VIQ Solutions Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 7 speakers on the call.

Operator

Morning, ladies and gentlemen. My name is Julianne, and I will be your conference operator. Today, we are hosting a conference call to discuss the Q1 2023 Financial Results for VIQ Solutions, Inc. At this time, all participants are in a listen only mode. For those that have dialed in, We will have a question and answer session at the end of the call.

Operator

At which time all participants wishing to ask a question will be instructed to press star 1 and identify themselves before asking a question. Your host for today is Ms. Laura Kiernan, Head of Investor Relations for VIQ. Please go ahead.

Speaker 1

Thank you, Julianne. Good morning, everyone, and welcome to our Q1 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@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 Alexey Edwards, CFO and Susan Sumner, President and COO of CIQ, all of whom will be available for terms following the prepared remarks. I will now turn the call over to Sebastien Perre to begin.

Speaker 2

Thank you, Laura. Welcome everyone to our Q1. I'll provide some high level remarks on our results, then I'll hand it over to Susan who will discuss some of our operating results, which will be followed by Alexei, who will discuss some of our financial results. Then we'll open up for questions. The increasing demand for digital content by global organizations requires the implementation of innovative, specialized technology to process data more swiftly and in a secure and precise manner.

Speaker 2

Transcribers play a critical role in leveraging artificial intelligence to achieve greater productivity and accuracy rates to meet Aventuria's standards. During the quarter with the seasonality factor due to the year end holiday recess in our court segments, We remain focused and committed to delivering a strong and consistent value to our customers and partners. As a concentration of our record level of net new bookings last year, we are encouraged by our strong Q1 bookings that represent an increase of 69% when compared to the same period in 2022. Net new bookings or an early indication of organic growth. Contracts take some time to ramp and revenue to be recognized.

Speaker 2

As of March 31, our total contracted net new bookings were $9,400,000 of which 20% has been recognized as revenue so far. The remaining 80% will be recognized over time. Increasingly, new customers have recognized the value of the IQ offering. After a detailed procurement evaluation, these new clients, including Fortune 500 Organizations, speed up the capture of high end quality audio and video, industry specialized workflow, cybersecurity protocols and engine agnostic AI that includes machine learnings, ensure the accurate actionable information is created in an expedited manner. We will continue to expand our solution suite, focusing on SaaS solutions to simplify content acquisition and accelerate documentation creation.

Speaker 2

Our intellectual property is changing the industry and is the catalyst to organic growth in 2023 2024. We're pleased to have completed the migration of the Queensland contract. Despite the short term revenue impacts, It is a crucial step in providing us with revenue predictability as we continue to scale. We believe this contract combined with the FX of foreign currency exchange will have normalized quarter over quarter revenue showing growth in Australia. Susan will speak more about the whole DJAC factor in the makeup of Q1 to make sure everyone understands this new contract.

Speaker 2

During the quarter, we also completed the refinancing of our debt with BD Capital. BD's approach, striking a measure, BD's approach striking a measure balance between innovations, advancement in RAI and competitive leadership, SaaS scalability and growth versus cost and a return to positive EBITDA became very important at this stage of our growth. BD's depth in technology and transition to SaaS knowledge is exceptional with incredible depth in financials and market analysis. Our partnership with Beattie at this stage of our growth is crucial. Finally, we implemented significant cost containment measures, which enable us to significantly reduce our overall operating cost.

Speaker 2

Alexey will provide you with more details on that topic. I will now pass the call over to Susan to discuss our operating results in greater details. Susan?

Speaker 3

Thank you, Seb. As Seth mentioned, we made key operational achievements this quarter in addition to continuing to work on the integration of our acquisitions, especially in the Queensland, Australia. Let me first provide you with background on the Australian contract, the Ascript acquisition and how the integration impacted the total value of the contract. We have spoken of this in prior scripts, but it is worth reviewing in a bit more detail as it can be confusing. And A.

