Dye & Durham Q3 2023 Earnings Call Transcript

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May 10, 2023

Key Takeaways

  • Duane Durham reported Q3 revenue of C$104.1 million (–15% YoY) and adjusted EBITDA of C$56.1 million, maintaining a strong 54% margin while reducing real estate transaction exposure to 50% of total revenue.
  • The company more than doubled its contractual annual recurring revenue to C$67 million (18% of total revenue) from 7% a year ago and has set a three-year target of 50% recurring revenue.
  • Operating expenses were cut by C$42 million (19% YoY), significantly exceeding last November’s 10% cost-reduction goal and streamlining the management structure.
  • Duane Durham announced a C$15 million substantial issuer bid at C$17–C$20 per share, reflecting management’s view that the stock is deeply undervalued, and has reduced shares outstanding by 20% year-to-date.
  • For Q4, the company expects adjusted EBITDA of C$65–70 million and revenue visibility of C$115–120 million, driven by a recovering real estate market and ongoing M&A to diversify away from transaction-dependent revenue.
AI Generated. May Contain Errors.
Earnings Conference Call
Dye & Durham Q3 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

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. I would now like to turn the call over to Ross Marshall, Investor Relations on behalf of Die Underham. Mr.

Operator

Marshall, you may begin your conference.

Speaker 1

Thank you. Good afternoon. Welcome to the Duane 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 orientated financial information regarding Dienturam and its business and disclosure regarding possible events, conditions or results that are based on information currently available to management, which indicate management's expectations of future growth, results of operations, business performance and business prospects and opportunities.

Speaker 1

To the operator. Such statements are made as of this date hereof and DyneDerm assumes no obligation to update or revise them or 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. To the operator. A number of these risks or uncertainties could cause results to differ materially from the results discussed today.

Speaker 1

Given these risks and uncertainties, one should not place undue reliance on these statements and information. To the forward looking statements and information and future orientated financial information section of our public filings without limitation our MD and A and our earnings to the press release issued today for additional information. Joining us today on the call are Matt Prow, Dione Durham's Chief Executive Officer and Frank Delizzo, Dione Durham's Chief Financial Officer. A question and answer session will follow the formal remarks for research analysts. I will now turn the call over to Matt for opening remarks.

Speaker 1

Matt?

Speaker 2

Thanks, Ross, and good afternoon, everyone. Our business continued to perform well during the Q3 to the challenging operating environment. So far this fiscal year, we made important progress across key areas. Most notably, we've grown our contractual annual recurring revenue to a point where today it's 18% of our total revenue and continuing to grow. We reduced our operating expenses by $42,000,000 or close to 20% as measured on a year over year basis And significantly exceeded the 10% target set out in our cost reduction plan last November.

Speaker 2

To the operator today. Year to date, we've reduced the number of shares outstanding by 20%, and we've proactively taken steps to continuously streamline the business while continuing to market best in class software products for more than 60,000 customers. With the primary focus on 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 firm efficiently and reliably. We believe our depth and breadth of experience in marketing software in the Alleo community is unmatched.

Speaker 2

Today, we are 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 a mission critical workflow and matter specific software applications that enable the automation of various areas of LOFT. As you'll see on Slide 7 of the earnings presentation, law firms rely on our software every day to serve their clients across a variety of needs from litigation to the convenience of real estate to wills, due diligence and more. In an industry known for its complexity, we are focused on keeping things as simple as possible for our customers with one contract and 1 minute on spend. To we recorded $104,000,000 in revenue $56,000,000 in adjusted EBITDA, which brings our last 12 months total to 461,000,000 to revenue and $253,000,000 of adjusted EBITDA. During the quarter, 50% of our total revenue was exposed to real estate transaction volumes.

Speaker 2

To continue to maintain a strong 54% EBITDA margin for the quarter. 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, We believe our stock is significantly undervalued and represents one of the best opportunities in the market today. When we compare ourselves to other publicly traded to our company's in North America with over $200,000,000 of EBITDA, our valuation multiple ranks 45th out of 52 companies. Despite Daimler and Durham being top quartile on important industry metrics like the rule of 40.

