NowVertical Group, Inc. (NOW) Q2 2022 Earnings Call Transcript

NowVertical Group, Inc. ( TSXV : NOW) Q2 2022 earnings call dated Aug. 25, 2022

Corporate Participants:

Glen Nelson — Vice President, Investor Relations and Communications

Daren Trousdell — Chairman and Chief Executive Officer

Presentation:

Glen Nelson — Vice President, Investor Relations and Communications

Good morning, everyone. Pleased you could join us today for NowVertical’s Second Quarter 2022 Webinar. I’m Glen Nelson, Vice President of Investor Relations and Communications and today with us we h Vice President, Investor Relations and Communications. And today, with us we have Daren Trousdell, Chairman and CEO of NowVertical Group.

The webinar today will begin with some opening comments from Daren, on recent company developments and the results from the quarter, we released last night. After Daren’s prepared remarks, we’ll take some questions from you all. You can ask a question by clicking the Q&A button at the bottom of the screen here.

I’d like to remind you all that our remarks today will include some forward-looking statements and are subject to important risks and uncertainties. We also may refer to certain non-IFRS measures such as adjusted revenue, pro forma TTM adjusted revenue and adjusted EBITDA. These measures do not have any standardized meaning under IFRS. And as a result, they may not be comparable to similar measures presented by other companies. We’d like to get some more information on that. Please see our reports that are filed on our website as well as on SEDAR.

And lastly, a replay of this webinar will be available on our website later today where you can download it. And see what we’ve hit.

With that, I’ll turn it over to Daren.

Daren Trousdell — Chairman and Chief Executive Officer

Thanks, Glenn. And thanks, everyone, for joining today. We’re going to get started right on time. So as Glenn mentioned, we released our Q2 results last evening. A lot of hard work has gone into our program since inception. And especially in the last 12 months, since we have been a public company. Today, I’m going to share briefly an overview of those results. And to answer a couple of questions as Glenn mentioned, which I’m excited to get with everyone to do.

For new people in the NowVertical story, just a refresher what we do. NowVertical provides enterprise customers and network of big data AI enterprise technologies in the data space, led by industry experts. So we’re really focused on industries that we have expertise in that in the Big Data space, it’s very important because every industry has a specialized approach. And what we deliver to our customers is all things from data security and governance, automation of operational tasks by data and most powerfully predictive and prescriptive analytics that help customers have the confidence — or our customers have the confidence to make bold data back decisions, and that’s really — that’s really what’s important in today’s enterprise. The stakes have never been higher. The global socio macro-economic problems that exists in our world are getting bigger and everybody has answers in their data and we help them uncover those answers.

We have built this in this company in our platform in very rapid-fire in a very rapid-fire manner. We’ve been public for just over 13 months. In that time frame, there has been seven acquisitions. We’ve integrated two prior to that. So nine acquisitions total. We’re servicing seven core verticals right now and that’s going to expand over time. Our network has over 170 customers, multiple countries around the world, and now over 300 employees servicing our customers globally.

From ’21 to ’22, in the nine acquisitions we’ve made, the first two are our formative acquisitions with Signafire and Seafront. From there, we’ve acquired four companies — three companies in ’21, Integra, DocAuthority, and Affinio and another four so far this year, which is really showing our platform kind of in action and more to come. And the work we’ve been doing this year is to integrate what we’ve acquired, set the stage and platform for new acquisitions that are helping us position the business in platform for servicing our customers but also enough scale to drive our program through growth both organically and inorganically.

When I speak of customers, we have some of the best customers on, are doing some of the most amazing things and data and we’re helping them either through our technologies or through our services and solutions offerings, servicing core very important verticals in the Big Data space government, media, energy, oil and gas, financial services and some of the best names in those industries and in global markets. I think that’s one of the most exciting parts about what we’ve done in our acquisition program is it’s not just centered around North America. We have arguably probably the best data solution shop in Latin America with CoreBI we acquired. I mean, we’re continuing to develop that market and region. We see big, big upside in Latin America, strong in Canada and the U.S., obviously where we’re based. But also in Europe, we bought assets in the U.K., and we’re looking at other markets. Now we want to have a true global footprint, because our customers are a true global customers and they need us being aligned with them in markets that are important.

