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Good morning, ladies and gentlemen. My name is Emma, and I will be your conference operator. Today, we are hosting a conference call to discuss the first quarter 2022 financial results for VIQ Solutions. [Operator Instructions]
Your host today is Ms. Laura Kiernan, Head of Investor Relations for VIQ. Please go ahead.
Thank you, Emma. Good morning, everyone, and welcome to the VIQ Solutions First Quarter 2022 Results Conference Call. Before we begin, I would like to point out that certain statements made on today's calls contain forward-looking information subject to known and unknown risks, uncertainties, and other factors. For complete discussion of the risks and uncertainties facing the VIQ. We refer you to the company's MD&A and other continuous disclosure filings, which are available on sedar.com and ftc.gov. As a reminder, all dollar amounts are in U.S. dollars unless otherwise stated. Today's presenters are Susan Sumner, President and Chief Operating Officer of the VIQ, and Alexie Edwards, Chief Financial Officer. Our CEO, Sebastian Pare, had a family emergency and he will not be able to join us for the call today. Susan and Alexie will be able to answer all the questions following the prepared remarks.
I will now turn the call over to Susan Sumner to begin.
Thank you, Laura, and welcome everybody to our first quarter earnings call for 2022. We are happy to be addressing you now that the impact of the courts-related COVID disclosures in our key regions seem to be behind us. While the predicted seasonality and closures impacted Australia in January and February, March represents the first month in over 26 months that the revenue is free from lockdown. It reflects the beginning of our recovery and the expectation of the returns to normal. The impact of COVID shows most profoundly, and what is always the worst quarter for the court space in Australia, but with that, we also see the rebound in March. This rebound is not only witnessed in our technology services business, but also in the activity that will build on the investments that we've made to our technology. As evidenced in dramatic improvements in gross margin and services, as well in the interest in selling our technology services to key customers around the globe. In April, a headline in the Naples Daily News stated that in Lee County, Florida, a high-profile murder trial could have been delayed, as they had no live court reporters to support the upcoming trial. This would lead them to the option of using the digital transcription. This shortage, while affecting all criminal trials and courtrooms in southwest Florida, is not unique to this area, and is affecting courts across the globe. This is exactly the situation that is forcing government agencies to look at new ways to utilize hybrid technologies to ensure justice is served within a more efficient ecosystem. The ability of secure technologies that provide options to process audio and video, and create transcripts in near real-time are key to solving the backlog, and the resource issues facing court agencies today. Delivery of the electronic transcripts seconds behind the spoken word, both in the courtroom and to remote events, gives attorneys and judges the ability to flag events and take notes in the transcripts instantaneously. Our net scribe live solution, which is to be released in beta later this quarter, will provide tools needed to offset the shortage and create real efficiencies. We have the solutions our courtroom and legal clients need to help them solve their critical challenges. While our expected technology sales were delayed, our pipeline remains strong. With 3 major technology trials in play, we believe that the novel solutions being implemented will continue to drive client engagement and pipeline growth. In Q1, we signed 2 new technology services contracts to support court recording, and transcription services to facilitate providing trans an estimated annual value of approximately $1.9 million. Which will increase annual recurring revenue and positively impact organic growth numbers post-COVID. The Auscript’s acquisition has increased both our geographic and segment, next to support further investment in core technologies, given the response to the productivity gains in the segment. In addition, VIQ's ability to scale large contracts, not only in Australia but also across the globe, will continue to accelerate revenue improvements in our most strategic region. The enhancements or core technology to service complex court application from workflow and customization of templates, formats, and language models will allow for an acceleration in both the usability of the documentation our editors received. A reduction in the overall headcount of clients that choose to buy these solutions to source their in-house applications. This is at the heart of the trials that we are currently active across the globe. We are collaborating with major U.S. court systems to utilize our end-to-end solution suite to create efficiencies in the way testimony is managed. This high margin solution will help increase demand created by court reporter shortages, and by automating the creation of a draft transcript that will be edited by those court resources. We are collaborating with notable court clients in the U.K. to use first draft to create new ways to deliver content that will improve the accessibility of information in near real-time. With the ability to segment, search, and prioritize key data elements. These examples reflect the desire of our clients to trial and migrate to newer technologies that will be launched in Q2 and Q3 of this year. Our recent Fast Company Award recognizes VIQ's innovative approach to leveraging AI to create efficiencies, and drive transparency in courtrooms around the world. Our suite of technologies and services to record, transcribe, and collaborate provides an end-to-end solution for the courtroom of the future. We are honored to be recognized by Fast Company for the ability of our solutions to make meaningful change. The success of our AI assist and the integration of our end-to-end workflow is central to our biggest technology trials. We are on track to achieve our goals this year, realizing at least $50 million in revenue, and continuing to improve our gross margin to reflect the integration of our technology platforms across all verticals, including courts. We expect to see an acceleration of technology sales as courtrooms and court systems recover from the stress of managing increased demand resulting from closures in 2020 and 2021. New products to be launched later this year, will support this growth, and the depth of our end-to-end solution. And now I will hand this over to Alexie, who will speak about our financial results. We will then open the lines to answer your questions.
