Quisitive Technology Solutions, Inc. (QUIS), a premier Microsoft (NASDAQ:MSFT) solutions provider, has reported a stable financial performance for the second quarter of 2024, with significant advancements in artificial intelligence (AI) initiatives and strategic partnerships.
CEO Mike Reinhart emphasized the company's strong customer relationships and growing demand for professional services, which contributed to a solid revenue base. The company's collaboration with Microsoft, including investment to expand the AI Black Belt team, and the hosting of AI strategy roadshows, has positioned Quisitive for incremental revenue improvement in the latter half of 2024 while maintaining its fiscal year guidance.
Key Takeaways
- Quisitive closed several large-scale deals over $1 million and saw over 90% of H1 2024 revenue from long-term customers.
- AI initiatives are attracting more engagements, with a $15 million pipeline for AI-related projects.
- The company received an investment from Microsoft to expand its AI Black Belt team.
- Financial results met expectations with stable revenue, improved gross profit, and adjusted EBITDA.
- Recurring revenue increased to 41.9%, and gross margin rose to 42.1%.
- Quisitive maintains a strong balance sheet with $5.3 million in cash and a pro forma leverage ratio of about 1.8 times.
Company Outlook
- Quisitive expects revenue growth in Q3 and Q4, focusing on professional services related to AI.
- The company is exploring the integration of Copilot into managed services offerings.
- The financial impact of Microsoft's investment will be neutral in the first year but will aid in pipeline development and revenue generation in subsequent quarters.
Bearish Highlights
- The company conducted headcount reductions in Q3 of 2023 to improve gross margins due to shifts in demand.
- Issues faced by Microsoft and CrowdStrike (NASDAQ:CRWD) did not significantly impact Quisitive's customers but present a reevaluation opportunity for the use of Microsoft Defender.
Bullish Highlights
- Quisitive is leveraging industry-specific offerings and its partnership with Microsoft to drive AI design wins.
- The company's customer base for Copilot service has grown from 70 to 170, indicating strong demand.
- Quisitive is adding sales capacity and expanding its sales and delivery teams, with an equal focus on Copilot and custom AI solutions.
Misses
- There have been no significant shifts between managed services and other offerings.
- The financial impact of new initiatives and partnerships will take time to materialize in revenue figures.
Q&A Highlights
- Quisitive is committed to enhancing shareholder value and driving innovation.
- The company sees an opportunity for customers to transition to Microsoft Defender in light of recent cybersecurity issues.
- Revenue impact from AI and partnerships is expected to become more apparent in the second half of 2024.
Full transcript - None (QUISF) Q2 2024:
Operator: Good afternoon, and welcome to Quisitive's Second Quarter 2024 Earnings Conference Call. Joining us for today's call are Quisitive's Chief Executive Officer, Mike Reinhart; and Chief Financial Officer, Scott Meriwether. Following their remarks, we will open the call for your questions. Before we begin, I'd like to remind everyone that during the conference call, management will be making statements that contain forward-looking statements within the meaning of applicable Canadian securities legislation. Please refer to the company's forward-looking information disclaimer and statement, which can be found on the notice for this call, the website and the second quarter 2024 release. Now, I will turn the call over to Mike Reinhart. Sir, please proceed.
