Snipp Interactive Inc (OTCQX:SNIPF) Q3 2016 Earnings Conference Call November 30, 2016 12:00 PM ET
Mark Forney - MKR Group
Atul Sabharwal - Co-Founder and CEO
Jaisun Garcha - CFO
Rob Goff - Echelon Wealth Partners
Shawn Brown - Shawn Brown and Associates
Good day and welcome to the Snipp Interactive Third Quarter 2016 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Forney. Please go ahead sir.
Thank you operator and good morning everyone and welcome to Snipp Interactive's fiscal 2016 third quarter conference call. Yesterday we issued our third quarter fiscal 2016 financial results and a copy of the press release is available on the investor relations section of our website and the financials are posted on SEDAR. We report our financials in U.S. dollars so in today's discussion we will use that currency unless otherwise noted.
Before beginning our formal remarks, I would like to remind listeners that today's discussion may contain forward-looking statements that reflect management's current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Snipp does not undertake to update any forward-looking statements except as required. I will now turn the call over to Snipp CEO, Atul Sabharwal. Please go ahead.
Thanks Mark. Hi, everybody and welcome to our quarterly conference call. Every quarter we select some key takeaways that we hope investors will embrace to better understand our progress as well as our long-term vision for Snipp. We believe that Q3 2016 ranks as one of our most notable quarters for reasons that we will explain in detail during this call.
When the company is in the early stages of developing new technology in new markets as Snipp has been doing for the last few years it is sometimes very hard to effectively spell out management's vision for the future. That is particularly true with the company such as ours that has historically allocated a majority of resources into engineering and technology, the kind of behind the scenes activities as mainly registered as expense line items on financial statements. However it is worth taking a step back and taking stock of the fruit that those investments have borne.
We were one of the first to market with our receipt processing solution and rapidly created an industry around our platform and have become its dominant player today. Today we process receipts for the two largest receipt based loyalty programs in North America and in Q3 we had over 90 programs running simulatneously in the market, a testament to our technology and scalability.
We chose to buy two companies in 2015 and that rapidly enabled us to develop additional and new solutions around our core technology. Given the due structures we negotiatied the build was by decision was a simple one enabling us to spend very little if at all any upfront cash on the acquisitions. As a result of these steps we recently launched loyalty base more on that later. Our new low cost loyalty in a box solution tailor made for consumer packaged goods CPG and multichannel brands built on top of our industry leading receipt processing engine.
There is no competing product in the market, atleast none that can match our pricing, functionality, and speed of setup today. Since its launch and in less than a month we have secured five new customers. Today we are one of the few providers in the marketplace that can provide clients a onestop shop for promotions, rewards, loyalty, and rebates. All under the same roof and all deeply integrated with each other.
The investment in our platforms has provided significant top line benefits. Recently we were ranked number 49 on Delloites Technology Fast 500, a ranking of the 500 fastest growing technology companies in all of North America. It is worth noting that Snipp grew 2223% during the ranking period of 2012 to 2015. So for us the third quarter of 2016 marked an important point in our evolution because a majority of that initial investment in engineering and technology is now behind us. And we have begun to allocate our resources towards achieving profitability.
In Q3 multiple positive trends began to show themselves providing a better picture of our roadmap. First we saw a 23% EBITDA improvement during the quarter providing a very big step towards becoming profitable on an ongoing basis. We now project that we will reach breakeven in the backhalf of calendar 2017 with the potential that this might come a bit earlier based on some of the open opportunity we are currently pursuing. This ongoing improvement is coming from three sources. Number one, scale as we layer more customers and programs into our existing platform. Number two, decreased payroll expenses as we streamline the mix and number of personnel part of our move from an engineering to a sales oriented operation. And number three, the ongoing effect of high margin recurring business as part of each quarters revenue mix.
