Quisitive Technology Solutions Inc.

Good morning and welcome to Quisitive's second quarter 2023 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 second quarter 2023 earnings release. I will now 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 Q2 2023 earnings call. In the second quarter, our teams took necessary actions to mitigate the impact of macroeconomic challenges while advancing important business goals. Throughout the quarter, our payment solutions business delivered as expected. Yet the second quarter experienced a continuation of the prior quarter's trend, with numerous cloud solutions deal activations postponed until the second half of 2023, resulting in a sequential decline in results. These deferrals were predominantly in the professional services offerings, especially in our application development services. Various factors contributed to this, including increased customer caution and broader market trends impacting the professional services sector. This delay affected our short-term performance as multiple planned activations and corresponding revenues expected to be realized this quarter were deferred. This trend was exasperated by the operational and system changes implemented at the start of Q2, which hindered visibility into bookings and resource utilization. To realign the company with our anticipated performance levels, we have implemented several corrective measures. Firstly, we have reduced our cost of sales and operating expenses to align them with our expected margins, which Scott will elaborate on in his commentary. Secondly, we have implemented enhanced operations reporting and tracking, including a comprehensive 13-week KPI dashboard for meticulous monitoring of revenue backlog, resource allocation, and utilization. Additionally, we have refined our sales process and improve pipeline management to adapt to increased customer caution and conservatism. We are also assessing our approach to new accounts and projects by developing a customized strategic business value case at the commencement of the sales cycle, while primarily focusing on managing the existing pipeline. Our pipeline continues to be robust in terms of overall volume, as it has surpassed the levels of 2022. And our emphasis is on accelerating the conversion rate of these inflows. We have undertaken necessary measures to gain adequate visibility into our existing book and backlog, which will enable us to more accurately forecast future results. We remain committed to reducing costs to align our resources with the areas of highest growth while managing the business to stay agile. The combination of our strategic cost reductions and the IT market's growth rebound trend will propel our results within the cloud segment as we progress. Expanding on that, let's delve deeper into the cloud solutions business. We witnessed a more than 17% year-over-year increase in recurring revenues, showcasing the robust demand for our managed services as we broaden our reach across numerous customer accounts. The focus on recurring revenues continues to be a pivotal driver for our organic growth. This quarter marked a significant expansion in our service offerings with the enhancement of our existing Spyglass security to incorporate managed detection and response capabilities into our portfolio. The integration of these capabilities with Quisitive's comprehensive security services under the Spyglass umbrella, along with the Microsoft security solutions, equips our customers with holistic protection and a centralized perspective of their security landscape. This expansion opens up our addressable market to a new customer base seeking a 24 by 7 incident response model. This initiative, among others, will contribute to sustaining growth momentum in our recurring revenues. Recently, we disclosed our partnership with HeartTech Health to deploy MacyCare CarePath as an integrated care delivery tool aimed at preventing women's heart disease. We are delighted to persist in our collaboration with healthcare innovators like HeartTech Health and Arthur Health. MacyCare is demonstrating its efficacy and influence across various healthcare specialties and provider categories, and we plan to extend its presence in the industry further. We are witnessing robust demand for our offerings in the healthcare sector. prompting us to broaden our emphasis by augmenting our sales resources in this industry and intensifying our market penetration strategies in collaboration with Microsoft. Looking ahead, we see incremental growth in the next generation of workloads heavily influenced by generative AI. The incorporation of Azure OpenAI services and Microsoft Copilot offerings will be pivotable, market influencers that Quisitive is strategically poised to capitalize on. Additionally, our intricate development, data analytics capabilities, and other areas of expertise present considerable opportunities to activate AI. The activation of these workloads will generate momentum in Azure consumption, benefiting both Microsoft and Quisitive. As Microsoft commenced their fiscal year in July, we devoted substantial time to territory and account planning with their teams. Our current focus is on initiating AI-centric engagements with customers, as AI is now a central topic in all our discussions with both new and and existing clients. To harness this, we have already launched six AI-focused offerings catering to all stages of the customer journey, accompanied by targeted sales and marketing activities to promote these offerings and assess new prospects. To dive deeper, Quisitive collaborated with Microsoft Solution Teams to create generative AI tools, utilizing Azure OpenAI and Microsoft Copilot to integrate AI into our proprietary industry IP. Our initial focus is on developing new AI features for basic care. MacyCare Copilot for Care Coordination will enhance clinical efficiency in administrative tasks, patient care plans, and effectively address patient inquiries using AI. Additionally, MacyCare Copilot for Revenue Cycle Management will facilitate efficient claim denial management. These new product solutions will further strengthen our healthcare offerings and provide the potential to drive increased pipeline and opportunity. Moreover, we incorporated Azure OpenAI into EverWatch, a component of our Azure managed solution engineered on Azure platform intelligence to oversee services and resources. This integration promptly scrutinizes alerts activated by EverWatch and proposes comprehensive troubleshooting actions. These smart suggestions expedite the triage and troubleshooting processes. Quizzitive has also embedded anomaly detection capabilities through Azure Cognitive Services into the customer's alert history, pinpointing anomalies that diverge from the usual patterns. These metal alerts uncover new challenges or underscore alterations in the behavior of existing alerts, delivering invaluable insights into the customer's environment and enhancing the identification and handling of issues. Additionally, these capabilities will augment our profit margins on our managed services offerings. We have already initiated AI engagements with several customers. For instance, we collaborated with an existing enterprise technology client to develop a private large language model that enabled them to utilize generative AI's capabilities while safeguarding company data within their existing infrastructure. By creating a custom model, we empowered them to train the model on company information, yielding the most detailed and pertinent data as outputs. In the financial services sector, we were chosen as the preferred AI implementation partner for a firm establishing a business level partnership. We worked closely with our team to outline their generative AI strategy, assess workloads for adoption, and facilitate organizational change. As we look towards the third quarter in our cloud business, we anticipate growth stabilization as we bolster managed services and sustain a robust professional services pipeline. It's worth noting that the dynamic nature of this industry is standard, and success lies with companies that can adapt and harness the macro tailwinds. As market demands shift, we maintain operational flexibility to reinforce our high margin segments. thereby enabling us to allocate resources strategically to areas with greater potential for returns. In June, we held our Investor Day and