Rubicon Technologies, Inc.
Q3 2023 Earnings Call Transcript

Published: 11 Nov 2023

[Operator:]

Good afternoon and welcome to the Rubicon Technologies Third Quarter 2023 Earnings Call. My name is Kayla and I will be your operator for today's call. As a reminder, this conference call is being recorded. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions] Thank you. And it is now my pleasure to introduce Chris Spooner, Executive Vice President of Finance. You may begin.

[Chris Spooner:]

Thank you. Hello, everyone, and welcome to Rubicon's third quarter 2023 earnings call. A few quick reminders before we begin. This call is being webcast and can be accessed on the Investors section of our website, which can be found at investors.rubicon.com. Today, we will present Rubicon's financial results for the third quarter of 2023, which will be followed by a question-and-answer session. During the call, management will be making forward looking statements that are subject to the Safe Harbor provisions and the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and our actual results may differ materially due to known and unknown risks and uncertainties, as discussed in greater detail in our earnings release and our SEC filings. We assume no obligation to update forward-looking statements except as required by law. Additionally, we will refer to non-GAAP financial measures during our call today, including but not limited to adjusted gross profit and adjusted EBITDA. We provide these non-GAAP results for informational purposes and they should not be considered in isolation from the most directly comparable GAAP measures. A discussion of why we believe these non-GAAP measures are useful to investors, certain limitations of using these measures, and reconciliation to the most directly comparable GAAP measure can be found in our earnings release and our filings with the SEC. Joining me on the call today are Phil Rodoni, Rubicon's Chief Executive Officer, and Kevin Schubert, Rubicon's President and Chief Financial Officer. With that, I would now like to turn the call over to Phil.

[Phil Rodoni:]

Thank you, Chris, and thank you to everyone for joining us today. To start, I am very proud to announce for the third quarter in a row, we have achieved record adjusted gross profit, our key operating metric, with an increase of 41% year-over-year and 11% from the prior quarter. We also expanded AGP margin by 395 basis points year-over-year, despite slightly softer revenue due to commodity headwinds in the ongoing process of optimizing our portfolio. Adjusted EBITDA also improved by $12 million to a loss of $8.9 million year-over-year, an improvement of 8% from the prior quarter. In addition, it is worth noting that the adjusted EBITDA figure includes approximately $5 million of non-cash operating expenses, including technology expenses strategically shifted earlier to accelerate growth initiatives. The macro and capital market environments in which we operate remain challenging, but waste and recycling is a mission-critical business service that is stable, growing, and finding new ways to create customer value. Rubicon is helping to drive our industry forward, and I'm very pleased with the progress the team has made in the last 12 months. Our core business is stronger than ever, and we remain focused on our drive to profitability. Kevin will provide additional detail on our quarterly results, but before he does, I wanted to briefly remind everyone of who Rubicon is and how our products are helping to modernize our industry with an environmental proposition that improves our customers' bottom line. Rubicon is a global technology company that provides cloud-based waste and recycling solutions to three key customer constituents

[Kevin Schubert:]

Thanks, Phil. I will now take a few minutes to review our third quarter results. Rubicon generated approximately $171 million of revenue in the third quarter. This was a decrease of $14 million or 7%, compared to the third quarter of 2022. The decline was mainly driven by softness in commodities, in particular, OCC prices. The remaining decrease was mainly a result of our ongoing portfolio optimization activities. Adjusted gross profit in the third quarter was approximately $20 million, an increase of $6 million or 41%, compared to the third quarter of 2022 and we are very proud to say that Q3 2023 was our third consecutive quarter of record adjusted gross profit. The increase in adjusted gross profit was primarily driven by an increase in the RUBICONConnect business due to optimizing our portfolio and margin improvement activities. Adjusted EBITDA for the third quarter was negative $8.9 million, which is an improvement of $12 million, compared to the third quarter of 2022. And as Phil previously mentioned, the adjusted EBITDA figure includes approximately $5 million of non-cash operating expenses including technology expenses strategically shifted earlier to accelerate growth initiatives. As of the end of the third quarter, the company had $15 million of cash and undrawn availability under our credit facility. Now that we are through our key corporate financing initiatives and making significant progress towards positive adjusted EBITDA, we have also begun to look to the future and to find opportunities to accelerate growth. For example, we have prioritized certain initiatives to streamline back-office procedures such as using AI to improve invoice auditing, which we believe should allow us to grow more profitably next year. In addition, we have expanded the SmartCity sales team to accommodate the substantial growth in interest in our high margin smart city product. These accelerated investments will put us in a strong position to deliver positive adjusted EBITDA for the full year 2024. In addition, after adjusting for the effect of certain non-cash technology expenses, we still expect to begin earning positive adjusted EBITDA in the fourth quarter of this year. I will now turn it back over to Phil, before we take questions.

