NowVertical Group Inc. (NOW) Earnings Call Transcript & Summary

We will begin our webinar. Maybe I can just start out and say, well, thank you that you -- I'm pleased that you could join us for our First Quarter 2024 Financial Webinar. I'm Glen Nelson, Vice President of Investor Relations and Communications. And with us today, we have Sandeep Mendiratta, our CEO; Christine Nelson, our Interim CFO; and Andre Garber, our Chief Development Officer. All 3 will be available to answer questions at the end of the webinar. And just to give you an idea of the format. The webinar today will begin with some opening comments from Sandeep on our results. Then we'll hear from Andre Garber around our recent disposition of Allegient. And as well as Christine Nelson will provide some insights into the financials. I would like to remind you all today that some of the things that we will present are non-IFRS. You can find those measures or a reconciliation to the closest IFRS measure on our MD&A that we filed on SEDAR+ last night. Also, a recording of this webinar will be available on our website in our Investor Relations section after the call. With that, I would like to also remind everyone that we may contain some forward-looking statements. These statements are as of management's views of today and may not be reflective of any other dates. So with that, I would like to pass it over to Sandeep.

Thank you very much, Glen, and a very warm welcome to everyone. I'm thrilled to have you join us today. For our Q1 '24 updates. This is the agenda that we will be using. We will be -- I'll be taking you through the NowVertical overview. This is for any of our new investors joining us today and just a quick reminder for our existing stakeholders. And then we will go into the Q1 2024 strategic updates, what kind of developments have been happening, what we have been working on. So I'll share some of these updates with you. And finally, I'll hand it over to Christine Nelson, who is our Interim CFO, to share with you some of the financial results from Q1. With that in mind, let us get into what is the NowVertical equation in the market. And it's quite impressing where our positioning is the position of operating in a very strong and rapidly growing artificial intelligence market. And we know that the demand for these AI solutions are increasing quite rapidly. And the pressure on the CEOs is growing so significantly to deliver the business outcomes using the AI technology to gain that competitive market -- edge in the market. And what that also creates is the problem for the organizations to really adopt these technologies at the pace at which the leadership wants them to do it. There are some of the organizational complexities that we would have. There are these ever-growing data complexities in every business that we come across. Then you have got the growth in the AI technology landscape, and that is bringing in more complexity because of the lack of knowledge and understanding of this technology, the in-house capabilities in these organizations. And if you look at that whole intersection of it, which is how do you deliver that AI, the return on investment from your investment in the artificial intelligence technologies. This is exactly where the problems are being faced by these large enterprises. This is where NowVertical operates. We bring in this value to our clients. The value we bring to them is that we help our clients transform data into tangible business value with artificial intelligence, and we do it fast. That's where we are operating in the market space. What this equates into for us is it has given us a very credible portfolio of 250-plus clients globally. And these are some of the household names that you would see that are on the screen. Out of these 250 clients, there are about 100-plus enterprise clients that we are dealing with, which is quite phenomenal for the size of the business that we have. And out of these clients, there is one very interesting metric that we have, which is 30-plus of our clients have delivered a customer lifetime value of more than $5 million for us over their lifetime of the engagement with us, which is quite phenomenal. But at the same time, the question is raised what about the rest of the clients? And this just presents the massive opportunity of us being able to grow all of our enterprise clients. And all the clients that we work with to the customer lifetime value of $5 million or higher. And that's a wonderful opportunity space for NowVertical. If you now look at the shift in the strategic direction that we are going through, what are we transitioning ourselves to. This is going from the inorganic aggressive acquisition-led strategy to focus on the very organic growth, which is helping us build that sustainable platform and the foundation. And this is where we are going from being a business that was led by the acquisitions that collected a lot of data businesses to being that One brand and One business. And this is the platform that we are moving to build this platform of One brand, One business. This platform that will leverage the combined integrated strength of all the acquired businesses. This platform that is going to be driven by sustainability and profitability. And at the same time, this platform is going to help us create the foundation for the future inorganic growth as well. And we have talked about these 4 pillars, the 4 drivers, if you like, of our integration strategy. And what we would like to do is take you through some more details, deep dive into this integration strategy, give you more clarity around what this integration strategy means for NowVertical. What kind of actions we have taken in each one of these pillars? What are our future plans? And we are going to do this via a webinar that we will be press releasing the date for, most likely, the status is going to be the end of June. And we really -- I recommend and invite you to that webinar where we will be bringing a lot more details about what this integration strategy is going to look like for NowVertical in the coming months and quarters. Jumping straight into the Q1 strategic updates. As you know, this is our transition quarter. A lot of changes have happened in this quarter. This is going to be our transition year as well. I just want to give you some updates on the areas of the changes that we are bringing about. And of course, the very first one that I would like to talk about the changes that we brought about in Q1 are around the leadership and the governance. As you know, this