Q2 2023 Dye & Durham Ltd Earnings Call
Good morning, My name is Michelle and I will be your operator this morning.
At this time I would like to welcome everyone to the die in Durham second quarter fiscal 2023 earnings call.
I will now turn the conference over to Ross Marshalls Investor Relations on behalf of Die in Europe . Mr. Marshall You May begin your conference.
Thank you Michelle and good morning, everyone.
So the Guy in Durham Conference call before we start we'd like to remind you that all amounts discussed on this call are denominated in Canadian dollars unless otherwise indicated. Please note that statements made during this call may include forward looking statements and information and future oriented financial information regarding <unk> and its business and disclosure regarding possible events.
Conditions or results are based on information currently available to management, which.
Which indicate managements' expectations of future growth results of operations business performance and business prospects and opportunities.
Statements are made as of the date hereof, and <unk> assumes no obligation to update or revise them to reflect events disclosures or circumstances, except as required by applicable securities laws such.
Such statements involve significant risks and uncertainties are not a guarantee of future performance or results.
A number of these risks or 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 and information and future oriented financial information section of our public filings without limitation, our MD&A our earnings press release issued today.
Additional information.
Joining us on the call today are Matt proud I interrupt Chief Executive Officer, and Frank <unk>, Chief Financial Officer.
Question and answer session will follow the formal remarks for research analysts I'll now turn the call over to Matt for his opening remarks.
Thanks, Ross and good morning, everyone.
Our business continued to perform well during the second quarter, we recorded a $107 7 million in revenue and $58 million adjusted EBITDA, which brings our last 12 months total to 479 billion in revenue at $264 million of adjusted EBITDA.
This morning's results demonstrate the strength of our underlying business, we continue to outperform the broader real estate market with transaction volumes in Canada for example, down 38% compared to the same period last year.
Despite these challenges in the market our business is close to flat year over year. This is because we actively manage the business and are taking concrete actions to deliver this performance, including executing on purchasing on pricing power in the business, resulting in additional revenue per unit, we sell our customers in many cases.
Yes.
Growing our base of subscription revenue within our practice management product vertical.
Delivering on our cost reduction plan with $18 million in ongoing head count eliminated from the business, We announced this at the end of last quarter and as you can see from the results released this morning, we've already achieved what we said we would do.
Purchasing you're retiring approximately 20% of our outstanding shares due to the NCI BNS IP.
These steps to set the stage for future growth growth, which I'll address in a moment.
We built a very profitable business of scale delivering mission critical non discretionary software to more than 60000 customers globally.
We delivered significant EBITDA and cash flow again at scale.
I'm asked about net income for.
<unk>, it's not a primary performance metric because in an acquisition business model, particularly when doing larger M&A youre going to have significant noncash items like amortization of purchase intangibles, which this quarter were approximately $39 billion.
However, we didn't generate 39.
$9 million less cash so we believe using adjusted EBITDA provides investors a more effective analyst analysis of underlying operations and financial performance, including importantly, our ability to generate cash.
So looking at di and Jeremy today, the business is diversified across geographies and product lines.
We serve customers in Canada, the U K, Ireland and Australia.
Our products include practice management software data insights and due diligence software as well as payment infrastructure banking technology.
All very sticky.
Yes.
We believe delivering on your commitments is important.
You can see the scale, we've added to the business. Since we went public which is more than 40000 customers added approximately $115 million of organic EBITDA and approximately $1 8 billion in capital deployed across 18 acquisitions.
The headwinds in the market during the past 12 months have been considerable and real.
Higher interest rates and inflation have negatively impacted the real estate transaction volumes.
These headwinds are more prevalent in Canada than in the U K, and Australia, which have held up better.
In the face of this pressure, we've consistently outperformed real estate transaction volumes across both our revenue and adjusted EBITDA for the past six quarters.
We've delivered this performance by actively managing the business through increasing our subscription revenue base, improving our price per unit and realigning our product positioning to address a wider range of applications for our customers.
We are effectively managing through the current ongoing market cycle.