discussed our vision for healthcare and payments. During this event, we highlighted the progress achieved in our multidimensional market strategy, addressing various initiatives in cloud under the Microsoft-powered healthcare solutions umbrella and payments, illustrated by our PayIQ live demo and market opportunity analysis. We are grateful to our partners and panelists for their valuable insights and contributions, as well as the feedback and support received from analysts and investors. Shifting focus to our payment solution segment, as previously mentioned, the revenue and performance of this segment were consistent with our expectations, demonstrating the stability we have established in this area. We observed a strong surge in volume, especially in the growth of third-party volume, which significantly elevated our total volume well beyond the nominal value for the quarter. Our volume with third-party processors rose to $204 million in the second quarter this year, up from $79 million in the same quarter last year. Collectively, the total charge volume for our merchants increased by 9% in the second quarter. Across the market, the sustained use of credit by consumers continues to be a significant driver, bolstering our team's confidence in the ongoing opportunities and the potential for organic growth through our existing initiatives. In their most recent call, Visa highlighted that domestic, international, and cross-border volumes increased both sequentially and year-over-year, suppressing pre-COVID-19 levels. MasterCard expressed similar views, indicating that the labor market, wage growth, and consumer behavior supported by credit and increased savings have contributed to favorable macro trends. The rise of AI and data-driven enterprises are becoming increasingly prominent topics for these companies as they explore innovative ways to grow, aligning directly with one of our key initiatives with PayIQ. As mentioned in previous updates, seasonality impacts the quarter-over-quarter performance of this division. Generally, the first and second quarters of any calendar year are characterized by strong volume metrics and revenue, whereas the latter parts of Q3 and Q4 experience a slight decline due to seasonal effects. This trend is primarily attributed to the mix of consumer purchases for our merchants and the surge of renewals from our customers who bill for membership services via annual fee structures, processed mainly in the second quarter. In essence, the observed growth in volume is promising, and we aim to sustain this growth trajectory moving forward. We have made steady progress with PayIQ since the merchant activation announcements recently. American Express and Discover are progressing through the testing phases, and we anticipate securing these certifications in the coming months. However, we will foresee a slowdown in progress due to the industry-wide freeze during the holiday season. This factors beyond our control and migrations will decelerate as the industry winds down in the year's final weeks. We expect momentum for PayQ to pick up again in the middle of Q1 2024. We recently witnessed the successful transition of agechecker.net to PayIQ's payment processing, signifying a crucial milestone as the first independent software vendor on the platform processing live payments. Currently, over 700 of AgeChecker's monthly customers will have their billing processed via PayIQ, In this role, PayIQ is operational, in production, and serving customers. The transition of agechecker.net, along with forthcoming partnerships with Amex and Discover, corroborates the progress made towards enhancing the digital customer experience, from real-time age verification to secure payment processing. There is growing momentum in our payments initiatives, and we received exceptionally positive feedback during our Investor Day presentation on the PayIQ platform. We demonstrated that the technology is ready operational, and integrated into the payment rails as we have been discussing. PayIQ aspires to provide a comprehensive 360-degree value add from an integrated software vendor to the merchant and ultimately to the end customer. We are enthusiastic about delivering this value to the market on a wide scale. On to our partnership with Microsoft. While the IT services and cloud solution markets are experiencing a slight pullback from a high level, Microsoft is observing reinvestment and return on end-customer digital transformation initiatives. Their three key priorities for the near future revolve around assisting customers in migrating and utilizing the full potential of the Microsoft Cloud, investing in new AI platform shifts by incorporating AI into every layer of the tech stack, and optimizing operating leverage on existing initiatives. Quisitive stands to benefit from each of these priorities and aims to continue capitalizing on Microsoft-related synergies. In July, we were privileged to be recognized as the Microsoft Partner of the Year in Healthcare and Solution Assessments. This marked our third consecutive year as Healthcare Partner of the Year and our fifth consecutive year receiving an award. This is a testament to the outstanding work of our team members and the trust bestowed upon us by our customers, which enable us to achieve this honor. Our partnership with Microsoft continues to thrive and generate opportunities for our organization. Our strategic alignment with Microsoft focus areas, including AI, managed services, security, and industry strengthens Quizzitive. The emphasis remains on Azure as Microsoft notes consistent customer migration to their platform and perceives the cycle of Azure adoption market-wide as still in its early stages. Furthermore, Microsoft recently announced plans to accelerate investment in their cloud infrastructure to support growth and demand for their AI platform. Our deep integration into the Microsoft ecosystem enables synchronized sales and marketing strategies that will expedite customer acquisition and drive future revenue. We aim to remain a premier solution provider in digital transformation and related services alongside Microsoft. On to an M&A discussion. Consistent with previous sentiment, Quisitive is diligently analyzing the market landscape, targeting both the IT and payment sectors for inorganic growth opportunities. We remain resolute in our commitment to identifying and capitalizing on promising opportunities that align with our core objectives. It is evident that there will be substantial opportunities to expand the business and reinforce our position with Microsoft and customers through strategic acquisitions. Additionally, we will continuously monitor the market and carefully assess the proper timing to make any incremental investments. We are strategically positioning ourselves with unique and nuanced value propositions in our cloud solutions business, most notably our mutually beneficial partnership with Microsoft, our deep tech exploitation that gives us competitive advantage in the AI domain, and our knowledge of industry that enables us to realize our strengthening pipeline through the latter part of the year. Our approach is both intentional and flexible, reflecting an expected gradual yet significant increase in IT investment in the upcoming quarters. With a broader economic context indicating a resurgence of technological expenditure, we remain focused and motivated. In the payments business, our efforts are leading to the achievement of critical milestones, demonstrating the effectiveness of our long-term strategy. We anticipate reaching further milestones in the final months of the year, while also carefully refining our internal infrastructure to support the substantial growth in transaction volume projected for 2024. This aligns with our broader vision of staying at the forefront of the payments market, marked by both complexity and opportunity. Our focus remains on delivering the one inquisitive experience to every customer. where we provide the full spectrum of our services through our engagement with each team and customer. We aim to not only address immediate business challenges, but realize our vision of becoming the preeminent go-to partner and end-to-end digital transformation and payments intelligence. Thank you for joining us as shareholders and supporters. I will now turn it over to our CFO, Scott Merriweather, to discuss our Q2 2023 financial results. Scott?

