Dye & Durham Q2 2024 Earnings Call Transcript

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Provided by Quartr
February 13, 2024

There are 8 speakers on the call.

Operator

Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dye and Durham Second Quarter Fiscal 20 24 Earnings Call. I would now like to turn the call over to Horst Hirji, VP Investor Relations of Dye and Durham. Mr.

Operator

Hirji, you may begin your conference.

Speaker 1

Thank you, Lara, and good morning. Welcome to the Dye and Durham Conference Call. Before we start, we'd like to remind 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 Dimesurm 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, business performance and business prospects as well as opportunities. Such statements made are made as of this date hereof Undyne Durham assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws.

Speaker 1

Such statements involve significant risks and uncertainties and 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 on future oriented financial information section of our public filings, without limitation, our MD and A and our earnings press release issued today for additional information. Joining us on the call today are Matt Proud, Dine Durham's Chief Executive Officer and Frank D'Lisso, Dine Durham's Chief Financial Officer.

Speaker 2

Remarks.

Speaker 3

Matt? Thanks, Gus, and good morning, everybody. The business performed really well in what is typically a seasonally low quarter. We're up 17% in revenue, taking into account the impact from the TM divestiture. We continue to grow our contracted revenue.

Speaker 3

Annual contracted revenue was $203,000,000 or 49 percent of total revenue as of December 31, 2020 3. Contracted revenue consists of ARR, which was $112,000,000 as of December 31, again representing 27% of our revenue and other rep contracted revenue from contracts, overages or service agreements, which was $93,000,000 We're building a business of scale, delivering mission critical software to law firms and financial institutions. The legal technology vertical was a $25,000,000,000 market in 2023 and is estimated to grow to be $46,000,000,000 in 2,030. This is according to third party reports. Our practice management and data insights and due diligence solutions address the market's fastest growing needs.

Speaker 3

As such, we're well positioned to win in this market. Our practice management solutions help small and medium sized law firms manage and grow their practices with key applications like case and matter management as well as core business functions like accounting, billing, client onboarding, workflow management and document management. Earlier this month, we announced the launch of our Unity Global Platform. We initially launched this in the U. K.

Speaker 3

And expect to launch later in Australia and Canada, that's later this year. We've built the business through acquisition. We have a very large customer base with multiple core product offerings in each of our markets. These offerings solve law firms' needs, which are critical for their business and customers. Building through acquisition means you don't necessarily have a uniform platform for clients to use across functions.

Speaker 3

The UX is also different. The customer experience is different. It's more difficult to leverage the brand across different applications as well. The Unigold platform solves this. It solves these challenges by bringing together all the acquisitions we've compiled in one seamless way for our customers.

Speaker 3

It was a big project for us and the team delivered in a very big way. The Unity Global Platform makes it more streamlined for customers to access a range of products and services in one location with one login. You get access to everything you need to manage your practice. Law firms can now reduce their administrative burden and reclaim time to earn fees dedicated to client services and in turn grow their business faster with less effort. Our competitors don't offer the same capabilities across comprehensive applications that we offer.

Speaker 3

For instance, the Unigolo platform includes a fully integrated client onboarding solution, allowing law firms to quickly get binding engagement letters signed by their customers and at the same time allows them to seamlessly take their customers through the digital ID verification, KYC and AML process. We believe the world class capabilities of the Udemy Global Platform position us effectively to compete and continue to win market share. By offering a single global platform for essential industry leading software solutions, we're positioned more strongly than we ever have been to lead in the global technology industry. At the same time, we're designing, building and launching new platforms. We've also taken A series of important steps is part of our larger plan to strengthen the business.

Speaker 3

1st, we strengthened our balance sheet and restructured a large portion of our convertible debt convertible debt, which taken together have significantly improved our capital structure and provides us greater flexibility. Specifically, since our last call, we increased and completed the $160,000,000 substantial issuer bid for the 2026 Temerilla Ventures. There is now $185,000,000 left in principal amount outstanding on the 2026s compared to $345,000,000 at the time of our last call. We also issued $140,000,000 of new debentures due November 1, 2028. These new debentures do not have the same accelerated maturity as the 20 26 convertibles.

