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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
The company will make forward-looking statements on the call today that are based on assumptions and therefore, 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 this afternoon as well as in our filings on SEDAR.Note that the adjusted financial measures we speak to today are non-IFRS measures, which are not a substitute for IFRS financial measures. Reconciliation of these measures to IFRS measures are available in our earnings release and most recent MD&A. All amounts referenced in today's call are in Canadian dollars unless otherwise stated.I will now turn the call over to Chris Sparling, CEO of WeCommerce.
Thank you, operator. Good afternoon. As the operator said, my name is Chris Sparling, and I am the Chief Executive Officer of WeCommerce. Today, I'm joined on this call by our President and Interim Chief Financial Officer, Alex Persson. Earlier today, after the market closed, we released our second quarter 2021 results, which are now available on SEDAR. As is our practice in these calls, Alex and I will make a few opening comments and then open the floor for questions from analysts and shareholders.Let us start with the financial review of the quarter. Alex?
Thank you, Chris, and good afternoon to everyone on the call. As a reminder for everyone, we do report in Canadian dollars and all references to amounts on this call and in our published financial reports, unless otherwise stated, are in Canadian dollars.In the second quarter of 2021, we generated revenues of $9.5 million, up 85% year-over-year and 108% on a constant currency basis. Net loss in the second quarter was $45,000 compared to net income of $508,000 in the prior year. The net loss during the quarter includes certain noncash and nonrecurring items, including depreciation and amortization costs of $2.7 million, mostly attributable to our Stamped acquisition and acquisition costs of $332,000. Adjusted EBITDA for the second quarter amounted to approximately $2.9 million or 30% of revenue.Our nonstaff operating expenses in the second quarter were elevated due to, among other items, higher professional fees, attributable primarily to WeCommerce being a public company and costs associated with our ongoing CFO search. We're also continuing to add headcount at WeCommerce to support current and anticipated growth. Our operating margin was negatively impacted by a decline in Themes revenue in the second quarter of 2021 compared to the prior year.App segment revenue was $6.1 million, an increase of 331% or 385% on a constant currency basis compared to Q2 2020, reflecting primarily the recognition of revenue from Stamped, which closed on April 6 of this year; as well as Foursixty, which closed on June 1 of last year. Excluding Foursixty and Stamped, App segment revenue decreased by $7,000 or negative 1%, though App segment revenue increased 10% on a constant currency basis in Q2 2021 compared to Q2 2020.As it relates to Stamped and further discussed in our MD&A, contract liabilities purchased with an original carrying amount of $1.8 million were estimated to have a fair value at acquisition date of $1.5 million, resulting in a fair value write-down of $0.3 million. This fair value adjustment resulted in a decrease in Stamped revenue recognized during Q2 2021.As you may have noticed, we have begun adding constant currency detail, which is a non-IFRS measure to our press release and MD&A as we generate revenue from the sale of Apps and Themes, predominantly in U.S. dollars.On August 24, we closed the acquisition of Archetype for USD 20 million upfront and an up to USD 12 million in contingent consideration. The upfront consideration represents a multiple of approximately 5x EBITDA, based on Archetype's unaudited financial statements for the trailing 12-month period ending March 31, 2021. To finance the upfront consideration, we drew USD 10 million under our revolving credit facility and paid the balance of the upfront consideration with cash on hand. Pro forma for the acquisition, our net leverage remains under 3x as of June 30, 2021, excluding the impact of the $33.7 million bought deal financing that closed on July 7, 2021.We're continuing to invest across all teams in Stamped, including hiring several new functional leaders. We're pleased with Stamped's revenue growth for the first half of the year, and we continue to have ample margin to further reinvest in that business to develop new products, better showcase our existing products and continue building the foundation for Stamped to grow significantly in the years to come.It's been a very active first half for WeCommerce. We're well positioned to continue becoming the acquirer of choice to leading companies in the Shopify Partner ecosystem and we're investing in building the foundation of WeCommerce to capitalize on the opportunity ahead of us.I'll leave it there and pass it back to Chris.
Thank you, Alex. I'll leave a few comments before opening for questions. Mostly, I want to say we're pretty happy with this quarter. Over the last 3 months, we've strengthened the WeCommerce team with several key hires; Stamped continues to amaze us, we're seeing many long-term opportunities with that business; and we're excited with the team assembled by the CEO, Andrew Dumont. And as Alex highlighted, we acquired Archetype this week, making WeCommerce a juggernaut in Shopify themes. We're over the moon for Archetype to join the WeCommerce family. We went public half a year ago. And since then, we've transformed the business, and we're eager to get started on the next half of the year. So with that, I'll pass it back to the operator to facilitate the Q&A.
