Quisitive Technology Solutions Inc.

Good afternoon and welcome to Quisitive's fourth quarter and full year 2021 earnings conference call. Joining us today for today's call are Quisitive's Chief Executive Officer Mike Reinhart and Chief Financial Officer Scott Merriweather. Following their remarks, we will open the call for your questions. Before we begin today, I'd like to remind everyone that during the conference call, management will be making statements that contain forward-looking statements within the meaning of applicable Canadian security legislations. Please refer to the company's forward-looking information disclaimer statement, which can be found on the notice for this call, our website, and the fourth quarter and full year 2021 earnings release. Now, I would like to turn the call over to Mike Reinhart. Sir, please proceed.

Thank you, Operator, and good afternoon, everyone. We appreciate you taking the time to join our Q4 and full year 2021 earnings call. This past year marked another period of extensive growth for Quisitive. as we've continued to make substantial progress on all fronts of our business. Highlighted by three accretive acquisitions, the significant advancement of our payment solutions business, and the bolstering of our executive team, I am pleased to share that the milestones necessary to promote further transformational growth have been met. To review 2021 in short, we saw a strong mix of both organic and inorganic growth. culminating in previously discussed acquisitions of Microsoft's healthcare cloud solutions expert, Macec Global, the payment provider independent sales organization, BankCard USA, and subsequently the highly touted Microsoft-focused digital solution and services provider, Catapult Systems. Each of these strategic acquisitions have benefited Quisitive from day one and have provided us with the capabilities to scale our operations and fuel organic growth going forward. Additionally, we made significant advancements on our payment solution side. We achieved Microsoft co-sell ready status, received bank sponsorship as a payment processor, and achieved LedgerPay payment platform PCI certification. We also further demonstrated the prominence of our Microsoft partnership by winning numerous awards, including the Microsoft Healthcare Partner of the Year and selection into the Microsoft Business Applications Inner Circle. Despite the headwinds posed by the global pandemic and recent geopolitical issues, we had a strong 2021 and exceeded our revenue forecast. More importantly, one key point that I wanted to note is we recognized a 19% organic growth rate in our cloud solutions business, including cross-selling of services and synergies with the basic acquisition during the year. Thanks to the continued operational excellence of our team and the growing demand we're experiencing within IT services, we've been able to accomplish this impressive progress. Though we are proud of what we are able to accomplish last year, we recognize that there's still a lot of work to be done to unveil the potential of Quisitive. As I reflect on our accomplishments, I wanted to highlight the fact that we've done an admirable job in setting up our organization for continued growth in 2022 and beyond. Not only have we accomplished what we said we would, especially within our payments business, but also made some incredible hires recently with the onboarding of Jana Schmidt, as our President of Global Payment Solutions, and Scott Merriweather as our CFO, which will certainly fuel our growth trajectory. Jan and Scott are both well-respected executives with robust backgrounds and relevant experiences, and they'll be playing important roles going forward in preparing Quizitive for future success. First, let's talk about our payment solutions business. I'd like to take a moment and recognize the journey we've been through in getting our payments business to where it is today. Following the public announcement of LedgerPay's solution in early 2020, we've moved full steam ahead. Over the past 18 months, we have developed a LedgerPay-centric risk management program, achieved Microsoft CoSell-ready status, signed the United States Bank sponsorship with the Bancorp, received patent approval for AgeChecker, obtained PCI compliance for the LedgerPay platform, and obtained an ISO customer, Patron. Fast forward to 2022, and we successfully closed the Canadian bank sponsorship with People's Trust Company and have now also completed MasterCard certification, which enables us to begin onboarding pilot merchants to LedgerPay. It is important to remind everyone how rare it is for a payment processing endpoint with the card networks to become certified. In our workings with Visa, MasterCard, and American Express, they have all stated it has been many years since a new processor has been approved and implemented by the networks. I am truly proud of our team's ability to receive the MasterCard certification, and we are actively progressing with Visa, American Express, and Discover for certification. We had originally planned to do gateway services through the initial card network, expecting there would be a significant delay to get all of the card networks certified independently. The progress we have been making with Visa and American Express in parallel to MasterCard has shifted our focus to activating the direct connections with each rather than do any work to ready a gateway, which would only delay the time to get the direct connections completed. We do not want to risk losing the focus of Visa and MasterCard since they have dedicated teams working with us right now. Although we faced hurdles that were out of our control, such as global supply chain constraints, we've done our best in executing each short-term milestone to get us to where we are now. Today, we stand