Although our overall margins were slightly down this quarter partly due to the launch of the new products Snipp and loyalty base, margins remain healthy at over 60%. We anticipate margins rising back to the 70% range in 2017 as we continue to grow the mix of high margin revenues in upcoming quarters. Secondly, we would like to highlight some improvements in our financial strength. In addition to having nearly 2.3 million in cash at the end of the third quarter we posted 5 million in accounts receivable, the highest level in our company’s history. This number represents a 63% increase over the prior quarter Q2 2016 and is a great indicator of the kind of revenue stream that builds beneath the surface during the recurring revenue transition. And remember our customers are among the largest consumer product companies in the world so our receivables are rock solid and at an almost zero payment risk.
Because the quality of our customer are so high, we gained even greater financial flexibility this month by establishing a 4 million line of credit with Silicon Valley Bank. Financial strength is a very important element in signing longer-term contracts with our Fortune 500 customer base. So having this kind of third party stamp of approval helps us create confidence among our target customers. When a client decides to move from a test promotion phase to becoming an active user and eventually to a longer multiyear commitment knowing that the vendor has the financial strength to fulfill that contract is very important. So the Silicon Valley Bank relationship is another step in building a strong financial base for the future.
As we have previously explained in recent quarters, during our transition to a recurring revenue model our year-over-year comparisons will be negative as we shift from onetime upfront license fees to recognizing a significant portion of revenue ratably into future quarters. Q3 2016 was no different. So investors should remember that the 9% revenue decrease when compared to Q3 2015 does not represent an apples-to-apples comparison as we shift to a ratable recurring revenue model.
Additionally there was a short-term bump in revenue last year in Q3 2015 from the acquisition of Hip Digital that skews the comparison as well. Talking about Hip Digital we hired KPMG as valuation consultants to assist us in evaluating the need for any impairment from the Hip Digital acquisition a possibility that we mentioned during our last earnings call.
This review was necessary as Q3 2016 represented the one year anniversary of the acquisition. I am very happy to report that no impairment is necessary to be accounted for at this stage because we have completely absorbed and integrated the acquisitions into our business as per the KPMG review. While this might change when we do our end of year audit with our current auditors, we feel very happy that the value of the acquisition has been correctly reflected in our financials. It was a simple decision for us to buy this company last year versus attempting to build a similar platform. Not only was it faster and way more cost effective to buy Hip, the opportunity was a golden one to acquire a great team and product with no cash leaving our coffers.
We paid for the HIP acquisition entirely in stock at a conversion price north of 80 cents Canadian per share and that too it was indexed to their revenue flow cost. Because we tied payment terms to their revenue forecast which did not meet projections during the sales team integration period earlier this year we actually ended up paying far fewer shares for the acquisitions than originally expected. We did end up acquiring a company with over $10 million in venture funding for a fraction of its value along with its entire roster of blue chip customers. These are proving to be a tremendous addition to our portfolio of customers and we’ve inherited a great team and a superb technology platform that we would have spent many years attempting to build.
Moving back to this quarter of greater importance, it should be noted that Q3 is our fourth consecutive quarter of sequential revenue improvement but our last four quarters at 1.8 million, 2.1 million, 2.8 million, and now 3.3 million. In Q3 2016 our quarter-over-quarter revenue improved by 17%, another quality double-digit increase. Due to heightened activity in our established customer base and an emphasis on generating new clients our promotion of the business in Q3 2016 was 61% of revenue which is on par with our last quarter in Q2 2016 which was 62%.
Like any other company with ground breaking technology we are essentially pulling an old technology market into the modern world of digital and model. Many of our customers have never tried receipt capture prior to running a promotion with us. So our model can be viewed as a kind of seed planting starting with a few test promotions but with an ultimate goal to eventually evolve each relationship into long-term loyalty and promotions contracts.
A look at the growing size and duration of our contracts tells the whole story. In 2015 our largest contract was $542,000 and we topped that with a $620,000 contract in Q2 2016, all dollars are in U.S. Dollars. Well in September we signed a record 1.5 million follow on contract, 142% larger than any prior deal. Some of these revenues will be recognized ratably all the way into 2018. In fact we currently have revenue totaling more than 2 million that needs to be recognized going into 2017 and 2018. So we essentially start every quarter now with a head start.