So we are really working hard to grow organically and inorganically in these markets to service this customer base and what we believe is every one of these customers has a lot more opportunity than we’re seeing today. And because it’s still very new, again 13 months since we’ve gone public and started the program in motion. There is so much synergy to uncover here both in market, new markets, new capabilities.

So as we acquire new companies and capabilities, we can bring and introduce those into these customers. And in 2023, we expect that to really materialize and become the foundation of fabric of our organic growth story.

So look next year to see how we kind of message and show that because it’s very important part of this program and how it will work for the future and drive outsized annual growth in our revenue and that’s very important to the story.

For the quarter for a minute, I appreciate everybody’s texts and Discord chats and Twitter posts last night, we had an outstanding quarter. And I want to thank the team, I want to thank our partners, I want to thank our customers. We really — from where we’re starting to where we are today, we hit it out of the park in our opinion and we’re setting the stage for something much bigger and I hope everyone can kind of see this now. Like, we expect significant growth to continue in our program. Definitely on a proforma adjusted revenue basis, it’s a key metric for us because it really shows what our businesses is doing and has done with the assets we own.

So going from 2.9 is what we booked in revenue in Q1 to 7.9 proforma adjusted revenue, we couldn’t be more thrilled with that. But again, I really believe that this is the first inning of the story. Even though the growth is great, we’ve done a lot of work. We’ve got a lot of stuff set up. This is still the earliest of early days for our story. We have very, very big aspirations. And now with this active platform producing meaningful result, we think this is the springboard that we needed to get to the next kind of phase of our growth.

The other thing that I wanted to point out and we’ve mentioned this previously in press releases and previous talks for me. We are laser focused on getting this business to positive adjusted EBITDA, laser focused. And we’re getting close, so you can see in this last — in our Q2 results in the press release, we highlighted that our adjusted EBITDA loss was negative $600,000. So we’re really on the precipice here of flipping to neutral the positivity in short order. And that’s really important to our story, and you’ll see us as we add new M&A, we continue to drive growth in the existing business that that’s going to happen in short order and it’s going to be meaningful. And I think it will be a really nice feature in our story in the capital markets that people will be attracted to given that our aspirational comparables are typically losing money still. On a negative EPS basis, these companies have not flipped to positive yet. Even on the cloud side, Snowflake put out a great quarter, but they’re still on a net income basis losing money. So lots of opportunity here to augment our story with great financial, great financial features.

So we really see the growth in our current base continuing. So you’ll see the story evolves going into next year to talking about both organic and inorganic growth. To-date, we’ve been talking purely inorganic and that’s just germane to our story in what we’re doing. The organic growth, now with this scale we’ve built is equally as important. So we’d like to see these units together integrated as we’ve been doing and now they’re integrated all starting to row to a target of definitely north of 20% growth on these assets. So that’s what we’re working really hard to achieve and we think that’s a reasonable target for these units.

So we’ll start to share kind of how we see it as modeling in ’23 coming out to market on top of additional M&A. And again, our program set up where, like I said on the customer slide, the more we have going on with customers in our own world, the quicker we get to those growth targets, and the more meaningful they can become as opposed to just the new business focus. That’s the kind of super important part of our internal program that we’re driving and you’re going to hear a lot more from us on that.

So just kind of getting to the point. Our year plan and program has not changed. We need to get this business to revenue scale and that’s going to continue through M&A. Our target is to get to $100 million U.S. topline. We want to do it this year. Hopefully we can continue to do it. And the way we have been at this pace, we will get there. And that is important because it gives us enough revenue scale to enter new markets like the U.S. market in the capital market side, and have enough weight in our story to matter instead of being another microcap trying to claw at the idea of a big revenue number. We’ll be there and obviously margins in our business. From a gross margin perspective and future adjusted EBITDA margins, we’ll be good. I think that’ll be a really good point to enter.

So with the current business, we’re tracking well to that. New M&A is online. So we have stuff in the works, as we always do. That we will be working hard to get done to deliver this plan and again like I said, it’s insight for us, we have to execute still. We’ve got the rest of this quarter and next quarter to do it. We have a lot of incredible things in our M&A pipeline that are showing us the way here that are very exciting, very accretive, following our vision, but also following our financial requirements that are really important to the story.