at the precipice of commercialization, and we are uniquely equipped to bring this product to market. Our team has been working hard at aligning our strategic initiatives to achieve commercialization of LedgerPay, along with the ongoing management of Bank Card USA and the build-out of the growing Merchant Services Group. The Merchant Services Group, powered by Bank Card, continues to see strong growth, and for the full year 2021, had payment volume of $3.8 billion as compared to the full year 2020 payment volume of $3 billion. Total merchants is now nearly 7,300, and pro forma revenue grew over 20% for calendar year 2021. As we have discussed, our merchant services business is a strong asset independent of the ledger pay synergies creating value for our shareholders. Having achieved the MasterCard certification, we are now preparing to onboard pilot customers to LedgerPay throughout Q2. Once the pilot phase is completed, we will begin migrating bank card customers to the platform and expect to continue that process over the next several quarters. We're also expecting to accelerate our go-to-market strategy once the pilot phase is completed, which we forecast will occur beginning in third quarter of this year. This strategy will include multi-channel marketing and sales to independent sales organizations, or ISOs, and independent software vendors, or ISVs, as well as direct sales to merchants. Further, we will begin joint marketing and sales activities with Microsoft, aligning our payment solutions with their industry teams for retail and financial services. These efforts will combine the LedgerPay payment solution along with our cloud data and analytics offerings to help drive momentum in these industries, and arm both the Quizzitive and Microsoft sales team to engage these customers. Recently, we attended the ETA Transact Payments Industry Conference in Las Vegas. We had the opportunity to meet in person with executives from MasterCard, Visa, American Express, and Discover to discuss our platform and ways that we can partner together in the future. They all expressed their excitement for our unique cloud and data offering in payments and their commitment to our shared success. As one of the executives stated in an email to me after the conference, quote, I'm excited to have our company be part of the journey with Quisitive. I love your approach to payments and data and look forward to a deeper partnership together. I also met with several investment banking groups, M&A advisors, and acquisition targets in the payments industry. all expressed strong interest in our unique model and approach, and the conference allowed us to broaden our network in the U.S. and share our story as we embark on commercial launch of LedgerPay. Our payment solution segment is truly born out of the success we garnered from the cloud solutions capabilities. It is because of our cloud solutions business we've established the technical expertise and the robust relationship with Microsoft needed to develop the first cloud-based payment processor using Microsoft Azure. As the payments business grows, we will expand the scope of our customer base and increase the customer lifetime value and engagements by pairing payment solutions with complimentary cloud services. The payments business will enable cross-sell opportunities and data-rich services through cloud and Microsoft technologies and practices. We expect to continue leveraging the synergies from the two businesses under the acquisitive umbrella. Next, I want to move on and share some updates regarding our cloud solutions business. As I mentioned at the outset of the call, we were able to achieve a strong 19% organic growth rate within our IT services business. Thanks to the continued growing demand and, of course, our team's ability to consistently execute. The addition of the basic solutions to our global business application group allowed us to expand services for D365 ERP, customer engagement, and our SaaS offerings in healthcare and manufacturing. The acquisitive platform for commercialization combined with the solutions and services from the basic business created strong organic growth for our cloud solutions business. In calendar year 2022, we expect to see the synergistic benefits from our Catapult acquisition, including their security and Azure managed services beginning in Q1 and throughout the year as we further integrate the business. Thus far in Q4, We have only recognized a fraction of the synergies from a financial standpoint, given the timing of the acquisition and subsequent accounting treatments. But anecdotally, what I can share is that we've continued to see immense progress in the integration, and I'm very pleased with the rate at which we are progressing. As I iterated on the last call, Catapult strengthens our executive team with veteran industry leaders, diversifies our recurring revenue streams, provides incremental cross-sell and up-sell opportunities with their client base and vice versa, and brings a similar culture and philosophy that we embody here at Quisitive. The synergies are numerous, and to ensure that we capture these strategic joint opportunities, we have a dedicated task force that is leading this integration, in addition to actively onboarding their team members into our ecosystem. I also want to stress that the onboarding of Catapult will be quite evident on our financial statements for this calendar year, as their robust recurring revenues will be reflected in our quarterly filings. Consistent with our philosophy of integrating the business under one inquisitive to serve our customers, we recently made changes to our organization structure to better align our model to enable our strategy and strategic objectives. Our cloud solutions business is now fully integrated across all of our cloud solutions