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Corrected Transcript

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

CORPORATE PARTICIPANTS

Sara Pearson Donna de Winter

Director-Investor Relations, Q4, Inc. Chief Financial Officer & Chief Operating Officer, Q4, Inc.

Darrell Heaps

Founder, Chief Executive Officer & Director, Q4, Inc.

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OTHER PARTICIPANTS

Doug Taylor

Analyst, Canaccord Genuity Corp.

Stephanie Price

Analyst, CIBC World Markets, Inc.

Stephen Boland

Analyst, Raymond James Ltd.

Kevin McVeigh

Analyst, Credit Suisse Securities (USA) LLC

Richard Tse

Analyst, National Bank Financial, Inc.

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MANAGEMENT DISCUSSION SECTION

Sara Pearson

Director-Investor Relations, Q4, Inc.

Good morning, everyone, and welcome to Q4's Third Quarter 2022 Earnings Call. My name is Sara Pearson and I'm Q4's Director of Investor Relations. I'm joined this morning by Darrell Heaps, our CEO; and Donna de Winter, our CFO and COO, to review our third quarter results. Please note, a copy of today's presentation will be available on our website. Please be aware that today's prepared remarks have being posted live.

Following the prepared remarks, we will be looking forward to welcoming our research analysts onto the call for a live video Q&A session. To those in our virtual audience, you can use the webcast Q&A button to submit questions in real-time. We need to remind participants that certain information discussed on today's call may be forward-looking in nature. Such information reflects the company's views with respect to the future events. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on the assumptions related to the forward-looking statements, please refer to Q4's public filings available on SEDAR.

During the call, we will be referencing certain non-IFRS financial measures. Although, we believe these measures provide useful supplemental information about our financial performance, they're not recognized measures and do not have standardized use under IFRS. Please see our MD&A for additional information regarding our financial measures including for reconciliations to the nearest IFRS measure. Please note that unless otherwise stated, all figures are in US dollars.

And with that, I'll pass it over to Darrell Heaps. Darrell?

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Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

Darrell Heaps

Founder, Chief Executive Officer & Director, Q4, Inc.

Wonderful. Thank you, Sara. And good morning, everyone. Thanks for joining us here on our Q3 earnings call. Before Donna walks us through our Q3 financial performance I wanted to take a few minutes to highlight the progress that we've been making against our strategic initiatives as we execute our profitable growth strategy. During our call last quarter, we outlined a number of initiatives that we're focused on expanding operating leverage and accelerating our path to profitability. I'm pleased to let you know that since then we've been able to deliver some solid growth, as well as rapidly improving our gross margin, implementing our sales efficiency tactics, as well as opening our centers of excellence in Latin America.

The rapid implementation of these initiatives is really helping us to insulate the business from the macro headwinds that we see out there in regards to inflation, as well as the challenging capital markets. As we continue to set the expectation of delivering positive cash and EBITDA results in H2 of 2023. The successful and rapid implementation of these initiatives is really a testament to our team's laser focus on operational excellence and reaching profitable growth in 2023.

The team knows that every day that they can accelerate these initiatives only sets us up better for success. As a result of their hard work, we are already seeing a meaningful improvement in the business from the size adjusted sales and marketing teams to refining and prioritizing our R&D investments to focus on our most successful products, all without skipping a beat.

In addition, we established our first Latin America center of excellence in Mexico. We've already ramped up technical roles with additional transitions continuing through year end. We expect to realize the efficiency benefits and the margin expansion improvements from these efforts in the fourth quarter and throughout 2023. Despite these changes and the headwinds of market forces, we are displacing our competition more than ever. We are winning more and signing bigger and longer term deals that will maintain our double digit revenue growth and contribute to our profitability next year. With the heavy lifting now behind us, we are monitoring the trajectory of our expected benefits closely and look forward to demonstrating our progression as we exit 2022 and are propelled to profitable growth in 2023.

One of the main reasons for our ability to pivot so successfully is our innovative Capital Connect platform and how we are delivering all of our products into a tightly integrated experience. Capital Connect is the platform we've been building since we went public. It's built on top of a unified data layer that connects all of our products and is the cornerstone of our ability to deliver a unique and differentiated analytics. The value of Capital Connect increases as we add customers and those customers adopt additional products. This adoption increases the amount of interaction data flowing through our platform and enables us to deliver exponentially better insights and analytics to our customers.

These improved products help us attract more customers, which in turn increases the data and improves the workflow, insights and analytics. At the scale we are today and where we're headed, this is a very powerful driver. This is really our network effect, and it will become the most valuable aspect of our business over the coming years. This is the one plus one, equals three value proposition; customers that use more than one product get substantially more value from us. Those that use more than two receive even more. This is a unique and core value proposition that is driving our ability to displace our competitors and continue being the market leader.