is a new management team within NowVertical. I joined as the Chief Executive of our NowVertical Group in January. Christine Nelson took over as the Interim CFO in January. We have got Santiago, who's the EVP of LatAm. We have got Mostafa, who came in from Smartlytics and he is now the EVP of Product and Tech. We have also promoted Shailesh Mallya, who is now the EVP of Solutions and Services and focused on the growth of our strategic accounts in North America and EMEA. We also promoted Pankaj Ghag, who is now responsible for the projects and the delivery. So he's the EVP of Products and Delivery and focused on North America and EMEA. And there's a lot of integration work we have already done here. There were significant changes we brought about within the Board of NowVertical as well. Dave Charron, he and Chris Ford, they joined us earlier in the year on the Board as the non-exec members. I joined the Board as well as the member of the executive team earlier this year. And we have also David Doritty, who has joined the Board recently. And as you know, Andre Garber resigned from his Board position but he is acting as the Chief Development Officer and still actively involved in many aspects of our business and the growth. Another important area, which is the go-to-market strategy. As we are changing our strategy, it's very important to articulate our position very clearly to the market space because this is going to be our foundation of the organic growth. One of the things we are doing is we have already completed this consolidation, which is organizing ourselves around 2 markets. So we are no longer operating as the individual business units, those 12 businesses that have been acquired, we are now organized -- we have now organized ourselves into 2 markets, that's LatAm, and the other market is North America and EMEA. It not only brings us the -- brings the significance of the revenue in the markets, but it also drives the accountability and focus in those markets for our leadership team. The other important and very critical aspect is our proposition strategy. As we are bringing all these business units together, it's very -- it was critical for us to bring all of these best solutions and services that we have been delivering across the business. And we are joining them up, keeping in mind which ones are having -- are carrying the best potential of getting the traction from our clients in both the markets. And this is the solutions and services catalog that we are building up, which is then going to be reflected not only all of our -- on all of our digital assets like website or social media but all of the collaterals are going to be carrying these solutions and services catalog as the proposition. This is also one of be enabling the strategic accounts growth team. A lot of work has already happened, and we will be sharing this work and how it's shaping up and what shape it has taken in the webinar, like I mentioned, about the integration strategy. Some of the other strategic integration and restructuring that we have done. One is the corporate restructuring. I talked about this in the -- earlier in the month when we were delivering the results for 2023. This contract restructuring of the streamline our cost and how we are organized in the corporate structure, which was the original roll-up strategy. This has changed quite significantly for us, and we are optimizing the cost in the corporate function. At the same time, we have completely restructured our products function what used to be just a software assets within NowVertical now has transformed into a proper product structure, which again is going to be integrated properly within both the markets and the solutions and services. So this has resulted in the cost benefit, the annualized cost benefit of about $3.1 million. This is coming down from $7.4 million of costs that we had in corporate structure and the product launch. We have done a lot of renegotiations on the original SPAs after they were acquired the businesses. This was very critical for us because the integration and the collaboration of these business units within the integrated world was reliant on how the SPAs were structured earlier or not structured. The other notes were related completely to the performance of the individual business units. And where we want to see is the incentives of the leadership team and the management team being linked with the long-term value creation. And that's what we have been able to bring about with the SPA renegotiations. Some more work needs to be done here. But if you remember, this has given us the cost or it has given us the benefit of deferring our liabilities in tune of $2.6 million to 2025. This has come down from $5.1 million deferred liability we had when we started the year 2024. Another point is the operator-first structure. This is driving our integration strategy quite nicely. We are bringing in the operators of the business, the owners of the business who were very successfully running their business in each of the markets. This is giving us enhanced agility and the decision-making capability already. And we know that these are the people who are very focused on the growth of the business, and we are seeing the benefits already and Christine will be sharing some of these numbers with you. Allegient sale something we announced earlier this week. We're really proud of this decision and the management team and the Board supporting this decision for us to move away from the noncore side of our business. And I think this really presents the right opportunity for us to grow the core business in the future. One of the things I would like to mention is that there is a lot that has happened in Q1, as you can see and there is so much behind each one of the aspects of these 3 areas that I have mentioned. And when the new management team took over, they had to immediately get into the action mode. And at the same time, they had to look at the planning for the integration strategy as well. And we are transforming the business. As you know, the transformation of any of these business has the potential of bringing a lot of distractions for the team. What I'm glad to report is even though a lot of work has happened here, the leadership team and the management team stayed committed to deliver the run rate -- the revenue run rate of 2023. Christine is going to be sharing that in a minute with you. But what I would like to do before we hand it over to Christine is let Andre take the stage and talk about briefly our Allegient. Andre?

