Viq Solutions Inc

TSX:VQS

Earnings Call Transcript 2023-Q3

[Operator]

Good day, ladies and gentlemen. Today, we are hosting a conference call to discuss the 2023 Third Quarter Financial Results for VIQ Solutions Inc. [Operator Instructions] Your host for today is Audrey Liu, Corporate Finance Controller for VIQ. Please go ahead.

[Audrey Liu, executive]

Thank you. Good morning, everyone, and welcome to VIQ Solutions 2023 Third Quarter 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 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 Pare, CEO; Susan Sumner, President and COO; and Alexie Edwards, CFO of VIQ. I will now turn the call over to Sebastien Pare to begin. Sebastien?

[Sebastien Paré, executive]

Thank you, Audrey. Welcome, everyone, to our third quarter of 2023 earnings call. In Q3, we continue to adapt to industry and market conditions that continue to evolve, including foreign exchange rates and labor shortages, particularly in Australia. These challenges are largely in the mirror view now, but they did create a significant impact in the quarter for both the acceleration of the revenue and the abatements that have impacted our bottom line. The implementation of NetScribe powered by aiAssist is critical to mitigate the labor risk in the coming years. Amidst such industry challenges, the urgent need to digitize has never been so clear and pressing. The pressure on customers and many resellers to bring in new technology workflow and proven AI to increase productivity to meet growing volume is reflected in VIQ recent solid bookings for NetScribe aiAssist and the sales pipeline for AI solutions in Q3 with trends getting stronger and stronger. Demand continues to be high for our AI-enabled transcription and translation technologies. This is evident in our healthy backlog that represent approximately 45 days of law enforcement work in Australia alone. While certain challenges have limited our ability to fully recognize this backlog, our bookings remain really strong and proof of recovery underscores the resilience in the industry and of VIQ. The third quarter represents the last comparable quarter against the prior Queensland Courts Department of Justice and Attorney-General, known as DJAG contracts, which created challenges and comparative metrics trailed the whole 2023. Excluding the DJAG contract and the negative impact of foreign exchange, the VIQ will have reported positive year-to-year -- year-to-date revenue growth of 1.2% over the comparative period in 2022. I will now pass the call over to Susan to discuss our operating results in great detail. Susan?

[Susan Sumner, executive]

Thank you, Seb. Q3 2023 was a very exciting quarter as we began the long-awaited migrations of our core customers in Australia. Based on proven material gains in gross margins in the United States and other regions, we began the acceleration of our migrations that we believe will lead to similar material gains in net gross margin in 2024. This will not only lead to improved efficiency in our production operations, lower costs and less time to produce content, but it will also create the foundation to accelerate the addition of incremental solutions to the NetScribe ecosystem, such as language expansion, enhanced formatting that will ultimately drive change. Another exciting milestone in quarter 3 was the addition of the new client. One of the top 15 insurers in the United States and one of the top property and casualty providers in the U.S., who is utilizing our technology to replace an estimated 90% of their traditional transcription requirements with content that is created exclusively by our AI-generated text. After months of testing, it was concluded that our solution which they found unique in comparison to other vendors, provided reports that were highly usable because of our customization with domain-specific language models and post-processing enhancements. Also influencing their decision is the ease of use of our workflow, allowing them to easily route the document to be fully edited with our human editors or translators. This transition to an AI-only draft will save our customer close to $1 million [indiscernible] and provide VIQ gross margin from that technology in the mid-90s. This week, we will launch our superhuman transcription campaign, promoting our core solutions to current and expanded segments. Our integrated solution validates the requirements for the 3 core elements of our technology: AI, the human editor or translator and the critical workflow that enables the management of that document. This is evident in our core solutions, where we bridge the gap between audio capture and certified transcription, being able to gain delivery to -- being able to, again, deliver all 3 core elements with audio capture, AI-generated FirstDraft and certified human-delivered transcripts. We will not only consume this highly efficient technology to optimize our internal workflow, but deliver it to court and law enforcement agencies around the globe. We've already validated dramatic improvements in transcriber and editor productivity. But in our initial migrations in Australia, we are also experiencing meaningful improvements in the automation of workflow. We have discussed the complexity of the creation of court documents, particularly in Australia. Now utilizing NetScribe, transcribers and editors can self-select content no longer waiting on workflow teams to assign it to them. This improvement alone is driving additional content to be produced each and every day by editors as work is available when they are available, day or night, weekdays or weekends.

And in an industry where capacity is so constrained, improvements like this and many other features from NetScribe helped to not only improve margins but also solve the very complex longer-term capacity issues that have been such a challenge to us and other service providers around the globe. We have always said that we do not compete with companies like Google and AWS on pure speech-to-text output, but we are unique in our approach in AI-driving customized documentation by utilization of AI and workflow to drive improvements that accelerate the requirement for digitization and modernization in the segments and the geographies where we focus. Third quarter operational highlights include the transition to AI-only drafts that are helping to solve capacity challenges, capacity recovery and expansion, leading to growth in revenue and margins in our U.S. legal vertical. We recognized Q3 bookings that were strong at $932,000, demonstrating continued demand despite capacity challenges. We saw early success from initial Australian migrations, having shown up to a 50% improvement in gross margin percentage, but overall reductions in AI margin -- in Australian margins were impacted by training and migration costs due to costs that are expected to be temporary from training and other productivity challenges. Increases in AI-only SaaS sales being driven by domain-specific language models are proving to improve overall [indiscernible] scores and improving editor efficiency. As we look to Q4, we have launched solutions that enhance self-editing and video capabilities to deepen our reach to law enforcement, media and insurance, driving faster access to our technology and also expanding the languages that we support and the delivery of the draft, but also in access to our platforms globally. Now I will hand the call over to Alexie to discuss our financial results in greater detail. Alexie?

[Alexie Edwards, executive]

Thank you, Susan. Good day, everyone. Let me recap a few of our third quarter 2023 financial highlights for you. Revenue of $10.1 million, a decrease of $1.7 million or 14% compared to the same period of the prior year was primarily due to the expected change in the DJAG contract, which accounts for 76% of the variance. Gross profit was $4.3 million or 42.9% of revenue compared to $5.6 million or 47.3% of revenue during the same period of the prior year. The decrease in gross margin was primarily due to the anticipated reduction in volume from the higher-margin DJAG contract. Additionally, for the 3 months ended September 30, 2023, gross profit was negatively impacted by approximately $0.1 million due to the weakening Australian dollar in comparison to the U.S. dollar. Net loss of $4.4 million or $0.11 per diluted share versus net loss of $1.3 million or $0.04 per diluted share in the same prior year period. Adjusted EBITDA deficit of $1.4 million versus adjusted EBITDA deficit of $0.6 million in the same period in the prior year. The increase in adjusted EBITDA deficit was primarily due to the decreased gross profit as a result of the expected change in the DJAG contract and the negative impact of foreign exchange. Partially offset by decreased selling and administrative expenses, which is due to the reduction in IT-related costs because of system integration and secondly, lower headcount-related costs due to organizational restructuring. We're continuously working to improve our cash flow with a focus on cost containment. Additionally, we expect the migration of the Australian customers to NetScribe and implementation of net new bookings to have a positive impact on cash. Now I would like to hand it over to the operator.

[Operator]

Thank you. And ladies and gentlemen, for questions and answers regarding recent disclosures or any other matter, please reach out directly to the company using the contact details on the company website. We thank you for joining our call today. And this now concludes our conference. You may disconnect.