Thanks, Mike, and thank you to all who are joining us for today's call. The second quarter of 2023 was weaker than expected for Quisitive, as revenue decreased 8% to $45.3 million from $47.6 million from Q2 of 2022, driven by softness in the cloud segment. Our payment segment delivered performance consistent with expectations. Overall gross margin decreased 13.4% to $16.7 million in Q2 of 2023 from $19.3 million in Q2 of 2022. Gross margin as a percentage of revenue decreased to 36.9% from 40.6% in Q2 of 22. The gross margin decrease was driven by excess costs carried by our cloud segment, which I will cover in additional detail. Adjusted EBITDA decreased 36.5% to 4.4 million for Q2 of 23, from 6.9 million for Q2 of 2022. Adjusted EBITDA as a percentage of revenues was 9.6% for Q2 of 23, a decrease from 14.4% in Q2 of 22. We'll now move to discussing the specific performance of our segments. Revenue in our global cloud solution segment decreased 14.3% to $30.2 million for Q2 of 23 from $35.3 million for Q2 of 2022. The continued weakness within the cloud segment was consistent with industry trends, as we've seen across the IT services industry. Our weakness was primarily contained to professional services revenue, particularly within our application development service line. Deals continued to push out from projected dates, but they did not disappear from our pipeline. For example, in one of our practices, we expected five specific deals to close and start work in Q2. These five deals pushed into Q3. Four of them have since signed and the projects have commenced. Given the status of our pipeline, we carry significantly more bench capacity in Q2 than we typically carry, which is evidenced in our abnormally low gross profit margins and EBITDA margins that we experienced in Q2 of 23 when compared to our normal margin profile. The cloud segments adjusted EBITDA after the allocation of corporate cost was $3.9 million in Q2 of 23 compared to $3.8 million in Q2 of 22. EBITDA margin decreased to 9.6% in Q2 of 23 from 10.9% in Q2 of 22. This margin decrease was directly attributable to the excess bench capacity that we carried. As Mike alluded to earlier, given delays in pipeline conversion, we made further adjustments to our cost structure. On our last call, we referenced cost reductions at the end of April that equated to approximately $4.5 million in annualized costs. At the end of July, we removed additional costs out of our run rate. In total, we have now removed $9.4 million in annualized hard costs out of our expense structure, along with reductions of plan costs that were not yet realized. The majority of the $9.4 million was related to cloud segment expenses. Had we removed these costs for all of the second quarter, we would have reported $1.1 million more in gross margin in cloud which would equate to a 43% cloud gross margin rate, which is more than 4% more gross margin than we reported as our actual results. Within cloud, we also had further OpEx reductions of approximately 350,000 per quarter, which, when combined with the savings and gross margin, would have resulted in 1.5 million more of EBITDA within the cloud segment, which would be 4.4 million compared to our reported 2.9 million. If we were to perform an impact of these headcount reductions for all of fiscal year 23, we would have reported 2.8 million more in gross margin and 3.5 million more in EBITDA for the first six months in 23 for the cloud segment. We believe the reductions we've made bring our cost structure back into line with our current demand and set the company on proper footing moving forward. The other component of our confidence in our ability to deliver our projected results in the second half of 2023 is that we have started to see strengthening in our pipeline conversion. Our booked backlog of signed and scheduled professional service projects currently sits at approximately 29 million for the cloud segment. In addition, our recurring revenue is growing from a base of around $12 million per quarter. Given our book backlog, recurring revenue, weighted pipeline, and our cost reductions, we believe we've made the necessary changes to return to and exceed our historic EBITDA run rates. Q3 of 2022 was a record quarter for us, which will make top-line Q3 comparable performance more difficult for the cloud segment. We expect Q3 2023 revenue for cloud to be less than Q3 of 2022 and for the segment to return to top-line growth in Q4. Given our OpEx reductions and our gross margin improvements, we expect EBITDA will be more comparable than revenue. Pivoting to the global payment segment, revenue increased to $15.1 million for Q2 of 23 from $12.4 million for Q2 of 22, and it delivered organic growth of 22%. All of the Q2 revenue was from our bank card acquisition. Charge volume on our direct portfolios was relatively flat year over year. The revenue growth was driven primarily by the volume growth on our third-party revenue streams which grew