Quorum Information Technologies Inc. (QIS) Earnings Call Transcript & Summary

Good afternoon. My name is Joanne, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Quorum Information Technologies 2019 Year-End Results Conference Call. [Operator Instructions] Thank you. Mr. Maury Marks, you may begin your conference.

Thank you, Joanne. Good morning and thank you for attending Quorum Information Technologies' 2019 Year-End Results Conference Call. Quorum is a leading provider of dealership and customer management software and value-added services to the automotive industry. Assuming you've all read the press release we issued after markets closed yesterday, today, we will provide you with a financial and operational overview of our Q4 2019 and full year 2019 results and an overview of how we are navigating in the current COVID-19 environment. We will then open the floor to your questions. Marilyn will now begin with our forward-looking information advisory. Marilyn, please go ahead.

Thank you, Maury. Good day, everyone. Thank you for being here with us today. I would like to remind everyone that certain statements in this presentation and on our call are forward-looking in nature. These include statements involving known and unknown risks, such as the risks related to COVID-19, uncertainties and other factors outside of management's control that could cause actual results to differ materially from those expressed in the forward-looking statements. Quorum does not assume any responsibility for the accuracy and completeness of the forward-looking statements and does not undertake any obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. For additional information on possible risks, including risks related to COVID-19, please refer to our MD&A dated December 31, 2019, located on the SEDAR website. 2019 was our first full year as a combined company following the acquisition of Autovance in September 2017, DealerMine in October 2018 and Oasis in January 2019. In 2019, we posted the highest annual gross revenue and the highest annual SaaS revenue in our history. Gross revenue for the full year 2019 effectively doubled from the previous year to $33 million in 2019 from $16 million in 2018. SaaS revenue was 68% of total revenue in 2019 and increased by 75% to $22 million in 2019 compared to $13 million in 2018. Additionally, BDC revenue was $6.8 million and 21% of total revenue in 2019. Adjusted EBITDA was also the highest in Quorum's history, more than doubling from $2 million in 2018 to $4.6 million in 2019. Adjusted cash income was $1.8 million in 2019 compared to negative $0.1 million in 2018 for an increase of $1.9 million. Our customer rooftops totaled 1,022 at the end of 2019 compared to 876 at the end of 2018. And our average recurring revenue per rooftop or ARRPU was $1,819 at the end of 2019, with no comparable ARRPU calculation for 2018, as we only had 2 months of DealerMine recurring revenue. Looking to our Q4 2019 results, I will provide a comparison to our Q3 2019 results because, as mentioned, the timing of the acquisition of DealerMine afforded us only 2 months of comparable revenue in Q4 2018. Gross revenue in Q4 2019 was again our highest-ever recorded quarterly revenue at $8.7 million, an increase of 2% or $129,000 from $8.6 million in Q3 2019. For