So the next quarter, we’re going to continue to work on our debt financing program. We’ve been fortunate that we’ve secured previously a great U.S. partner that’s been servicing our U.S. deals. So as you saw on our last acquisition announcement, Resonant that was financed with the bank partner in the U.S., same bank partner we used on our Allegient acquisition. We have other projects in the works for expanding that in other markets. So you’ll see news from us in that regard.

And then in Q4, we’re always keeping our eye on this U.S. market. If we can show tracking to this kind of scale target on our revenue, we think that project becomes meaningful Q4, Q1 time frame for us. So you’ll hear more about that as we go. And this acquisition train is going to keep going. We want to build a multi-billion dollar revenue business. We see this. We see our platform today. We see what 13 months can produce.

It’s also important, and I want to remind everyone, and sometimes I forget this. Not only have we done this in 13 months, we’ve only raised net of fee, $16 million in this company. So looking at comps in the market, looking at other small cap stories, I don’t know any other story that can get to this stage in the speed with that little capital invested. So think about as we look to the future, our bank partners are — and our debt program really expanding and the cost of capital and our debt program right now is so cheap. The last deal we did with Resonant was sub 7%, 6 and change percent debt. Like that’s — you can’t beat that cost of capital in this market.

So, so much of going on. I really appreciate everybody’s support. I appreciate interacting with all of you, getting your questions in, spending time together. And I say sometimes I say corny things like ‘hey team’, but we’re all a team. Our shareholders are part of the team. This is not a black box company and everyone’s just along for the ride. This is an interactive company and forum, and I want everybody who invests in this company to feel like an owner as you are owners, and we need to do this together. And to build a multi-billion dollar revenue business that would have obviously the supporting market cap where we all win together, it’s a lot of work. And everybody is playing a role here, whether you bought shares in the open market, you’ve been part of financings, you’re customer partner of ours, you’re an employee. Everyone’s playing a critical role in our growth. So I’ll leave you with that. Anytime you want to talk to me, get with myself or Glenn, and we’ll get something set up and we’ll go from there.

So thank you for joining today. We’ll move to questions now.

Questions and Answers:

Glen Nelson — Vice President, Investor Relations and Communications

Thank you, Daren. So I will like to remind everyone, there is a Q&A button at the bottom of the screen there. Feel free to answer those and then I’ll give you a minute with those in.

Daren Trousdell — Chairman and Chief Executive Officer

And whatever we can’t answer in this session, we can definitely get with people over e-mail or set up another time.

Glen Nelson — Vice President, Investor Relations and Communications

So Daren, this is a question from Rob Goff at Echelon. He’s asking if you could give us a minute to talk about revenue backlog that’s in the business.

Daren Trousdell — Chairman and Chief Executive Officer

So the revenue backlog is currently north of $70 million mostly in our government business. We expect that to grow through the rest of this year. We’ll know on some new awards in actually the next couple of weeks. So we really still see that becoming over $100 million opportunity in short order, definitely going into next year. There’s a lot of big opportunity out in the market right now on some new wins. So we see the backlog being expanding quickly there.

Glen Nelson — Vice President, Investor Relations and Communications

So another question from Sanchez Leon. What are your capital needs for future store in your M&A piece? And how are the deal structures looking as you’re putting these together?

Daren Trousdell — Chairman and Chief Executive Officer

So there’s not really a number for what we need, because we don’t know what the deals will end up becoming when we’re working on them. But that said, our U.S. program right now has up to — we view some of it, so call it USD65 million of capability that we can work against the rest of world. We’re working on something that’s going to be hopefully equivalent. So we can get to USD100 million, USD150 million of capability, I think that’s the right number against the pipeline that the M&A pipeline right now in aggregates always hovering around USD250 million to USD350 million. So I think obviously we don’t do every deal we have. So I think getting to USD100 million, USD150 million of capability in the debt program for the future is target.

And in terms of deal structures, we really codified the NOW transaction. We don’t — every deal is different, but we really don’t deviate from the structure and you can kind of see this. And as new M&A comes on, you’ll see this again. Some cash upfront, some stock upfront and there is an earn out in every deal. The earn-out is tied to the company’s, obviously their EBITDA performance and there is a minimum amount of EBITDA they have to drive. We keep all the EBITDA in the company until they hit their floor, then they start earning, and we have a share on the excess EBITDA where they can earn, and we also take some back.

