Quisitive Technology Solutions Inc.

Good afternoon and welcome to acquisitive first quarter 2022 earnings conference call. Joining us for today's call are acquisitive 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 securities legislation. 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 first quarter 2022 earnings release. Now, I'll 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 Q1 2022 earnings call. We are off to a strong start in fiscal 2022 with quarterly revenues up 256% year over year, resulting in a record-breaking $45 million top line. This strong financial quarter demonstrates good momentum on delivering the integrated value of the Catapult acquisition, continued organic growth in our payments business, and validation of our acquisition strategy as we focus on our one-quisitive interaction, all evidenced by results. It has only been a few short weeks since our last update, so we will keep our comments brief, but want to address both macro market as well as high-level updates in our business. First, I'd like to talk about the broader market and key indicators. As I alluded to on the last call, our team has been paying very close attention to the various macroeconomic headwinds that have affected virtually every single business in the world. The cool down and potential recession posed risk to all facets of the market, particularly on the front of inflation as money becomes more expensive and we see various commodities temporarily losing projected value. That said, as I shared on our previous call, Quisitive successfully took proactive steps towards strengthening our executive team with industry leaders and diversifying our recurring revenue streams with the intention to gain resiliency during the natural cycling of the market. As Satya Nadella, CEO of Microsoft, noted during his most recent earnings call, instead of businesses pulling back on digital transformation efforts, they're accelerating these moves with the knowledge that increasing investment in the quality of automation within a company's infrastructure results in a properly placed deflationary force against the market's current whims. Investments in IoT, data, and digital transformation are at an all-time high and are continuing to grow. To provide additional context, Satya noted that Microsoft has not heard of businesses looking to their IT budgets or digital transformations projects as the place for cuts, but on the contrary, are places where they are looking to accelerate their growth efforts. To put it short, it's a shared idea that investment in enterprise software and services is a strong deflationary force, and that's something we at Quisitive can confidently echo as well. This puts us in an ideal situation to grab further market share as companies pivot their needs to services and solutions that we offer to ultimately ramp up their digital transformation strategies. In parallel to the enterprise business effects, there has been an impact on the average consumer purchase behaviors. Nevertheless, I wanted to take a moment to dive into something CEO of Visa, Alfred Kelly, shared on his most recent earnings call. In the topic surrounding volumes and transactions within the payments market, Alfred mentioned that despite the forces of the recent supply chain constraints caused by the Omicron surge and the war in Eastern Europe, credit card transactions continued to grow. He profoundly noted that He had not seen a noticeable impact due to inflation, supply chain issues, or the war in Ukraine, and that payment volume growth relative to three years ago has been stable and strong now for four quarters in a row, paving the way for payment networks to power both more traditional and newer ways to transact and move money. Networks inside and out of Quisitive are still expanding. and the acceleration of this growth is achievable with the measures we've taken to this point in the face of the aforementioned headwinds. These market indicators are validated by our strong Q1 results, and we are experiencing similar demand as we progress through Q2. I'd like to now shift gears and dive deeper into our global cloud solutions business segment, where a combination of the organic growth and realization of acquisition-related contributions has brought about a strong set of results for Quisitive. Our internal efforts are again supported by the previously stated theme of today's market-wide shift to hybrid business, fueled by a surging demand for technical data services and application modernization services to support enterprise customers and their digital transformation needs. Quisitive has already begun to capitalize on the synergies with Catapult, including an integrated recruiting engine to fuel headcount growth, a joint security assessment offering, and initial motions to cross-sell Catapult managed service offerings focused on security and managed Microsoft Azure services to existing inquisitive customers. This is the first full quarter we've been able to completely bake in a full three months of Catapult's financial results into our own. I am proud to say that the integration process has been going well, and the partnership across the company to immerse Catapult into the one inquisitive vision is on track. To further quantify the relationship, I'm pleased to share that to this date, there's been 19 existing Catapult customers with inquisitive assessments and services completed in process or in the pipeline, and 25 inquisitive customers engaging in the upsell of Catapult security assessments and services in similar stages. Leveraging the cross-selling opportunities within the various inquisitive specialty segments has always been a key component of our growth strategy. and we intend to further capitalize on this initiative going forward. As a committed Microsoft partner focusing on expanding our capabilities and customer reach with our broad portfolio of cloud services, Quisitive has taken a direct interest in procuring the well-respected line of Microsoft Advanced Specializations. With that said, I'm pleased to reiterate that we've achieved 11 Advanced Specializations in total and recently received the fourth and final Security Solutions Specializations. To provide additional context around how we separate ourselves from the rest of the pack, there are only six other Microsoft partners out of thousands that have obtained all four of the security solution specializations. Partners who earn an advanced specialization further differentiate their organization from companies inside and out of the Microsoft ecosystem, ultimately providing additional marketing and brand equity value to Quisitive. Additionally, Microsoft