our critical SaaS revenue stream, we posted a record of $5.8 million for Q4 2019, which equates to an increase of 3.3% from 5.6% in Q3 2019. SaaS gross margin stayed relatively flat at 66% during Q4 2019 as compared to 67% for Q3 2019. SaaS revenue now represents 67% of total revenue in Q4 2019 compared to 66% in Q3 2019. BDC revenue represented 20% of total revenue in Q4 2019 compared to 22% in Q3 2019, decreasing by $132,000 or 7% to 7 -- $1.75 million from $1.88 million. This was attributable to onetime credits of $170,000 that were issued to a customer due to missed minimum staffing requirements. These credits, also with some added staffing and commission expenses, resulted in BDC gross margin decreasing to negative $30,000 or negative 2% of revenue in Q4 2019 compared to $259,000 or 14% in Q3 2019. In Q1 2020, we did not have to issue any credits, and we anticipate that BDC revenues will be much stronger than Q4 2019. We have also taken steps to ensure that this issue does not happen again, including hiring a new BDC Director with years of experience running profitable, high-growth BDCs. Quorum's annual run rate based on Q4 2019 is $23.3 million for its SaaS revenue and $7 million for its BDC revenue. Services and onetime revenue represented 13% of total revenues in Q4 2019 compared to 12% in Q3 2019 or $1.1 million and $1 million, respectively. Services and onetime gross margin decreased to negative 7% during Q4 2019 as compared to 13% for Q3 2019. In the quarter, we had a higher percentage of new install versus services revenue. Increases in our new installed revenue does put downward pressure on our gross margins. However, those installs are critical to our future SaaS revenue growth. Adjusted EBITDA for Q4 was $1 million, a decrease of $0.4 million or 27% compared to $1.4 million in Q3 2019. Adjusted EBITDA in Q4 2019 decreased primarily due to the decrease in our gross margins in BDC and services and onetime revenues and also as well due to expenses for new hires in the DealerMine division. Adjusted cash income at Q4 was $294,000 compared to $655,000 for Q3 2019, a decrease of $360,000. In March 2019, Quorum closed a $15 million debt financing facility with BDC Capital. The $1.1 million initial draw was used to retire the bridge loan, which was used as a temporary measure to fund the purchase of DealerMine in late 2018 as well as pay the cash consideration of the Oasis acquisition. In June 2019, Quorum closed a $1.5 million interest-free, unsecured, repayable investment with The Atlantic Canada Opportunities Agency to assist with its Lead Generation Data Hub project. And in November of 2019, Quorum closed an oversubscribed bought deal private placement financing, issuing 10,574,825 shares at a price of $0.87 per share for aggregate gross proceeds of $9.2 million. The net proceeds of the offering will be used for growth initiatives, working capital, general corporate purposes and future potential acquisition opportunities. At December 31, 2019, Quorum had a cash and cash equivalents balance of $8.6 million, $13.3 million in current assets, working capital of $9.5 million and a current ratio of 3.55. Long-term debt was $8.8 million, of which $8.2 million is attributed to our BDC Capital debt financing facility. With that, I'd like to pass it back to Maury.