Mike Reinhart: Thank you, Alesia and good afternoon everyone. We appreciate you taking time to join our second quarter 2024 earnings call. The first half of 2024 has progressed as expected, with stable revenue and earnings alongside indicators of rising customer demand as we exit the first half. As we transitioned into the second half of the year, these positive trends are gaining momentum, setting a solid foundation for us to capitalize on the emerging AI opportunities and the required cloud solutions in 2025. In Q2, we successfully closed several large scale deals exceeding $1 million each and we are witnessing a growing demand for our professional services with an upward trend in our average deal sizes. Our pipeline continues to expand and the momentum we have gained makes us optimistic about the future. Notably, over 90% of our revenue in the first half of 2024 came from customers who have been with us more than one year. This underscores the exceptional value Quisitive consistently provides and highlights the deep relationships, loyalty and trust we have built with our clients. Our AI initiatives have been particularly impactful, attracting a growing number of engagements as we assist customers in developing their AI roadmap. The response to our services has been overwhelmingly positive as we have begun to deploy AI solutions that allow customers to explore use cases within their own environments. This initial phase of readiness is critical as we prepare for the full scale deployment of AI in collaboration with Microsoft. Ensuring our customers are well prepared with the appropriate infrastructure for AI integration is essential not only for them to fully leverage AI's benefits, but also for Quisitive and Microsoft to maximize the return on significant investments that we are making in this AI driven transformation. This progress has been further bolstered by an enhanced partnership and investment agreement with Microsoft. In previous calls, we highlighted our joint marketing campaigns and funding programs with Microsoft designed to offer assessments in security, data, AI, Copilot, solutions and others to help customers shape their AI strategy and plans. Building on this solid foundation, Microsoft has recently committed to investing in our AI go-to-market efforts, specifically our Black Belt AI strategy to enhance our team and capabilities during this crucial readiness phase. This investment includes funding to expand our AI Black Belt team with AI strategists and pre-sales solution architects supporting Microsoft's key priority to secure an AI design win in every account. Additionally, it includes marketing campaign funds to support demand creation and a unique incremental program pool to fund AI roadmap strategies and architectural design projects for both existing and new customers. We are honored to be one of a short list of companies in the Americas region to receive this unique support for Microsoft, reflecting the strength of our strategic partnership. As we continue to work closely with Microsoft, this investment in expanding our AI Black Belt team will help grow our deal pipeline, accelerate system adoption and allow us to scale more rapidly, all reducing the need for incremental investment from our own resources. We are already seeing significant pipeline growth across all our AI offerings including Copilot, with over 170 customers currently engaged in various stages of AI discussions and early stage projects. On the marketing front, we have been collaborating with Microsoft to host AI strategy roadshows at Microsoft Technology centers across the U.S. Quisitive has taken the lead in delivering keynote presentations. These sessions have been instrumental in expanding our pipeline, engaging customers to assess their readiness for Copilot and further developing roadmap strategies and AI design win use cases for Azure AI services. In addition to our AI advancements, our healthcare industry team recently achieved a new significant customer by securing a multimillion dollar win with a large university medical center. This solution leverages our MazikCare software and Microsoft Dynamics to help the medical center recruit and hire medical professionals during their major expansion. Quisitive was chosen due to our expertise in healthcare and the unique capabilities of our MazikCare solution built on Microsoft Dynamics and the Power platform. We are also proud to have been recognized as the 2024 Microsoft Global Analytics Partner of the Year. This award acknowledges the impact our team made in implementing Microsoft Fabric for healthcare for the Ontario Workers Network (LON:NETW), where we help create more precise and tailored patient care plans while enhancing clinical efficiency. The healthcare industry remains a key focus for us as we drive innovation and deliver personalized solutions that create significant value for businesses. Our efforts are concentrated on addressing unique challenges and needs within this sector, enabling healthcare organizations to prove outcomes, enhance efficiency and deliver better patient care. We are optimistic about the opportunities that continue to emerge within the healthcare industry and we're keen on pushing the boundaries of innovation with MazikCare in partnership with Microsoft. Furthermore, we were honored to be recognized as Board International Solutions Partner of the Year for the second consecutive year, a testament to our expertise in financial planning and analysis innovation. This recognition underscores the strength of our partnership with Board International, which enhances our office of the CFO services and solutions, enabling us to transfer data into actionable insights and deliver customized analytic solutions for our enterprise customers. In the manufacturing sector, we secured a significant million dollar expansion project with a longstanding Dynamics F&O customer who is utilizing our ShopFloor software solution. This expansion supports the deployment of Dynamics 365 across additional divisions within their business, demonstrating the continued trust and reliance on our services and solutions. Alongside this expansion, we are also providing ongoing long term managed support to ensure their operations run smoothly. In the public sector, we achieved a major win by securing a multimillion dollar managed support extension for a state retirement system solution, further solidifying our role as a trusted partner in delivering critical services. Additionally, our team has demonstrated strong financial stewardship by effectively managing expenses, which has significantly bolstered our overall profitability. This disciplined approach has led to notable improvements in both gross profits and adjusted EBITDA, key metrics that reflect our financial health and operational efficiency. At the same time, we have strategically increased our investments in sales capacity to enhance our ability to drive organic growth in the future. Leveraging a portion of these cost savings to invest in sales will allow us to build momentum as we enter 2025. Scott will provide a more detailed analysis of these improvements shortly. As we progress into the latter part of the year and look ahead to 2025, we are gaining momentum with favorable tailwinds supporting our efforts. Customer buying behavior is moving in a positive direction and growing demand for Microsoft's Copilot fabric and generative AI offerings clearly indicates widespread market acceptance in the integration of AI into everyday business operations. The strategic expansion of our sales team, bolstered by investments from both Microsoft and Quisitive, will further enhance our ability to drive growth. Our vision remains unwavering to provide premier technical guidance and integration strategies, develop personalized AI solutions tailored to each customer's unique needs, and continue our alignment as a proud Microsoft go-to-market partner in this transformative era of AI. With encouraging signs of customer engagement and growing demand for AI, we are excited about what the future holds for Quisitive. Thank you all for joining us today. I will now turn it over to our CFO, Scott Meriwether to discuss our Q2 2024 financial results. Scott?