And in what continues to be a challenging macro environment. We are very pleased to see the traction that we are achieving during the back half of the quarter following the restructuring. In fact, September was our largest sales bookings month in our history and we're very pleased to see a significant increase in average deal size,

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

reflecting an increase in customer adoption of our Capital Connect platform and further reinforcing our core value proposition.

Along with the encouraging trajectory in the third quarter, we continue to see strong performance in our expansion sales efforts with current customers again focused on the value that we can provide through Capital Connect and the integration of all of our products. When we combine this, with our 96% controllable retention rates, our rising ARPA and the percentage of customers using two or more products, we are very pleased to be delivering double- digit growth during the quarter while also expanding gross margin and materially improving our operating leverage.

And I'll take a few minutes to provide an update on a few of our products. Our Web Management app today is serving over 1,500 customers and provides an exceptional experience for how customers manage their websites and their most critical updates. We expect the adoption of this platform to continue to grow steadily, serving virtually all of our 2,600 customers – 2,600-plus customers during 2023. During the quarter, we expanded the coverage of this product to include all of our corporate website and multi-website clients as well as all of our agency partners.

All client types are now fully enabled to use Capital Connect to facilitate their engagements with us. The Web Management app is the cornerstone of how we are delivering on our commitment to provide the best customer experience in the industry bar none, while allowing us to scale efficiently and expand gross margin. I'm thrilled to report that we continue to receive record levels of five-star ratings across all of our service interactions. We are very pleased with the performance of our teams and how well we're partnering with our clients.

Engagement Analytics is our first product that is really leveraging the vast amount of interaction data that is generated from all of the behavior of investors across our platform. Keep in mind that we have more than 13 million investors a month hitting our network of investor websites and more than 400,000 investors joining live investor calls each quarter.

Engagement Analytics is the first product that utilizes all of this behavior from all of these interactions and delivers a set of analytics designed to help IR teams understand those investors that are engaging and doing work and those that are not, helping them to prioritize their targeting and outreach efforts. Engagement Analytics had some great sales traction during the quarter and we were really pleased with all the feedback it received from our customers. Our roadmap is focused on continuing to evolve the analytics aligned with actionable insights, benchmarking and recommended next steps.

The goal being to help IR teams prioritize investor engagement and ultimately to help drive premium valuation. If you recall from last quarter, we announced a new product called Q4 Login. You may have seen it as you registered for this call. Simply, it allows an investor to choose to create a Q4 account and then be automatically logged into any quarterly earnings call hosted by Q4 in the future. This is an important step as we begin to unify all of the capital markets experiences for all types of investors, public companies, analysts and advisors across the Capital Connect platform.

I'm pleased to report that this product has continued to gain significant traction over the quarter, now counting over 114,000 investor accounts. To give you some perspective, we have maintained an investor database of around 350,000 profiles over the last couple of years. So we're very pleased to see the number of self-created Q4 Login accounts growing consistently quarter-over-quarter.

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

We're also really impressed with this number because it highlights the scale of investors engaged in our platform and reinforces our position of being a de facto source of investor information. As this number continues to grow and as we build out additional functionality, we'll be able to help all types of investors, retail and institutional more effectively research and engage with public companies and IR teams. On the virtual events front, we've been continuing to innovate and evolve our virtual events platform, which is what we're using here today on our earnings call.

We continue to see an increased demand from customers for video earnings calls and what we call non- conference call-based earnings calls. This is an aspect of the capital markets that has not evolved in many years and we are well positioned to bring a series of innovative features that will help issuers communicate more effectively over both audio and video, while also making the experience more engaging for all types of investors. As well during the quarter, we continued to expand our virtual events platform to serve the sell side and corporate access customers, hosting a number of investor conferences and ESG events, along with onboarding new banking customers.

As of today, our proprietary virtual events platform serves over 90% of our events client base. As we have rolled it out to our clients, we've been especially proud to reduce the incident rate from an industry standard of roughly 6% for earnings calls, down to under, 1% for all earnings calls hosted on Q4. This low incident rate in the Investor Relations space is unprecedented and is part of our commitment to delivering the best customer service to all of our clients.

But having said that, the other key driver to our virtual events business has been the vertical integration and the removal of third parties and how we deliver this part of the business. This has been one of the primary drivers of our gross margin expansion strategy this year. And Donna will speak more about the progress we've been making with expanding gross margins. But in general, we're just really pleased to see the positive impact that this strategy has been having on the business.