[Phil Rodoni:]

Thank you for continuing this journey with us. We look forward to updating you on our progress in the coming quarters. With that, I will turn the call over to the operator who can open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Maria Ripps with Canaccord Genuity. Your line is open.

[Maria Ripps:]

Good afternoon, and thank you for taking my questions. Could you maybe spend a few moments unpacking some of the drivers of the slowdown in the service revenue this quarter? I know you mentioned the portfolio optimization efforts, but is there anything else to highlight either in terms of the pace of onboarding new loggers or expanding wallet share with existing clients?

[Phil Rodoni:]

Thanks, Maria. And let me just - so I think what we saw kind of the major contributing factor there was the commodity price offset on the really on the cardboard side. That's the significant drop that you're seeing. There's also a slight adjustment on the top-line revenue relative to some of the portfolio optimization that we've been doing. But by and large, you've seen the growth that's on the AGP side. So again, the profitability has increased while we've actually been facing those revenue - those revenue differences.

[Maria Ripps:]

Got it. That's helpful. And can you just talk about your SaaS business? So, sort of what's the progress there? How is it trending? How has this been trending, excuse me, relative to your expectations? And at what point that segment will become sort of a more meaningful contributor to profitability?

[Phil Rodoni:]

I appreciate the question. So again, our Smart City business has actually been growing really quite well. You heard the announcements of both Austin and Phoenix. So those are big cities within the United States, top five cities in one case. And again, that business has doubled year-over-year. And we still expect that to continue on in the future. So, we're very much pleased with how it's going. And we continue – and we have high expectations of that going forward.

[Maria Ripps:]

Got it. Thank you for the color.

[Operator:]

And your next question comes from the line of Stephanie Moore with Jefferies. Your line is open.

[Stephanie Moore:]

Hi, good afternoon. Thank you. My first question, I just wanted to maybe you could touch a little bit about – I know you've made a lot of progress this year in terms of working with some of your customers, maybe walking away from contracts that were deemed not as profitable as you would like. Do you think that we are kind of past the majority of that? What's your sort of view as you look into 2024 and kind of optimizing on the core business?

[Phil Rodoni:]

Yeah, great question. So I think – thank you, Stephanie. So again, I think by and large, this year was really more about resetting where we are and making sure that we've tracked towards profitability. As you heard on the call and what Kevin's comments as well as mine, we've also started to accelerate some of our efforts towards building the capacities and grow going forward. So we've added to our software sales teams on the Smart City side. We've made some investments also in most recently on the AI side that actually really help us operationally on the commercial side of our business, on the waste-generation side of the business that also puts us in a better position to grow and attract new customers. So we're making those investments already now to accelerate our growth going into next year. So, I think the vast majority of that portfolio optimization has taken place. But again, we have to be good stewards of our business, that we always look for opportunities that make sense. And if we need to shed on profitable business, we'll do so. But I think the majority of that is behind us.

[Stephanie Moore:]

Great, that's helpful. And then, I just wanted to follow up any intention of maybe reaccelerating some M&A plans? Or how would you view the overall M&A landscape at this time?

