VIQ Solutions Inc. (NASDAQ:VQS) Q3 2022 Earnings Conference Call November 10, 2022 11:00 AM ET
Laura Kiernan – Head of Investor Relations
Sebastien Paré – Chief Executive Officer
Susan Sumner – President & Chief Operating Officer
Alexie Edwards – Chief Financial Officer
Conference Call Participants
Scott Buck – H.C. Wainwright
Marla Marin – Zacks
Good morning, ladies and gentlemen. My name is Brent, and I will be your conference operator today. Today, we are hosting a conference call to discuss the Third Quarter 2022 Financial Results for VIQ Solutions, Inc. At this time, all participants are in a listen-only mode. [Operator Instructions] Please limit yourself to one or two questions, so that others may have a chance to ask questions. You may reenter the queue.
Your host for today is Ms. Laura Kiernan, Head of Investor Relations for VIQ. Please, go ahead.
Thank you, Brent. Good morning, everyone, and welcome to the VIQ Solutions third quarter 2022 results conference call.
Before we begin, I would like to point out that certain statements made today contain forward-looking information, subject to known and unknown risks, uncertainties and other factors. For a complete discussion of the risks and uncertainties facing VIQ, we refer you to the company’s MD&A and other continuous disclosure filings, which are available on SEDAR at sedar.com and on SEC.gov. As a reminder, all dollar amounts are in US dollars, unless otherwise stated.
With us today, we have Sebastien Paré, CEO; Alexie Edwards, CFO; and Susan Sumner, President and Chief Operating Officer of VIQ, all of whom will be available for questions following the prepared remarks.
I will now turn the call over to Sebastien Paré to begin.
Thank you, Laura. Welcome, everyone, to our third quarter earnings call. I’ll provide some high-level remarks on our results and business plan. Then I’ll hand it over to Susan, who will discuss our operating results, will then be followed by Alexie, who will discuss our financial results. Then we’ll open up the call for your questions. We have structured this call to keep it short.
2022 has been a difficult year for capital markets and technology companies, in particular. Spiking inflation and interest rates across the globe have caused government agencies and companies to protect cash at all costs.
VIQ customers are moving away from large technology purchases to buying and engaging on a monthly basis over the course of a contract. As such, we are accelerating the transition of our organization and cost structure towards a subscription-based annual recurring revenue model.
Over time, we expect this will manifest in the financial results with higher revenue and overall margins and more consistent monthly and annual revenue. Additionally, we believe it will improve the lifetime value of our customers.
We all know the equity markets, especially the technology sector, are dislocated with valuations not matching intrinsic values of public companies. This is a macro factor that we are not in control of. What is our control is our own business model, how we go to market and our ability to manage and control cost as we integrate acquisition.
Focusing, generating annual recurring revenue, rightsizing our organization and aggressively reducing our cost structure, will allow us to return to profitability next year. We also expect that organic growth will overtake acquisitions as the main growth driver for revenue in 2023.
I will now pass the call over to Susan to discuss our operating results in greater details. Susan?
Thank you, Sebastian. Q3 progressed with many operational advancements that sets us up to recognize our year-to-date 2022 bookings revenue. A major Australian contract that we announced in the past began its three-phase integration plan to their new technology.
As expected, with any major implementation, challenges were encountered that impacted our overall production in Australia and temporarily negatively impacted gross margin. For the most part, we have completed that implementation and have onboarded many new resources that were hired as a result of the great resignation of Q2 and are now entering their full production phase.
Complex integration work was also completed in the US for our new sales that were recognized as bookings in Q2. As the industry increases its reliance on technology, the requirements for tighter integration and security protocols with major insurance and governmental agencies puts us in a very favorable position against our competitors.
Once implemented, the replacement of our solution is very challenging, providing a significant competitive advantage. This is evidenced in the renewal or extension of all the major contracts that were presented to us in 2022.
While 60% of our revenue comes from the top 10 customers, it is our ability to respond to the complexity of the technology, the data sovereignty and the security that has allowed us to continue to secure and grow this business year-over-year.