Scott Meriwether: Thanks Mike, and thank you to all who are joining us for today's call. Our second quarter results were in line with our expectations as revenue has stabilized since the second quarter of 2023 and we have maintained the improvements we previously made to our margin profile. In general, our Q2 financial performance was a repeat of Q1. Revenue in our global cloud solutions segment was $29.6 million, a 2% decrease from Q2 of last year. We had several large projects that wrapped up in the first part of Q2 and revenue then strengthened through the quarter into Q3. Recurring revenue increased to 41.9%, a record for Quisitive driven primarily by growth in our managed services revenue. Similar to what we noted in our Q1 report, the most indicative financial metric that depicts the progress made within the cloud segment is gross margin. Overall gross margin in Q2 of '24 was $12.5 million, which was up $0.8 million or 7% from $11.7 million in Q2 of '23. Gross margin as a percentage of revenue increased to 42.1% from 38.6% in Q2 of '23. Adjusted EBITDA from our continuing operations was $3.9 million in Q2 of '24, up from $1.9 million in Q2 of '23 and similar to the $3.9 million reported last quarter. EBITDA margin increased to 13% in Q2 of '24 from 6.3% in Q2 of '23 due to cost cutting measures and our focus on operational efficiencies. Quickly on payments, Bankcard contributed four days of financial results in Q2 prior to the sale. Other than potential minor adjustments due to the disposition purchase accounting throughout the remainder of the year, there should be no further financial impact from that discontinued segment. Moving to the balance sheet at June 30, we had $5.3 million of cash on hand. Our term loans were $33.15 million at June 30 as we made our first quarterly payment under the new credit facility of 850,000 at the end of June. At June 30, our pro forma leverage ratio was approximately 1.8 times, but the ratio as reported through our credit agreement is slightly higher due to the treatment of some Bankcard transaction expenses. After the amendment and restatement of our credit facility, we have ample headroom under our covenants and the appropriate portion where debt is reported as long term. The current weighted average interest rate on our term loan is 7.99%. Capital expenditures were $0.9 million in the second quarter of 2024 as we wrapped up some planned investments in our MazikCare product and began investing in additional proprietary IP that we believe will have a significant impact beginning in fiscal year '25. We currently expect our capital expenditures will be approximately $3 million for 2024. We are maintaining our guidance for fiscal year 2024 for the continuing operation. We continue to expect incremental revenue improvement in the second half of '24. This concludes the financial section of the call. We thank all our shareholders and supporters who have joined us in this call. We are now ready to open the call up for your questions. Operator?
Operator: [Operator Instructions] Our first question comes from the line of Adhir Kadve with Eight Capital. Please proceed with your question.
Adhir Kadve: Great. Thanks a lot for taking my questions here, guys. I just want to ask on the broader demand environment, I think there's some - press release, of course, in your prepared remarks that's kind of highlighting better purchasing patterns from customers. Can you just dive into that a little bit? What's changed since the last time you've spoken to investors and what's really driving your confidence?
