Quisitive Technology Solutions Inc.

Good afternoon and welcome to Quisitive's third 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 the 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, the website, and the third quarter 2023 earnings release. Now, I would like to turn the call over to Mike Reinhart. Sir, please proceed.

Thank you, operator, and good afternoon, everyone. We appreciate you taking the time to join our Q3 2023 earnings call. Let me begin by addressing the announcement we made yesterday regarding the sale of PayIQ to Fulcrum IT Partners. Our decision, which I will detail shortly, comes as part of a strategic review process over the past few quarters by management and the board, including the work in partnership with William Blair. This comprehensive evaluation aims to realign our resources and strategies to maximize shareholder value. It comes as a necessary step. shaped by our understanding of the PayIQ business's needs and the current public market environment. PayIQ has arrived at a critical point where consistent capital investment is essential for growth. Our journey towards commercialization has seen remarkable advancements, notably establishing direct connections with Visa and MasterCard. The next phase crucially involves investing in capital for acquisitions, focusing on acquiring companies that offer technological advancements, improving connectivity, and scalability. Such strategic acquisitions are key to accelerating PayIQ's growth trajectory. In the current public market environment, such levels of investment and execution pose significant challenges for Quisitive. We recognize that to unlock the potential of PayIQ a different path was needed. Under the agreement, Quisitive will transfer ownership of PayIQ to Fulcrum in exchange for an equity stake. This allows us to not only benefit from the financial returns as PayIQ grows in the market, but also to maintain a connection with its future development. The divestiture reduces our annual capital allocation by nearly $12 million, a strategic move to optimize our financial resources and focus on key growth areas. This transition allows us to channel our efforts and investments more intensely into the cloud solution business, reinforcing our core competencies. The partnership with Fulcrum will include a close strategic alliance to support the commercialization of PayIQ, as well as leverage Quisitive's partnership with Microsoft and our Microsoft IT solutions capabilities, creating incremental synergy between Fulcrum's IT services companies and Quisitive's cloud solutions business. The bank card business will be retained as our focused payments division. This step is the first in our strategic review process, marking a move towards greater focus and strategic alignment. It's a decision that we believe positions both Quisitive and PayIQ for greater success in the future. Next, let's talk about Q3 performance. During the quarter, our company navigated a rapidly changing market environment, building upon the challenges encountered in the second quarter. Amidst these obstacles, our resilience and strategic flexibility have shown through. A highlight has been the performance of our cloud solution sector, which stood out as a pillar of success, showcasing strong performance and significant recovery. While we take pride in the notable improvements seen in our cloud solutions business during the quarter, it's important to acknowledge that this period also brought some challenges in our bank card business due to market conditions starting in the second quarter and persisting into the third, which had a tangible impact on Q3 results. On a positive note, the bank card management team has shared directly with me that they feel like the business has stabilized exiting Q3 and anticipates steady performance in Q4. On the sales front, the team is working to deploy new SMB market products to look for ways to increase merchant applications to drive volumes. Scott will address the financial components and key payments metrics in more depth, but from a strategic standpoint, I plan to work closely in collaboration with the Bankard leadership team to fortify the business in aspects we can influence and tailor our strategy to align with the prevailing economic environment. Now on to the cloud business. In Q3, our cloud division demonstrated a strong return to margin growth, a testament to our cost or to our strategic cost-saving initiatives. We're witnessing a promising rebound in this sector. For over six months, sales have been consistent, underscoring the robustness of our fundamental business proposition. A key factor has been our team's rigorous approach to financial discipline and cost efficiency, leading to improved margins and utilization in the recent quarter. I'd like to express my gratitude to the entire Cloud Solutions team and their leaders for their unwavering commitment and contribution to these enhanced outcomes. With our prudent management and cost reduction strategies, we expect these positive trends to persist, laying strong groundwork for sustained future growth. Scott will elaborate further, but it's important to mention that while we're on a positive track, our revenue generating capacity has been impacted by this year's cost-cutting measures. Therefore, year-over-year comparisons don't fully represent our progress throughout the year. Implementing strategic expense management was essential for enhancing our operational efficiency. especially considering the increased challenges we faced this year. Nonetheless, a