me okay? Yeah. Hi, Max. Hey, how are you? Thanks for taking my questions. So my first question is on the Q4 call, which I realized was not that long ago, Bill, you'd mentioned you'd been seeing early signs that customers were starting to open up their budgets. I'm just wondering if that dynamic is still at play or if you've seen any changes. We've seen some names in our space that have changed their tone recently, noting a more cautious outlook. So just wanted to ask what you're seeing there.

Yeah, look, I've actually been spending more time personally out in front of customers. And there's no question that we're seeing the conversations have shifted now. They're looking for solutions. In fact, I would say a bunch of the conversations I've been having with folks have reflected what a terrible year 2023 was. What we're hearing is they're gaining optimism. Frankly, they're gaining optimism about 2025. And what that seems to be allowing them to do is start prepping for a better 2025. So we're definitely having, I think, more optimistic conversations than we've had in the past. And we're seeing folks start to plan. And it's also why I'm not telling you next quarter is going to pop. I think what we're having are a progression of conversations that are leading to the back end build. But no, I'm definitely seeing more optimism about 25. And I think it's increasing their confidence in setting things up for that. So we are definitely seeing more budgets starting to open up. But again, don't expect next quarter to to have all of that show up. I think it's going to, it's showing up in our pipeline, which will start showing up in bookings. And that's why, you know, we've been really focusing on that Q4 exit run rate that we're after.

Right. Okay. That makes sense. My second question is on the professional services. It looks like this quarter marks the second quarter of sequential improvement. Are you able just to touch on what's driving that?

A lot of what I just described, right? I think it's a, Folks are looking over the course of this year, trying to set themselves up. I think we had a good quarter of bookings in part because it's the start of the new year. It's showing that the budget is there. And we have a couple of customers that will give us 12 months of visibility. So, you know, I think the key now is building on that in Q2. And when I look at what's in our pipeline and I look at what the team's calling for Q2, we've got a chance to have another really solid quarter.

Okay. And then one just quick last one for me. In your shareholder letter, you mentioned you expect the working capital to sort itself out over the next two quarters. Can you just help me understand what that means?

Yeah, I'll pass that to him.

Yeah. Hey, Max. I mean, ultimately just our receivables went up and we should be able to get that back down to kind of prior levels. So it's really just a matter of closing down on some of those receivables. I was the probably single most, you know, biggest contributor to the working capital increase.

Okay. Thanks very much for the color and I will pass the line.

Thanks, Max. Thank you. Our next question is from John Xiao at National Bank Financial. Please go ahead, John.

Good morning. Thanks for taking my question. So, Bill, you mentioned a significant legacy MS renewal in some of the 36-month long contracts. So what's the nature of those contracts and how should we read into this customer move? Does that mean the client are actually extending their stay with the legacy solutions?

Yeah, that's exactly what it means, John. And I'm going to apologize. It sounds like I might have some choppy internet connection. So we had a power outage. Yeah, in one particular case, as we were closing data centers, we worked through our customer base and gave them choices. They could leave. They could move to the cloud with us. Many of our complex Oracle ATG customers that are not ready to go have moved to the cloud with us. And some of them have been quite clear. We're not going to be ready to go for probably 36 months. So They're signing bigger extensions with us. But it's a renewal. It doesn't grow the revenue. It just extends the life. We did take some price increases with all of these new contracts on the ATG, as you would expect in a business like this, which, again, will also help offset the plan to churn. So I think about this as a managed decline. And I think the team is doing a great job of helping our customers transition and giving them as long as they need and maintaining the cash production we would expect off a declining business.

Okay, got it. And as you move clients out of your own data centers to public cloud, how should we access the impact on your gross profit and potential operating expense?

I know Mo spends a lot of time in there. I'll let him talk to that.

Yeah, John, I'm not expecting any material impact. I think the way we've kind of handled the contract, the pricing and the contracts, we're still expecting to hold our gross margins. So I don't expect a material impact on declining as we add more cloud costs in there. Obviously, the CapEx will continue to be light as it has been late as a result of the move over the past couple of years. But we've been operating quite a bit of our larger customers on AWS, and this is just going to contribute to it. So not a material impact to the current rates.