[Operator Instructions] We have our first question coming from the line of Daniel Chan with TD Securities.
Just wanted to dig into the App revenue a little bit. You said it was up 10% in constant currency. I know last quarter, you mentioned that there were some pricing changes in your Pixel Union apps in Q4, but this quarter was also below what Shopify did in their app store in Q2. So just wondering if that -- those pricing changes are still the only cause of that? Or if there's something else that's causing the difference between the Shopify performance and what you guys are seeing in the app?
Yes. I think I can't really have a blanket statement for all of apps. As it relates to USO, Dan, it's still the impact as we see it of that pricing changes that we believe is driving a lot of the change in top line. As we mentioned in our prior quarter, we're still seeing healthy product metrics for that application, including lower churn and higher LTV.As it relates to other factors, including in Q2, I think what we saw in Q2 generally, was a slowdown compared to Q1, especially with related to e-commerce, which grew at a slower pace in Q2 compared to Q1, just looking at the U.S. retail e-commerce data. But with our businesses, we see a variety of growth rates, indicating that some performed better than others in Q2.
Okay. And then you mentioned in the MD&A that you sold some themes to third-party vendor. I just wonder if you can provide some more color on that?
Yes, happy to. So I can't provide the name of that vendor. But we -- what I can say is that it was a noncore catalog of non-Shopify themes that were internally developed. And we sold those to refocus on our Shopify theme portfolio.
Okay. That's helpful. And then maybe some color on the margins, those came down. You did talk about some of the additional expenses you had this year.
Yes.
Is that intentional? And then if so, where do you think the margins can go as you're kind of ramping up these expenses?
Yes. So it's a fair question. There's a couple of things that one, I highlighted in our remarks. I think a few things just worth noting. One is the fair value adjustment related to purchase accounting for Stamped. And essentially, what that means is we're unable to recognize revenue of $0.3 million that we would otherwise been able to recognize, had purchase accounting adjustments not occurred. So that revenue drops to the bottom line.The second was a softer environment for our Themes business. This is obviously excluding Archetype, but a softer environment, especially in June, when we saw merchants pause purchasing of themes as they waited changes unveiled at Shopify Unite, which we are extremely excited about, especially as it relates to the Themes business. And we're already seeing a lot of positive momentum from themes that have upgraded to the 2.0 architecture.And then away from that, as I mentioned, there were some increased investments at the WeCommerce level, costs associated with our CFO search, but just by virtue of expensing those entirely in Q2, led to higher operating expenses compared especially to Q2 last year, but Q1 as well.
Okay. That's very helpful. And then maybe sticking on to this themes topic. On the Archetype acquisition, can you just maybe talk about what the impact would be from the lower Shopify commission rate on themes as you kind of bring Archetype in-house?
Yes. So the one thing that jumps out is obviously, the commission is being reduced starting September 15 from 30% down to 15% plus a 2.9% transaction fee, so effectively down from 30% to 18%. You also have the savings for themes on commission for the first USD 1 million of earnings. That is not on a per partner basis, it's across the entire of WeCommerce. And so it includes both Pixel Union as well as Out of the Sandbox, conversely for our Apps portfolio, whether that is a Pixel Union app, Foursixty or Stamped, that $1 million commission-free threshold applies across all of those businesses, not individually. So we'll see some improved margin at Archetype directly from that. Offsetting that, as with most of our acquisitions, is that we will expect to build on that foundation and add headcount to that business going forward.
And if we kind of look into your acquisition pipeline, should we expect more themes type of acquisitions ahead of some of these commission changes as well as maybe you can talk about the change in the pricing caps for the themes store?
Yes. I think how we think about themes generally is that with Archetype, as Chris alluded to, we're a clear leader in that space with our 3 brands, Out of the Sandbox, Pixel Union and now Archetype. So as it relates to future acquisitions, one, obviously, it has to be a really strong portfolio at the right price. But I think we can expect that's the emphasis to remain on apps acquisitions going forward.And I'm sorry, your second part of that question?
Yes. I was just wondering whether the change in commission and the pricing caps, the themes, Shopify themes has any kind of impact on how you think about acquiring themes, but yes, that's helpful.
