Dye & Durham Limited (DND) Earnings Call Transcript

Good morning. Welcome to Dye & Durham Fourth Quarter and Fiscal Year 2026 Results Conference Call. [Operator Instructions] With me on the call today are Todd Schulte, Dye & Durham's Interim Chief Executive Officer; and Steve Waszak, Dye & Durham's Interim Chief Financial Officer. Dye & Durham's Q4 and fiscal 2026 earnings press release, audited annual financial statements and MD&A are available on SEDAR+. Please note that statements made during this call may include forward-looking statements and information and future-oriented financial information regarding Dye & Durham and its business. Any disclosure regarding possible future events, conditions or results are based on information currently available to management and indicate management's current expectation of future growth, results of operations, business performance and business prospects and opportunities. Such statements are made as of the date hereof, and Dye & Durham assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws. Such statements involve significant risks and uncertainties and are not a guarantee of future performance or results. A number of these risks and uncertainties could cause results to differ materially from the results discussed today. Given these risks and uncertainties, one should not place undue reliance on these statements and information. Please refer to the forward-looking statements section of our public filings, including, without limitation, our recently filed MD&A and earnings press release for additional information. In particular, for additional details regarding Dye & Durham's run rate, cost saving results and expectations, please refer to the section titled Update on Run Rate, Cost Savings in Dye & Durham's Q4 and fiscal 2026 MD&A. In addition, certain financial results discussed on this call are non-IFRS financial measures, namely adjusted EBITDA and segment adjusted EBITDA. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Please refer to the non-IFRS measures section of our public filings, including, without limitation, our recently filed MD&A and earnings press release. For additional information on the company's use of non-IFRS measures, include the company's definitions of adjusted EBITDA and segment adjusted EBITDA and the applicable reconciliation of adjusted EBITDA and segment adjusted EBITDA to their most directly comparable IFRS measures. I'll now turn the call over to Todd Schulte.

Hello, everyone. Thank you for taking time out of your day and to join us on the Dye & Durham Fourth Quarter and Fiscal Year 2026 Conference Call. We appreciate your time and look forward to sharing information with you. My name is Todd Schulte, and my background is an operational leadership of large multiproduct software organizations. In addition to my role as COO, I was recently named interim CEO following the conclusion of the Transformation Committee of the Board. I want to start with the fourth quarter because it shows the direction this business is heading. Excluding the impact of the Credas disposal, revenue returned to growth, up 4% year-over-year. Adjusted EBITDA increased 18% on the same basis, and our adjusted EBITDA margin expanded to approximately 53% from approximately 45% in the fourth quarter last year. We generated $65.6 million of cash flow from operating activities in the quarter, which was up 15%. For the full year, our results reflect the company in transition. Fiscal 2026 revenue was $410.7 million, and adjusted EBITDA was $198.8 million, both lower than last year. The transition is ongoing, and I want to be clear with you about how we are managing it and where we are focused. I also want to acknowledge that adjustments to our Q3 2026 results were required, and those adjustments are reflected in the results we reported on Monday, including in the section titled Q3 2026 Adjustments of our Recent Earnings press release. Steve will walk through them, but I want to be clear that our technical corrections do not affect our cash position, revenue, cash