Our clients are adopting new technologies to automate their workflow, while our internal teams are creating best practices for implementations and training. While this certainly slowed our revenue attainment and our gross margin progression, it is critical in our ability to scale and support this new client experience. This transition has created a longer book-to-bill cycle when compared to the simple implementations of the past.
In the first three quarters of 2022, we sold $7.1 million of new bookings, of which only approximately 10% has been recognized up to September 30th, which means that approximately 90% of the year-to-date new bookings will commence flowing through the P&L in Q4 2022 and into 2023 and 2024.
As Seb mentioned, VIQ’s customers are seeking to partner with companies that provide alternative pricing models to eliminate upfront capital payments and instead allow for subscriptions over the course of a multi-year contract. We have seen a pivot in the industry from capital funding to operational funding, driven by the global economic situation. The result of this is an acceleration of our SaaS model.
As an example, a court that committed a $700,000 licensing sale to us in early 2022 lost capital funding for their major upgrade. Our ability to adapt and allow our distributor to sell an end-to-end SaaS solution solved the funding problem by transitioning from an upfront payment to a monthly four-year contract. This will result in improving the lifetime value of this customer by over 40%.
We are refining and redefining our approach through revenue models and delivery of our end-to-end solutions to align with market conditions to ensure growth and profitability. Over the course of the past year, we’ve put into place a number of KPIs to assess the growth of our business and the effectiveness of our operational strategies. We are making great progress in many areas and I would like to highlight a few.
In the fourth quarter of 2021, we started tracking active clients and client retention. This quarter we saw an increase of 20% sequentially from 3,455 active clients in Q2 to 4,155 clients in Q3. The retention and expansion of our relationship with existing clients are key indicators of our revenue potential.
We are also seeing confirmation that our revenue and productivity levels are increasing through the total number of minutes of content processed on aiAssist. This metric increased approximately 27% from 1.3 million in Q3 2021 to 1.6 million in Q3 2022, as a result of the migrations that have taken place during the quarter and the additional use of the platform by technology customers purchasing on subscription solutions.
The improvement in this metric would not be possible without our global network of approximately 1,500 active editors. They support our ability and deliver on our increased volumes that result in improved and profitable ARR in 2023 and 2024.
We announced several major initiatives that will greatly impact our approach to our segments and to the regions. In July, we announced the purchase of Carbon. This technology was thought to be specifically focused on delivering near real-time content attached to video for media applications.
We have already seen significant growth in this platform from our media customers, and market feedback has shown promise for a much broader application with our law enforcement customers. Mobile audio and video capture within interview rooms or while on-site, creates a new output that enables the video to create a more usable and accurate document.
In October, we announced the strategic partnership with ORdigiNAL, headquartered in the Netherlands. One of the largest Nuance, now a Microsoft company, distributors. Nuance recently announced the sunsetting of one of their workflow technologies. Our partnership with ORdigiNAL provides the perfect collaboration for VIQ to fill the gap in workflow technologies to produce the documentation required for legal — for the legal and transcription industry.
The relationship with ORdigiNAL provides access to approximately 1,200 distribution resources that profoundly changes the trajectory of our global expansion, particularly in EMEA. As we look to Q4, we will complete the migrations of our TTA acquisition and begin the migration of our entire AU enterprise and launch our technologies to the ORdigiNAL partners.
That, along with the onboarding of new customers that have been preparing to go live, sets VIQ up for a very busy quarter and positions us well to accelerate the SaaS and services model that represents the new focus and direction for VIQ.
We are focusing on positioning the company for success by deepening our customer relationships, maximizing the value of our integrated technology and doing it efficiently, as we begin to consolidate the post-acquisition infrastructure to aggressively reduce our overall cost.
I will now pass the call over to Alexie to discuss our financial results in greater detail.
Thank you, Susan. Good morning, good afternoon, and good evening to everyone. I’m going to keep this shorter than we have historically done since the numbers are all in the press release.
In Q3, we reported revenue of $11.8 million this quarter as compared to $7.1 million last year. The increase of approximately $4.7 million or 66% was driven by the acquisitions of Auscript in Australia and TTA in the UK and was partially offset by a negative foreign currency impacts of approximately $0.2 million on revenue outside of the US, due to the appreciation of the US dollar.