Finally in regards to M&A, while we remain opportunistic with a healthy pipeline of potential acquisitions, we are primarily focused on delivering against our organic profitable growth plan. As well in terms of deals that we were actually working on, the bar for acquisitions to make sense for us has increased over the last couple of quarters due to overall market conditions and our priority on profitability, having said that, during the quarter, we did make the decision to exit an acquisition opportunity in the late stages of discussions. As we determined during diligence that it did not meet the thresholds we had in place to ensure that we are making the best use of our capital.

And with that, I'll now pass things over to Donna to take us through the financial results.

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Donna de Winter

Chief Financial Officer & Chief Operating Officer, Q4, Inc.

Thanks, Darrell, and good morning, everyone. Thank you for joining us. I'm pleased to share the results of our third quarter. A reminder, before we get into the numbers that the restructuring and the cost reductions occurred late in Q3 and as such, they have a minimal impact on this quarter's results, but we anticipate a significant impact on the fourth quarter and future quarters.

So looking at the results, total revenue for the third quarter was $14.2 million, an 11% normalized year-over-year growth compared to normalized revenue of $12.7 million in 2021. This excludes one-time VSM revenue in the same quarter in 2021, even before this adjustment though revenue growth exceeded 8%. This quarter's revenue growth can be attributed to the recovery of our new logo sales, our ability to displace competitors and the continued strength of our expansion sales. New logo acquisition with higher ARR bundle platform – platform

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

bundles, coupled with strong value added services into the client base resulted in September being our strongest booking month ever.

Our capital markets platform revenue grew by 9.2% excluding the VSM revenue from the comparable quarter last year. Platform revenue is important as 94% of year-to-date, capital markets platform revenue is recurring long- term customer contracts providing more predictable revenue and expense management, as well as a strong client foundation into which we can offer additional platform subscriptions and services. Our platform services continue to expand noticeably, with 41.8% year-over-year growth driven by our clients' needs for value-added services including website redesigns, accessibility and ESG updates.

We are pleased to see a strong improvement in ARR, ending Q3 at $54.7 million, an 8.7% year-over-year growth. ARR expansion was driven by existing customers embracing the value of aggregating all their IR needs with a single provider on our Capital Connect platform and this integration equally resonating with new clients driving bundled sales at higher value to the clients and higher ARR to us. Average revenue for the quarter or ARPA – average revenue per account or ARPA was $19,154 at the end of the quarter. This represents a 5.7% increase over the prior year, driven in part by 96 existing customers adding to their subscription during the quarter.

Consistent with our strategy, we have delivered steady quarterly ARPA expansion sequentially with Q3 representing our largest increase since early 2020. We expect this trend to continue as we execute on our expansion strategy with both new and existing customers using more products on the Capital Connect platform. The trend for Capital Connect product adoption continues with customers leveraging two or more products. This quarter, 66.4% of our ARR was generated from these customers, up from 65.4% one quarter ago.

As Darrell mentioned, our third product, Engagement Analytics, launched on Capital Connect and our Web Management app and events platform expanded to all clients, we see clients spending more time on Capital Connect as we offer more valuable IR functionality to them on the platform. In the third quarter, we added 80 new clients on Capital Connect, of which 67 became subscribers. Our quarter ended with 2,679 customers on the platform. Uncontrollable churn tied to M&A in the public markets, along with withdrawn IPOs and de-listings, continued to impact retention and the growth of our customer base.

This trend continued from Q1 and Q2 and remains elevated due to overall macro conditions. However, we are pleased to see strong controllable logo retention at 96% again this quarter, demonstrating our ability to create value for our clients across all of their Investor Relations needs and provide exceptional customer service in the delivery of our expertise. Pursuit of value creation for our large client base has added – has the added benefit of reinforcing the durability of our core revenue base. Our gross margin for the quarter came in at 59%, expanding by 212 basis points sequentially.

We are very pleased with this progress as it demonstrates that the gross margin expansion strategy we laid out during our IPO is working well. Broader deployment of our operating center of excellence in Mexico was deferred until the end of September to ensure the transition was seamless to our clients. Our focus on ramping up the center will continue to be accretive to gross margin as additional resources are onboarded. We expect to see the benefit of $4 million in annual cost reductions starting in the fourth quarter, contributing to margins that will exceed 60% next quarter and exit 2023 above 70%. We remain focused on all five gross margin pillars, expecting incremental improvements on a continuous basis as we operationalize each of these strategies.

In the third quarter, operating expenses, excluding depreciation and amortization, foreign exchange loss and other expenses totaled $16.8 million, down from $17.3 million last quarter.

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

The actions taken in Q3 drove marginal improvements to our operating expenses in the quarter, but these cost reductions and efficiency gains will be fully realized in future quarters. Overall, the initiatives should result in savings to the ongoing operating expenses of $9 million annually. Sales and marketing costs were $5.6 million or 40% of revenue. Compared to this quarter last year, sales and marketing increased by $1.1 million, primarily from higher employee expenses and an expanded product marketing function.