Yes. How we think about that is that the addressable market for themes should expand, given that they're more extensible, the functionality is greater. And in theory, merchants shouldn't need to build custom offerings because of how extensible themes are today. The pricing caps, which for everyone's benefit, themes have been capped at $180 per theme for years now, and it's now more of a free market approach, although there's still a cap at $500. We think for a variety of reasons that there's a lot of -- there's not a lot of price sensitivity when it comes to theme pricing, whether it's $180 or $310, in our view, shouldn't necessarily impact unit sales that significantly. It's still too early to see how that plays out, given the changes were only unveiled frankly, about 10 days ago. So it's something that we're super excited about, given Shopify continues to invest in this theme ecosystem. And as I mentioned, it's an expanded addressable market. And therefore, in theory, makes those acquisition targets more attractive to us.
Sounds good. Last one for me. Any change to the activity and valuations in the M&A pipeline?
No. Well, yes, it's been interesting. I feel like we're still talking to a number of different founders. They're definitely still organically reaching out. Some valuation expectations have continued to swell. That said, I do think that we have such an unfair advantage in the space, really supporting ourselves as being for founders, by founders. And Archetype is a really great example of that.The Archetype founders, Paul and Carson, they reached out directly to us, and they kind of articulated to us that they wouldn't really want to sell to anyone else but WeCommerce. And I think it just really kind of just solidifies how our positioning in the ecosystem, I think, is a real unfair advantage there.
We have our next question coming from the line of Robert Young with Canaccord Genuity.
You mentioned a couple of times, the CFO search is a good place to start, just maybe an update there, whatever you can share.
Yes. So the CFO search, I feel like we're -- we kind of said this last time, but we believe we're incredibly close. We should have an announcement pretty soon. It's been a bit longer than we anticipated, but we're pretty happy with the candidates we've been speaking to. And we really think we'll have something to announce pretty soon.
Okay. And you're talking about momentum in the Themes business, post-Unity (sic) [ Unite ]. And so can you expand on that? Did you see a return back to previous levels? Or are you seeing some pent-up demand is catching up? Or maybe any other color you can provide on how...
Sorry, Rob. It's coming in a bit too garbled. And I can't make it out.
I think if I heard you correctly, Rob, you were asking about any sort of momentum changes in themes, post Shopify Unite and now that theme partners have upgraded their stores. Is that right?
Yes. If you hear me better now, sorry if there's a bad connection here. Yes. I would just -- you've said that the momentum had -- you're seeing stronger momentum, post-Unity (sic) [ Unite ]. And so I was just hoping you could expand on that. Like is it return back to normal? Is there pent-up demand that you're catching up on? Any other color there that you talked about, the theme growth...
[Technical Difficulty] Shall we move on to the next question? Ladies and gentlemen, we're experiencing technical difficulties. The conference will begin momentarily. Please stand by.
Thank you, operator. We apologize, everyone, for that technical difficulty there. Operator, are there any other questions in the queue that we can address?
Yes, sir. We still have the line of Robert Young.
Okay. Great. I'll ask the question again. Hopefully -- yes, sir, the Themes business, you said you saw momentum after Unity (sic) [ Unite ] and maybe you can just expand on that?
Yes. No, I'm happy to do that. I think the third time's a charm.
He gave a great answer the first time, by the way.
So we have seen a good pickup in sales based on the past 10 days, when the new architecture was really unveiled for most of the theme partners. Whether that is pent-up demand, whether that is a return to healthier volumes due to seasonality or whether that is a true shift, I think it's frankly too early to tell. We do see stronger sales in Q3 and Q4, obviously, leading up to Black Friday. That seasonality shifted a little bit in 2020. So Q2 was much stronger than it typically is. So it's suffice to say it's too early to tell, but if the momentum continues as it is today, we'd be very pleased.
Okay. And then the Services business seemed to have very strong constant currency growth relative to the expectations you guys said through the RTO. And so I was wondering if you could talk about that. Is that true? Or is this seasonality? What would just -- what would...
Well, I would say part of that, especially for the Agency business was there was a drop in activity in Q2 of last year. And so there's a slight bump on a constant currency basis for that business. I think our long-term growth expectations for that business remain the same, Rob.
Okay. So that's just recovery off...
[indiscernible] Sorry, Rob?
I would say that's just recovery off of the pandemic then, I guess?
Somewhat. There is a very strong backlog of work there. I'd say, if anything, the team is hiring to attempt to meet all the demand. And so we continue to have pretty strong expectations there.
Okay. That's great. And then maybe I'll just add to some of Dan's questions around the pipeline. Maybe just update us on the overall size. Is it still $100 million revenue equivalent? Or has it grown? And if you talk about the -- I think you said it follows relatively a normal curve, the diversity of size in the pipeline. Maybe you could update that? That would be helpful.