to $204 million from $76 million in Q2 of 22. When combined, our total volume grew 9% in Q2 of 23 over Q2 of 22. Last quarter, we noted how these third-party portfolios are more seasonal in nature than our historical base portfolio revenue. We do not expect that these revenue streams will contribute a similar proportion of growth throughout the fiscal year of 23. These third-party revenue streams also have a high residual and commission split with our sales teams and our historical averages, which also drives down a gross margin percentage for payments from historical averages. Q2 of 23 included some one-time residual expenses of bank card that reduced gross margins from historical levels. The gross margin percentage of bank card was 34% for Q2, but we expected to return to the upper 30s for Q3 and Q4. Adjusted EBITDA for our payment segment decreased to $1.4 million in Q2 of 23 from the $3.0 million recognized in Q2 of 2022, which reflects greater expenses of pay IQ and a larger allocation of corporate expenses than in Q2 of 22. Before the allocation of corporate costs, BankCard contributed $4.1 million in EBITDA in Q2 of 23, which is similar to the $4.2 million BankCard contributed in Q2 of 22. EBITDA for the payment division includes spending on the PIQ platform, which reduced payments EBITDA by $1.7 million in Q2 of 23 compared to $1.0 million in Q2 of 22. We've noticed on our previous calls that operating costs related to PIQ are expected to increase throughout 2023 as we reach market readiness and the launch of the platform. As part of our headcount reductions at the beginning of August, we did remove $150,000 in quarterly costs of PayIQ. That impact offsets some of the hiring in other areas for PayIQ, so we expect Q3 EBITDA to be similar to Q2 for PayIQ. Ultimately, we expect our quarterly EBITDA losses from PayIQ will increase approximately $1.9 million in Q4 before reducing through FY24 as revenue will begin to offset the existing spend in fiscal year 24. Moving to the balance sheet at June 30th, we had $73.4 million of term loans outstanding and $6.7 million of cash on hand. As of June 30th, our total average ratio was 2.65 times. Our quarterly debt paydowns are $2.4 million. Cash flows from operations in Q2 of 23 were $3 million. This was a marginal uptick from Q1 that the extra carry cost and resulting lower margins of experience aided to our typical operating cash flow lift that we normally see between Q1 and Q2. Our cash flow in investing activities was $2.1 million, which is an increase from $1.7 million in Q1 of 23, as our investments in PayIQ have increased as the platform nears its market launch. Our recent announcements regarding our first live customers reflect the progress being made on the PayIQ product. At the end of Q2, we raised $4.5 million in equity proceeds. These proceeds will be used for general corporate work and capital, including funding capital expenditures on PayIQ and paying earnouts, and also to fund potential residual buyouts with some of our sellers in the payments markets. We will look for residual buyout opportunities when they are at appropriate market terms and the timing makes sense for both parties. At this time, we have not completed any residual buyouts. We made one earn-out payment in Q2. $1.2 million was paid to Menlo with 50% paid in cash and 50% in equity. This was the final earn-out payment related to the Menlo acquisition. We have $10 million of projected earn-out payments and short-term liabilities on the balance sheet at June 30th related to the bank card earn-out. Of the $10 million, $5 million will be paid with equity for the contractual terms of the purchase agreement. There's another $2 million in accrued liabilities, whether the basic earn-out and acquisitive has discretion in how it will make that payment of cash and equity. As a result, the working capital deficit at June 30th of $5.3 million is overstated as it includes earn-out amounts expected to be paid with equity. The current weighted average interest rate on our term loans is approximately 7.97%, and we're forecasting an increase in that rate through the end of FY23 and early FY24. Despite the softness we experienced in Q2, We believe we have taken the necessary corrective actions to return to improve performances in Q3 and Q4. We have confidence in our book backlog and awaited pipeline, and we believe our margins will be strong. We are providing guidance for the remainder of this fiscal year as follows. Revenue for Q3, low of $45.75 million with a high of $47.25 million. Revenue for Q4, a low of $46.5 million to a high of $48.5 million. Adjusted EBITDA. For Key 3, a low of $7 million to a high of $7.75 million. Adjusted EBITDA for Key 4, a low of $7.75 million to a high of $8.5 million. We look forward to presenting strong results in our coming quarters. This concludes our prepared remarks. Thank you all for your time this morning. We're now ready to open the call for your questions. Operator?