acquisitions. The cloud services and applications component of Global Cloud Solutions, CSA for short, We'll report to Terry Burmeister, who is the president of Catapult. This CSA business includes all of our services and solutions related to Azure security, infrastructure, data, and modern application development, as well as the Microsoft 365 solution platform. This team combines the legacy Quisitive, Menlo, and Catapult businesses, as well as our India and South America teams under one business area within Global Cloud Solutions. Terry and her team will be instrumental in executing our strategy and growing this business perquisitive. Our business applications component of Global Cloud Solutions, GBA for short, will report to Lane Sorgen, who is a former regional vice president at Microsoft. The GBA business includes all of our services and solutions related to the Microsoft Dynamics 365 ERP and customer engagement platforms, as well as our industry SaaS offerings for healthcare, manufacturing, and public sector. This team combines the legacy CRG, MASIC, and the D365 components from the Menlo and Catapult businesses, as well as our offshore partners in the UK and Pakistan under one business area within global cloud solution segment. Lane and his team will drive growth across North America and in Europe as we expand in this area of the business. The purpose of these changes is to establish the leadership and organization structure to focus each of the business areas to drive growth and create scale. Our public reporting will continue to be the two segments of global cloud solutions and global payment solutions, so these changes do not have any effect on how our financials will be reported. It does, however, provide the proper focus and accountability to help realize our organic growth objectives and also enables me to focus less on operations, and more on the strategic areas of the business, including payments acceleration in partnership with Jana, as well as our strategic partnerships and M&A to create scale. As the world economy transitions to a digital-first ecosystem, we've seen marked increase in demand for our IT services. Quizative's concerted effort to offer best-in-class cloud solution services through our unique partnership with Microsoft and utilizing the Microsoft 3Cloud platform has paid off with strong growth prospects. Companies are making investments for digital transformation to revamp their workflow and are turning to us in an increasing fashion. With our reformed and enhanced cloud solutions division, we intend to further augment our footprint and capture as much market share as possible. Next, I'll touch on our M&A work. Consistent with our stated strategy over the past several years, we continue to invest in the future of our business by fueling our growth with inorganic measures. M&A will continue to play a prominent role in the acquisitive story as we dedicate resources to acquiring companies that provide accretive value for our shareholders via acquisition. We've laid a strong and focused M&A path that will continue forward in the coming years and are also grateful for the continued inbound requests from potential acquisition targets that come across our desk. That said, I wanted to reiterate, for the next few months, our team remains primarily dedicated. towards the activation of ledger pay and the integration of the Catapult acquisition. Though we don't want to neglect our M&A initiative, getting ledger pay up and running and realizing the synergies of Catapult are priority one. Both the IT services and payments industry markets remain very active on the M&A front. We continue to have strong pipeline of targets, but also recognize that the strategic and financial buyers in both areas remain very active. While public valuations have come down, the private market has stayed consistent, driven by the significant money looking for quality growth assets in these two industries. This was confirmed during our discussions at the previously mentioned Transact Payments Conference. On brand with the operational progress and growth we've been able to achieve, we continue to grow our workforce by hiring high-quality employees to the Quisitive family. Moreover, due to the strong work culture we've been able to develop over the years, Inquisitive has been unaffected by the media's increasing mention great resignation. The point of pride we hold is our retention rate of employees across the business has remained industry leading. We've made proactive investments in onboarding and ongoing employee experience to ensure every employee, whether hired organically or integrated via acquisition, is equipped with the necessary resources and training to successfully accomplish their responsibilities. We look to continue our trend of success on that front going forward. The retention of employees is a critical component of growth, as the labor shortage creates challenges in hiring the skills necessary at a global level. The focus on retention reduces the number of hires necessary to enable growth, which is key to our business. Looking ahead, we expect to continue to grow our cloud business at a rate of 15% to 20% organically and 20% growth in our merchant services business enabled through bank cards. Our first quarter saw strong momentum and continued growth in both of our business segments, and I look forward to sharing further details with all on our next call. Looking at our first half of 2022, we remain laser-focused on the integration and launch of our LedgerPay payments platform, along with the continued unlocking of Catapult's full range of value. Thank you all for joining us in this exciting growth journey as shareholders of Quisitive. I'll turn it over now to our CFO, Scott Merriweather, to discuss our Q4 and full year 2021 financial results. Scott?

