Quisitive Technology Solutions Inc.

Good afternoon and welcome to Quisitive's third quarter 2024 earnings conference call. Joining us for today's call are Quisitive Chief Executive Officer Mike Reinhart and Chief Financial Officer Scott Mayweather. Following the remarks, we'll open the call for your questions. Before we begin today, I'd like to remind everyone that during the conference call, management may make statements that contain forward-looking statements within the meaning of applicable Canadian securities legislations. Please refer to the company's forward-looking information disclaimer statement, which can be found on the notice for this call, and the website of the third quarter 2024 earnings release. Now I'm going to turn the call over to Mike Reinhart. You may begin. Thank you, Operator, and good afternoon, everyone.

We appreciate you taking the time to join our third quarter 2024 earnings call. The third quarter saw solid sequential financial improvement with marginal upticks across both revenue and EBITDA. Gross margins across our cloud business continue to hold steady and healthy above the 40% range, showing slight sequential gains and remain stable year over year. Recurring revenue stayed firmly within the 40% range to reflect our consistent customer engagement and retention over time. We are pleased with the results of our continued focus on recurring revenues as it generates a solid foundation for the business. Our anchor customers continue to reaffirm their commitment. She's inquisitive as their strategic partner of choice with 90% of revenue come from customers that have engaged with us for more than one year. This is an ongoing theme from the first half of 2024 and our ability to deliver value consistently positions us as an integral component of our customer's operations. In addition to our solid foundations, we are still seeing positive traction with the AI motion as we continue to engage with Microsoft's AI go-to-market initiatives. As of September 30th, our pipeline included over 200 AI opportunities. Approximately one-third of these are with state and local government customers, an industry rich with potential for disrupting manual processes. The remaining opportunities span diverse industries, including retail, manufacturing, and healthcare. Our AI backlog continues to be robust, with the majority of our customers still in the early stages of AI adoption readiness. Our strategic alignment with Microsoft's ecosystem and AI go-to-market strategy, combined with our expertise in data, security, and infrastructure, uniquely positions us to engage with customers at these critical initial phases of their AI journey. For instance, a leading retailer sought to drive brand growth by leveraging AI to optimize their HR operations, aiming to reduce HR resource demands by 40% through the implementation of a knowledge-based chat agent. Utilizing our AI and Design Innovation Center intellectual property, we augmented a large language model with unstructured data to develop an AI-powered chatbot tailored to meet their employees' needs. This solution streamlined HR support, enhanced efficiency, and aligned with the retailer's growth objectives. Our team has developed a systematic and holistic approach to AI, enabling us to meet customers where they are, regardless of their current readiness. For some, this begins with security and readiness assessments. Central to our approach is our combined AI design lab and innovation center offering, which was developed in alignment with Microsoft's priority for an AI design win in every account. This offering includes workshops to uncover customers' unique AI use cases and extensive ROI analysis. We then deploy RIP within the customer's tenant, providing a secure environment to test use cases through live prototyping, This acts as a proof of concept that builds confidence in the business value of AI tools and lays the foundation for more advanced AI platform development. This approach has been well received by both customers and Microsoft, offering a streamlined pathway for accelerated deployment of custom AI use cases. Through these engagements, we've uncovered powerful use cases, including an AI-driven RFP generator that leverages a company's internal documentation to respond to RFPs faster. directly contributing to revenue generation. In the last four weeks alone, we've designed AI lab and innovation center engagements with customers in retail, manufacturing, and engineering industries. As discussed last quarter, Microsoft invested in our AI Black Belt team to fund the expansion of specialized go-to-market roles, including AI strategists and pre-sales solution architects. This team is focused on delivering Microsoft's strategic priority to secure AI design wins in every account. We are pleased to announce that as of early Q4, the hiring process has been completed and we have secured high quality talent to staff this expanded team. They are now fully onboarded and working to further increase our robust pipeline of AI opportunities. Over time, we will convert this pipeline into AI platform engagements and full suite cloud and managed services offerings. Notably, this AI team expansion through Microsoft's funding is particularly advantageous as it represents an expansion in our sales capacity at no direct cost to us in the first year. These strategic steps, including developing our unique AI approach, enhancing our go-to-market team, and engaging with customers at early readiness stages are crucial to capitalize on the long-term AI opportunity in the market and shape our trajectory through organic expansion. Turning to our broader partnership with Microsoft, we continue to prioritize strengthening this relationship through diverse engagement strategies. In October, we sponsored Microsoft's SMC Sales and Tech Summit in Dallas, where we participated in over 200 discussions focused on customer activations. This investment has generated momentum across our partnership and continues to create opportunities with SMC customers. Additionally, just last week, our team traveled to Chicago to participate in Microsoft's Ignite Conference, a major event that gathered Microsoft leaders and key customers for a week of productive discussions and strategic planning. I was honored to formally accept Quisitive's Microsoft Analytics Partner of the Year Award during this event. We also had the opportunity to meet with many of our customers at the Microsoft event, engaging in in-depth discussions about planning for 2025 and exploring how Quisitive can support them in the next phase of their customer journey. These meetings allowed us to understand their evolving needs and strategic objectives, enabling us to tailor our solutions to better align with their future plans. By collaborating closely on their 2025 initiatives, we are positioning Quisitive as a key partner in helping them navigate the next steps of their digital transformation and achieve sustained growth. While AI remains central to our strategy, we are also focusing on providing comprehensive solutions to customers and collaborating with Microsoft across their range of strategic priorities. We are aligning with the key initiatives of AI like Copilot for every Microsoft user and AI design wins in every account, as well as broader efforts such as strong emphasis on cybersecurity, Azure migrations, dynamics industry solutions, and Microsoft 365. Quisitive's value proposition remains rooted in our extensive Microsoft expertise and solutions. Next week, our team will be in Toronto participating in the Microsoft AI Tour event at the Microsoft Technology Center and to meet our customers in Canada. Looking ahead, we want to reiterate the seasonal impact we faced during the fourth quarter holiday periods. The calendar naturally dictates a reduction in revenue producing days along with decreased customer availability throughout this time. This is consistent with previous years as a normal aspect of our business cycle. We continue to closely manage our operations to maximize our impact during the available billable days in Q4. Our strategic vision remains unchanged, strengthening our role as a trusted Microsoft Go-To partner while delivering premier technical solutions rooted in strong business acumen across AI, security, application development, managed services, and our full portfolio of cloud offerings. Thank you all for joining us today. I'll now turn it over to our CFO, Scott Merriweather, to discuss our Q3 2024 financial results. Scott?