Thanks, Sandeep. So we're thrilled to have completed the sale of our Allegient business unit. And in addition to what Sandeep just mentioned, you can find more information in a video we posted last week, which is accessible on our website. It does go into more detail on the sale rationale. And these deals don't happen overnight. So with that, we do want to thank everyone involved, including the Allegient business unit CEO, Angel Diaz, who's a rock star and the Allegient executive team. We ran a planned process over a number of months to execute this disposition and could not have happened without the team effort. When we originally bought Allegient, we paid about $2.3 million of our own cash. And so looking at the multiples we paid about less than 3x EBITDA on acquisition on their ending '21 EBITDA. And looking on exit, just on the gross closing proceeds alone, our exit multiple is 6x. But when you add in all of the contingencies and post-closing payments on a gross basis, our exit multiple ends up being approximately 8.8x 2023 EBITDA. It also nets about a 50% IRR since we acquired the Allegient business in 2020 -- in April 2022. So we're quite happy about the terms. Obviously, on this slide, it shows a $3.8 million approximate debt paydown, which significantly reduces our global consolidated debt position, margin enhancements by getting rid of this sort of lower margin business as well. And we're really excited to see what the buyer does with this business, building on the really strong pipeline of backlog we've developed since owning Allegient for the last couple of years. And with that, I'll pass it over to Christine Nelson.

Thanks, Andre. Okay. So I'd like to start by walking through some of the key 2024 metric highlights in comparison to the same quarter last year 2023. So overall, all of these metrics are trending in the right direction. This is something we're really excited about. This has been a big transition quarter for the company, and it's going to be a big transition year. Sandeep definitely spoke about it. We have a new CEO, restructured management team, new Board members, and we're making a lot of positive changes as we execute our strategies. So we're really happy that all of these metrics are trending in the right direction. So revenue has increased by 3% over last year to 12.9% and gross profit has increased by 2% to $6.3 million. Now while these are only small increases year-over-year, they are in line with our 2023 annual run rate. And this really goes to show that the business is being supported by our strategy to move to an operator-first model. So this has been a big transition quarter. Management team is being restructured, lots of changes, significant headcount reduction. And with all of these changes that we're putting in place, we're really proud that we're still able to meet that 2023 annual run rate. And while the revenue growth will always be a vital metric for us, we are focusing on other metrics and other growth metrics as well. Specifically, profitability and sustainability and what we can do to get there. And our strategy to move to an operator-first model is a key part of that. That leads perfectly into adjusted EBITDA, which was about $1.6 million this quarter. This is a 314% increase over last year. Huge, huge increase over last year. So we're really proud of this. Also, income from operations was [ $220,000 ] this year, which is a huge increase of 120% or $1.2 million over Q1 2023, which we actually had a loss last year. So huge improvement here. And this was driven by a decrease in admin expenses. So there was a 16% decrease or $1.1 million decrease year-over-year. So next slide, I'll talk about -- I'll go into the admin expenses in a bit more detail. So what you're looking at here are our consolidated net expenses year-over-year. So it decreased from $7.2 million to $6.1 million. And this consolidated admin includes our CGU admin, our corporate admin costs. And then we've also just broken out that corporate admin just to show the huge decrease that we've managed to obtain year-over-year. So last year, $1.9 million. This year, $1.1 million. And this is really driven by a 68% corporate headcount decrease year-over-year, a direct result of our strategy to move to an operator-first model. We are focusing on utilizing the expertise that we have and the local CGUs. Capitalizing on that and reducing our corporate overhead to get to where we want to be for -- to be sustainable and to promote growth and profitability. The strategy, of course, we've said it a few times, I'm going to reiterate it. This strategy is in progress, right? These things take time. And we're really proud that this is -- we can see some changes already happening, but we're expecting to see future cost reductions in the coming quarter. So next, I'd like to highlight the increase in adjusted EBITDA. So adjusted EBITDA is a metric that we use internally to measure the performance of all of our CGUs. So I think it's a really important metric to highlight here. It increased by 314% or $1.2 million from up to $1.6 million this quarter. And also, that's a huge change in the margin as well. So not just the dollar value, but we're going from a 3% EBITDA margin to 12% EBITDA margin. So big metric we're very, very proud of. This is mainly a result of the decrease in the admin costs that I spoke about previously part of our strategy to move to an operator-first model, make us more sustainable, make us more profitable. So this really speaks to our efforts there. And then once again, this is a transition year. This is going to be every quarter. We're making changes, making positive changes. We're really happy with the positive trends that we've been seeing, and we're really looking forward to more positive metrics in the following quarters. And with that, I'll hand it back to Sandeep.