Thanks, Mike, and thank you to all who are joining us for today's call. We had a solid quarter, setting a new revenue high-water mark for the company. Revenues from the fourth quarter ended in December increased 155% to $33.3 million from $13.1 million for Q4 2020, reflecting the pace of our acquisitions and healthy organic growth. Gross margin increased 141% to $13.1 million in Q4 2021, over $5.4 million in Q4 2020. Our gross margin as a percentage of revenue held at 39%, similar to Q3 of 21. It was a drop from our abnormal seasonal high of 41% in Q4 2020. Our professional services and consulting staff had higher utilization rates during the 2020 holidays due to the travel restrictions of the COVID-19 pandemic, resulting in a higher gross margin percentage for that quarter. The 2021 gross margin percentage for Q4 of 21 is more steady state for our current organization. As we continue to integrate and sell products, cross-selling them from our recent acquisitions, we aim to drive gross margin percentage higher. Adjusted EBITDA increased 105% to 4.5 million for Q4 2021 from 2.2 million for Q4 of 20. Adjusted EBITDA as a percentage of revenues was 14% for Q4 of 21. The EBITDA margin was 17% for Q4 of 20. The Catapult acquisition contributed revenues, but essentially no adjusted EBITDA in Q4 of 21, given the timing of when the acquisition closed, just before Thanksgiving, and the available billing dates for professional staff, which was further impacted by PTO, versus our fixed costs. Catapult historically has had lower EBITDA margin profiles than the remainder of our company, but we believe recurring revenue product sales, both of products from the Catapult portfolio and of our previously owned products into the Catapult portfolio, will offset that impact. We've also continued to invest in our payments division, building its scale as we near market readiness for the launch of the LedgerPay platform, which has also impacted our consolidated adjusted EBITDA margin. We'll now move to discussing the specific performance of our segments. Revenue in our global cloud solutions segment increased 94% to a record $23.0 million for Q4-21, from $11.9 million for Q4 2020, driven by the Masek and Catapult acquisitions and reflecting organic growth. We have seen greater cross-selling opportunities between our historical acquisitions and believe we can continue our growth base as we continue to integrate these themes in our products, as Mike noted earlier. This segment's adjusted EBITDA improved 76% to $2.6 million for Q4 2021 from $1.4 million of Q4 2020. As noted previously, the Catapult acquisition contributed no EBITDA for the fourth quarter. We had planned for greater EBITDA contributions to the quarter from Catapult, but the ultimate timing of the acquisition close resulted in little impact. Catapult's impact to adjusted EBITDA will be reflected beginning with the first quarter of 2022. Revenue for the global payment segment also set a quarterly record, increasing to $10.3 million for Q4 of 21 from $1.2 million for Q4 of 20. Substantially, all of the Q4 revenue was from our bank card acquisition. In the payments industry, Q4 typically experiences higher seasonal payment volumes. We saw this trend modestly present itself in Bancard's merchant base as Q4 payment volume had a slight uptick in Q4 to just shy of $1 billion, but there is not heavy seasonality within that portfolio of merchants. Adjusted EBITDA for our global payment solution segment increased $2.0 million from Q4 2021 from $0.8 million for Q4 2020. Adjusted EBITDA as a percentage of revenue decreased in this segment as we continue to scale up internally for the launch of our electric pay platform, as noted earlier. Moving to the balance sheet, On December 31st, we had $79.6 million of term loans outstanding and $13.5 million of cash on hand. As of December 31st, our total leverage ratio was 3.26x, while the current constraint is 3.5x. Our covenants stepped down a quarter step in each of Q1 and Q2 of 2022, at which time our total leverage ratio will be below 3x, absent any further M&A activity. During the quarter, we exercised the accordion feature of our credit agreement and borrowed an additional $15 million to complete the capital acquisition. We also completed a bought deal offering in November 21 and used $30.3 million of the net proceeds from that capital raise to also fund the acquisition. As a note to better understand our working capital position at December 31st, we had $15.6 million of projected earn-out payments for fiscal year 22, along with $1.6 million of projected earn-out compensation that's displayed within accrued liabilities. We expect to pay half of this amount in cash and the other half in equity as per the terms of the agreement, so that has an effect to the working capital view on the balance sheet. The current interest rate on our term loans is approximately 3.3%. We currently convert half of our adjusted EBITDA into free cash flow, which can either be used for acquisitions or for debt repayment. We define free cash flow as adjusted EBITDA minus capital expenditures, cash interest, and cash taxes. Looking forward, the finish to our fiscal year gives us confidence for fiscal year 2022. 2021 was a transformational year for the company, and we look to accelerate our growth as we approach the market as one integrated team. This concludes our prepared remarks. Thank you all for your time this afternoon, and we look forward to updating you on our progress going forward, and we're now ready to open the call for your questions. Operator?

