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?

Great, thank you. We will now be conducting a question and answer session. If you'd like to ask a question, 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 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys.

One moment, please, while we poll for questions. The first question here is from my dear Kafei from A Capital.

Please go ahead.

Great. Thanks a lot for taking my questions, guys. So, it seems as though the macro has improved a bit, given your results and some of the commentary you made there, Mike. First of all, I wanted to ask, would that be a fair characterization? And I fully appreciate the seasonality into Q4, but would you say in the early days of Q4, you continue to see that kind of those green shoots forming? And I know last quarter we also talked about some customer purchasing intentions. Do you, being positive, do you continue to see that as we sit here in Q4?

Yeah, I mean, obviously we see the momentum of the things that we've seen going, you know, steady stabilization with modest growth. Obviously, as I discussed, the seasonality will impact what that looks like in terms of the Q4 results just because there's significantly fewer billable days available to us, both in terms of holiday schedule, vacation schedule, and things like that. But we're seeing customers continue to prioritize their evaluation of AI as a component, but at the same time recognizing the fundamental changes that they've got to put in place around data security and other kinds of things to be prepared to activate that. So great conversations around that and seeing good engagement with customers talking about their 2025 planning, as I mentioned, and really using Q4 as their readiness for that.

Okay, excellent. And it's good to see that the hiring was done for the AI Black Belt team. And I think you mentioned that they're all fully onboarded. Do you have a sense of timeline to when the personnel and the bodies would really kind of start contributing to revenue? I think you said It's a no expense for you for the first year, but does that imply that it's going to take about a 12 month ramp for them to kind of hit their stride?

No, we'll start to see momentum building. They're already engaging with customers, so that's a positive step. But we'll start to see as we move through Q1, We'll start to see, you know, it really takes about a quarter for them to, you know, start to really actively engage. The people we're hiring are already very versed in Microsoft technology, very versed in the Microsoft channel. So there's not a lot of education and things like that. It's really about engaging with both the Microsoft field as well as customers. So we anticipate to start to see that momentum build through Q1 and start to be, you know, show up as impact in Q2 and beyond.

Excellent. Thanks a lot, guys. I'll pass the line. Thank you. Our next question is from Rob Goff from Ventum. Please go ahead.

Thank you very much for taking the question. If I might, a further question on black belts. Could you give us a bit better description of what is the level of experience? Are they typically five years plus? Do they have strong account relationships that they might bring with them? How many would you be, Robert?

Yeah, I mean, across the team, obviously, there's about eight that are focused on this in the organization, and then there's ancillary folks that are complementary to that, but there are eight dedicated. These team members are all 15-plus-year veterans in the space, and all of them typically five-plus years related to AI. Obviously, generative AI being the most recent, but more traditional, what is now considered traditional AI related. So these folks have deep expertise, and they're both strategists who are experts in driving conversations with customers to understand business outcomes and opportunities and where the priorities are and how to really think about it in that way, as well what we call pre-sale solution architects, And these folks are ones who know and understand how to develop complicated services and integrate and leverage generative AI across the data estate, across the applications that customers use to embed AI into it. So those are the kinds of things that when you think about an AI design win, these are what are called custom AI or custom co-pilot deals versus we're also doing certainly activities around deploying co-pilot services in the context of Microsoft's M365, D365, and other co-pilots that they're building out, which we're doing there. But this team is really about those custom co-pilots where customers are using their data set, much like the retailer, where we're using large language models and generative AI and using the customer's unique data, in particular around unstructured, to create unique use cases applied to them. And these are folks that have deep expertise in data applications and strategy around that. And their focus is all about the sale motion and early POC activation to create and show value to customers.

Great. Thank you. And if you may have a follow-up. With the last quarter, I believe you said that the pipeline for AI and related revenues was roughly $15 million up from $10 after Q1. And I think you also said that the co-pilot and custom AI-related customers were at roughly $170 million. Was the 170 the figure that's now 200? And what might the 15 currently be?

Yeah, it's 200 active opportunities of the combined. Obviously, we've completed a bunch of of assessment engagements and other things. So you'll see that there'll be a kind of a constant replacement of those versus there's a capacity. I mean, like, uh, we can only do so many of these at once. So those opportunities were, we, you know, complete a series of these, uh, roadmaps and creation of those that then move to deployments. Those land inside of our delivery organization as application initiatives, as data initiatives, as security initiatives. and are part of our standard cloud solutions capabilities. So we don't count as just AI, but they're led through the AI motion. So that 200 is across the mix of AI design win and co-pilot combined and working with customers to help them establish their journey and then move into activation and deployment depending upon the path they're taking.

Great. And the revenue pipeline there, an update on the $15 million?

Yeah, it's growing a little bit from there. Again, we've started to convert much of that. So, again, it's growing. But I don't have that number, to be honest, in front of me. I hadn't had a chance to grab that with me being at the conference all week last week at Microsoft. It's been kind of a mad scramble. But we can get back to you with that. But it's north of the $15 million. I just don't have the number in front of me at the time.

Great. Thank you very much. Once again, as a reminder, if you'd like to ask a question, it is star one. Next question here is from Jerome Dubril from Desjardins.

