Quisitive Technology Solutions Inc.

Good morning and welcome to Quisitive Third Quarter 2022 Earnings Conference Call. Joining us for today's call are Quisitive 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 third quarter 2022 earnings release. Now, I will turn the call over to Mike Reinhart. Sir, please proceed.

Thank you, operator, and good morning, everyone. We appreciate you taking the time to join our Q3 2022 earnings call. This quarter marked another period of significant growth as we recognized record high results in top line revenue and adjusted EBITDA figures, which are attributed to the continued momentum we generated across both the cloud and payment businesses. Additionally, despite irregular market conditions, We've heard from Microsoft that they affirm the growth of key segments directly impacting our business, including continued growth in Azure that supports our strategic trajectory. Scott will provide additional insight on the specific metrics later in the call. But now I want to start the discussion of our cloud solutions business. In cloud solutions, our focus in Q3 was the realization of acquisition synergies following key integration motions. We are seeing the synergies in cross-sell opportunities consistently turning to wins with greater breadth and customer impact than ever before. Our aligned leadership team and consolidated structure has created internal efficiencies across our marketing, sales, and delivery teams to enable cohesive experiences from prospecting through to close of projects to ensure customers are seeing the true value of our stated one inquisitive vision come to life in their engagement with our teams. This execution of our M&A thesis resulted in a 107% increase year-over-year of top-line growth in cloud solutions and additional recognition from Microsoft in the announcement of the Microsoft Business Applications Inner Circle Award that we received in September. Growth of this magnitude is possible because of cross-selling and upsell strategies that allow us to take legacy acquisition accounts and expand wallet share and opportunity that allows us to stretch accounts up to four times revenue by offering a more holistic value proposition to customers that fold into our industry expertise and IP, along with project and managed services. Additionally, as we have now begun to create not only breadth of services, but also scale, we are able to serve larger customers with our unique offerings. With this high-value bundled offering approach has been our goal throughout the year, we are moving from key examples validating success to a fully adopted go-to-market strategy. Across the board, we are now seeing key themes play out in customer accounts in a way that assures that these are not point-in-time individual creative actions, but the embodiment of a visionary strategy penetrating in each level of our sales and delivery execution cycle. In practice, this looks like consistently upselling deals to include security offerings, including our Spyglass IP solution to existing and new customers. or our business application customers extending their engagements with Quisitive beyond Microsoft Dynamics and Quisitive SaaS implementations to include ongoing support through our managed service offerings. And our healthcare customers are utilizing Quisitive industry thought leadership, our basic SaaS product, and turning to Quisitive to provide services to deploy Azure infrastructure and data services along with our security and managed services offerings. In the past, we have focused heavily within the cloud solutions group to bring our acquisition synergies to life, bundling services and IP across acquisitions to strengthen our value proposition to customers and enhance our reputation with Microsoft. As we move into 2023, we will take this same approach and continue to augment it so that these strategies are core tenants of our go-to-market strategy. Every acquisitive customer should experience the full breadth and depth of our services and their engagement with us, and see how we don't just address acute business problems, but are the true go-to partner for end-to-end digital transformation. Pivoting now to payments, I want to start by sharing a little bit about Ledger Pay's recent rebrand to PayIQ. The new brand identity and logo define PayIQ as a leading innovator in the payment space. The brand evokes intelligence and innovation and is a clear embodiment of our vision for acquisitive payment solutions. The refresh did not stem from any fundamental change within our core technology roadmap, but is a strategic move to position us for maximum brand equity and runway in coming months as we activate our innovative payments solution. To touch on one other recent press release, we are pleased to have just announced an expanded partnership of Visa and their CyberSource solution. Most importantly, this collaboration opens a new distribution channel for our PayIQ payment processing services, and expands the payment acceptance model for the PayIQ platform. This opportunity is a signifier that PayIQ is a provider of innovative payment solutions, and we believe it's indicative of the reputation we are building within the ecosystem. We're making steady progress on our PayIQ platform as we've successfully completed the first live transactions using the MasterCard network for authorization. These live authorization transactions mark a significant milestone with the platform, and we are very proud of our team for this accomplishment. We are now approved to have both MasterCard and Visa operating in our cloud production environments, and in parallel are continuing to advance the American Express and Discover certifications. As we have previously shared, the retail and payments industries all