Good morning, everyone, and welcome to NowVertical's earnings call for the second quarter of 2023. My name is Glen Nelson, and I'm the Vice President of Investor Relations here. With me on the call today, I have Sasha Grujicic, our Chief Executive Officer, Alim Virani, our Chief Financial Officer, and Andre Garber, our Chief Development Officer. After the markets closed yesterday, we issued our Q2 2023 results, as well as our MD&A, our financial statements, all of which you can get on our investor relations website at ir.nowvertical.com. Just so you guys know, this call is being broadcast live this morning at 9 A.M. on August 30th, 2023, and a replay will be available on our IR website following the conclusion of the call today. During the call, we'll be making some statements related to our business that may be considered forward-looking.
These statements reflect our views only as of today and should not be regarded as representative of our views at any subsequent date. These statements are subject to various risks and uncertainties that could change or could cause actual results to differ materially. Today, all figures that we will be discussed are on an IFRS basis, unless otherwise noted, and also, after today's call, we will refer to specific non-IFRS terms, such as Adjusted EBITDA, Adjusted revenues. A reconciliation of those to the closest IFRS measures can be found at the end of this presentation or at the end of the press release that we issued last night. And finally, at times in our prepared remarks and in responses to your questions, we may discuss additional metrics to give greater insight into the dynamics of our business or our results.
So please be advised that we may or may not continue to provide this additional detail in the future. With that, I'd like to pass the call over to Sasha.
Thanks, Glen. Really appreciate it. Good morning, everyone, and thanks for taking the time to be with us this morning. So here at Now, we're working with our over 250 customers by helping to teach computers to solve some of their hardest problems. Whether this is using computer vision to detect manufacturing faults, machine learning to identify customer churn, or generative AI to support customer service, we're delivering real data and AI solutions to our customers around the world. To do this work, it comes down to a consistent and repeatable process of prep, train, and deploy. We start by prepping their data and tech. Most of our customers' data and technologies are hidden, siloed, and not in a usable form. So we work with our customers to prepare that in a way that's usable for machines to learn from.
From there, we train these computers to learn from the data, making sure that they're enterprise-grade and ready for use. Finally, we deploy them into our customers' environments to create real ROIs and speed up their time to value from their investments. This needs to create real value to the business, no science projects here. This is how you do AI with companies and governments. This is how you teach computers to help solve their hardest problems. Now, let's dive into the quarter and share some more details. In the past 90 days, we've been really focusing in on these 5 key operating items across our global group: driving increased revenues, generating operating efficiencies, strengthening our cash position, aligning our interests with our shareholders, and sharing our real-world AI work. Now, let's walk through just how the team has done just that.
Over the quarter, we've had our best revenue performance ever. Our teams around the world have been executing the plan and are delivering high-value work to our customers. Our gross profit margins remain strong, and we've shown for the first time in our history, a gain from operations, net of our corporate operating model costs. We've been also very aggressive in reducing our costs to generate improvements in our financial performance. We pulled almost $2 million of annualized cost out of the business in Q2 and delivered a very strong Adjusted EBITDA. With the exclusion of Affinio Social, which we sold in this quarter, we would have had over $200,000 of a gain from operations, as we carried some of those costs post-transaction. Overall, a lot to be proud of.
Our teams also demonstrated strong customer acquisition growth in the quarter, with 53 new customers coming to Now. Our average total revenue per customer year to date is about $300,000, with the average value per contract coming in around $120,000. Our average contracts per customer in the year to date is around 1.7, but if you looked actually at our service-focused groups, that number is over two year to date. The recurring nature of the work that we do points to the critical nature of our capabilities and supports further expansion and organic growth for us as a business. Again, this is a repeatable process of prep, train, and deploy. It creates many different customer expansion opportunities for us as a company and something that we're focused on in executing.