Thanks, Mike. And thank you to all who are joining us for today's call. Third quarter results saw sequential improvements and remained relatively in line with our results from the third quarter of 2023. Revenue in our global cloud solution segment was $30.7 million and remained relatively unchanged compared to Q3 of last year. Revenue improved sequentially from the prior quarter, up to $30.7 million from $29.6 million. Recurring revenue was 40.4%, a notable improvement from 37.2% in the same period last year. Overall gross margin in Q3 of 24 was 13.2 million, and gross margin as a percentage of revenue was 42.9%, which was identical to last year's performance of 13.2 million and 42.9%. Gross margin improved sequentially from the prior quarter, up to 13.2 million from 12.5 million. Adjusted EBITDA for our continuing operations was 4.2 million in Q3 of 24, up sequentially from 3.9 million in Q2 of 24. Even though the results decreased when compared to last year's performance of $4.9 million. Even a margin increase to 14% in Q3 of 24 from 13% in the prior quarter. Moving to the balance sheet, as of September 30th, we had $9.7 million in cash on hand. Our term loans were $32.3 million at September 30th after making our quarterly payment of $850,000 at the end of September. At September 30th, our pro forma leverage ratio was approximately 1.9 times. The current weighted average interest rate on our term line is 7.79%. Capital expenditures were $0.9 million in the third quarter of 2024. We currently expect our capital expenditures to be approximately $3 million for 2024. We are updating our guidance for the remainder of fiscal year 2024. The following amounts are for our continuing operations. Fiscal year 2024 revenue from continuing operations, a low of $119 million and a high of $121 million. fiscal year 2024 pro forma adjusted EBITDA, a low of $15 million and a high of $16 million. This concludes the financial section of this call. We thank all of our shareholders and supporters who have joined us. We are now ready to open the call up for your questions. Operator?