Quisitive Technology Solutions Inc.

Good morning and welcome to Quisitive's fourth quarter and full year 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 fourth quarter of full year 2022 earnings release. Now, I'll turn the call over to Mike Reinhart. Sir, you may proceed.

Thank you, Operator, and good morning, everyone. We appreciate you taking the time to join our Q4 and full year 2022 earnings call. 2022 marked another year of significant top-line revenue growth with solid gross margin contribution and considerable progress on operational priorities. Additionally, we were pleased by our continued strength of adjusted EBITDA performance, something Scott will dive deeper into during his section. Throughout the year, we focused on integrating our business under the one inquisitive umbrella, a core foundation for our future strategy. It's our imperative for every inquisitive customer to experience the full breadth and depth of our services through our engagement with our teams. We look to prove our ability to address not just acute business challenges, but actualize our vision to become a true go-to partner for end-to-end digital transformation. We invested in internal integration initiatives with the necessary energy and focus to ensure our routes are healthy and properly spread across our horizontally integrated market penetration approach. Despite the standard fourth quarter seasonality contributing to a lower revenue outcome in our cloud solutions business, Recurring revenue maintains its pace and contribution coupled with sustained growth in payment solutions. From a high level, in 2022, we experienced minimal direct impact from the existing macroeconomic environment and continue to flex our nimbleness to adjust to fluid market conditions. Additionally, we've seen dividends paid from our investments in recurring revenue streams. We continue to look for opportunities to bundle services and solutions to maximize impact and optimize customer spend. and are reinforced by the executed deals we're receiving across key areas and customers' continual prioritization of IT investment. In the same vein, Microsoft continues to affirm the growth of key segments directly impacting our business, including an emphasis on Azure and Dynamics, core pillars of our business growth. We continue to advance our strategy to leverage our strong partnership with Microsoft, improve our depth of cloud-based technology solutions and services, and provide industry offerings within healthcare, leveraging our basic care solution, as well as in retail and payments with the PayIQ platform. These combined capabilities are positioning inquisitive as an industry leader in modern cloud services and industry software solutions. I'm very pleased with how our vision was validated in 2022. We have begun 2023 with a clear vision and strategy and will remain opportunistic to openings in the market, emergent synergies from previous investments, and new customer demands. Now let's dive into the details of our segment performance. First, cloud solutions. We've experienced strong demand for our managed services division. Catapult's unique managed services skill set and offerings in both security and Azure are now core elements of our acquisitive portfolio and are being integrated into contracts earlier and more consistently within our sales process to bring greater depth with existing and future customer accounts. As you will have seen in our press release last week, the Spyglass solution is filling a critical demand in the marketplace for security solutions. Spyglass is an expert-led, roadmap-driven, and IP-enabled managed service focused on security posture improvement. It includes assessment of vulnerabilities and strategy definition and management of improvements, including technology, process, and policy solutions. As it is a recurring managed services contract that is industry agnostic and customizable based on the assessment of the customer's technology landscape, it is proving to be a powerful cross and upsell offering that fills a critical need for our customers. We are also seeing a clear inflection point in the realization of our basic care vision leading into 2023. The MasonCare solution boasts five distinct modules that effectively cover the spectrum of healthcare information technology needs for organizations of many types, including providers, care management, home health, labs, pharmacies, and payers. In late 2022 and early 2023, we've had three new customers onboarded that represent the full spectrum of solutions and customer identities, validating and fully realizing the vision of MasonCare. I'll provide a brief summary of these wins for you. We provided the basic care care supply module to an at-home dialysis provider. The engagement consolidated several enterprise resource planning software sets for a multitude of legal and healthcare related entities together as a singular supply chain tool. The results of our efforts has enabled on-time dialysis with no disruptions based on supply chain for the customer's patients