The majority of the August 23rd restructuring, address the size of our sales and marketing team in the context of growth expectations and increasing sales efficiency. We expect sales and marketing as a percentage of revenue to settle in the low 30s in the near-term and decrease further as a percentage of revenue in H2 2023.

Research and development was $4.9 million or 34% of revenue. This was a $2.3 million increase from this time last year. This quarter's R&D costs continue to include investment in Capital Connect and the development of new product offerings. The reduction in force in R&D was the outcome of a strategic assessment of all product offerings, with the conclusion that certain initiatives didn't – did not contribute meaningfully to the 2023 strategy and a reduction could be made. We are targeting normalized level of R&D as a percentage of revenue in the low- 20s as we accelerate profitable growth.

G&A for the quarter was $6.2 million or 44% of revenue for the quarter. The increase of $2.5 million from the comparable period in the prior year related to $900,000 of one-time expenses, with the balance of expenses associated with operating as a public company. Our efforts will continue to reduce G&A and we expect a gradual decrease as a percentage of revenue through 2023 to attain a mid-20s level. Our adjusted EBITDA was negative $7.5 million or negative 53% of revenue for the quarter. Execution of the growth in gross profit as well as reductions in all operating expense lines drives profitable growth in the coming quarters, resulting in positive EBITDA late in 2023.

Earnings per share is negative $0.30 for Q3 2022 compared to negative $0.43 in the same quarter of 2021. On an adjusted EBITDA basis, EPS would be negative $0.19 and negative $0.13 – $0.30 respectively. At the end of the quarter, we had $37.6 million in cash and short-term investments, net of negative operating cash flow of $6.6 million. Operating cash flow will be positively impacted by the material changes to our expenses and is expected to follow the same trajectory as adjusted EBITDA.

The strength of our balance sheet is a critical component of our success. The aging of our current assets and liabilities is healthy, reflecting discipline in these accounting functions. And our core working capital metrics remain strong ending with a working capital balance of $31.1 million. Additionally, as of September 30, we had no outstanding debt with a $22.5 million revolving credit facility fully available as needed to support profitable growth.

The macro environment remains challenging, requiring us to provide for growth in a disciplined way. We've taken the steps necessary to fund our strategy at an investment level that still delivers our financial targets. The majority of these investments to increase gross profit and decrease operating expenses have been executed. But are yet to be realized in our operating results, we are committed to profitable growth and maintain our view that we will be cash flow and EBITDA positive in the late quarters of 2023.

And with that, we will switch over to the Q&A session.

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

QUESTION AND ANSWER SECTION

Operator: Thank you, everyone. We will kick-off our Q&A session with our first question from one of our research analysts. Our first question comes in from Doug Taylor at Canaccord.

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Doug Taylor Q Analyst, Canaccord Genuity Corp.

Yeah. Thank you. Good morning.

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Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Hi, Doug.

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Doug Taylor Q Analyst, Canaccord Genuity Corp.

I'd like to – [indiscernible] (00:24:08) last quarter as well. And that is that what kind of market backdrop are you

seeing in your expectation of achieving [indiscernible] (00:24:18) EBITDA profitability in the second half of next

year?

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Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Yeah, I'll take that one and then Donna, if you'd like to add on to it. And Doug thanks for joining the call this

morning. I think the expectations that we have when we're looking at next year is really to – on a steady state

basis in terms of where we're operating today. So we've talked before in terms of some of the aspects of that don't

exist in the market today would be namely the lack of IPOs, the lack of financings, as well as the challenging

market from an uncontrollable churn perspective, de-listings, go privates, M&A, et cetera. Our expectations

through next year, is that that market will continue. And we won't see any benefits from overall market conditions.

However, that's what we feel good about the plan that we have in place that should those conditions improve, we

do see that as being a tailwind which will be additive to our growth during 2023. But we're not making any of those

assumptions when we're planning out for next year.

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Doug Taylor Q Analyst, Canaccord Genuity Corp.

And so assuming that [ph] amount (00:25:26) the market backdrop doesn't change, I think everyone

[indiscernible] (00:25:29). What factors here does help lead to a revenue growth [indiscernible] (00:25:35-

00:25:41) look back to high activity levels a year ago with public company formation [indiscernible] (00:25:47)

promotional pricing period that one of the events we should be looking forward to?

