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

Good day, and thank you for standing by. Welcome to the Quorum Information Technologies 2020 Year End Results Conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would like to hand the conference over to your speaker today, Maury Marks, President and CEO. Thank you. Please go ahead.

Thank you, Mike. Good morning and thank you for attending Quorum Information Technologies Q4 and Full Year 2020 Results Conference Call with Concurrent Webcast. Quorum offers innovative and robust technology solutions and services to traditional and electric vehicle dealerships and original equipment manufacturers, or OEMs, across North America. Today, we will provide you with a financial and operational overview of our Q4 and full year 2020 results. After our presentation, we'll open the floor to your questions. Marilyn will now begin with our forward-looking information advisory. Marilyn, please go ahead.

Thank you, Maury, and 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 continued 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, 2020, located on the SEDAR website. From a business perspective, 2020 was both a year of uncertainty and opportunity for Quorum. The COVID-19 pandemic have bought on challenges we have never experienced before, including reacting to the COVID-19 pandemic to ensure the safety of all of our employees and transitioning them to work remotely to combat the spread of the virus and providing our customers $1.8 million in COVID-19-related discounts, as the pandemic was taking an unchartered toll on businesses across Canada and U.S. and it continues to take a toll a year later. 2020 was, however, a positive catalyst year in some areas as we strengthened our dealership customer relationships through the COVID-19 related discounts. We provided them in April and May. We expanded our BDC services, which support the very valuable ongoing automobile maintenance side of a dealership business to a second location, utilizing Quorum's existing leased space in St. John's, Newfoundland to allow for accelerated growth and improved customer satisfaction. We launched the process of providing remote installation and training services for most of the corporation's products to both new and existing dealership customers, and we invested $2.9 million in product development to further develop our suite of software products to meet the growing demand for our online digital retailing solutions as we and our customers prepare for the future of the automotive industry, and Maury will speak to that a bit more later on. Financial highlights for 2020 include the following: revenue decreased by 6% and to $30.9 million in 2020 compared to $32.9 million in 2019. The decrease in total revenue was a result of the COVID-19 pandemic and COVID-19-related discounts provided to dealership customers. SaaS revenue decreased marginally by 1% to $22.1 million in 2020 compared to $22.3 million in 2019. The decrease in SaaS revenue is directly attributable to the $1.5 million in COVID-19-related onetime discounts provided to dealership customers during Q2 2020. BDC revenue increased to $7.5 million in 2020 compared to $6.8 million in 2019, an increase of 9%. During Q2 2020, Quorum provided $0.2 million in COVID-19-related onetime discounts. Services and onetime revenue decreased by 67% to $1.2 million in 2020 and compared to $3.7 million in 2019. The decrease in services and onetime revenue is due to the COVID-19 pandemic and due to the corporation lowering the cost of upfront fees for new installations and training in order to secure further SaaS revenue. Total annual recurring SaaS revenue was $24 million in the fourth quarter of 2020 compared to $23 million in the fourth quarter of 2019. 2020 adjusted EBITDA was the highest in the corporation's history at $4.9 million, an increase of $0.3 million over 2019. The adjusted cash income was $2.5 million in 2020 compared to $1.8 million in 2019, an increase of $0.7 million. At December 31, 2020, Quorum had cash and cash equivalents balance of $9.3 million, net working capital of $9.1 million and a current ratio of 3.2. Long-term debt was $9.6 million, including the $8.6 million that we have drawn on our $15 million BDC Capital debt financing facility. With that, I'd like to pass it back to Maury.