Speaker 3

In effect, we termed out $160,000,000 for an increased yield to maturity of 2.4%. Additionally, earlier this month, we raised $145,000,000 in cash through an equity bought deal. Capital raise places us in a stronger position with more optionality in the method we continue to in the method we use to continue to deleverage. We are committed to driving our leverage ratio below 4 times net debt to adjusted EBITDA, including the converts, as quickly as possible. The business is stronger today as a result of these transactions.

Speaker 3

During the Q2, we also launched a strategic review of our non core assets to expediate our priority to deleverage. The review is examining a variety of options and is ongoing. I'm required to say that no assurances can be made that that strategic review will result in any specific transaction or additional actions. But I assure you, we're committed to the process and we'll continue to work through the review to identify and close on the best outcome for our shareholders. Free cash flow performance and cash flow conversion are priorities for the business.

Speaker 3

In 2024 and beyond, Last quarter, we announced a plan that targets $70,000,000 or more of free cash flow performance improvement by the end of Q3 fiscal 2024 compared to Q1 fiscal 2024. We're on track to meet this target with a $40,000,000 improvement on an annualized basis in Q2. This improvement was primarily due to price optimization, a reduction in CapEx and improvement in restructuring and other costs and lowering adjusted operating costs. We've made Material progress in diversifying the business over the past 24 months. We're a legal technology company that supports law firms to manage and grow their practice Practice is faster with less effort.

Speaker 3

We're not a real estate company. Our exposure to Canadian real estate continues to shrink. It now stands at just 19% of total revenue. And we have even less explosion than that to resale transactions when you take into account refinancings. Put in perspective, some software companies have customer concentration that's higher than that figure.

Speaker 3

Revenue driven by global real estate transactions that law firms are working on was 44% in the quarter. That's great progress towards our goal to drive that figure down to 33% of total revenue within 3 years. I also want to take a second to talk about our Board refresh. We added 2 new directors at the end of last year, Colleen Moorhead and Peter Brim, and we're excited to have them on Board and to bring their capabilities and skill sets with them. I'd also like to say thank you to Mario DiPietro, who served on the Board for many years, and we wish Mario all the luck in his future ventures.

Speaker 3

The business is in a great position today with the launch of the global Unity platform, a more diversified revenue base, a strong and growing base of ARR, a strong balance sheet and an improved capital structure. I'll now turn it over to Frank to discuss the financials.

Speaker 4

Thank you, Matt, and good morning, everyone. This morning, we reported our Q2 fiscal 2024 results. Our results continue to demonstrate the resiliency and diversification of the business. As Matt mentioned, we continue to diversify our revenue base enhance our practice management offering, continue to reduce our reliance on real estate transactions and increase our annual recurring revenue primarily through our practice management solutions. This quarter, we've included a new metric, annual contracted revenue, which further demonstrates the consistency of the business.

Speaker 4

Revenue exposed to real estate transactions globally in Q2 was 44% compared to 54% in the same period of fiscal 2023. While revenue exposed to real estate transactions in Canada was only 19% compared to 30% in the same period of last year. Keep in mind that a portion of our 19% exposure in Canada includes refinancing transactions when excluded, which further reduce this metric. Any recurring revenue contracted was 27% as of December 31, 2023 compared to just 16% at the same point last year. There are components of our revenue which we do not include in ARR, such as revenue from contracted overages and other revenues under contract with service agreements.

Speaker 4

Annual contracted revenue in the 2nd quarter was 49%, inclusive of ARR. We reported revenue of $110,000,000 during the Q2, an increase of 17% compared to the same period last year and taking into consideration the sale of TM Group on August 3, 2023. Revenue grew 3% year over year, including the impact of in the prior period. Keep in mind that the Q2 and Q3 periods of our fiscal year are typically the weakest from a seasonality perspective. Q4 and Q1 in that order are typically our strongest seasonal periods.

Speaker 4

We generated Adjusted EBITDA of $60,000,000 in the Q2 of fiscal 2024, an increase of 9% or $5,000,000 compared to the same period last year and taking into consideration the selling of TM Group. Adjusted EBITDA grew 4% or 2,400,000 including the contribution of TM Group in the prior year. The improvement is primarily a result of the growth in revenues, both organic and inorganic, as well as the early impacts from our business improvement plan. We continue to maintain our strong EBITDA margins coming in at 54.5% this quarter, which is in line with our target range of 50% to 60%. Total adjusted operating expenses, which includes direct costs, technology costs, G and A, Sales and marketing were $50,200,000 for the quarter or 44.5 percent of revenues.