As we layer on these kinds of large high margin long-term contracts we will eventually reach a tipping point where our revenue stream should become more predictable and profitable. We believe we are on the cusp of that period of growth. Two thirds of the way through Q4 2016 I am happy to report that we have already exceeded our Q4 2015 revenue totals quite significantly, so investors should expect a good year-on-year comparison in the coming quarter. At this time I will turn the call over to Jaisun for additional details on our Q3 2016 financial results.
Thank you Atul. I am going to highlight some of our financial metrics and also provide some color on the cost savings we realized in the third quarter of 2016. As Atul mentioned we were very pleased with the progress we made during the quarter as we continued to streamline our combined operations. Our acquisitions are fully integrated at this point but the mix of our workforce will continue to change as we migrate toward a more sales oriented organization in the future.
First a few comments about our cost cutting program. In Q3 2016 we continued to decrease salaries and compensation which dropped 10% to 2.7 million compared to 2.9 million in Q2 2016. We will continue to work toward improving our cost structure in coming quarters in an effort to move Snipp towards profitability. Our operating loss which has averaged more than negative 3 million each of the prior two quarters improved considerably to negative 1.86 million in Q3 2016. So our efforts have already begun to show improvement. We also exited the quarter with zero debt.
Furthermore towards the end of Q3 we launched a series of initiatives to dramatically restructure both our non-FTE and FTE related operating cost. We have set ourselves the target of reducing our overall cost base by atleast 4 million roughly 23% of our existing cost base on a run rate basis by the end of Q1 2017. To date we have already identified 750,000 in non-FTE savings and approximately 1.5 million of FTE savings which we have already captured or are in the process of doing so.
Some of those savings will be seen in Q4 with the majority starting to flow through in the new fiscal year. Our business mix in the quarter was promotion heavy with promotions accounting for 61% of revenue followed by loyalty at 27% and API sales at 12%. This mix affected the quarter's metrics with the gross margins temporarily dropping down to 61% compared to over 70% in the prior two quarters. We expect margins to improve in upcoming quarters. Current assets at the end of Q3 2016 rose to 7.6 million which is a 12% increase over Q2 2016.
As Atul mentioned the key number in our financials is the accounts receivable figure which reached a record $5 million, a 63% increase over the last quarter. Our deal flow came in at 100 deals in Q3, an increase over prior quarters. Through the third quarter we had already signed 254 deals a 30% increase over the 204 deals we signed for all of last year. So we are far ahead of 2015 in terms of signing and completing deals. With nearly half of our current sales persons new to Snipp in 2016, we expect to see even more improvement as the sales team seasoned and gained experience.
One of the unfortunate things for our stock price in 2016 has been the overhang of stock released each quarter in conjunction with the Hip Digital acquisition that took place in 2015. We are glad to report that the last of the shares required for payment were issued during the third quarter. So that source of supply has now ended.
Finally, I comment on valuation, Snipp as a company clearly has one of the best product lines in its young history. But during this transition year with necessary integration activities and evolving recurring revenue mix our shares have traded at about onetime sales. That is the kind of the price to sales level usually associated with the no growth business. Certainly not one with disruptive technology such as Snipp.
The market clearly rewards growth so we are very anxious and optimistic about returning to double-digit year-over-year revenue growth in our future quarters as we anniversary our recurring revenue adoption and benefit from our new product offerings. To help investors gauge the impact of that kind of change consider that in the U.S. and Canadian micro caps those stocks with 15% to 50% growth rates currently trade at an average of 2.5 times sales. As we survey the remainder of the year we are very encouraged by our sales activities. We continue to bid on very large seven figure projects with Fortune 500 brands.
Now I will turn the call back to Atul for some additional comments.
Thanks Jaisun. Before I open the call for questions I’d like to talk about our newest product offering Snipp Loyalty base which we introduced in November. This is a very important product for both our company and the industry in general. Most consumers have some familiarity with loyalty programs typically involving airline miles, hotel stays, similar entities and this consumer package gift space there are tens of thousands of products but really just two large scale loyalty programs one run by Kellogg's and the other by Coke.