Please go ahead.

Hi, thanks for taking my questions. First one I have is from the people I've spoken to on the client side, you know, everyone's talking about co-pilot adoption, obviously, but many of these are starting with pilot projects, and that's to me is a good indication of a very solid pipeline. Is this what you're seeing as well? And has there been an inflection point maybe in terms of the number of pilot projects you are actively pursuing right now?

Yeah, so we're working on volume versus quality, right? I mean, so there's certainly everybody's kicking tires and we're working to help customers do that tire kicking exercise on POC to understand it. But also in partnership with Microsoft, one of the things we're really working to do is really focus on those that are intent on moving forward in a more meaningful way. And really trying to prioritize those where the POC is truly a step to something sooner than later. And so there's a balancing act there to do that. But we are seeing customers really thinking through that journey. And it took a little bit. Obviously, there's all kinds of noise in the market about copilots and things like that. But Microsoft has made some significant updates in the models being used in their copilots. Obviously, if you paid any attention to Ignite last week, there were numerous incremental concepts introduced, one of which we think is really going to be significant around all the agents involved. that can be executed using Copilot Studio, as well as some of the things with some of the new development things under the AI Foundry and other things which are core to our offerings. We think those are going to really be catalysts as we get in further into 2025 to really activate and increase the use of Copilot in different forms. But there's no question, POCs are a big part of it, but making sure we prioritize those that are going to convert to meaningful deployments And then in parallel, also these custom AI design wins, which is where customers are going to get enormous value from leveraging their data in the context of use cases that are going to drive outcomes for their business.

That's great. Second I have for you is looking at the updated guidance there and with the results that were reported today. It looks like the midpoint of the guidance for the fourth quarter is approximately in the mid single digit in terms of sales growth. But I'm looking at PR wording is kind of more suggestive of a back half recovery in terms of actual sales. So if you can please help us maybe bridge the gap. Are we seeing the recovery right now or a bit later? Just to make sure expectations are in the right place. Thanks.

I'll let you comment on the guidance.

Yeah, so overall, margins have held very strong, and so we expect a little bit of – from a revenue perspective, we're fine with where we put out there. We've held strong on margins, and so I didn't – I'll admit I did not 100% follow the numbers they're using to coordinate that, but from a guidance perspective, we feel that revenue, while it's been a little – has been a little slower on the revenue growth. The margin has held very strong, and so we're very confident in even the numbers we've put out.

Okay, thank you.

Just on that, related to the trend line, one of the things to note, obviously, is the seasonality of Q4, so coming off of growth from Q2 to Q3, we wouldn't expect to see growth Q3 to Q4 just because of the impact of the number of billable days.

and the revenue generation that's just not available to us as a result of that. Next question here is from Steven Boland from Raymond James. Please go ahead.

Thanks. You might have answered this just now, Mike, but just that kind of indication of the second half of next year. And I guess the work that you're doing now in terms of moving certain clients forward, I guess is that that's kind of indicative when the revenue would come in closer to the second half of 2025?

Related to the AI kinds of things. We'll see revenue growth from it. There's no question, but you know, some of the bigger initiatives, larger scale deployments because there's, there's all the readiness work that has to happen. And we're certainly, you know, leveraging that activity as we speak, data security, all the things there. But secondly is these proof of concepts, which then inform customer budgeting. So a lot of what we're seeing right now is this concept of people using the proof of concepts to validate kind of their approach and strategy, inform their budgets for 2025, which then we believe will start to become executed. They are shifting budgets. We're seeing customers shift budget from other priorities and other kinds of things to invest in AI, but that wasn't planned for this year. So they're doing things to carve out budgets to do these, you know, use cases to do these early proof of concepts and other kinds of things to get started while they're casting and validating budgets for the new years to go and begin that journey in a more earnest way. And we think that momentum will build throughout the new year. Okay.

I know you didn't give 2025, guys. When could we expect to see that? Would that be next quarter?

We'll give that next quarter, Stephen, when we put out the annual results.

Okay. Just one more question, Scott. The sales and marketing expense, I know you've got a lot of initiatives year over year in terms of hiring, but sales and marketing, is this a good level? Obviously, activity is your...

going out and trying to find your customers and shows and things like that is this a good run rate uh on a quarterly basis well i think q3 if you look at the numbers is a good indicative rate of where we're at we still intend to add some further sales capacity as we exit 24 and enter 25. um we believe our all of our travel etc and related sales costs are pretty well baked so This is a good baseline, but I expect a little further increase in expense and investment to the first part of next year. So I think it'll increase slightly into 25. Okay.

That's all I have. Thanks, guys. Thank you. Next question here is from Vivian Goya from Scotiabank.

Please go ahead.

Good afternoon, everyone. I wanted to get a little bit more color on some of the industries where you're seeing this growth. And could you provide additional color on the healthcare segment requisitive was seen some significant traction. Thank you.