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Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

I think the – again it's the same thing. If we see the market conditions improve, that's only going to be a tailwind. I think what we're assuming, not only from a forecast perspective, but in terms of how we're executing and we saw this in our sales results for the third quarter that really just showed up in September with our strongest sales bookings month in our history is that we've been – as we went through and made the changes in terms of sales

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

efficiency and reorganizing our sales and marketing function is really around being much better from a segmentation standpoint in terms of who are the customers that we can provide the most value to and who are their types of customers and in what markets that really benefit from our platform approach.

So that's where we're seeing that the actual net number of customers that we're acquiring from our sales efforts

are lower than they were last year. We're getting close to being able to deliver the same amount of bookings that

we did in – during 2021, when we had immense tailwinds happening. So we feel really good about that

restructuring and we feel like our sales and marketing capability in this market from a displacement standpoint

has gotten substantially stronger over the last quarter. And so, we're continuing to really focus on that and being

able to deliver some great results in future quarters, again assuming that we don't get any help from the marketing

in achieving that.

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Operator: Great. Our next question is coming in from Stephanie Price at CIBC. ......................................................................................................................................................................................................................................................

Stephanie Price Q Analyst, CIBC World Markets, Inc.

Hi. Good morning.

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Doug Taylor A Analyst, Canaccord Genuity Corp.

Good morning, Stephanie.

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Stephanie Price Q Analyst, CIBC World Markets, Inc.

Donna thanks for the color on the OpEx lines. I'm just hoping you can talk a little bit more about the cadence of EBITDA margins? And how to think about some of those recent cost savings initiatives kind of ramping up here?

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Donna de Winter A Chief Financial Officer & Chief Operating Officer, Q4, Inc.

Stephanie, great question and thanks for joining us this morning. We sized it at the frontend of my commentary as being about $9 million in annual savings on the initiatives that were taken alone in Q3. And so those initiatives are behind us. There is; however, the continuous five pillars on gross margin, which will continue to deliver that increasing spread on gross margin and growth. The continued adoption of the Latin America centers. And then when we think about each of the individual lines, the sales efficiency and the number of bundled sales and the bundled sales approach is actually allowing higher return on lower sales costs. So as with revenue increase, proportionally, sales can get to those target levels in the low 30s.

R&D will also benefit from the Latin America expansion and as we discover talent and ways to fulfill our product

roadmap and our productivity with a full geo hiring strategy. So I think we were able to articulate the $4 million in

savings on COGS and the $9 million on OpEx as being already executed and enabled to speak to initiatives that

were laid down or the tracks that were laid down in the quarter will deliver incremental from here. But the largest

amount has already been executed.

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Stephanie Price Q Analyst, CIBC World Markets, Inc.

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

Okay. Thanks for the color. And then maybe just drilling down on gross margins a little bit, it looks like the gross

margin cadence has changed. That's now at plus 60% exiting the year from kind of a mid-60% in the past. Just

curious about the puts and takes there and the path to longer term gross margin targets here?

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Donna de Winter A Chief Financial Officer & Chief Operating Officer, Q4, Inc.

I still hold true on that on the – Stephanie on the – we had expected 60% and we had sort of prepped everybody

there'd be a six in front of it for the third quarter. Until we delayed the movement into Latin America that the larger

movement until late in the third quarter to make sure that it was not disruptive to the business and not disruptive

to our clients. And I think we managed through that extremely well. We saw the maintenance of our five-star

ratings on the service levels and on the delivery of high-quality websites as well. So that did put a little crimp in

impacting – positively impacting the third quarter, but that has been executed at this point. So confident that it's

over 60% in the fourth quarter and confident that you can draw a line between over 60% and over 70% over the

four quarters gradually in 2023.

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Stephanie Price Q Analyst, CIBC World Markets, Inc.

Great. Thanks so much for the color.

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Operator: The next question comes in from Stephen Boland at Raymond James. ......................................................................................................................................................................................................................................................

Stephen Boland Q Analyst, Raymond James Ltd.

Good morning, everyone. Can you hear me okay?

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Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

We can hear you. Good morning, Stephen. Thanks for joining.

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Stephen Boland Q Analyst, Raymond James Ltd.

Thanks. Maybe just on the customer count, I mean, you mentioned the number of new customers, but also that

there were some losses because of mergers, privatizations. Was there – would you say that the sales

environment is also being impacted in terms of getting new customers because of recession concerns, things of

that sort, not just lower IPOs and financings, but just an unwillingness of companies to convert?

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Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

So I think when we look at the what we saw during the quarter, certainly in July and August, the activity levels were kind of noticeably lower. Now, there's a lot of different reasons that we think about that kind of post-COVID vacation period was certainly very high so people were certainly away. But seeing the ability for us to deliver a very strong month in September it comes back to our ability to be better from a displacement standpoint with our competitors, as well as the core value proposition that we have.