When the market normalizes, which they always do.
We're extremely well positioned.
First greater purposes, we provided a perspective on how the business in Canada again. This is just Canada could perform across a range of scenarios versus the last six months.
Starting on slide eight starting from left to right, we modeled a modest 10% improvement.
Our forecasted range from third parties, a 17% improvement and then normalization of the 10 or five year average performance again. This is the Canadian real estate market.
The incremental revenue captured under these scenarios range from 20% to $65 million.
With very limited incremental cost. So you should expect that to fall right to EBITDA.
Once the real estate market improves we're in a great position to see material benefits across the topline and bottom line of our business.
The resiliency of our business is one of the primary reasons, we had such a high conviction the substantial issuer bid with the right strategy.
Since October one we purchased and retired $13 8 million shares or approximately 20% of the shares outstanding between the <unk> and the CIB for a total consideration of $208 6 million.
This has resulted in a very consolidated ownership structure.
Given the consistency of our business in the face of real estate headwinds the strength of our balance sheet.
Our ability to generate free cash flow and a significant discount at which we are trading where we're trading when we announced the CIB. We believe there was no better use of capital and based on the capital market dynamics since we announced the SIV that strategy. So far it has proven right.
Underpinning our entire business strategy is disciplined and effective capital allocation. The simple as just one example of our ability to be flexible in search of the best returns for our shareholder.
Paramount for us.
We continue to execute our strategy of disciplined capital allocation to build a business of scale through acquisitions and investments in our existing platform. These.
These acquisition investments drive enhancements, new capabilities and improve the productivity of our customers.
We completed two smaller acquisitions recently, one that expanded our practice Daniel capabilities with a stronger focus on offering our customers literally litigation capabilities.
And the other are expanding our practice and our capabilities in the kingdom.
Given the current capital markets, we intend to be judicious in our acquisition strategy with a greater focus on smaller tuck ins in the near term versus much larger transformative acquisitions.
Effective capital allocation is a key aspect of building a durable business of scale disciplined cost management is also key.
During the quarter, we announced the strategy to identify and eliminate at least 10% of our operating costs.
July one 2023, we've reduced our annualized annualized head count expense by almost $18 million and you can see the impact that is having on our operating costs in Q2.
Since January one we've taken action to reduce head count further.
This is by a further $5 million on an annualized basis or $1 3 million on a quarterly basis.
We are well positioned for a rebound in the real estate market with material topline and bottom line growth as markets normalize.
We will continue to grow our subscription revenue offering more value to our customers and increasing the stickiness of our platform.
Finally, as I, just mentioned will continue to execute on our M&A strategy with approximately $270 million available liquidity at the close of the quarter plus proceeds coming from the sale of TM group as well as ongoing cash flow, we generate from our healthy cash conversion business.
This business generates a lot of cash.
We're building a global leader in the BW software and services space that supports legal and business professionals.
The business are dramatically larger today than it was at the time of IPO.
We have demonstrated through multiple market cycles, we're able to manage the business for consistent and sustainable performance and we continue to execute on our strategy of scaling through acquisitions.
We rapidly built a business to generate strong top line growth within an industry that provides stable cash flow and a very healthy margin margin profile. We look forward to updating you on our progress as we move forward I'll now turn it over to Frank to review the financials Frank over to you.
Thank you, Matt and good morning, everyone. Thank you for joining us today.
We reported revenue of $106 7 million during the second quarter, a decrease of $3 million or 3% from the same period last year.
Change is primarily related to lower real estate transactions as a result of unfavorable market conditions.
The pricing changes implemented combined with the launch of our minimum subscription program and the and the impact of acquisitions. Since October one 2022, nearly offset the entire pressure from the challenging market conditions.
As background fiscal Q2 is typically a seasonally low period for real estate transactions.
We generated adjusted EBITDA of $57 6 million, a decrease of $5 million or 8% from the same period last year.
We continue to maintain our strong EBITDA margins coming in at 54% this quarter, which is in line with our target range of 50% to 60%.
