VIQ Solutions Inc. (NASDAQ:VQS) Third Quarter 2022 Results Conference Call November 10, 2022 11:00 AMm. ET
Participating companies
Laura Kiernan – Director of Investor Relations
Sébastien Paré – President and CEO
Susan Sumner – President and Chief Operating Officer
Alexie Edwards – Chief Financial Officer
Conference Call Participants
Scott Buck – HC Wainwright
Marla Marin – Zacks
Operator
Good morning, girls and gentlemen. My call is Brent and I will be your convention operator today. Today, we are a convention call to discuss VIQ Solutions, Inc. ‘s third quarter 2022 monetary results. Currently, all participants are in listen-only mode. [Operator Instructions] Limit yourself to one or two questions, so others may have a chance to ask questions. You can re-enter the queue.
Your host is Ms. Laura Kiernan, VIQ Investor Relations Manager. Go ahead.
Laura Kiernan
Thank you, Brent. Hello, welcome to VIQ Solutions’ Q2 2022 earnings conference call.
Before we begin, I wish to emphasize that certain statements made today involve forward-looking information, subject matter of known and unknown dangers, uncertainties, and other factors. For a full discussion of the dangers and uncertainties facing VIQ, we refer you to the Company’s Management Discussion and Analysis and other ongoing disclosure documents, found on SEDAR in sedar. com and SEC. gov. As a reminder, all dollar amounts are in U. S. dollars, unless otherwise stated.
With us today, we have Sébastien Paré, CEO; Alexie Edwards, Chief Financial Officer; and Susan Sumner, president and chief operating officer of VIQ, who will be available to answer questions after ready comments.
I now pass the floor to Sébastien Paré to begin.
Sébastien Paré
Welcome to our third quarter effects convention call. I will make some high-level comments about our effects and business plan. Next, I’ll give the floor to Susan, who will talk about our operating effects, followed by Alexie, who will talk about our monetary effects. We will then open the call for your questions. We have structured this call to be brief.
2022 has been a challenging year for capital markets and technology companies in particular. Inflation and rising interest rates around the world have driven government agencies and businesses to their liquidity at all costs.
VIQ consumers move away from giant generation purchases to purchase and dedicate monthly over the course of a contract. As a result, we are accelerating the transition of our organization and fee design to a subscription-based recurring annual earnings model.
Over time, we expect this to manifest itself in monetary effects with higher overall revenues and margins and more consistent monthly and annual revenue. In addition, we will adorn the lifetime price of our customers.
We all know that inventory markets, especially the generation sector, are dislocated with valuations that do not fit the intrinsic values of public companies. This is a macro thing that we don’t have an Array about. What we have is our own business model, how we move to market, and our ability to manage and pricing as we integrate acquisition.
Focusing, generating recurring annual profits, resizing our organization and aggressively cutting our job structure will allow us to return to profitability next year. We also expect biological expansion to overtake acquisitions as the main driving force of profit expansion in 2023.
Now I’ll pass the call to Susan to talk about our operational effects in more detail. Suzanne?
Susana Sumner
The third quarter has progressed with many operational advances that allow us to recognize our booking revenue from early 2022. A first Australian contract we have announced in the future has introduced its three-phase integration plan with its new technology. .
Unsurprisingly, with any primary implementation, we encountered demanding situations that affected our overall production in Australia and negatively impacted gross margin. For the most part, we have completed this implementation and have added many new resources that were hired after the big second-quarter resignation. And now they are entering their full production phase.
Complex integration tables were also performed in the USA. For our new sales, which were identified as bookings in the current quarter. Since the industry is technology-based, the stricter integration and security protocol needs with primary insurance corporations and government agencies put us in a very favorable position compared to our competitors.
Once implemented, replacing our is very difficult and offers a significant competitive advantage. This is evidenced through the renewal or extension of all major contracts presented to us in 2022.
While 60% of our profits come from the 10 most sensible customers, it is our ability to cope with generation complexity, knowledge sovereignty and security that has allowed us to continue to protect and grow this business year after year.
Our consumers adopt new technologies to automate their workflow, while our internal groups create the most productive practices for implementations and training. While this has held back our profit realization and gross margin growth, it is critical to our ability to evolve and this new visitor experience. This transition has created a longer billing booking cycle compared to undeniable implementations of the past.