flows from operating activities or adjusted EBITDA. As a leadership team, our focus is clear. First and foremost, we are operationalizing the business using automation and AI to make Dye & Durham more efficient and to make our customers more efficient. At the same time, we are continuing to stabilize the company for our customers, our employees and our shareholders. Dye & Durham has a broad portfolio of products and services, and bringing automation to how we deliver them is the single largest opportunity in front of us. It is where I'm spending most of my time. Internally, automation is how we are building a lasting, more efficient cost structure. We are automating the manual steps in our fulfillment and operations workflows so that high-volume, repeatable work is handled by system and not by hand. We are standardizing processes across all of our regions so that when we automate a workflow once, the improvement applies everywhere. And we are utilizing AI in the multiple areas of the business, from resolving customer issues faster and more consistently to improving our internal efficiency. For our customers, making their jobs easier is what we sell. Our legal workflow platform and our legal due diligence and filing platform are designed to take manual effort out of how law firms, banks and enterprises work, from intake and document automation through to embedding registry data and filing capabilities directly into our own systems and AI tools. The same discipline we apply to our operations is what we are building into our products. You can see the results of this work in our margins. Fourth quarter adjusted EBITDA margin was approximately 53%, up from approximately 47% in the third quarter and approximately 45% in the fourth quarter of last year. Part of that sequential improvement is seasonal, but the year-over-year expansion reflects a more efficient operating model. Our cost basis is holding as volumes return. Fourth quarter operating costs, meaning those costs comprised of direct costs, technology and operations, G&A and sales and marketing, were essentially flat compared to the third quarter at approximately $49 million, while revenue increased $13 million or 14%. That is the operating leverage we are building. As revenue grows, more of each additional dollar flows through to adjusted EBITDA. We also continue to see meaningful opportunity to remove costs from the business. In fiscal 2026, we achieved approximately $20 million in annualized run rate cost savings, ahead of the target we set out [ for the ] year, driven by automation, process standardization and a more efficient global operating model. We are on track to complete the remaining initiatives by the end of fiscal 2027. We plan to continue to reinvest a portion of these savings to generate into the product development, automation and our customers because efficiency is not only about spending less, it is about putting our resources to work where it creates the most value. Operational improvement only works on a stable foundation, and we are continuing to enhance ours. For our customers, that means consistent, reliable services and a product road map they can count on. In the fourth quarter, Canada revenue grew 9% year-over-year, and Canada segment adjusted EBITDA grew 13% year-over-year. We have also added resources and new performance measures so we can better track our service levels and drive continuous improvement. For our people, it means clear leadership, clear priorities and a culture built on accountability and execution. For our shareholders, it means transparent reporting and a stronger balance sheet. Strong cash generation remains the foundation of our financial strategy, and strengthening our balance sheet remains a priority for the company. We are in compliance with the financial maintenance covenants under our senior credit agreement as of June 30, 2026, and Steve will provide more detail on our capital structure. I'll now turn the call over to Steve to review our fourth quarter and full year financial results. Steve?