Overall, the business held extremely well as.
As can be seen from the consistency of our revenue adjusted EBITDA and margin performance.
As we said before we've built a resilient business on slide 13, you can see the quarterly performance. We have delivered on our adjusted EBITDA, We've managed through the challenging market conditions. During the past 12 months with continued strong performance.
Despite lower real estate market transactions, our adjusted EBITDA performance remains consistent.
This indicates how we can manage the business cycles, while we still deliver shareholder value.
As an example during Q2 fiscal 'twenty three we took proactive action to reduce our cost structure by $5 million relative to Q1 fiscal year 'twenty three.
Total operating costs, which includes direct cost technology and operations costs, and G&A and sales and marketing costs were $41 1 million for the quarter or <unk> 43, 6% of revenue compared to $47 million for the same period last year.
The 4% increase in operating costs in the year over year period is mainly due to cost acquired from acquisitions completed during the period.
In November 'twenty, two we disclosed that given the macroeconomic challenging environment, we will be implementing our cost reduction initiatives to reduce our current operating cost by at least 10% commencing in Q2 fiscal year 'twenty three.
By the end of December 'twenty, two we had reduced approximately <unk> had reduced approximately $78 million in annual salary since the start of the fiscal year.
This is reflected in the $5 million of total operating cost savings realized in fiscal year 'twenty three Q2 relative to Q1.
Given the timing of the head count reductions in the quarter, we expect an additional $5 million annual or one 3 million per quarter of additional salary savings.
Just on the cost savings actions to date, we expect to exceed on the overall cost target of 10% and we continued to expect our ongoing operating cost to be within the 40% to 50% range of revenue.
Net finance costs for the quarter was $38 4 million compared to $22 3 million in the second quarter prior year.
Change is due to higher interest and accretion expense of $14 6 million related primarily to the Ares credit facility as well as a $4 2 million noncash impact from changes in the fair value of our convertible debenture as a reminder, <unk> accounting requires us to mark to market or fair value of these instruments each quarter.
So we do expect as variability in our finance costs to continue.
Acquisition restructuring and other costs for the quarter were $15 6 million compared to $9 8 million in the second quarter of last year.
The change is due to higher acquisition costs related to prior acquisitions due diligence due diligence activity and additional restructuring cost incurred.
A portion of these costs relate to the proposed acquisition of link.
During Q1 fiscal year 'twenty, three we announced a normal course issuer bid and in Q2 of fiscal year 'twenty three we completed a substantial issuer bid.
Matt mentioned previously between the two programs, we have purchased and retired $13 8 million outstanding shares for the duration of $208 6 million.
This consists of $2 8 million shares under the under the <unk> program from October one.
<unk> 2022 through December 31, 2022.
$10 3 million shares completed under the SCB as well as 0.7 million shares subsequent to the quarter, which completes the NCI.
Turning to our balance sheet as of December 31 of 2022, we had approximately $217 million of liquidity.
Liquidity consists of cash the revolving credit facility and delayed draw term loan.
Our leverage ratio and based on fiscal year 'twenty three consensus net of proceeds of assets available for sale and cash is currently two nine times as of December 31, which we believe provides sufficient headroom along with our free cash flow conversion.
We intend to continue to deploy that capital towards new acquisitions.
Also worthy to mention that our team group business is classified as assets available for sale. During the three months ended December 31 2022.
With that I will turn it over to the operator for Q&A.
Operator.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
We would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number two and if you are using a speaker phone. Please lift the handset before entering any.
One moment. Please for your first question.
Your first question will come from Robert Young of Canaccord Genuity. Please go ahead.
Hi, Good morning, maybe first question just a quick one on the.
The TM group.
You said it was classified as held for sale is that still contributing through the income statement I don't see anything below the line. There so is that still yet.
Hi, Rob it's <unk>, that's correct Rob.
Still part of the P&L, Rob as it was not classified as a discontinued operation.
And maybe any update on the timing or any any update on TM group Divesture you can provide would be helpful.
