Dye & Durham Limited Q3 2023 Earnings Call
Speaker 1: Good afternoon. My name is Lara and I will be your conference operator today. At this time, I would like to welcome everyone to the Diane Durham Third Quarter Fiscal 2023 earnings call.
Speaker 1: I would now like to turn the call over to Ross Marshall, Investor Relations on behalf of Diane Durham. Mr. Marshall, you may begin your conference. Thank you. Good afternoon. Welcome to Diane Durham Conference call. Before we start, we'd like to remind you that all amounts discussed on this call are those of you who are listening.
Speaker 2: 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-orientated financial information regarding dying derm and its business and disclosure regarding possible events, conditions or results that are based on information currently available to management, which indicate management's expectation of future growth, results of operations.
Speaker 2: a future performance of results. A number of these risks are uncertainties could cause results to differ materially from the results discussed today. Given these risks, uncertainties, one should not place undue reliance on these statements and information. Please refer to the Foreign Looking Statements and Information and Futuriantated Financial Information section.
Speaker 2: of our public violence without limitation our MD&A and our earnings press release issued today for additional information. Joining us today on the call are Matt Frow, Diane Durham Chief Executive Officer and Frank D'Alesso, Diane Durham Chief Financial Officer. A question and answer session will follow the formal remarks for research analysts.
Speaker 2: I will now call turn the call over to Matt for opening remarks. Thanks Ross and good afternoon everyone. Our business continued to perform well during the third quarter despite a challenging operating environment. So far this fiscal year we made important progress across key areas.
Speaker 3: Most notably, we've grown our contractual annual recurring revenue to a point where today is 18% of our total revenue and continuing to grow.
Speaker 3: We reduced our operating expenses by 42 million or close to 20% as measured on a year-over-year basis.
Speaker 3: and then significantly exceeded the 10% target set out in our cost reduction plan last November .
Speaker 3: Year to date, we reduce the number of shares outstanding by 20%.
Speaker 3: And we proactively take steps to continuously stream one of the business while continuing to market best in class software products to more than 60,000 customers.
Speaker 3: With the primary focus in the legal sector, we offer our customers a fully integrated legal technology software suite. It gives them almost every capability required to run a law from efficiently and reliably.
Speaker 3: We believe our depth and breadth of experience in marketing software in the Leo community is on-board.
Speaker 3: Today, we're one of the world's largest providers to this market for software that provides the productivity tools required to manage small and medium-sized law firms, as well as emission critical workflow and matter specific software applications that enable the automation of various areas of law.
Speaker 3: As you will see on slide seven of the earnings presentation, law firms rely on our software every day to serve their clients across the variety of needs, from litigation to the commands in your real estate to wills, due diligence and more.
Speaker 3: In an industry known for its complexity, we are focused on keeping things as simple as possible for our customers with one contract and one minimum spend.
Speaker 3: We recorded $104 million in revenue and $56 million in adjusted EBITDA, which brings our last 12 months total to $461 million in revenue and $253 million in adjusted EBITDA.
Speaker 3: During the quarter, 50% of our total revenue was exposed to real estate transaction volumes.
Speaker 3: We continue to maintain a strong 50%, 54% EBITDA margin for the quarter.
Speaker 3: We've also purposely taken measures to reduce our reliance on revenue from real estate transactions, which has been reduced to 50% of the total revenue globally and just 26% of revenue from Canadian real estate transactions. Despite the positive progress we've seen,
Speaker 3: We believe that a stock is significantly undervalued and represents one of the best opportunities in the market today.
Speaker 3: When we compare ourselves to other publicly traded software companies in North America with over $200 million of EBITDA, our valuation multiple ranks.
Speaker 3: 45 out of 52 companies. Despite Dyn Durham being top quartile on an important industry metrics like the Rulah 40.
Speaker 3: Just given just how significantly under value we believe our stock is, and the clear disconnect that exists between financial performance.