In Q2, we're tracking between 5% and 30% organic growth rate across our businesses, and it's a huge, it's a huge achievement for our operating companies. I also recognize that I may have jumped forward a little bit on this slide, so I'll give you know the participants in this session to have a quick look at those metrics. All right. So from a new logo acquisition, we've seen a nice distribution of growth across our key verticals. Commercial Services and Consumer Goods are kind of leading the way, and this is really indicative of the maturity of those verticals from a data- readiness perspective. Industrials tend to lag a little bit far, further behind because of the difficulty in accessing their data and the heavy capital costs around those facilities.
That being said, you know, we anticipate that that area of our business is gonna continue to improve. Government has also been a strong focus for us in terms of kind of net new logo acquisitions around the world. Part of our revenue growth strategy is partnering with some of the world's largest technology companies to deliver these cutting-edge capabilities to our clients. It's also about accelerating our go-to-market. With our partnership with Azure OpenAI, we've brought enterprise-grade, large language model capabilities to our clients via our Smart Hub product. Our case study that we've shared is one of the world's first, and indicates the power of leveraging these new LLM technologies in industry. These deployments still require the same prep, train, and deploy process that our company uses globally, so we're really excited to bring that capability to our customers.
In our work with Snowflake and our various different Snowflake partners, we're accelerating our go-to-market of NOW SnowGraph, a cutting-edge application of Graph Analytics. We're working with over 40 Snowflake account execs, field CTOs, practice leads, and sales directors to bring our Graph Analytics technology to market. More to come in the coming quarters for this new and advanced technology. So at Now, our operational excellence is a strong focus, specifically in how we jointly sell and deliver our capabilities. In Q2, we had strong integration across a variety of our different business units, driven in large part by our Global Delivery Model. The commercial integration work that the team has done in the quarter has driven new revenue into different business units, improved operating margins across different customers, and has supplemented others with different and new capabilities.
The commercial impact from this revenue, margin, and cost improvements will be a key pillar for us at NOW moving forward. A critical area of success for us at NOW is also the constant management improvement of our Net Working Capital metrics. In Q2, we had a 50% improvement in our cash flows from operations. Free cash flows from operations is a critical metric that we're constantly working to improve, and will be a critical focus for us in Q3 and Q4 this year. To further support our Net Working Capital position, we implemented a variety of different cost savings initiatives across the operating model, netting out almost $2 million of annualized cost improvements to the business.
Cost optimization will be an ongoing focus for us across the business units, which will accrete more free cash flows from operations and improve our net working capital position in the coming quarters. Finally, to further support the business, we're actively working with our financial partners to support any further needs for working capital. Underpinning all of this is ensuring that our incentives and group are tightly aligned with our shareholders. Currently, total inside ownership is over 40%, and with current management and business leaders, it's about 11.5% plus options. We've done some work around exec compensation, but more to be done in the coming quarters. We need to align and continue to align our shared interests with our shareholders.
The final piece I want to share before handing it over to Alim to dive into the financials in a little more detail, is how we continue to share our real-world data and AI solutions that we're delivering to some of the best companies on the planet. From ML, to computer vision, to generative AI applications, we are teaching computers to solve our customers' hardest problems. AI, for all of the world's companies and governments, is becoming a baseline requirement to stay competitive. The work that we do is mission-critical to our customers, and if we're not there doing the work, it doesn't get done. So the future is very bright here at NOW, and with that, I'm gonna pass it off to Alim to dig into the financials with a little bit more detail.
Thank you, Sasha, and good morning, everyone. Our revenue performance in Q2 was very strong. This was the first full quarter of reported results that included the acquisitions completed in Q1. We are still in the process of validating the prior period data for some of the Q1 acquisitions, given the changes in accounting policies. However, most of the business units achieved strong organic growth in Q2, ranging from approximately 5%-30% quarter-over-quarter. The main contributors of this growth included our government sector work, which started to pick up in March 2023 and continued in Q2. We anticipate this trend continuing in Q3, with more support from our operations in Latin America. We also saw strong performance in our retail sector as we successfully expanded our scope of work with existing customers.