quarter-over-quarter analysis reveals a boost in both gross profit and adjusted EBITDA margins. Our recurring revenues now represent 37% of cloud revenue, up from 31% last year. This trend bolsters our confidence in the financial stability we've achieved and sets a solid foundation for the business. In our sales and marketing efforts, we've been actively engaged in advancing our pipeline, establishing Quisitive as a reliable partner for our clients and aligning with Microsoft's key initiatives to boost sales. In the third quarter, we closed six large deals, each providing over $1 million in contract value, and the total contract value of our top five deals exceeded $10 million. Notably, there are several encouraging trends within these figures. While we continue to thrive in specific sectors like the healthcare and state local government, our top deals are spread across various industries, including healthcare, state local government, oil and gas, and technology. This diversification shows the effectiveness and broad reach of our go-to-market strategy. Moreover, these significant deals underscore the success of our cloud solutions approach. Our customers are increasingly seeking service providers capable of offering comprehensive, integrated services across various domains to facilitate a complete cloud transformation. This quarter, our commitment to excellence was further underscored by the notable achievement of securing the information protection and governance and service advanced specializations with Microsoft. The recognition highlights our commitment to staying at the forefront of innovation and providing best-in-class solutions, as well as dedication to our partnership with Microsoft. In the quarter, we are proud to collaborate with Microsoft as a preview partner leveraging Microsoft Fabric for healthcare data solutions. We implemented the new healthcare data solutions in Microsoft Fabric to the Ontario Workers Network in Ottawa Hospital, among others within the network, and our efforts and possible results were showcased by Microsoft as a featured case study. The continued robust demand in this sector underscores our success in meeting the evolving needs of healthcare providers, and we are committed to leveraging our trusted partnership with Microsoft to continue exploring new collaborative ways to advance and innovate in pursuit of improved patient experiences and health outcomes. As you might be aware, Microsoft is at the forefront of the AI revolution, showcased by their industry collaborations and advancements in products like Copilot and Azure AI. Their strategic emphasis on AI is a significant boost for our pipeline as we align our services to this wave of innovation. We are confident that the surge in AI will spur demand for our core services, as customers need solid IT infrastructure, data management, application development, and modernization to effectively adopt AI and harness its benefits. Most businesses currently lack the necessary foundation to integrate AI meaningfully, so we've positioned ourselves as a strategic partner to guide them into this new era of enterprise technology. Recently, we organized a four-city event series introducing AI concepts, which received considerable positive feedback from customers highlighting the need for education and implementation bridges from their present to an AI-inclusive future. We're fully aligned with Microsoft's AI vision and are focusing on the offerings and technical expertise required to be Microsoft's most effective partner. Meanwhile, we continue to concentrate on our core services to prepare customers for future innovations. While our team consistently delivers strong performance, it's important to remember that due to the holiday period and associated paid time off, Q4 traditionally experiences a slowdown in the cloud solution sector. Despite the seasonal trend, we are committed to seizing every available opportunity and maintaining solid performance for the rest of the year. Before I pass the mic to Scott, I recognize that this is our final call of the calendar year and wanted to provide a brief reflection. 2023 presented new and real challenges to our business. but we've demonstrated adaptability and resilience that have generated measurable outcomes. In the cloud business, our strategic cost reduction and careful management and collective efforts of the team have honed our execution and strengthened the business. You'll see the stabilization in the financials from Scott shortly. In payments to sale, PayIQ is the result of a careful strategic review of the business and is an incredibly positive next step in the platform's journey. I feel proud of the contributions Quisitive has made to get PayIQ to this point. We look forward to the closing of that deal and in the future of the platform as it transforms the payments industry. Our bank card business continues to be a significant asset and look to leverage this business to help drive future value. Considerable effort is still required, and we are committed to further investing in our sales and marketing initiatives to enhance our business and achieve robust growth. We are vigilantly monitoring the upcoming market trends and stand prepared to adjust our strategy accordingly. However, I believe that our activities over the past quarter and a half has strategically positioned for stability, innovation, and future growth. Thank you all for joining us as shareholders and supporters. I'll turn it over now to our CFO, Scott Merriweather, to discuss Q3 2023 financial results.