One of the main things that we did in, in adjusting our go-to-market is really focused on platform, focused on the value that comes from Capital Connect, not only in terms of how it can help customers, but also in terms of cost

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

savings that customers being able to kind of bundle more things with us that we provide. We can provide significant savings to them rather than them buying things independently in the market. And so that adjustment for us and our focus on displacement, what I'm quite pleased with from a sales perspective is that, we have effectively replaced the hole that was – that has been created from the lack of IPOs. And we're doing that through segmentation and through our core value proposition.

So we're really pleased with that. We think we can continue to deliver along those lines. And so that's how what

we're seeing in markets so we're not seeing the fears of recession really impact purchasing because of our ability

to kind of pivot our value proposition and focus on what matters most to customers in today's market.

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Donna de Winter A Chief Financial Officer & Chief Operating Officer, Q4, Inc.

And perhaps, Darrell, I can add, and Stephen, our sales or bookings numbers are really a balance between new

logo acquisition and expansion into the base. Selling into the client base and so we saw roughly 80 clients coming

in through new logo, but we also saw another 96 of our clients subscribe – taking additional subscriptions within

our client base as well as driving some 42% growth in one-time services to that same base. So it is a durable

model that is able to balance in any market as to whether it tilts a little more towards new logo or it's propelled a

little more by our expansion.

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Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Yeah, very good point.

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Stephen Boland Q Analyst, Raymond James Ltd.

Okay. And then I guess because you've mentioned IPOs in the past, I think you've kind of said that was a

secondary source of new customers. Would you say then that in terms of distribution, direct-to-customer as has

been the biggest win for you as opposed to some of the partnerships that you have to gain new customers?

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Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Absolutely, Stephen. That's exactly it. That the strength in our go-to-market, in our sales execution now is entirely

in direct with customer and for new logo and in addition to what Donna is mentioning in terms of expansion. And

typically, we would see kind of new logo acquisition and maybe 30% of that coming through IPOs. So the fact of

where we're executing now and our ability to deliver at the level that we are now without those IPOs is what gives

us great confidence as we move forward in executing in this current market as it continues. But in the future,

when the IPO market becomes healthy again, we think, we're going to be very well positioned to benefit

significantly at that point as well.

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Stephen Boland Q Analyst, Raymond James Ltd.

Okay. Thank you.

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Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Great. Thanks, Stephen.

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

Operator: Our next question comes in from Kevin McVeigh at Credit Suisse. ......................................................................................................................................................................................................................................................

Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

We're not able to hear you, Kevin.

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Kevin McVeigh Q Analyst, Credit Suisse Securities (USA) LLC

Hey, Darrell, can you hear me now?

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Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Yeah. Very good.

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Kevin McVeigh Q Analyst, Credit Suisse Securities (USA) LLC

There you go. Thanks so much. And thanks for the call this morning. Hey, can you give us a sense of what type of

revenue we should assume kind of in Q4? And then, you know, I know it's a little bit early for 2023, but just what

type of revenue objectives we should think about within the context of the really nice work you've done on the

expense management?

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Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Sure. Maybe, I'll let, Donna take it.

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Donna de Winter A Chief Financial Officer & Chief Operating Officer, Q4, Inc.

Absolutely. Kevin, we still feel that in this environment that we're probably in the range of half of what we had

seen as historical growth rates. And so in the past, we've been able to deliver on 30%-ish type revenue growth.

And our expectations and the way we're planning our quarters in this environment is in around that range.

......................................................................................................................................................................................................................................................

Kevin McVeigh Q Analyst, Credit Suisse Securities (USA) LLC

So it would be about half [ph] that Donna said (00:37:06) in the 10% to 15% range, something like that?

......................................................................................................................................................................................................................................................

Donna de Winter A Chief Financial Officer & Chief Operating Officer, Q4, Inc.

No. That's how I look at it, yes.

......................................................................................................................................................................................................................................................

Kevin McVeigh Q Analyst, Credit Suisse Securities (USA) LLC

Great. And then what – it looks like on slide number eight, the number of investors connected to events each

quarter to about 400,000 this quarter versus 500,000 last quarter. Darrell, is it just a function of the macro? Or is

that some of the kind of client or obviously the uncontrollable client retention and anything to call out there?

......................................................................................................................................................................................................................................................

Q4, Inc. (QFOR.CA) Q3 2022 Earnings Call

Darrell Heaps

Founder, Chief Executive Officer & Director, Q4, Inc.

Corrected Transcript 04-Nov-2022

A

No, I don't think it – we didn't read anything too much into that particular number that those ranges that we

provide kind of [ph] – like (00:37:46) over 400,000, 500,000, actual delta between those two numbers quarter over

quarter fluctuates a little bit in terms of kind of tens of thousands each quarter depending upon market cycle

where we're at over the course of the year. So we would – when we look at that number, we see that it is

substantially the same kind of quarter-over-quarter. So we wouldn't read anything into that.

