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

Good day, and thank you for standing by. Welcome to the Quorum Information Technologies Second Quarter 2025 Results. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to your speaker today, Maury Marks, President and CEO. Please go ahead.

Thank you, Victor. Hello everybody, and thank you for attending Quorum Information Technologies' Q2 2025 results conference call and concurrent webcast. Joining me is our Chief Financial Officer, Marilyn Bown. Quorum offers innovative and robust technology solutions and services to vehicle dealerships and original equipment manufacturers, or OEMs, across North America. With a uniquely integrated product suite of 13 essential software solutions that are used in whole or in part by over 1,400 dealership customers across North America, there is at least 1 Quorum software solution installed in 40% of the franchise automotive dealerships in Canada. Offering 13 of the 25 most common categories of software solutions that automotive dealerships utilize, Quorum is well positioned to develop, partner or acquire software solutions for the remaining 12 categories. Looking to our Q2 2025 results, Quorum delivered a 3% increase in reocurring revenue, driven by a 1% increase in SaaS revenue and 11% increase in BDC revenue. This 11% growth in BDC revenue reflects strong demand for our Service CRM and BDC offerings, particularly from new dealership customers. I am also happy to report that our adjusted EBITDA in Q2 2025 increased to $1.8 million or 18% of revenue, from $1.5 million or 15% of revenue in Q1 2025. This was a result of the adjusted EBITDA improvement plan that we implemented in Q1 2025. Our adjusted EBITDA of $1.8 million in Q2 2025 was also comparable to Q2 2024's $2 million when accounting for the $0.2 million in software development costs that we chose to more conservatively expense versus capitalize this year. Comparatively, our cash EBITDA in Q2 2025 was $1.4 million versus $1.3 million in Q2 2024. The improvements in our adjusted EBITDA allowed us to pay down the full $0.9 million of our cash flow loan balance in Q2 2025, and that portion of the BDC capital loan is now fully repaid. Strengthening our balance sheet has been a key focus as we have reduced the BDC capital loan balance from $9.1 million at the end of 2023 to $2.8 million at the end of Q2 2025. We have also optimized our lease space in Q2 2025 by canceling a lease for our new space in St. John's, New Brunswick and by reallocating to a smaller office in Q3 2025 in St. John's, Newfoundland and Labrador. On our balance sheet, our lease asset decreased from $1.4 million at the end of Q4 2024 to $0.5 million at the end of Q2 2025, while lease liabilities declined from $1.6 million to $0.4 million, reflecting our office space optimization efforts. At the end of Q2 2025, Quorum had $3.6 million in cash and cash equivalents and $4.2 million in net working capital. Marilyn will now review our Q2 2025 financial results in more detail, and I will follow up with some additional comments. After our prepared remarks, we will open the floor to your questions. Marilyn, please go ahead.

Thank you, Maury, and good day, everybody. Thank you for being here with us today. I would like to remind everyone that certain statements in the presentation are forward-looking in nature. These include statements involving known and unknown risks, 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 is not assuming 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, please refer to our annual MD&A dated December 31, 2024 on the sedarplus.ca website. As Maury mentioned, in Q2 2025, Quorum also expanded its top line revenue year-over-year, significantly improved its adjusted EBITDA and cash EBITDA quarter-over-quarter, and paid out the remaining balance of the cash flow loan portion of our BDC capital loan facility. Year-over-year, the second quarter of 2025, as compared to the second quarter of 2024, saw total revenue increase by 3% to $10.3 million, SaaS revenue increase by 1% to $7.3 million, BDC revenue increase by 11% to $2.7 million due to new customer revenue. SaaS gross margin decreased to 65% from 67%, primarily due to an increase in third-party costs. BDC gross margin remained consistent at 20% as Quorum continues to work on multiple initiatives to reduce the BDC cost structure. Looking to quarter-over-quarter gross margin improvement, our BDC gross margin returned to 20% in Q2 2025, compared to 15% in Q1 2025, as we implemented our adjusted EBITDA improvement plan. Overall, gross margin increased to $5 million or 49% of revenue in Q2 2025 compared to $4.9 million or 50% in Q2 2024. Adjusted EBITDA decreased by 7% to $1.8 million or an 18% margin, compared to $2 million or a 20% margin year-over-year, primarily because we expensed $0.2 million more software development costs in Q2 2025 versus Q2 2024, as Maury mentioned. Our adjusted EBITDA in Q2 2025 increased to $1.8 million or 18% of revenue from $1.5 million or 15% of revenue in Q1 2025. This was a result of the adjusted EBITDA improvement plan we implemented in Q1 2025, and Maury will talk about that later in the call. Comparatively, our cash EBITDA in Q2 2025 was $1.4 million versus $1.3 million in Q2 2024. In Q2 2025, Quorum prepaid $0.8 million in principal and interest on the cash flow loan portion of our BDC capital loan facility, which now has been fully repaid 6 months earlier than originally anticipated, and with the remaining mezzanine loan portion of the BDC capital loan facility standing at $2.8 million. As mentioned in our past few earnings calls, Quorum will continue to prepay 15% of the BDC capital mezzanine loan balance of $2.8 million as of June 30, 2025 on an annual basis until maturity in August 2027. Note that paying more than 15% on an annual basis would result in significant penalties to Quorum. As of June 30, 2025, Quorum had net working capital of $4.2 million, cash and cash equivalents of $3.6 million, and total debt to cash EBITDA of 0.8x compared to 2x at June 30, 2024. With that, I'd like to pass it back to Maury.

