VIQ Solutions Q3 2023 Earnings Call Transcript

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November 13, 2023

Key Takeaways

  • Despite labor shortages and foreign exchange headwinds in Q3, VIQ reported strong bookings (US$932k) and maintains a healthy backlog covering ~45 days of Australian law enforcement work, underscoring robust demand for its AI-enabled transcription and translation services.
  • The Netscribe powered by AI Assist migration in Australia delivered up to a 50% uplift in gross margin in initial phases and is expected to drive similar material margin gains and efficiency improvements in 2024.
  • A new US insurer client will replace 90% of traditional transcription with AI-generated drafts, projected to save nearly US$1 million and deliver gross margins in the mid-90s, highlighting the appeal of VIQ’s domain-specific language models and integrated workflow.
  • Q3 revenue fell 14% year-over-year to US$10.1 million, gross margin declined to 42.9%, net loss widened to US$4.4 million (US$0.11/share), and adjusted EBITDA deficit increased to US$1.4 million, primarily due to the end of the high-margin DJAG contract and adverse currency impacts.
  • VIQ’s cost containment efforts—system integrations, headcount reductions—and anticipated positive cash flow from AI migrations and new bookings are expected to strengthen the balance sheet and support future growth.
AI Generated. May Contain Errors.
Earnings Conference Call
VIQ Solutions Q3 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen. Today, we are hosting a conference call to discuss the 2023 Third Quarter Financial Results for VIQ Solutions Incorporated. Currently, all participants are in a listen only mode. We will have a question and answer session at the end of the call, at which Your host for today is Audrey Liu, Corporate Finance Controller for VIQ. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to VIQ Solutions 2023 Third Quarter Results Conference Call. Before we begin, I would like to point out that certain statements made on today's call 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 and A and other continuous disclosure filings, which are available on SEDAR at sedar.comandonsec.gov. As a reminder, all dollar amounts are in U.

Speaker 1

S. Dollars unless otherwise stated. With us today, we have Sebastien Pare, CEO Susan Sumner, President and COO and Alexei Edwards, CFO of VIQ. I will now turn the call over to Sebastien Pare to begin. Sebastien?

Speaker 2

Thank you, Andre. Welcome everyone to our Q3 of 2023 earnings call. In Q3, we continue to adapt to industry and market conditions that continue to evolve, including foreign exchange rates and labor shortages, particularly in Australia. These challenges are largely in the mirror view now, but they did create significant impact in the quarter for both the acceleration of the revenue and the abatements that have impacted our bottom line. The implementation of NetScribe powered by AI Assist is critical to mitigate the labor risk in the coming years.

Speaker 2

Amid such industry challenges, the urgent need to digitize has never been so clear and pressing. The pressure on customers and many resellers to bring in new technology workflow and proven AI to increase productivity to meet growing volume is reflected in VIQ recent solid bookings from NETSCAR BI Assist and the sales pipeline for AI solutions in Q3 with trends getting stronger and stronger. Demand continues to be high for our AI enabled transcription and translation technologies. This is evident in our healthy backlog that represent approximately 45 days of law enforcement work in Australia alone. While certain challenges have limited our ability to fully recognize this backlog, Our bookings remain really strong and proof of recovery underscores the resilience in the industry and of VIQ.

Speaker 2

The Q3 represents the last comparable quarter against the prior Queensland Courts Department of Justice and Attorney General, known as DJAG contracts, which created challenges and comparative metrics throughout the whole 2023. Excluding the DJI contract and the negative impact of foreign exchange, the VIQ will have reported positive year to year year to date revenue growth of 1.2% over the comparative period in 2022. I will now pass the call over to Susan to discuss our operating results in great details. Susan?

Speaker 3

Thank you, Seb. Q3 2023 was a very exciting quarter as we began the long awaited migrations of our Schimmers in Australia. Based on proven material gains and gross margins in the United States and other regions, We began the acceleration of our migrations that we believe will lead to similar material gains in net gross margin in 2024. This will not only lead to improved efficiency in our production operations, Lower costs and less time to produce content, but it will also create the foundation to accelerate the addition of incremental solutions to the Netskribe ecosystem, such as language expansion, enhanced formatting that will ultimately drive change. Another exciting milestone in quarter 3 was the addition of a new client, one of the top 15 insurers in the United States and one of the top property and casualty providers in the U.