Thank you. As a reminder, each analyst will be limited to a maximum of two questions At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation symbol will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Kevin Krishnarante with Desjardins. You may proceed with your question.

Hey there, team. Good afternoon. First question for me is just on the strong organic growth that you saw in cloud. 19% very strong, still within your range, but towards the high end. You indicated cross-selling upside from Mazic and CSP. I'm just wondering, how do we think about the sustainability of that type of growth rate and maybe what you're seeing in the CSP business? And any thoughts on how eventually as you get Catapult integrated, how that can contribute to upside? You know, I just want to understand your thoughts on the 15-20% range do we skew towards the higher end? And sorry, a follow-up on that too. In Q1, you were facing a tough comp last Q1. I think there were some shutdowns in Texas. So just thoughts on the trends you're seeing in Q1. Yeah, sure. So appreciate it, Kevin.

First, relative to, I don't think I mentioned CSP as a growth engine there, but if I did, that was a misstatement. You know, CSP was not a big factor this year in the growth. It's, you know, we had some climb earlier in the year, but really kind of as we go through. A lot of it, you know, the interesting thing is we buy these companies, in particular some of the smaller firms, and we saw that even some synergistic things that are happening with CRG acquisition and MASIC as well. They have these opportunities that they get brought into or find through their motion, but because of their size, these larger opportunities, they're not allowed to participate because the customers were afraid that the company was just too small to deal with something at this scale. By joining Quisitive, Macy's is a great example. They have some really unique capabilities in healthcare, the IP solution that the customers were really attracted to, but they couldn't win the work because the size and scale and balance sheet and those things weren't there for the customer to feel comfortable. Instantly, by us being part of it at the table, combining it with what we're capable of on full cloud capabilities, back to this whole idea about they don't want a one-trick pony. They don't want to deal with these Little one-off point solution providers, they want a digital transformation. And that's what's happened is as we capture this, we're able to now go into these customers and capture much more meaningful wallet share from the opportunity and really capture value. opportunities that maybe neither of us could have gotten on our own. But when we combine the capabilities of MASIC, for example, with Quisitive, we now have this really powerful capability that allows us to go capture large deals. We were able to win some very large deals and actually continue to see growing pipelines that are multimillion-dollar deals versus smaller deals that they may have had before. So that's a big part of what you saw happen, and we think we can sustain that as we go forward with them. Relative to Catapult, there's no question we see some great cross-sell synergies there. We've already got a strong pipeline of opportunities around some of their unique offers as an example relative to security and security services that were just not something we had within the acquisitive family prior to that. So we have a strong pipeline. We're starting to see some of those conversions happen as a result of that. So that continues to be a really powerful story about this acquisition activity is the capture of wallet share in customers that we just weren't able to do independently across both sides. Lastly, to your question about, you know, last year, some of the things from winter weather in Texas and things like that. While we had a little bit of that this year, it was nothing to the magnitude. So we don't see any of those kinds of factors impacting our Q1 results.