In the first 3 quarters of 2022, we sold $7. 1 million in new bookings, of which only about 10% were booked through September 30, and about 90% of new bookings from the beginning of the year will start through P.
As Seb mentioned, VIQ customers are looking for spouses with corporations that offer select pricing models to eliminate anticipated capital bills and instead allow subscriptions on a multi-year contract. We have noticed a shift in the industry from equity to operating financing, driven through the global economic situation. The result is an acceleration of our SaaS model.
For example, a court that initiated a $700,000 license sale to us in early 2022 lost the capital investment for its major upgrade. Our ability to scale and allow our distributor to sell a comprehensive SaaS solution solved the investment challenge by moving from prepayment to a four-year-per-month contract. This will result in an improvement in the price of living of this visitor of more than 40%.
We are refining and redefining our technique through profit models and delivering end-to-end solutions to align with market situations for expansion and profitability. Over the past year, we have implemented a number of key functionality signals to evaluate the expansion of our business and the effectiveness of our operating strategies. We are making wonderful progress in many areas, and I would like to highlight some of them.
In the fourth quarter of 2021, we began tracking active consumers and visitor retention. This quarter, we saw a sequential increase of 20% from 3455 active consumers in the second quarter to 4155 consumers in the third quarter. Retaining and expanding our appointments with existing consumers are key signs of our earning potential.
We are also seeing confirmation that our profit and productivity levels are increasing thanks to the total number of minutes of content processed in aiAssist. This metric increased approximately 27%, from 1. 3 million in the third quarter of 2021 to 1. 6 million in the third quarter of 2022, due to migrations that took position in the quarter and increased use of the platform through the generation of consumers purchasing subscription solutions.
Improving this metric would not be imaginable without our global network of approximately 1500 active publishers. They help our capacity and deliver our highest volumes, resulting in improved and cost-effective ARR in 2023 and 2024.
We have announced several major projects that will have a significant impact on our technique for our segments and regions. In July, we announced the acquisition of Carbon. This generation was designed to focus specifically on the near real-time delivery of video attachments for multimedia applications.
We have already noticed significant expansion on this platform by our media clients, and market feedback has shown promise for much broader application with our law enforcement clients. More usable and accurate document.
In October, we announced the strategic partnership with Netherlands-based ORdigiNAL. One of Nuance’s largest distributors, now a Microsoft company. Nuance recently announced the phase-out of one of its workflow technologies. Our partnership with ORdigiNAL provides seamless collaboration for VIQ to fill the gap in workflow technologies to produce the required documentation for the legal and transcription industry.
ORdigiNAL dating provides approximately 1200 distribution resources that are profoundly changing the trajectory of our global expansion, specifically in EMEA. As we look ahead to the fourth quarter, we will complete migrations from our TTA acquisition and begin migrating our entire AU business and launching our technologies to ORdigiNAL partners.
This, along with onboarding new consumers as they prepare to get started, prepares VIQ for a busy quarter and positions us well to drive SaaS and the style that VIQ’s new direction and direction represents.
Our goal is to position the business for good fortune through deepening our relationships with our customers, maximizing the price of our incorporated generation and doing so effectively, as we begin to aggressively consolidate post-acquisition infrastructure at our overall cost.
Now I’ll pass the call to Alexie to talk about our currency effects in more detail.
Alexia?
Alexie Edwards
Thank you, Suzanne. Good morning, good afternoon and good evening everyone. I’m going to be shorter than is traditionally done, as all the numbers are in the press release.
In the third quarter, we posted revenue of $11. 8 million this quarter, compared to $7. 1 million last year. The accumulation of approximately $4. 7 million or 66% is attributed to the acquisitions of Auscript in Australia and TTA in the UK and was partially offset by a negative exchange rate having an effect of approximately $0. 2 million on revenue outside the U. S. The US economy is due to the appreciation of the US dollar.
Our gross margin, COVID wage subsidies, rose 0. 7 points, driven by strong productivity gains. They accounted for 47. 3% of sales, compared to 46. 6% of sales last year. Our adjusted EBITDA was negative by $0. 6 million compared to adjusted EBITDA of minus $3. 1 million in the third quarter of 2021.