Thank you, Todd, and welcome, everyone. As usual, my comparisons to the equivalent period in the prior year, unless otherwise noted, and all figures are in Canadian dollars. For revenue for the 3 and 12 months ended June 30, 2026, revenue was $104.2 million and $410.7 million, respectively. Fourth quarter revenue decreased by $1 million or 1%. Excluding the impact of Credas disposal in all periods, revenue increased by $3.5 million or 4%. The increase is primarily driven by our practice management and payment infrastructure platforms in Canada. For fiscal year 2026, revenue decreased by $30.1 million or 7%. Excluding the impact of the Credas disposal, revenue decreased by $24.6 million or 6%. This decrease was primarily driven by the market downturn and by lower volumes and pricing in our practice management and data insight platforms, reflecting both customer losses and contract renewal terms. This is primarily offset by growth in banking technology, where the revenue increased by $4.8 million or 5% to $108.3 million, and by the LexisNexis Affinity platform. Now turning to adjusted EBITDA. Fourth quarter adjusted EBITDA was $55.1 million, an increase of 7.4% or 15%. Excluding the impact of the Credas disposal, adjusted EBITDA increased by $8.5 million or 18%. Adjusted EBITDA margin was approximately 53% compared to approximately 45% in the prior year quarter. The increase reflects the revenue growth I just described and the benefit of our cost saving initiatives that Todd has mentioned. Technology and operations, general and administration and sales and marketing expenses decreased by $7.8 million or 16% by $5.4 million or 12%, excluding Credas. This is primarily due to our operational efficiencies from saving initiatives anchored during the year, partially offset by the continued reinvestment in IT infrastructure. For 2026, adjusted EBITDA was $198.8 million, a decrease of $34.1 million or 15%. Excluding the impact of the Credas disposal, adjusted EBITDA decreased by $32.4 million or 14%. Adjusted EBITDA margins for the year was approximately 48% compared to approximately 53% in fiscal '25. The decrease reflects the revenue impacts that I described, as well as strategic reinvestments we've made to stabilize the business, predominantly in the labor and IT infrastructure, and lower capitalization rates in the first half of the year as we temporarily shifted certain expenditures from capitalized project to maintenance expenses. These are partially offset by operational efficiencies which we realized largely in the third and fourth quarters. We executed the fiscal '26 portion of our cost reduction plan. And based on information available today, we have achieved the approximately $20 million of annualized run rate cost savings, all within the year. Net loss and cash flow. For the fourth quarter, net loss was $19.9 million compared to a net loss of $29.6 million. The lower net loss primarily reflects lower amortization, depreciation and impairment, partially offset by higher finance costs, largely from noncash foreign exchange and fair value movements and lower income tax recovery. Cash flow provided by operating activities was $65.6 million compared to $56.8 million, or an increase of 15%. For fiscal year '26, net loss was $38.5 million compared to a net loss of $88 million. The lower net loss primarily reflects the $81.5 million gain on the sale of Credas, lower amortization and depreciation and lower acquisition, restructuring and other costs, partially offset by higher finance costs, lower revenue and higher stock-based compensation, as fiscal year '25 included a large nonrecurring recovery. Cash flow provided by operating activities was $153.4 million compared to $142.8 million, an increase of 4%. In both periods, the increase in operating cash flow was driven by higher contributions of working capital and lower taxes paid, partially offset by higher financing costs. For sequential [ trends ], compared to the third quarter, fourth quarter revenue increased by $13 million or 14%, and adjusted EBITDA increased by $12.2 million or 29%. As a reminder, our real estate conveyance and search product lines experienced seasonality, with revenue typically peaking in the spring and summer, which fall in our fourth and first fiscal quarters. The sequential improvements in adjusted EBITDA margin from approximately 47% to approximately 53% reflects both seasonal and cost efficiencies, as Todd described. Now turning towards the balance sheet and liquidity. We were in compliance with the financial maintenance covenants under our senior agreements as of June 30, 2026. At year-end, we had $29.5 million on our revolving credit facility or approximately 28% of the facility, well below the 35% level, which is the leverage covenants tested. And our consolidated first lien leverage ratio as defined in our senior credit agreement was approximately 5.17x, which is also below the 5.8x maximum. Cash and cash equivalents were $41.4 million. During the year, we repaid the $185 million of convertible debentures that matured in March 2026 and applied $129.8 million of the net proceeds from the sale of Credas to voluntarily prepay a portion of the Term Loan B, senior security notes and revolving facility. As a result, the Term Loan B has no further scheduled principal amortization before [ material ]. Loans and borrowings, together with convertible debentures, decreased from approximately $1.59 billion at June 30, 2025, to approximately $1.28 billion as of June 30, 2026. Now for the Q3 2026 adjustments as described in our 2026 MDA. Our fourth quarter net loss reflects certain adjustments that we recorded in Q4 2026 but related to Q3 2026. These reduced previously reported 2026 net revenue by $32.5 million, consisting of $29.9 million adjusted to stock-based compensation, which is primarily the reversal of an incorrectly recorded recovery related to forfeited or expired options of former employees and $2.6 million adjusted to financing costs. These were technical corrections. They do not affect our cash position or reported revenue, cash flows from operating activities or adjusted EBITDA for Q3 2026. In summary, the fourth quarter showed the operating leverage in this business, revenue growth, excluding Credas' significant margin expansion and strong cash flow generation. The full year reflects the transition we are working through. As we move into fiscal 2027, we intend to remain focused on cost discipline, cash generation and strengthening of our balance sheet. With that, let me turn it back over to Todd.