......................................................................................................................................................................................................................................................

Kevin McVeigh Q Analyst, Credit Suisse Securities (USA) LLC

Super. And then just if I could one more, Donna, what type of revenue run rate is the business sized for today,

given the cost actions, how should we think about just the kind of on a go-forward basis, what type of revenue can

the business support based on the expenses you've really nimbly kind of adjusted?

......................................................................................................................................................................................................................................................

Donna de Winter A Chief Financial Officer & Chief Operating Officer, Q4, Inc.

Yeah. Really, it falls, Kevin in line with what I just gave you looking at the growth expectations for. We didn't cut

below what we were forecasting as revenue growth for the upcoming four quarters. And so the sizing was really to

support that outcome and the types of growth we just spoke of on revenue and recognizing that a good portion of

that was going to be ARR and multi-product ARR.

......................................................................................................................................................................................................................................................

Kevin McVeigh Q Analyst, Credit Suisse Securities (USA) LLC

Great. Thank you.

......................................................................................................................................................................................................................................................

Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Thanks, Kevin.

......................................................................................................................................................................................................................................................

Operator: Our next question comes in from Richard Tse at National Bank. We can't hear you Richard. We're just

going to give Richard a second to get his audio working. In the meantime, we'll take a question from the webcast

and we have a question that came in through the webcast platform asking, could you please provide an update on

head count figures? Any commentary on the mix of employees between Canada, US and LatAm? Thanks.

......................................................................................................................................................................................................................................................

Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

So don't have that those specific numbers at the – ready at the moment. So, but what we can say is that the – our

total employee count remains when we're thinking about the balance of LatAm versus our North America and

European teammates, we're looking at kind of north of 500 and total across the entire business and Latin America

making up kind of in and around 10% of that number. So we do see that over time that may increase somewhat,

but the vast majority of our team will likely continue to reside in North America and in London in other areas of

Europe. I think that's fair.

......................................................................................................................................................................................................................................................

Operator: All right. We're going to give another shot with Richard. Here we go. ......................................................................................................................................................................................................................................................

Q4, Inc. (QFOR.CA) Q3 2022 Earnings Call

Richard Tse

Analyst, National Bank Financial, Inc.

Can you hear me now?

Corrected Transcript 04-Nov-2022

Q

......................................................................................................................................................................................................................................................

Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Yes. Very good. [indiscernible] (00:41:29)

......................................................................................................................................................................................................................................................

Richard Tse Q Analyst, National Bank Financial, Inc.

Sorry about that. Yeah, too many different conference applications here. So on the acquisition what you walked

away from I'm kind of curious if you maybe share like the order of magnitude of that transaction, and perhaps was

it to that logos, was it that IP, just curious, if you can give us a bit of color there?

......................................................................................................................................................................................................................................................

Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

So I think what we can share is that we were looking at – we continue to look at opportunities from an acquisition standpoint. And what we've shared in the past was we had kind of two main buckets that we were focused on. One was around consolidation within our industry, and the other was in expansion opportunities to accelerate our kind of capital markets platform approach. And so this opportunity that we did walk away from was on the consolidation side of that in terms of those two buckets.

And it's something that that I think, as I mentioned during the prepared remarks, is while we continue to be

opportunistic and looking for those acquisition opportunities it really is the bar continues to be quite high and has

moved up in terms of what are the key metrics, what are the fundamentals of the businesses to make sure that

they would be highly accretive in this market? And so in this case, we felt the best decision was to walk away from

that deal and focus on our organic execution of our profitable growth.

......................................................................................................................................................................................................................................................

Richard Tse Q Analyst, National Bank Financial, Inc.

Okay. And then we've been hearing that you've been taking some prices up across the board – actually not

across the board, but I guess I'm asking a question is that sort of across the board and how has that been

resonating?

......................................................................................................................................................................................................................................................

Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Sure. You can take that one?

......................................................................................................................................................................................................................................................

Donna de Winter A Chief Financial Officer & Chief Operating Officer, Q4, Inc.

Yeah. I can take that one and good morning, Richard. We had discourse, I guess, in the last couple of quarters that inflation impacted us as it has pretty much every business. And that we had taken a position, if price increases as part of that strategy to pass – to absorb the cost of inflation, particularly wage inflation, but across all providers. And that we were on – upon renewals we're issuing price increases into our renewals. It also reflects –

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

the price increase, also reflects the amount of investment that's gone into the product and the increased functionality, particularly functionality on the platform.