Thank you, Marilyn. While navigating both the ongoing impacts and opportunities in 2020 that emanated from the COVID-19 pandemic, I am pleased to report that we were able to exit the year with increases to both SaaS and BDC reoccurring revenue streams in Q4. SaaS revenue in Q4 was $6 million, a 2.1% increase over Q3 2020, which equates to an 8.4% annualized run rate. Our annual SaaS revenue run rate is now $24.2 million. Our BDC revenue was $1.95 million in Q4, a 4.7% increase over Q3, which equates to an 18.8% annualized run rate. Our annual BDC revenue run rate is now $7.8 million. Together, our SaaS and BDC revenues made up 96% of our Q4 revenue. With SaaS representing 73% and BDC representing 23%. Our SaaS gross margin in Q4 was back up to the 66% we achieved pre-pandemic in Q1 2020. However, our BDC gross margin rate at 9% in Q4 was below the 11% we achieved in Q1 2020 pre-pandemic. Part of the reason for the lower Q4 BDC gross margin was our expansion to a second BDC office in St. John's, Newfoundland. We opened this office to help with managing our future anticipated BDC growth. Our dealership count at December 31, 2021, was 1,021 rooftops with 893 in Canada and 128 in the U.S. Our monthly reoccurring revenue per customer or MRRPU, expanded from $1,886 in Q4 2019 to $1,971 in Q4 2020. Our cross-selling available customer spend TAM is $5,000 per month per store, which is a 2.5x MRRPU cross-selling growth opportunity based on our current MRRPU of $1,971. And as Marilyn mentioned, I'd also like to reiterate that our adjusted EBITDA was the highest in the corporation's history for both Q4 and the full year 2020 at $1.5 million and $4.9 million, respectively. Next, I'd like to talk about our product development successes in 2020. Automotive dealerships are transforming their business, and we made several changes in 2020 to ensure that we could lead that transformation. Key to our product development in 2020 was the release of 2 new digital retailing tools, Power Lane and MyDeal. Power Lane is our mobile service lane inspection tool that allows dealership customers to have a touchless digital service experience. Early metrics show that Power Lane can help increase hours per work order by as high as 25%. MyDeal is our product that allows a dealership customer to buy a vehicle online. We are excited to have signed a recent agreement with EDealer, the largest supplier of franchise dealership websites in Canada, to sell MyDeal to their customers. In the last month, we have doubled our MyDeal sales, and we now have over 50 dealerships that have signed up for MyDeal. A few more key 2020 product releases include: one, the release of our menu product, which complements the best-in-class Autovance desking product. Accelerator dealerships that use the combination of desk and menu products are achieving gross profits of $500 more per vehicle, which equates to another 15% gross margin per vehicle. And two, Quorum also released a new advanced reporting and analysis tool for dealerships called Q Analytics. This tool has become our dealership-wide reporting tool for our entire product suite. We've continued our product development momentum from 2020 into 2021 with 2 key Microsoft announcements. The first announcement was for replatforming our data resources on Microsoft Azure to enable the future delivery of advanced analytics and artificial intelligence applications. To date, we have consolidated data from over 395 dealerships into Azure, which represents over 2 billion records. The second was the announcement that we will start deploying Accelerator dealerships on a new cloud offering on Microsoft Azure. Currently, we have 28 dealerships transition to the Microsoft Azure cloud. I'm proud to say that we continue to build and enhance our product suite to allow our dealerships to positively transform their business. Overall, 2020 was both a challenging year in a year of positive catalysts that enable us to improve our business. My biggest gratitude lies with our employees. Our employees are the driving force behind our strong 2020 results and their continued dedication and innovation also ensures that Quorum has a product suite and supporting services prepared for the future of automotive. I'd also like to thank our shareholders for the long-term interest in and support of Quorum as we continue to provide the automotive industry with modern solutions that will help dealerships positively transform their business going forward. Operator, I'd now like to open the conference to any questions from our audience.

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

I wanted to start out on the MyDeal side. Can you just provide -- obviously, it's been a key area of product development focus for you. Can you just provide us with a bit of an update on exactly where you're at and kind of which pieces are needed to fully fill in the full digital retailing experience?

Yes. Sure, Gavin. That's a broad question. You bet. So what we have in terms of MyDeal, the core elements are, of course, integration to dealers' websites. That's why the dealer announcement for us was a key one because we wanted to actually have a partner who really could seamlessly integrate MyDeal right into the website. And we've done that, and we're now sort of selling through that partner. Then MyDeal itself the key elements that it provides are the ability to get a price for a vehicle online based on the data that Autovance manages, so all the different programs, incentives, rates and residuals program. It allows for a trade valuation. It allows you to book a test drive on a vehicle as you book an appointment for your trade. Can then move in a number of other smaller things, but then moves you into an actual prospect for the dealership. And then from there, the dealership can sort of manage the end of the sales cycle. Some things that we still want to do within MyDeal is we would still like to take our menuing capability that we have in the Autovance menu product. So that's the F&I menuing capability and have that as part of the MyDeal functionality. We'd like to build in the ability to sell accessories within this. So those are a couple of sort of key pieces. Also note that we did recently announce the ability to book a -- or make a deposit for a consumer on a vehicle. So that's a new recent addition and something we wanted to add that just got added.

Okay. Great. You've certainly made some very good progress on that front. Maybe just on the EDealer announcement, can you kind of walk us through how you're thinking about that partnership? It sounds like you're already kind of selling. So have you completed kind of training of their salespeople? And how are they thinking about this as a growth opportunity for them?

