Good afternoon, and welcome to the Rubicon Technologies third quarter 2023 earnings call. My name is Kayla, and I will be your operator for today's call. As a reminder, this conference call is being recorded. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star followed by the one on your telephone keypad. If you'd like to withdraw your question, again, press star and one. Thank you, and it is now my pleasure to introduce Chris Spooner, Executive Vice President of Finance. You may begin.
Thank you. Hello, everyone, and welcome to Rubicon's third quarter 2023 earnings call. A few quick reminders before we begin. This call is being webcast and can be accessed on the Investors section of our website, which can be found at investors.rubicon.com. Today, we will present Rubicon's financial results for the third quarter of 2023, which will be followed by a question-and-answer session. During the call, management will be making forward-looking statements that are subject to the safe harbor provisions and the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance, and our actual results may differ materially due to known and unknown risks and uncertainties, as discussed in greater detail in our earnings release and our SEC filings. We assume no obligation to update forward-looking statements except as required by law.
Additionally, we will refer to non-GAAP financial measures during our call today, including, but not limited to, adjusted gross profit and adjusted EBITDA. We provide these non-GAAP results for informational purposes, and they should not be considered in isolation from the most directly comparable GAAP measures. A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and reconciliations to the most directly comparable GAAP measure can be found in our earnings release and our filings with the SEC. Joining me on the call today are Phil Rodoni, Rubicon's Chief Executive Officer, and Kevin Schubert, Rubicon's President and Chief Financial Officer. With that, I would now like to turn the call over to Phil.
Thank you, Chris, and thank you to everyone for joining us today. To start, I am very proud to announce, for the third quarter in a row, we have achieved record adjusted gross profit, our key operating metric, with an increase of 41% year-over-year and 11% from the prior quarter. We also expanded AGP margin by 395 basis points year-over-year, despite slightly softer revenue due to commodity headwinds and the ongoing process of optimizing our portfolio. Adjusted EBITDA also improved by $12 million to a loss of $8.9 million year-over-year, an improvement of 8% from the prior quarter. In addition, it is worth noting that the adjusted EBITDA figure includes approximately $5 million of non-cash operating expenses, including technology expenses, strategically shifted earlier to accelerate growth initiatives.
The macro and capital market environments in which we operate remain challenging, but waste and recycling is a mission-critical business service that is stable, growing, and finding new ways to create customer value. Rubicon is helping to drive our industry forward, and I'm very pleased with the progress the team has made in the last 12 months. Our core business is stronger than ever, and we remain focused on our drive to profitability. Kevin will provide additional detail on our quarterly results, but before he does, I wanted to briefly remind everyone of who Rubicon is and how our products are helping to modernize our industry with an environmental proposition that improves our customers' bottom line. Rubicon is a global technology company that provides cloud-based waste and recycling solutions to three key customer constituents: waste generators, waste haulers, and waste processors.
For our waste generator customers, including businesses and local governments, the Rubicon software platform is a single solution to streamline the procurement and management of their waste and recycling services. Our platform helps to improve the performance of these services and provides much-needed data and analytics for ESG reporting purposes. For waste haulers, including both city and private fleets, our platform provides easy-to-use fleet management and route optimization tools to help our customers improve service delivery, streamline internal operations and processes, and save time and money. In addition, we provide AI-powered camera and computer vision technology that can detect contamination in recycling streams. For our city and municipal fleet customers, these tools have helped to deliver significant taxpayer savings. Our final customer segment is waste processors, who rely on our technology and relationships with waste generator customers to receive high- quality and consistent volumes of valuable commodities.
We enable our customers to increase diversion rates and send greater volumes of materials to recycling processors. We also design programs for our customers that incorporate best practices for material handling and logistics that allow them to command premium commodity rates. Today, Rubicon has achieved significant scale, surpassing 13 million unique service locations and 8,000 haulers and recycling partners, with the ability to manage more than 160 types of waste streams. As our network continues to grow, our customers benefit from better pricing, a broader service offering, increased diversion capabilities, and improved insights into waste operations, allowing for more data-driven decisions to enhance efficiency. In the third quarter of 2022, we outlined our strategic plan and committed to materially improving our operational performance and strengthening our financial position.