enforce a production freeze beginning in November and extending until mid-January due to the importance of the holiday season for most merchants. Our production and deployment of American Express and Discover will occur after this industry freeze period. While we are working through these final certification steps, we have also initiated a robust external security audit as a prudent readiness step for final commercialization. This audit is in addition to the PCI and ISO audits that we have previously conducted and felt it important to use this time to take extra steps before going live with customers. Finally, in our payment solution segment, our merchant services team through BankCard has continued to drive value and payment volume in the quarter consistent with our strong Q2 results and once again exceeded $1.1 billion this past quarter. In Q3, we kicked off internal efforts to integrate the BankCard USA employees and operations into the acquisitive umbrella, a key motion to precede the migration of merchants to PayIQ. Following the completion of these integration efforts in early 2023, the Merchant Services Group will transition its go-to-market service offerings to the PayIQ brand. We are encouraged by the continued growth and momentum offered by our Merchant Services team to date in 2022 as it validates our preparedness to serve customers on the PayIQ platform as we move to live transaction processing. Evidenced by our success across the BankCard Merchant Services results, and the cloud solution synergies I shared earlier, our M&A strategy continues to resonate and create positive forward motion. As such, we stay vigilant to new and creative opportunities with the end goal in mind to increase our share in our respective markets and provide lasting value to our shareholders. While I have no material updates to share at this time, our team is carefully watching the market as we look to 2023. Lastly, before I transition to Scott's portion, I want to share some brief notes on the general economic conditions and shed some light on the forward-looking guidance. As much of the tech industry has started to react to recessionary conditions with the announcement of layoffs, Quisitive has been fortunate that we've not experienced this downturn, as evidenced by our record high results in top-line revenue and EBITDA. Moreover, we continue to hire particularly technical talent in our consulting delivery organizations. In our cloud business, we remain diversified across customers, service lines, and industries to offer some protectionary factors against these uncertain markets. And we were encouraged to hear that in the most recent earnings call, Microsoft highlighted their revenues were up 42% on a constant currency basis in their Azure business, where we experienced the most overlap with their business, and that the areas where they were experiencing softness, namely PC and OEM sales, are not impactful on our partnership or business. In payments, payments industry leaders have continued to see strong demand for credit transactions and is consistent with our experience as well. We would like to note that while Q3 was a strong quarter for us, the fourth quarter always proves to be a little slower period for inquisitive in the broader cloud and payments industries. In the cloud services business, we experienced some seasonality given vacation time around the holidays, specifically both Thanksgiving and Christmas in the US. And the specific segments served by our merchant services group tend to have experienced a bit of slowdown at the tail end of the year. Regardless, at this time, we remain on track to meet our goals and retain strong progress despite volatility in the broader market. However, while we report strong Q3 results, I want to emphasize that our team is closely monitoring our internal and external indicators and strategically planning to be nimble enough to pivot in the event of greater market transitions. We will move into 2023 with these cautionary considerations at the forefront of our strategic planning to best position Quisitive for continued growth and success. Thank you all for joining us as shareholders and supporters. I'll turn it over now to our CFO, Scott Merriweather, to discuss our Q3 2022 financial results. Scott?

Thanks, Mike, and thank you to all who are joining us for today's call. We continued our growth trajectory as we once again set new quarterly records for revenue and adjusted EBITDA. Revenues for the third quarter ended in September, increased 76% to $48.8 million from $27.8 million for Q3 of 21, driven by our acquisitions and our healthy organic growth. Gross margin increased 87% to $20.3 million in Q3 of 22, over $10.6 million in Q3 of 21. Our gross margin as a percentage of revenue was 41.6%, continuing our sequential quarter-over-quarter trend of increases. For comparison, our Q3 21 gross margin percentage was 39.1%. We will continue to focus on increasing our gross margin percentage as we integrate our acquisitions, focus on cross-selling activities, and begin to activate our PIQ payments channel. Adjusted EBITDA increased 47% to 7.6 million from Q3 of 22 from 5.2 million for Q2 of 21. Adjusted EBITDA's percentage of revenues was 15.6% for Q3 of 22. an increase from the 14.3% we produced in Q1 and the 14.4% we produced in Q2. Our EBITDA margins increased in both our cloud and payment segments as both segments had outstanding results. We'll now move to discussing the specific performance of our segments. Revenue in our global cloud solutions segment increased 108%, to another new record of $36.0 million for Q3 of 22 from $17.4 million for Q3 of 21, driven by the Catapult acquisition and reflecting 19% organic growth. Recurring revenue within the cloud segment eclipsed $11 million