Our gross margin, excluding COVID wage subsidies, increased point 0.7%, driven by strong productivity gains. It was 47.3% of revenue, compared to 46.6% of revenue last year. Our adjusted EBITDA was negative $0.6 million versus adjusted EBITDA of negative $3.1 million in the third quarter of 2021.
The prior year period included one-time expenses related to professional fees and M&A activity. We have revised our full-year 2022 goals to be the range of $46 million to $47 million in revenue and negative adjusted EBITDA to be in the range of $2.3 million to $2.8 million.
Our gross margin goal has been tightened and is expected to be in the range of 48% to 51% for the full year. We revise our goals for the year for several reasons, including one, the negative impact of foreign exchange rates; two, the timing of execution of new contracts and a ramp-up of new bookings and ongoing labor shortage constraints in some regions that impacted production capacity during the third quarter.
In addition to our acceleration to annual recurring revenue model, we are currently focused on integration of the Australia businesses, as well as rightsizing our cost base to enable us to move closer to positive adjusted EBITDA in 2023. Additionally, we are ramping up our tech-enabled services capacity to recognize revenue for the sizable new bookings we want this year.
Much like the Adobe and Nuance transition from a license to subscription-based models, it is vital that we align our model to the changing needs of our customers. We’re seeing a transformational shift from this traditional on-premise software license model to governmental entities, to a SaaS model that results in longer term relationship with the customer.
These are the actions we are taking to reposition VIQ to rapidly respond to changing market conditions and customer needs. When worldwide capital markets improve in 2023 and beyond, VIQ will be in a position for profitable growth.
Now, I would like to hand it over to the operator for a Q&A session.
[Operator instructions] Your first question is from the line of Brian Kinstlinger with Alliance Global Partners. Your line is open. Mr. Kinstlinger, your line is open.
Hello? Can you hear me?
Hi, Brian. Yes.
Hi there. This is Shervin [ph] on for Brian. Thank you for taking my questions.
Revenue declined $600,000 sequentially and based on your outlook, it’s expected to drop another between $400,000 and $1.4 million sequentially. During the third quarter, did certain work or volume go away? Otherwise, can you explain the sequential drop in revenue and anticipated drop in the fourth quarter? Thanks.
Thank you for your question. There are a couple of factors. The activation of new customer contracts were delayed. That’s one of the reasons. Also, if you look at the change from Q2 to Q3, it was impacted by foreign exchange of about $300,000. So those are the two main factors of why the revenue decline.
Okay. Thank you. Next question. So what is the impact of these challenges related to Queensland and the unfavorable challenges of foreign exchange in 2023, both from a margin and revenue perspective? Are we building off of these new lows in the fourth quarter, or will your revenue and margin profile move closer to where you originally thought you would be once Queensland contracts challenges were behind you? And if so, when do you expect that will occur?
So the heavy load of the migration from Queensland took place in Q3, and we believe that we will get back to the margin expectations in Q4. We go into Q1 as the most challenging in terms of margin attainment, because of the shutdown of the courts, which is standard every year in January. But we believe that as we begin the migration and the consolidation to the NetScribe and aiAssist technologies that that will allow the hockey stick that will accelerate, particularly in Australia as we exit Q1 and get into Q2.
So the Queensland revenue is normalizing relative to margin, and we expect that that will be fully standardized by follow-up of the January shutdowns of the courts in — as we enter February.
Okay. Thank you. And one last quick question. In the press release, you guys said you have booked over $7 million of revenue, but only converted 10% of that. What is the challenge? Well, what is — what was the challenge to converting bookings revenue and what can you do to accelerate this conversion?
Yes, so it was — it was — it was basically related to…
Go ahead, I’m sorry.
…when the new bookings are coming in, there’s a first phase related to securing the cybersecurity linkages between the customers’ repository and our technology. So that’s a big part of what’s going on in terms of the activations. And then from there, there’s basically a ramping up phase with each of the clients.
So we’ve kind of picked up on that now, because in the last couple of quarters, particularly kind of late Q2, early Q3, a lot of those resources were diverted to deal with a lot of the production capacity challenges that were caused directly from some of the great resignation that we’ve documented quite well in our MD&A.