The previous year’s era included one-time expenses similar to professional fees and M&A activities. We have revised our guidance for the full year 2022 to between $46 million and $47 million in earnings and negative adjusted EBITDA to between $2. 3 million and $2. 8 million.
Our gross margin target has been adjusted and is expected to be between 48% and 51% for the full year. We are revising our guidance for the year for several reasons, adding one, the negative effect of exchange rates; Second, the timing of new contracts and an increase in new reserves and persistent labor shortage restrictions in some regions that have affected production capacity during the third quarter.
In addition to our acceleration towards an annual recurring earnings model, we are ultimately aiming to integrate Australian operations as well as resize our charge base to move closer to positive adjusted EBITDA in 2023. In addition, we are increasing our generation: the ability to be activated to recognize the benefit of the new vital reserves we need this year.
Like Adobe and Nuance’s transition from a license-based style to a subscription-based style, it’s critical that we adjust our style to our customers’ conversion needs. We are seeing a transformative shift from this classic style of on-premises software licensing to government entities, to a SaaS style that focuses on a long-term encounter with the customer.
These are the moves we are taking to reposition VIQ to temporarily respond to market conversion situations and visitor needs. When global money markets in 2023 and beyond, VIQ will be able to revel in successful growth.
Now I would like to hand it over to the operator for a response session.
Q&A session
Operator
[Operator Instructions] Its first line is along Brian Kinstlinger’s line with Alliance Global Partners. Your line is abierta. Sr. Kinstlinger, your line is open.
unidentified analyst
Hello? Can you hear me?
Susana Sumner
Hi Brian. Yes.
unidentified analyst
Hello everyone. I’m Shervin [ph] for Brian. Thank you for answering my questions.
Susana Sumner
Ok, thanks.
unidentified analyst
Revenue has decreased to $600,000 sequentially and, based on your outlook, is expected to decrease from $400,000 to $1. 4 million sequentially. During the third trimester, did any paintings or volume disappear?in the fourth trimester? Thank you.
Sébastien Paré
Alexie, yes.
Alexie Edwards
Thank you for your question. There are several points. The activation of new visitor contracts has been delayed. That’s one of the reasons. Also, if you take a look at the second- to third-quarter replacement, it was affected by a replacement rate of around $300,000. These are the two main points in the decrease in income.
unidentified analyst
It is ok. Thank you. Next question. So what is the effect of those demanding situations related to Queensland and the adverse situations of demand for currencies in 2023, either from a margin and profit perspective?Are we building on those new lows in the fourth quarter?Or will your profit and margin profile be what you originally thought once the demanding situations of the Queensland contract are behind you?And if so, when do you think it will happen?
Sébastien Paré
Susana?
Susana Sumner
As such, the heavy burden of Queensland migration occurred in the third quarter, and we expect to return to margin expectations in the fourth quarter. We consider the first quarter to be the ultimate challenge in terms of margin realization, due to the closure of the courts, which is the norm each and every year in January. But we know that as we begin migration and consolidation to NetScribe and aiAssist technologies, this will allow the hockey stick to accelerate, especially in Australia as we leave the first quarter and Q2 inning.
As a result, Queensland’s revenues are normalising relative to margin, and we expect them to fully normalise by tracking court closures in January, as we entered in February.
unidentified analyst
It is ok. And one last quick question. In the press release, you said you had set aside more than $7 million in profits, but only changed more than 10%. What’s the challenge of converting earnings from bookings and what can you do to drive that conversion?
Sébastien Paré
Yes, so it’s essentially similar to. . .
Susana Sumner
Go ahead, sorry.
Sébastien Paré
. . . When new bookings arrive, there is a first phase similar to securing the cybersecurity links between the visitor repository and our technology. So that’s a big component of what’s happening in terms of activations. And then, from there, there’s essentially an acceleration phase with visitors.
