Quisitive Technology Solutions Inc.

Good afternoon and welcome to Quisitive's first quarter 2024 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 and statement, which can be found on the notice for this call, the website, and the first quarter 2024 earnings release. Now, I will 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 first quarter 2024 earnings call. Just to note, we had an issue with the press release getting sent out. It should be hitting the wire very shortly, so we'll expect it to land here in a matter of minutes. Before we begin, I'd like to note that today's earnings call will be brief, as we provided a comprehensive update just a few weeks ago. However, I did want to highlight that while we're refocusing back to our core as a peer play premier and specialized Microsoft Cloud and AI solutions provider, our team has made important advancements and developments. We've seen encouraging progress with our AI strategy offerings and marketing program. Our dedicated efforts in AI, including robust marketing campaign initiatives and strategic alignment with Microsoft on their leading early stage adoption offerings have generated nearly 10 million in new sales pipeline. By leveraging our Microsoft AI assessment and accelerator programs, we have engaged over 70 customers with Quisitive on Copilot and security initiatives, showcasing the early traction of this AI era. Additionally, we achieved the AI and machine learning in Azure advanced specialization from Microsoft in Q1, further solidifying our AI capabilities within the Microsoft ecosystem and unlocking co-selling opportunities alongside Microsoft. We continue to prioritize aligning with Microsoft's focus on AI and are seeing positive returns on our investment through Microsoft funding and collaborative marketing opportunities. Recently, we launched a targeted marketing campaign for our acquisitive AI accelerator, which provides a sandbox environment for customers to explore AI opportunities from a specific use case perspective. This campaign has significantly increased customer interest, resulting in 45 customer leads and two signed contracts in less than 30 days. This surge reflects the growing sentiment among customers who are eager to take action on AI and seek seamless ways to experiment with their data using AI tools. In terms of revenue recognition, our accelerators, copilot assessment programs, and security assessment programs are identifying critical security and data quality issues that must be addressed within customers' technology estates before implementing a comprehensive AI as a platform strategy. We anticipate that resolving these issues will unlock opportunities for revenue generating cloud data, infrastructure, and security projects in the latter half of the year with more substantial gains in AI expected in 2025. Given the significant interest, our technical teams and global back belt team have been developing a repeatable methodology to guide customers from early stage accelerator engagement to AI as a platform implementation and ongoing support. This prescriptive yet flexible implementation model aligned with best practices will enable us to meet the demands of our growing pipeline. Additionally, it will allow us to stay aligned with Microsoft's leadership in AI adoption in the industry for the upcoming fiscal year. Shifting our focus to specific industries, we are making significant progress in penetrating the healthcare, public sector, and manufacturing sectors with notable wins and solution development. In the manufacturing sector, we continue to secure major deals for large-scale ERP migrations and consolidation projects using Microsoft Dynamics F&O. Currently we are working on a $4 million contract for an ERP consolidation, as well as providing data analytics and Azure managed services for a large publicly traded industrial leader. A win attributed to our expertise in the Microsoft SureStep methodology and bundled offerings across the Microsoft cloud. In the public sector, we are balancing the delivery of traditional cloud services with new AI developments. We are currently executing a nearly $2 million contract for a public education institution focusing on infrastructure and application development to consolidate and enhance the security of their identity management solution. On the AI front, we are collaborating with state governments to develop an advanced suite of AI-backed tools designed to streamline the writing and reviewing of legislation and provide greater transparency to citizens. This initiative highlights the significant opportunities we have identified through customer AI strategy discussions, where Quizitive can address market gaps with AI tools that leverage large language models and ingest multimedia data sources to transform the industry. In healthcare, we've partnered with Microsoft to secure a project for a large healthcare network aimed at modernizing their Microsoft Office 365 estate. This initiative focuses on enhancing collaboration by leveraging Microsoft Teams and cloud solutions, streamlining workflows, and providing a new content management solution. By utilizing Microsoft Teams and OneDrive, we aim to improve communication and coordination across the network, making it easier for healthcare professionals to collaborate in real time and securely share important documents. Additionally, the project will streamline workflows by automating routine tasks and integrating various applications, thereby reducing manual effort and increasing efficiency. The new content management solution will offer a centralized, secure platform for storing, organizing, and accessing critical healthcare documents, ensuring that the right information is available to the right people at the right time. The second stage of this project is anticipated to exceed $1 million, further enhancing the network's technological infrastructure, and operational capabilities. Our focus on manufacturing, public sector, and healthcare is driving an increase in our million-dollar deals, thanks to our proven expertise in Microsoft technology and our deep industry-specific knowledge. We are leveraging our comprehensive cloud solution suite, proprietary IP, and new AI offerings to deliver exceptional value to these sectors. This strategic approach allows us to effectively pursue and implement solutions that meet the unique needs of our customers in these industries. As highlighted in our last earnings call, I'd like to reiterate some of the strategic advantages available to Quisitive as a trusted premier partner of Microsoft. We are collaborating with Microsoft on joint marketing campaigns and funding programs to provide assessments in security, data, and co-pilot solutions, helping customers develop their AI strategy and plans. Quisitive continues to leverage this partnership to support the activation of our AI offerings for both existing and new customers. This strategy drives demand and accelerates customer acquisition. This partnership is crucial to Quisitive's broader sales and marketing initiatives, significantly reducing our sales cost as we develop our own AI and co-pilot pipeline. Utilizing these programs enables us to scale our efforts more efficiently ensuring that we can deliver cutting-edge solutions while reducing our customer acquisition costs. As we progress through the year, we anticipate leveraging the increased demand and enthusiasm for AI. Our goal is to capitalize on this trend by offering premier technical guidance and integration strategies as a proud Microsoft go-to-market partner. Additionally, we are committed to developing personalized AI solutions tailored to meet each customer's unique industry and business needs. Early indications of demand have been strong, and we expect to see tangible benefits from these efforts in the latter half of 2024 and into 2025. Our redefined vision and strategy focus, coupled with our investments and dedicated team, position us well to deliver consistent and stable growth for our valued customers. Thank you all for joining us today. I'll now turn it over to our CFO, Scott Merriweather, to discuss Q1 2024 financial results. Scott?