Speaker 3: And the financial and operational scale of the business and evaluation. Today we announce another substantial issue of bid for up to 15 million at a price between $17 and $20 per share.
Speaker 3: This is substantial issue of it reflects our confidence in the business. While we don't typically provide quarterly guidance, we also decided to offer it this quarter. So, investors can make fully informed decisions.
Speaker 3: but wanted to participate in the substantial issue of bid or not.
Speaker 3: Therefore, for the fourth quarter of fiscal 2023, we expect our ingested EBITDA to be in the range of $65 to $70 million.
Speaker 3: Given our strong and substantial earnings and cash flow profile and organic and M&A growth pipeline, together with the significant discount of which we are trading, we believe there is no better use of capital and continue to invest in ourselves.
Speaker 3: Discipline capital issues of core element of our strategy.
Speaker 3: Deploying another SIB is an extension of that discipline given the current levels of which we are trading and we think this will be the best outcome for shareholders. As the real estate market begins to rebound, we are seeing a significant acceleration in our business in the current quarter.
Speaker 3: As you will see on slide seven on the Erning presentation, Q4 is off to a very strong start with 36 million of revenue in the month to pay for.
Speaker 3: We categorized their main periods across contracted revenue, real estate and non-real estate exposed revenue and TM Group.
Speaker 3: Taking these revenue items together, we can serve really having the visibility on 115 to 120 million of revenue for Q4. It's important to note that given we already have April preliminary results.
Speaker 3: This means the exposure from Robin you in Bay and June .
Speaker 3: related to real estate transactions is only estimated to be approximately 30% of our Q4 guidance raising.
Speaker 3: There is significant upside to our business in both top line and bottom line based on the operating leverage inherited from our scalable platform.
Speaker 3: to a more practical multiple would see significant lift for evaluation. As shown on page 8 of the earnings presentation, we believe that the disconnect that we trade at today is completely and frustratingly disconnected again from the scale of business we built and our proven ability to manage the business through multiple cycles like the one we're just coming through. So, I appreciate anything to be able to give me to do with this fine Sword crossing. Thank you so much for understanding, please. I would like to support the
Speaker 3: Last November , we announced a target of a 10% reduction operating costs. We have significantly exceeded that.
Speaker 3: target with a 19% reduction in annualized
Speaker 3: $23 or $42 million compared to the same period in fiscal 22. Net of Optics in the acquisitions we've made in the past 12 months.
Speaker 3: As part of that cost reduction, we've improved the performance of the business and streamlined our structure, moving from a regionally based manager structure to a functional based structure, creating clear lines of accountability. In doing so, we've been able to collapse and eliminate layers of management, reducing headcount and improving our performance.
Speaker 3: With these changes, we have brought greater focus on recruiting the track at World Class Talent in all areas of management.
Speaker 3: We are well positioned to scale the business and continue to deliver growth based on our existing management structure and cost base with minimal additional investment.
Speaker 3: As a result of our strong long term client relationships and refresh sale strategy, we've significantly grown our contractual annual recurring revenue more than doubling it in the past year. And now stands in nearly 67 million up from 29 million in Q3 fiscal to 22.
Speaker 3: Contracted annual recurring revenue now represents 18% of total revenue up from 7% in Q3 of fiscal 22. Increasing our recurring revenue provides us better predictability and outlook as we have established a three-year goal of establishing and achieving 50% annual recurring revenue.
Speaker 3: This growth and recurring revenue has driven by our success in moving accounts to minimum volume subscription contracts on our practice management platforms, as well as strategic emanate, which again has been focused on practice management applications and includes subscription
Speaker 3: The minimum volume contracts where a practice manager platforms provide price certainty for our small-law clients.
Speaker 3: These clients have access to entire practices and solutions, offering case management, account and billing, document management and CRM capability, just an infuse. The contract structure allows them to continue to charge their clients a disbursement fee on a matter, like a conveyance or corporate matter, which is an important feature of their business.