Thank you, Marilyn. Rather than focus on 2019, I'm going to focus my discussion on how we are navigating through the COVID-19 pandemic. When the World Health Organization characterized COVID-19 as a pandemic on March 11, our primary concern was for the safety of our staff. By March 20, we had transitioned all staff to work from home, and all on-site training and installation activities were postponed until after the COVID-19 pandemic. At this time, we were also concerned for our dealership customers. What we learned was that by early April, dealership sales departments were shut down or operating on minimal staff, while service and parts departments operations had slowed down considerably. Most dealerships have laid off 50% or more of their staff, and some dealerships have closed completely. With dealership customers facing an extremely difficult business environment, we made a number of key changes in early April as follows: number one, provided -- we provided dealerships with a 50% discount on their monthly support or SaaS invoice for April and May 2020. This discount did not apply to any other revenue streams and did not apply to outside third-party costs such as DMS integration fees. This was a strategically provided discount because Quorum has always treated its dealerships as partners and because it was a short-term discount to protect long-term SaaS revenue. Number two, we adjusted staffing levels across the company. Three, we negotiated discounts from various Quorum suppliers. Additionally, we are actively working with both the U.S. and Canadian governments for financial relief from the lost revenues. While there remains some uncertainty regarding the duration and depth of the disruption to our customers' businesses, we are confident that the combination of the actions we have taken to stem cash outflow, the proceeds raised from the financing in November and government support provides us with sufficient resources to regain growth momentum through the recovery. Our solutions are critical to dealership operations and should be highly valued in helping dealers recover from the COVID-19 shutdown. Furthermore, our management team guided Quorum through similar challenges in 2008 and 2009, where we emerged from the global financial crisis stronger than we entered. Here is some additional information on April and May 2020 numbers. Number one, with SaaS revenue, the XSellerator, Advantage and Autovance divisions provided their customers with 50% discounts. DealerMine did not provide a 50% discount due to the DMS integration fees that they need to pay to other DMS providers. As a result, their discount percentage was closer to 35%. The net result was $850,000 of SaaS discounts for each of April and May 2020. As mentioned, this was a strategic discount. And to date, our typical churn levels have not currently been impacted by the COVID-19 pandemic, in large part due to this strategic discount. Number two, our BDC revenue in April has been impacted by approximately $270,000 in reduced fees. However, we do expect those fees to resume again post COVID as long as our dealership customers are back to work. In fact, some BDC customers have already resumed some services. Number three, we will have minimal onetime and services revenue because all of our on-site services have been delayed until post COVID. Number four, our typical salary expense is about $1.8 million per month. The April cost savings from staff layoffs were $400,000 per month or 22%. Number five, our typical non-salary cash expense, not including BDC Capital interest, is approximately $850,000 per month. We believe we will see at least $100,000 per month discount on supplier savings that we've negotiated. Number six, additionally, we are applying for approximately $600,000 per month in government programs, which is largely the 75% Canadian wage subsidy. Here are some key strategic steps that we are taking to ensure we emerge from the COVID-19 shutdown as a stronger organization that is more adaptable to the new business circumstances. Number one, the COVID-19 pandemic has accelerated the automotive industry's move to a digital retail strategy, focused on allowing customers to purchase a vehicle or get their vehicle serviced with a lot less interaction and contact with the dealership. Quorum is innovating to meet this shift as follows: our Autovance division is building out Quorum's digital retail vision to allow consumers to purchase a vehicle online. The XSellerator division is improving our service lane product called Power Lane to allow customers to transparently receive videos directly from service advisers or technicians for possible added repairs and then to approve those repairs from their phone or any other device. DealerMine is preparing a bundled offering that includes BDC services to allow dealerships to refill their service lanes by contacting customers about more urgent repairs like vehicle recalls or campaigns. Number two, COVID-19 has significantly increased everyone's acceptance of videoconferencing and web training. We are moving the delivery of our installation and training services to be web-based. This is not an easy transition for our installation services because we introduced a lot of process change in the dealership that in the past has been best handled by being on site. Two key benefits of web-based installation and training services are that we can scale the delivery of our services faster and book SaaS revenue related to our products quicker. Number three, we are also looking internally on how we can be more effective and efficient as one company, as One Quorum. Some One Quorum initiatives underway are: we are integrating the corporate and HR functions. And although we are not prepared to comment on the magnitude, there should be some cost synergies. To accelerate this move, we have brought on a consultant that is partially paid for with government funding to consolidate costs, help accelerate government-funding opportunities and find efficiencies across the company. We are also aligning the sales teams to help capture the tremendous cross-selling opportunities that exist to sell our products across divisions. Number four. Finally, we believe that the COVID crisis presents an M&A opportunity as many automotive software companies may be in a difficult financial situation. We have completed a detailed automotive software market analysis, focusing on software solutions that fit our current product suite and our vision for the future of our product suite. We will leverage that analysis as we prepare to engage with companies as opportunities arise. Overall, we will execute our growth plans post COVID as fast as the market will allow us to. In the meantime, we continue to diligently model the financial impact this may have on our business in order to maintain the longevity and stability of our operations while supporting those around us. Operator, I'd now like to open the conference to any questions from our audience.