Speaker 4

We expect our ongoing operating costs to be within the 40 50% range of revenues. Net of the impact of expenses from our last 12 months of acquisitions and the Cell of TM Group, Our adjusted operating expenses for the quarter were lower by approximately $1,000,000 from the prior year, which demonstrates the improvements from our business improvement plan announced in the previous quarter. As we acquire assets and manage the broader business, we continually look for ways to drive cost synergies and eliminate redundancies. Net finance costs for the quarter were $49,000,000 compared to $38,400,000 in the same period of fiscal 2023. The increase is mainly due to an increase in interest rates, higher debt balances as well as unfavorable non cash impacts from the change in fair value of our convertible debentures as compared to the prior period.

Speaker 4

Acquisition, restructuring and other costs for the quarter were $5,300,000 This was a decrease from $15,600,000 in the Q2 of fiscal 2023, and we believe we could deliver additional improvements in this cost line item over time. We're taking actions to increase our cash flow performance and placing a greater emphasis on this measure. Our Q2 cash flow from operations was $44,600,000 in the quarter, up 57% compared to the same period last year an improvement in free cash flows of $9,000,000 as compared to the previous quarter. Turning to our balance sheet. Our net debt, excluding the convertible ventures, stood at approximately $1,050,000,000 as of December 31, 2023.

Speaker 4

Subsequent to the end of the period, we increased the size of the substantial issuer bid that Matt talked about earlier and closed the equity Bak deal financing, which raised net proceeds of approximately $140,000,000 which was partially used to retire all of the outstanding revolving facility as of December 31, 2023. We understand the importance of reducing our leverage ratio and we have set a clear target to reduce it below 4 times total net debt to adjusted EBITDA. That said, we have sufficient resources to manage our debt levels. The business generates strong sustainable cash

Speaker 3

flows. We built a

Speaker 4

business of scale that is mission critical to small and medium sized law firms and financial institutions. Today's results and the recent actions we've taken demonstrate the consistency of the business and the opportunity in front of us. With that, I'll turn it back to the operator for Q and A.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. We have our first question coming from the line of Robert Young from Canaccord

Speaker 5

First question for me would be related to the delayed draw. It looks like you drew down on that in the quarter. And then you said that you are going to use proceeds from the recent deal to pay down the revolver. Does that include The delayed draw or do you think of the revolver as separate? And what's the reason for the drawdown on the delayed draw?

Speaker 3

Hey, Rob. It's Frank here.

Speaker 4

Yes, we as I mentioned, we did we didn't draw down on the delayed draw. We added a separate facility as compared to the revolving credit facility. So we completely eliminated the balance of the revolving facility That was outstanding. As you recall, it was approximately $30,000,000 at the end of December 31.

Speaker 5

Okay. And then, maybe if you could talk about the focus on deleveraging and What happens after you reach 4 times leverage? Maybe we can just talk about how you view the strategy once you hit that level?

Speaker 3

Look, Rob, I don't think our strategies dramatically changed. The business continues to generate a lot of cash. We'd like to Obviously, having less dowry and also having paying less interest enables us to redeploy that cash to continue to grow. And that's what our plan is going to be.

Speaker 5

If I just ask in slightly different way, if the deleveraging goes a little faster than people expected. Will you continue to focus on deleveraging? Like, is that going to be important or will you shift more to more M and A?

Speaker 3

We'll continue to grow the business.

Speaker 5

All right. And then maybe last question for me. You talked a little bit about ARR expansion. I think you said that you started in the UK and Australia last quarter. Maybe just talk about The areas of growth in the near term dominated by Canada to date, but how far

Speaker 3

have you been able to expand that? We rolled out Our AR sales effort in the U. K, and despite it being early days, we're seeing great traction from the numbers of customers taking up contracts. Again, we're going in with a cross sell between our data and insights business and our practice and business, and it's being very well received despite being early days.

Speaker 5

Okay. That's all for me. Thanks.

Operator

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

Speaker 6

Hi, good morning. It looks like you acquired Credis during the quarter. Can you provide some color on that business? Is that an ARR type of some more transaction driven and is there a technology you can leverage in other 2 Aqua Foods or is it primarily UK specific technology?