Thank you, Susan, and good morning, good afternoon and good evening, everyone. Some of our Q1 highlights include revenue of $11.5 million increased by 40% driven by the acquisitions of Auscript and TTA. These were partially offset by lower technology sales in Q1. As Susan stated, we have 3 major active technology trials and a strong pipeline this year, or wherever you mix, by vertical continues to evolve. In Q1, the mix by vertical was 58% for legal, including courts and law firms, 13% criminal justice, including law enforcement, 16% insurance, and 14% for media, corporate, and government combined. Gross profit was $5.5 million, or 47.6% of revenue, compared to $4 million, or 48.7% of revenue, in the same quarter of 2021. The increase in gross profit was primarily due to the Q4 acquisition and U.S. productivity gains, partially offset by law technology revenue versus comparative period in 2021. In addition, the comparative period in 2021 includes $0.1 million and COVID-19 wage subsidies. Excluding COVID-19 wage subsidies, gross profit margin for the 3 months ended March 31st, 2022, would be 47.6% versus 47.3% in a comparative period in 2021. This represents a 30 basis point increase, which includes acquisition that has yet to be integrated. Our adjusted EBITDA was negative $1 million versus adjusted EBITDA of positive $0.3 million in the first quarter of 2021. The decrease in adjusted EBITDA was due to, primarily, by lower technology sales, not fully offset by higher technology services revenue, and related gross profit, and higher selling, general, and administrative expenses. Additionally, we have $0.3 million in COVID-19 wage subsidies in the comparable 2021 period. As has happened in the past, post-acquisition consolidation is expected to result in a favorable material impact on SG&A. Given that the acquisition closed late in the fourth quarter of last year, our gross margin reflect pre-integration results this quarter. As we integrate acquisitions this year, we expect that all overall gross margins will gradually lift. Our SG&A expenses will decrease slightly as we gain operating leverage, and as we begin to generate positive EBITDA. This quarter represents our first release of key metrics to track the progress of the core business. Given this is the first time we have presented these metrics, I will take a few minutes to share with you the key takeaways found within those metrics. We have seen significant growth margin improvement in our core technology services driven by the migration to our technology. Which increased from 38.4% to 46.5% year-over-year without subsidies. We will continue to drive improved results as we integrate and migrate our new acquisition. And while gross margin, particularly in the technology services space, show the continued improvement of our operations and influence of our technology, the cost to produce a minute of transcription, particularly in the U.S., which is furthest along in integration, shows a 13% reduction in the time to produce a minute of transcription. The impact of Auscript and TTA will, in the beginning, negatively impact the consolidated number. As we move to integrate them and the remaining legacy clients into the VIQ technologies, additional margin acceleration is expected. Our cash balance at Q1 was $3.7. Historically, Q1 has been the lowest quarter with respect to collection, and Q1 '22 is no different. This is because a significant portion of our business is tied to the core segments in Australia. That closes for recess in late December to mid-late January. Additionally, resignation of finance staff has negatively impacted our collection efforts, especially in Australia. However, we've already seen a positive cash inflow in Q2. We're seeing meaningful improvements of key performance measures as we integrate the technology throughout all the services operations. As well as an improved sales activity, which has resulted in increased organic bookings by 64%. The technology and technology services in pipeline have strengthened and related revenue will be realized during 2022. We have shown that the revenue, even with the seasonality and closures in Q1, firmly positioned us to achieve our commitment of at least $50 million for the year. While we did not track the Net Promoter Score in early 2021, we do know that based on the results of Q1, our NPS shows a world-class client engagement score of 86 which translates into highly secure customer base. So in summary, Q1 is the beginning of post-COVID recovery for VIQ, and quantitative measurements show that the technology and operations are performing as expected. We believe that Q2 will show a favorable impact in SG&A resulting from normal, post-acquisition consolidation and efficiencies. The resulting Q1 profit for the direction shown in March, leaves us very confident in the performance of the rest of the year.