Okay. And lastly, it's more of a modeling question. When you have a new managed IP solution booking, how long does it usually take to convert the bookings into revenue? Is it within a quarter or beyond one quarter?

The management and IP largely would probably be, I would say, within a quarter. I mean, our licenses are typically pretty quick to spin up unless there is some customization, but obviously a lot of it we're trying to leverage to scale, so try and minimize some of that as much as possible. But I would say within three months, do you expect that to start converting? Potentially faster if they are already just going off the shelves and we're ready to deploy it off of office solution that we were ready to deliver.

Okay, thanks. By that question, John, are you asking where the total value of the contract converts or when we should start seeing the revenue coming off those contracts?

It's just the timing of the revenue recognition of the bookings.

Yeah. So again, we should just clarify, we wouldn't burn the entire value of the contract in a quarter. In most cases, a lot of those MIPS solutions are three, six, nine month types of contracts. And again, the goal with MIPS really is it's a longer term contract. So we expect that to be more of a consistent billing and regular extensions on it. So You know, kind of think about it as revenue starts to come on that contract within the first three months, but it wouldn't expire in those three months. Correct.

Got it. Thanks.

Yep. Thank you. Our next question is from Jesse Pitalak from Cormark Securities.

Hey, good morning. Just coming back to the Oracle legacy business. Can you just speak a little bit about the success that you have when you try to convert some of these customers over to a new platform? Just maybe any type of success rates or anything else you could provide?

Yeah, we haven't actually shared what those conversions are, but I can tell you, as we get into the long tail of customers now, the more complex ones, we're actually seeing more of them coming and asking for that assistance. So we've got a large number of what we'll call multi-domain customers. who buy more than one category of capabilities. And many of these ATG customers are actually multi-domain customers of ours. So they're not just buying the Oracle, they may be buying data from us, they might be buying control tower, And we're now also starting to see we've moved recently a handful over to some new platforms, including Shopify. And we're in flight right now with two or three that we're moving to, again, a new commerce platform. So we are seeing the benefit of retaining the relationship with client as we start moving them on to new platforms.

Okay, that's helpful. And then just on the closing of the data center business, has that been completed or can you just remind us of the timings?

Yeah, the majority of our Toronto data center should be complete in June. So, you know, that gets off our books. All of those customers will either exit or be on the cloud with us. And as far as I know, we're still on track to finish up in June because I believe that's also when our lease ends in that facility.

All right. And then just one final question. Your intangibles CapEx was a bit higher this quarter. Can you just elaborate what that spend was related to?

Yeah, it's a skew build development. Our AI, machine learning, all the tools that we're continuing to invest in and develop. And that's essentially kind of continuing some of the development on the products. I think with skew build pace, we've capitalized slightly more than we have in prior quarters within our product suite. All right.

That's all for me. Thank you.

Thanks, Jess. Thanks, Jess. Thank you. Our next question is from Daniel Rosenberg at Paradigm Capital.

Good morning. My first question was just around some of the technology partnerships that you guys have in place. I know in the past, you know, you've been really strategic about who you work with and where you see the future of frictionless commerce. I was wondering if you could just speak to, you know, you know, who, where are the places that are most interesting to you that are most strategically important to you? And, you know, who are you working with as you think about future opportunities?

I would say each one of our what I'll call skills or capability areas, we have really strategic partners we're working with. And it's we call them strategic, not just because we have particular skills in the area, but because we go to market together. We we we battle for clients together. And in some cases, we're actually starting to share product roadmaps together. and work together on the way we develop the products. So I'd use a simple example. Fluent is our OMS partner. We work extremely closely with them and go to market. We just had another terrific win with a major sporting goods brand. And Control Tower is a big part of what we're bringing as a value add on that. And we're collaborating more and more with them on how Control Power is something that their entire customer base can benefit from. So that would be a really strategic partner. When you get into the data business, you know, Syndigo, Stevo, Informatica, three major partners, each one of them does something a little bit different that, again, creates a point of difference in the market that we work on together. Syndigo is big into syndication and really important. dovetails nicely into our messaging with SKU Build. And so, you know, some of our product categories are even more strategic with some of our partners. And so we focus on them. And in commerce, Vitex has been a strong partner of ours. A couple of those in-flight transitions that are going on right now are actually on Vitex, as well as we're seeing an increased demand on Shopify. And we're spending more time with Shopify on B2B So we have kind of two B2B partners, Spriker and Shopify. We've got VTechs more on the B2C and marketplace. Each one of them has a capability that we feel is a market differentiator. And depending on what problem customers trying to solve, one may be more suitable than the other. So a really good set of partners that both bring us leads and collaborate with us.

