DATA Communications Management Corp. (DCM) Earnings Call Transcript

Okay, James. We get started. Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Data Communications Management Corporation Third Quarter 2022 Financial Results Conference Call. My name is James Lorimer, and I'm pleased to be hosting today's call. Joining me on the call today is Richard Kellam, President and Chief Executive Officer. Following our prepared remarks, we will be moderating a Q&A session. As a reminder, this conference call is being broadcast live and recorded. We'd also like to remind everyone that Richard and I can be available after the call for any follow-up questions that you may have. Before we begin, I'll remind everyone that we will refer to forward-looking information on today's call. This information is subject to certain risks and uncertainties as outlined in the forward-looking information disclosure in our press release and more fully within our public disclosure filings on SEDAR. We have posted a brief radio message from Richard, along with a summary of our results and key initiatives in the quarter on our website in the form of an infographic. Our detailed information is also available on the website and SEDAR. You can also follow us on LinkedIn to keep up to date with some of our business insights on relevant market trends and customer case studies. I'll now turn the call over to Richard.

Thank you, James, and good morning, shareholders, and I guess, good afternoon and good evening for some of our shareholders that are dialing in from other time zones. So I've been with the business 20 -- exactly 20 months now. And 20 months ago, we put a strategy in place to build both a better and a bigger business. And I'm happy to say we've got fantastic momentum against the strategy of building a better and bigger business. I'm going to talk about the momentum today. So James, you don't mind just going forward 1 slide. Let's start off with where we are on the bigger business. And happy to report that after a very strong Q2, shareholders may remember that we actually grew 23.4% in Q2. We continue to deliver strength in Q3 with 11.4% growth over Q3 a year ago. Total revenue of $63.4 million, up $6.5 million versus prior year. So a very good quarter performance from a revenue acceleration perspective, off the back of a solid quarter in quarter 2. And it puts our year-to-date number at 15.1%. So we're actually really proud of what we're delivering in terms of building that bigger revenue and bigger business through the quarter and through year-to-date. From a gross profit standpoint, we love to see gross profit growing faster than revenue, and we're certainly seeing that, as I said, revenue up 11.4%, gross profit, up 15.8%. We delivered just around $20 million in gross profit on the quarter, and that equated to 31.4% gross margin as a percent of revenue, that's up a full 1.2% over a year ago. So a very positive gross profit momentum despite raw material headwinds and pricing headwinds that we experienced. So the team has done a fantastic job to ensure that we're getting kind of full value and return on the materials and the cost increases that we're experiencing. So as I said, not seeing gross profit exceeding revenue. That means we're doing our job of continuing to build a bigger and a better business here. On the new business side, we have reported just over $30 million in new business this year. And that's a combination of expansion revenue, so expanding revenue within existing clients and then new business development as well. And we're winning business across all the key verticals that we worked in. And a really important point is that of any new business that we're securing today, 100% of it is really due to our technical capabilities, not that we're a great printers. We're fantastic printers, but we enable that print and that workflow with technology, the digital technology. And that's really what's differentiated us and allowed us to win a lot of new business out there, helping as we say, clients and customers simplify their complexity in their marketing communication workflow, and we use technology to help simplify that complexity. So I'm very pleased with our new business development, and we've got a great -- the commercial team is doing a fantastic job to lead that. A few key highlights on our better business strategy and results of delivering a better business, have to report EBITDA continues to move from strength. We're up 25.7% in EBITDA on the quarter, that's $8 million up over a year ago -- sorry, $8 million over a year ago. We were $6.4 million a year ago. And we committed to the street -- we really committed to our shareholders at the beginning of the year that we got a 0 restructuring. We said that our -- we've got the perfect footprint. We've got a fantastic kind of organizational structure now. And we're delivering is we've had 0 restructuring year-to-date. We don't anticipate any through year-end. So this is a, what we call a clean EBITDA, non-restructured EBITDA. So very, very solid progress in EBITDA. We've also had some great success on delivering net income, obviously, if we're not restructuring our business, so we're delivering positive cash flow. Of course, that's going to show up in net income. And our net income is up 176% in the quarter. So we [indiscernible] $2.8 million of net income, up over -- up from $1 million a year ago. And year-to-date, our net income is 7.3% versus -- sorry, $3 million versus $3.4 million a year ago. So real positive, positive net income delivery as well. Finally, really pleased with what the entire team has done on our environmental, social and governance strategy and more importantly, deliverables on that strategy. We've got clear strategy for social and for governance and some really good progress against that, as I said. And we're real proud of the accomplishments on environmental, especially on our commitment to reforestation. We have reinforced 100% of our paper use. The paper we use for clients 100% of that we've reforested and that equates to 468,000 trees. So approaching 0.5 million trees. In fact, by the time we exit quarter 4, we will be well over of 0.5 million trees. So really proud of what the team has done and our delivery and our commitment on ESG. Okay. So over to James to talk in a little bit more detail on the numbers. James?