Now I would like to hand it over to the operator for our Q&A sessions. Operator?
[Operator Instructions] Your first question today comes from the line of Brian Kinstlinger with Alliance Global Partners.
Great recovery in the first quarter here from the fourth quarter. And I like the new stats on the MD&A that you've talked about. First, I want to touch on the transcription minutes that are running through automation, which is only 32% to date. First, when do you expect TSA and Auscript to be automated on the platform? And then when you look at your entire book of business, are there some use cases that cannot use automation? And if so, what percentage does that represent?
Brian, and thanks for the question. It's a great question too. So I'll answer them in the order that they were asked. In terms of TTA and Auscript, as you know, we just closed on Auscript in December. We are in the process, as we always do, of stabilizing that integration, working on the plan toward that migration, which we have always planned to take place late in the second half of the year. The migration to the speech-to-text automation may actually happen earlier than that. But again, it is essential to us that we have a very solid migration that anticipates a transaction that doesn't negatively influence both contractor and customer experience. We're also implementing the very large contract in Australia mid-year. So that may influence the acceleration of that as well. On TTA, they will begin in the next couple of weeks that migration. And we're very excited about what that means both to the customer base of TTA, but also to the prospects in the pipeline. And yes, you're right, but it only represents about 34% of our overall revenue. There are clients that required incremental development on the NetScribe platform, in order to be able to successfully migrate them. And you will see the readiness of that evolution of the technology in late 2022. And that's when you'll see the remaining customers that we will move. But to your point, are there customers that will not make it to that? Yes, they may not make it to the platform. They may use different variations of AI assist, but not use that in conjunction with NetScribe. The goal is to make sure that we maximize the efficiency of the user experience, and in certain applications such as media or in new segments that we may be looking toward. The introduction of our eCommerce application and the back-end technology of the AI assist platform may be sufficient and not require the workflow technology. So we're constantly evaluating what the right mix is, but I think it's fair to say that as we exit 2022 get into 2023, we expect that that 34% will be in the high 60s to 80s.
Oh, wow. That's huge. My follow up is, I realize your presence in U.S. ports is more limited than Australia and the U.K., but can you talk about the progress you're making there, you've had a great anecdotal piece about Lee County. How is the pipeline evolving, and more specifically, how are you attacking the market? You have tons of direct salespeople, a handful of direct salespeople, how are you attacking the market?
So in the United States, we have a direct sales organization and we also have distribution channels that we talked a little bit about in the last earnings call. We also sit on the CareSoft framework, which is the GSA enablement as well as the NASA enablement for the federal government. As you know, EOIR is one of our largest customers in the United States. We do a combination of both, depending upon what the requirement of the customer is, what the combination of technology hardware and services will be, we'll certainly change our strategic approach toward how we're going to sell. I think you're going to see a difference in the services requirements in the United States, versus the way we accelerate that delivery in other geographies. I believe that SaaS in terms of the end-to-end integrated technology will be facilitated in the sale to the court and governmental entities, versus a more bifurcated sales approach that you see in rest of world where they tend to buy capture technologies and then transcription services. In the U.S., many of those court systems have independent in-house transcription services because of the complexity of the approval process that is unique to the United States, which is absolutely why we believe that the end-to-end technology that we're now testing in the Midwest is going to be the right application to solve for this resource crisis that they're experiencing in the United States.
Great. One numbers question then I'll get back in the queue. Alexie, can you provide the total revenue contribution from the 2 acquisitions in the first quarter?
For the first quarter, $4 million.
Your next question comes from the line of Daniel Rosenberg with Paradigm Capital.
My first one revolves around the selling and administrative expense line. I know you had mentioned they're expecting a slight decrease there. So I just wondered, what does a normalized level look like if you think through having the acquisitions fully integrated?