Okay. Okay. Appreciate all that color, Mike. Thanks. Second question for me, just on the margins. I think the margin performance in the quarter was light versus what you were expecting on your Q3 calls. And a lot of that's explained from the ramp up within payment. So my question is, you look at cloud 11%, payments 19%. How do we think about the margin profile over the next couple of quarters in those two respective segments? acknowledging some of the rampant payments, and also you alluded to the fact that you're very good on retention and talent, so there must be some implications there on wage increases and whatnot. Can you just talk about the margin profile? Thank you.

Yeah, so there's a few different factors. On Q4 in particular, the Q4 margin profile impacted by some seasonality, again, in a professional services business, some of that additional PTO time and other kinds of things that may have occurred that, you know, we always factor in what we think is seasonality, but you sometimes get hit. So there were some of that. And so you have the cost of labor, but it's not, and it had the possibility to generate revenue, but because they're on vacation time, you don't capture it. So that's one element. Second element of margin impact in Q4 was catapult. And, you know, Scott alluded to this a little bit. It actually turned out that Catapult had negative EBITDA contribution in the quarter, and it was really because of the timing of that. I think I tried to set the stage for it because I knew this was going to happen. We actually thought they were going to have the opportunity to generate some positive, but at the end of the day, we bought them in Thanksgiving week in the U.S., which basically everybody was on vacation. Then we had two weeks where we got some contributions, and then we had a week of Christmastime vacation. So really, about 50%, almost 50% of the time, we're now living on, in their face, we had all the costs associated with labor and other kinds of things, but not revenue generating. So that was also a bit of an anomaly in the quarter. And then lastly, to your point around that, we believe that we can have the payments business continue to operate in the low 20s. As we go forward, we believe that's still very reasonable in the near term while we're still investing in the LedgerPay platform and some of the things we're doing there until further activation starts to present itself from that. And on the cloud side, we think we can be in that 14% to 15% range going forward, more consistent than what we had, but Q4 was a bit of an anomaly.

Awesome. Thanks for the call. I appreciate it. Pass the line.

Our next question comes from the line of Christian Escrow with 8 Capital. You may proceed with your question.

Hi, good afternoon, Mike and Scott. For my first question today, I wanted to ask about the certification with the card network providers. It sounds like the focus in the coming months here will be the direct activations with Visa and Amex and the like. Could you just remind us on the benefits of the direct activation and sort of the process around commercializing those, those angles and how it affects the financial profile under ledger pay.

Yeah. So, so the good news, we weren't sure, you know, we were always hopeful, but we weren't sure that we were able to get all these card networks to lean in at the same time and dedicate teams. They have to dedicate teams to us. There's deployment of hardware and, and then dedicating teams to us for network circuits, as well as in all the testing and stuff. And, you know, we, we had always been hopeful, but not a hundred percent confident. Well, As we've progressed, we have dedicated teams from all of those going at the same time. For example, these are the gears already in, circuits are in. We have what's called our decks installed. So all of that's there and now readying. The good news for us on the testing side, we still have to go through the testing process, but I'll say it's a lighter lift. on the testing scenario because we've already done it with MasterCard. The only things that are different, there might be some slightly different specifications related to each of the networks where they might have a different set of rules and things like that that they provide us a spec and we integrate it in. But the good news is that's all very active in flight and the team is doing that. We feel very good about that. So, yeah, it's going to be something that we're going to do in parallel while we're migrating, doing the pilot customers. but expect all that to come together here over the summer months to bring all that together and have it finalized. But we're still able to progress our efforts with pilot customers independent of that activity.

Okay, perfect. And on the second question I have, I'll ask about supply chain. I know there's no direct impact across Microsoft software, the offerings there, but Mike, do you see any potential tailwind from supply chain issues resolving? If customers can get hardware elsewhere, could there be a tailwind to the business if supply chain unwinds sooner than expected? Or would you say that Inquisitive is fairly independent, immune to the macro there?