Speaker 3

It's a client onboarding tool that's used today primarily in the UK. It has large market share in that market. And we are looking to depending on the needs of the market, every market has different KYC needs and they're not just kind of country needs, they're at a on a state by state, province by province basis. And so we'll continue to we are looking at the markets where that technology can be leveraged. But when we launched the Imiglo platform, we already integrated in and white label Cretus as the dine durn solution for our many, many law firms That spend their days in Insider platform already.

Speaker 6

Okay. And could you provide an update regarding the you review the Canadian Financial Infrastructure Business or is there not much you can say on that front?

Speaker 3

I said like what I'm allowed to say at I should say at the beginning of the call, but we do remain committed to seeing where that process goes. Fair enough. Last one for

Speaker 6

me. Just given that there seems to be signs of life property transaction volumes, at least in Canada. And just heading into the upcoming quarter, is it safe to assume that We should expect to see some sequential uptick in the business in both revenue and EBITDA.

Speaker 3

I mean recognizing you don't provide guidance, but just directionally? Sales software to law firms, it's hard for me to comment on the real estate market. And maybe just to add,

Speaker 4

We do disclose the real estate exposure metric panels. So right now, it's at for Q2, it was at 19% And that includes refinancing transactions. So as we continue to bring customers on board with minimum subscription volumes, our will continue to decrease.

Speaker 3

Yes. And Kevin, I think I would just reiterate like your sub-twenty percent of your revenue today is coming from lawyers working on transactions that involve real estate in Canada. So it will dramatically diversify the business. I think just wanted to reiterate that. Fair enough.

Speaker 3

I'll pass the line. Thanks.

Operator

Our next question comes from the line of Kevin Krishnan from Scotiabank. Please go ahead.

Speaker 2

Hey there. Good morning. Just Question on the ARR, 27%, I think that was kind of flat from the last quarter. I mean, can you explain why that may have been So that was an expectations and any ways to think about targets of where that could go over the next couple of quarters?

Speaker 4

Yes. I mean, in terms of targets, Kevin, we are committed to seeing ARR grow to 15% over the next two and a half years. So that we remain committed towards that and now that we've added a metric on annual contracted revenue that will always be 1 step higher than our ARR metric. So we have obviously in our results, some seasonality factors that wouldn't impact ARR, which was the main reason why you'd see a flat amount quarter to quarter and some other revenue adjustments that were made.

Speaker 2

Okay. Thanks for that. Interesting on the contracted revenue, can you dig in a little bit deeper, maybe give us some examples? Are those how are those are they 1 year, multi year? And any other color you can provide on that would

Speaker 6

be helpful.

Speaker 3

Yes. Generally, our contracts 3 year contracts. Again, they generally have auto renew clauses. There is some exceptions. We have some 1 year.

Speaker 3

So we have a couple, not many, a few 5 years. But generally, they're 3 year contracts, revenues and a lot of them have price escalators built in them. When Craig talks about overages, there is really kind of 3 types of contracted revenue we have. There's Per user per month contracts over 3 years, depending on your traditional subscription ARR contract, There is minimum spend contracts. Some people refer to as take or pay contracts.

Speaker 3

And then we have the overages on those take or pay contracts if they go over. In that other category, which I'm counting overage, we also have contracts where we are suppliers, Particularly for big banks, we offer a service often exclusively or exclusive like. We provide on their behalf and we often charge transactionally for those services that we provided a contract. So that's what we capture in the other bucket.

Speaker 2

Got it. Okay. So That would be the payments, TELUS Financial sort of business would be kind of captured in there?

Speaker 3

Yes. Australia, we do the same things for banks. So it's a combination of like all those supplier contracts we have for banks and the overages on our minimum spend contracts. Those pockets where we count as other.

Speaker 2

Got it. Okay, cool. The last one for me, if I try to think about Free cash flow, I take your EBITDA, deduct the interest cash, cash working capital, I think was softer again in the quarter. You get sort of flat on that basis. But as we look forward, I know you said CapEx.

Speaker 2

What are some of the other drivers that give you the confidence in the sort of like underlying free cash flow growth? I guess, how do we see working capital normalizing in the next few quarters?