Speaker 3

S. Who is utilizing our technology to replace an estimated 90% of their traditional transcription requirements with content that is created exclusively by our AI generated text. After months of testing, it was concluded that our solution, which they found unique in comparison to other vendors, provided reports that were highly usable because of our customization with domain specific language models and post processing enhancements. Also influencing their decision is the ease of use of our workflow, allowing them to easily route the document to be fully edited with our human editors or translators. This transition to an AI only draft will save close to $1,000,000 when fully deployed and provide VIQ gross margin from that technology in the mid-90s.

Speaker 3

This week, we will launch our superhuman transcription campaign promoting our core solutions to current and expanded segments. Our integrated solution validates the requirements for the 3 core elements of our technology: AI, the human editor or translator and the critical workflow that enables the management of that document. This is evident in our core solutions where we bridge the gap between audio capture and certified transcription being able to gain delivery to being able to again deliver all three core elements with audio capture, AI generated first draft and certified human delivered transcripts. We will not only consume this highly efficient technology to optimize our internal workflow, but deliver it to courts and law enforcement agencies around the globe. We have already validated dramatic improvements in transcriber and editor productivity, but in our initial migrations in Australia, we are also experiencing meaningful improvements in the automation of workflow.

Speaker 3

We have discussed the complexity of the creation of court documents, particularly in Australia. Now utilizing Netskribe, Transcribers and editors can self select content no longer waiting on workflow teams to assign it to them. This improvement alone is driving Content to be produced each and every day by editors as work is available when they are available, day or night, weekdays or weekends. And in an industry where capacity is so constrained, improvements like this and many other features from Netscribe helped to not only improve margins, but also solve the very complex longer term capacity issues that have been such a challenge to us and other service providers around the globe. We have always said that we do not compete with companies like Google and AWS on pure speech to text output, but we are unique in our approach in AI driving customized documentation by utilization of AI and work to drive improvements that accelerate the requirement for digitization and modernization in the segments and the geographies where we focus.

Speaker 3

3rd quarter operational highlights include the transition to AI only drafts that are helping to solve capacity challenges, Capacity recovery and expansion leading to growth in revenue and margins in our U. S. Legal vertical. We recognized Q3 bookings that were strong at $932,000 demonstrating continued demand despite capacity challenges. We saw early success from initial Australian migrations having shown up to a 50% improvement in gross margin percentage, But overall reductions in AI margins in Australia margins were impacted by training and migration costs due to costs that are expected to be temporary from training and other productivity challenges.

Speaker 3

Increases in AI only SaaS sales being driven by domain specific language models are proving to improve overall EditRT scores and improving editor efficiency. As we look to Q4, we have launched solutions that enhance self editing and video capabilities to deepen our reach to law enforcement, media and insurance, driving faster access to our technology and also expanding the languages that we support and the delivery of the draft, but also in access to our platforms globally. Now I will hand the call over to Alexey Steve to discuss our financial results in greater detail. Alexey?

Speaker 4

Thank you, Susan. Good day, everyone. Let me recap a few of our Q3 2023 financial highlights for you. Revenue of $10,100,000 a decrease of $1,700,000 or 14% compared to the same period of the prior year was primarily due to the expected change in the DJI contract which accounts for 76% of the variance. Gross profit was $4,300,000 or 42.9 percent of revenue compared to 5,600,000 or 47.3 percent of revenue during the same period of the prior year.

Speaker 4

The decrease in gross margin was primarily due to the anticipated reduction in volume from the higher margin DJR contract. Additionally, For the 3 months ended September 30, 2023, gross profit was negatively impacted by approximately 100,000 due to the weakening Australian dollar in comparison to the U. S. Dollar. Net loss of $4,400,000 or $0.11 per diluted share versus net loss of $1,300,000 or $0.04 per diluted share in the same prior year period.

Speaker 4

Adjusted EBITDA deficit of $1,400,000 versus adjusted EBITDA deficit of $600,000 in the same period in the prior year. The increase in adjusted EBITDA deficit was primarily due to the decreased gross profit as a result of the expected change in the DJAC contract and the negative impact of foreign exchange, partially offset by decreased selling and administrative expenses, which is due to the reduction in IT related costs because of system integration and secondly, lower headcount related costs due to organizational restructuring. We're continuously working to improve our cash flow with a focus on cost containment. Additionally, we expect the migration of the Australian customers to Netscribe and the implementation of net new bookings to have a positive impact on cash. Now, I would like to hand it over to the operator.

Operator

Thank you. And ladies and gentlemen, for questions and answers regarding recent disclosures or any other matter, please reach out directly to the company using the contact details on the company website. We thank you for joining our call today and this now concludes our conference. You may disconnect.

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