across the United States. For Arthur Health, a Canadian healthcare innovator focused on care coordination and value-based models of care, Macy Care Path and ProviderLink have been instrumental in reducing the time from symptoms to specialist care for thousands of patients across Canada. Finally, an enterprise pharmacy care services organization has deployed MacyCare Payer Matrix to simplify the revenue recognition process and correctly manage the healthcare payment process, decreasing patient costs and maximizing revenue collection. These stories paint the picture of our market penetration across customer types and healthcare use cases and represents a 100% increase in MacyCare licenses once fully deployed. The product roadmap for MesaCare will continue to expand this solution's impact to customers and sets a bar for the realization of potential for our industry specific IP solutions. Our focus in cloud at this time is on delivering our bundled solutions and services that drive holistic digital transformation, leveraging our broad portfolio of solutions. Continued emphasis on driving recurring revenues via first-party IP is a consistent internal topic as we look to accelerate our impact for cloud customers and subsequently retain their business via managed services offerings. Our Q4 results are consistent with projections, and we expect continued growth in cloud solutions this year. As we discussed last call, there have been some decision delays in elongated sales cycles, and we saw this continuing in Q1 as a result of the aforementioned macroeconomic circumstances. The overall pipeline remains strong, but these delays have shifted some Q1 revenue into Q2. We've also spent time and investment of resources in Q1 implementing new CRM, time management, project operations, and billing systems internally. These platforms are essential for the business to provide operational foundation as we grow and to streamline future acquisitions. One other topic to touch on is related to artificial intelligence, which has been trending the past several months. As you are likely aware, Microsoft has made a large investment in OpenAI's ChatGPT, and has already launched their Dynamics co-pilot AI offerings across many areas, including sales and security. We are building offerings across our services and solutions that will leverage these AI capabilities. This will include advisory and consulting services to help our customers evaluate and implement these solutions, while also extending the AI platform into MacyCare and PayIQ. As we find opportunities for implementation to solve business needs, we will pursue them diligently. While this is an interesting element to the equation of Azure and Dynamics, we believe that the utilization of AI technology in direct correlation with revenue is still in its nascent stage. As we shift to payments, I recognize there's been much talk of turbulence throughout the broader macro economy and its impact on consumer spend. However, Amex noted on their latest earnings call that bonds rose both on a sequential and year-over-year basis with record levels of spending on their networks recorded for the full year. Visa and MasterCard echoed similar resilience as domestic and international volumes either steadily rose or maintained consistency. That said, our Bank Card Merchant Services Group, the arm of our payment solutions business that focuses on merchant acquiring, recognized strong growth in payment volumes and revenue in the quarter. Some of this Q4 growth is attributed to seasonal volumes, which were new this year to the portfolio. As we touched on in previous calls, seasonality plays a role in the quarter-over-quarter performance of this segment. Generally speaking, the first and second quarters of the calendar year are strongest in volume metrics and revenue, while the latter part of Q3 into Q4 see a slight tapering. This year, we saw stronger growth in Q4 than previous years. The traditional Q1 and Q2 seasonality is predominantly due to the product sales mix of consumer purchases, coupled with a strong wave of renewals we see from our merchants who bill for membership services annually, which are processed in the second quarter. In summary, the increasing improvement we see on both volume sequentially and year-over-year is encouraging, and that trend we look to continue. Last quarter, we discussed the Card Network's holiday production freeze and the impact to pay IQ certification, which we're happy to report was lifted at the end of January. We're fully re-engaged and the teams are actively working with both Amex and Discover to execute the certification process. We expect the Amex Direct and Discover certifications to be completed in Q3 and the Amex OpBlue to follow shortly after. We continue to build out full operations and integrations with Visa, MasterCard, and our banks for clearing and settlement and plan to begin to onboard select e-commerce merchants to Visa and MasterCard beginning in early July. Then, once the Amex certification process is completed, we can begin to migrate groups