Thank you. The floor is now open for questions. As a reminder, each analyst will be limited to a maximum of two questions. If you would like to register a question today, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, that is star 1 to register a question at this time. This morning's first question is coming from Christian Skrow of 8 Capital. Please go ahead.

Hi, good morning, and thanks for taking my questions. I'll start on the guidance that you just offered up, Scott, and thanks for giving us that visibility into the back half of the year, the next two quarters. The question would be, maybe qualitatively, what gives you guys the confidence to issue that? It's tremendously helpful, but looking out into Q3 and Q4, is it your pipeline that you commented on, some of the conversations with customers? Those are pretty narrow ranges, and what seems a pretty dynamic market. So just unpack What gives you the confidence in those ranges?

As you stated, Chris, I think part of it is we think Q2 is an anomaly, and we think we took the corrective actions. Between the corrective actions we took, along with our overall visibility with the book backlog that we have, we wanted to provide that to the market so that everyone knows that we have confidence in our backend ability to deliver the results that we expect to deliver. It's just as you said, it's the booked backlog mixed in with our sales pipeline conversion that we forgot to see. And payments continues to hold steady. So the focus has been our professional services pipeline conversion.

Okay, that's helpful. And the numbers, that was offered just at the last moment there. So sizing that all up now. And again, thank you for providing those ranges. The next question I'd ask, and it's similar, it's on the recurring revenue side of the business. Of course, that's when we want to see continuing to trend upward through the year and power results. Where are you seeing some momentum in the recurring revenue side? Is managed services a large component of that as always? And how are those services changing into the back half of the year?