Speaker 2

Given just to how significantly undervalued we believe our stock is and the clear disconnect that exists between financial performance to the financial and operational scale of the business and valuation. Today, we announced another substantial issuer bid for up to $15,000,000 at a price between $17 $20 per share. This substantial issuer bid reflects our confidence in the business. To the operator. While we don't typically provide forward looking guidance, we also decided to offer it this quarter.

Speaker 2

So to the Investor Relations and Investors can make fully informed decisions about whether to participate in the substantial issuer bid or no. Therefore, for the Q4 of fiscal 2023, we expect our adjusted EBITDA to be in the range of $65,000,000 to 70,000,000 Given our strong and substantial earnings and cash flow profile and organic and M and A growth pipeline, Together with the significant discount at which we are trading, we believe there is no better use of capital and continue to invest in ourselves. To disciplined capital allocation is a core element of our strategy. Deploying another SIB is an extension of that discipline given the current levels at 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 2

As you will see on Slide 7 of the earnings presentation, Q4 is off to a very strong start with $36,000,000 of revenue in the month of April. We categorize the remaining periods across contracted revenue, real estate and non real estate and exposed revenue and TM Group. Taking these revenue items together, we conservatively have visibility on $115,000,000 to $120,000,000 of revenue for Q4. It's important to note that given we already have April preliminary results, this means the exposure from revenue in May June related to real estate transactions is only estimated to be approximately 30% of our Q4 guidance revenue. 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 2

In addition to this upside, returning to a more practical multiple would see significant lift for our valuation. To. 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. Last November, we announced a target of a 10% reduction in operating costs. We have significantly exceeded that to Target with a 19% reduction in annualized operating costs in Q3 of fiscal 2023 or $42,000,000 compared to the same period in fiscal 2022, net of OpEx and the acquisitions we've made in the past 12 months.

Speaker 2

To the operator. 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 to structure, creating clear lines of accountability. In doing so, we've been able to collapse and eliminate layers of management, to the Q1 of 2019. With these changes, we have brought greater focus on recruiting an attractive world class talent in all areas of management. To 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 2

As a result of our to strong long term client relationships and refresh sales strategy. We've significantly grown our contractual annual recurring revenue, more than doubling it in the past year. Enel stands at nearly $67,000,000 up from $29,000,000 in Q3 fiscal 2022. Contracted annual recurring revenue now represents 18% of total revenue, up from 7% in Q3 of fiscal 2022. Increasing our recurring revenue provides us better predictability and outlook as we have and we've established a 3 year goal of establishing in achieving 50% annual recurring revenue.

Speaker 2

This growth in recurring revenue is driven by our to moving accounts to minimum volume subscription contracts on our practice management platforms as well as strategic M and A, which again has been focused on practice management applications and include subscription revenue. The minimum volume contracts for our practice management platforms to provide price certainty for our small block clients. These clients have access to entire Interactive Solutions offering case management, account and billing, document management and CRM capability, just to name a few. To the contract structure allows them to continue to charge their clients a disbursement fee on a matter like a conveyancing of corporate matter, which is an important feature of their business. With this contract structure, we diversified our revenue base away from transactional volumes on the downside, but we retained the upside.

Speaker 2

Looking ahead, we've established clear goals for the business that we categorize across financial performance indicators and continue to have a market leading product in continuing our M and A growth. On the financial metrics, we will set a target of annually delivering 20% to 25% adjusted EBITDA growth. If achieved, this growth would put us firmly on the path to building to our objective of building to 1,000,000,000 An important aspect to achieving this growth is building more predictable recurring revenue streams and diversifying our revenue mix from what we've endured during the past 18 months with the real estate market. The 50% recurring revenue goal addresses predictability. We've also set a 3 year goal to reduce our real estate transaction exposure as it relates to revenue to less than 33%, which which will help us further deliver on diversification.

Speaker 2

And we intend to continue to grow through M and A. We've added approximately 108,000,000 to adjusted EBITDA through acquisitions by deploying $1,800,000,000 in capital since our IPO. We've grown the business another $106,000,000 organically, Which delivered a post synergy multiple approximately 8 times. We believe we built a world class software business of scale. It's a great business that generates strong top line growth within an industry that provides to a very healthy margin profile.