Speaker 3: With this contract structure, we diversify our revenue base away from transactional volumes on the down side, but we retain the upside.
Speaker 3: Looking ahead, we've established clear goals for the business that we counter-courage across financial performance indicators and continue to have a market-leading product and continue her M&A growth.
Speaker 3: On the financial metrics, we were set a target of annually delivering 20 to 25 percent of that im intercepted about in chap??? say one should hit if he wouldn't approve.
Speaker 3: If achieved, this growth would put a sperm on the path and building to our objective of building to a billion. An important aspect of achieving this growth is building more predictable recurring revenue streams and diversifying our revenue mix.
Speaker 3: from what we've endured during the past 18 months with the real estate market.
Speaker 3: The 50% recurring revenue goal addresses predictability. We've also set a three-year goal to reduce our real estate transaction exposure as it's to revenue to less than 33%.
Speaker 3: which will help us further deliver on diversification. And we intend to continue to grow through revenue. We've added approximately 108 million in adjusted EBIT through actualitions by deploying 1.8 billion in capital since our IPO. We've grown the business to another 106 million organically, which delivered a post-energy multiple approximately eight times.
Speaker 3: We believe we built a world class software business of scale.
Speaker 3: It's a great business that generates strong top line growth within an industry that provides stable cash flow and a very healthy margin profile. Evidence of this scale can be seen in the fact we're now on a 52 public companies in North America in the software application space that have won a $200 million of either Dutch.
Speaker 3: We look forward to updating you on our progress with the care to grow, optimizing the diversify our global business, on the outturn of a frame to review the financial. Frank. Thank you, Matt and good afternoon, everyone. We reported revenue of 104.1 million during the third quarter, a decrease of 18.8 million or 15% from the same period lasted.
Speaker 3: like levels at this stage.
Speaker 3: Okay. During the period.
Speaker 3: Revenue exposed real estate transaction volumes globally was 50%, compared to 67% in the same period of fiscal 22.
Speaker 3: We've updated our method for CACLE in its figure.
Speaker 3: In our disclosure, we report revenue driven by real estate transactions globally, revenue driven by real estate transactions for Canada, and for the first time, annual recurring revenue contracted.
Speaker 3: On a global-forward basis, we'll be consistent with using this method to give you greater transparency into the key drivers of the business.
Speaker 3: and the recurring revenue contract was 18% in Q3 of fiscal 23 compared to just 7% in the same period last year.
Speaker 3: We generated adjusted EVA of $56.1 million, a decrease of $10.7 million or 16% for the same period last year.
Speaker 3: We continue to maintain our strong-li bit of margins, coming at 54% this quarter, which is in line with our target range of 50 to 60%.
Speaker 3: As you said before, we built a resilient business.
Speaker 3: On strike 12, you can see the Quarney performance that we've delivered on our just-see-it-up. We've managed through the challenging market conditions over the past 12 months, which continues strong performance.
Speaker 3: Despite significant lower real estate market transactions, our justly but the performance remains relatively consistent.
Speaker 3: This indicates how we can manage the business cycles while still delivering sharedholder value. Total operating costs, which includes direct cost, technology operations costs, and GNA and sales and marketing expenses worth 48 million for the order.
Speaker 3: or 46% of revenue compared to 56 million for the same period last year. Net of the impact of expenses from actual positions, or operating costs for the quarter, were 45.6 million. As a result of our cost reduction plan in an innocent November , we have reduced our office by 19% for more than 42 million on an analyzed basis for the same period last year.
Speaker 3: This excludes the impact of expenses from the acquisitions since Q3 2022. We expect our ongoing operating cost to be within the FU 40-50% range of revenue.
Speaker 3: Net Finance costs for the border were 40.3 million compared to 18.3 million in the same period of the prior year.