Yeah, most of it is related to our managed services, certainly some tied to licensing revenues. You've seen some of the announcements of basic care and other kinds of things continuing to activate and in each of those scenarios. There are licensing components as well as services components with the implementation, but our managed services business continues to grow both across Azure Managed Services as well as our security offerings that we have. As you look at that, there are a few different drivers to it. One is, you know, we continue to have great retention, so our revenue retention with customers is high, so continuing to have a strong base that we grow and including many of those accounts that we have increasing the capacity of our services year over year as they renew. So not only are they renewing, but they're expanding offerings, maybe taking on some additional components of our managed services offering. So capturing additional wallet share per customer on that, as well as then incremental net new offerings. As we talked about before, we've been spending time incorporating managed services, not just as an independent motion with our customers, but more importantly, part of every conversation, beginning with discussions around professional services and how we're activating projects and having the managed services layered into that. We're seeing positive momentum with that as we go forward. And then the addition of some of the things we touched on in incident response and other things to be able to open up to a larger market segment. now being able to offer 24 by seven. We're just getting that into market as we announced it just a couple of months ago. But those are all offerings that are increasing our footprint. And again, you think about cost savings and you think about the decision making of customers while they're delaying decisions on projects, they are looking at ways to manage costs. And often that can be leaning on a managed services provider to take over operations of their environments rather than hiring staff and doing other kinds of things. So we're seeing that be one of the drivers of the offset of the things that are impacting our professional services.

That's all helpful. Thanks for taking my questions, and I'll pass the line. Thanks, Christian.

Thank you. The next question is coming from Rob Goff of Echelon Wealth Partners. Please go ahead.

Good morning, and thank you for taking my question. While it's encouraging to hear about the conversion rates on the large contracts and the backlog, can you talk to the size and nature of some of these delays? And is it a case where they're now likely to get into 2024 budgets as opposed to 2023 budgets at the corporates?

Yeah, so a couple different things. The delays, as we talked about Q1, Q2, those delays, we were holding resources under the expectation that these customer decisions would be occurring, albeit on a delay. As we talk about the back half of the year, many of those we have taken out of our forecast. They may still happen this year, and if they do, that'll create additional upside, but we've removed those from our forecast models, unlike where we were in Q1 and Q2. So some of those we do expect to delay to the next year, but we've already factored them out of the forecast. We are seeing, we've seen to Scott's point, there's been several Q3 deals, deals that we thought were going to happen in Q2 that have happened in Q3. We've seen, you know, many of these are, you know, seven digit projects that, you have substance to them. So we'll continue to see those. We are seeing new ones come into the pipeline. As I described, we're putting additional rigor on what's happening. One of the big changes in these projects is we're not losing them to competitors. What is the competitor is no decision. Right. At the end of the day, people who had decision making authority over the last five years and were giving us verbal commitments that those projects were, in fact, going to move forward and often actually telling us, yes, we're going to start in two, three weeks. They are finding out inside of their organizations that their senior leadership, is challenging them to come back and re-business business case and do those kinds of things. And so we've built all that into our process to try to do a better job of knowing and understanding which of these deals are real, where the decision-making and what the new processes might be in these companies that many of our contacts themselves inside the organization didn't know that there was a new process that they had to go through as the economy tightened. So we feel like we put the process and rigor in place to try to really help manage and understand the opportunities, how really are the timing of those. But as I said earlier, we've removed some of those deals out of forecast and less dependent on those as part of backlog and expected revenues.

Great. Thank you. And just for perspective, on the $29 million of backlog, how might that compare on a year-on-year basis or QOQ basis or?

you know, as a percentage of our expected revenues, it's much higher. On a dollar basis, it's a little tricky because it was a bigger, the number may have been similar or slightly bigger, but on a much bigger target, right? Because we now, especially when you look at a Q3 to Q3 comparison on the cloud business, our revenue capacity is down dramatically because of the reductions that we've made. So our ability at a high utilization rate and all those things to deliver the same volume of revenue that we did last year in Q3 is just not there and available to it. We would have to significantly higher and do those things which aren't in the model today. So it's as a percentage of what we need to have in the back half of the year, it's a higher percentage than we would have had in prior years.

Okay, great. Thank you, guys.

Thank you. Once again, ladies and gentlemen, that is Star 1 if you would like to register a question at this time. The next question is coming from Jerome Dupre of Desjardins. Please go ahead.