We recognized the challenges ahead and laid out steps we would take to get the company to profitability and growth. We said we were going to push out debt maturities, and we pushed them out to 2025 from 2023. We said we were going to improve liquidity, and we closed a $75 million term loan and expanded our revolver capacity by $15 million. We said we were going to reduce expenses, and we reduced expenses by $55 million on an annualized basis. We said we were going to expand adjusted gross profit margin to double digits by the end of 2023. We surpassed 10% in the second quarter, ahead of our goal. We secured an additional $24 million of equity financing from new and existing investors in Q2.
To underscore our exceptional performance during an extremely turbulent time, while completing all this, we were able to drive 35% growth in adjusted gross profit year to date in 2023. All of this was accomplished while continuing to deliver for our customers and diverting over 800,000 tons from landfill, equating to approximately 1.6 million metric tons of CO2 emissions avoided for the first half of 2023. Accomplishing all of this in less than a year was not an easy task, but our team worked tirelessly and successfully completed these strategic objectives, positioning the company for profitability and future growth. We're excited for what's to come for Rubicon, and moving forward, we're looking forward to focusing our efforts on growing the business. Turning to the current quarter, I'd like to take a moment to highlight some key business wins across the company.
Starting with our RUBICONSmartCity business, in September, we announced a new five-year partnership with the City of Phoenix, Arizona, the fifth largest city in the United States. The agreement will put RUBICONSmartCity software at the heart of the city's Public Works Department, providing waste and recycling collection to more than 418,000 locations weekly. Rubicon will help the city digitize its solid waste collection operation, transitioning from largely manual and paper-based processes to running our software in their solid waste and recycling fleet of more than 300 vehicles. On top of this, today, we announced a new five-year partnership with the City of Austin, Texas.
Rubicon will help the city continue its process of digitizing its solid waste and recycling collection operations across its fleet of 290 vehicles, which service more than 210,000 locations every week. Austin will use our technology to streamline collection, track material and tonnage on its bulky trash routes, and reduce missed pickups and unnecessary go- backs. The city will be able to closely monitor route performance, identify areas where waste and recycling services can be improved, and make data-driven decisions to enhance route efficiency and better serve its residents. On the RUBICONConnect side, we recently welcomed Neiman Marcus and Atlantis Management Group to the platform, and we completed a two-year extension of our existing agreement with Americold.
RUBICONConnect has been deployed at more than 150 Americold locations since 2020, where we have managed Americold's trash, mixed recycling, baled cardboard, baled plastic, and food waste. The new agreement extends this relationship through the end of 2025 and includes a go-forward plan to onboard more locations within the Americold portfolio. We are proud of these achievements and look forward to sharing more of them with you on future calls. I will now turn the call over to Kevin to provide a review of the third quarter financials.
Thanks, Phil. I will now take a few minutes to review our third quarter results. Rubicon generated approximately $171 million of revenue in the third quarter. This was a decrease of $14 million or 7% compared to the third quarter of 2022. The decline was mainly driven by softness in commodities, in particular, OCC prices. The remaining decrease was mainly a result of our ongoing portfolio optimization activities. Adjusted gross profit in the third quarter was approximately $20 million, an increase of $6 million or 41% compared to the third quarter of 2022. We are very proud to say that Q3 2023 was our third consecutive quarter of record adjusted gross profit. The increase in adjusted gross profit was primarily driven by an increase in the RUBICONConnect business due to optimizing our portfolio and margin improvement activity.