for the first time in the third quarter. Given the strong overall quarter from the cloud business, recurring revenue remained at 31% of our overall cloud revenue, but we are pleased with the continued growth of these revenue streams. The segments adjusted EBITDA improved 111% to $4.7 million for Q3 of 22 from $2.2 million for Q2 of 21. With our one-quisite approach within cloud and internal acquisition integration efforts, We've adjusted the calculation methodology for allocation of corporate costs to our segments to a revenue-driven allocation that we believe is more accurate. These allocation changes did not affect our consolidated results, but are simply changes between the cloud and payment segments. With the new methodology, EBITDA for cloud in Q1 was $4.6 million, Q2 was $4.5 million, and Q3 was $4.7 million. Revenue for our global clouds Our global payment segment also set a quarterly record, increasing to $12.8 million for Q3 of 22 from $10.4 million for Q3 of 21 and delivering organic growth of 23%. All of the Q3 revenue was from our bank card acquisition. Strong payments charge volume drove the strong revenue performance from this segment. Historically, our Q2 charge volume of bank card was our strongest quarter of the year. Q3 22 volume held steady with Q2, with only a slight dip of approximately half a percent. August was our second-strongest charge volume month of the year. The strong charge volume combined with a favorable customer mix resulted in Q3 revenue to sequentially increase over Q2. Our payments theme has managed our merchant portfolio to attrition rates that are well below market averages. This strong base of existing merchants, along with the new merchant sales, are driving the strong revenue and EBITDA results. Last year, Q4 of 21, charge volume increased slightly over Q3 of 21. Looking forward, we're expecting Q4 to hold relatively steady with Q3. Adjusted EBITDA for our global payment solution segment increased to $2.9 million in Q3 of 22, similar to the $2.9 million for Q3 of 21. With the methodology change I noted earlier, EBITDA for payments in Q1 was $1.8 million, Q2 was $2.4 million, and Q3 was $2.9 million. Baycard contributed a strong quarter of EBITDA with $4.7 million in Q3 of 22. The payments division includes increased spending on the PayIQ platform, which reduced the payments even above $1.6 million for Q3. We have noted on our previous calls that operating costs related to ledger pay would continue to increase through 2022 as we reach market readiness and launch the platform. Moving to the balance sheet, at September 30th, we had $80.6 million of term loans outstanding and $9.5 million of cash on hand. As of our last fall, we expanded our credit facility in August. We ultimately borrowed an additional $7.5 million for the expansion and then made our normal quarterly paydowns at the end of the quarter. As of September 30th, our total leverage ratio was 2.92X or 2.92 times. Even with the additional borrowings, our leverage ratio was slightly lower than last quarter. Our leverage ratio covenant limit was 3.25 times at September 30th, and the covenant ratio will step down to 3.0 at December 31st. Our quarterly paydowns now are $2.5 million. We are confident in our cash flow and working capital position. Cash flow for operations were $5.9 million in Q3. During Q3, we made large earn-out payments related to two acquisitions. $5 million of those earn-outs was paid with equity as for the contractual terms of the earn-out. For comparison purposes, we had $15.7 million of projected earn-out payments and short-term liabilities in the balance sheet at June 30th. At September 30th, we have $7.3 million accrued. This balance will be adjusted going forward as we have greater certainty of earn-outs being achieved. We previously noted we have an additional $2.1 million balance of projected earn-out compensation within accrued liabilities. This payment was made in Q4 using $1.3 million of cash and $0.8 million of equity. Our working capital deficit is September 30th of $0.6 million. It's arguably overstated as it includes earn-out amounts expected to be paid with equity. Overall, as we've previewed last quarter, our working capital looks much different at the end of Q3. It will improve throughout 2023 as our earn-out obligations begin to roll off. The current weighted average interest rate on our term loans is approximately 6.8%. We currently expect to convert between half and two-thirds 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 close 2022, we remain confident in our ability to deliver strong results. We expect our payment segment to continue to get strong performance through this year and into 2023, especially as PIQ builds through 2023. Related to the cloud segment, we've all seen the news of many tech companies that are implementing hiring freezes or layoff programs as they forecast slowdowns, directly impacting our channel. Microsoft pulled back some of its guidance for 2023. However, as Mike noted earlier, Microsoft's softness was not in the areas where Quisitive works. Microsoft is relying on our product lines to drive this growth. And as a small cap company, we've never had the bladed head count as we have built our teams to meet our market demand. We remain in that state of hiring and growth to meet our current demand. Inevitably, we do expect some customers will delay projects or pull back spending as they evaluate current economic conditions. However, we remain confident in our pipeline and our ability to deliver strong organic growth rates. We remain excited about what 2023 will hold. This concludes our prepared remarks. Thank you all for your time this morning. We are very proud of our Q3 results, and we look forward to updating you on our progress going forward.