Speaker 2

Evidence of this scale can be seen in the fact we're now one of 52 public companies in North America in the software application space that have more than $200,000,000 of EBITDA. We look forward to updating you on our progress as we continue to grow, to optimize and diversify our global business. I'll now turn it over to Frank to review the financials. Frank?

Speaker 1

Thank you, Matt, and good afternoon, everyone. We reported revenue of $104,100,000 during the Q3, a decrease of $18,800,000 or 15% from the same period last year. To the change primarily related to lower real estate transactions as a result of seasonality and unfavorable market conditions. As Matt mentioned, to see an improvement in the real estate market in Q4, which is typically one of the stronger seasonal periods, but we're not back yet to normalized levels at this stage. During the period, revenue exposed real estate transaction volumes globally was 50% compared to 67% in the same period to fiscal 2022.

Speaker 1

We've updated our method for calculating this figure. In our disclosure, we report revenue driven by real estate to the Q1 of 2019. Revenue driven by real estate transactions for Canada and for the first time annual recurring revenue contracted. On a go forward basis, we'll be consistent with using this method to give you greater transparency into the key drivers of the business. Annual recurring revenue contracted was 18% in Q3 fiscal 2023 compared to just 7% in the same period last year.

Speaker 1

We generated adjusted EBITDA of $56,100,000 a decrease of $10,700,000 or 16% from the same period last year. We continue to maintain our strong EBITDA margins coming at 54% this quarter, which is in line with our target range of 50% to 60%. To. As we said before, we've booked a resilient business. On Slide 12, you can see the quarterly performance that we've delivered on our adjusted EBITDA.

Speaker 1

We've managed through the challenging market conditions over the past 12 months with continued strong performance. Despite significantly lower real estate market transactions, to our adjusted EBITDA performance remains relatively consistent. This indicates how we can manage the business cycles while still delivering shareholder value. Total operating costs, which includes direct costs, technology and operations costs, SG and A and sales and marketing expenses were $48,000,000 for the to the Q1 of 2019. Order or 46 percent of revenue compared to $56,000,000 for the same period last year.

Speaker 1

Net of the impact of expenses from acquisitions, our operating costs for the quarter were 45,600,000 As a result of our cost reduction plan announced in November, we have reduced our office by 19% or more than $42,000,000 on an annualized basis to the same period last year. This excludes the impact of expenses from the acquisitions since Q3 2022. We expect our ongoing operating costs to be within the 40% to 50% range of revenue. Net finance costs for the quarter were to $40,300,000 compared to $18,300,000 in the same period in the prior year. The increase is due to lower favorable non cash impacts from the change in fair value of the convertible debentures and loss on the settlement of loans as compared to the prior period.

Speaker 1

To this conference call. This was also partially offset by lower interest costs in the current period. As a reminder, IFRS accounting requires us to mark to market or fair value these instruments each to the Q1. So we do expect this variability in our finance costs to continue. Acquisition, restructuring and other costs for the quarter were $15,800,000 an increase of $3,100,000 from $12,700,000 in Q3 of last year.

Speaker 1

A large portion of this cost in the fiscal 2023 period relates to the ongoing divestiture of TM Group. Turning to our balance sheet, as of March 31, 2023, we had approximately $193,000,000 of liquidity. To the operator. This liquidity consists of cash, the revolving credit facility and the delayed draw term loan. To our leverage ratio based on fiscal 2024 consensus is currently 3.5 times as of March 31.

Speaker 1

To our track record of strong cash flow conversion and potential sales of TM Group, we have a clear line of sight to reducing the leverage ratio in the near term. This afternoon, we announced a substantial issuer bid of up to $15,000,000 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. To view our shares at these levels as a great opportunity in the market available to us. We'll continue to be disciplined in our approach to capital allocation as we grow the business. With that, I will turn it back to the operator for Q and A.

Speaker 1

Operator?

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Robert Young from Canaccord Genuity. Please go ahead.

Speaker 3

Hi, good evening. First place to start for me would be around the components of the annual recurring revenue I've seen 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. What are the constituents?