We've also started to mobilize our global delivery model, as several business units have started to share resources that are based in lower-cost jurisdictions. Even though there were only a handful of deals in Q2, we are starting to see the positive impact this is having on gross margin - gross margins. This is a trend we are looking to continue to focus on in Q3 and Q4, given the strong capabilities of our global resource pool. As we continue to execute on our integration plan, we anticipate identifying further operating expense savings from shared resources and vendors, and from a consolidation of administrative functions, which will further help drive EBITDA margins going forward. Lastly, there's been significant focus on reducing the operating model cost through a combination of restructuring efforts and a rationalization of key vendors, which is a key factor to the increase in the Q2 Adjusted EBITDA.
In Q2, we also incurred approximately $300,000 of restructuring costs, which has been shown as an adjustment to the EBITDA calculation, as this provides a better proxy of the expected run rate of costs going forward. In addition to this, in Q2, we also booked a one-time reversal of accrued costs that did not materialize. We do anticipate the impact of cost-saving initiatives to carry on in Q3 as we focus on leveraging internal resources to supplement key vendors and transition external spending to lower cost regions. I also wanted to note that the sale of the Affinio assets occurred on May tenth, 2023. The Q2 results only include revenue up to the sale date. However, we did incur some additional costs related to the sale in Q2.
To provide some context on the impact of the Affinio social business, the fiscal year 2022 revenue associated with this business line was $2.2 million, and the EBITDA was approximately $500,000. As mentioned previously, NowVertical hit a revenue milestone in Q2 by surpassing the $15 million dollar mark. As those familiar with our story, the quarter-over-quarter growth we have experienced over the last year and a half has been driven primarily by acquisitions. Our focus in Q1 and Q2 of 2023 has been mainly around integrations and untapping organic growth opportunities. Our new logo wins and the impact of executing on the global delivery model has been a key contributor to our Q2 performance. Q2 has been a record on multiple fronts for NowVertical, as our gross profit exceeded $6.3 million.
In the upcoming quarters, we are prioritizing the execution of our Global Delivery Model to strengthen our gross margins. While we take pride in elevated margins we are generating from our service businesses, we are working towards incorporating Now software solutions, as well as lower-cost third-party software providers within our businesses in Latin America, which will have a direct impact on gross margins. Lastly, profitability remains a key focus for our operators. The trend in improvement of Adjusted EBITDA is driven primarily by the increased profitability of our acquired companies, and a sustained effort to minimize the costs associated with our operating model. We do anticipate this trend to continue as we execute on cost savings initiatives and capitalize on organic growth opportunities.
As Sasha alluded to, managing our working capital is a key focus for us as this is a critical ingredient to build a sustainable operating model. In the second half of fiscal year 2023, we will be executing on the following initiatives to improve our working capital position. The first of which is to optimize our free cash flow from operations. As of today, our current cash balance is $4.8 million. We have disclosed that some of this cash is located in countries with FX restrictions or are subject to covenant compliance requirements. We do have access to the cash that is subject to covenant requirements and are working with our global partners to fully utilize and access cash held within countries with FX restrictions. The second key focus is having a laser focus on AR collections and billings.
Our current AR and unbilled revenue position is $11.5 million. We will be working closely with our business unit leaders and customers to ensure the efficient collections of these balances. We are also anticipating strong billings in Q3 and Q4 within our government and retail verticals, which will have a direct impact on our working capital position. We're also in the process of working with our existing lending partners to secure up to $1 million in additional capital. In addition to this, we are exploring other opportunities with our lenders to expand our position on existing debt facilities. Cost-cutting initiatives will be a critical focus in the second half of the year as we further integrate our business units. We are anticipating to see a direct impact on working capital in mid to late Q4.
Moving forward, we do not foresee the working capital needs of the business as a critical concern for us. Our sources of funds are robust and diverse, and our active management of outflows has been and will be continued to be a priority of our business. Sustainability of our global model is within sight and is at the top of our priority list operationally. With that, I'll hand it back to Sasha to conclude our presentation.