Thanks, Mike, and thank you to all who are joining us for today's call. Before we move to the financial results, I want to take a moment to reiterate the changes in presentation to our financial statements that we made at December 31st. All of our historical cloud and corporate costs are considered continuing operations. All results from our legacy payment segment are considered discontinued operations. All of our discussions will be only for the continuing operations of the company, unless we specifically note it is for the discontinued payment segment. Our first quarter results were in line with our expectations as revenue has stabilized since the second quarter of 2023, and we have maintained the improvements we previously made to our margin profile. Revenue in our global cloud solution segment was $29.9 million, a 6% decrease from Q1 of last year and a 5% increase from last quarter. The most indicative financial metric that best depicts the progress made within the cloud segment is gross margin. Overall gross margin in Q1 2024 was $12.8 million, which was up 0.9 million or 8% from 11.9 million in Q1 of 23. Gross margin as a percentage of revenue increased to 42.8% this quarter from 37.3% in Q1 of 2023. Adjusted EBITDA for continuing operations was 3.9 million in Q1 of 24, up from 3.3 million in Q1 of 23, and also up 1.1 million from the 2.8 million we reported last quarter. EBITDA margin increased to 13.2% in Q1 of 24, up from 10.5% in Q1 of 23. As we noted in our last call, we see the need to further invest in our AI teams and in sales expansion in fiscal year 24, so we don't expect our margins to grow in fiscal year 24 from the current run rate. Over time, we do expect EBITDA margin to increase as overall growth should outpace the growth of our corporate and public company expenses. Quickly on payments, with the sale pay IQ effective in January, the EBITDA contribution of the discontinued payment segment improved from a week 1.9 million in Q4 of 23 to 3.3 million this quarter. For comparison, EBITDA was 3.7 million in Q1 of 23. Payments contributed 10.8 million of revenue in the first quarter of 2024 compared to 16.4 million in the first quarter of 2023. Moving to the balance sheet, at March 31st, we had 6.6 million of cash on hand. Our term loans were 68.6 million at March 31st, but they were paid down four days later to 34.0 million. Our next quarterly pay down will be in June 30th and will be 850,000. At March 31st, our pro forma leverage ratio was approximately 1.9 times. Similar to last quarter, all our debt is classified as current at March 31st. After the closing of the bank card transaction and the corresponding pay down to the facility to 34 million, we have ample headroom under our covenants and our debt will be primarily be presented as long term when we report the June 30 quarter. The current weighted average interest rate under term loans is 7.96%. Capital expenditures were $0.5 million in the first quarter of 2024. We don't expect capital expenditures to exceed $3 million for 2024. We have paid the outstanding major earn out and the bank card earn out was cleared as part of the bank card sale. Going forward, we have no expected future earn-out payments related to our past acquisitions, and there's nothing accrued on the balance sheet. We are updating our guidance for fiscal year 2024 for the continuing operation. We continue to expect revenue improvement in the second half of 2024, but the general IT services market has been cautious about the remainder of 2024. As Mike previously noted, we see AI activities driving pipeline growth throughout the remainder of 2024. One other item to note is that our prior guidance included $1.2 million of projected revenue for transitional services related to the CLPIQ that we will now classify as a contract expense and are removing it from revenue. This lowers our revenue projection, though it effectively improves our EBITDA margin profile. The updated guidance is as follows. This will be your 2024 revenue from continuing operations, a range of below of $120 million to a high of $130 million. fiscal year 2024 adjusted EBITDA from continuing operations, a low of $15 million to a high of $17 million. This concludes the financial section of this call. We are now ready to open the call up for your questions. Operator?