is making a major investment in security, and we are well aligned to be a go-to partner in this space. Quizit is offering in the security space, Spyglass, is a holistic solution that includes assessment, roadmapping, security alerts, remediation, and coaching. It is a cross-platform expert security support that enhances customers' existing security investments, as well as identifies overlapping security solutions to provide opportunities for customers to actually decrease their costs while improving security. The cybersecurity market has reached an inflection point. Our nation is facing a shortage of skilled labor with nearly one in three security jobs vacant in the United States. This, unfortunately, has pushed the time for detection of breaches in closed networks to an alarming 287 days, a trend that Quiztive intends to help reverse. Microsoft continues to sharpen its knife on the Azure front, as Azure machine learning has grown in consumer and business usage at a rate of 86% year over year. The usage and optimization of Azure is incredibly important to our organization, as both our cloud and payment segments utilize that technology as the backbone of our platform and software as a service offerings. The headways made on the Microsoft AI front greatly assist our team in continuing to deliver top of the line services through data analytics and native cloud applications, all the while acting as a foundational platform for our payments innovation initiatives. On that note, our global payment solution segment continues to grow, highlighted by the ongoing efforts of our merchant services group, formerly known as Bank Card USA. From a volume perspective, we had a phenomenal quarter. the best March on record, as average daily volume exceeded $11 million. One thing that I did want to share is that there's variability in the way of forecasted volume-related numbers month to month due to the seasonality of both the quantity of days in any given month and the quantity of transactions that occur during different spending periods. Nevertheless, reaching an all-time high for the month of March is a milestone worth commenting on, is an encouraging example of the reference at the beginning of my remarks to the growing volume trends noted by Visa's CEO. We have onboarded over 500 new merchants over the past seven months, and the contributed increase in volume from those merchants is nearly 23 million per month. The payments industry from a broad view has not shown significant downtrends since the waves of macroeconomic factors began impacting the U.S. economy, which helps us remain focused and cautiously optimistic that our efforts in the market will continue to increasingly bear fruit. On brand with payments volumes, Ledger Pay is progressing well, as we have received MasterCard certification and are in the later stages of active testing for Visa certification. We are also preparing for our pilot customers and expect the first to be onboarded shortly after we finalize our Visa certification. We intend to accelerate our go-to-market strategy once the pilot phase is completed, which is currently expected in Q3 of this year. This includes multi-channel marketing and sales to ISOs and ISVs and direct sales to merchants. With the support of the Microsoft Sales Channel, Quizzo's sales teams will begin promoting its payment solutions to potential customers as well as targeted large U.S. merchants that would benefit from our innovative payments intelligence solution. In parallel to this Q3 go-to-market activity, we will also begin the migration of the existing merchant services customers to the Legit Play platform as shared during our last call. This will all be followed by an expansion into the Canadian mark as announced earlier this year. We are also actively in discussion with prospective customers to conduct payments intelligence proof of concepts consistent with the timelines that we had previously shared. We continue to receive positive feedback on our technology and validation of the unique data insights our solution will provide to merchants to engage their consumers. We believe that this will be increasingly important as consumer purchase behavior changes imposed by market conditions will require merchants to be more precise in understanding their customer and be able to personalize the experiences and activate engagement. Next, we will briefly discuss M&A activities for the company. The strong growth we've displayed on our organic efforts were fueled by the meticulous and calculated acquisitions over the past years, and we view today's market as still viable for these opportunities. We continue to have ongoing conversations with some very high-quality companies and are actively monitoring valuations in the private sector, given the current public market changes to multiples. Though I have nothing material to share on this call, I want to reiterate that we are proactively tweaking our mindset given the shift in macro multiples versus the historic highs of valuations we saw over the previous two years. We feel this is a prudent measure and reflects our focus on fiduciary responsibility and capitalizing on our inorganic growth strategy. On a closing note, I'll touch on the quality of our partnership with Microsoft. As they have announced the elimination of their legacy programs for gold and silver competencies creating a much more sophisticated model with the previously mentioned advanced specializations program. As a result, they're reducing their total portfolio of strategic partners, going fewer and deeper in the process. I'm proud to share that we are on that boat of existing partners and plan to dive deeper in our efforts with Microsoft. A recent happening I want to briefly touch on was the invitation we received from Microsoft to travel across the U.S. and engage with their field sales organizations across their industry teams in a co-sell partnership effort. The idea was to engage with their field sales org across the industry teams to identify key accounts in which the portfolio services Quisitive offers could be leveraged to drive customized introductions and offerings as we move into Microsoft's new fiscal year beginning July 1. Looking at our first half of 2022, we remain laser-focused on the integration and launch of our ledger payments platform, along with the continued unlocking of Catapult's full range of value. All in all, I am extremely pleased and encouraged with our execution of our plan. Thank you all for joining us in this exciting growth journey as shareholders acquisitive. I'll turn it over now to our CFO, Scott Merriweather, to discuss our Q1 2022 financial results. Scott?