Thank you, Marilyn. As mentioned, our adjusted EBITDA in Q2 2025 increased to $1.8 million or 18% of revenue from $1.5 million or 15% of revenue in Q1 2025. This was the result of our adjusted EBITDA improvement plan we implemented in Q1 2025. The key elements of this plan were the following initiatives: Number one, office lease cost savings from significantly reducing our lease space, which reduced the related lease asset and liability on our balance sheet; number two, third-party cost savings, including a change in benefit plan providers that resulted in significant savings; number three, and most critically, BDC gross margin improvements, which allowed us to return to a 20% gross margin in Q2 2025 after posting a 15% BDC gross margin in Q1 2025. We deployed new technology, including AI tools, to allow our BDC agents to be more effective and efficient at booking dealership customers' service appointments. And we deployed these changes at a time when we also implemented new dealership customers in our BDC and related Service CRM software. With a stronger balance sheet and improved profitability, Quorum is well positioned to evaluate a range of capital allocation strategies that support long-term shareholder value. As I've mentioned on past earnings calls, Quorum has multiple diverse capital allocation options, including, one, investing in organic sales growth, including strategic product investments to pursue new dealerships in Canada and/or the U.S. market; number two, pursuing inorganic growth through accretive acquisitions that enhance our product suite and provide opportunities to improve our organic growth; number three, allocating capital to initiatives such as a normal course issuer bid to repurchase shares or the payment of dividends. That said, the automotive tariffs introduced by both the U.S. and Canadian governments continue to create uncertainty around future capital allocation decisions. The tariffs are currently impacting some import dealerships' vehicle inventories and will impact vehicle sales from most dealerships on both sides of the border. Dealerships and OEMs will face challenges in raising prices, potentially losing market share and/or experiencing contracted gross margins. While these headwinds may impact dealership operations, Quorum's diversified product suite and deep experience in fixed operations enable us to support our customers through these challenges. Despite the uncertainty, we are starting to make additional product investments with our new user interface and user experience, our UI/UX project, for our DMS product. We're working closely with our dealership partners to co-design these enhancements, ensuring the new UI/UX delivers meaningful improvements to their daily workflows. I would like to conclude by sincerely expressing my appreciation to our employees. Their commitment to Quorum is crucial to achieving our 2025 plan. The hard work of our employees is enhanced by our integrated suite of 13 essential software solutions and services. This product suite is fundamental to our profitable growth strategy as it facilitates product cross-selling and plays a vital role in driving the success of our dealerships, thereby increasing value for both Quorum and its customers. Operator, I'd now like to open this conference call to any questions from our audience.

[Operator Instructions] Our first question will come from the line of Gavin Fairweather from Cormark.

Maybe just to start on the macro and to dig a little bit deeper, I mean I'm curious for the conversations that you're having with clients, how is it going? What are the priorities that they have? What opportunities is that presenting for Quorum? And then, are you also a little bit worried about kind of churn and financial difficulties in the base? Maybe just expand on that, that would be helpful.