Thank you very much, Christine. As you see, there are some positive impact that we are already seeing. And like I said, the team has been completely committed on delivering the revenue as we go through a lot of changes as part of the new strategy that we are putting in place. And this is my belief that the potential we have in the business and what we have acquired as the 12 acquisitions in the past and the goodness it brings to us, there is so much that we can keep working towards to keep improving the growth metrics of the business, both in terms of the revenue growth in different areas of the business, the efficiencies of the performance metrics, if you like, whether it's the EBITDA, whether it's the cost efficiencies, it's delivering higher margins. And moving towards generating more of the free cash flow in the business. But this is the equation that we believe there is so much of leverage we have, and we'll keep working towards improving this business and making it a grand success. On one side, we are absolutely focused on improving our cash position to capitalize on that market growth, like we described last time as well, our cash position has changed quite significantly by deferring some of the liabilities from '24 to '25. We have improved our cost on the corporate structure as well as the products team, like I mentioned, $3.1 million of the efficiencies there. And at the same time, we are working towards deferring some more liabilities to the future. The Allegient sale has got massive impact on our cash position as well. So this really helps us get the right runway for deploying the growth strategies into the business in 2024 itself without having the need to raise any capital for the working capital needs, if at all. So this is really a positive moment, I would say. And like Christine thing was saying, all the actions that we have put in place in Q1, they will be reflected in the positive metrics in Q2 and thereafter. And there are some more positive changes we are bringing back. The other thing that we are doing is unleashing the power of this scope to enhance the delivery of the profitability for the business and how do we deliver this value to our clients also. And essentially, what it means is how do we maximize the shareholder value through all of our acquired assets. And this is where I just want to make this one last point here is that this new management team is taking control of this business and all the situations with confidence. And this management team is not going to shy away from making the right decisions for the business even if there are tough decisions in certain ways. And I really thank for the collaboration of the whole leadership team, management team and the support from the Board that we have received. This is going really in the right direction, and we look forward to some more success in the future. Back to you , Glen, for the questions and the answers from us.

Great. Thank you, Sandeep. [Operator Instructions] So the first question comes from [ Hernan Gomez ] and the question is regarding the income statement, can you expand on the high impacts for both inflation effect and net monetary position and foreign currency translation adjustment items?

Yes, I can handle that. So the inflation effect in the net monetary position increased quite a bit this quarter due to the Argentine subsidiary. So there was a huge increase in inflation. It increased from about 3,500 to 5,300 in 1 quarter. So just a huge increase. Now it does affect like overall, it's kind of a no impact because it's affecting revenue and expenses in the -- at the same rate. And so both revenue or expenses are getting adjusted by that same inflation impact. But there was just a really large increase. Normally, we don't see an increase that large, so it's just a local CPI index in Argentina that's causing it. And as for the currency translation adjustment, the large increase is driven by -- in 2023, we acquired a material amount of companies globally that we have that operate outside of the USD currency. So we acquired [indiscernible] they operate in Chile and Mexico and Brazil, and [indiscernible] Smartlytics, which operate in the U.K., in India and UAE. So just the intercompany transactions, and also the increased number of transactions and volume outside of USD has generated an increase in the currency translation adjustment due just to the number of currencies and the fluctuations in currency against the USD.

Great. Thank you, Christine. Again, it's from [ Hernan Gomez ], regarding the segmented reporting, can you shed some light on lower-than-expected revenues for Acrotrend, Affinio and the other? Was Affinio business unit dissolved?

Yes. So I think the simple answer to Affinio business unit is that, yes, it was dissolved last year. And I think, Christine, if you could give the exact dates and the revenue numbers there. But I can answer some of the other questions as well. Yes, we have seen some decline in the revenue on some of the business units, including Acrotrend and this is more of the seasonality in certain ways for some of these business units. You will see that, depending on the budget cycles of the clients, you have the spike in either Q2, Q3 or Q4 at times and sometimes the budget cycles. Last year, in Q4, we saw the budget cycles were fast forwarded for some of the clients, and we won additional work in Q4, and that's why you saw a little bit of a slump in Q1. But the overall targets are definitely set with certain growth metrics for 2025 -- 2024.

And just a follow-up on the Affinio. Yes, we've sold Affinio Social last year in May. So there is no revenue this year because it was sold last year.

The next question is from [ Rob Goff ]. Could you review the cash and access available to now at this time.

Christine, that's for you.

Yes. So as of yesterday, we had about $6.1 million in cash available globally in the banks. We -- this is a kind of direct result from the Allegient sale.