VIQ Solutions Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 15, 2023

Key Takeaways

  • VIQ secured a $1,000,000 draw on its BD Investment facility and closed an oversubscribed $1.8 million private placement to fund its AI acceleration and support a restructuring expected to yield $2–2.5 million in expense savings by year‐end 2023.
  • The company set a record $8.9 million in net new organic bookings over the past 12 months, validating strong demand for its AI and SaaS offerings despite slower ramp‐ups, with volumes climbing in June and July.
  • Second‐quarter revenue declined 15% year-over-year to CAD 10.5 million and net loss widened to CAD 3.6 million (CAD 0.10 per share), with adjusted EBITDA at negative CAD 0.9 million, driven largely by the Queensland contract change and foreign‐exchange headwinds.
  • VIQ filed two patent applications for its domain‐specific language models and is expanding its first‐draft AI workflows across multiple languages to further boost transcript accuracy, productivity and gross margins.
  • A new partnership with Jazz aims to address the U.S. court reporter shortage by integrating AI-powered courtroom recording and transcription, while a major Netscribe migration in Australia is underway to drive margin improvements and capacity expansion.
AI Generated. May Contain Errors.
Earnings Conference Call
VIQ Solutions Q2 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Day, ladies and gentlemen. Today, we are hosting a conference call to discuss the 2023 Second Quarter Financial Results for VIQ Solutions, Inc. 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 time all participants wishing to ask a question will be instructed to press star 1 and identify themselves before asking a question.

Operator

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 Second 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@sedar.com and onsec.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 Sandy Kung, VP Finance of VIQ. They will be available for questions following their prepared remarks. I will now turn the call over to Sebastien Pare to begin.

Speaker 1

Sebastien?

Speaker 2

Thank you, Ajay. Welcome everyone to our Q2 of 2023 earnings call. I'll provide some high level remarks on our results, Then I'll hand it over to Susan, who will discuss our operating results. Unfortunately, Alexei Edwards, our CFO, is not able to attend the call today, as he is attending a personal matter. Sandy Kong, VP of Finance, will discuss the financial results.

Speaker 2

We'll then open up for questions. As announced in July, we secured $1,000,000 draw from the BD Investment loan facility initiated in January. As a result of the productivity gains realized by the rollout of our AI Power workflow technology in the United States and in the UK, The draw is an important part of our restructuring, which is expected to yield between $2,000,000 $2,500,000 in reduced expenses over the next 12 months. The planned restructuring is scheduled to be substantially completed by December 31, 2023. Following the $1,000,000 draw, We successfully closed on an oversubscribed non broker private placement of $1,800,000 While we plan to bring back positive EBITDA In the second half of twenty twenty three, the placement was an important part of our AI acceleration to further expand our competitiveness and competitive lead in our domain specific AI models for the verticals and the region in which we operate.

Speaker 2

As of June 30, we set a record for the net new organic bookings of $8,900,000 in the last 12 months. Many of these new larger contracts are taking longer to ramp up than before COVID due to project and IT capacity within Fortune 500 Companies and many governmental agencies. These delays negatively impacted Q3 revenue Q2 revenue, But we're seeing increased volumes in June July. The organic wins validate that we've got the right offering at the right time for our industry segments. The agencies we serve are evolving rapidly towards cloud workflow, AI and SaaS solutions.

Speaker 2

The private placement will accelerate the commercialization of the AI models to further strengthen accuracy and usability first draft and continue to increase margins. Our winning track record for SaaS offering with new and existing clients is directly tied to the usability and accuracy of the AI generated draft documents. Our first draft NEI workflow derived their value from the domain specific AI models that we've developed, which further improves gross margin. AI is no longer in the hands of a few mega caps with 1,000,000,000 in revenue and unlimited cash balances. Access to AI has been democratized in 2023.

Speaker 2

AI is going broader and deeper into specific industry applications ripe for automation. More flexible, smaller and mid cap companies with deep reach into specific global industries are driving commercial AI adoption. VIQ is one of them. The change to the Queensland contract, as previously disclosed, continued to negatively impact some of our key metrics when compared to prior quarters. Decreases in revenue and gross margin are largely due to contract change.

Speaker 2

In fact, normalized Q2 results when factoring the new Queensland contract and foreign exchange rates were up by 3% compared to Q2 2022. We see tailwinds from improved business optimism and increased interest in the client VIQ solution to address business needs, further lengthening the main cycle. As of our top 20 clients are trending higher in volume compared to same period of last year. We're seeing expansion in our insurance client base in July And the backlog in line enforcement from Q2 has been clear. During Q2, we continued to make great strides in our transition to SaaS.