Speaker 3: The increases due to lower favorable non-catch impacts from the change in fair value of the riverbed ventures and loss on a settlement of loans as compared to the prior period. This was also partially upset by low-rangeous costs in the current period. As a reminder, IFRS accounting refers us to market market or fair value these instruments each quarter.
Speaker 3: So we do expect this variability in our finance cost to continue. Opposition or restructuring other cost of the quarter were 15.9 million.
Speaker 3: and increase a 3.1 million from $12.7 million of third quarter last year. A large portion of this cost in the fiscal 23 period relates the ongoing investor of TM Group. Turning to our balance sheet, as of March 31st, 2023, we get approximately $193 million of liquidity. This liquidity consists of cash.
Speaker 3: the revolving credit facility and the delayed draw term loan.
Speaker 3: Our leverage ratio based on fiscal 24 consensus is currently 3.5 times as of March 31st.
Speaker 3: with their trial record of strong cashful conversion at the potential sale of the TM Group. We have a clear line of sight to reducing the leverage ratio in the near term. We have a clear line of sight to reduce the leverage ratio in the near term.
Speaker 3: This afternoon, we announced a substantial issuer bid of up to $15 million.
Speaker 3: We believe this is a prudent use of capital given the current valuation of the market and our discount relative to the other scaled application software companies Matt mentioned previously.
Speaker 3: The viewer shares at these levels as a great opportunity in the market available to us.
Speaker 3: We'll continue to be disciplined in our growth to capital allocation as we grow the business.
Speaker 1: With that, I will turn it back to the operator for Q&A. Operators? Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touch tone phone. Again, that star followed by the number one on your touch tone phone. If you would like to avoid a request.
Speaker 1: Please press star followed by the number 2.
Speaker 1: followed by the number two. One moment please for your first question.
Speaker 1: Your first question comes from the line of Robert Young from Canacor Community.
Speaker 4: Hi, good evening. First place to start from you would be around the components of the annual recurring revenue. I've seen it in the deck. It looks as though the build on annual recurring revenue has been steady. And so I was hoping if you could just break apart the pieces there.
Speaker 4: What are the constituents? What parts of the business is that coming from?
Speaker 4: That's a lot for that question again. Please want one of the can. Jason so as it coming from recent emanating. It's easy to come is it coming from the practice management is it coming from you know minimum contract agreements is it coming from other parts. It'd be great to understand just what is driving this annual current revenue.
Speaker 3: break it apart so it's a little easier to understand. The biggest driving route is our new sales strategy, which we currently have in Canada and are soon to look to expand or to Australia and the UK, where we are on our practice management application, signing folks up to multi-year contracts.
Speaker 3: In the case of Canada right now, it's a minimum volume contract where they will agree to spend a certain amount of money with us over a 3 year period.
Speaker 3: Okay, and then back in component is there was two recently announced acquisitions both on the practice and inside want a litigation business a little bit of self-rebusiness in the fall and then halfway through the quarter we we expanded our practice and the ability in the UK.
Speaker 5: Wow, the vast majority of that growth is coming through our Canadian sales ever.
Speaker 4: Okay, and then the minimum contracts on the transaction because I think you're at 31, 33%. Is that moved forward meaning filly?
Speaker 4: Sorry, we didn't catch that last sentence. Is it getting wrong? Sorry, maybe I'm breaking up here, but the percentage on minimum contracts for the transaction business, has that moved forward or is that still around 30%? It's about 30% now. Okay, we are at the Second kneecap in hiding.
Speaker 5: It's around 35% in retail.
Speaker 3: Okay. As we call we what I'm
Speaker 3: Rob, we would have launched that in the early part of Q4 last year. So we started at zero and as Matt mentioned, where we're staying, headway above 30%. That's a key driver for that contracted revenue.
Speaker 4: Okay, and so that when you say that it's up to X-Year over year, the big driver there would be the practice management and the recent M&A. That'd be probably the best way to describe that, right? Correct, and the majority that would be the sales, the practice management sales strategy. And those occupants when we did were both the practice management segments, the segment of our product mix.