Yes. So I'd say the pipeline in terms of revenue, it's still north of $100 million of revenue that we're kind of in conversations with. We looked at the pipeline before this, and we have about 224 active conversations. And so we're talking with a wide swath of different types of founders in the space.And I kind of think it's interesting like the 2 types of acquisitions we've done so far of going public has just been overall indication. Stamped, we kind of think is that mismanaged gem. We think it's an exceptional long-term business. And Archetype, while a bit smaller to check, is just like a great base hit, highly cash flow generative. And so companies that we're looking at within the ecosystem, they kind of vary between those types of two goalposts, I'd say, quite often.
Okay. And the competitive situation relative -- there seems to be a lot of news today about Amazon roll-ups, Amazon Store roll-ups and maybe there's a Shopify, you have that to yourself for the moment. Are you seeing any increase in competition there from business models similar to yourself or VC and private equity getting more active? Anything you can say about that would be helpful.
I feel like we haven't really seen a major uptick since the last time we talked with you about that. We still run up to venture, run across venture. Fairly often, a founder, they're either thinking about raising VC capital or they're looking for full exit. And we really -- in what we're offering to founders, I feel like we haven't really seen much competition.
We have our next question coming from the line of Alan Pentz with Corner Alliance.
I'm just a new investor, but happy to be on the call today. Just first question, why even have the Agency Services? Obviously, lower margin service than your digital goods are recurring subscription. So what's the thinking there? Does that help support the other lines of business?
I think it does in some ways. I think if we're a factory producing wood chairs all day, what are the byproducts of that sawdust and how can we turn that into new revenue lines. And so a great example of that would almost be having a touch point to merchant needs and to seeing what merchants are actually asking for and willing to pay for, that they believe that doesn't exist in the ecosystem is always a -- it's kind of a paid insight as to what merchant needs are at any given moment.I also just think it takes advantage of the overall brand that we have. A lot of merchants do reach out to different brands that we have and are looking for work. And so it's nice just to be able to fulfill it and capture those dollars.
Okay. So how do you see, like going forward on the acquisition pipeline, what are you looking at split-wise between those 3 lines of business?
Yes. I think our revenue split, at least for Q1 -- sorry, for Q2 this year, it's about 60% Apps, 15% Agency and the remainder Themes. And that's generally a pretty good breakdown of what our pipeline looks like in terms of opportunities, maybe a little bit higher on the Themes versus Agency, but the majority of our pipeline are Apps and software opportunities.
Got you. And you had mentioned you -- I think earlier in the call that you guys might be focusing a little more on the App side obviously, it's the majority of revenue versus Themes. What's the thinking there? Is it the subscription -- reoccurring subscription versus the onetime kind of thing? Or why you have to focus in one part?
Yes. It's a couple of reasons that jump out. One is it's a larger opportunity, both in terms of the addressable market as well as the number of providers out there. We think there's a lot of low-hanging fruit, meaning either mismanaged gems or there are companies that have gone from 0 to 1, and they're looking for a partner to take it from 1 to 10. There's a lot more of those opportunities within the app ecosystem.As you pointed out, there -- the revenue is certainly more predictable as it is recurring subscription revenue, which generally makes it easier to invest in sales and marketing as an example, and really have the operating costs at the right level for those businesses. You see some more variability in the Themes business, which is not something that scares us all. It's just so you just need to make sure you're -- have the right cost base for it.
And then I don't know if you want to talk about the people you just bought it from, but when you say mismanaged gems, what are you kind of getting out there? Is it just like people are not optimizing for the ecosystem? Or what kind of things are you guys bringing to the table there?
Yes. It varies from company to company. But generally, we would describe a lot of individuals in this ecosystem that they are accidental entrepreneurs. They're often focused -- they're often developers. They're often focused on product and only on product, and have spent very little time thinking through pricing, value proposition, sales and marketing, really scaling from 1 to 10 versus just 0 to 1. And that's why we say there are a lot of companies, frankly, they're run extremely lean, which wouldn't surprise me if that has scared many other buyers away. We're comfortable with those sorts of businesses. And that's what we mean when we say mismanaged gems, which is there is a strong foundation to build on top of, as you think about just rounding out the entire company.
So good product, bad business. Okay. Excellent.
There are no further questions at this time. I will now turn the call back over to the speakers for any closing comments.
Wonderful. Thank you, operator. There's been some really great discussion and some really enjoyable questions here. As everyone can hear, we're very excited about the business and especially to bring Stamped and now Archetype into the family. If there are any other questions that anyone has, feel free to just reach out to us. You can always e-mail us, we're always happy to make time for you. We'll leave it there. Thank you, everyone.
This concludes today's conference call. Thank you for participating. You may now disconnect.