Scott? Thanks, Mike, and thank you to all who are joining us for today's call. To reiterate Mike's message from before, we are very proud of Q3 results and the turnaround that was accomplished within our cloud segment. Our revenue within cloud has stabilized, and we've made appropriate changes to our cost structure to align to market demand and to return to our expected margins. The relative strength of our cloud performance was somewhat offset by reductions in payments as Bank Card experienced greater operating costs and PIQ expenses increased. We will break down the impact of PIQ and the removal of our future investments in the platform in later discussion. As a result of the revenue-producing headcount reductions we made, year-over-year comparisons aren't indicative of performance. Quarter-over-quarter changes are a better depiction of the company's progress, so we will present both in this discussion. Moreover, Q3 of 2022 was a record quarter for Quisitive, which further impacts meaningful comparisons. Revenue in the third quarter of 2023 decreased 2% from the prior quarter, as cloud revenue increased quarter-over-quarter and payments revenue decreased quarter-over-quarter. Comparing to the prior year, revenue decreased 9% to $44.4 million in Q3 of 23 from $48.8 million for Q3 of 22. The prior year trends here are opposite of the quarter-over-quarter trends, as cloud revenue was the primary driver of the year-over-year decrease, reflecting overall market trends and our reduced professional services headcount. Payments revenue in the third quarter was up more than 6.5% year-over-year. The most indicative financial metric that best depicts the progress made during the third quarter is gross margin. Overall, gross margin was up almost 10% for Q3 of 23 from last quarter, reflecting the cost structure changes made within the cloud segment. Gross margin as percentage of revenue increased to 41.3% in Q3 of 23 from 36.9% last quarter. Overall, gross margin decreased 10% to 18.3 million in Q3 of 23 from 20.3 million in Q3 of 22. Gross margin as percentage of revenue was more similar, albeit slightly less in Q3 of 23 at 41.3% compared to 41.6% in Q3 of 22. Adjusted EBITDA increased 61% from the prior quarter to $7.0 million for Q3 of 23 from $4.4 million for Q2 of 20 or Q2 of 2023. Adjusted EBITDA as a percentage of revenue was 15.8% for Q3 of 23, an increase from 9.6% in Q2 of 23. Compared to the prior year, adjusted EBITDA decreased 7.7% to $7 million for Q3 of 23 from $7.6 million for Q3 of 22. Adjusted EBITDA as a percentage of revenues was 15.8% for Q3 of 23, an increase from 15.6% in Q3 of 22. We'll now dive in further on the specific performance of our segments. Revenue in our global cloud solution segment increased mildly, approximately 1.5%, to $30.7 million for Q3 of 23 from $30.2 million in the prior quarter. Revenue within the cloud segment has stabilized over the past few quarters, and we expect similar revenue trends in Q4 after adjusting for the normal holiday seasonality. Our gross margin within cloud was a record 43%. This was despite the extra staff costs we carried in July prior to the staffing changes. Our professional services teams have been running at high utilization ratios as we ever came to prior quarters weakness. Our teams have leaned in and produced a very strong quarter. We have some outstanding team members and we're thankful for their commitment to quickly right the ship after Q2. Going forward, we expect our streamlined cost structure to continue to produce strong gross margins. We will need to further invest in our AI teams and the sales expansion in FY24, so we don't expect our gross margins to grow in FY24 from the current run rates. The cloud segments adjusted EBITDA after the allocation of corporate costs was 5.7 million in Q3 of 23 compared to 2.9 million in Q2 of 23. EBITDA margin increased 18.7% in Q3 of 23 from 9.6% in Q2 of 23. We removed non-lobal resources as part of the staff reductions we made to start August, which had a significant EBITDA margin impact. We also focused on cost containment in Q3, and as a result, produced a very strong EBITDA quarter. On our last earnings call, we noted that we believed we had brought our cost structure back into line and that we had set the company on proper footing. I believe the Q3 results speak to the success of those efforts. Fitting to the global payments segment, revenue increased over 6.5% to 13.7 million for Q3 of 23 from 12.8 million for Q3 of 22. However, revenue was down 9% from Q2 of 23. Charge volume on our direct portfolios was down 4% year over year. The revenue growth was driven by the volume growth on our third-party revenue streams, which grew to 157 million in Q3 of 23 from 76 million in Q3 of 22. When combined, our total volume grew 3.5% in Q3 of 23 over Q3 of 22. On prior calls, we have noted that these third-party portfolios