Thanks, Richard. For the 9 months ended September 30, revenue was $200 million, and that's up about $26 million from last year or 15.1%. Likewise, gross profit was also up, in this case, it was up 17% -- 17.1%. And as Richard referenced earlier, we're pleased that gross profit is accelerating at a faster than the revenue growth. Gross profit margin year-to-date is just over 30%, and we expect that strength that we saw in the third quarter to continue in gross profit in the fourth quarter. SG&A expenses were a little bit higher, and I've got a slide that we'll kind of walk through that in a minute. But really pleased to our restructuring expenses last year were fairly significant through this point. Last year's EBITDA also included $4.5 million of wage subsidies. So not only are we $6.8 million ahead on an EBITDA basis, it's up 34.2%, and that is not only clean from restructuring, it's also clean with no wage subsidy included in that. We've got future iterates to show you our quarter-over-quarter growth for the third quarter this year and actually the fourth quarter in a row now, our revenue has actually exceeded previous year's quarters. We expect that to continue in the fourth quarter. Likewise, gross profit has also been strong and has been pretty consistently in that kind of $20 million range. But we're really pleased that in the third quarter, we exceeded our 31% target, which we have been dying the Street that we would hit that number in the fourth quarter. So we're a little bit ahead of plan on that. From SG&A productivity perspective, something we've set out as kind of objectives for the years or for our 5-year plan is an SG&A target of 18% to 20% of our revenue. We're pleased to see that we're making great progress, and that's a combination of keeping our SG&A in check, but it's also a combination of higher revenues. SG&A expenses were a little bit higher in the quarter -- or sorry, year-to-date by about $1.8 million. But a big part of that would be related to -- because of higher revenues, we are paying higher commissions to our sales reps and we have experienced a modest wage inflation in that number. Again, just to call it our restructuring expenses were 0 through today, and we expect to continue that through the balance of the year. So again, you can see how we've experienced strong year-over-year clean EBITDA, and we did have the benefit again in EBITDA in the first, second, third and fourth quarter -- actually, the first and second quarters last year of the wage subsidy program, which we clearly do not have this year. From a debt perspective, we're pleased that we continue to pay down debt. We paid down $8.9 million of term debt through the first 3 quarters. So you can see that our term debt is sitting about $25 million today. That's more than 26% lower than it was at the end of last year. Our revolving credit facility and at about $8.9 million at the end of the year. We did have a cash balance of a little over $1.5 million. From a revolving credit facility, it did come down by about $2 million from June, and we expect it to continue to come down through the balance of this year. And with that, I'll turn it back to Richard.