Yes, sure. So Gavin, I think based on our conversations with the dealerships, I think the first half of the year was a relatively strong year for them, right, in that they were selling a lot of, what I will call, pull-ahead purchases because consumers were rushing to buy before the anticipated tariffs or they had inventory that didn't have tariffs on top of them. And so I think first half of the year was quite comfortable, quite solid for them. I think what people are looking at is in the second half of the year, especially import dealerships out there, are -- there's just certain vehicle brands that they just can't -- for certain makes, they just -- they can't get because the OEM has decided not to -- they might be manufactured in the U.S., and they don't want to ship them to Canada because there'll be a tariff or vice versa or whatever the case may be. So I think people are just a little more cautious going into the second half of the year. But also keep in mind, right, with all our dealerships, and we've talked about this in the past, but with all our dealerships, their fixed operations business, their service and parts business is sort of the anchor to their dealership. That's a very consistent business for them. Regardless of what happens in new vehicles -- the new vehicle sales side of things, it -- for some dealerships, that business covers their entire cost of the dealership. And so anything that that leadership makes on the new vehicle side of things is [ extra ] profit on top of that. And that's a very consistent business for dealerships. Also keep in mind that used vehicle inventory is -- the used vehicle market is good. Like, sales are up, prices are up slightly on the used vehicle side of things. So franchise dealerships also have used vehicles that they can go ahead and sell. So thinking, looking forward, we're not worried about our dealerships. They always get a bit concerned, and rightfully so, when new vehicle sales decline for them. But our dealerships are creative. They're going to come up with ways to improve the fixed operations business, the used vehicle business. And so yes, we're confident that they're going to be very creative, and we're going to help them wherever we possibly can.

Yes. That's a good kind of lead-in to my second question. I mean the script referenced dealer demand both on the services side, but also the CRM software side. So is that an area where you do see increased opportunity to help the dealerships over the back half of the year? And do you think that that demand will be maintained?

Yes, we do. We think -- yes, we're -- we believe that demand will be maintained. And right now, right, we're seeing that demand. We're also -- just sort of a side note on the BDC business and the related Service CRM software, which is now enhanced with AI tools in it, and our whole offering is enhanced with new software that we've put in place to really improve efficiency across that group. What we're also seeing in that group is we're seeing just a real improvement in effectiveness. For instance, our error rate on service appointments has gone down significantly for that particular business, which just means that the dealerships can have a lot more confidence in our ability to look after them on that side of the business. So I don't like to make a lot of forward-looking statements in this particular call, but I'm fairly bullish on where we're going on the BDC side of our business. I'm excited about some of the new AI improvements that we'll bring into that business. And yes, no, I think it has an exciting future for us.

And then maybe on BDC gross margins, it's nice to see the snapback there to 20%, which is the highest that we've seen in a little while, and you referenced some of the efficiency gains that you've made to help profitability there. And I know the gross margins on this line can bounce around a little bit. So would you say 20% is at the higher end of the range? Do you see further efficiency gains that you can make? Maybe just help us out on that one.

Yes, we're always looking for further efficiency gains. So without a doubt, we're going to be looking for further efficiency gains on the BDC side of the business. Some of those are going to be AI-driven. Yes. And over the next probably 2 to 3 years, we're going to see likely a number of exciting AI improvements that will help our BDC business and its related gross margins.

Okay. That's interesting. It doesn't sound like you're willing to put a BDC gross margin target out there over the next couple of years? I have to ask.

Yes. No, sorry. I'm not putting a BDC gross margin target out there for you. You'll just have to wait until our results come out, and we'll just keep moving the needle.

Yes. Okay. Sounds good. And then on M&A, I mean, certainly a fluid macro environment, and you talked about how that might be kind of influencing your thinking around capital allocation around M&A. But the balance sheet is also in great shape, and maybe the valuations might be a little bit more attractive. So what would it take for you to be active on M&A, given the current backdrop?

Yes. No, great question. Yes, I think we're getting to the point where we're wanting to get more active on M&A. We have seen a number of U.S. opportunities over the last couple of quarters, but are hesitant to pursue those U.S. opportunities. Not that we haven't pursued a couple of them, they were just so attractive, but they're tough ones for us to make in the existing climate. So we'll continue to look at Canadian opportunities as well. But yes, I think, over time, you'll see us ramp up our M&A activity. There seems to be a lot of opportunities in the marketplace, so...

Okay. Congrats on the nice bounce-back in results.

Yes. I appreciate it.

Thank you. I'm not showing any further questions in the queue at this moment. I would now like to turn it back over to Maury for closing remarks.

All right. Well, thanks, everybody, for joining us today and your continued support of Quorum. And we look forward to talking to you again in -- after the end of Q3. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.