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Good afternoon. Welcome to WeCommerce First Quarter 2022 Financial Results Conference Call. After market close, WeCommerce released financial results for the period ended March 31, 2022. The press release as well as a replay of today's call can be found on the company's Investor Relations website at investors.wecommerce.co. Please view the release for additional information on what will be discussed during today's presentation.
The company will make forward-looking statements on the call today that are based on assumptions and therefore, are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The company undertakes no obligation to update these statements, except as required by law. You can read about these risks and uncertainties in the press release issued by the company this afternoon as well in our filings on SEDAR.
Note that the adjusted financial measures the company speaks to today are non-IFRS measures, which are not a substitute for IFRS financial measures. Reconciliations of these measures to IFRS measures are available in the company's earnings release and most recent MD&A.
I will now turn the call over to WeCommerce CEO, Alex Persson.
Thank you operator and good afternoon, everyone. I'm joined today by Dave Charron, our Chief Financial Officer. I'll provide some brief opening remarks before turning it over to Dave to discuss our financials in greater detail, followed by our standard Q&A.
The first quarter was a strong start to the year and marked a continuation of the same trends in performance and market dynamics we noted in our year-end update. We continue to drive healthy year-over-year growth in our Apps and Themes businesses. Our core portfolio companies, including Stamped, Archetype and Foursixty are all performing well, providing us a stability in an otherwise challenged e-commerce market compared to last year.
In our agency business, we recently bolstered the leadership function in that segment to reinvigorate growth in the coming quarters. Q1 was also a clear proof point for the steady-state performance of our existing business. As we did in Q4, we generated north of 30% operating cash flow margins. We have a strong financial position with over $26 million in cash, and we continue to balance investing internally, while evaluating attractive acquisition opportunities in a compelling acquirers market. There have been lots of significant industry announcements over the past few months in e-commerce, including Amazon launching BiwetPrime to extend their footprint beyond amazon.com as well as Shopify acquiring Deliver to bolster its fulfillment network.
We're excited about the continued innovation within e-commerce infrastructure as we play directly on top of that infrastructure and extend it further. Many investors ask me what keeps me up at night, and the answer is always the same, the viability of merchants. Merchants have been hit by a confluence of factors over the past 12 months, increasing both the cost of doing business through supply chain bottlenecks impacting both cost and working capital as well as rising advertising costs. New e-commerce infrastructure to help mitigate these effects is overwhelmingly positive for our long-term success. Indeed, many merchants were negatively impacted by Apple's ATT changes last year. And we're already seeing amazing innovation in that space to help merchants get clarity and customer attribution and acquisition costs. There may be bumps along the way, but the trend for e-commerce is very much up and to the right.
We remain rated in our mission, which is to build e-commerce into a leading acquirer and operator of e-commerce enablement technology companies. Altogether, I'm immensely proud of the business our employees have built over the past 20 months and I'm confident WeCommerce can continue to build the leading e-commerce-enabled platform for many years to come.
I'll now turn the call over to Dave Charron, our Chief Financial Officer, to review our financial results in more detail.
Thanks, Alex, and good afternoon to everyone on the call. Before I begin, and as a reminder, we report in Canadian dollars and all references to amounts on this call and in our published financial reports are in Canadian dollars unless otherwise stated. Moving on to our results. In the first quarter of 2022, we generated revenue of $12.1 million, up 100% year-over-year and 100% on a constant currency basis.
Breaking down revenues by segment, the company has 3 reportable lines of business through which revenue is generated, Apps, Themes and Agency. The App segment refers to the operations associated with providing software to customers, which we classify as recurring subscription revenue. In Q1, Apps or recurring subscription revenue was $7.4 million, an increase of $5.1 million or 223% equal to 222% on a constant currency basis from Q1 of 2021.
The Theme segment refers to the sale of the design templates to customers operating their stores on various e-commerce platforms. We refer to this segment as regular bridge revenue. In Q1, Themes or digital goods revenue was $3.7 million, an increase of $1.6 million or 72%, equal to 72% on a constant currency basis from Q1 of 2021.