Jerome Dupre of Desjardins. Hey, good morning, everyone. So, thanks for providing the guidance. Very helpful there. We'll dig into that for sure. First question is on the industry, on the cloud side. On AI, you probably see AI as something that can bring your business down the road and actually is already doing. Is it possible that it's somewhat freezing the market for other cloud capabilities in the meantime, in the sense that maybe, I don't know, clients could be waiting to see what's around the corner on AI and aren't as comfortable investing in digitization because of this right now?

I think there's certainly some shifting of demand. You know, application development, as an example, some of the delays are not only about, you know, cost and other things, but sometimes it's about thinking about how they want to incorporate AI as a component of these applications and revisiting some of those things. So it is part of every conversation. AI is not an independent act. Other things that you see, other technology drivers might, when you think about Azure infrastructure, it creates a certain motion. But the way AI impacts basically everything that happens within the context of IT services is important. And so it's being factored in, and as I describe it, sprinkled into every engagement in some form, whether it's about how to enhance productivity using co-pilot offerings and things that Microsoft has, or if it's more substantive about leveraging Azure OpenAI and using language models in the context of a customer's private data estate. And those things are meaningful. But to your point, there is some shifting of services that are going to move from traditional kind of data initiatives, traditional application initiatives, and other things to AI-led initiatives. And we've been building for that and working closely with Microsoft, who is the industry leader on those spaces. So I feel like we're well-positioned to take advantage of that as that moves forward.

All right. Second question, you're talking about this industry freeze for certification from credit card companies. Does that mean that you're not expecting to get the Amex certification this year?

No, we're expecting to get the Amex certification, as I said, in the coming months. We'll have the certification. What I referenced was migration of merchants will be stalled. Merchants aren't going to be moving processors anymore. during the holiday season, both from there's limitations on some things with the freeze on the side of the cards and doing things as well as with merchants themselves that it's such a critical time for most merchants during the holiday season that they don't want to do anything. They put a full lockdown on all of their POS, their back office systems, and certainly everything related to their payments. So there's not an opportunity to do migration without creating tremendous risk. So we won't be able to do that during those freeze periods. And that'll happen every year in the cycle, no matter what is happening relative to our certifications. But they're kind of independent. But the certification we're still expecting with both Amex and Discover to occur here in the coming months.

Okay, thanks for the clarification. I'm glad I asked. And Finally, are there things that you've learned? Well, first of all, congrats for the migration on the PIQ that's operational right now. Are there things that you learned from this transition?

It went very well. Our team was super excited. It's a big, big accomplishment. I know that the market can't fully appreciate how difficult it is to take and certify and go live with a platform to do what we're doing. So, uh, was, is very exciting for our team. Um, obviously, uh, you know, went very well. We had great feedback from our bank card team members who, um, you know, have been using the legacy platforms with first data thesis and others. And when we moved over and they started interacting with our pay IQ portal environment, they, you know, were enthusiastically talking about, uh, kind of this, they, they, for the first time have entered the 21st century. Um, because it's, you know, again, they're used to green screen and all the kinds of things. So really changing even just for our teams and how they can service customers, what they have access to and the information beyond the mechanics of processing and clearing transactions and doing all that stuff, but also the data and insights just from a payment side. So it was rewarding from that side. Obviously, a lot of work left to do to complete and prepare all the migration. We've got teams fully focused on that, but a really big step, and the team was super excited, and we're very, very proud of all the great work that they've done to get to this stage.

Thank you. Thanks, Jerome.

Thank you. The next question is coming from Stephen Boland of Raymond James. Please go ahead.

Morning, guys. Scott, maybe you could just talk a little bit about, you mentioned leverage and your covenants and things like that, but there's some language in the MD&A that suggests that maybe you may not, I'm not sure if that's just to CYA kind of thing, but that you may not be in compliance going forward. Maybe you could just talk where you think leverage goes over the remainder of the year.

Sure. That's typical language that we always put in there is cautionary guidance that you'll see in most public filings. So not any specific concerns, especially with the guidance numbers that we've put out. Obviously, if the market would ever turn sour on us, we always have risk like any company would. So we'll always put that cautionary language in there. But I think we're sitting right now at leverage around 2.65. I anticipate we'll kind of stay at that level getting back down to about 2.5%. right around that two and a half range, uh, coming out of the year and then ultimately below that as we move forward. Uh, so that's, that's our overall projection and goal.

Can you just remind me the, the earnouts, uh, the ones that are getting paid in shares, is that done at specific times? Like it could be the June end price. It could be a September end price. Um, Yeah, correct.

Those are, those are, those are pegged to the end of the earn out period. So those prices that were already, those were pre-pegged on the equity component there. Okay. Amazing. It was pegged at the end of March and bank card at the end of May. Okay. All right.