Speaker 4: Okay, okay. Maybe the second question would be around the TM group activity as much as you can share an update there would be helpful. I know you had the CMA issued some updates recently. In the movie, just give us the current state of affairs.
Speaker 3: Rob, yeah, we didn't want to have much of an update since the last quarter. It's still classified as an asset available for sale on our financials as you can see. And, you know, we still continue to currently hold it that way and something that's not necessary. And I think we said in our public disclosure, our preference is to sale the business.
Speaker 4: but as a backup plan, we'll look to spend it out too. Okay, and then maybe last question for the past line would be around.
Speaker 4: Turn. Have you ever seen any change in behavior, positive or negative?
Speaker 4: If you ever seen any change in behavior, positive or negative relative to the last quarter, then I'll pass the line.
Speaker 3: No change in the turn levels, Rob. We're still seeing a lotus mid single digits on that. And yeah, that's the interest mentors. There's been no change in that trajectory.
Speaker 3: No change in the churn levels, Rob. We're still seeing a lot of single digits on that. And yeah, there's been no change in that trajectory. Okay, thanks. I'll hop back in the queue.
Speaker 1: Thank you. Your next question comes from the line of Tana's most shopper list from BMO Capital markets. Please go ahead.
Speaker 3: Hi, good afternoon. Regarding the savings from the restructuring, would you have had a full quarter run rate in this quarter, or sequentially heading to the gene quarter, should there be some more benefit from the full quarter impact? Yeah, we realized.
Speaker 6: Okay. Seems like there was a super 100 million of emanate this quarter. Can you clarify on?
Speaker 6: whether, you know, what that pertains to. I'm assuming that wasn't all in-site legal. I mean, that was disclosed. But as far as other acquisitions not disclosed, any colour in terms of number or geographies or types of assets.
Speaker 5: So in the quarter, all our business we did were in the UK.
Speaker 5: The assets we bought were in the UK on our due diligence and insight side of the business. And then we talked about the product press release on the NSA on the press side.
Speaker 6: Okay. And just as far as we had markets.
Speaker 6: And just as far as the end market, sorry, we're going to say something.
Speaker 5: Yeah, no, so they on the on the assets reference, there was they were, they were done, I believe almost the last day of the quarter. So there was no financial performance in the numbers from those acquisitions.
Speaker 5: Yeah, no, so they only on the assets reference there was they were they were done. We've almost the last data quarter so there was no financial performance in the numbers from those acquisitions. Okay.
Speaker 6: And then as far as the market outlook in terms of just the geographic dynamic between Canada, the UK, Australia, is it the case that you're seeing some bottoming and recovery in all three of those geographies or how does the geographic dynamic differ across those?
Speaker 3: Yeah, I mean, if you're referring to our Q4 outlook, we are seeing a bigger recovery in the EK markets, our biggest market. The Australian market has been relatively stable. You'll see in the financial statements that were quarter, year over year, it's quite stable in Australia.
Speaker 3: And the UK, as Matt mentioned, that will be influenced by a series of recent acquisitions that we have just performed. Okay, I'll pass the line then. Okay, thank you. Okay, I'll pass the line then.
Speaker 1: Thank you. Your next question comes from the line of Stephen Bowling from Raymond James. Please go ahead. Thanks guys. Just one question on the SID.
Speaker 7: How did you come up with the 15 million? Obviously you're still acquiring, so, and you're waiting for TM Group. But what, you know, it is probably less than a week of volume. You know, it probably would give the saga a lift, but maybe on a temporary basis. So I just want to know how you came up with the 15 million. Yes, we have million.
Speaker 5: Actually, it's just a balance. We want to make sure we employ our capital in a balanced way. We're going to continue to grow through M&A and we think buying back stock right now makes sense as well. Look, this stock is deeply undervalued.