No disclosure there despite what's in the public already.
Then I guess.
Next question I would ask is around the housing transactions you gave a bit of a <unk>.
And then occasion on the Canadian market, 38% decline in the quarter, maybe if you could just give us a sense of what the UK and Australia, where.
I mean.
<unk> mentioned, a little bit about the potential upside, but is there any signs of dropping or what would you be looking for as a sign that <unk> hit a bottom.
Well I mean look we you can look at the public data available and what Youre seeing is is clearly not the same.
The decrease year over year.
In the UK and Australia compared.
To Canada.
So look I mean, we remain optimistic that going forward.
Should there be any kind of normalization in Canada. That's why we kind of focus to provide Canadian numbers only just given the dramatic decrease you've seen in Canada compared to other markets, which I'll I'll say a more stable.
That you will have a big pickup in revenue, which would turn will drop to EBITDA.
Bob.
But if you if you go to slide six of the deck, we provided I believe it's slide six.
We provide a public numbers for you.
Okay.
And then on the <unk>.
Best use of capital going forward would you consider to be can continue to be very aggressive on the buyback given where the valuation you already highlighted valuations low.
In your view.
Look we always.
I'll step back and think hey, what's the best use of your capital today.
Historically, there's been a large focus on scaling and growing the business.
And overall.
<unk> comes to shove I'd say, our preference is to use our capital to scale the business not to buy back stock.
But the reality is theres nothing cheaper, we can buy our stock today.
Assets in our space don't trade, where we trade.
And so we've had to be flexible in our approach, which I think has so far proven to be the correct approach to it.
So I don't want to rule it out, but it's not a primary focus of ours.
Okay and then.
Presentation. It said that you are focused on increasing growing subscription revenue.
Can you just talk about your success, there and then whether youre going to take what you've done in Canada to expand that to other regions.
Australia et cetera, and then I'll pass line, yes. So second part of the question, Yes, we are.
Going to be expanding that.
The other regions we operate.
<unk>.
And then with regard to the first part of the question.
The focus of ours.
We continue to.
A lot of effort and activity into that.
And what can you do so going forward I.
I think last time, you gave a number around that it was 31% I think of revenue in Canada was tied to minimum value.
Contract zone is that pulse.
Full scope of subscription or other parts of the business or within subscription maybe just if you could just.
Expand on that and give us a sense of what the full scope of the subscription is.
Yes, that's for the full scope of subscription revenue and our business is greater than that.
When you look at kind of annualized numbers, it's about $50 million of subscription revenue across the business.
And it makes up.
A healthy part of that.
Okay. Thanks for answering the questions.
Your next question comes from service must Cabelas of BMO capital markets. Please go ahead.
Hi, good morning.
Matt.
Youre more focused on smaller tuck in M&A.
Can you speak to the ongoing opportunity to you.
As more of your bandwidth in time to drive internal efficiency in the business. I mean, obviously this is a restructuring program that you've called out but as we think kind of longer term over the next year or two.
Are there other things you can be doing as far as that.
You're integrating your existing operations leveraging technology.
And so forth to try better agreements.
Yes, no. It's a good question.
Over the last.
12 months, we were fairly preoccupied on the M&A side with the bigger unsuccessful linked transaction.
What that gave us the time to do internally was focus on integration and making sure. The business is the correct side synergies are realized.
And that the organization is structured in the appropriate way.
So we spent a lot of time last year doing that I think you're you are seeing in our results today I mean, we are the results of that so for example, we have aside.
Aside from our results, though we also have moved from a geographical management structure to a function based structure, which has resulted in.
Better managerial performance over the business.
Less layers of management and just overall, a more effective and integrated business. There's been a high degree of focus on integrating systems as.
As well.
Aside from standard stuff like accounting systems like HR systems. We've also had a big focus on putting and building out a single unified billing system for the entire company. So a lot of that work has happened and is continuing to happen.
I wouldn't position that is as either oil are mutually exclusive.
Continue to believe that that we haven't effectively ramp business. It is it is well integrated.