Mike Reinhart: Yes, so there's a few different things. Obviously, some of the more strategic initiatives that we'd see being delayed and pushed back as we progressed through last year, we started to see those kinds of initiatives back on the table and customers progressing forward with things that they had deferred throughout '23 and even, just even the early part of this year. Secondly, we've begun some of the things I talked about, the industry focus that we've been working on really aligning our business go-to-market. When you think about healthcare, manufacturing and public sectors, three core areas, and us really leveraging an approach that's industry led as we start to have an ability for us to have a different set of conversations with customers about the types of engagements rather than talking to them about a single initiative or workload, is talking about their broader journey from an industry lens and how that needs to unfold and how we as Quisitive team bring a comprehensive set of offerings across our Dynamics offerings, our capabilities in application data, and as well as now what we're doing with AI. And fundamentally, that's a part of all these conversations about how we're helping them either deploy and ready for AI or activate AI as part of it.
Adhir Kadve: Excellent. And for my second question, just kind of maybe building on the last part of your comment there. Last quarter you guys mentioned that customers continue to play in the Quisitive AI accelerator in that sandbox there. Can you give us a sense of the progress that customers are making with regards to their comfort and ultimately towards their journey in deploying AI?
Mike Reinhart: Yes. What they're all realizing is many of them have a lot of work to do to be prepared for AI getting their data estate in the cloud. Many don't have that. So you got to have your data in the cloud having security and other kinds of things established such that as you activate Copilots or other AI scenarios that you're only exposing to those participants the proper data. And we're finding that a lot of customers haven't dealt with some of those things. So we're seeing a lot of those kinds of discussions, but we are beginning to see them all start to activate the use cases. And so a lot of the work we've been doing, leading from assessment and readiness kinds of things, is identification in the sandbox environment, activating initial use cases. And I talked a little bit on the last call about one that we're doing for a state here centered around legislative, and that's been advancing nicely. And it's again a great demonstration of how using constructs of data in both structured and unstructured form, consuming that data and giving a natural language interaction mechanism for both legislators as well as public constituents to be able to interact and ask questions and get insights to things it was very difficult to do before is all being exposed through this. And we see those kinds of use cases starting to come to life. And as we do that, customers are realizing the power of what this can do to really enhance both engagement as well as reduce administrative time and other kinds of things that normally would have been people reading PDF documents and going and consuming videos and then writing up some sort of a summary document and then keep refreshing that as new things come out. Whereas the model and this approach to do this is consuming that information, the model is trained on it. And then as new information is constantly being updated, the ability to interact with it on a daily basis and have fresh perspective based on new information and new insights is something that was very difficult to do before. We're seeing those kinds of scenarios start to open up the eyes to our customers about how it can bring value.
Adhir Kadve: I appreciate all the color there, Mike.
Operator: Thank you. Our next question comes from the line of Rob Goff with Echelon. Please proceed with your question.
Rob Goff: Thank you very much for taking my questions. Actually, two questions. One is perhaps a medium term and one is a bit shorter term in nature. When you look at the billions going into AI investment on a monthly basis, is this supporting a marketplace where you can see 8% to 10% organic growth exiting 2025? And then on the shorter term do you see the demand starting to build such that you want to invest in sales to get them at full speed? Or do you have unused capacity within that sales function currently?
Mike Reinhart: So I'll answer your first question because I think about things in time horizons. As I mentioned in my comments, we're adding sales capacity today and that sales capacity is across all of our offerings. But AI is kind of, I call it sprinkled in everything that we're doing. So AI is not a thing. People don't buy AI. They buy the set of capabilities offered by Microsoft, capabilities across Azure, across Copilot, across Data, across Dynamics to empower their business and then activate AI as a component of that. So we are adding sales capacity as we speak and really building that out. Both our industry focus as well as driving demand and many of those in the discussion I talked about with the unique partnership with Microsoft is we're building out a unique set of sales and pre sales capabilities that my Black Belt team that we've been expanding now in partnership with Microsoft to really drive this AI design win concept which Microsoft believes is a critical component for them. So short term that investment has been active and will continue to drive scale. We do believe that AI as an accelerator for growth in next year is a key thing. We do believe that the market is positioning to allow us to have the kind of growth you're describing and it will have AI as a component of it. But again it's - you're selling a set of services and AI embedded in those services or as an extension of the business outcome. But there's heavy data, there's heavy security, there's heavy applications that are all necessary services for us to bring to life that AI activation in every scenario we do. As an example, I talked about the state scenario. That's a heavy application development initiative that was historically maybe been done more in that construct. There's a data component, there's obviously a big security component. In fact the data and the application development. We're actually using GitHub copilot and doing the entire development of that, leveraging paired programming and AI, complimenting developers to enhance productivity and get done faster with a quicker output, and all those things and really enhancing it. So you're seeing us both embed AI into our services, as well as deliver those. And we do believe that those combination of things will be a growth accelerator. And the kinds of discussions we're having in the back half of this year around that roadmap, and architectural plan and then unlocking sort of the development, of those use cases will be a key piece of how we scale and grow, and see that opportunity in '25.