So it’s a combination of those things. But so far, the $7.1 million this year is a record for us. And that’s what I made a comment that, you know, we’re starting to see that organic growth coming out of a really neutral, and even the first year of COVID, negative, now we’re really starting to really pick up quite a bit of the organic growth, which is a testimony to the strength of what we’ve been doing from a technology perspective.
Our challenge for the last couple of months were all related to the capacity to move that backlog, but we’re picking up on that. At least 10% got recognized by the time we filed Q3. And then we’re basically aggressively ramping up across all those customers. That’s what we basically made a reference to, basically, all of this is going to start hitting the recognized revenue P&L in the fourth quarter, but really mostly throughout the 2023, 2024.
So that was a critical piece for us, because we came out from two very strong years of M&A and we were fully aware that during that time, during COVID, organic was quite neutral. And now obviously we’ve reversed the trend, and I think it’s a positive thing going into 2023.
Yes. That’s good to hear. Thank you so much. That’s all I had.
Your next question comes from the line of Scott Buck with H.C. Wainwright. Your line is open.
Hi. Good morning, guys. Could you tell me what ARR or true SaaS revenue is today as a percentage of total revenue, and maybe what the expectation is for ending 2023 and ending 2024?
Yes. Thank you, Scott. Our ARR is oscillates [ph] about between 85% to 90%, it oscillates between 85% to 90% on a quarterly basis. We expect that number to increase going forward. As we mentioned in our previous statements, we’re seeing on a lot of changes from especially governmental entities where everyone is pivoting now to a SaaS model. So we expect that 85% to 90% to increase going forward.
Okay. Can you give a little bit more color around maybe what you can do on the OpEx side to bring those kind of costs in line, I guess, and help drive that profitability maybe sooner rather than later?
Yes, so what we — what we’re doing, Scott, is I think we’ve kind of built in a bit of a blueprint within the organization. I just want to be very clear. It’s all tied back to the productivity gains. So whether or not it’s the old days versus an asset that was acquired, there’s a migration to the platform, then there’s a transition of that FirstDraft to come in as the main part of the workflow to allow the editors.
So once those productivities have been kind of reached and confirmed, like we saw what’s happening in the US, then what we do is we basically go into an internal rightsizing of that region and then we align the OpEx and the COGS accordingly. When it’s all in the context of the productivity gains, the gross margin improvement for the region, and the vertical, and once that’s done, then we proceed to streamline OpEx and COGS.
For example, earlier this year, there was about a $2.5 million OpEx/COGS reduction that came in on the back of all the work that went on last year in the United States related to all the heavy lifting of the migrations. So now the United States is in good shape, it’s kind of leading the regions in terms of gross margin. Now, we need to replicate the same story in the UK. And that’s what Susan made a very strong reference. So, right now, all hands on deck to make sure that the UK is undergoing the same kind of migrations and they’re almost there.
What’s going to happen is there’s going to be a streamlining of the OpEx and COGS in the UK region based on the productivity post migration into the AI technology. And obviously, the big lift, which represents almost 50% of our revenue, is we’re also starting the migration of the entire Australia enterprise on bringing in FirstDraft and converting all that revenue into a much higher level of profitability moving forward. But it basically starts with those migrations. Productivity gains are improving, and then we go forward behind it once stability has been reached, customers have been retained, and then we go ahead and proceed.
So we have that plan. That’s what we made reference today on rightsizing, because we have been chipping away at rightsizing the OpEx and the COGS all along. But I think the heavy lifting now is line of sight, because the UK is almost done and then the Australia is going to go through the same process.
Okay, that’s helpful, Sebastian. And last one for me. Should these headwinds continue into 2023? How are you guys feeling about your cash position and what’s the likelihood that you guys will have to come back to the market at some point?
Scott, thank you for your question again. You know, it goes back to what Sebastian just said just now. We have taken a look at the organizational cost base. We have looked at the revenue stream. We have looked — we’re aligning the cost base, and we believe that we’re — the steps we have taken or will continue to take will provide enough liquidity in the business to operate the business in the foreseeable future. At this point, there is no intention and/or plan to go to the market to raise any capital at this point in time. We believe that our plan once executed would provide — generate enough cash to operate the business.