And we can continue to.
To do acquisitions, while maintaining that.
Great.
That's kind of focusing on the near term, there's obviously a lot of moving parts and no one has a crystal ball but.
Just thinking about the restructuring program the recent tuck in M&A.
And I guess, the current state of the market and seasonality.
Would you think that.
The March quarter should show, maybe a sequential uptick from revenue and EBITDA, we saw in December quarter or would that be hard to conclude.
Suffice.
I think it's hard to conclude today exactly where the March quarter will be.
Sure.
Again, I think we can give some color on the and some guidance on some.
Some colors of insight onto into the cost base.
But as it comes to revenue.
It is still a bit too early to tell.
Okay fair enough.
And then just final one for me is you're disclosing customer churn which is.
Great disclosure I appreciate that just.
Just to clarify the calculation of that would that just simply be customers expenses all of our revenue in the current periods.
A year ago.
We will be the definition of that churn metric.
Yes.
It's correct previous period.
And we are taking I believe material customers some customers over $5000 as we look at them.
It is measured over an annual basis.
So just wanted to get that clear as some companies report churn out on a monthly but this is an annual basis Telus.
Yes.
Okay, Great I'll pass the line thanks, guys.
Your next question is from Kevin Chris <unk> of Scotiabank. Please go ahead.
Hey, gentlemen, good morning, just one from me looking at the geographical breakdown the revenue in the UK It was down a little bit more.
And we've seen growth over the past few quarters.
Can you just explain.
What was happening there I think FX might have been a tailwind for you in the quarter can you just flush out what you.
Youre seeing in the U K business specifically.
Yes, I think again the.
The UK market has been down more than Australia market, but not as much as the Canadian market and Thats being reflected I think in the numbers.
Add to that we don't have the same pricing power.
In the U K as we have today as we have in Canada.
So our practice management business is smaller than the U K than it is in Canada.
And so we in Canada, we've been able to kind of over the last year.
Year.
Execute successfully.
Fairly material and significant price increases, which which have resulted in a higher price per unit.
That we sell our products for our customers for so we've been able to despite a much worst downturn in the market and you saw on the UK still have the revenue performance you saw in Canada.
Which which which was up.
And so that's the dynamic we're seeing.
And if the REIT like what drives your you are less less of an ability to have pricing power in the UK as it is.
You bring potentially youre going to be there and other product better.
Better product in the U K market could that could that change.
So it has to do with if you look at our product mix from a product line perspective.
We have a bigger data and in fact, the business in the UK than we do practice manager business today. So a goal of ours is to keep growing that perhaps the basic business in the U K given the size of that market, where when you look at the Canadian market today, we have a very big practice management business.
So it just has to do with product mix.
Okay got it and maybe just.
Just mentioned that the price increases that you've been doing in Canada can you remind us sort of.
Relative to Q Q2, where we are in Q3 in terms of.
Where you've done pricing are there opportunities come how much of the base any any sort of you can give us on.
On trends on pricing going forward.
Look this is again as I keep saying this is a very healthy business that has pricing power.
So we continue where appropriate to put forth.
<unk> plus price increases, which will enable us to have continued.
They drive the business forward.
Okay.
Thanks, I appreciate the color I'll pass the line.
Your next question comes from Stephen Boland of Raymond James. Please go ahead.
Good morning, guys.
Yes, two questions first would be.
When you talked about salary cost reductions.
Reductions.
And Matt your comments on.
Removing layers of management I take that to mean that if volumes increase.
Across the board in all the jurisdictions.
Dot stopping will not be required again. So these are almost like permanent.
Yes.
Expense reductions is that the right way to think about it.
Correct. When you when you think of our business, it's not like a lot of other businesses you see in the real estate space, where those bodies attached to it. This is the computer processing. The vast majority of transactions. So that's why we have such a low amount of Cogs. So we're able to scale the business.
Without adding more bodies.
Yes.
Our software business. So so these are permanent layers of management and permanent efficiencies, we realize that that we will not be replacing with that said as we buy companies you do get head count naturally from that but there is revenue there.