Speaker 3

What parts of the business is that coming from? To the management, is it coming from minimum contract agreements, is it coming from It'd be great to understand just what is driving this annual recurring revenue. Just break it apart, so it's a little easier to understand then. I think that'd be helpful.

Speaker 2

The biggest driver of it is our new sales strategy, which we currently have in Canada and are soon to look to expand to Australia and the U. K. Where we are on our practice management application signing folks up to multiyear contracts. In the case of Canada right now, it's minimum volume contracts where they will agree to spend a certain amount of money with us over a 3 year period primarily. Okay.

Speaker 2

And then The second component is, there was 2 recently announced to acquisitions both on the practice management side, 1 a litigation business, a litigation software business in the fall and then halfway through the quarter, We expanded our practice standard capability in the UK, but the vast majority of that growth is coming through our Canadian sales effort.

Speaker 3

And then the minimum contracts on the transaction, I think you're at 31%, 30%. Is that move forward meaningfully?

Speaker 1

Sorry, we didn't catch that last sentence.

Speaker 3

To 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%?

Speaker 2

It's about 30% now. It's around 35% give or take.

Speaker 1

Okay. Rob, we would have launched that in the early part of Q4 last year. So Well, we start at 0. And as Matt mentioned, we're seeing headway above 30%. That's a key driver for that contracted revenue.

Speaker 3

Okay. And so that when you said it's up 2x year over year, the big driver there would be the practice management and the recent M and A. That'd be Probably the best way to describe that, right?

Speaker 2

Correct. And the majority of that would be the sales, the capacity and sales strategy. And those factors we did were both in the practice management to the segment of our product mix.

Speaker 3

Okay. Okay. Maybe the second question would be around the TM Group activity as much as Can share an update there would be helpful. I know you had the CMA issued some updates recently. Maybe you could just give us the current state of affairs.

Speaker 1

Rob, yes, we don't 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 we continue to to Currently hold it that way, and selling efforts are contingent.

Speaker 2

And I think we said in our public disclosure, our preference is to sale the business, But as a backup plan, we'll look to spend it out too.

Speaker 3

Okay. And then maybe last question before I pass the line would be around Churn, have you ever seen any change in behavior, positive or negative, relative to last quarter? And then I'll pass the line.

Speaker 1

No change in the churn levels, Rob. We're still seeing a low to to mid single digits on that. And yes, that's there's been no change in that trajectory.

Speaker 3

Okay. Thanks. I'll hop back in the queue.

Operator

Thank you. Your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Please go ahead.

Speaker 4

Hi, good afternoon. Regarding the savings from the restructuring, Would you have had a full quarter run rate in this quarter or sequentially heading into the June quarter, should there be some more benefit just from the full quarter impact?

Speaker 1

Yes, we realized and I know we provided that disclosure in the We'll always look at our cost base in light of the market conditions.

Speaker 4

Okay. Seems like there was to. I mean that was disclosed, but as far as other acquisitions not disclosed, any color in terms of No, number or geographies or types of assets.

Speaker 2

So in the both I mean, in the quarter, all acquisitions we did were in the UK. The assets we bought were in the UK on our due diligence And inside side of the business and then we talked about there is a product press release on the inside acquisition on the breast cancer side.

Speaker 4

Okay. And just as far as the end markets, sorry, were you going to say something?

Speaker 2

Yes. No, on the assets referenced, there was they were done, I believe, almost the last day of the quarter. So there was no financial performance in the numbers from those acquisitions. Okay.

Speaker 4

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 1

Yes. I mean, if you're referring to our Q4 outlook, we are seeing A bigger recovery in the Canadian market, it's our biggest market. The Australian market has been relatively stable. You'll see in the financial statements that were quarter Year over year is quite stable in Australia. And the U.

Speaker 1

K, as Matt mentioned, that will be influenced by the series of recent acquisitions that we have just performed.

Speaker 5

Okay. I'll pass the line to next.

Operator

Thank you. Your next Question comes from the line of Steven Bolland from Raymond James. Please go ahead.