Snipp loyalty base is the first platform of its kind that was purposed build for CPG and other multichannel brands. This is a very big deal for the industry because we now offer for the first time ever the ability for brands to run loyalty programs where the idea previously seemed impossible and this is also a very affordable program with a setup cost of less than 45,000 and a total annual cost of under 100,000 for our basic version. Our engineers put a lot of time into this product and it shows.
Snipp loyalty base is highly configurable out of the box, can be setup in weeks instead of months, its highly scalable and it comes preintegrated with SnippCheck our industry leading solution for purchase verification by a receipt instead of codes on packaging. We are calling this loyalty in a box because it gives CPG brands the ability to migrate from running a single promotion at a time to running a continuous loyalty program supporting multiple promotions. There has never been anything like this in the marketplace.
We are very excited about this new product and we look to forward to reporting on our progress as we noted out to the CPG market over the next few months. We are also on track to release our smarter rebates product at the end of this year. Smarter rebates is a self service rebates platform that like our loyalty base product which is doing for loyalty it aims to disrupt the age old rebates industry by providing a modular sub service platform with better features and at a lower price point than currently available in the industry. So stay tuned for that too.
Okay Amelia at this I’d like to open up the call to questions.
Absolutely. [Operator Instructions]. And we’ll take our first question from Rob Goff from Echelon.
Thank you very much for taking my call or question I should state. My first question will be on the new product development pipeline, could you -– products you may be looking for in 2017 and the resources required to get those to market?
Thanks, so we -- if you think about our company right, we built a bunch of what we were calling minimum viable products, the first one being was -- first one was our receipt processing engine. And that product really exploded and allowed us to grow at the 2000% rate that we did for the first three years. And that minimum viable product became the product which is a very scary part. However, the feedback we got from the market was so great that we said okay, there is a huge potential for us to convert those engines into full blown solutions. So we bought and built solutions around the core engines that we had; one was our receipt processing engine, the other was our rewards engine that we bought right. So this Snipp loyalty product is an example of a solution built around these engines that we are now take – smarter rebates product I just spoke about is another full blown solution.
I mean I understand, each of the industry the rebate industry, the loyalty industry they are multibillion dollar markets, right. The promotions in the marketing industry, right. So we have these core engines and now we’re focused on three or four of these solutions that we’ve launched in the market but we have a whole roadmap here of how not only to enhance these solutions for our clients but also to build other vertical solutions as needed for other markets. I was on the phone the other day with a Marijuana [ph] company which is all the rage these days in Canada where they’re looking for e-verification system based on some of our technology to validate a person's prescription and ID for online sales. And it’s a solution we already have, questions will we launch it or not launch it, it is to be seen because we have got some really strong solutions in-house, massive markets, existing client base for it already, before we think through launching other solutions on our platform, right.
So, for 2017 I think our company like we said before it's all about getting to profitability with what we have and focusing down on the solutions we know work, that there is demand from large Fortune 500 companies. And when you look at enterprise promotion platform and you look at our loyalty platform and you look at our rebates platform, right you look at the modular nature of these products. We’ve not even exploited the low hanging fruit in the industry yet. But there are other spinoffs that could come from this quite easily, that we’ll evaluate based on the market size opportunity and you know frankly if it helps us drive profitability in the short-term.
Thank you Atul, and a follow up could you talk to your pipeline and your bookings what the composition there would look like?
So right now our pipeline is about $22.3 million to be precise as of yesterday. Of which 36% is promotions, 47% is loyalty, and 14% is sales of our API solutions and 1% is other stuff. At some point this quarter will actually break out rebate separately but that’s the composition of our pipeline. So as I've said repeatedly right, we want to end the year at 60% loyalty and API sales which represents long-term recurring revenues for us and 40% on promotions and we are on track to do that. Yeah, that is our pipeline, right.
Bookings for this quarter was 2.8 million which was higher than last quarter which was 2.6 million. And this quarter we sold a lot of promotions which is normal because Q3 and Q4 are high promotion marketing seasons for Thanksgiving, Black Friday, Christmas. About 15% of bookings were for longer-term solutions, related to API and the rest were for promotions.
And one last one if I may, Jaisun had made reference to your sales force, could you talk to the number at the beginning of the year the current and how that might expand going into 2017?