Rob Goff: Very good. Thank you.
Operator: Thank you. Our next question comes from the line of Jerome Dubreuil with Desjardins. Please proceed with your question.
Jerome Dubreuil: Hi. Thanks very much for taking my questions. The first one is on the Microsoft investing in the go-to-market approach that you have. Is this something they have done before on material scale with you before?
Mike Reinhart: I've never seen it in my history of working with Microsoft. I've been told it's something new that they've not done before, and it's really centered around us. How do we scale up, and really grow with them and help them activate touch points with customers, to really accelerate these conversations that I'm talking about. And us taking the concept of what our black belt team was doing, and being able to have more touch points with more customers, and having a more fluid motion with program funding and things like that, to really get customers in this AI design win context, which Microsoft believes creates that roadmap that unlocks, all the consumption and things. So it's very unique and it's something that we're proud to be, one of the very few doing that. And expect - we have a lot of things we got to go make happen as part of that, but we expect it to be a catalyst in a way similar to what we had back in '19, '20, '21, '22, where we saw enormous growth driving assessments of doing these things. This is a variant of that that is uniquely positioned with a small number of partners.
Jerome Dubreuil: Great. And a follow-up on that, maybe for Scott, how will this be accounted for? We're going to be seeing the OpEx on a net basis, or is there going to be a lag maybe in terms of payments received - from Microsoft and if it's material that we're going to be seeing it or not?
Scott Meriwether: Ultimately, what's going to happen here, is look out for this as contract expense spread as we add the staff. So ultimately it's, we'll be adding the staff and adding the incremental capacity, but with no increase through our cost basis. And so hopefully, after their first year, when they are fully functional and are more than paying for themselves, it's just simply additive at that point in time, to margins and to EBITDA - in the interim period, it more than covers the overall investment we need.
Jerome Dubreuil: Great. And maybe a last one from me, the win in healthcare with the university that you mentioned in prepared remarks, is this one of the first wins with the new products you've been talking about, since the last year or so?
Mike Reinhart: No, we've had other small wins, many of them with some of net new customers, some expanding in additional customers. We've had ongoing wins. This just happened to be one of the larger wins that we've had. It's a combination of dynamics, MazikCare and a unique set of offerings that again, back to what I discussed, the size of deals we're seeing, because of our unique position with depth and understanding and industry, combined with whether it's our dynamics or other capabilities. AI is going to be a big component of what we're building out, some custom copilots and other things as part of this offering as well. And then, the MazikCare solution as an IP asset that accelerates their journey, to business outcome is a big part of it. But we've had ongoing, but this is one of the larger ones this year.
Jerome Dubreuil: Good to hear. Thanks.
Operator: Thank you. Our next question comes from the line of Stephen Boland with Raymond James. Please proceed with your question.
Stephen Boland: Thanks. Mike, I think you said in Q1 you had 70, a pipeline of 70 customers you can gauge with Copilot. I think you said now it's 170. So you mentioned expansion in your sales team. What about the technical team? It seems like there's a lot of business coming your way. Some that maybe takes a day, maybe some it takes a week or a month. But I'm just curious, on the technical side, are you adequately staffed to support this growth?