Thanks, Mike, and thank you to all of you who are joining us for today's call. We had a great start to the new fiscal year. As we set a new quarterly revenue high watermark for the company, as Mike previously noted, revenues for the first quarter ended in March increased 256% to $44.9 million from $12.7 million for Q1 of 21, driven both by our acquisitions and our healthy organic growth. Gross margin increased 317% to $17.9 million in the first quarter of 22, over $4.3 million in Q1 of 21. Our gross margin as a percentage of revenue increased to 40%, a slight uptick from the prior two quarters and significantly greater than the 34% we experienced in Q1 of 21. As we noted last quarter, the current gross margin rate is a more steady state for our current organization. Our comparison to the prior years aided by the fact that Q1 of 21 had weaker gross margins due to lost productivity from winter storms and the addition of some lower margin CSP business that was spread across a smaller total revenue base at that time. We will continue to focus on increasing our gross margin percentage as we integrate our acquisitions and focus on cross-selling activities. Adjusted EBITDA increased 451% to 6.4 million for Q1 of 22 from 1.2 million for Q1 of 21. Adjusted EBITDA as a percentage of revenues was 14% for Q1 of 22, similar to Q4 of 21. The EBITDA margin was 9% for Q1 of 21. This was our first full quarter with the Catapult acquisition. As we noted on last quarter's call, 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, and that throughout 22, our EBITDA margins will blend towards our historical rates. We also continue to invest in our payments division, building its scale as we near market readiness for ledger pay, which has also impacted our consolidated adjusted EBITDA margin. Q1 of 22 was the last quarter in which the MAZIC and Bancard acquisitions do not have prior year results included with Quisitive's historical results. Going forward, those acquisitions will have lapped, and period over period results will be evident within our financials, We'll now move to discussing the segment performance, the specific performance of our segments. Revenue in our global cloud solutions segment increased 176% to a new record of $33.8 million for Q1 of 22 from $12.2 million for Q1 of 21, driven by the Masek and Catapult acquisitions and reflecting organic growth. March has historically been one of the better months for our cloud businesses. There are no holidays, and typically March has more billing days than other months. This quarter followed that trend and our expectations, as March was a very strong month for our cloud solution segment. The segment suggested EBITDA improved 462% to $4.5 million for Q1 of 22 from $0.8 million for Q1 of 21. After contributing negative EBITDA in Q4 of 21, the impact of the catapult acquisition is evident in this quarter's results. We are confident in our ability to cross-sell and integrate our historical acquisitions and that Pending macroeconomic conditions remaining steady, we can continue our growth pace. Revenue for our global payment solution segment also set a quarterly record, increasing to $11.2 million for Q1 of 22 from $0.4 million for Q1 of 21. Substantially, all of the Q1 revenue is from our bank card acquisition. Within the payments industry, January and February are often the two weakest months, typically from a post-holiday slowdown and a short month of February. March tends to be a good indicator of the remainder of the year. Our Bank Card business follows some of these same trend lines. Given the mix of merchants within their portfolio, March is expected to be the strongest month of the year. In 2022, the Bank Card portfolio set a monthly charge volume record in March and produced strong results. Adjusted EBITDA for our Global Payment Solutions segment increased to $1.9 million in Q1 of 22 from $0.4 million for Q1 of 21. Bank Card contributed strong EBITDA results in the quarter, which were offset by our increased spending on the LedgerPay platform. In total, the payment solutions segment had very similar quarter-over-quarter EBITDA contributions compared to Q4 of 21. Operating costs related to ledger pay will continue to rise throughout 2022 as we reach market readiness and the launch of the platform. Accordingly, adjusted EBITDA as a percentage of revenue decreased in this segment, reflecting the increased costs related to the ledger pay platform. Moving to the balance sheet, At March 31st, we had 77.6 million of term loans outstanding and 9.5 million of cash on hand. As of March 31st, our total leverage ratio was 3.16 times, while the current constraint is 3.25 times. As a reminder, at March 31st, our leverage covenant stepped down a quarter step from 3.5 times. We have one more step down at June 30th to 3.0 times, where the leverage ratio will remain under the current credit agreement. There were no significant changes to our capital structure, debt, or equity, as this was a relatively steady state quarter. As a note to better understand our working capital position, at March 31st, we had $15.6 million of projected earn-out payments and short-term liabilities on the balance sheet, along with another $2.1 million of projected earn-out compensation within accrued liabilities. These earn-outs will be paid within fiscal year 22. However, they will be paid with a mix of cash and stock. the amounts reflected on the balance sheet will not have an equal impact to our working capital or our cash position. The current interest rate on our term loans is approximately 4.4%, and we currently convert around half of our adjusted EBITDA into free cash flow, which can either be used for acquisitions or debt repayment. We define free cash flow as adjusted EBITDA minus capital expenditures, internally capitalized software, cash interest, and cash taxes. As we look into the remainder of the year, we remain confident in our ability to deliver strong results, but remain wary of macroeconomic indicators of recession. We do not currently see indicators of a slowdown in tech spending, and we believe we will deliver continued growth. We are very pleased with our strong first quarter and believe it sets us up well for the remainder of the year. 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?