Obviously offset that but just for clarity I want to mention that.
Okay. That's good and maybe just if you could expand.
You mentioned the function, but management now is more on a functionality basis as opposed to geographic can you can you just break that down like what are the layers.
Is there one person in charge offs not just due process clause.
Canada, maybe you could just explain what is the next layer of management.
Yes, the way our business works is.
The key functions are are we have operations and so that has all the.
Cut for help desks.
And customer support functions that roll up into it for all products.
So that's a function of when it's not broken down by due process or by Fai global or by any other business. We've acquired we've integrated the organization structure.
The various support capabilities from operational perspective.
Within our finance, we have sales we have product.
We have IP, which consists of both.
Infrastructure as well as software development.
With communications.
And.
And legal.
Okay, and so you have a single person.
For each of those functions that are doing it globally is that the way to think about it or close to being global.
As close to a level.
One the one jurisdiction stated we still have a AA.
Using director with a lot of kind of cross supporting is Australia, just given that the proximity with the.
The time difference.
But but it's a very integrated and at global functional management structure.
And just on the pipeline of M&A. So I appreciate you, saying that youre, probably going to focus on tuck ins.
Seen compared to 12 months or 24 months ago, what the multiples are like is it rational or is it still nothing's really changed in that.
Yes.
And <unk>, what you what you saw in the past.
Yes, I think I think we were hoping we talked about this last quarter and kind of towards the end of last fiscal year, We reported September November .
We're hoping that.
Wed see more decrease in valuations thats not happen. The reality is when you have in our industry. These businesses are.
Software businesses in general a lot of cash.
And they go for high multiples often at multiples.
When we pay now I think we've.
Don't see that changing to answer your question.
So I think.
We have a demonstrated ability to pay that and bring it down to a more reasonable people.
But.
The multiples are definitely.
More kind of high teens and they are.
Single digits.
Okay. Thanks, guys.
Your next question comes from Scott Fletcher of CIBC. Please go ahead.
Thanks, Good morning.
A follow up on the M&A for me you mentioned, obviously, taking a pause from looking at the.
Taking action on the larger deals.
The current backdrop is there a certain macro indicator or maybe level of housing market improvement, where you would start to get more comfortable looking at larger deals or is it more of a function of the cash will start to drop through once the transaction activity comes back nobody is doing E mails.
Oh five.
<unk> in there.
So I think you are.
Line is live.
Go ahead, Matt.
So is there is there a metric we're looking at.
No Theres no and look as I continue to say I mean, we.
We continue to believe adjusted EBIT as the best metric when looking at this from a.
Yes.
From a cash flow perspective.
For many reasons to talk with a noncash <unk>.
<unk>.
Also if you look at things that impact on the coffee Gary interested obviously one of them.
But no. It answer your question no there's nothing that that per se a hard metric.
We're just being cautious in an environment, where capital is tighter.
And I think we've we're very confident ability to execute on what we what we do.
But just be a little more cautious thats kind of approach, we're taking in a world where we're again capital is more expensive and it's harder to come by.
Okay. Thanks, and then on the type of company Youre looking at on the tuck in side with that.
The idea there would be to look at.
Adding more subscription revenue it seems like thats been the idea with some of the tuck ins in the past yes.
Rows and columns of subscription revenue, obviously, you have the pricing power.
It's there it's harder to execute upon and it's less instantaneous thing youll get a transactional business.
Though you have the certainty attached to it for a period of time.
We obviously when we look at what we're buying.
Talk into that fits in the three verticals that we have.
And yes, we can diversify away from from real estate transactions, we think Thats a positive thing and to do that also buy buy subscriptions is helpful. As well. So so yes, we obviously consider that.
Okay. Thanks.
At this time, we have no further questions. So I will turn the conference back to Ross' Marshall for any closing remarks.
Thanks, Robert Thanks, very much everyone for joining us today, we look forward to updating you on our Q3 call in May have a great day.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.
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