Speaker 2

We grew our partner ecosystem in the United States and in Europe. We expanded our pipeline and we won several new contracts, which will make their way into our disclosures in the coming months. I'll now pass it over to Susan to discuss some of our operating results in greater details. Susan?

Speaker 3

Thank you, Seb. During the quarter, we continued to see stabilization of the Queensland contract, Growth in new client contracts in Australia and the beginning of transcription services volume for 2 large insurance companies booked in Q1 of 2023. We have also started the critical migrations of our Australian client base. This migration will span 2023 early 2024. The scope of this migration is fast, including the largest court system in Australia.

Speaker 3

While we developed the highly complex requirements to transform court workflows over 3 years ago. The Off Script acquisition helped us to further refine the requirements to create our highly effective technology. In Q2, we began delivering on our commitment to drive margin improvement from this client base and the results we see in terms of productivity enhancements are the highest of any segment we have migrated. While this is not without challenge or risk with our highly constrained capacity, we believe that taking on this challenge now reduces longer term closure in this critical market. Our teams are very excited to bring this new technology to this segment.

Speaker 3

After a successful trial, one of the largest insurance companies made the decision not only pivot to utilizing 1st draft technology to support their recorded statements, but they also committed to sole source this contract to VIQ. This is a net new customer for VIQ. This serves as validation of the usability of our technology. When business requirements mandate a professionally edited transcript, this client will purchase additional services for us. We began testing 1st draft in a multi language environment and expect to deliver Spanish to Spanish, Spanish to English, German to German and German to English, French to French and French to English, Dutch to Dutch and Dutch to English and Swahili to Swahili and Swahili to English within this calendar year.

Speaker 3

This will also include languages and mixed language use as well. We will also be localizing Netskribe as this expansion continues. We announced 2 patent applications that augment our speech engine agnostic workflows, improving documentation accuracy and usability of documentation. Both workflows utilize DSLM, Domain Specific Language Models, to improve the quality of the draft transcript. DSLM use vast databases to unleash a new task specific model that is trained on knowledge within large language models.

Speaker 3

It leverages knowledge learned during the documentation editing process to improve its performance, resulting in increased efficiency and even greater usability of our draft documents. The accuracy and usability of 1st Draft is expected to increase and become even more competitive when enhanced with series of extra training routes and our AI assistant workflow, resulting in continuously trained VIQ DSLM. Fewer edits equal greater efficiency and higher productivity and more capacity for turnaround of orders, Time Savings and Cost Reduction. Security is a requirement that is top of mind for all of our clients and as such, Security is the first design parameter that we consider when our products and features are deployed. We are proud to have been selected as the 2023 Fortress Cybersecurity Winner in the Data Protection category.

Speaker 3

The court reporter shortage continues to plague the U. S. Court. Our new partnership with Jazz, a global provider of Court recording and AV services to courtroom will drive the expansion of VIQ's technologies into courtrooms to provide automated draft transcripts of courtroom proceedings. This will save legal and professional time and improve accessibility of all information for all interested parties.

Speaker 3

By combining Job's expertise in recording and AV support with our advanced transcription workflow technology powered by AIs, We can provide a powerful solution that transforms the user experience and enhances courtroom efficiency. We remain focused on stabilizing capacity, while aggressively deploying Netscribe globally to recognize the margin expansion that we have seen in the U. S. This will allow us to improve gross profit and create a more efficient production environment to expand and manage capacity. We plan to utilize global resourcing where allowed by our clients via our secure platform to drive incremental volumes and margin expansion.

Speaker 3

I will now pass the call over to Sandy to discuss our financial results in greater detail as well as the cost containment initiatives and related impacts on our cash. Sandy?

Speaker 4

Thank you, Susan. Let me recap a few of our Q2 2023 financial highlights for you. Our revenue was CAD 10,500,000, a decrease of CAD 1,800,000 or 15% in the same period of the prior year. The decrease was primarily due to the expected contractual change in the Queensland contract. Normalized for the Queensland effect and foreign exchange, Our revenue growth for the Q2 would have been up by $400,000 or 3.6 percent in comparison to the same period last year.

Speaker 4

Our gross profit was $4,600,000 or 41 percent of revenue compared to 49.3 percent of revenue in the same period of the prior year. The decrease in gross margin percentage was primarily due to a change in the Queensland contract and foreign exchange. Normalized for the Queensland contract and foreign exchange, Our gross margin growth for the 2nd quarter would have been a 0.7% increase in comparison to the same period last year. Our net loss was $3,600,000 or $0.10 per diluted share versus a net loss of $3,200,000 or $0.11 per diluted share last year. And finally, our adjusted EBITDA was negative $900,000 versus negative adjusted EBITDA of $700,000 in the same period last year.