Okay so I don’t have my sales force numbers on the top of my head, let me email that to you.
Okay, thank you very much.
[Operator Instructions]. And we’ll take our next question from Shawn Brown from Shawn Brown & Associates. Please go ahead.
Hey, good morning Atul. I am doing well thanks. What's the current cash position as of November 30th?
So we have -- we just got our 4 million receivables lines so we have almost 5 million of cash on receivables in the bank.
So you have a $4 million line how has that factored, do they account every dollar of your accounts receivable as a dollar that you can draw against the line?
Let me break it down so there is no confusion. We have about 5 million between cash and accounts receivable irrespective of the line, right. Now that cash and receivable can be converted into all cash on a faster cycle in our client space if we so choose to by utilizing this line from Silicon Valley Bank. Silicon Valley Bank gave us a 4 million line of credit which is tied a 100% to our receivables and we can use about 80% of any outstanding of our total receivables to convert into cash at any given time. If I have 10 million of receivables I can take 80% of that in cash flow, if I have 5 million of receivable I can take 80% of that in cash, if I chose to.
And its revolving, does it convert into longer-term debt, what's the structure?
No, we’ve kept it very simple tied to receivables because we don’t want to impact our balance sheet in any form or fashion. It’s a simple working capital lying tight to receivables.
So just moving a little bit further down your consolidated financials, in the revenue you showed 3.3 million, Jaisun eluded to a 100 deals, should we expect a deal size to continue to shrink as you offer more competitive solutions to the marketplace?
Well actually our deal size it was -- for Q3 it was about $40,000 which is about the same as it was for Q2. And the deal size has actually increased because our longer-term contract value, our loyalty API rebate sales are of much higher contract value than 4 week or 5 week promotions.
Okay, fair enough. So I read and heard you guys talk about some cost cutting measures that have taken place but by looking compared quarter-over-quarter it looks like salaries and comps just continue just to sky rock off the charts and I want you to speak a little bit more to campaign infrastructure in the sort of the nebulous around not including that number in the expense as it relates this net loss that you incurred for the quarter?
So let me make sure I understand the question so one, that you want me to comment on salaries no problem, the other one you want to understand campaign infrastructure cost, I didn’t quite the third question which was it is reflected in our financials right? And it flow through.
What I am ultimately looking at and moving towards is you have a change in your cash position year-over-year of about $9 million and I am trying to figure out when that’s going to stop? I don’t see cost reducing, I see just the opposite of that?
I think you should go analyze our quarterly EBITDA numbers. We I think in our press release we outlined our EBITDA loss was about $1.1 million this quarter versus what was the number Jaisun last quarter 3 million?
No, it was about 1.18 this quarter, last quarter it was about 1.5, and the prior quarter it was about 2.5. So when you look at I guess it depends on which period you focus on. If you look at Q1 of this year to Q3 of this year on both the salaries and compensations and on our EBITDA loss position, there has been a steady improvement in that specific timeframe.
Okay, fair enough. My last question is about the number of shares in the float and as of December 31, 2014 till now you got about 15 million more shares, what should we expect for the next calendar year?
I have no clue. We will strategically look at opportunities to fund the business if we need it but our whole goal is to drive to profitability right. So these rates of -- these equity values that are currently in the market we don’t see, it starts to raising equity so that should give you some comfort. No one wants to dilute the company for no reason. But what happens in 2017 given all of the new products that we’ve launched is I’d be lying if I told you I knew what was going to happen in the future.
But the same trajectory we should expect?
Well the trajectory is pretty clear. Right now our revenues have been going up, our cost have been coming down, and yeah, we hope to continue that paths to profitability and beyond.
Okay, great. Thanks a lot.
[Operator Instructions]. And it appears we have no further phone questions at this time.
Okay. Thanks everybody for joining us on today's call. I’m actually going to be presenting at the Drexel Hamilton Growth Conference tomorrow in New York if anyone is around, you’ll are welcome to stop by. I think the details will be on our website later today. But yes, talk to you next quarter.
Ladies and gentlemen that does conclude today’s presentation. Thank you for your participation. You may now disconnect.
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