Pivotree Inc.

Good morning, everyone, and welcome to Pivotree's third quarter 2024 earnings call. All participants are currently in listen-only mode. Following the presentation, we'll open the line for a 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, 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 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 are 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 Pivotry CEO, Bill DiNardo.

Thank you, Dennis. Good morning, everyone. Thanks for joining us for our third quarter 2020-4 conference call. With me today, as always, is our Chief Financial Officer, Mo Ashour. As we normally do each quarter, we've also published a CEO letter in conjunction with our earnings results that's available on our website and filed on CDAR. And I'll be covering some of that same material today. Additionally, we've made some key changes to set the business up for leaner growth, which we shared in our pre-earnings release. And we'll go into some more detail over the course of the call today on what that means. So far, 2024 has been a period of significant transformation across the whole business. I'm pleased to say that we are now well positioned to execute on our strategy and deliver leaner growth and to generate cash flow. We've seen positive indications in our managed IP solutions category, where trailing 12-month revenue is up 28% versus the previous 12 months. MIPS bookings have been holding relatively constant in the three plus million dollar range, and we continue to see quality late stage pipeline being built and contracts in the works right now. And again, we said this category, given some of the transactional nature of SKU building, will be a bit volatile. We've had some very lumpy bookings in the past that extend over multiple months and sometimes over multiple years. But again, we're seeing a sort of consistency with it that makes us quite happy. Across the business, we had a strong quarter of bookings, up 13% year over year, which is driven by a variety of things. And I'm actually going to get into it in the next slide around what some of the mix was inside that bookings. But at 19.2, again, fairly consistent in the last couple of quarters. And again, up versus a year ago. And again, most importantly, as outlined in our pre-earnings release, we identified and executed on $8.5 million in cost savings across the business. Now, these reductions are going to allow us to match more closely and align with industry benchmarks and some of these key operating expense ratios and set up a path to generate sustainable cash flow going forward. So you'll start to see these show up in Q4. We expect the full cash flow impact of the restructurings to really take full effect by Q2 of 2025. Now, I'm really pleased with the TCV, total contract value bookings in Q3. It's kept up with our current trends recently, but I'm even more encouraged by the mix when you look at some of the positive indicators for growth. Last quarter, we benefited greatly from our legacy managed services. And again, we love this particular part of our business for its contribution to EBITDA, but really the growth indicators are going to come in that the MIPS and the PS. And so again, when you look at those two, the MIPS bookings have been consistent over the last few quarters and it's been consistent sequential growth. Again, versus 2023 where we had a couple of larger big bumps in Q2, this has been a consistent steady increase and we're starting to see more customers participating in our MIPS category. Um, again, even though we may be reporting a modest 7%, uh, year over year decline, um, when you adjust it for some of those, uh, one of those large contracts bookings are actually up 35% year ago, 14% sequentially. So again, good, healthy underlying indicators. And that late stage pipeline, what I can see coming down the pipe, the contracts that I know are under negotiation, those, again, continue to have us believe we're on the right track in that category. We're getting some real traction in some very specific industry segments. So, again, going deeper in what we call ideal customer profiles. Again, we're starting to see some consistency of problem and solution, which has us very optimistic. Again, we're building SKUs in categories that are going to value them. Q3 marked a strong comeback for PS bookings, recording the highest quarter of 2024 at 11.7 million and really, again, up there in the top in the last five or six quarters. PS bookings are up 52% year over year and 24% sequentially. The only thing I'll point out on this is what we're finally starting to see again are longer term contracts. So our clients are now starting to extend beyond what they can see right in front of them. We're getting into six, nine and 12 month contracts. So again, good visibility and visibility for us means better ability to manage bench and all really feeds back to the ability to run a more profitable business with a little bit less volatility. So, again, don't expect to see 11.7 turn into a huge quarter in Q4. Expect it to see smoothed out over multiple quarters. And again, we're happy for that. Our legacy managed services or LMS bookings continues to support total bookings in Q3. Again, the folks keep coming back in this category. We know this is on a curve that will decline over time, but we continue to support and maintain a number of different products that are ending their life. And our customers are still turning to us to help maintain that. those technologies for an extended period of time. Some of those contracts, again, are extending beyond 12 months. So we've got fairly good visibility into the LMS category. And this, as everyone knows, is technologies like Oracle ATG. A few of the other elements inside this category have maybe a little bit longer life than ATG. And we expect, again, to see this take a number of years to fully run off. We are managing it very carefully both for quality of delivery to customer because these are really important