Speaker 7: Nothing cheap we can buy in the market today than I've been asked to talk and wouldn't take advantage of that. Maybe then why not 20 million or 25 mean that a cousin you want to have some some balance sheet left is that kind of the reason you didn't make it bigger just.
Speaker 7: I wouldn't take advantage of that. Okay, maybe then why not 20 million or 25 million? I presume you want to have some some balance sheet left. Is that kind of the reason you didn't make it bigger? Just to keep some liquidity?
Speaker 5: Correct, we want to better get the balance, the key word, even if we thought it would be bigger. I think in the day we wanted to make sure we just had enough balance sheet capacity. We still have committed credit lines for acquisitions as well. So, so we just want to make sure we had enough cash.
Speaker 7: Okay, well a last question I probably asked the reporters just what what are you seeing in the M&A market in terms of multiples? You've always kind of said it does trail that sellers, you know want too much for their businesses typically What do you see now mad in terms of what's out there?
Speaker 5: So if the legal practice man in space is one of the hottest and most thoughtful spaces within the market today, multiple routinely go for high teams, not one in the 20s. It's a really expensive and sought out space. Often things are transitioning to Missouri multiple now, particularly in the United States. It's a very, very expensive space way. It's a very, very expensive space.
Speaker 8: Okay, thanks very much guys. Thank you.
Speaker 9: Just a reminder, should you have a question, please press star followed by the number one on your touchstone phone. Your next question comes from the line of Kevin Pashneratne from Scotiabank. Please go ahead. Hey there, good evening. I had a question for you just on the guidance build-up. It might be a bit technical here, but if I look at the remaining revenue to get to the $1.15, $1.20 and look at the for the real estate transactional revenue.
Speaker 9: 34 million, it's about 40% of the remainder between the two months. I'm wondering, is that how you look at it or is there something I'm missing there from the contractual revenue that go into that equation? Is there anything lumpy and seasonal in the non-relistate revenue? I'm just looking at that.
Speaker 9: calculation relative to the 50% exposure that you had in the current quarter. Sorry, Kevin, what's the exact, you may just say that question again, we're trying to understand it. Yeah, sorry, if you take, you've disclosed that between May and June , you think you could do $34 million in real estate related revenue. So to take that 34 divided by the roughly 80, you know, the ratio, it's about 40%, a little bit over 40%.
Speaker 3: Go ahead. I think what we are missing here, you are comparing the 34 divided by the guidance and saying that is a...
Speaker 3: That's a lower percentage than our real estate exposure. So we have to realize that in April , it's the total revenue, which includes both revenue exposed and revenue not exposed to real estate. So that would be the reason why the numbers are different. Much different. Okay.
of your revenue being exposed to real estate. You just talk about M&A then. You know, the current pipeline does look like, you know, are you looking at a lot of assets then that are outside of real estate? Or, you know, do you have to think about a shift in the way you're thinking about M&A and sort of the prospect that you're looking at, just curious?
on that longer-term goal relative to your sort of your M&A watchlisting pipeline? A lot of our M&A pipelines focus generally on the practice of management space. That's a big part of our business. We're arguably, and we believe, the world's largest provider of software to small and medium law.
You know, we go to the asset purchase we did in the UK. We were related to products sold to law firms that focus on real estate, which small a lot does a lot of, but the proximity and assets we bought both in the fall and last quarter would have been that I got a realistic exposure in them.
I think less, I mean, as we looked at diversify, we're looking to buy less stuff that has direct exposure to transactional real estate. So, really focused on increasing the predictability, given what we've been through the last 18 months.
and subscription slash error revenue gives us that.
Very good. I will pass the line. Thank you. Thank you. There are no further questions at this time. I would now like to turn the call back over to Mr. Ross Marshall for any closing remarks.
Thanks everyone for joining us today. We look forward to updating you with our Q4 results later this summer. Have a great night.
Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lonely day.