Lastly, the Agency segment refers to the operations associated with providing Agency services to customers. This segment is classified in Agency service revenue. In Q1, the Agency services revenue was $994,000, a decrease of $594,000 or 37% from Q1 of 2021. The net income in Q1 of 2022 was $790,000 compared to a net loss of $1.8 million in Q1 of 2021. The net income for the quarter includes fair value adjustments amounting to $2.1 million, which relate to the revaluation of the contingent consideration for the Stamped and Archetype acquisitions. The net loss for Q1 of 2021 includes finance fees of $1 million in connection with the early repayment of long-term debt on March 31, 2021, as well as the accelerated amortization of $128,000 of deferred finance fees on that previous facility.
Our adjusted EBITDA for the first quarter was $2.8 million or 23% of revenue, up 42% from the $2 million or 33% of revenue reported in the first quarter of 2021. Our operating cash flow at quarter end was $3.9 million or 32% of revenues, an increase of 201% compared to the $1.3 million or 21% of revenues in the first quarter of 2021. Unrestricted cash at hand at March 31, 2022 was $26.2 million compared to $26.1 million on December 31, 2021, and total debt outstanding at March 31, 2022, was $59 million.
I'll now turn the call back to Alex for a business update.
Thanks, Dave. Overall, our first quarter was a continuation of the strong operating momentum we've generated since entering the public markets, and we're well positioned for the road ahead. For a more specific update on our portfolio segments, I'll begin with Stamped, which we acquired in April of last year. As a reminder, Stamped is a leading provider of reviews, ratings, loyalty and reward solutions with over 15,000 paying subscribers.
At Stamped, we've continued to see a strong improvement in the financial performance and operations of the business. Merchants are increasingly converting to the full suite bundled product offering that includes both reviews and ratings as well as loyalty and rewards. Average revenue per paying customer has increased more than 20% since the acquisition last year, showcasing Stamped strong value proposition. Of our other portfolio companies within the App segment, Orbit Apps, which was formerly the Pixel Union apps business, and Foursixty have also performed well and continued to generate significant cash flows.
In the Theme segment, Archetype has continued to lead the way, driving strong growth and profitability despite the backdrop of a more challenging e-commerce environment that directly packs new merchant adds. Archetype impulse theme continues to be the most popular paid them in the Shopify theme store and Pixel Union recently launched its new apparel focused theme Taylor, which is showing promising initial traction.
Lastly, we made positive strides in the stabilization of our agency segment, which we expect to drive improved results in future periods. Notably, we recently appointed a new CEO of this segment to reinvigorate growth. Moving to our strategic initiatives. In March, we announced the addition of no commerce to the Apps portfolio. KnoCommerce is a leading e-commerce survey and insights platform provider that helps merchants capture and act on 0 party data collected directly from customers. As noted during our last update, while we don't expect a significant contribution from KnoCommerce commerce this calendar year, we're excited by the company's strategic positioning and what its growth profile could look like in the coming years in a post iOS 14 world.
We're seeing marquee brands with over 100 million in GMV join no commerce to build proprietary customer data and insights.
Looking ahead, while we continue to invest in portfolio companies, we're also actively canvasing the plentiful e-commerce enablement ecosystem for attractive opportunities in an improved acquired market. We continue to see valuation levels decline compared to the second half of last year. Our current prospect pool stands at approximately 1,000 companies and our active pipeline continues to represent well north of $100 million of annualized revenue. As valuations trends for more attractive levels, we're optimistic that some of the letters of intent we've circulated this year can materialize into quality deal announcements.
In summary, we're building the team, capital base and systems to scale e-commerce both organically and through targeted complementary acquisitions. We're excited about the opportunity ahead of us this year and going forward. And with that, I'll pass it back to the operator to facilitate the Q&A.
[Operator Instructions] Your first question today comes from the line of Robert Young with Canaccord.
First question, you summarized the pipeline. Any change in competition for deals? Are you seeing any new entrants in your market or any difference in competition?
Rob, nice to hear from you again. It's Alex here. We've seen a few announcements of several companies that are targeting the Shopify ecosystem. Some of those have been private equity backed. We haven't seen that translate into anything directly competing with targets.