Okay, great. Appreciate the time, guys. Thank you.
Thank you, Scott.
Your next question is from the line of Marla Marin with Zacks. Your line is open.
Thank you. So switching topics to some of the operational issues that you discussed in your prepared remarks, some of the challenges that you encountered in initially implementing the Australia contract, are there any takeaways that you can derive from those challenges that can help you in terms of going forward and integrating other large contracts?
Sebastien, you want me to take that? Sebastien, you want me to take that?
Hello, Marla. Thanks for the question, and I think it’s a great question because Q3 has been rather brutal in the impact of taking this customer on. It was a very long process to get to this point. As I explained, there were three phases to the contract. They have completely changed the way the technology is deployed from the original contract that starts with the Auscript acquisition. It has been very resource-draining on the entire Australian operation to be able to get into what I would call a mainstreamed production level where we are able to get to standard operating metrics within that account. And it has actually slowed down a lot of the onboarding. Some of the bigger customers like the Victoria Courts that we expected to ramp much more quickly because of the drain of this acquisition — of this customer.
What learnings have we had from this? A lot, but I’m not sure that they were avoidable. I think what we had in Australia in Q3 was just the perfect storm. We were coming off of the Q2 labor shortages, so we had a large percentage of our production team that were new. They had not been security cleared, they had not been trained to the point where they had achieved efficiency gains and then they were thrown right into this new contract environment.
So we’re seeing a much more stable Q4. We’re happy to be past the ugly phase of the onboarding of that contract and ready to get Australia back to a more normalized environment, which is why we feel very committed to the timeliness of the migrations and also to the integration of the consolidation of the organization.
What we’re seeing in the United States, we had also complex implementations here that what I would say are more normal to what we’re going to see, customers that had requests for SSO applications, which we had to go in and develop. I think the foundations that were established will allow for an accelerated onboarding, but everybody is coming out of COVID with new resources, newly trained resources and new requirements that are coming out of customer agreements that we’ve adapted to. And I think it has made us a much stronger company and we’re pretty excited about the position that it leaves us to accelerate the new onboarding processes that we’ve developed.
And in terms of your team right now, how do you feel about where your team is in terms of expertise? And, you know, having developed training for the time that some of the new people onboard, do you feel that you’re adequately staffed at this point to continue to address some of these issues going forward?
I do. I think we’re in a great position. I think that we took the learnings from the United States and created a global organization that is now helping to manage these onboarding waves. So they’ve, kind of, finished the stuff that’s going on in the United States. They’re moving into the UK right now. They will begin to accelerate in Australia as we hit December and much more aggressively in the beginning of the first half of 2023.
They — the team that we have has adopted and embraced the technology. And it required adjustment for localization, which is why Australia has taken a little longer than I think we originally wanted. But we’re there and the teams are all ready and we — again, the access to global resourcing to support all of these implementations and migrations is really the essential element that allows us to move from one geography to the next.
Yes, if I could add, Marla to this, I mentioned that earlier on one of the questions, but behind every one of those migrations, there’s a strong handshake with every one of those customers on the cybersecurity. And in the space there we’re in, which is really dealing with a lot of highly confidential material, you can appreciate that that is a really key component. And I’m very, very proud that we’ve been able to get not only the ISO certification lately, but we’ve also been able to keep up all our cybersecurity compliance.
And it’s a testimony that we are building that technology team behind the operations to undertake a significant amount of volumes now flowing to the platform. And, I think, behind the scene, that team has gone out of its way, particularly with the $7.1 million of new bookings coming in, plus the existing migrations that we’re working with, that we are gaining some speed. The instances in the Cloud have all been fully operational in all of the regions, and all of that is working really well at the moment.
Okay. Thank you very much.
There are no further questions at this time. I would like to turn the conference back over to Sebastien Paré for closing remarks.
Well, I would like to thank everyone for joining our call today. Please make sure to follow up with Laura Kiernan, if there’s any outstanding questions you might have. And we all look forward to speaking with you in the spring of next year. Thank you.
Ladies and gentlemen, thank you for participating. This concludes today’s conference call. You may now disconnect.