[Operator Instructions] Your first question comes from the line of Gavin Fairweather from Cormark.

So some good color there just in terms of -- some good color just in terms of kind of all the actions that you're taking. I just wanted to start out on the discounts. You talked about a 50% discount, a little bit lower for DealerMine. Just thinking about June and potentially July, would you consider discount kind of further out? And is the key trigger for that whether the dealership is able to reopen? Just trying to wrap my head around that.

Yes. So Gavin, I do believe the key trigger is where we all are with COVID-19, right? And where the dealerships are in terms of reopening, what the traffic levels are, we're monitoring all kinds of different levels of activity across our dealerships to get a really good gauge on how their business is shaping up. And so we'll keep an eye on all that, and we'll keep you posted.

Okay. And then you mentioned that churn hasn't really had a material kind of change thus far. Just when you're thinking about it and you're kind of looking at the landscape, what do you see as kind of maybe the greater risk for a bit higher churn within your installed base? Would it be the independence at Oasis or maybe kind of the smaller dealers, kind of smaller than the bigger groups within XSellerator? Or would it be maybe kind of customers curtailing additional adjacent applications kind of outside the core DMS? Just curious of your thoughts on that.

Yes. So I do think the -- there's more risk around churn around products outside the core DMS. So those include some products that our XSellerator division sells, right, like Communicator and Power Lane and elements like that, although those are going to be critical products to helping the dealership with the recovery. I also agree with your statement that there's more risk related to, obviously, the smaller independent dealerships or used-car operations that Advantage services out there as opposed to the franchise dealerships. Yes, I would say those are the 2 higher-risk areas for us.

And maybe you can just -- I mean, obviously, I'm sure a lot of people on the call maybe weren't following you as closely in kind of '08/'09. Maybe you can just kind of compare and contrast your view on kind of the health of the dealers and OEMs kind of coming into this period compared to the prior recession.

Yes. So a lot of differences between '08/'09. At the time we -- our dealerships were losing their franchise. So a lot of things were completely outside their control, and not that COVID, they have control, but they -- once you've lost your franchise, it was really difficult for you to even continue operating even on some kind of reduced level. And so it was a tough environment. We were very concentrated at the time with GM dealerships. 90% -- 95% plus of our stores were GM stores. And they, of course, GM and Chrysler had gone through -- or going through bankruptcies. So we were at great risk with both GM and Chrysler. Financially, we weren't near as strong a position as we are today to weather through this. And so yes, there's quite a bit of sort of key fundamental differences, and I contrasted that to today. And we're a lot more diverse across different manufacturers. We've got the experience of what we've lived through in 2008, 2009. We've got a stronger Board that's helping us through the challenges. We've got government funding available to help us through the challenges. So yes, I think it's -- we're just in a much better position. However, I don't want to lessen the fact that we learned a lot of lessons back then, and we've applied those to our situation today to really be very conscious about managing our cash flow through the COVID crisis.

Okay. That's very helpful. I've got some more stuff, but I'll re-queue and ask offline.

You bet.

[Operator Instructions] Your next question comes from the line of David Kwan from PI Financial.

Obviously, one thing we are focused on more of the outlook as opposed to what your Q4 numbers were, and the color that you gave on the various parts of your business, including the cost line, was quite helpful. I'm just looking to get some more clarity on a couple of things that you talked about. I guess as it relates to the government funding, I know a lot of that has just kind of got up and going in recent weeks here. But have you been able to get confirmation that you guys qualifying for like government funding specifically, the plan here in Canada for the 75% wage subsidy?

So no, we haven't, but nobody has, right? I mean last reported, the government website should be open on Monday. And I think a lot of businesses are waiting and hoping that they hit that particular deadline. Marilyn, I don't know if you have any more color on that.

No. That's it, Maury. Like I said, we had all our information ready. We're just waiting for the portal to open on CRA so we can submit an application. But nothing -- we don't have any confirmation of any client at this time.

Okay. No, that's helpful. And as it relates to your -- the gross margins, I guess, I guess you talked about some of the revenue impacts, and I suspect that, obviously, you would have a negative impact on the gross margin side. Can you comment on how we should be thinking about that? I guess your SaaS revenue is kind of in the mid-60s percent range. How we should think about it, in particular, I guess, for Q2, how that impacts your SaaS gross margins? And then maybe as well on the BDC side, a bit surprised that, that revenue, I guess, to date in April hasn't been less given what's going on. But maybe, I guess, they're still trying -- dealers are still trying to push revenue into the service lanes. But any help you can provide would be great.

Right. So I don't know if I can provide a lot of color on Q2 on gross margins. I guess we could model some of that out and take that particular piece offline and talk about that. And then I think the second part of your question is related to the BDC side of things and the fact that we've seen a reduction in BDC revenues, correct?

Yes. I just would have thought, given everything that's going on with dealerships either shutting down or significantly curtailing operations, that there's probably not much call center activity. So I would have thought that, that revenue probably would have come down more than at least what you've said so far in April.