customers to us, but also we're really managing them for profitability. I'll wrap up my business update just talking about these four particular areas that I know are of interest, the restructure, the customer trends that we're observing, some product highlights, and the pipeline signals in our sales funnel. So I already mentioned the cost takeout. I won't keep going over that. We know how much was taken out and really the focus on aligning our OPEX spend more closely with our peers. You'll also note in the letter I wrote, there's one particular area we continue to overspend or outspend the ratios that we would find in our peer group, and that's in sales and marketing. That really is to continue to push for moving the top line growth. Gross margins this quarter were affected by some one-time events. Mo's going to discuss those. But the key takeaway from all of this is between the cost takeouts and normalization, we really expect to see margins return to levels we saw in the first half of 2024. And we expect some cash production really to kick into gear in 2025. Some of my observations around client trends, we really are seeing a difference between our B2B and our B2C customers. We do have both, as everyone knows. We have a lot of marquee brands in retail, but we have a growing and very healthy business in B2B, particularly industrial goods manufacturers and distributors. And we've been focusing heavily on some particularly clear and discrete ICPs or ideal customer profiles. The B2C customers that we're focusing on are really optimizing and simplifying their systems. That's the key message. They're aiming to achieve long-term reductions in operational costs and their total cost of ownership through their digital ecosystems. We think there's no surprise that Shopify is performing so well. They hit all those key messages. It's simplified, it's easier to manage, and it's going to cost less than some of the enterprise platforms these bigger customers have been on. We are working with larger enterprise customers as they try to make the shift to our platforms like VTechs and Shopify. B2B customers are investing in channel transformation. And that really is to drive more volume through their digital channels. Data cleanup seems to be the place they're starting. It's essential to unlock revenue opportunities in those channels. But what we're observing is the data cleanup really is a phase one step. Their channels need work. The way that they execute on their sales channels in digital is far behind B2C. It also looks different than B2C. And so it's not just a straight swap of, you know, let's drop an e-commerce platform in. There's some nuance to B2B that is requiring more investment. So long term, we actually see a more comprehensive amount of investment going on in B2B. We see the greatest growth potential in B2B in the near term because they've got the most work to do to transform. Now, what we do find with B2B is it's newer for them. There's a bit of the show me mentality and there's a lot more POC work that goes on in this category, particularly with our SKU build. Some of the value propositions we're demonstrating, you know, folks are unconvinced until they see it. So we spend time showing them the outcomes and showing them the speed with which we can do it. But a lot of the work we're doing in B2B and data starts with POCs now. Our products continue to help differentiate us with our partners, our clients, and our prospects. SKU Build in particular, we have a line of sight to bookings for a large amount of SKU volume that can close this year. We're in POC, as I mentioned. But it really does differentiate us. Our ability to manage and clean data, move data through systems, it does allow us to have conversations around PIM. We're even getting into more of the other verticals like customer, vendor, and location as a result of some of the innovation that we bring into the conversation. Control Tower, we've launched a number of new dashboards this quarter. We're really excited about the number of connectors that have been built. So we had Fluent in order management. We now have VTechs in the commerce space. And we have launched Enterworks Slash Precisely, which is a data health dashboard. Most of these are really proving out the value of observability in these platforms. Our ability to add new platform systems and new connectors can take anywhere from two weeks to a month. And one of the areas I'm really excited about is we are about to bring big commerce on and we have a particular customer who straddles big commerce and fluent. And we really see the opportunity where we can cover multiple platforms in a single customer as a real value driver. One of the biggest things we're hearing is observing order state through multiple systems. And that's our goal now as we, again, launch more dashboards, converging this data, being able to track and follow order state through multiple systems. And finally, the last topic here, pipeline. In Q3, we added close to $12 million of qualified new logo pipeline. That's the highest level of new logo additions since 2022. This is a really important leading indicator for us because this is where growth is going to come from. We're doing particularly well retaining customers and retaining projects that we have. But really, if we're going to grow, it's going to come with new logos, starting a relationship with us. And I think Kyle and the sales team he's been building is really focusing on building that category of pipeline and revenue. And he's off to a great start. There's some great late stage pipeline opportunities in MIPS that could lead to a really strong quarter for us in Q4. I'm going to hesitate to call it at this stage because we've certainly seen some volatility in closings, but we are seeing some things starting to free up and I'm more optimistic that our conversion rates on our pipeline are going to start to grow. So with that, I'll pass it to Mo and he'll take you through some of the financial highlights.