Mike Reinhart: So first on the numbers, you're accurate. It's both Copilot and custom AI. So Copilot being a subset of both of those. But the numbers are correct. We have an equal number now, both in Copilot as well as these AI accelerator and design, which are really much more about a custom Copilot kind of scenario that we have going on. Delivery talent is something that we've been working very hard on, both in terms of internal development as well as hiring talent. But the good news is, as I said, a lot of this is sprinkling AI into our other services. So, it is not like I have to go create a whole new workforce, to do this work. I need to take existing solution architects and principals in our business. We have weekly AI office hours. We're doing internal mentoring. We've created champions of AI within each of our services, to know and understand it. So again, it's a natural motion. For much of the work we do, we have been identifying, hiring some of these solution architects, and other folks that we believe are critical to architecting and bringing that together. And our head of AI and strategy has a team, and internally doing a lot of internal development. We're doing some things joint with Microsoft. We're in the middle of building out a hackathon across our organization, globally, with some of the team member, the technical teams at Microsoft. We'll be doing that here very soon. So did a lot of that internal training. But the good news is back to this. I use this iceberg analogy. Yes, there's this above the water part that is AI centric, but below the water is security and data, and modern applications and bringing all of that together, which is our core skills, and there's a way for us, to use it as an accelerant. So hasn't been a big challenge. Obviously, continuing develop talent, while we're also hiring is an important piece, but overall we've been able to meet that demand fairly well.
Stephen Boland: Just in terms of the pipeline you gave, I think in Q1 again gave a pipeline, I think around $10 million. Is that a number you can update at this point?
Mike Reinhart: Yes, we're pushing $15 million in pipeline. We've closed a bunch, obviously, but we've got about $15 million in pipeline that has been. That is currently open, related to a combination across both Copilot and other kinds of things that we're doing that, are what we call tag this AI. As I said, almost none of it is pure AI. That's very rare. Other than kind of the upfront assessments and - road mapping and stuff. The other stuff is doing a data initiative, leveraging fabric in preparation of AI, deploying dynamics, and bringing it together to deploy dynamics, Copilot, things like that that are all kind of interwoven together.
Stephen Boland: I'll sneak one more in. Can you just talk about the investment in PayiQ? I mean, it is a big part of your balance sheet. So - what's the update there? If you can provide like, how is that operation running at this point?
Mike Reinhart: Yes, obviously we don't oversee operations of that. I'm a Board member and as a Board member I have obligations. But we continue to work closely with them, and I know that they're progressing on the work that they were doing prior to leaving, on completing certifications and things like that. But I'm not in a position to represent PayiQ in regard to their operations.
Stephen Boland: Scott, maybe just a part b, there. Is that investment, is that updated the mark-to-market value every quarter, or is that an annual valuation?
Scott Meriwether: It'll be a more in depth annual exercise. Obviously, if there's anything that changes - that needs to be updated in the quarter. We'll make a quarterly adjustment, but it'll be more of an annual exercise from a quantitative perspective, and then more qualitative reviews during the quarters.
Stephen Boland: Okay. I appreciate your patience, guys. Thanks.
Scott Meriwether: Yes.
Operator: Thank you. Our next question comes from the line of Robert Young with Canaccord Genuity. Please proceed with your question.
Robert Young: Hi, good evening. A couple questions. First one would be on this focus. I think last quarter you said you were focusing on larger deals. So, the intent was to drive larger deals, and you're starting to see benefit this quarter. Maybe just talk about that dynamic. And if you could also talk about, I think you said that 90% of the revenue is coming from repeat, or customers have been around for one year. So these are large upsells. Or maybe you just talk about those two dynamics separately or together, if it makes sense? And I'll have another question?