Yes. So we have completed training and we've just started selling, right? And so there's still some work going on, some integration work. Some of it is completed and in pilot. There will be OEM work going on as we certify under different OEMs where EDealer have a relationship in place. So from their perspective, how do -- why are we are they excited? Well, they're getting pushed by their customers to have a digital retailing solution. So we were a fantastic option for them. One, due to the fact that MyDeal, I think, is a leader in the space out there from a product point of view, but, two, also just due to the fact that we wanted to partner and work with them. Hence, they've got that demand from their customers, one; two, they also have the ability to bundle, right? So they can bundle MyDeal with their particular product as needed and sell the collective pieces in this 1 bundled price, which is attractive to a number of dealerships as well.

Got it. You touched on something, which I was planning on asking and that's the ability to sell MyDeal into OEMs or dealerships with OEMs where you could have an Accelerator or integration. It sounds like they're kind of stand-alone products that where you wouldn't need that integration on the DMS side to sell MyDeal into a Honda or a Mazda. Is that -- am I thinking about that correctly, or?

You are thinking of that correctly. Yes. You do not need -- the dealership does not need to buy Accelerator. They can buy MyDeal. They could buy MyDeal from Autovance directly independently or through EDealer independently. Do know that when you buy MyDeal, you are also buying Autovance Desk at the same time. And the idea behind that is MyDeal is the digital retailing solution but Desk is the in-store solution, and they are fully integrated. So, hence, you never get a price online that is any different than the price you will get inside the store. And as you started transaction online and you move to in-store, the in-store staff, the dealership staff still have all the same data right in front of them. So they will never contradict every -- anything you've ever seen online. And I know that sounds like a basic piece that you would assume we should have. And of course, we do. But in the automotive space with other digital retailing solutions, we're seeing all kinds of reports of consumers getting one price online and a completely different price in the dealership because there's 2 different systems being used in the store.

[Operator Instructions] Our next question comes from Gabriel Leung from Beacon Securities.

A couple of things. First, maybe just to continue on the product development road map. I'm curious to hear about whether or not you're working on anything new as it relates to services. Some of the things we've seen in some dealerships are a couple of self-serve kiosks on the services side and curious if you guys are seeing anything or working or anything on that from that perspective.

Well, so Power Lane, like I didn't talk much about Power Lane's capabilities in the script that I went through. But it has the full capability to do mobile check-in, right? So you, as a consumer, show up at the dealership. You can mobile-ly check-in. Just leave your keys somewhere agreed to within the vehicle and then the shuttle could take you home or you could get a ride home. And then from there, Power Lane will sort of help the dealership through that whole -- through the whole process, right, of doing then a walk around on the vehicle, a full inspection by the technician than sends you, as the consumer, to your phone any possible repairs with a complete listing of how well the inspection went on your car with video and pictures for possible repairs allowing you to electronically sign off. And then from there, you can online digitally pay and complete the transaction. So Power Lane is -- has a lot of capability to it. It took us a while to build it out. And then it is, of course, fully integrated into the Accelerator DMS. So it ties right into Accelerator's quoting process and all of that particular flow as well.

Got you. So when I think about MyDeal, I'm curious to -- it sounds like you've had some good success already with the 50 dealership lined up to deploy. I'm curious with some of the discussions you've had, whether you've received any sort of pushback or if there -- if the dealership says no, what's typical reason for them to say so?

Yes. We haven't -- probably one of the biggest pushbacks we were getting was we didn't have deposit capability built-in to accept a deposit. So that's there now. We don't seem to be getting a lot of pushback. It's going great, right, so, so.

And, obviously, it sounds like this could be a meaningful contributor to your monthly recurring revenue ARPU, I guess, given the dollar figures amount involved with MyDeal, right?

Yes. We think of it from the perspective of not only -- yes, is it contributing to adding new customers and MRRPU? Keeping in mind that when you're buying it, you're buying MyDeal and Desk, as I mentioned before. So it's -- yes, it's a meaningful contributor. But also it's bringing brand-new customers to the Quorum family that we can then sell additional products to, additional fully integrated products to and keep adding value to that dealership.

Got you. Just shifting over to gross margins. I just want to talk about the BDC side for a second, down because of the expansion, as you mentioned. I'm curious to if you could just talk a little bit about the BDC pipeline. What your expectations are over the next couple of quarters in terms of being able to fill up that extra capacity?

Yes. So I think that this last quarter, Q4 for us was pretty indicative of run rates going forward for the BDC. I mean that was a fantastic growth quarter for us. Yes. We -- I mean, keep in mind, right, the DealerMine service CRM software helps with lead gen into the store, helps drive customers into the service line. Well, this is a time when dealerships need lead generation. I mean they need it at all points in time, but they especially need it right now. And for us to be able to then also provide BDC services on top of the software as we always sell the software first in the BDC services, are an option that they can buy on top is -- it's a very in-demand set of services right now. So hence, yes, we see continued growth. And then we've made some changes inside of Quorum, so we now have a new BDC Director. And this will sound strange, but we're not worried about the growth. We've got an active pipeline. We see lots of growth possibilities and that continued momentum going. What we're focused on right now for our BDC Director is gross margin, how do we move the needle on gross margin. The fellow who we brought in, the -- our new Director, has tons of call center experience, and he sees lots of opportunity to move the needle in gross margins.