[Phil Rodoni:]

Great. Now, again, appreciate the question. So I think, by and large, again, we're still focused on growing our business organically and doing all that we can do there. And again, the investments that we just mentioned, we're putting investments in there to actually help us grow organically. We will always be opportunistic in terms of deals that are out there and so we stay connected to the marketplace. And we know folks that are potentially going to be coming on the block. And so we'll evaluate those as necessary. And if the capital exists with which to do a deal, we'll pursue it. But again, we're going to be focused very directly on our plans for our existing organic growth. And again, like I said, we'll be opportunistic as opportunities arise.

[Stephanie Moore:]

Great. And then, just lastly, on a follow-up to that, in terms of M&A, appreciate the focus on the core business. If you do, kind of looking at what's out there and maybe this is a more than a 12-month view. Is it software or any kind of maybe on the technology front be attractive to you at M&A? Or kind of still looking on the waste side?

[Phil Rodoni:]

Sure. If you look at just, I appreciate it. If you've looked at what we've done, historically, we've done five deals, I would say over time. The majority of those were books of businesses that we've added on to our existing book. But we've also made technology acquisitions, as well. And so again, it's hard to say specifically without talking about a very specific opportunity. But we look across a broad spectrum of potential companies that we look at, whether it be books of business that are interesting to us, specific customer segments that are interesting to us, specific technologies that are interesting to us. So we try and take a wide view when it comes to M&A opportunities. But again, without a very specific example, it's hard to give any detail. But we'll take an expansive view of it, for sure.

[Stephanie Moore:]

Got it. Thanks so much.

[Operator:]

And your next question comes from the line of Brett Knoblauch with Cantor Fitzgerald. Your line is open.

[Brett Knoblauch:]

Hi, guys. Thanks for taking my question. Maybe first, if we could just start on the adjusted EBITDA outlook, I think you guys reiterated that you expect to be positive in the fourth quarter. Is that on a month in the fourth quarter, the whole fourth quarter? And if I heard you correctly, is that backing out the non-cash technology expenses?

[Phil Rodoni:]

Yes. Thanks again for the question, Brett. So again, we expect to be profitable, adjusted EBITDA profitable for the fourth quarter overall. And then, obviously, for 2024 - for the full year of 2024. That is including the back out of some non-cash items at the time for Q4.

[Brett Knoblauch:]

Got it. So I guess, the reported adjusted EBITDA number that you're expecting in the fourth quarter will still be negative. But if we then adjust that adjusted EBITDA number, it would be positive?

[Phil Rodoni:]

That's right.

[Brett Knoblauch:]

Got it. And then on the balance sheet, how much – I mean, you guys have $13 million of cash. How much available debt capacity do you have to draw down? Because, I guess, free cash flow in the quarter was negative $27 million or so, negative $29 million.

[Kevin Schubert:]

Yeah, thanks. Brett. It’s Kevin. I think we currently have – I think, as we said, I think that was at the end of the quarter, we had about $15 million of cash, but there was some suppressed availability leading to that number. So we actually have a good amount of availability once the sort of suppressed availability from sort of transitioning our – the invoice processing service that we've been using. We've been transitioning to a new one, which led to a slight compression there. So we have substantial liquidity that we'll be able to tap into once that suppressed availability comes back. So we're in a good spot to get us to profitability and beyond. Obviously, to the extent we wanted to do some M&A or things like that, then we'd have to look to likely outside financing, but just to fund the internal operations and are getting to profitability beyond, so that we have the liquidity we need.

[Brett Knoblauch:]

Awesome. And then, I don't know if you guys have provided this before, but how long should we expect maybe free cash flow to turn positive after you guys reach adjusted EBITDA positive?

[Kevin Schubert:]

I think we've not specifically broken that out. But it should be shortly thereafter. So, I guess, this would be the guidance I would give.

[Brett Knoblauch:]

Perfect. All right. Thank you guys very much.

[Kevin Schubert:]

All right.

[Operator:]

And there are no further questions. I will now turn the call back over to Phil Rodoni.

[Phil Rodoni:]

Well, thank you for everyone for joining us today. And we look forward to updating you on our further progress in quarters to come. So take care all.

[Operator:]

And this concludes today's conference call. You may now disconnect.