Speaker 3

In December of 2020, prior to the Osgood acquisition, VIQ announced the award of the Queensland contract or DJAC, which was awarded to us and one other provider to deliver transcription services to replace the current services delivered by OSCript, who at the time was owned by FTR. While the Off Scripts contract was for both transcription and recording services, The new contract was exclusively for transcription services. Queensland at the time was totally revamping the end to end technology that drove how recordings were captured and transcripts ordered and processed, moving much of the technology in house. Once live, it was expected that that contract value would be approximately 50% of the value of the transcription services piece of the original contract with OSCRYPT, which again was for both recording and transcription. In December of 2021, VI2 closed on the Off Script acquisition.

Speaker 3

Knowing at the time that their contract with Queensland had been lost and that we would be delivering services for that contract until it was split to the new VIQ agreement. Fiscal 2020, but it did not commence until July of 2022. This rollout was very challenging for both of the new vendors and was phased in over 3 stages that went to full go live in October of 2022. Q1 of 2023 is the 1st full quarter of revenue under this new agreement. And compared to Q1 of 2022, there is a reduction expectation in revenue of approximately $1,200,000 year over year.

Speaker 3

The reduction in this revenue also impacted gross margin for Australia as the recording revenue component of the Off Scripts contract was also moved in house and was at a significantly higher margin and the transcription revenue. It is important as we did not lose a customer, we did not lose unexpected revenue. The variance was anticipated after the purchase of Ascript and was certainly built into the expected revenue announced with the Ascript transaction. And A session. In sub reference that we are now fully operational with this contract, we reference not only the full integration of the new contract, but also the stabilization of the operational challenges associated with their new technologies that had a dramatic impact on our operation in Q3 and Q4 of last year.

Speaker 3

So in summary, there are 3 stages of this contract. 1, pre Off Script acquisition. The contract was awarded to VIQ, but it was Off Script's revenue. 2, post acquisition, the Off Script's contract continued until July 2020 and the contracts we're in transition from July until October, both revenue and operational stability. And the 3rd stage VIQ revenue Q1 is the 1st full quarter of this new VIQ contract.

Speaker 3

The good news is that the gross margins expected from this customer are solid as we exit Q1 and the volumes are tracking slightly higher than planned. Our team in Australia has done an amazing job in responding to this new very complex and very substantial award. And A. Now regarding the achievements of the quarter, we had $2,800,000 of net new bookings sold for the quarter, representing a 69% increase from Q1 of 2022. This is very exciting as it represents a full range of products and services and segments.

Speaker 3

Several large SaaS contracts for our Netscribe and First Draft Technologies, service agreement for 1 of the top 5 insurance companies in the United States and geographic expansion as well. We had our 1st active installation of Netscribe where it was sold in India for an international transcription company. This contract will allow our partner in India to offer NetScribe to transcription companies throughout India as a SaaS offering and provide us begin to deliver more multi speaker verbatim content, helping to fill the demand for increasing capacity globally. We also closed our initial sales for the original agreement, and we believe that this relationship will bring great opportunities across EMEA and Asia Pac. Our technology has been upgraded to enable self management by distributors and resellers and to provide resellers with tools to easily onboard, train, support and build their customers, accelerating the scale and the sale of our SaaS and Pro Services revenue.

Speaker 3

We launched CapturePRO Mobile, expanding our commitment to building technologies that advanced the need for tight integration of video with fully integrated editing in all mobile applications. As we begin our beta for this product, the pipeline is quickly building with large opportunities across all key segments, particularly in Media. As we pivot to meet market demand for SaaS Solutions, there will be an impact to the revenue mix for organic and run rate revenue. This change is expected to protect long term revenue and ultimately lead to significant margin improvement, that will impact our top line revenue in the short term. Q1 had a slight decline in our U.

Speaker 3

S. Revenue due to the acceleration of speech to text and SaaS Sales in Insurance and Law Enforcement. Reduced transcription, editing and reporting capacity globally along with the need to gain efficiencies driven by current economic conditions, provide the optimal environment to strategically introduce our 1st draft technology to new named customers as well as our current customer base. AI generated content has progressed enough to deliver highly usable documents in terms of accuracy, diarization and formatting. VIQ will lead the disruption that the acceleration of this technology provides.