Got you. Maybe one last question for me. Just as we think about top line growth over the next couple of quarters, what else -- I guess, what are the priorities that you have in place to help drive that growth? Is it going to be -- is it going to involve getting more OEM certifications? Is it going to be signing on more channel distribution partnerships, maybe more direct sales? How are you thinking about this over the course of the next 12 months?

Yes. So a few things. So number 1 is, I mean, we're always pursuing OEMs, and I think I've said in the past, I've talked about the fact that we are in some more detailed conversations that I can't disclose with a couple of different OEMs. So those are continuing to proceed along. So that's piece #1. Piece #2 is, I mean, we've obviously talked about the continued growth in the Canadian marketplace and the big U.S. opportunity. But an element for us just internally, that we are really working to fix that will help us grow in both the Canadian and the U.S. marketplace is our marketing team. We've had a change in marketing leadership recently. And we believe we now have a leader in the marketing group that will be very focused on lead generation for us. We need more leads at the top of our funnel. And so that is our key mission when it comes to the total marketing and sales engine within the organization is how do we do a better job of driving leads to the top of the funnel, whether they be Canadian leads in a market that we're already well recognized in or in terms of U.S. leads, which is a market that we have huge growth possibilities inside of. Additionally, from an added growth point of view is we're getting better at cross-selling, and we just continue to try and improve those particular processes and the training of our staff in that area so that we can improve the cross-sell. Big piece of that is we're laser-focused on getting ROIs across our whole product suite, very, very defendable ROIs across the whole suite that will help our cross-selling teams.

Got you. I appreciate the feedback and congrats on the progress.

Your next question comes from Gavin Fairweather from Cormark.

Yes. Just a couple of follow-ups for me. Can you talk about the Accelerator kind of backlog or pipeline? And obviously, you've done a lot of kind of the product development front and a lot of kind of focus on cross-selling those in, but do you have all of installs booked up for the core DMS?

Yes, Gavin, we have less than we'd like. So we're booked out right now until the end of June. I think, third week of June or so. We would like to be booked out further than that. Our ideal situation is sort of a 3 to 4 months window where we would have the full pipeline lined up and ready to go. So I go back to my comment about lead generation for us as an organization. In fact, not only are we focusing our marketing team on -- under a new leadership on lead gen, but we've actually also hired an outside firm to help us with additional lead gen. And so our pipeline, we can see our pipelines growing on the Accelerator side of things, but we need to get some of those deals to come out of the bottom of the pipeline.

I noticed you had a new website set up. So is it part of this just kind of increasing kind of SEO marketing, particularly in the U.S.?

Yes. So yes, we're going through all of our websites right now. We've launched new websites across the board. What we're finding, though -- so yes. So SEO is a piece of it, but we're also finding on our websites is we just are needing to make a bunch of improvements because we're driving traffic to our website, but we're not doing as good a job as we should in terms of a landing page for people that come to our website and then a call to action from that particular landing page. So, yes, there's improvements being made there as well.

Okay. And then just lastly for me. It looks like you lost a couple of rooftops in Q4. Can you just provide some color? Was that acquisition related? Or was it kind of ancillary product related? Just kind of a handful [indiscernible].

When you say it looks like we lost a couple of rooftops in Q4 based on...

I think you had 1,045 unique rooftops at the end of Q3, and that was, I think, 1,021 at...

Yes. Actually -- so what we did was we restated our rooftop counts for Q2, Q3 and Q4. And I apologize. We made a mistake. We were counting Autovance products sold, not unique customers. So we found the mistake, and we went back and restated. So if you look on our MD&A on Page 9, you'll see the actual rooftop counts that go across the year. And we also have a footnote on what the counts were and what the counts now -- the accurate counts now are.

Okay. My mistake then also for not reading the footnotes close enough. But better than losing customers, though. So...

That's correct. Yes. You got it. No problem.

There are no further questions at this time. I will turn the call back over to the presenters.

All right. Well, I really appreciate everybody's time today and interest -- continued interest in our story. And hopefully, you found today's conference good and hopefully, provide some great information. Thanks for joining us today. So, mike, you can end the conference now. Sorry?

This concludes today's conference call. Thank you for participating. You may now disconnect.