Thanks.

Thanks, David.

Thank you. The next question is coming from Robert Young of Canaccord Genuity. Please go ahead.

Good morning. Maybe I'll ask a quick question on back of the last one. What's the timing of the cash component of that bank card? When should we be modeling that over the next little while?

We're working with the sellers on that right now. Obviously, coming out of a rougher Q2, we just wanted to make sure everything was – we knew exactly where we stood. So our goal is to get that taken care of quickly with the sellers. So – could happen at the end of this quarter. It could lead into the first part of Q4, but soon.

Okay. And then a couple things in the prepared comments suggest that you've done some things this quarter to increase your ability to react. I think it said excess bench capacity, but you've got a dashboard and you're validating some of the approach on assessing new programs. Is that around reacting more quickly to, you know, demand so you can adjust your capacity or whatever? Maybe we just talk about that. And then if you could add to that, just maybe the flexibility you have and, you know, the pay IQ investment, like is, do you have levers to sort of, you know, pull more EBITDA and how quickly can you do that?

Yeah. So as I referenced, you know, remember we've done a lot of acquisitions and prior to, the Q2 timeframe, we were operating on five different operational systems. So had some limited visibility at that time as well. But when demand is high, it's less of an impact. We have been making investments and putting operational systems in place that give us a consolidated view. Unfortunately, the timing of those, we went live with them in April. And like many systems, there were a lot of moving parts happening bringing nine different CRM systems together and five different project operation systems together and doing all those things. And we had some blind spots, unfortunately, as we ironed that out. But all of that was in preparation for putting in place the kinds of systems and metrics that I'm accustomed to using to run the business. And we put those foundational pieces in place. We have quality data. Our teams are every week updating full allocation against every project. sales pipeline being layered out based on recognizable revenue and timing and all these things that, again, we just didn't have in place because many of the legacy systems and or companies didn't have that kind of view and we put them in place. So those now give us weekly visibility where before we didn't have that granularity of utilization and backlog and committed resources that we now have the tooling to do that. They give us better mechanisms to react. So those systems, we're still doing some final adjustments, but we're in a much better place on that regard. Relative to adjusting costs, obviously, much like a lot of it is labor-based costs. So taking those out is tough decisions, but we would do those as necessary. On the pay IQ side, what we're doing there is we've been adjusting incremental investments And, you know, only taking on any additional resources that are critical as we are now live with the product we are serving customers and so we have to make sure that we have the operational kinds of things necessary. We're in the final stretch with Some of the things, but mostly what we're doing there is deferring the investments of incremental and pushing some of those into Q1 of next year so that we minimize the impact here in Q4 without disrupting the progress that we're making and making sure that we can continue to serve. We are onboarding additional customers as we speak. And so, again, we need to make sure that we're able to continually operate and successfully deliver to those customers and not create a bad experience.

All right. And then maybe this last question for me would be around these residual buyouts. Can you just give us a better maybe description of what that is and how it impacts margins? And they'll pass on.

Yeah, Rob, what those are within the payments world, most salespeople get a commission stream or a residual stream that's usually tied into the life of the customer contract. And so we are looking for opportunities where we can buy out that future right to revenue at a appropriate multiple. It's a regular motion within the industry. Ultimately, what that will do, it reduces our cost of sales, which increases our gross margin because you no longer pay residuals associated with certain accounts at that point in time. And so we have some sellers that we're having discussions with right now. We'd like to begin that motion within the payment space. But we're only going to do it if it makes sense. The portfolio has the attributes that we're looking for, and frankly, the financials make sense. So we haven't completed any at this time, but we are actively looking.

Okay, great. And would that be a sizable upfront outflow of cash? Maybe if you put a quantum around it, what you might be thinking of? Yes.

Well, you basically take a monthly run rate. buying multiple, it's at least going to be, you know, 24X on the monthly. It can get up to 60X depending on the quality of the portfolio, right? But for us, with where we sit today, where we sit with leverage and cash flow, we would only be doing it if it was accretive for shareholders and deleveraging for our leverage ratio.

Got it. Great. Thank you. I'll pass the line.

Thanks, Robert.

Thank you. At this time, this concludes the company's question and answer session. If your question was not taken, you may contact Quisitive Investor Relations team at qis at gateway-grp.com. I'll now turn the call back over to Mr. Reinhart for his closing comments.

Thank you for being here today. I want to express my sincere gratitude to our employees, partners, investors, and customers for their unwavering support. We value your ongoing interest in Quisitive and are eager to share more updates on our next call. Operator?

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.