Mike Reinhart: Yes, so the larger deals, as I talked about, is this whole idea about going into the customer, and while they may have identified that they've got a component, or a business challenge of trying to solve, is getting much more into a conversation about the context of what they're trying to solve, and how it is a much broader initiative. I'll talk about. Last time, I had touched on another initiative where working with a major healthcare provider. They were talking about having some things that were centered around a content platform on share point and some things like that. And initially, it was a discussion to talk about that. But when we sat down with them and said, look here, let us bring our healthcare team, and talk about your broader roadmap and journey, and what are you trying to do. And giving them a perspective of how we understand healthcare and what it means, it was allowing us to help them think more holistically, about pulling that together. And the deal size in that regard starts to expand, because they have a broader set of things that need to be addressed in parallel, to achieve what they're trying to do. And we, because of our size and scale, have the ability to do that. Some of that is training sellers. Some of it is, again, having this industry acumen that has a credibility and conversation with customer that, allows us to take the conversation to a different level, rather than just talking about how to solve the one point solution, need that they have. So that's one piece around it. The other component about how we're going to market around different things here, is really driving these conversations with customers and really trying to understand how do, we address the right customers. And the 90% is referencing, if you think about certainly we've got our recurring revenues that by definition are 41% - a little over 41% now as Scott shared in the quarter, that are automatically repeat, if you will, because they're recurring in nature. We have high renewals and all that. But we also have a big portion of our work that's professional services, right. Nearly about just under 60% is professional services. As we sit here today, those customers, while they're not contracted as recurring, we continue to do work year-over-year. And the point of that 90%, is a lot of that project work is us continuing to do project work as part of those customers, because of our trusted relationship and loyalty. I alluded to a couple those a renewal of a large retirement system, managed support initiative, the win that we had. The next phase win of the large dynamics F&O deployments and things like that, where they are contracted within the year. But for us, it's the stickiness of customers that we build on the platform, and have high repeat even in our professional services.
Robert Young: Okay. Thanks for all that. My next question would be on the headcount reduction. You notice that had an impact on revenue. And so, I was curious if the focus there was on reducing specific end markets, or tightening up the focus, or was it utilization, maybe any kind of commentary on, where that was, where that was focused?
Mike Reinhart: Yes. And again, remember, all of that was executed last summer. So, we've done no headcount reductions, or workforce reductions at all in 2024. The last one we did was in Q3 of '23. So the reflection of that is, again, if you look at our gross margin profile beginning Q3 of '23, till now, that lift is due to the decisions we made back then. And those were all targeted on primarily that excess capacity, primarily around professional services, again, where demand had shifted, and some of those kinds of things that we talked about. But there's been no reduction of - in form of any sort since Q3 of last year. And that was all tied to that shift in demand and right-sizing the company and capacity. But since then, our revenues have remained relatively flat, and our headcount has remained relatively flat in terms of professional services resources. We have grown in other areas where our managed services continue to grow and some of those kinds of things. Some of the investments in sales I talked about. But anyways, that's the context of that is all. Just making sure that people understand the adjustments we made last year, which are supportive of why we, when we compare year-over-year that we see a lot of improvements based on those decisions we made last year.
Robert Young: Yes, maybe - I guess I was trying to get a sense of whether the gross margin improvement is mostly driven by utilization, like just higher utilization on the workforce, I guess, or if there's like a shift in the products, or something like that at a high level year-over-year…?
Scott Meriwether: Yes, I get it. So - obviously a big chunk of it's recurring. So the margin profile, there has nothing to do with utilization. Certainly professional services is heavily tied to utilization, and the correction of that utilization was removing excess capacity. And since that time last year, our capacity and utilization have maintained. Therefore, the profile of, of gross profits has stayed strong throughout that, even though we have still the high percentage of professional services.
Robert Young: That makes sense. And then last question, just a small one. Right after the quarter, I think Microsoft and CrowdStrike had a bunch of problems, and I was wondering if that caused any kind of a bump in your revenue or any opportunities. Then I'll pass the line?
Mike Reinhart: Yes. So interestingly, Microsoft was the downstream effect of that caused by CrowdStrike. In our case, our customers were all patched and current, because of our managed services and some of those kinds of things. So there was little to no disruption to them, provided they had a good managed services provider or our key function was doing proper patching, they would not have been impacted by this. But, because they had dated technology and data OS systems and stuff like that, they were impacted. So our customers were very little. We did help several others that weren't part of our main services offering, and troubleshooting resolve, but it was not a big issue. We do actually see Microsoft speaking a pretty aggressive approach to position with customers to move from CrowdStrike to their Defender platform, which would have been insulated from all this, because of the kernel control. So all kinds of things around that. The only reason that CrowdStrike has kernel access is, because European regulatory wouldn't have - required Microsoft as part of the whole monopolistic thing to not, not protect the kernel, which is kind of an ironic thing. The regulatory caused them to give access to something they would otherwise not like to. But we see it as an opportunity. We're going to customers and they're reevaluating their CrowdStrike position in many cases, and considering a look at Defender.