of merchants to the platform later this year. In late Q4, we launched a development effort in partnership with Microsoft to create our API platform and PayIQ developer portal that will enable integrations with ISVs and other industry software solutions. We have made great progress getting this capability in place, and we are near completion with our first ISV solution, WooCommerce, and have other efforts underway with providers for POS solutions and gateways. all of which will enable a scale approach for industry software solutions built on Microsoft and other technologies to easily integrate the PayIQ solution and drive payments volume. In addition, we are building out a PayIQ platform environment with an e-commerce storefront that will allow us to showcase live transactions powered by PayIQ and our merchant portal platform for prospective merchants and all of you as investors. We expect to have this complete by the end of May and will develop opportunities to develop this environment and allow the world to see the platform in real time execute and process payments. It has been a long journey, and I know there has been many doubters along the way. We are excited and look forward to showing all of you PayIQ, the payment platform of the future. On to our partnership with Microsoft. Our cloud IP and scale for sales and delivery continues to be a differentiator from our other Microsoft partners as our solutions enable speed and innovation and deployment and are coupled with first-class service by professionals with deep industry expertise across verticals. We are in the top tier of Microsoft's North American partners, driving Azure Consumption Revenue, or ACR, a key metric utilized by Microsoft. Additionally, we've achieved all six of Microsoft's available cloud solution program designations, including Azure service and integration, as well as security and business application solutions. Again, the strength of our relationship with Microsoft not only enables aligned sales and marketing motions that accelerate customer acquisition and drive revenue, but also establish Quisitive as a premier solution provider in this broad ecosystem. In alignment with our positioning at the end of 2022, we anticipate more growth and further penetration of Microsoft-related opportunities as we leverage all available tool sets, including partnership programs to supplement continual vertical expansion of our cloud solutions and assisted innovation on our payment solutions. In our M&A strategy, we continue to review both opportunities in cloud and payments. In cloud, we will look to add our IP and services scale, while in payments, we will look to add accretive payments technologies and or ISOs with diversified portfolios that lend additional merchants to our pool and more talent in our back office operations for the global payment solutions business. As the M&A landscape shifts towards a buyer's market, we're proactively vetting candidates, remaining keen on companies that will provide incremental value to our organizations. Thus far, our M&A strategy has allowed us to grow sales capabilities, expand geographic presence, and facilitate the expansion of our product and services portfolio. We recognize the immense value of M&A and remain on the lookout to find the right opportunities. Looking ahead, we expect to continue growth in spite of the broader market conditions. We're continuing on the path set forth from the previous years with a focus on complete activation of the payments business capabilities and simultaneously leaning deeper into our partnership with Microsoft to generate value for customers and shareholders. Thank you all for joining us as shareholders and supporters. I'll turn it over now to our CFO, Scott Merriweather, to discuss our Q4 and full year 2022 financial results. Scott?

Thanks, Mike. And thank you to all who are joining us for today's call. Before we get into the numbers, I know many of you are curious about our exposure to Silicon Valley Bank and any of the other affected banks in the banking ecosystem. We have zero direct exposure to SVB and these other banks. We know of only a handful of customers that had any exposure to these banks. They are immaterial to our results and have not created any impact to our financial projections or operations. Basically, we are not affected or impacted by the Silicon Valley Bank situation. Moving on to our fourth quarter results, revenue for the fourth quarter ended in December, increased 38% to $45.9 million from $33.3 million for Q4 of 21, driven by our acquisitions and our organic growth. We had a partial quarter of the catapult acquisition in Q4 of 21 compared to a full quarter in Q4 of 22. Removing catapult completely from the results, we experienced organic revenue growth of 17% in Q4. We normally have a seasonal dip in Q4 as the professional services revenue within our cloud segment is impacted by the Q4 holiday schedule. This seasonal trend drove the sequential quarterly dip from Q3 of 22. Gross margin increased 45% to $19.0 million in Q4 of 22 over $13.1 