Speaker 3

Organic growth has certainly offset some of the revenue from this change in Australian contracts. Organic growth from 2022 sales begins to weave into the ARR mix in Q1, but we expect the full value of these larger contracts will mostly impact Q3 and Q4. As evidenced in Queensland, these larger contracts require significant change management for our customers and therefore take longer to fully ramp. While we see a slow recovery in insurance and law enforcement from the downward trends of late last year, We are leading the path to change this industry. We have recently launched our new brand Velocity.

Speaker 3

Velocity is defined as speed of motion, action or operation, and this truly defines VIQ at the moment. We are using our technology to build velocity to accelerate the motion and the actions of internal operations and the clients that we support. And A session. I will now pass the call over to Alexei to discuss our financial results in greater detail as well as the cost containment initiatives and related impacts on our cash. Alexis?

Speaker 4

Thank you, Susan. Good day, everyone. Let me recap a few of our Q1 2023 financial highlights for you. As Sebastien mentioned, Our revenue was $10,100,000 a decrease of $1,500,000 or 13% in the same period of the prior year. The decrease was primarily due to the expected contractual change in the Queensland contract, which accounts for 81% of the variance.

Speaker 4

Our gross profit was $4,400,000 or 44 percent of revenue compared to 5,500,000 of 47.6 percent of revenue in the same period of the prior year. The decrease in the gross margin was primarily due to the anticipated change in the Queensland contract as Susan mentioned earlier. Our net loss of 3,500,000 or $0.10 per diluted share versus a net loss of $2,000,000 or $0.07 per diluted share last year. And finally, our adjusted EBITDA was negative $1,100,000 versus negative adjusted EBITDA of $900,000 in the same period last year. The items that impacted our adjusted EBITDA included decreased gross profit as previously mentioned, partially offset by decreased selling and administrative expenses, primarily due to lower insurance premiums, reduction in IT related costs because of system integration and thirdly, lower headcount related costs due to organizational restructuring.

Speaker 4

While we are continuously working to improve our cash flow and with a focus on cost containment, coupled with the refinancing completed in January, we were able to shore up our balance sheet. Additionally, we expect the migration of the Australian customers to Netskribe and the implementation of net new bookings to have a positive impact on cash. As of March 31, 2023, We had a total of $2,500,000 in cash. On January 13, 2023, we entered a senior debt facility with Beadek Investments Limited with maximum available funds of $27,000,000 of the loan was provided to us as an additional advance with an additional $3,000,000 available to the company subject to the company's satisfying certain conditions. Now, I'd like to hand it over to the operator for Q and A session.

Operator

Our first question comes from Scott Buck from H. C. Wainwright. Please go ahead. Your line is open.

Speaker 5

Hi, good morning, guys. Thank you for taking my questions. First You guys have done a really nice job on cost containment the last couple of quarters. I'm curious whether or not you can sustain these OpEx levels as revenue starts to move higher again in the second half of the year.

Speaker 2

So I'm going to go first, Scott. This is General Sebastian, so what we've disclosed previously is if you look back at what we achieved in the United States and the U. K. And what we're about to go to in Australia, All the cost reduction in terms of OpEx and COGS as well were all related to the success of the migrations into the Netskribe platform, turning on the AI, retraining our people to become editors. Once that stability has been reached, then we actually go ahead and actually make the restructuring.

Speaker 2

So we've gone through basically so far 2 major restructures in the context of the gross margin attainment in the United States last year as well as in the U. K. And then what we're going through now is the migrations in Australia. So it's all directly tied to the migration and then the gain in the gross margins before in the manual world versus post into the NetScribe AI system. Alexey?

Speaker 4

Yes. Thanks, Seb. And Scott, to add to Sebastien's point, right, when we look at this, we are very confident of the OpEx level. And we as I said on the last call, we will always monitor the OpEx to ensure that we are containing costs. And if you listen to what we're saying, we're saying that we're going to move our customers in Australia to Netskribe and that's strictly on automation of the workflow.