So we’ve taken that up now, because in the last two quarters, that is, at the end of the current quarter, at the beginning of the third quarter, a lot of the resources were diverted to deal with a lot of capacity. issues that were directly caused by some of the large resignations that we documented well in our MD
So it’s a mix of things. But so far, this year’s $7. 1 million is a record for us. And that’s what I made an observation, you know, we’re starting to see a biological expansion coming out of a very neutral, and even the first year of COVID, negative, now we started picking up some of the biological expansion, which is a testament to the strength of what we’ve done from a generational standpoint.
All of our demanding situations over the past two months have been akin to the ability to eliminate that backlog, but we’re executing it. At least 10% were identified at the time we introduced the third quarter. And then we aggressively built all those customers. That’s what we’ve been referring to, Array, everything will start pressing the P.
So it was a must have detail for us, because we were coming out of two very smart years of M&A and we were fully aware that this period, COVID, biological, was pretty neutral. And now, obviously, we’ve reversed the trend, and I think that’s a positive thing for 2023.
unidentified analyst
Yes. It’s great to hear. Thank you very much. That’s all she had.
Sébastien Paré
Ok, thanks.
Operator
The next one comes from Scott Buck’s lineage with H. C. Wainright. Your line is open.
Scott’s dollar
Hi, Could you tell me what is the ARR or the true SaaS benefit today as a percentage of total profit and what are the expectations for late 2023 and late 2024?
Sébastien Paré
Alexia?
Alexie Edwards
Thank you Scott. Our ARR ranges [ph] between 85% and 90%, ranges from 85% to 90% quarterly. We expect that figure to increase in the future. As we discussed in our previous statements, we are seeing a lot of changes, especially from government entities, where everyone is now turning to a SaaS model. Therefore, we expect it to develop between 85% and 90% in the future.
Scott’s dollar
Can you give a little more color on what you can do in the OpEx aspect to align those kinds of costs, I guess, and help generate that profitability maybe sooner rather than later?
Sébastien Paré
Yes, what we’re doing, Scott, is that I think we’ve built a plan within the organization. I just need to be very clear. It’s about productivity gains. So whether or not it’s the old days rather than an asset that’s been acquired, there’s a migration to the platform and then there’s a transition from that FirstDraft to the core component of the workflow to allow publishers.
So, once those productivitys have been achieved and confirmed, as we have noticed what is happening in the US, we have been able to do so. In the U. S. , we essentially do an internal resizing of that region and then align operating expenses and COGS accordingly. When everything is in the context of productivity gains, gross margin for the region and vertical, and once this is done, we will continue to rationalize OpEx and COGS.
For example, earlier this year, there was relief of around $2. 5 million in OpEx/COGS as a result of all the paintings that took place last year in the US. Similar to the heavy migratory burden, they are leaders in the regions in terms of gross margin. Now we want to reflect the same story in the UK. And that’s what Susan made a very strong reference. So, right now, everyone is ready to make sure that the UK is experiencing the same kind of migration and that it’s almost there.
What is certain is that there will be a streamlining of OpEx and COGS in the UK region based on productivity after the migration to AI technology. And obviously, the big push, which accounts for almost 50% of our earnings, is that we’re also starting to migrate the entire Australian business through integrating FirstDraft and converting all those profits into a much higher point of profitability going forward. But it necessarily begins with those migrations. Productivity gains improve, then we move forward once stability is achieved, consumers have held on, and then we continue.
So we have this plan. That’s what we mean today about resizing, because all the time it came down to resizing OpEx and COGS. But I think most of the tasks are now in the firing line, because the UK is almost done and Australia is going through the same process.
scott dollar
Okay, that’s useful, Sebastian. Et the last one for me. Are those headwinds expected to continue in 2023?What do you think about your monetary position and how likely is it that you will have to return to the market at some point?
Alexie Edwards
Scott, thank you for your question. You know, he’s going back to what Sebastian just said. We analyze the basis of organizational positions. We analyze the profit stream. We have analyzed, we are aligning the basis of charges, and we believe we are, the movements we have taken or will continue to take will provide sufficient liquidity to the business to operate the business as expected. future. At this stage, there is no goal and/or plan to move to market to raise capital at this stage. Once executed, our plan would provide, generate enough money to make the business work.
Scott’s dollar
It is ok! Super. Appreciate the time, guys. Thank you.
Sébastien Paré
Thank you, Scott.