The good news there is we're not working with customers in the dark ages needing hardware and data centers and things like that. We're working in a modern cloud world where you know, obviously the only kind of barrier is the capacity of people like Microsoft in our case, but Amazon or others, in others' case, they have cloud capacity. It turns out they have lots of it. They were able to get way ahead of that. And, you know, Microsoft in their earnings call and things like that, they don't, you know, that's not the supply chain and their ability to scale their data centers is not a concern of theirs. So that's the good news on that front. Outside of that, The only impact that we would have on supply chain changes, positive or negative, would be if we have a customer who has some sort of major disruption to their business that we happen to be doing transformational engagement with. In general, that's just not the case with our customers. In fact, many cases, they're actually hiring us in the cloud services side of the business because they are constrained by their supply chain and they want to redefine and re-engineer it. and we're helping them create new ways to better manage just-in-time inventory and doing those kinds of things and using system capabilities to give them better insights to all of that so that they can streamline it. If you think about most of these companies, they have very antiquated supply chain management and optimization because they didn't have to. They could carry things in warehouses and do all those things. Now they have to have very good data and insights and streamlined capabilities, and we're actually being hired by them as an investment for them to help mitigate it. So, you know, certainly there are probably some factors, but it has not been anything that we've seen as an impact to our business.

That's all very helpful. Thanks for taking my questions.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for questions. Our next question comes from the line of, Andre Bodo with Echelon Wealth Partners. You may proceed with your question.

Hi, good evening and congratulations on the quarter and all the hard work you guys put in to get ledger pay where it is today. My first question for tonight is, should we be viewing your M&A objectives in IT services and ISO businesses as a longer-term story where we could see you returning to focus on this, perhaps exiting the second half of 22 or even 23? once Ledger Pay is in full swing? And could you maybe comment on the volume of M&A target opportunities you're seeing in the industry?

So first, I'll clarify something. So you talked about cloud services, M&A, and maybe ISOs. That's only one dimension of the payments. You know, certainly ISO or other kinds of portfolio acquisitions is one, but other software, industry software solutions, as an example, could be a complement to that as part of our M&A strategy where we're looking to get an ISV solution that's integrated into an industry or domain area that connecting payments to we think would be a really valuable asset. So just a point of clarification there. But, yeah, absolutely. I mean, you know, creating scale in these businesses is critical, and organic growth is always a key part. Unlike others that I know do consolidation, they've got to have the next acquisition to actually show you guys some sort of growth. We're going to continue to execute, and our team is very locked and loaded on organic growth. At the same time, though, we believe creating scale in both businesses, but in particular in the payments business, is one of our key opportunities. We have this incredible platform that really unlocks new value, and we have a mechanism to do that. So as we go forward, we will absolutely continue to look at M&A. To my point in the talk earlier, it's really centered around right now we're focused on the things we need to do to be in a best position to take advantage of those acquisitions. So in the near term, activation of all those things and integration with Catapult. But yeah, we'll continue to begin that process and look to do those things back half of this year and forward. In terms of the opportunities, the market's very active. There was a little bit of a stall early Q1 on both the cloud side and on the payment side, just a little hesitation. but the number of deals in flight been presented to us is significant. The number of active buyers is also significant. A lot of private equity money in particular in the market, but also strategics that are on both sides of the table making moves to grow and scale through acquisition. And the reality of it is market valuations, albeit public valuations, have dropped, unfortunately, and we're feeling the pain of that now. in our case, but the private valuations have not really adjusted whatsoever because the value of these assets to strategic investors is so high that they see it as a great opportunity to continue to scale and grow. They need a place to put their money, and they view both IT services and the payments and fintech space in general as great places to place investments over the next three to five years.

Great. And my second question would be, could you maybe comment on what would be involved with entering the Canadian market with LedgerPay and like what timing or conditions that you'd look for in order to make that move?

Yeah. So, you know, the good news is we did get the bank sponsorship with People's Trust and I actually met with some of the executives of People's Trust when I was out at the Las Vegas conference as well. Had a good discussion with them. So the good news is once we're certified, you know, with each of the card networks here, really at the end of the day, there's a process we need to do. It's not the same, though. We don't have to do the physical infrastructure part. We can leverage the U.S. infrastructure components to do it. But what we have to do, same thing, is they'll give us, there are certain specifications that each of the card networks have. give that are based on, okay, local in-country rules or regulations. So we'll have to, you know, review those and make sure that any of those kinds of configuration changes or rules, it's usually a business rule set up and not really any kind of coding. That business rule set up is made and then we do a quick test with them and we're active. So then it's really about the go-to-market strategy. We are having some discussions both direct with the peoples as well as with others in market that have questions interest in us maybe providing the back-end processing platform and helping them activate some things there in that market, and we're exploring that. It probably will be something we focus on later in the year. We'll be opportunistic. I'll be honest. There may be some unique acquisition opportunities that could accelerate that. There could be some other partnership opportunities that do that. But at the moment, again, back to my earlier point about getting ledger pay up and running, getting catapult. Those are our focal points. And we'll be, you know, kind of looking to do some of these other kinds of things, whether it's M&A or activation of the Canadian market, you know, later in the year. Great. Thank you so much.