Thanks, Alim. Moving forward, we'll continue the hard work we've done in Q2 and drive improvements across our global operations. Integration, revenue growth, and cost improvements are of paramount importance to us operationally, as we lead our customers into this AI-enabled future. Improvements in our net working capital quarter over quarter, freeing up cash from operations, improving our operating metrics globally, supporting our customers to maximize the impact from AI is what we're focused on. In closing, I wanna personally thank the entire team, our board, our shareholders, and stakeholders for the support over the past 90 days. It's been wild, but fantastic. This company has a really bright future, and I'm honored to be here helping to guide it. With that, I'll open it up to questions.
Great, so I'd like to remind everybody to, if they have a question, to submit that below in your browser, and we will go through them one at a time here. So Sasha and Andre, and we're also joined by Andre Garber. Let me jump in to answer some questions here. So the first question is from Danny Graham. "First off, congrats on the 53 new customer wins. What is the typical conversion timeframe to see those turn into kind of billable revenues? And two, with these win, what does that kinda look like for, you know, the full year 2023 from a revenue position?
Yeah, thanks for the question. I won't give any fiscal 2023 revenue guidance, but what I will speak to specifically is the nature of our customer wins and how quickly... I guess the question is the book-to-bill rate or timeframe. So, in most instances, it's pretty immediate from a book-to-bill perspective. Obviously, not talking about collections per se, but you know, our teams operate at scale, and part of the compelling nature of the NowVertical company is the ability to service global contracts in all time zones and scale quite dynamically. So, different parts of our business have different kind of times from a book-to-bill perspective, but it is, you know, quite immediate because we do anticipate it.
When we bring on a new customer, we're anticipating those revenues, and our ability to scale up that model is quite quickly. The only slight difference in the operations worth noting is sometimes in our government contracting work that we do through Allegient Defense, the ramp time is a little bit longer, but not by a material amount. And, you know, the team there does a fantastic job to scale up. So sorry, I can't give you guidance on the rest of the year from a revenue perspective, but we have a very specific mechanism around customer expansion that we execute against.
Great. Thank you. The next question here is from Rob Goff. "Can you please talk about the seasonality, if any, of your cash flows?
Sure, I can jump in here. Given now the majority of our revenue is driven by service-oriented businesses, so we do see high billings in Q2 and Q3. And Q4, you know, in December, things tend to slow down. However, you know, we are working with three new businesses that we've acquired in Q1, so we are gaining more insight into the seasonality trends of cash flows.
Perfect. Thank you. And the next question is from Hernan Gomez: "Gomez, can you shed some light on how Now team was able to secure 53 new customers during Q2?
Yeah, I mean, the team is executing around the world to source these new companies and contracts. The space is obviously very interesting to many organizations that are looking to modernize and leverage some of these new types of technologies. We do have active, you know, sales and marketing efforts around the world to acquire these net new customers, but a lot of it is driven through referrals, and through our partner network. So, it's a, you know, fantastic number.
I think what excites me a little bit more, and, you know, just to jump around a little bit, if you can still see the slides on screen, is the manner in which that we take, you know, single contracts, which these would start within, and then build kind of a repeatable nature within how we execute those contracts. So on average, right now, the group is about 1.7 kind of customer contracts executed per, you know, per customer per year within the first half of the year. And then, as I mentioned, on the services side, it's more like 2.2. So, you know, our efforts and our focus around customer expansion in terms of post-acquisition of these customers and generating recurring revenues is kind of what we're most excited about. So customer acquisition comes through those means.
And then the government side is much more around published bids.
Great. The next question: "Did the sale of the Affinio asset back in May have an impact on Q2 revenue?
Yes, it did. It did have a little bit of impact. The sale occurred around May 10th, and there was revenue from the Affinio assets from April 1st to May 10th, which was approximately about $200,000 or so.
All right, and the next question is from Rob Goff. Again, around the new customers, can you give a little color on who these customers are? Kind of the size, duration, and the services that we're offering.
Yeah. Thanks, Rob, for the question. So, our focus is around Fortune 1000 companies and OECD governments, and the average kind of contract values associated with our customers is around $300K, and the duration to deliver that contract is about five months on average, in the commercial sector, primarily. So the average kind of contracts that we... excuse me. The average value per contract is about $120K. So that gives you some operating metrics in terms of, what the actual value and the type and nature of those of those contracts are, and the recurring nature of the work in which we do. Again, coming back to this whole prep, train, deploy methodology that we execute.