So essentially in our model, the earn-outs are self-funded by performance of the units and we get paid as well on top of that. So it’s a really, it’s a really partner-oriented model, everyone wins. Obviously, the targets get their upside out. We get free cash sent up to the corporate office, and that’s a consistent model and at scale if there is — now there’s nine, there’ll be more soon. Once we get to 10, 20, 30, 50 companies and entities in our group doing that model, it’s a substantial amount of free cash to corporate.

Glen Nelson — Vice President, Investor Relations and Communications

Can you maybe talk a little bit about private valuations and how they move-in in the marketplace now, especially considering the pressures they’re seeing?

Daren Trousdell — Chairman and Chief Executive Officer

So that’s a great question. You’re seeing us right now doing deals like Resonant and more coming that are profitable. Our Solutions business, which is really important that we get this built out quickly, our global footprint. The tech side, we haven’t been as focused on short-term because the valuations were still little frothy, what we’re seeing now and I am going to call this going into this fall is the contraction is started, fundraising is become extremely difficult in the private markets, performance expectations have become more in line with reality that you must drive good revenue profile, you must have a path to profitability, sticky customers. Some of these diligence points weren’t being met on the private side previously. It was a free for all.

So we’re seeing financings fail or happening at extremely negative down around situations which are creating an environment where an acquisition will become more appealing. So as we complete what we have in in the works right now, we’re going to flip back in Q4, to start looking at some more of our foundational text stuff software deals that will be at better valuations. This negative valuation crunch is going to happen for, I think the next 24 months.

Glen Nelson — Vice President, Investor Relations and Communications

Should we look for solutions acquisitions to add depth to your existing verticals or add new verticals?

Daren Trousdell — Chairman and Chief Executive Officer

Great question. Both. We’re going to see new verticals emerge. We have one, we’re working on a kind of evolving right now because we already have customers in the vertical quietly. Now it’s enough weight that we need to kind of expand into that vertical, which will be the pharma vertical. The new acquisitions, we are working on, definitely expose us or bring us new verticals that we have not been in. So you’re going to see both.

Glen Nelson — Vice President, Investor Relations and Communications

Okay. This question is from Hernan Gomez. I think you touched on a little bit. But how has the downturn in the capital markets and rising interest rates affected your announced M&A strategy?

Daren Trousdell — Chairman and Chief Executive Officer

Yes. We’ve been fortunate that long before the stock market started declining substantially, we knew that we needed a Tier 1, Tier 2 bank debt program in place. It was not — even at frothy valuations, the cost of capital, using equity as a stand-alone financing tool is not efficient and it’s not a good cost of capital. So we needed additional sources. So obviously our stock is one piece. So trying to minimize that too. We don’t want to make these transactions too dilutive. So you’ll see what we’ve done in our stock program is we’ve been getting our targets to take our stock at substantial premiums to the market. So that’s number one. And we really want our shareholders to see that, like you know — and luckily, we’ve had a great rebound in the last month or two. But when we’re trading at $0.43, $0.48 whatever, and we have our targets taking it at a U.S. 1. So call it a $1.26 Canadian, what does that tell you? It tells you the reality is the seller. The seller is the real barometer of the enterprise value of the company. Because they are the ones, doing the value trade. So that’s what where we look at, and we’ve been successful with that.

Next is the cost of capital on our debt program, like I mentioned previously, we’re still in the sixes. So the interest rate increase, obviously, we probably would have been in the high fours before any interest rate increases, but still in the low sixes is amazing cost of capital in comparison to other forms. So we’re stuck. We think this is the tailwinds we need it and we’re executing on it.

Glen Nelson — Vice President, Investor Relations and Communications

Right. Thank you. Well, that looks like end of the questions right now. If anyone has any more, please feel free to reach out to Daren or myself or always open for a call. Thank you, Daren.

Daren Trousdell — Chairman and Chief Executive Officer

Yes. Thanks, everybody, for coming today. Back to work. We’re not — we celebrated a little bit last night, but it’s Q3, get this delivered Q4. We want to keep driving this performance that you saw from Q2. And I think in short order, we’re going to look back and go. This was really a foundational turning point, but it is nowhere near where this is going to — where this is going to end. So appreciate your time. Appreciate your support. Get with us anytime and we’ll see you next quarter.

Glen Nelson — Vice President, Investor Relations and Communications

Thank you.