VIQ Solutions Inc. (NASDAQ:VQS) Q1 2023 Earnings Call Transcript May 12, 2023
Operator: Good 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 first quarter 2023 financial results for VIQ Solutions, Inc. At this time all participants are in a listen-only mode. [Operator Instructions] Your host for today is Ms. Laura Kiernan, Head of Investor Relations for VIQ. Please go ahead.
Laura Kiernan: Thank you, Julianne. Good morning, everyone, and welcome to our first 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&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 U.S. dollars unless otherwise stated. With us today, we have Sebastien Paré, CEO; Alexie Edwards, CFO; and Susan Sumner, President, and COO of VIQ, all of whom will be available for questions following the prepared remarks. I will now turn the call over to Sebastian Paré to begin.
Sebastien Paré: Thank you, Laura. Welcome, everyone, to our first quarter. I’ll provide some high-level remarks on our results, and then I’ll hand it over to Susan, who will discuss some of our operating results, which will be followed by Alexie, who will discuss some of our financial results. Then we’ll open 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. Transcribers play a critical role in leveraging artificial intelligence to achieve greater productivity and accuracy rates to meet the evidentiary 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 continuation of our record level of net new booking 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 are an early indication of organic growth. Contracts take some time to ramp up and revenue to be recognized. As of March 31, our total contracted net new bookings were $9.4 million, of which 20% has been recognized as revenue so far. The remaining 80% will be recognized over time. Increasingly, new customers have recognized the unique value of the VIQ offering. After a detailed procurement evaluation, these new clients, including Fortune 500 organizations, have told us that our Velocity offering is unique in its end-to-end approach, utilizing innovative technology to speed 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. Our intellectual property is changing the industry and is the catalyst to organic growth in 2023 and 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 make-up of Q1 to make sure everyone understands this new contract. During the quarter, we also completed the refinancing of our debt with Beedie Capital.
Beedie’s approach striking a measured balance between innovations, advancement in our AI and competitive leadership, SaaS scalability and growth versus cost and a return to positive EBITDA became very important at this stage of our growth. Beedie’s depth in technology and transition to SaaS knowledge is exceptional with incredible depth in financials and market analysis. Our partnership with Beedie at this stage of our growth is crucial. Finally, we implemented significant cost containment measures, which enabled us to significantly reduce our overall operating costs. Alexie 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 detail. Susan?
Susan Sumner: Thank you, Seb. As Seb 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 Auscript 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. In December of 2020, prior to the Auscript 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 Auscript who, at the time, was owned by FTR.
While the Auscript 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 Auscript, which, again, was for both recording and transcription. In December of 2021, VIQ closed on the Auscript acquisition, knowing at the time that their contract with Queensland have been lost and that we would be delivering services for that contract until it splits to the new VIQ agreement.
It was expected that this new agreement will begin implementation in February of 2022, 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 three stages that went to full go-live in October of 2022. Q1 of 2023 is the first full quarter of revenue under this new agreement. When compared to Q1 of 2022, there is a reduction in revenue of approximately $1.2 million year-over-year. The reduction in this revenue also impacted gross margin for Australia as the recording revenue component of the Auscript’s contract was also moved in-house and without a significantly higher margin than the transcription revenue. It is important, as we did not lose a customer, we did not leave unexpected revenue.
The variance was anticipated after the purchase of Auscript and was certainly built into the expected revenue announced with the Auscript transaction. In sub-reference that we are now fully operational with this contract, we referenced 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 operations in Q3 and Q4 of last year. So in summary, there are three stages of this contract: one, pre-Auscript acquisition, the contract was awarded to VIQ, but it was Auscript revenue; two, post-acquisition, the Auscript contract continued until July 2022 and the contracts were in transition from July until October, both revenue and operational stability; and the third stage, VIQ revenue Q1 is the first full quarter of this new VIQ contract.
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 awards. Now regarding the achievements of the quarter, we had $2.8 million 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. Several large SaaS contracts were NetScribe and FirstDraft technologies, a service agreement for one of the top five insurance companies in the United States and geographic expansion as well. We had our first 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 or in collaboration with customers to deliver transcription services. As transcription providers begin to deliver more multi-speaker verbatim content, helping to fill the demand for increasing capacity globally. It is the right time for this product to support the required workflows in this very important geography. We also closed our initial sales for the ORdigiNAL 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 bill their customers, accelerating the scale and the sale of our SaaS and [indiscernible] revenue.
We launched CapturePro Mobile, expanding our commitment to building technologies that advance the need for tight integration of video with fully integrated editing in all mobile applications. As we begin our data 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 of 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 but will impact our top-line revenue in the short-term. Q1 had a slight decline in our U.S. revenue due to the acceleration of speech-to-text and SaaS sales and 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 FirstDraft 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, prioritization [ph], and formatting. VIQ will lead the disruption that the acceleration of this technology provides. 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 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 very excited to see our new insurance customers embracing products and technologies that augment and substitute traditional services. We are leading the path to change this industry. We have recently launched our new brand Velocity. Velocity is defined as speed of motion, action, or operations, and this truly defines VIQ at the moment. We are using our technology to build Velocity to accelerate the motion and the actions of our internal operations and the clients that we support. I will now pass the call over to Alexie to discuss our financial results in greater detail as well as the cost-containment initiatives and related impacts on our cash.
Alexie?
Alexie Edwards: Thank you, Susan. Good day, everyone. Let me recap a few of our first quarter 2023 financial highlights for you. As Sebastien mentioned, our revenue was $10.1 million, a decrease of $1.5 million 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. Our gross profit was $4.4 million or 44% of revenue compared to $5.5 million or 47.6% 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 $3.5 million or $0.10 per diluted share versus a net loss of $2 million or $0.07 per diluted share last year.
And finally, our adjusted EBITDA was negative $1.1 million versus negative adjusted EBITDA of $0.9 million 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. 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 NetScribe and the implementation of net new bookings to have a positive impact on cash.
As of March 31, 2023, we had a total of $2.5 million in cash. On January 13, 2023, we entered a senior debt facility with Beedie Investments Limited with maximum available funds of $15 million, $12 million of the loan was provided to us as an additional advance with an additional $3 million available to the company subject to the company satisfying certain conditions. Now, I would like to hand it over to the operator for a Q&A session.
Q&A Session
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Operator: Thank you. [Operator Instructions]. Our first question comes from Scott Buck from H.C. Wainwright. Please go ahead. Your line is open.
Operator: Our next question comes from Brian Kinstlinger from Alliance Global Partners. Please go ahead. Your line is open.
Operator: We have no further questions. This will conclude today’s conference call. Thank you for your participation. You may now disconnect. Have a great day.