Speaker 4

Yes. So I mean, you have the main drivers correct, Kevin. So working capital, There were some silver facts from the sale of TM that would have continued on into Q2. So there was slight hurt there from the working capital side. But as Matt mentioned in his opening remarks, pricing optimization, Our continued reduction of CapEx, we've only started that.

Speaker 4

We should expect more in Q3, as well as continued reduction in our one time in our one time charges and as we continue to integrate the businesses that we acquired over the last 18 months, there is further opportunities for integration.

Speaker 2

Great. I'll pass the line. Thank you.

Operator

Our next question comes from the line of Scott Fletcher from CIBC.

Speaker 7

I'm wondering if you could give us some content color on how much of the 17% growth at KTM, If you could sort of break it into how much was from pricing versus contribution from M and A versus customer expansion. I understand you probably can't share numbers, but if there's any sort of Directional buckets you could share, that would be helpful.

Speaker 4

Yes. So the 17% as you correctly point out, Scott, it doesn't exclude TM. We don't disclose inorganic organic. And the simple reason is when we acquire companies, We don't leave them we don't keep them status quo. We will look at their pricing model.

Speaker 4

We will upsell their customers to our products. And so the vast majority of the growth that you're seeing year over year is that effort of upselling customers, putting them into contracts, optimizing the pricing structure, and that's what was large and there were also some increases in our Canadian Financial Institution Services, as well as our data insight products in Canada also performed well year over year.

Speaker 7

Okay, thanks. And I'll post There was you had spoken about pricing increases coming through in the quarter across a number of the pieces of the business. Were those fully Reflected in the quarter or is there was there anything that might hit more in Q3?

Speaker 4

Yes. Some of them were fully reflected in the quarter, but there were other elements that, Scott, that we introduced in the middle of November, In which case, you only see 1.5 months impact in Q2. So there will be some more spillover impacts when you look at it on a full quarter basis, which will be Q3.

Speaker 7

Okay, thanks. Then I just wanted to ask one question on the remaining 2026 converts that are outstanding. I think we all understand that there's An intention to have deal with those, would another buyback take a similar shape if you were to take that approach? Would it be sort of an additional issuance or does the equity raise change the calculus there just potentially more cash considerations?

Speaker 3

It could be a few ways to deal with it. I mean, hypothetically, you could do what you said. You could offer to buy them back either through a combination of cash or terming out offering to new convert in essence. Our leverage levels are also potential again is that to the level we could refinance our debt. So you may be able to refinance to a credit facility.

Speaker 3

We do not have a spring maturity, but you could leave it outstanding, we're also buying back. So we're exploring all options. We take deleveraging seriously. We take having a lower cost of capital seriously. One of the best ways to build value is to have the lowest cost of capital possible, generate the most cash we can on the business and one of our biggest expense lines or our biggest is interest payments today.

Speaker 3

So to the extent we can reduce that, That's good for the company, good for the equity holders, good for business. Okay. Thanks, man. Thank

Operator

you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Huji for final closing comments.

Speaker 1

Thanks to all for attending and we look forward to connecting with you during the Q3 results call in May. Have a great day.

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.

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Key Takeaways

  • Dye & Durham reported 17% year-over-year revenue growth in Q2 FY2024 (C$110 M) despite seasonal headwinds, with 49% of total revenue now under annual contracted arrangements.
  • The company launched its Unity Global Platform—a single-login, integrated suite for practice management, client onboarding, digital ID/KYC and AML—to streamline customer workflows and support cross-sell opportunities.
  • Since the last quarter, Dye & Durham has reshaped its balance sheet by completing a C$160 M issuer bid on 2026 convertible debt, issuing C$140 M of longer-dated debentures, and raising C$145 M in equity, targeting net debt to adjusted EBITDA below 4×.
  • The company is on track to achieve a C$70 M free cash flow improvement by end of Q3 FY2024, driven by pricing optimization, reduced CapEx and lower restructuring costs, with Q2 delivering an annualized C$40 M uplift.
  • Revenue tied to Canadian real estate transactions has fallen to 19% of total, while global exposure is down to 44%, as Dye & Durham accelerates its shift toward mission-critical legal technology and data-insights solutions.
A.I. generated. May contain errors.
Earnings Conference Call
Dye & Durham Q2 2024
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