Speaker 4

And so we don't anticipate and seeing A significant increase in our OpEx as we do that migration, which as you pointed out, when we look at our OpEx, selling and G and A over the past, I would say, 4 quarters. In Q2, it was $6,500,000 in Q3, dollars 6,000,000 Q4, dollars 5,900,000 Q1, we are reporting 5.3, and we will continue to analyze and evaluate as we move forward. But the goal is to ensure that our cost base is manageable, to support the revenue.

Speaker 3

And Scott, I'll just jump in really quickly because you get the trifecta, but You did hear in my remarks that we had automated NetScribe to make it more self serving and that's going to make a major difference as we begin to onboard more customers from these resellers. So from onboarding all the way through servicing and building templates. The technology is meant now to be much more, low labor in terms of scale.

Speaker 5

Great. That's helpful, guys. And my second one, I was hoping just to get a little bit of color on how you guys are thinking about the cash balance and cash needs. You ended the quarter with $2,500,000 I think you still have $3,000,000 you can access from BD. Is that That $5,500,000 does that give you enough runway to get to the point where you're generating meaningful cash internally to fund the business?

Speaker 4

Yes, absolutely, Scott. And I'm going to contradict from the previous statement that Susan made, right? And we expect to see and increase in our gross margin as we migrate these customers to NetScribe. That's our goal. That's what we have been saying for a while.

Speaker 4

And we see we saw the benefits of that in the U. S. Where we took we made significant improvement in gross margin. We expect to see the same results or better in Australia, and that will generate cash in itself. And if we continue to maintain our cost within a certain level and with access to additional $3,000,000 from B2B, we think we're in a position in a good place.

Speaker 5

Great. That's helpful. And then just quick last one for me. Sequential change in bookings,

Speaker 4

I know you guys gave

Speaker 5

a year over year number, but I can't remember what the 4Q

Speaker 2

Yes. So last year, the total net new bookings was 7,700,000 and what we've disclosed last night is we've booked $2,800,000 in the Q1. So the running right now is about 9.4 percent, of which 20% has started to be recognized as revenue. The rest will be recognized throughout the year and over the next couple of quarters. But For us, this was really important because we've gone through some significant acquisitions during the pandemic in the last 2 years and that was our focus.

Speaker 2

And I think if you look back, this is something we want to report on moving forward is the results of taking those assets from the manual world into a digitized NetScribe AI assist power environment and the gross margin achievements of 55% in the United States last year and over 65% in the U. K. Was all basically A large exercise to get us to where we need to be, which is Australia representing 60% of our revenue in courts, where we expect significant gross margin gain. So when you combine all of that together, I think you're starting to see that our customers with the net new bookings have also started to recognize That the technology that we've got, the R and D investment and the intellectual property that we've secured is really starting to yield some results. And I think that's what's really important because now we're pivoted from basically inorganic focusing on acquisition And now we're really increasingly going back to organic being the primary driver.

Speaker 2

But in order to generate organic growth, You need the net new bookings, which means your product and technology and offering needs to be validated by the marketplace. I have to say like it's something that we're really, really delighted and it's a big reason why BD came forward during the financing as well. Do you see it as well? We have a very important lead right now on the technology, and I think the net bookings are good evidence on where we're headed in terms of the recognition by the customers.

Speaker 5

Great. Sebastian, I'm sorry. The net bookings, Are they coming from existing customers or are they new customers or likely a combination of both?

Speaker 2

They're all new customers. If you look at our if you look Absolutely 100 percent net new. And we have a very strict definition in our MD and A, but it's all coming from net new names.

Speaker 5

Great. Appreciate the additional color guys. Thank you.

Speaker 2

Thank you, Scott.

Operator

Our next question comes from Brian Kinstlinger from Alliance Global Partners. Please go ahead. Your line is open.

Speaker 6

Hi, there. This is Shervin in for Brian. Thanks for taking our questions. Just going to roll off the conversation on bookings. I heard you mentioned a 30% figure and I wanted to clarify what that was about.

Speaker 6

You talked about how onboarding these programs is challenging given your resources were mostly focused on Queensland. Can you tell us What percentage of this value of contracts has been onboarded? And then also during the March quarter, was there any revenue from these contracts?