Yes. So I'm going to close on this chart that just builds. It looks at our core 3 results, our year-to-date results and our TTM or trailing 12 months. So looking at revenue, as I said, 11.4% in the quarter, 15.1% year-to-date. [indiscernible] it's 11.3% on a TTM basis. So across all metrics, super positive. Gross profit again, all of these, you'll see that gross profit is exceeding revenue, that means, obviously, gross margins are improving. Gross profit, up 15.8%, as I said, on the quarter, 17.1%, up year-to-date and 17.3% on a TTM basis. So positive for all 3 key metrics. On net income, as already referenced, 176% increase in net income on the quarter, a 21% increase in net income year-to-date and 24% on a TTM basis. And we'll see, obviously, as we pull into the year, right? We dropped quarter 4 last year, and our TTM is now our fiscal. You'll see that net income number go up substantially on an annual basis. Okay. And then finally, EBITDA, as I referenced, 25.7% growth in EBITDA, so fantastic delivery and EBITDA, that's clean, no restructuring. So our adjusted EBITDA is the same as our EBITDA, year-to-date, plus 34.2% and TTM plus 19.6%. We'll see that 19.6% change as well as we move out of -- we get fourth quarter out of TTM last year, and we had fourth quarter this year into our annual, if you will, into our TTM. So real positive and strong momentum across our business and really proud of the team and the accomplishments of the entire team. It really takes the team, everybody kind of moving forward together. It's--yes, it's commercial driven, but it's some of the raw material challenges that we're experiencing, making sure we've got access to raw materials. [indiscernible] team has done a fantastic job. The operations team to keep supply in check with demand, kind of sweating our assets and running our operations hard, certainly done a fantastic job and all the other support functions as well. Terrific effort and excellent momentum delivered on a year-to-date basis, right? It's delivered this year. And obviously, as we exited last year and ended this year, super strong momentum. And before we turn it over to Q&A, I just want to I just want to share something with our shareholders. And the best of [indiscernible] people dialing in, can't see it, but it's actually a catalog from Amazon, okay? Now Amazon basically revolutionized online sales, right? Revolutionized online sales, online will not be -- online e-commerce will not be what it is today without Amazon sort of creating that years ago. Now we would have thought that Amazon would have a catalog that consumers can -- shoppers can shop the catalog, and obviously, there's a QR code that links to the website to buy, but do want to thought that Amazon would use print to help with their marketing communications to help drive consumer engagement to help drive consumer penetration. And this is just one example from Amazon on the printed piece of material. They also do direct mail and other print communications. So for any shareholders who think that print is debt, is not. It's an important part of communication for all marketers, for all organizations. And again, if it's an important piece of communication for Amazon, right, which is an online retailer, how can it not be for every other. So I wanted to share that with you. We're really bullish in terms of where the market is going and the opportunities we see. We've got -- we live, we breathe, I'd like to say my team, we dream of growth, and you're seeing those dreams and actions and activities and strategy showing through in our results. So please the accomplishment of the entire team. And we'll now -- as the results we've delivered, and I will now turn it over to questions for our shareholders.

[Operator Instructions] We have a question from 5740469. I think we lost that question. Okay. Go ahead.

Can you hear me now?

Yes.

Yes, sorry, they needed to unmute me. This is Chris Thompson from eResearch. I just was -- it's great revenue growth you had. I wonder if you could comment what you're seeing in the market with all the talk of recession. You did mention in your news release that you did see some good wins. I also was looking at your inventory number and I was sort of surprised that it's sort of gone out much higher, but wondering if that's based on your comments about making sure that you had supplies to be able to execute on orders.

Yes. I'll take on the recession question and then we'll limit over to James to answer the into question, Chris. It's a great question, Chris, at this point, we're not experiencing any kind of client wins from a from an investment perspective. Not to say we aren't anticipating some. But the way we look at it is twofold, right? One is there's a lot of growth opportunities in the marketplace beyond the clients that we're working with, and we're constantly looking for new business development. We've got what we call vertical strategic teams that are responsible for buying opportunities. So we think that even if there are some headwinds from existing clients, these kind of new business opportunities in the marketplace to offset that. And I will say that we're building a very strong growth muscle. And a growth muscle for us needs to be built by going to the gym every day. You can't take a break as your muscle atrophy. So we're really spending a lot of time in is team in building those identify opportunities. The second thing I'd say to that as well is -- and we're actually experiencing that this year. We're an execution machine, okay? We know how to simplify complex workflows and actually help clients take cost out, okay? And that's our competitive difference relative to other marketing communication services companies out there. So as companies maybe experience some budget challenges, we can help them simplify that complexity and take work out and deliver more with less, shall we say. And we're experiencing that with a couple of clients now that -- a couple of financial clients where their assets under management, right, are declining, obviously, given the challenges in the marketplace, which means their revenue is declining, which means their budgets are somewhat compromised. And we're helping them simplify complexity. So maybe they've been working with another partner, and they come to us because they want to be the same or they want to do more with less. And we're helping them solve that complexity and deliver the ability to do more or less. So we actually -- a long way to answer your question, we're not experiencing any kind of headwinds yet, but we think we're well positioned if they do appear, okay? And I will turn it over to James for the inventory question.