Yes. And so when we originally modeled this out, we assumed that as well. And we were actually quite pleasantly surprised. And what we found was that the BDC -- keep in mind, right, the BDC we have is they're focused on service and parts, so driving in service revenue as opposed to sales revenue. So most of our dealerships out there are still operating their service and parts organizations. And what we were finding was that dealership's immediate reaction was, hey, we're going to curtail our BDC activities. But then they found with them cutting back staff as well that they just couldn't even handle the number of calls that they needed to even handle from an inbound perspective, but they also couldn't complete the number of calls they wanted to do from an outbound perspective. So what we tend to see was a dip in BDC revenues that was a little more substantial, not much, more substantial than what I mentioned. But then all of a sudden, people were going, uh-oh, we overreacted. We still got to keep the service and parts organization going. And so we want to come back to you and contract more BDC services again. And so that's what I meant when I said that some of our BDC services came back as recently as in the last 3 or 4 days. And we're in conversations with more dealerships on resuming BDC activities. I think another thing to keep in mind in this area is as dealerships started to get back to business, as we all start to get back to work at whatever point in time that is, that BDC that Quorum has within DealerMine is going to be critical to dealerships on helping them really start to fill their service departments up again. And so we're looking at ways that we can scale that BDC up, and we can provide it to not only the customers that will resume services with us, but also broaden that and provide it to new customers, especially XSellerator division customers.

So it sounds like -- let's just say, things open up in June at some point, that Q3 could potentially get back to the level that we've seen, call it, middle of last year in Q4 with the service credit?

Yes. Yes. Yes, agreed. I mean that's how we're modeling that out is, if we are back to business in June and we're starting to grow the business back again, that, yes, we are going to work really hard to get our BDC levels back to what they were sort of Q3. Yes, we had a dip in Q4, but also, we believe that we'll have strong BDC service levels and revenues in Q1. And yes, we want to resume that and then grow from that as well.

Okay. Helpful. And just 2 more questions. Can you provide any updates on the VW/Audi certification? Obviously, you have that in the U.S., I think, over a year ago. Any update as to where that is in Canada? I know technically, I think you do have integration, but I don't recall any commentary on kind of getting the formal blessing from the head office here.

Right. Yes. So just as a reminder for everybody on the call as a background, we got technically certified with VW and Audi for both Canada and the U.S. So in the U.S. marketplace, we're open for business. We can turn on -- we can pilot with VW and Audi stores and then move into sort of a general release. In the Canadian marketplace, we weren't sort of fully business-certified. But we have had some information circulating from VW/Audi about us. And we actually got a really incredibly favorable remark coming out of VW/Audi about the partnership level discounts that we provided through to our customers out there. And we have seen pipeline growth related to VW/Audi dealerships in the Canadian marketplace with us having installed one store in Canada and with us having sold another one in the Canadian market.

So I know you had one, I think, through the Oasis transaction. So it sounds like you've added another one since then?

We haven't installed them yet.

So -- okay. But you sold it though.

Yes.

Okay. No, that's good. And then I guess last question. Just in case this thing drags on longer -- fortunately for you guys, you've got a good position given the capital that you raised last fall. But should this thing drag on, I know you have that BDC facility that I thought was for acquisitions, but are you able to access that if you do need to at some point down the road for your operations?

Yes...

Hey, Maury? [Technical Difficulty]

Maury, we might have lost you.

So Marilyn, do you have access? I guess, is that a purely acquisition-driven facility? Or if you need to access it for your regular operations, can you access that facility?

Yes, David, we can access some of that facility for working capital purposes if we needed to.

[Operator Instructions] Your next question comes from the line of Gavin Fairweather from Cormark.

Maury, are you back on? Or -- doesn't sound like it.

No. I think he is having some technical issues there, Gavin.

That's okay. Marilyn, maybe I'll lob this in here. So Maury kind of chatted a little bit about the M&A environment and the opportunity to be kind of -- play some offense in the current environment. It sounds like, correct me if I'm wrong, you guys are being pretty kind of hands on deck at the moment in terms of the existing operations. So just I was wondering about the appetite for M&A kind of near term and whether you've seen any kind of change in the M&A kind of landscape, whether it be kind of valuations or the number of kind of inbounds that you're seeing or anything like that.

Right. Well, I wish Maury is on the call right now because Maury has been more heavily involved in that piece of the business, Gavin, lately than I have been. But yes, I mean we do -- we are looking for potential opportunities. I haven't heard anything about any recent acquisitions or any -- anything with respect to different companies' valuations at this time. But yes, I mean we'll see what 2020 brings, but it's definitely something that we're still looking into, right? We have worked with a consultant who's doing an industry analysis for us. So yes, we're looking into it for 2020.