million in Q4 of 21. Our gross margin as a percentage of revenue increased to 41.4% from 39.3% in Q4 of 21. Our gross margin percentage remained relatively consistent with Q3 of 21, with Q3 of 22, and given the seasonality of our revenue within the cloud segment, we are pleased with this overall gross margin performance for Q4 of 22. We will continue to focus on increasing our gross margin percentage as we emphasize cross-selling across our integrated cloud acquisitions and later in FY23 as we begin to activate our PayIQ payments channel. Adjusted EBITDA increased 79% to $8.1 million for Q4 of 22 from $4.5 million for Q4 of 21. Adjusted EBITDA as a percentage of revenues was 17.6% for Q4 of 22, an increase from 13.6% in Q4 of 21, and also a sequential increase from each quarter during fiscal 2022. There was a one-time item in Q4 that was a benefit to EBITDA, which will be discussed in greater detail within our segment discussion. Excluding this one-time benefit, adjusted EBITDA would have been $7.6 million, which is similar to Q3 of 22, albeit with a higher EBITDA margin on revenue for Q4 of 22. We'll now move to discussing the specific performance of our segments. Revenue in our global cloud solution segment increased 40.3% to $32.3 million for Q4 of 22 from $23.0 million for Q4 of 21, driven by the catapult acquisition. Recurring revenue within the cloud segment was $10.8 million in Q4 of 22, up from $7.6 million in Q4 of 21. After a strong year performance and an especially strong Q3, the cloud segment's performance was slightly weaker in Q4 of 22. Frankly, team members took more PTO in Q4 than we forecasted, which affected our professional services revenue and intensified the seasonality of Q4. As a result, organic growth was 8% for the quarter. For context, organic growth was 19% in Q3. Despite the weaker Q4, we averaged 12% for the fiscal year. As Mike noted earlier, we expect Q1 to be the weakest quarter for the cloud business in 2023, as several customers delayed projects while they evaluated the macro economy and their own Q1 results. Q1 23 will look more like Q1 of 22. Given the strength of our pipeline, we still expect double-digit growth from cloud for all of fiscal year 23, but it will be weighted more heavily in the last three quarters. The cloud segment suggested EBITDA improved 44% to $3.7 million for Q4 of 22 from $2.6 million for Q4 of 21. EBITDA margin increased to 11.4% in Q4 of 22 from 11.1% in Q4 of 21. In line with the revenue trends we noted earlier, EBITDA and EBITDA margin decreased sequentially in Q4 of 22 from our Q3 of 22 high watermarks. Revenue for our global payment segment once again set a quarterly record, increasing to $13.6 million for Q4 of 22 from $10.3 million for Q4 of 21 and delivering organic growth of 32%. All of the Q4 revenue was from our bank card acquisition. We continue to deliver strong payments charge volume growth as charge volume grew 8% year over year. Revenue growth outpaced the charge volume growth as we added new revenue to third-party revenue streams for which we did not control or count the charge volume. This is a change in how we previously reported our charge volume, but we believe it is the most accurate measure We only report the charge volume from NAR directly in BINS with our charge volume number. Last year, we had a mild uptake in charge volume between Key 3 and Key 4. We had a slight decrease in charge volume between Key 3 and 24, but this was driven by that change in how we report volume. Revenue was actually up 6% from Key 3, 22 to Key 4, 22. Seasonality had a greater impact on our revenue in adjusted EBITDA within the bank card portfolio as a performance that teetered expectations. The seasonal performance would pull back some in 2023, so I want to caution that this is not a new run rate, but we were certainly pleased with the results. Adjusted EBITDA for our payment segment increased to $4.4 million in Q4 of 22, an increase of 123% from the $2.0 million recognized in Q4 of 21. Q4 of 22 was also a $1.9 million increase from Q3 of 22. Bancard contributed a strong quarter of EBITDA, with $5.1 million in Q4 of 22 before the allocation of corporate costs. This is a $1.7 million or 49% increase over Q4 of 21. The increase was driven by the year-over-year increase in charge volume and the increased seasonality we noted earlier. The EBITDA for the payments division in total includes spending on the PIQ platform, which reduced payments EBITDA by $0.4 million in Q4 of 22. This $0.4 million of cost in Q4 of 22 is arbitrarily low as we had a $0.5 million out-of-pocket catch-up, out-of-period, catch-up entry for our software development capitalization cost. This $0.5 million was an add-back to EBITDA within Q4 for payments. Without this entry, PIQ would have contributed negative $0.9 million of EBITDA in Q4 of 22. Overall, PIQ ran at an EBITDA loss of $4.2 million for all of fiscal year of 22. In addition, we took a $1.5 million charge to income in Q4 of 22 related to the write-down of the contract receivable from the early days of ledger