Yeah. So in general, in the AI motion, as I touched on a little bit in, in the conversation earlier, you know, we're seeing the discussion span across, obviously a fair number in the public sector space, which is, uh, you know, pretty obvious, but, uh, healthcare related. Certainly manufacturing, retail, as I talked about, one of our case studies in retail. So we're seeing some of that activity span. Where we continue to see good momentum in healthcare is really twofold. One is all the things related to our MacyCare platform centered around the dynamics capabilities and continuing to have good conversations with existing customers around expanding and doing those things as well as new opportunities. But in addition, we're really starting to see in strategic discussions with healthcare customers sort of the value acquisitive all up. In the past, it's been a little bit because of basic care we want in healthcare and the value point there. And now as we have those discussions with these customers, they understand our depth and breadth across things like security and identity management that they're dealing with, around their data estate and how they need to make changes to that environment, things around document management, like kind of this holistic and understanding that we, Quizzitive, have this broader set of capabilities that, from an industry perspective in healthcare in particular, is complemented by this really powerful set of capabilities on MacyCare and our industry acumen about healthcare, but then backed up by our horizontal services, which are the breadth of Microsoft capabilities across M365, Azure State, and all those things, including security and our managed services as a core component of that. We're starting to see that drive pipeline and conversation to be more of a strategic partner in various payer profiles as well as provider profiles as well. So anyways, we're seeing that expansion as something as our sellers become more versed and to be quite honest, both Microsoft and customers become more fully appreciative of the depth and breadth of our offerings. And AI is kind of the facilitator to that conversation. As we have these AI conversations with these customers, it opens the doorway for us to talk to them about their data state and how it helps inform it, where they are with their capabilities on collaboration tools and others. And it's really been an agent for us to open their eyes to our broader set of capabilities, which, again, for us, starting to expand wallet share opportunities within accounts, not just net new accounts.

That's helpful, Mike. Maybe I'll ask one question on this specific AI discussion. I know you've talked about the proof of concept and the whole industry is talking about it. What are some of the ongoing hesitations where the global enterprises are not ready potentially to shift from proof of concept to implementation? Are you seeing some inherent concerns? And has the recent election made a certain shift in mindset, if I may ask? And that's all from me. Thank you.

Yeah, it's interesting. There's a couple of things. One is there's so much noise around it, right? You got Microsoft, you got Salesforce, you got SAP, you got Adobe, you got everybody running to every customer saying, we're your AI solution, right? So there's a lot of noise and that's a big part of what we're doing in a lot of these early discussions. It's helping them understand AI holistically, where and when different components should play and, in that and how to manage the cost footprint of that. If you start to stack up a whole bunch of these different offerings from independent players, you're going to pay a premium per user to get the benefits. We actually think it's one of the compelling value propositions with Microsoft is that in their copilot at 30 bucks or whatever, versus 120 or $30 per user. If you start to buy it across various capabilities that aren't going to be fully integrated. So there's some of that that's happening. The bigger thing is their readiness. Most of these customers are not ready to activate AI. They don't have their data in a state that allows them to do it. They don't have their security profile properly postured for document sharing and other kinds of things so that copilot can properly act and engage on it. Those are eye-opening to many customers, so it's pausing them to go, okay, wait a minute. We didn't plan for that. We now got to figure out how do we, you know, make sure we're doing the right things to position so we do it successfully. So those are the kinds of things that are really the barriers to it. A little bit about market noise, but more importantly, readiness. And that's what we're helping them do is try to figure out how to start to do early wins so they start to show value while in parallel getting their environments ready to properly activate it and do it in the right way. The biggest mistake people will make is if they rush to it, they will deploy something that has a security posture issue or other kinds of things and it will be very detrimental to the momentum. Those are the biggest things that we're seeing are the barriers, and we're starting to work through those, and we're doing that jointly with Microsoft to really educate customers on that journey, and it's part of the value of what we're doing with them and this team that we put in place on the Black Belt side across security and data and apps and bringing all that together really helps kind of customers feel confident and comfortable with that landscape and how we can help them navigate through it.

Thank you so much. Our next question is from Rob Goff from Ventum. Please go ahead.

Thank you very much for taking my follow-up. Do you see yourself pursuing larger RFPs where perhaps the larger clients are more ready to adapt or adopt, you should say?

Yeah, so we certainly participate in RFPs, mostly in public sector where it's sort of a known thing. Most commercial enterprises do not explore these early innovation things through RFP processes. There's certainly exceptions to that, but most of them are about... strategic leaders that are driving the initiative, looking for someone to help them guide it and activate it and do those things, and they're not RFPs. Again, there's certainly exceptions to that, but that's not how innovation happens in commercial enterprise typically. That's more the commodity-level services that you will see, the RFP, which are about cost-driven versus strategic engagement and things like that.

Thank you. Thanks, Rob. This concludes the question and answer session.

I'd like to turn the floor back to Mr. Reinhart for any closing comments.

Well, thanks, everyone, for joining us today. I want to express my gratitude to our employees, partners, investors, and customers for your continued support. We appreciate your interest in Quizitive and wish all of you a happy holidays, those in the U.S. for this week and obviously the holidays upcoming. Appreciate everybody's support and look forward to opportunities to connect again in the future. Operator?

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.