Thanks, Daniel, for the question. In terms of a normalized level, I would use Q1. But you know, when we look at SG&A, I get a number of factors that influence that. Because of integrating the acquisitions, we have not yet made some changes in terms of consolidation and realizing some of the efficiencies. But Q1 it's a quarter where it's the first quarter of the year. And it's a [indiscernible], it's a range, but there are too many factors influences. So I really don't want to get you telling you to use Q1 as a guide because of the number of factors that influence Q1. As we progress through the year, you will get a better indication of what our SG&A is going to be. When you look at Q1 versus Q1 last year, I mean, it's higher by $2.4 million, I think. And $2 million, that is a tribute to the acquisitions. And as we progress through integrating to this acquisition those SG&A, we expect to get a favorable impact from the integrating those acquisitions.
And then now let us jump in and add to that. You saw us last year in the second quarter, where we announced consolidation improvements in the SG&A. I think that you'll continue to see our approach toward consolidation consistent in the same amount of time from post-acquisition into consolidation. But you're also going to see toward the second half of the year, the improvements that are tied to our Project Titan, you've heard me talk about, we will begin utilizing global resources for administrative support, as we have attrition to replace headcount in lower-cost regions where that function can still provide secure results. And so we're very excited about what that's going to mean to the second half of the year as well.
And that's a interesting point around the labor fronts. So could you speak to any changes in the dynamic in terms of you guys accessing transcription, human capital, you know, and any changes in pricing or labor costs that you're seeing or just supply, demand?
Certainly there is an extraordinary amount of demand. We are very, very fortunate that we're able to distribute the demand around the globe to the degree that it is possible without the restrictions of sovereignty that exists within certain contracts. You will see the offset of some of the incremental costs due to CPI changes by the reduction in cost of the migration from transcription costs to editing costs. So you will still see a downward trend even in a more competitive labor market on the editing costs. We're also moving into a different kind of labor market as we pivot from transcriptionists, which seem to be in more high demand, to a more editing function where we can train a new labor force. It also seems to be based on what we're seeing from our recruiting organization, perfect for the migration to the stay-at-home worker. So we are getting a very large pipeline in terms of applications that are coming from people that are not in the industry, that are changing industries in order to take on a new skill set that will allow them to continue to work from home post-COVID.
Okay. I know in the past, you had spoken to kind of organizing the sales team and, you know, with a greater focus on RFPs and larger type contract wins. I was wondering if you could provide some color around, you know, just how you view that sales pipeline in terms of the opportunity there and your ability to convert.
So we're doing an extraordinary job in terms of delivering a higher acceleration of RFPs. What we saw in 2021, and you've heard me speak to this before, I won't get into the specifics, but we won a major RFP that we had been working on for over 2 years, that was then stalled because of the time it took to actually get the award out the door. All of those decisions, because of the pressure around the court systems, are now beginning to accelerate. So the pipeline that you see for our technology services in terms of RFPs that we're responding to is pretty significant. And the RFP that we won for the big part of that contract that was announced in my comments was also part of the pipeline of the last 2 years. It just took a lot longer to build into the results of the organic revenue. So we're not seeing as much the result but that's not a factor that we haven't built up that RFP team it's that there was a slowdown in the velocity of RFPs coming out because of the COVID backlogs that you're now beginning to see in terms of acceleration. I think we've done as many RFPs in Q1 as we did in the entire year, last year. That just gives you an idea in terms of the velocity of what we're putting through that new group.
Great. That's good to hear. Lastly, for me, just on the balance sheet, so you ended the quarter, I think it's $3.7 million in cash. I was just wondering how does working capital move with receivables and payables in the near term and also as you're digesting the acquisition?
Yes. Great question, Daniel. As I indicated in my prepared remarks and the cash balance of $3.7 million. Q1 is always a tough quarter in terms of collection of receivables was impacted by the closures in Australia primarily. We were donned some staff members in terms of our affecting negatively or collection efforts. And so we have already seen a reverse of that trend already in Q2 where we have collected a lot of the outstanding cash. We expect Q2 to show positive work in capital as we take action to consolidate the acquisitions and the collection efforts. We see the fruits of the collection efforts.
[Operator Instructions] Your next question comes from Scott Buck with H.C. Wainwright.
I want to apologize if any of these have been asked, I've been jumping back and forth between calls, first one for me, just given the momentum in Australia, what do you guys see there as the potential opportunity going forward? Is there still a meaningful amount of new business that you can contract with there?