I think I beat this drum a lot but we really believe that we continue to invest in those relationships over multiple quarters, in many cases, multiple years, combined with our unique philosophy of operating these companies without must change the company culture is a core differentiator vis-a-vis a lot of private equity-backed app aggregators.
Okay. And I think last quarter, you said that you'd put out more nonbinding offers than all of...
Yes.
And so the conversion, maybe give us a sense of like your expectations for conversion or how that's playing out? That would be helpful.
Yes. I wish I could provide a more clear figure of what that could potentially look like. I think if you look back over the past 2 months, obviously, a lot has changed in the broader macroeconomic environment. And so what that translates into, yes, more lower valuations, but at the same time, not surprisingly, seller uncertainty of, "Are things going to be better in 6 or 12 months from now?", so I can't quite comment on what a conversion is. I think what we continue to do is harness those relationships and make sure that we are seeing as many opportunities as possible to continue to improve our opportunity costs for acquisitions.
Okay. Okay. That's fair. Maybe just -- I know it's a subjective question, but is it moving as quickly as you might have thought last quarter? Or would you say that there's more challenges, maybe the competitive thing you just highlighted or maybe would you say easier, harder same as you expected?
Yes. I think on the whole, what is increasingly clear, I think this is clear from just a broader macro environment, it's just uncertainty is higher. And so what that means is sellers are -- continue to be uncertain about what the future of their business looks like. We actually like that environment because if we're overwhelmingly positive about the long-term trend, we can take advantage of any sort of sentiment dislocations. I would say that for now, we're not competing against competitive environment is not an impediment to us being able to source and execute on attractive acquisitions, Rob.
Okay. Another thing in the Stamped -- I'm sorry if I missed it in your prepared comments, but the bundling strategy had a lot of success with.
Yes.
Maybe an update there. Is that continuing to be a strong strategy for that business?
Yes. So it's a core focus given that those products are quite complementary. So we continue to see an increased proportion of the overall revenue being a bundled offering. Reviews and ratings as the sole product continues to be the majority when it comes to revenue mix. The bundle mix continues to increase, and that's part of what's contributing to that 20% increase in ARPU since acquisition.
Okay. Maybe last question, maybe last 2 questions. The Agency business, David noted it was down year-over-year again. Is that nonrenewal that you were talking about? Is that a ...
Yes, it's 2 things. Sure. It's 2 things, Rob. One is Q1 of last year was a very strong quarter. So you recall, Q1 to Q2 saw a decline last year in the Agency business. The Agency business continues to have given that client that has yet to launch the project continues to be over staffed temporarily. In my prepared remarks, I also mentioned we've made some leadership changes in that business and then we expect growth to return as well as profitability in the coming quarters.
Okay. And just last question. I mean I had thought that the -- like a tougher market and more difficult e-commerce market. Would encourage a lot of smaller independent operators of some of the Apps and Theme businesses to throw in with WeCommerce to get access to the higher quality of management and oversight and all of the things that you provide. Is that a trend that you're seeing? Or is that something you're hoping might be silver lining in more difficult e-commerce market. Is that -- maybe just give me a sense of that?
Yes, our general philosophy, Rob, which partnered with wonderful companies, not necessarily decent companies what on the face of it looked like very attractive prices. So we're still continuing that core focus of how do we partner with great companies or the very long run at good fair pricing. So there is a long tail of applications that are very subscale. Some of those could equally be complementary tuck-in acquisitions to our portfolio. but we have to make sure that these are durable companies, which some of the small ones can absolutely be. If you think about no, it's a smaller company today with a lot of potential. But we haven't seen apps or games companies throw in the towel, I'd say, not at all.
Your next question comes from the line of Daniel Chan with TD Securities.
With e-commerce volumes normalizing and Shopify lowering its 2022 expectations for new merchant additions. Just wondering if you have a sense of how sensitive your business is to new merchant additions versus spending from existing customers?