Speaker 6

Thanks, guys. Just one question on the SID. How did you come up with the $15,000,000 Obviously, you're still acquiring, so and you're waiting for TM Group. But what it is Probably less than a week of volume. It probably would give the stock a lift, but maybe on a temporary basis.

Speaker 6

So just wondering how you came up with the $15,000,000

Speaker 2

Actually, it's the balance. We want to make sure we to deploy our capital in a balanced way. We're going to continue to grow through M and A and we think buying back stock Right now, it makes sense as well. Look, this stock is deeply undervalued. And so there's nothing cheap we can buy in the market today than our stock.

Speaker 2

I want to take advantage of that.

Speaker 6

Okay. Maybe then why not $20,000,000 or $25,000,000 I mean, I presume you want to have some balance sheet left. Is that know the reason you didn't make it bigger, just to keep some liquidity.

Speaker 2

Correct. We want to get the balance of the keyword even if we thought it went bigger. At the end of the day, we wanted to make sure we just had we had enough balance sheet capacity. We still have committed credit lines for acquisitions as well. So we just want to make sure we had enough cash.

Speaker 1

Okay.

Speaker 6

And our last question I'd probably ask every quarter is just What are you seeing in the M and A market in terms of multiples? You've always kind of said that it does trail that sellers want too much for their businesses typically. What are you seeing now, Matt, in terms of what's out there?

Speaker 2

Look, the legal practice management space is one of the hottest and most thoughtful spaces in the market today, Multiples routinely go for high teens, if not well into 20s. It's a really expensive and Okay. Thanks very much guys.

Operator

Thank Your next question comes from the line of Kevin Reshnaratne from Scotiabank. Please go ahead.

Speaker 5

Hey there, good evening. I have a question for you just on the guidance build up, it might be a bit Tactical here, but if I look at the remaining revenue to get to the $115,000,000 $120,000,000 and look at The real estate transaction revenue $34,000,000 it's about 40% of the remainder between the 2 months.

Speaker 2

So I'm

Speaker 5

wondering is that how you look at it or is there something I'm missing there from the contractual revenue that would go into that equation? Is there anything lumpy and seasonal in the non real estate Revenue, I'm just looking at that calculation relative to the 50% exposure that you had in the current quarter.

Speaker 2

Sorry, Kevin, what's the you maybe just say that question again, we're trying to understand it.

Speaker 5

Yes, sorry. If you take you've disclosed that between May June, you think to $34,000,000 in real estate related revenue. So to take that $34,000,000 divided by roughly $80,000,000 it's about 40%, a little bit over 40% and that's versus the 50% I think that you did in Q3. I'm just curious on what's happening in the quarter there.

Speaker 2

So you get 40% when you add together, is that correct what you're saying?

Speaker 5

Yes. Go ahead.

Speaker 1

I think what we're missing here, you're Comparing I think the 34 divided by the guidance and saying 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.

Speaker 5

Okay. Okay, maybe I'll follow-up afterwards, but I think that makes sense. And then just on going forward the guidance of 33% of your to revenue being exposed to real estate. Can you just talk about M and A then, the current pipeline, does it look like, are you looking at a lot of assets then that outside of real estate or do you have to think about a shift in the way you're thinking about M and A and sort of the prospects that you're looking at? Just curious on that longer term goal relative to your sort of your M and A watchlist pipeline.

Speaker 2

A lot of our M and A pipeline is focused generally on the Craftsman and Space. That's a big part of our business. Again, we're to we believe the world's largest provider of the software to small and medium law. The asset to purchase suite in the UK were related to products sold to law firms that focus on real estate, which Smallblad does a lot of. But the property management assets we bought, both in the fall and last quarter would have been I'd say less, I mean, as we look to diversify, We're looking to buy less stuff that has direct exposure to transactional real estate, as we're really focused on increasing the predictability given what we've been through in the last 18 months to the operator.

Speaker 2

Thank you.

Operator

There are no further questions at this time. I'd now like to turn the call back over to Mr. Ross Marshall for any closing remarks.

Speaker 1

Thanks everyone for joining us today. We look forward to updating you with our Q4 results later this summer. Have a great night.

Operator

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 lovely

Speaker 2

day.

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