In the next, I think, 2 months, we will have 3 major RFPs that we will be participating in. Then as we look to this year, you will see, and that those were predominantly, Scott, for services. We have several opportunities for integrated end-to-end solutions, and I think you'll begin to see more technology only, RFPs as again, they begin to crawl out of the post-COVID recovery, the crawl out of post-COVID and into recovery. There is a lot of upside. I mean, the business is in very large chunks, which positions us extraordinarily well in that region. But there is about a 5-year to 6-year window once you've won an award before that award becomes available. So it was quite your last year, next year, this year we'll gain awards that will have a value that are pretty significant for 2023, and what we haven't seen in the last 2 years that we believe will accelerate toward the end of this year is more of the integration of the actual technology or the migration to SaaS solutions that we're seeing in the United States right now.
Great, that's a really good caller. Second one, gross margin was up meaningfully sequentially and year over year. How should we think about the longer-term gross margin opportunity? I mean, what is the ceiling on the business?
As we noted, Scott, gross margin for Q1 was 47.6% and as Susan alluded to earlier, when we look at the fact that in Australia, none of the core customers are already on our platform, we expect to see gross margin gradually lift. In our guidance, we provided 47% to 55% gross margin, and we're confident that we'll be able to achieve that target this year, as we migrate those 2 acquisitions and we start to see improvements on those website gross margins to show an uplift point later this year.
Okay, that's helpful. And then in 5 years, can it be a 65%, 70% gross margin business?
What I can say, Scott, is that we are constantly going implementing improvements. We expect to as I said, migrate those customers to a platform. Do know that if we do acquisitions in the future, usually the first 3 to 6 months dependent on the acquisition that may negatively impact the gross margin, but it's our goal to have continuous improvements in our gross margin.
Yes, in addition to what Alexie said, I mean, I think that if you look at the cost of producing and then that of documentation that Alexie talked about, the bottom line is we believe that sometime in 2023, 2024, we will be able to produce a document that is usable by our segments that is significantly less cost to produce than it is today.
Okay, that's helpful. And then just the last one for me Alexie, I don't know if you've disclosed before, but what do you guys see as a potential expense synergies from the recent M&A deal?
Sorry, could you repeat that, Scott? I didn't get the first part.
Yes. I'm not sure if you guys have disclosed this before, but what do you think is a reasonable expectation for expense synergies from the integration of the recent M&A deal?
We're going through that process as we speak now, Scott. And those synergies and cost savings are based on the consolidation of work and the different businesses that we acquired, we expect those to flow through a favorable impact to our SG&A starting in Q2 and in Q3. We haven't quantified what that number is right now, but there are a number of opportunities that we're taking advantage of to reduce the SG&A for those 2 acquisitions.
Okay. I appreciate the additional color, guys, and congrats on a strong start to the year.
Thank you.
Thanks, Scott.
Your next question again comes from the line of Brian Kinstlinger with Alliance Global Partners.
I think I heard you correctly saying that in March was the first quarter you worked out. So many of the headwinds that unfortunately the company had faced for the last year-plus. So I guess I'm curious as we look at March and we look at April, was the company profitable on an adjusted EBITDA basis was a break-even and you weren't that far off in the first quarter and it sounds like expenses were a little bit high compared to where they're going to be going forward.
So what we have said, Brian, is that when we look at the monthly results, March provides us with a good indication that we have turned a corner. Q1 was impacted by COVID, forest closures in Australia. Also, there was a flood in Brisbane which the courts were shut down for, I think, 5 days. So that negative impact January and February. But based on what we have seen in the March results, it's a trend in the right direction where we believe that we're going to be profitable from EBITDA going forward based on the latest numbers we are seeing for March. We haven't disclosed our quantified April yet, so we cannot speak to that. But based on what we are seeing in March, we seem to turn in the right direction.
There are no further questions at this time. I would like to turn the conference back over to Susan Sumner for closing remarks.
Thank you guys for your time today. We really were excited about spending time talking about Q1 2022. We certainly wish Seb and his family the best. And I know he looks forward to speaking with everyone at the AGM on June 7 and participating in Q2 results later this summer. I hope you all have a great and safe weekend.
This concludes today's conference call. Thank you for attending. You may now disconnect.