Great. And then are there any... This also comes from Rob Goff. Are there any required earn-out payments within the calendar year for 2023 still remaining?
Maybe leave that for Andre. Or I can, I can-
On mute. Yeah, Sasha, do you wanna take it or?
Yeah, I'll take it. So, no further required earn-out payments this year.
Yeah, that's right.
Sorry, I stole your thunder.
Just unmuting the mic. That's right.
How extensive do you see the reach of your Snowflake services across your revenue base over time?
Quantification is difficult from a forward-looking perspective, Rob, but they're an important strategic partner for us, both from a kind of a services perspective in terms of the way in which that we support customers looking to leverage some of Snowflake's compute capabilities. But more, I think, critically for us is in and around our managed application that sits within the Snowflake marketplace, which is the other part of the Affinio acquisition, which is the SnowGraph technology. So we'll be able to start to share some more kind of details around the successful nature of that partnership. But Snowflake is a critical technology partner for us globally, and we look forward to sharing some of those success stories in the coming quarters.
Great. Okay, and the next question is from Tetsu Mikanagi. Congratulations on a great quarter, team. Should we expect additional cost savings initiatives in future quarters, or was the lion's share cost-cutting action in Q2?
Yes, we should expect additional cost savings initiatives in the future quarters. Absolutely.
Okay. The next question is from Gabriel Leung. Can you quantify the cost savings expected in the second half of 2023 from your recent initiatives? And can you also talk about the planned credit facility to fund acquisitions, which was disclosed in the MD&A?
Sure. I can address the comment around the initiatives as well as touch on disclosure in the MD&A. So we are working through, you know, additional cost-cutting initiatives in Q3, where, you know, we haven't yet quantified what the impact is, but, you know, we've obviously set targets. With regards to what was initiated in Q2, the annualized savings were approximately $1 million, right? So about, you know, $250K, approximately a quarter. So, you know, with the credit facilities, you know, we obviously have, you know, relationships with existing banks, right? Especially in Q1 that supported our acquisitions that were completed. So, you know, the plan there is if strategic targets do come on our radar, right? You know, we'd be looking to expand those relationships with our existing lenders.
Okay. So another question that keeps coming up is around insider ownership. Can you give us kind of a preview or kind of a overview of insider ownership as it relates to Now?
Yeah. So I can, I can talk about the current state, and then some of the more systemic approaches that we're looking at to, to improve that through shareholder alignment. So, currently, insider ownership's around 40%. Current management and business unit leaders have about 11.5%, including options, it's over 14%. So we've done some work in and around the, executive compensation associated with, kind of alignment of shareholder interest and, and insider ownership. But our, our intention and focus for the coming quarters is to systemically address this across our global group. We have over 600 people in the group, of which, you know, we want to build strong alignment from a, from an insider ownership perspective.
It's.. y ou know, we've just been prioritizing some of the other, actions and items here, operationally in this past quarter. But it's absolutely, something that we'd rather address at a systemic level, versus on a kind of point-and-shoot level. So hopefully that answers that question.
Perfect. So it looks like now there are no further questions, so I will pass the call back over to you, Sasha, for conclusion.
Well, just, you know, in conclusion, just wanted to thank everybody for their continued support, and especially to the team and our board here at Now that have been kind of executing in lockstep over the past quarter. I think Q2 is an indication of a strong business and a strong foundation in a market that's, you know, highly interested in from our core customers. The acquisitions of these net new customers, you know, within our operating models is fantastic, and, you know, we'll continue to move forward and operate with discipline and prudence, managing our costs of capital and our allocations of capital in accordance with, you know, the nature in which that we've run the business in the past quarter.
Just wanted to thank everybody once again for all the support and, you know, we look forward to the Q3, Q4, and rounding out the year.
Thank you. With that, we will now conclude the conference call for Q2. Thank you. With that, we will now conclude the conference call for Q2.