Adjusted EBITDA for the third quarter was -$8.9 million, which is an improvement of $12 million compared to the third quarter of 2022. As Phil previously mentioned, the adjusted EBITDA figure includes approximately $5 million of non-cash operating expenses, including technology expenses strategically shifted earlier to accelerate growth initiatives. As of the end of the third quarter, the company had $15 million of cash and undrawn availability under our credit facility. Now that we are through our key corporate financing initiatives and making significant progress towards positive adjusted EBITDA, we've also begun to look to the future and to find opportunities to accelerate growth. For example, we have prioritized certain initiatives to streamline back office procedures, such as using AI to improve invoice auditing, which we believe should allow us to grow more profitably next year.
In addition, we have expanded the Smart City sales team to accommodate the substantial growth and interest in our high-margin Smart City product. These accelerated investments will put us in a strong position to deliver positive adjusted EBITDA for the full year 2024. In addition, after adjusting for the effect of certain non-cash technology expenses, we still expect to begin earning positive adjusted EBITDA in the fourth quarter of this year. I will now turn it back over to Phil before we take questions.
Thank you for continuing this journey with us. We look forward to updating you on our progress in the coming quarters. With that, I will turn the call over to the operator, who can open the line for questions.
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Our first question comes from the line of Maria Ripps with Canaccord Genuity. Your line is open.
Good afternoon, and thank you for taking my questions. Could you maybe spend a few moments, unpacking some of the drivers of the slowdown in the service revenue this quarter? I know you mentioned the portfolio optimization efforts, but is there anything else to highlight, either in terms of the pace of onboarding new logos or expanding wallet share with existing clients?
Thanks, Maria. So I think what we saw, kind of the major contributing factor there was kind of the commodity kind of price, you know, kind of offset really on the cardboard side. That's a significant kind of drop that you're seeing. There's also a slight, you know, kind of adjustment on the top-line revenue relative to kind of some of the portfolio optimization that we've been doing. But by and large, you've seen the growth that's, you know, on the AGP side. So again, the profitability has increased while we've actually been facing those revenue differences.
Got it. That's helpful. Can you just talk about your SaaS business to sort of what's the progress there? How is it trending? How has it been trending, excuse me, relative to your expectations? And at what point that segment will become sort of a more meaningful contributor to profitability?
I appreciate the question. So again, our Smart City business has actually been, you know, going really quite well. Again, you heard the announcements of, you know, both Austin and Phoenix. Those are, you know, kind of big cities within the United States, top five city in one case. And again, that business has doubled kind of year-over-year, and we still expect that to kind of, you know, continue on in the future. So we're very much pleased with how it's going, and we continue, and we have high expectations of that going forward.
Got it. Thank you for the color.
Your next question comes from the line of Stephanie Moore with Jefferies. Your line is open.
Hi, good afternoon. Thank you. My first question, I just wanted to maybe touch a little bit about I know you've made a lot of progress this year in terms of working with some of your customers, maybe walking away from, contracts that were, you know, deemed not as profitable as you would like. Do you think that we are, you know, kind of past the majority of that? You know, what's your kind of view as you look into 2024 and kind of optimizing on the core business?
Great question. So I think, you know, thank you, Stephanie. So again, I think, you know, by and large, this year was really kind of more about kind of resetting where we are and making sure that we track towards profitability. As you heard on the call and what kind of Kevin's comments as well as mine, we've also started to accelerate some of our efforts towards, you know, building kind of on the building the capacity to grow going forward. So we've added to our software, you know, sales teams on the Smart City side. We've made some investments also in, most recently on the AI side, that actually really kind of help us operationally, on the commercial side of our business, on the waste generation side of the business.
That also puts us in a better position to kinda grow and attract new customers. So we're making those investments already now to accelerate our growth, you know, going into next year. So, I think the vast majority of that portfolio optimization has taken place. But again, you know, we have to be good stewards of our business, that we always look for opportunities that make sense, and if we need to kind of shed unprofitable business, we'll do so. But I think the majority of that is behind us.
Great. That's helpful. And then I just wanted to follow up, you know, any intention, of, you know, maybe reaccelerating some M&A plans, or how would you view the overall M&A landscape-
Yeah
... at this time?