The acceptance of that price increase has been really well received. And so our clients have an expectation

because it is pretty uniform in the marketplace that inflation is recognized and prices are going up. But also

recognizing it on the value front, they see the investment in the offering, in the Web Management app that allows

them to do far more in a self-controlled way as well as with lower issue or incident challenges on the events

platform. So, it has been a well-received strategy and it's been impactful to us on our revenue and ARR.

......................................................................................................................................................................................................................................................

Richard Tse Q Analyst, National Bank Financial, Inc.

Okay. And just one last one for me. No doubt, we are all seen the benefit of the past two years, in a weird way on

a lot of businesses. And I think what you're doing obviously is ideal from a cost standpoint. But as you kind of

reset and look at things going forward, when you went IPO, you sort of had this trajectory of 30% organic growth.

Do you think that once we cross this chasm for a lack of better term that we'll get back to that trajectory? Or do

you think that business kind of resets maybe in the 20s or in the high teens? Just kind of curious to see what

you're thinking on that?

......................................................................................................................................................................................................................................................

Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Sure. I'll take that one. I think as we commented earlier with one of the questions, currently right now, when we're looking at our expectations into 2023 are about half of what it is we've kind of been looking at before that 30% cutting that in half. So kind of mid-teens is something that we think is a reasonable expectation. When we look at the market conditions improving, what I'll point back to is looking at 30% of those IPOs coming back in terms of our sales activity as well as a material improvement in the uncontrollable churn that we're seeing.

So the uncontrollable churn, which again makes up for companies that are de-listings or go private or M&A, which

we're seeing like an unprecedented level of that happening in the market. When you bring those back into the

model, the answer to your question is, yes, we believe that the business. We continue to be focused on a

profitable growth path and we believe that the growth trajectory of the business will get back to those norms and

we'll certainly set those expectations when we get there. But we think in that kind of like mid to high 20s into 30s

is a reasonable expectation when market conditions normalize. And I want to also say with that that we're not

talking about market conditions like 2021. 2021 was certainly out of the norms in terms of the amount of market

activity, IPOs, financings, et cetera. But this is more in kind of normal market conditions like we saw in the kind of

like 2017, 2018, 2019 kind of period.

......................................................................................................................................................................................................................................................

Richard Tse Q Analyst, National Bank Financial, Inc.

All right, fantastic.

......................................................................................................................................................................................................................................................

Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Thanks, Richard.

......................................................................................................................................................................................................................................................

Operator: We have one final question come in from the webcast. The question is on churn. If you could just, Donna, give us a little bit better understanding on the overall churn levels, both controllable and uncontrollable?

......................................................................................................................................................................................................................................................

Q4, Inc. (QFOR.CA) Q3 2022 Earnings Call

Donna de Winter

Chief Financial Officer & Chief Operating Officer, Q4, Inc.

Corrected Transcript 04-Nov-2022

A

So in addressing churn and we've not really provided total number on that. We've talked about the controllable and the controllable being at its record – controllable retention being at its record high at – holding at 96%. In a typical market that would be a little more than – the 4% would be about half of the churn rate in and the other half would be uncontrollable. In this market, we're seeing uncontrollable be a little higher than our controllable churn. And that is really driven. We've not seen a particularly level of withdrawn IPOs and de-listings.

There are cycles of M&A. And so M&A has somewhat of a cyclical, but somewhat predictable pattern across

uncontrollable. It's been really the de-listings and IPO withdrawals that have impacted. So assume in this type of

market that the uncontrollable is running a little hotter than 50% and that are controllable what has been the

benefit for us has been bringing the controllable to these levels and we expect these levels to improve on our

controllable side.

......................................................................................................................................................................................................................................................

Darrell Heaps A Founder, Chief Executive Officer & Director, Q4, Inc.

Great.

......................................................................................................................................................................................................................................................

Operator: Great. Thanks. That is the end of the questions that we got. So, I pass back to Darrell Heaps. ......................................................................................................................................................................................................................................................

Darrell Heaps

Founder, Chief Executive Officer & Director, Q4, Inc.

Very good. Well, just want to thank everyone for joining us on the call this morning. And thank you, Donna, as well and also just a big thank you to all of our teammates at Q4 and the exceptional execution during the quarter. It's an honor to work with all of you each and every day.

And then finally, last but not least, is a big thanks to all of our customers, both in terms of working with us and our business together, but also in your engagement with us as we continue to innovate on all of our products and our Capital Connect platform. We truly feel blessed to be able to work with all of you each and every day. So thank you very much. And with that, we will see you next quarter. Thank you so much.

Q4, Inc. (QFOR.CA) Corrected Transcript Q3 2022 Earnings Call 04-Nov-2022

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