Speaker 4

The items that impacted our adjusted EBITDA included delays in ramping up some of our largest new insurance and disposition wins from earlier in the year, 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 integrations and lower headcount related costs due to organizational restructuring. As of June 30, 2023, we had $1,800,000 in cash. In July 2023, we drew on our debt facility, will be utilized as part of the optimization of our workforce and for working capital. We also recently completed a private placement offering to fund domain specific AI models, Product Development and General Working Capital to catalyze the next stage of our growth. We believe that ongoing operations, working capital and associate cash flows, In addition to our cash resources, provide sufficient liquidity to support our ongoing business operation and satisfy our obligation as they become due for at least the next 12 months.

Speaker 4

Excluding the impact of the Queensland contract change and foreign exchange, Q2 results indicate a trend towards higher volumes and an accelerated adoption of vertical AI based workflow. 1 of our key indicators is the health of our top 20 accounts. After a tough cycle for the pandemic and great resignation, our customers are back on their feet and processing again to normal cadence. Volumes are all trending higher than last year among these top 20 customers. We are looking forward to activating and accelerating the ramp up of clients to convert the current 8,900,000 bookings to revenue as we continue to welcome significant new wins.

Speaker 4

Our solid net new bookings combined with the planned restructuring and migration in Australia supports a clear path to return to adjusted EBITDA profitability by end of the year. Now I'd like to hand it over to the operator for our Q and

Operator

One question and one further follow-up question. We'll now take a moment to compile our roster. We do have a question from the line of Brian Kinstlinger from Alliance Global Partners. Please go ahead.

Speaker 5

Hi, guys. Thanks for taking my questions. I guess one of the questions would be helpful to clarify is March is a seasonally weak quarter. Obviously, June should be stronger. And while it was a little bit, Even if you're not onboarding contracts, I would assume the run rate of revenue is stronger than 5% more than the March quarter.

Speaker 5

So take us through the puts and takes. Is there just less volume? Did some contracts fall off? I'm just trying to understand Comparing March to June on seasonality. Hey, Tom,

Speaker 3

do you want me to take that one?

Speaker 2

Yes. Go ahead, Sheila.

Speaker 3

Yes. Brian, seasonality that we're used to in the United States is a little different. Q2 is rought with some challenges in terms of seasonality, particularly in June in Australia, where they begin the court shutdowns at the end of the month and that continues into the first You also have in April all of the holidays that are associated with Easter. So June has a lot of public holidays. They also had several, what I would call, unexpected Events within Australia that impacted the run rate there as well.

Speaker 3

As an example, there was a new Supreme Court Justice that was appointed in Australia, which caused the courts to shut down for a 3 day recess, while he was brought into office. So it was a combination of the scheduled court shutdowns along with a couple of unexpected recesses within the courts In Australia that had major impacts on June.

Speaker 5

So Notwithstanding new contracts starting, which I'd love to hear about how they actually started that $8,900,000 in bookings. As you think about That portfolio of contracts that you have in the June quarter, are those going Produce more revenue in the second half of the year or is your ability to generate more revenue dependent only on New contracts ramping?

Speaker 3

The answer is yes to both. We are accelerating growth from current customers And we to go back to one of your first questions, we have not lost any customers. All of our top twenty accounts which represent a very high percentage of our overall revenue are trending ahead of last year. Capacity constraints That bled into Q2 restricted our ability to expand, but there is more demand certainly from our clients that we were able to take in Q2 as that capacity has been resolved, you'll see that acceleration in Q3 and Q4 of the current customer base. In terms of the new contracts, it was they both have the major contracts have all started.

Speaker 3

The unfortunate thing about the 2 very large ones is that project management on the part of the customer, Not on our ability to accelerate those ramps has been significantly slower than we had hoped. It is they are ramping, but they are ramping at a much more Lower pace than we had anticipated. But again, every day it gets better and we believe that Where we thought we would be at the end of Q2, we'll probably end at the end of Q4 in terms of the acceleration of those ramps, but it is Steady as she goes.

Speaker 2

Yes. Some of those contracts, Brian, are fairly large and they involve obviously a number of large regions. So that process took a little bit longer than expected. But at this point, as of end of June and then obviously through July, now they're all ramping According to the initial schedule.

Speaker 5

Okay. Thank you.

Speaker 2

Thank you, Brian.

Operator

Thank you for joining our call today. If there are any additional questions consistent with the company's practice, Please reach out directly to arrange 1 on ones. This now concludes our conference call. You may disconnect.

Speaker 2

Thank you.

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