pay. This receiver was several years old. We included an add-back of 1.5 million within other expense in our Q422 adjusted EBITDA to remove this out-of-period non-cash item. We have noted on our previous calls that operating costs related to PIQ are expected to increase throughout 2023 as we reach market readiness and launch the platform. We expect that the 4.2 million of EBITDA losses experienced in FY22 will increase in FY23 before reducing throughout fiscal year 24, as increased revenue will begin to offset the existing spend throughout fiscal year 24. Moving to the balance sheet, at December 31st, we had $78 million of term loans outstanding and $9.4 million of cash on hand. At December 31st, our total leverage ratio was 2.54 times, driven by increased EBITDA and our continued debt paydowns. Our leverage ratio covenant stepped down to 3.0 times at December 31st. Our quarterly debt pay downs are $2.4 million. On March 31st, we amended our credit facility with BMO to lower our fixed charge coverage ratio from 1.25 to 1 to a 1.10 to 1 covenant for fiscal year 2023. Our fixed charge coverage ratio is more than interest coverage, as it includes adjustments for interest, capex, and other items. This covenant change gives us more flexibility to deliver our strategy during a time of rising interest rates. We are confident in our cash flow and working capital position. Cash flows from operations were $7.6 million in Q4, and we want to highlight the strength of that performance. Moving forward, we expect Q1 of 23 to be our weakest quarter from cash flows from operations, similar to 2022, but to return to stronger operating cash flow for the remainder of 2023. During Q4, we made one earn-out payment of $2.1 million, with 70% being paid in cash and the remainder paid using equity. We have $11.1 million of projected earn-out payments and short-term liabilities in the balance sheet at December 31st related to the bank card and MNLO earn-outs. That $11.1 million includes $5.6 million of earn-outs that will ultimately be paid with equity for the contractual terms of the purchase agreements. As a result, our working capital deficit at December 31st of $5.2 million is arguably overstated as it includes earn-outs that are expected to be paid with equity. The final earn-out for MNLO will be paid in Q2, and the final earn-out for bank card will be paid in Q3. The second earn out for Mazic will be paid in Q3. After these payments, we will only have the year three earn out for Mazic remaining, and it will be our only remaining earn out for our prior acquisitions. Within cash flows for investing activities, you will note an unusual amount of CapEx for Q4 of 22, specifically within our purchase of intangible assets. This amount was $2.5 million for Q4 of 22 and was made up primarily of software capitalization. The $2.5 million includes the half-million-dollar catch-up for PayIQ I noted earlier. It also includes another half-million of IP we bought back from a customer for our major care platform. Given our momentum with the major care product, rather than redeveloping some specific IP we created for a customer, we bought back the rights to that IP so we can get it into the market faster. Excluding these two items, our software capex would have been $1.5 million, which is more in line with our expected quarterly run rate for fiscal year 23. We expect Q1 and 23 to be a touch lighter than that $1.5 million, and Q2 and Q3 will be a little higher as PIQ nears market readiness. But overall, we should average around that $1.5 million of spend per quarter. The current weighted average interest rate on our term loans is approximately 7.81%. Going forward, we expect to convert roughly half of our adjusted EBITDA into free cash flow, which can be used either for acquisitions or debt repayment. We define free cash flow as adjusted EBITDA minus CapEx, internally capitalized software, cash interest, and cash taxes. As we begin 2023, we remain confident in our ability to deliver continued growth. We expect our payment segment to continue its strong performance in 2023. The PIQ platform will launch in the second half of the fiscal year, but we do not expect the revenue contribution to be meaningful to the fiscal year. Its impact will be much more demonstrable in fiscal year 24. We expect our cloud segment to experience some pockets of softness as decision makers hedge over sessionary fears. However, our pipeline remains strong and our sales team is benefiting from our consolidation efforts in fiscal year 22 in our one-quisitive approach. Our proprietary IP with our cloud segment, namely our major care product suite, is gaining traction and will be a growth driver for fiscal year 23. These internal trends give us confidence in our ability to continue to build organic growth throughout fiscal year 23. This concludes our prepared remarks. Thank you for all your time this morning. We are very proud of our 22 results, and we look forward to updating you on our progress going forward. We're now ready to open the call for your questions. Operator?