Great. No, I again appreciate the question, but I think by and large, again, we're still focused on growing our business organically and doing all that we can do there. And again, the investments that we just mentioned, we're putting investments in there to actually help us grow organically. We will always be opportunistic in terms of deals that are out there, and so we stay connected to kind of to the marketplace, and we know of you know folks that are potentially gonna you know kind of be coming on the block, and so we'll evaluate those as necessary, and if the capital exists with which to do a deal, we'll pursue it. But again, we're gonna be focused you know very kind of directly on our plans for our existing organic growth. And again, like I said, we'll be opportunistic as opportunities arise.
Great. And then just lastly, on a follow-up to that, in terms of M&A, I appreciate the focus on the core business. If you do, you know, are kind of looking at what's out there, and maybe this is, you know, more than a 12-month view.
Yeah
I s it, you know, would you, is the software or any kind of, you know, maybe on the technology front, be attractive to you at M&A-
Sure
... or kind of still looking in the, on the waste side?
Sure. If you look at , n o, I appreciate it. If you've looked at what we've done kind of historically, we've done, you know, kind of five deals, I would say, kind of over time. The majority of those were kind of, you know, books of businesses that we've added onto the, to kind of, to our existing book. But we've also made technology acquisitions as well.
And so again, it's hard to say specifically without, you know, talking about a very specific opportunity, but we look across a broad spectrum of potential, you know, kind of companies that we look at, whether it be books of business that are interesting to us, specific customer segments that are interesting to us, specific technologies that are interesting to us. So we try and take a wide view when it comes to kind of M&A opportunities. But again, you know, it's, you know, without a very specific example, it's hard to give a detail, but we'll take an expansive view of it for sure.
Got it. Thanks so much!
Your next question comes from the line of Brett Knoblauch with Cantor Fitzgerald. Your line is open.
Hi, guys. Thanks for taking my question. Maybe first, if we could just start on the adjusted EBITDA outlook. You know, I think you guys reiterated that you expect to be positive in the fourth quarter. Is that on a month in the fourth quarter, the whole fourth quarter? And if I heard you correctly, is that backing out the non-cash technology expenses?
Yep. Thanks again for the question, Brett. So again, we expect to be profitable, adjusted EBITDA profitable for the fourth quarter overall. And then obviously for 2024, for the full year of 2024, that is including the backout of some kind of non-cash items at the time for Q4.
Got it. So I guess the reported adjusted EBITDA number that you're kind of expecting in the fourth quarter will still be negative, but if we then kind of adjust that adjusted EBITDA number, we would, it would be positive?
That's right.
Got it. And then on the balance sheet, how much, I mean, you guys have $13 million of cash. How much available debt capacity do you have to draw down? Because I guess, you know, free cash flow in the quarter was - $27 million or so, - $29 million.
Yeah, thanks, Brett. It's Kevin. You know, I think we currently have. I think as you said, that was at the end of the quarter, we had about $15 million of cash, but there was some suppressed availability, you know, leading to that number. So we actually have, you know, a good amount of availability once the suppressed availability from transitioning our, the invoice processing service that we've been using, we've been transitioning to a new one, which led to a slight compression there.
So, you know, we have substantial liquidity, that we'll be able to tap into once that suppressed availability comes back. So, you know, we're in a good spot to get us through profitability and beyond. Obviously, to the extent we wanted to do some M&A or things like that, then we'd have to look to likely outwards, outside financing. But just to fund the internal operations and our, you know, getting to profitability and beyond, you know, we have the liquidity we need.
Awesome. And then, I don't know if you guys have provided this before, but you know, how long should we expect maybe free cash flow to turn positive after you guys reach kind of adjusted EBITDA positive?
I think we've not specifically broken that out, but it should be shortly thereafter. I guess would be the guidance I would give.
Perfect. All right. Thank you guys very much.
All right.
There are no further questions. I will now turn the call back over to Phil Rodoni.
Well, thank you to everyone for joining us today, and we look forward to updating you on our further progress in quarters to come. So take care, all.
This concludes today's conference call. You may now disconnect.