Our next question comes from the line of Parth Shah with Canaccord Genuity. You may proceed with your question.

Hi, good evening. This is Parth on for Rob. First question, starting with ledger pay. Mike, you spoke about the ISO and ISV pilot migration starting in Q2. How should we think about the impact of, you know, migrating these pilots and bank card customers on your top and bottom line? So I'm guessing that this kind of ties into your 20% growth for payments. If you can just provide some more color around that.

Yeah, so Q2, there will be really no meaningful contributions as we do the ledger pay pilot customers. As we're making and doing those processing kinds of things, we're talking lower volumes, really testing systems and processes and all the things that we want to do and really make sure we put around. So we're not looking for revenue contribution from ledger pay in that time period. As we get into Q3 and Q4, where we start to do migration of customers, so set aside pilot customers, which are hand-selected, targeted people that we're doing this really kind of full system loop test, including process people technology, that is Q2. Q3 will start that process moving into Q4 and several quarters beyond, where we're actually migrating from the bank card existing provider over. Then we'll start to see revenue contributions coming into it. As we look at our payments growth, yeah, I mean, we're looking at a 20% target year over year. That's a combination of contributions from Ledger Pay as well as just natural organic growth through merchant services, all of that independent of anything that we're doing in an M&A capacity.

That's helpful, Mike. Thanks. And the second question would be about, again, since you're targeting your go-to-market in Q3, you've already expanded your Ledger Pay sales force quite a bit, and do you see this as adequate to undertake this expansion or do you still think that you need to add more capacity in your sales and marketing functions?

Yeah, we've been smart about it, right? Obviously, some of the added sales capacity that we put into the system is that was adding, extending our team as part of the Merchant Bank Card Merchant Services business. You'll see us using more and more of the language Merchant Services versus Bank Card because we're expanding the scope of that team's role. I'll try to use both in the short term, but over time you'll hear us transitioning to Merchant Services. Merchant services through BankCard, we've added sales capacity there, which is just about onboarding net new merchants today directly into the BankCard ecosystem, but also preparing to use that as an engine to add net new folks there. So that investment we've made. We have some investment we've made in our direct selling motion outside of that merchant services group, targeting customers, larger enterprise customers and things like that, as well as other ISOs and ISVs. we absolutely will need to make incremental investments in sales and marketing. We're going to do that in a smart way. We're not trying to throw a bunch of money at something on the front end. Remember that we've kind of got three go-to-market approaches on our sales motion for payments. One is leveraging the existing capability and footprint, the 30-plus sellers sitting in the merchant services business that we have. Second is The leveraging the existing cloud solution sales team that we've got in place today that have many of our cloud customers, our merchant services customers, and we'll start to activate that as we go forward. And then third is building out our own sales organization, but complementing that with our joint sales and marketing motion with Microsoft and using their scale and reach to give us access. But there's no question investment in sales and marketing will become a much more meaningful investment as we get further in this journey. We'll start to see that unfold in the late Q3, early Q4 timeframe and investing as we move throughout 2023. That's very helpful, Mike.

Thank you. I'll pass the line.

At this time, this does conclude the company's question and answer session. If your question was not taken, you may contact Quizzitive Investor Relations team at quizgatewayir.com. I'd now like to turn the call back over to Mr. Reinhart for closing remarks.

Thank you. Thank you, everyone, for joining us today. I especially want to thank our employees, partners, investors, and customers for their support. We appreciate your continued interest in Quizzitive and look forward to updating you on our next call. Operator?

Thank you for joining us today for Quisitive's fourth quarter 2021 earnings conference call. You may now disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.