Thank you, Steve. To close, I want to come back to what we are building. Dye & Durham has valuable products, deep customer relationships and critical positions in the markets that we serve. What we have not had is a single efficient way of operating that lets those strengths show up in our results. That is what our focus on operationalizing the business on a stable foundation is designed to deliver. The fourth quarter gives us early evidence that it's working. Revenue growth, excluding Credas margin expansion and strong cash flow. There is more work ahead, and the transition will continue through fiscal 2027. Our focus is clear: Serve our customers well, run the business efficiently through automation and AI and strengthen our balance sheet. I want to thank our employees around the world for their work through a demanding year and the customers and shareholders for their continued support. With that, we'd be happy to take questions. Operator?

[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

Good afternoon. I think many of us were surprised to see the year-over-year revenue growth during the quarter. So if you could expand on what drove that in the Canadian business? And can you clarify as well whether there was any contribution from onetime revenue such as term license renewals or anything like that might have helped [ burger ] unusually?

Yes. I'll take that. Thanks for your question. The biggest thing we've seen around that is somewhat of just the market and a little bit of the seasonality. We did have some revenue recognition that was a little stronger in Q4 than in previous times because of how we were recognizing some things. But excluding Credas, year-over-year, we were up $3.5 million or about 4%. So we were happy with that, and really shows things turning around a little bit. Do you have anything to add to that? I'm sorry. Go ahead. Go ahead. You were asking on the follow-up question?

No, sorry. Yes, sorry. I didn't mean to interrupt. I was going to say, is the implication then that within the Canadian practice management business, for example, that some of the prior churn is subsiding and stabilizing?

Yes, definitely. We're seeing quite a bit of -- I won't necessarily call it -- we're seeing the churn decrease, but we're seeing transaction volumes stabilize to what they -- they're -- what they were showing before.

And given that the Q1 is, I guess, pretty well over, any directional commentary you might want to provide in terms of what we should expect for Q1 revenue?

Yes. This is Steve. Let me comment on that. We're right now not talking towards future. So we're going to hold on that for now, and we'll look forward to communicate to you as available from that perspective. But I would just comment that Todd talked about his the operational background. And one of the things that the team is doing very, very well is monitoring daily, weekly, the churn, the new customers, things like that. So there's a lot of attention by the team, very rigorous attention towards how the business is running in a way that we monitor this very, very closely. So I'll just leave those comments to say that I think from an operational perspective, we are in control of what the future lies, but we are not prepared to yet or able to yet talk to the future.

Last one for me, just in general terms. I mean, you alluded to the opportunities for increased automation and cost efficiency in the business. Is there -- yes, on the revenue side, is there more opportunity as well that you'd call out? Or is the focus more on cost optimization or maintaining, I guess, revenue stability from where you are?

I would say traditionally, over the last few months, we've been focused more on the cost side. One of the things that we've been doing lately is really looking more into some new revenue streams, what those might be. It's too early to really comment on those. But focus is not just on the cost side, but also how we grow revenue and grow this company.

Your next question comes from the line of Stephen Boland from Raymond James.

I apologize, I'm kind of jumping back and forth on the call. You may have mentioned this, but the strategic review, can you just provide an update there in terms of what the delay -- was it the change in management, change in the Board that delayed this process? And what's your expectation in terms of coming to a decision?

Yes. The strategic review has been delayed by some of the management changes, probably more than anything else. I think we're close. I don't -- I haven't seen an exact date on when that is to be completed, but I do believe it's coming to an end. But definitely, the delay was changes we've had throughout the company, mostly in the management level.

Okay. That's great. Second question is -- I'm going to ask those questions about just churn and attrition. I mean, I think we've all had a chance to talk to a bunch of law firms that I think got pressured into their old contracts, especially on the monthly minimums, didn't hit that hurdle rate. So I guess, what concessions are you doing to retain the customers? Because obviously, there's been a lot of churn within the employees as well.

Yes, I would say we've really moved away from part of what we've done as we listen to the customers. And really, [ John Dawson ], who is our VP of Sales, Global Sales, really listening to our customers and trying to address what their concerns are. We've gone away a lot from the minimums and the renewal process and trying to adjust pricing to be more market-based and I would say more value-based in terms of what their -- where they're going. So we're seeing the -- you may see this too and some of the offers you're talking to. We have seen some positive interactions as we go forward relative to how we're renewing contracts without the minimums, without the blanks and things of that nature.

And so...

I was just going to add on that a little bit. A lot of this comes down to listening to the customers, too. And we've had a lot of customers want to move away from some of those minimums and some of the things in the contract. So we've listened to the customers and adjusted our business practices.

Okay. So just a follow-up to that, in terms of away from the minimums, has there been a price reduction on the transactions? I mean, it was [ $199, $299 ]. Has that come down as well? So I'm just trying to get an idea what the margin looks like going forward.