are more seasonal in nature. We saw a decrease in the charge volume from $204 million in Q2 to $157 million in Q3, and we expect further decreases in Q4. Last quarter, we noted that Q2 of 23 included some one-time residual expenses of Bankard that reduced gross margins from historical levels. The gross margin percentage of Bankard was 34% for Q2, First margin returned to 38% in Q3, in line with our expectations. Adjusted EBITDA for our payment segment decreased to $1.3 million in Q3 of 23 from the $1.4 million recognized last quarter and the $2.9 million recognized in Q3 of 22. The decrease reflects greater expenses at PIQ, a larger allocation of corporate expenses, and reduced performance at BankCard. Before the allocation of corporate costs, Bank cards contributed 3.9 million to EBITDA in Q3, as compared to 4.1 million in EBITDA in Q2 of 23, and 4.7 million to EBITDA in the prior year, or Q3 of 22. We incurred almost half a million of one-time expenses in Q3 of 23 that impacted the quarterly results. EBITDA for the payments division includes spending on the PIQ platform, which reduced payments to EBITDA by 1.8 million, as compared to the 1.6 million in Q2 of 23 and 1.6 million in the prior year, or Q3 of 22. We noted on the last earnings call that our staff reductions in August, and we expected Q2 and Q3 of 23 to have similar EBITDA impacts. Ultimately, we expect our quarterly EBITDA losses from PIQ will be approximately $1.5 billion in Q4, and this could vary if the sale closes prior to December 31st. To reiterate prior points, PIQ will be removed from our results in FY24, which will add back approximately $6 million of annual EBITDA to our consolidated EBITDA. From a cash flow perspective, Another $5 to $6 million will be added back in FY24 from the reduced CapEx spending on PIQ. We believe this will strengthen our balance sheet as we move forward. One separate administrative point related to the income statement and the sale of PIQ, after November, we will no longer have minority interest, so Q4 23 results will be the last time minority interest will be reflected on our income statement. Moving to the balance sheet and cash flows, on September 30th, we had $71 million of term loans outstanding and $5.6 million of cash on hand. As of September 30th, our total leverage ratio was 2.6 times. Our quarterly debt paydowns are 2.4 million. Cash flows from operations in Q3 of 23 were 5.2 million, an increase from 3.0 million in Q2 and 2.3 million in Q1. Our cash flow used in investing activities was 2.0 million, similar to the 2.1 million last quarter. These investments were primarily driven by investments in pay IQ. CapEx is expected to decrease below 1.5 million in Q4. After the stable PIP, we expect CapEx to run closer to 1 to 1.5 million annually at our current run rates, depending on future investments that we choose to make. One item to highlight on the balance sheet, all of our debt is classified as current at September 30th. During our review of some legal agreements in October, we found a default provision in the contract that triggered a cross-default provision in our credit agreement. We brought this to the bank's attention and subsequently obtained a waiver for the default. But, however, we did not have the waiver in place at September 30th, so our entire credit agreement balance is classified as current at September 30th under IFRS rules. Our debt will go back to its traditional short-term and long-term classification as of October 1st. Our working capital deficit at September 30th, after adjusting for the debt that will be reclassed back to long-term on October 1st, was 7.4 million. We did not make any earn-out payments in Q3. We continue to have $10 million of projected earn-out payments and short-term liabilities in the balance sheet at September 30th related to the bank card earn-out. Of the $10 million, $5 million will ultimately be paid with equity for the contractual terms of the purchase agreement. There's another $2 million in accrued liabilities related to the major earn-out. Inquisitive has discretion how it will make that payment in cash and equity. As a result, our working capital deficit at September 30th of $7.4 million is ever stated as it includes earn-out amounts expected to be paid with equity. The current weighted average interest rate on our term loans is 8.12%. Q3 brought several changes to QISTIV. Given the strength of cloud with the Q4 holiday seasonality, the change to PIQ and some of the related expenses related to sale, and some softness we have seen at Vanguard, we are updating our Q4 guidance as follows. Revenue for Q4, a low of $41.5 million to a high of $43.5 million. He gave it up for Q4, a low of $6.75 million to a high of $7.75 million. This concludes our prepared remarks. Thank you all for your time this afternoon. We're now ready to open the call for your questions. Operator?