Robert Young: Okay. Well. Thanks a lot for all that. I'll pass the line.
Operator: Thank you. Our next question comes from the line of Gavin Fairweather with Cormark. Please proceed with your question.
Gavin Fairweather: Hi, good afternoon. Just a quick one from me. Just to follow-up on the new Microsoft funding, can you just confirm when some of that funding starts to actually be spent. And then, how are you thinking about timeline to start seeing some benefits, in terms of an acceleration on top of that spend?
Mike Reinhart: Yes, we've already started some of this motion with them. The agreements were just signed, and we're just beginning right at the end of the quarter. And we're just beginning that process '30 fiscal year started July 1. They don't really get into action until here in mid to late August. But we're beginning that process. We're hiring resources as we speak and activating that. You won't see to Scott's point earlier. It'll be kind of masked on the financials in terms of the financial, because it'll be a contra expense. So it'll essentially look like zero to the financials, during the first year for those investments. Where you will see it is, as we start to activate the AI design wins, we'll start some of that funding that we're doing, will start to be realized as part of professional services on a small scale to drive additional pipeline. So it'll sit as a neutral item on our expense line fundamentally, so be funded - fundamentally it will be blind to the market. And then secondly, we will start to see that revenue impact by developing pipeline as we progress through Q3, Q4 of our period and building revenue generation as we exit Q4 into 2025.
Gavin Fairweather: That's helpful. Maybe I'll sneak one more. And have you noticed any, you talked about the pipeline growth that you've been seeing? Have you noticed any mix shift between managed services and IP, versus professional services? Has maybe the pipeline started to weight a little bit more to PS as you're getting ready to ramp engines on AI? Any shift there?
Mike Reinhart: Yes, the AI will be a heavy PS motion for everybody. I mean, because it's, other than Copilot deployments, most of the lift in AI is custom solutions, right. You're building a custom solution centered around a proprietary data set inside of a customer's environment using modeling and AI services and all those kinds of things. So it will present itself as heavy professional services in that regard. So, we do see that being a pipeline generator. At the same time, there's certainly some of the IP motion in managed services in particular. We are looking at ways to bring, for example Copilot, we believe is going to have a natural extension to our managed services offerings, where organizations aren't going to just do a project to deploy Copilot. In fact, they're going to have a long running motion to deploy Copilot by department, and things like that. So there's usually a readiness stage, where they've got to do some organizational things to get ready. Then they'll look at deploying it, and doing change management within finance, and then marketing, and then sales and operations or whatever. And we're looking to provide that as a managed services offering rather than just a long running project. So that we do see the opportunity for that and Microsoft is aligned to this, as we look at how Copilot might deploy as a managed offering rather than project services.
Gavin Fairweather: That's it from me. Thanks so much.
Mike Reinhart: Thanks Gavin.
Operator: Thank you. At this time, this concludes the company's question-and-answer session. If your question was not taken, you may have contact Quisitive Investor Relations team at quis@gateway-grp.com. I would now like to turn the call back over to Mr. Reinhart for his closing remarks.
Mike Reinhart: Thank you for joining us today. I'd like to take a moment, to express my sincere gratitude to our dedicated employees, valued partners, esteemed investors, and loyal customers. Your ongoing support is integral to our success, and we deeply appreciate your continued interest and confidence in Quisitive. I would also like to highlight the immense value of our partnership with Microsoft. This strategic collaboration not only strengthens our market position, but also enhances our ability to deliver innovative solutions that, meet the evolving needs of our customers. The trust and commitment we have built with Microsoft, plays a crucial role in our growth, and we look forward to further deepening this relationship, as we continue to drive value for our stakeholders. Rest assured, we are fully committed to working diligently to enhance shareholder value, and to drive sustained growth and innovation. Operator, please proceed?
Operator: Thank you for joining us today for Quisitive's second quarter 2024 earnings conference call. You may now disconnect.
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