Okay, appreciate all that context and gives us a sense of, you know, the quality of partners that you're working with.

Sorry, one thing I'll add, Daniel, that I was remiss in not talking about earlier, we're actually starting to transform some of the partner relationships to not be just applications like that. AWS would be a great example of a very strategic partner. They're working with us, for example, on all these migrations. There's some strategic initiatives around managed services that we're working on with them as well. And we're also starting to see our products could have new distribution channels through partners that are not application partners, but potentially service partners. So we're working on some of those. Expect to see what we call strategic partners start to change a little bit in the next 12 months as our products start to take hold.

Okay, I appreciate that context. In the dialogues you're having, you mentioned increasingly participating in the frontline dialogues with your customers. I was wondering if these are continuous conversations for some of your traditional customers, but in terms of getting new logos and things of that nature, is there a seasonality aspect towards budgeting season and whatnot, or is everybody operating on their own

uh timelines i'm just trying to think about kind of top of the funnel opportunities for you and how those convert um that's a it's a really good question dan especially when you get into enterprise planning the good news is um lots of companies have different budget cycles right so uh they don't all run on calendar years which uh is helpful i think the other thing that is um valuable about the approach we take is problem identification can happen outside budget cycles and so again as you start to see challenges in performance and we see this regularly and course corrections required we're actually quite effective problem solvers So sometimes it's projects that are going off the rails and they need to be course corrected. Our team on PS in some of our categories are absolutely world class. So we can be brought in to help fix projects that have budget and have gone off the rails. But we're also identifying problems that are affecting conversion rates and revenue. And so when we help identify the problem and we can demonstrate the ROI on fixing it, we also find out-of-budget cycle capabilities. Tough CFOs. We've talked about this for a while. Almost all the deals that we end up putting in front of our clients end up... owes. So the one consistency I believe that has not changed is if you can't demonstrate ROI, whether it's at the beginning of the budget cycle or when you find a problem that needs solving, if you can't prove a reasonably short-term return on that investment, you're not going to get funded. Your project and your managed services aren't going to go forward. I think the good news is a lot of the things we're identifying, we can demonstrate real problems. It's not hard to spot and we can show the ROI. Um, Again, you still have to work through the cycle. It would help if it was during the budgeting cycle, but it's still working even outside the budget cycle.

Understood. Thanks for taking my questions. You bet.

Thanks, Bill. And Daniel, it looks like we have no more questions, so I'll turn it back to you.

Thanks, everyone, again, for attending. You know, I got to admit that the more time I'm spending in front of customers the more excited I get. Most of what I spend my time talking about are problems and problems we can identify quite often through the digital channels our customers are working through. And what I get excited about is we get a universal agreement on problems. Probably SKU Builder is one of our best examples. Attributes that are missing, images that aren't there, the quality of information that makes things findable. We don't get a lot of pushback on whether we're identifying a real problem Those kind of problems cascade across the entire org. So it's not just how something presents on the website. It actually can affect whether that product gets ordered or whether it gets returned. So one of the things we are seeing is the problems we're identifying actually cascade across the whole business and can have a huge impact. So I'm excited about the fact we're hitting on universal problems. I think the only thing that is always challenging is transforming the sales cycle, trying to speed it up. But we're getting head nods on problem. We're getting tell me more. And I think we've got products that are really starting to answer those questions. I'm really excited about what I'm seeing in the market today. So I think there's lots of good news coming. I expect a couple of quarters for really to gain momentum. But I think we're really demonstrating we're on the right track. And I want to thank our team for all the great work that they're doing. We really do have a world-class team in the categories we play in, and they're the folks that are actually building these products as well. So stay tuned. Lots of good stuff to follow. Thanks again for attending, and we'll look forward to speaking to you again in another quarter.