Pardon for the interruption. Do you mind if -- oh, never mind. Someone -- I think Maury might be coming back in.

Okay.

Do we want to wait on that last question? Or...

Maybe if he is coming in, we can see if he has anything to kind of add to that.

Yes.

Are you there, Maury?

I think he has more color to add to it.

[Operator Instructions] You are back. Yes, you are back.

Maury, it's Gavin here. I just kind of logged in a question just on the M&A environment. You kind of mentioned it in your prepared remarks. Curious for your appetite on M&A right now, whether you're kind of looking at things or whether it's more kind of focused on your internal shop? And whether you've seen any kind of change in the environment, just given kind of the landscape out there?

Right. So I did mention in my talk, right, about the M&A environment from a landscape point of view. Look, I believe that we're going to see some opportunities that are going to come out of COVID from 2 perspectives, right? Obviously, going through the COVID tunnel that we're all in right now is very difficult on an organization, especially if you are not well capitalized. So there may be some opportunities from that. In addition, I think on the other side of the COVID tunnel, as business sort of resumes, it will resume in steps, in some kind of step-type fashion, and there might be opportunities there. So we're very aware of sort of what kind of M&A -- or sorry, what kind of third-party automotive software companies we're looking for. Now we're very focused on that. And we're really trying to spread the net wider, if you will, really fill more of the top of the funnel from an M&A point of view and then try and determine what kind of opportunities there are out there and see if we can get some strategic M&A opportunities at a good price.

Your next question comes from the line of Gabriel Leung from Beacon Securities.

Apologize if this has already been asked. It looks like I dropped off, but I got a couple of things. So Maury, first, just on the -- in terms of revenues, I just want to confirm something. You mentioned in terms of the SaaS discounts, so it sounds like everything outside of DealerMine is getting the 50% discount. In terms of DealerMine, can you confirm whether it's 35% for both April and May and potentially beyond, depending on what the situation is?

Yes. It's 35% for both April and May for DealerMine.

Okay. Got you. And then just looking at the cost savings, you're looking -- that you have achieved, I guess, via the headcount reductions, the supplier discounts and also potentially some of the government subsidies, if I sort of add all that together, it feels like you're going to be able to offset the revenue loss, even if I assume the revenue loss is almost 100% gross margin. Is that a fair statement to say, you expect all those things to sort of closely offset that?

Gabe, that is our goal is to offset all of that. Yes. So we're focused on trying to achieve that. You bet.

Got you. Got you. And just run again, what was the headcount at the end of Q4? And where does it stand today?

Oh, gosh. Marilyn lost -- we lost Marilyn on the call. She...

Oh, I just got back.

Okay.

I just heard that question. So sorry, can you just repeat, the headcount as of the end of year-end and then today's date?

Correct.

Yes. Well, we had -- one second, I had it done by division. So we were over 350, and we did approximately 72 layoffs due to COVID.

I got you. So I guess my last question would be, obviously, we're all expecting business to resume at some point over the near to midterm. Now would you expect that you would have to rehire the 70-or-so people that have been laid off as business starts to ramp up again? Or is there some permanent cost cutting you think that's going to stay in the business?

Yes. Gabe, that's a hard question to answer. So -- and the reason it's a hard question to answer is the last we did were COVID-related layoffs. So legally, those are layoffs due to the COVID pandemic, and they're classified as temporary layoffs. Are there some roles that those people were in longer term that we won't need going forward as we optimize the business? As I was talking about through the One Quorum approach, yes, there are. So sort of a split between the different layoffs. Like if business were to resume to normal levels, there are a number of those people we bring back, but there are some roles that we will look to as an organization to optimize and not require going forward.

[Operator Instructions] There are no further questions at this time. I turn the call back over to the presenters.

All right. Well, thank you, everybody, for attending today's call. This is probably the longest call we've ever had, and appreciate all the questions. And hopefully, everybody was able to get a lot of great information out of this conversation. Thank you for your support, and look forward to talking to you in the future. Thanks.

This concludes today's -- ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.