Operator
Next is from Marla Marin’s lineage with Zacks. Your line is open.
Marla Marin
So, moving from the topics to some of the operational issues you discussed in your ready remarks, to some of the demanding situations you faced in the initial implementation of the Australian contract, is there any class that you can learn about the demanding situations that can help you move forward and integrate other large contracts?
Sébastien Paré
Susana?
Susana Sumner
Sebastian, do you want me to take that? Sebastian, do you want me to take that?
Sébastien Paré
Yes, I did.
Susana Sumner
Hi Marla. Thank you for the inquiry, and I think it’s a great inquiry because the third quarter was pretty brutal in the effect of taking this client. It was a very long procedure to get to this point. As I explained, the contract had 3 phases. They have absolutely replaced the way generation is implemented from the initial contract that begins with the acquisition of Auscript. It’s been very exhausting for the total Australian operation to be able to enter what I would call a built-in production point where we can achieve popular operational parameters within that account. And that really slowed down integration a lot. Some of the larger consumers like Victoria Courts, which we expected to push much faster due to the exhaustion of this acquisition, from this client.
What classes have we learned? A lot, but I’m not sure they could be prevented. I think what we had in Australia in the third quarter was just the best storm. We were coming out of the labor shortage of the current quarter, so we had a giant percentage of our production equipment that new. They hadn’t obtained safety clearance, hadn’t been trained to the point of gaining power, and then they were thrown straight into this new contractual environment.
So we’re looking at a much stronger fourth quarter. We are pleased to have passed the ugly integration phase of this contract and to be in a position to bring Australia back to a more normalised environment, so we are very committed to the speed of migration and also to the integration of organisational consolidation.
What we’re seeing in the U. S. The U. S. also had complex implementations here that I would say are more general than what we’re going to see, consumers who have had requests for SSO applications, which had to be integrated and developed. I believe the foundation they have laid will allow for accelerated integration, however, everyone is coming out of COVID with new resources, newly trained resources, and new needs that stem from visitor agreements that were adapted. And I think that has made us a much more powerful corporation and we are excited about the position it leaves us to drive the new integration processes that were developed.
Marla Marin
And as far as your team’s involvement right now, what do you think of your team’s position in terms of experience?And, you know, after mentioning education for the time when some of the new people are coming onboard, do you think you’re empowered?Enough at this time to continue resolving some of those disorders in the future?
Susana Sumner
I do. I think we are in the right position. I think we’ve learned the classes from the United States and created a global organization that is now helping to manage those waves of integration. So they’re done with what’s going on in the United States. They will start to push themselves in Australia as we succeed in December and much more aggressively at the start of the first part of 2023.
They, the team we have, have adopted and embraced technology. And that required an adjustment for localization, which is why Australia took a little bit more than I think we originally wanted. But we’re here and all the groups are in one position and we: Again, access to global resources for all those deployments and migrations is actually the critical detail that gets us moving from one geography to another.
Sébastien Paré
Yes, if I could add, Marla to that, I talked about this earlier on one of the topics, however, every single one of those migrations, there’s a strong handshake with every single one of those consumers about cybersecurity. And in the area we are, which actually deals with a lot of highly confidential documents, you can perceive that this is a really key element. And I’m very, very proud that not only have we been able to get ISO certified lately, but we’ve also been able to maintain our full cybersecurity compliance.
And it’s a testament that we’re building the generation team’s operations to adopt a significant amount of volumes now flowing into the platform. And, I think the scenes, this team has gone out of its way, especially with the $7. 1 million in new reserves. Soon, as well as the existing migrations with which we are running, which we are gaining speed. Cloud times have been fully operational in all regions, and everything is working very well right now.
Marla Marin
It is ok. Thank you so much.
Operator
There are no more questions at this time. I would like to turn my back on Sébastien Paré for the closing remarks.
Sébastien Paré
Well, I’d like to thank everyone for joining our call today. Please contact Laura Kiernan if you have any important questions. And we look forward to talking to you in the spring of next year. Thank you.
Laura Kiernan
Ok, thanks.
Operator
Ladies and gentlemen, thank you for your participation. That concludes the call of today’s convention. You can now log out.