Yes. It's a good question. So not surprisingly, Themes is a bit more sensitive to new customer acquisitions, given where that product is in the life cycle of a merchant. Now and we mentioned this a few times, but the key to Themes is to treat it somewhat like a -- we treat it as a business that can have significant swings quarter-to-quarter in terms of unit growth and be prepared for that. So that segment for us continues to be highly profitable despite volatility.
When it comes to our 3 different income or our Apps businesses Stamped and Foursixty are generally less sensitive to new customer acquisitions as a function of who those merchants serve, which are typically mid-market customers, the higher ARPU product, and it has less churn. We see some more volatility, not surprisingly, in the Orbit Apps business, which is catering to a small and midsized businesses that inevitably can be more impacted by shocks in the economy, whether they're temporary or longer drawn out.
So for the most part, it's a bit of a mixed bag. But the core revenue contributors, if you think about it, Stamped and Foursixty on the App side are certainly less susceptible to declining new customer acquisition volumes.
Okay. That's very helpful. Do you think merchants -- the existing merchant base on the Shopify is slowing their spending on stores just given that there may be less pressure to do so given that consumers are spending more on in-person shopping and services?
Anecdotally and I think data would support this as well, you have stores that are doing phenomenally well and to continue to grow at an amazing pace. And some of those have found out product market fit, and they're really scaling it with paid acquisition, which has seen obviously a noticeable pullback in terms of just absolute dollars.
So with 2 million merchants, you really have a range of outcomes. I think what is different today versus the -- 2 years ago is actually the number of significant stores that just had an off-line presence that are trying to figure out how to operate their stores online and what some of that different functionality could entail, especially when you think about inventory or in-store pickup. So it's just a bit of a different merchant base, I think, today than it was perhaps 2 years ago. And that leads itself to product innovation and extending that application layer that we play in. I'll leave it at that.
Okay. That's helpful. You talked about Foursixty continuing to do well, a little bit more resilient just given that it's that serve the mid-market. Growth there seems to have slowed a little bit this quarter. I think it came in at 11%. You're doing like low 20% in prior quarters. Is that just year-over-year compare, I mean, the year-over-year compare was a phenomenal quarter for Shopify. Is that just a tough year to compare or something else?
Yes, I'd say Q1 of last year was a very strong year, kind of continuation of many trends that we saw during COVID, including stimulus checks. And some of those obviously were not as apparent in Q1 of this year.
Okay. Moving to M&A. You mentioned that valuations continue to move lower relative to H2 last year. Just based on what you're seeing in the public markets do, do you think there's still room for additional contraction relative to what you're seeing in the public markets?
Hard to say. I mean, generally, the private markets like the public market although we've obviously seen a gradual decline in public market valuations since October or November last year. So we're 6 months into it now. I imagine that the private markets will continue to decline. That being said, the good -- the wonderful companies who are financially flexible will emerge stronger from this.
And obviously, with our balance sheet and our ability to generate capital, we feel very good about our emerging much, much stronger from any sort of near-term uncertainty. But it's very hard to look at in the future and see what the future holds. I think the trade for the past 10 years has don't fight the Fed. And we continue to see what the Fed will do for the next 6 months.
Yes. No, that makes sense. Okay. Last 1 for me on M&A. Your presentation says that the short-term goal is to focus on tuck-in acquisitions. Is that more of a decision that you guys are making? Or is that what you're seeing in the pipeline? Why not go after bigger ones in the near term?
Yes. So we'll obviously continue to be opportunistic and ensure that we're positioned to take advantage of larger scale acquisitions. When it comes to tuck-in acquisitions, we're seeing complementary products be available for some of our larger companies, whether that's Stamped or Foursixty or, frankly, the Themes portfolio. So it is both. It's not necessarily negating the interest in larger platform companies, Dan.
At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Persson for his closing remarks.
Thank you, operator. I want to especially thank our employees and various stakeholders in our business, including our lenders and our long-term shareholders for their continued support and hard work. We look forward to updating you in a few short months about our Q2 results, and we're very optimistic about the road ahead. Thank you very much.
I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the company's website. Thank you for joining us today for WeCommerce First Quarter 2022 Financial Results Conference Call. You may now disconnect.