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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.
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.
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?
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?
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.
Thank you. [Operator Instructions]. Our first question comes from Scott Buck from H.C.
Wainwright. Please go ahead. Your line is open.
Hi, good morning guys. Thank you for taking my questions. First one, you guys have done a really nice job on cost containment the last couple of quarters. I’m curious whether not, you can sustain these OpEx levels as revenue starts to move higher again in the second half of the year.
Yes. I’m going to Scott, this is Sebastien. 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 through in Australia, all the cost reductions in terms of OpEx also COGS were all related to the success of the migrations into the NetScribe platform and turning on the AI and retraining our people to become editors. Once that stability has been reached, then we actually go ahead and actually make the restructuring.
So we’ve gone through basically so far two 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 aiAssist. Alexie?
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 are saying, we are saying that we’re going to move our customers in Australia to NetScribe and that’s strictly on automation of the workflow.
And so we don’t anticipate and seeing a significant increase in our OpEx as we do that migration, which, as you’ve pointed out, when we look at our OpEx, selling and G&A over the past, I would say, four quarters: In Q2, it was $6.5 million; in Q3, $6 million; Q4, $5.9 million. Q1, we are reporting $5.3 million, 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.
And Scott, I’ll just jump in 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 met now to be much more low labor in terms of scale.
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 $2.5 million. I think you still have $3 million you can access from Beedie. Is that going to give you – that $5.5 million, does that give you enough runway to get to the point where you’re generating meaningful cash internally to fund the business?
Yes, absolutely, Scott. And I’m going to continue from – this is the previous statement that Susan made, right? We expect to see an increase in our gross margins as we migrate these customers to NetScribe and that’s the old goal. That’s what we have been saying for a while. And we see – we saw the benefits of that in the U.S. where we took – we made significant improvements in gross margin. We expect to see the same result or better in Australia, and that will generate cash in itself. And if we continue to maintain our cost within a certain level with access to an additional $3 million from Beedie, we think we’re in a position – in a good place.
Great. That’s helpful. And then just quick last one for me. Sequential change in bookings. I know you gave a year-over-year number, but I can’t remember what the 4Q number was. Can you just tell me where we are there?
Yes. So last year, the total net new bookings was $7.7 million. And what we’ve disclosed last night, is we booked $2.8 million in the first quarter. So the running right now is about $9.4, of which 20% are starting to be recognized as revenue. The rest will be recognized throughout the year and over the next couple of quarters. But, for us, it was really important because we’ve gone through some significant acquisitions during the pandemic in the last two years, and that was our focus.
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 aiAssist power environment and the gross margin achievement of 55% in the United States last year and over 65% in the UK 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 gains. 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&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 our basically inorganic, focusing on acquisition. And now we’re really increasingly going back to organic being the primary driver. 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 Beedie came forward during the financing as well. They see it as well. We have a very important lead right now on the technology, and I think that net bookings are good evidence on where we’re headed in terms of the recognition by the customers.
Great. Sebastien, I’m sorry, the net bookings, are they coming from existing customers? Or are they new customers or likely a combination of both?
They all new customers. If you look at our – if you look – absolutely 100% net new. And we have a very strict definition in our MD&A, but it’s all coming from net new names.
Great. I Appreciate the additional color guys. Thank you.
Thank you, Scott Buck.
Our next question comes from Brian Kinstlinger from Alliance Global Partners. Please go ahead. Your line is open.
Hi, there. This is Shervin [ph] in for Brian. Thanks for our taking our questions. Just kind of roll off of the conversation on bookings. I heard you mentioned a 30% figure, and I wanted to clarify what that was about? You talked about how onboarding these programs are challenging given your resources were mostly focused on Queensland. Can you tell us what percentage of this value contracts has been onboarded. And then also during the March quarter, was there any revenue from these contracts?
Yes. So maybe let me start with Shervin 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 fourth quarter. But because of the labor constraints and everything that we have just been talking about, we were not able to do that. Now we’re picking up our speed. We’re picking up our cadence. DJAG 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.
Okay. Thank you. And then I think on the last call, you said that you’re expecting to have all these contracts onboarded by the end of June. Is this still on track?
Yes. So at the moment...
Seb, do you want me take that?
Yes, go ahead Susan.
Yes, I was just saying that – well we will have all of the contracts that we sold in 2022 onboarded. We had really good bookings in the first quarter of this year, and a lot of that will push through Q3 and Q4.
Okay. Do you think that you can return – yes, yes, go ahead.
And I want to be clear, these players when we start them, they migrate. So even accounts that we brought on in Q4 of last year, regardless of whether they are fully onboarded at the end of June, you may not see all of the revenue potential until later quarters as they began to inject the processes into their internal organizations. So you’re going to see that acceleration much like we have in the larger contracts last year, build progressively quarter-over-quarter.
Yes. If I could add, Shervin 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 scenes there’s an API that gets connected to the customer’s repository, behind the scene there’s an integration with larger case management in the case of insurance for claims, criminal investigation in terms of police.
So we do all the work upfront. And obviously, we’ve automated [ph] 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 is 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. So do you think that you’re going to return year-over-year growth in the second quarter with these contracts onboarded? And if not, when you think, you can expect to return to year-over-year growth?
We expect to – Shervin, we expect to have year-over-year growth second quarter.
That’s great to hear. 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 in [ph] overall gross margin for the remainder of the year?
There were two elements that were really explained in my comments. The first is that a large percentage of the revenue that came from the Auscript contract contained reporting revenue. That reporting 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. So while we are seeing greater-than-expected gross margins on transcription services from DJAG, the removal of the revenues associated with the recording certainly did have a negative impact on the gross margin.
And it was all expected, by the way. 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 way of bringing this process through. You have a downward trend in gross margin and then a hockey stick spike up, and we’re now at a business as usual state with them. So you’ll see a significant recovery from that.
And Shervin, if I may quantify all of what Susan just said. In terms of comparative purposes, if you back out the high-margin recurring revenue and the additional transcription revenue from the DJAG contract that existed in Q1 2022, if you back that out, the gross margin reported last year were normalized would have been 43.5%, we’re reporting 44% for Q1 2023.
All right. That’s great. Thank you so much.
Thanks, Shervin.
Thanks, Shervin.
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.