great thanks bill um so switch the revenue slide there we go um so total revenue was 10.1 million in q3 this was down 2.2 million or 11 year-over-year and you can see from the middle part of that chart the primary driver the year year-over-year change was the expected decline from the legacy managed services This segment was down nearly 30% year-over-year as clients continue to migrate away from legacy technology. The MIPS revenue was $3.8 million in Q3. It's a slight sequential decline, but it did decline 14% year-over-year. Last year, we had a short-term SKU Build volume contract come in to ramp up and drive overage for our SKU Build customer, and it benefited Q3 last year. In recent quarters, we also had benefits from overages and additional volumes, and those started to stabilize in Q3. And Q3 is about kind of where we expect to be when you kind of exclude some of those overages that we've been benefiting from. Our professional services revenue was 10.1 million, down 8% sequentially, but up modestly year over year. Q3PS revenues was negatively impacted as revenue was adjusted to align it to progress on fixed fee milestone engagements. And this is really to align our revenue recognition with when we complete milestones, which are expected to be in the following quarters. As Bill mentioned, with the 11.7 million of bookings in Q3, this gives us strong and improved predictability and ability to manage our costs appropriately going into 2025. It builds that backlog. And as he's highlighted, that should not expect this to be a Q4 2024 ramp up in revenue, but it does give us visibility and backlog over the next three to three, four quarters for those bookings. When we look at our gross margins it was 38.7% compared to a prior year's 46.2% and it contained the one-time items and the revenue impact that I mentioned related to fixed fee milestone programs. It's important to highlight this quarter is not indicative of what we should expect going forward as we renegotiated one of the contract extensions and it turned into TNM margin generating project And we're also aligning the revenue with some milestone completions coming in the coming quarters. So we do expect margins to return similar levels as those in the first half of the year. Looking at the chart on the right, we present the adjusted OpEx, which reconciles to the adjusted EBITDA. Adjusted operating expense was 8.1 million. This is about a million improvement over the prior year's 9.1, and it's run leaner versus the Q2 8.7. Obviously, with the restructuring efforts that we've mentioned, we expect this line item to continue to get leaner and contribute to delivering positive EBITDA and cash flow. You should start to see the EBITDA improvement in Q4 as a result of these restructurings and the improved gross margins. Now, turning to the balance sheet, we ended the quarter with cash of about $5.5 million. In Q3, we used about $300,000 of cash from operations, and this chart helps segment it to probably three key buckets. Our core business and core operation used $700,000 of cash, and that's a result of the gross margins and the one-time impacts that we've highlighted. As we discussed the restructuring impact, while we took the charge of $2.3 million, we netted $200,000 of cash outflow. The majority of those payments will be made through Q4 and Q1, after which you should start to see improved cash results. And the working capital, we're managing our accounts receivable really well. We've benefited $600,000 when excluding kind of some of the restructure payables that's not in that number, but it contributed $600,000 of cash. One item that was a bit frustrating, we were expecting a million dollar payment on a key milestone. By the end of Q3, it came three days after the quarter. Otherwise, our cash would have been 6.4, 6.5 million, but we did end up at 5.5. But we did collect that cash. It was a key milestone on an aged whip and milestone. So we're glad to have closed that contract and have collected all the cash right at the start of Q4. So as mentioned, the business continues to manage towards operating cash flow positive, and we believe it will be accomplished with all the changes that we're seeing and some of the pipeline opportunities that we're seeing in later stages. And we're going to continue to support our investments in growth and product within our capacity. As mentioned previously, in addition to the 5.5 cash, we still have access to up to 12 million through our credit facility with National Bank and access to additional accordion as well should we need. I'll turn it back to Bill now for a closing summary.