Speaker 2

Yes. So maybe let me start with Sherburn with the first part of your question. So out of the total new bookings so far between last year and this quarter, What we've said is we recognize at the moment in terms of revenue 20% of that value has now started to flow into our revenue. So that's the first piece of it. And what we said last time when we reported year end is We wanted to be in the 30%, 40% range last year, which will have made up the difference in the Q4.

Speaker 2

But because of the labor trains and everything that we just been talking about. We were not able to do that. Now we're picking up our speed. We're picking up our cadence. DJAC is behind us in terms of that and now that revenue is starting to flow in, but it's going to hit Q2, Q3 and Q4 as we continue.

Speaker 6

Okay. Thank you. And then I think on the last call, you said that you expected to All of these contracts onboarded by the end of June. Is this still on track?

Speaker 4

Yes. So at the moment Do you want

Speaker 3

me to take that?

Speaker 4

Yes, go ahead, Susan.

Speaker 3

Yes, I would just say that, well, we will have all of the contracts that we sold in 2020 2 on boarded. We had really good bookings in the Q1 of this year and a lot of that will push through Q3 and Q4.

Speaker 6

Okay. Do you think that Yes, yes. These plans

Speaker 3

when we start them, they migrate. So even accounts that we brought on in Q4 of last year, regardless of whether they're fully onboarded at the end of June, you may not see all of the revenue potential until later quarters as they begin to ingest the processes into their internal organizations. So you're going to see that acceleration much like we have in the larger contracts last this year build progressively quarter over quarter.

Speaker 2

Yes. If I could add, Sherburn, To that point, remember, we did a good job, I think, a couple of quarters ago explaining the ramp and the onboarding of new clients. And behind the scene, there's the cybersecurity compliance that takes place. Behind the scene, there's an API that gets connected to the customer's repository. Behind the scene is an integration with larger case management in the case of insurance for claims, criminal investigation in terms of police.

Speaker 2

So we do all that work upfront. And obviously, we've automated a lot of that. As Susan Pointed out, it's becoming a lot more self driven, but that's a key component of the stickiness of our revenue and why the technology is gaining that kind of level of traction, because we don't talk much about it in our disclosure, but that's a key component to win those net new bookings, The offering and everything else, but also the underpinning infrastructure and how tightly integrated we become with our large customers as well. All right. Thank you.

Speaker 6

So do you think that you can return to year over year growth in the second quarter with these contracts onboarded and if not, when you can expect to return to year over year growth?

Speaker 4

We expect to have year over year growth Q2.

Speaker 2

That's great to hear.

Speaker 6

And last question, you mentioned That the lower gross margin year over year was a result of the Queensland contract. Is it because you had higher resources on the contract along with the lower volume? And then as resources fall off for onboarding other programs, will this contract still weigh on overall gross margin for the remainder of the year?

Speaker 3

So, Sarah, I'll ask. There were 2 elements that were really explained in my comments. The first is that a large percentage of the revenue that came from the OSCO contract contained recording revenue. That recording revenue was at almost 100 margin. When you take that revenue out of the mix, it's going to have a negative impact on the overall revenue attained from that region.

Speaker 3

So while we are seeing greater than expected gross margins on transcription services from DJAC, The removal of the revenues associated with the recordings certainly did have a negative impact on the gross margin and it was all expected by the This was not a surprise. We also in Q3 and Q4 and in Q1 had what I would call adaptations to the new implementations. While you have large groups of transcribers learning to take on a new account and learning a new way of doing business. This was a very different and a very different way of bringing this process through. You have a downward trend in gross margin and then a hockey stick spike up and we are now at a business as usual state with them.

Speaker 3

So you'll see a significant recovery from that.

Speaker 4

And Sherburn, if I may quantify all of what Susan just said, in terms of comparative purposes, If you back out the high margin recording revenue and the additional transcription revenue from the DJAP contract that exist in Q1 2022. If you back that out, the gross margin reported last year normalized would have been 43.5%. We're reporting 44 percent for Q1 2023.

Speaker 2

All right. That's great. Thank you so much. Thanks, Irvin. You're welcome.

Operator

We have no further questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect.

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VIQ Solutions Q1 2023
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