Dye & Durham Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 14, 2024

There are 8 speakers on the call.

Operator

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

Operator

Mr. Hirji, you may begin your conference.

Speaker 1

Thank you, operator, and good morning.

Speaker 2

Welcome to the Dye and 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 the statements made during this call may include forward looking statements and information and future oriented financial information regarding Dienterm and its business and disclosure regarding possible events, conditions or results that are based on information currently available to management, which include management's expectation of future growth, results of operations, business performance, business prospects and opportunities. Such statements are made as of this date hereof, and DyneDerm assumes no obligation to update or revise them to reflect events, disclosures, 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.

Speaker 2

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 and A and our earnings press release issued today for additional information. Joining us on the call today are Matt Proun, Steinerm Chief Executive Officer and Frank D'Uliso, Steinerm Chief Financial Officer.

Speaker 2

A question and answer session will follow the formal remarks for research analysts. I'll now turn over the call to Matt for opening remarks.

Speaker 1

Thanks, Hans, and I appreciate the introduction. Over the last couple of years, Dime Derm has transformed into one of the largest legal technology software companies in the world. As we continue to build a business scale, our customers remain at the core of every decision we make as a company. And this is evident given the stickiness of our customer base who truly depend on our products daily. Our software is primarily targeted at solving the problems faced by small and medium sized law firms.

Speaker 1

In particular, our practice management applications act as a central operating system for law firms, providing them everything they need to run their practice from intake to invoice and truly everything in between. Our data and insights software seamlessly enables law firms to help their clients assess risk and make informed decisions on any given transaction that a law firm would likely be involved in. The legal services market is an extremely attractive market in which DyneDerm is well positioned to capture global market share in this fast growing and highly fragmented market. This is a market that's forecasted almost double the next 6 years. This afternoon we reported our Q3 fiscal 2024 results.

Speaker 1

The results continue to demonstrate the strength of our business and attractiveness to the legal technology market that I just mentioned. Our revenue for the 3 months ending March 31, 2024 was $107,000,000 representing a 16% increase in revenue versus the same period last year when factoring in last summer's divestiture of the TM Group business. Recently, we've made significant investments into our product offering and go to market strategy. This has been targeted at transitioning the business model away from our legacy single point solution product based relationship to a holistic modern SaaS based product based relationship involving bundling products from different platforms together under a single technology platform. At the core of this is the Unity Global Platform.

Speaker 1

The Unity Global Platform brings together all the tools a small or medium sized business law firm requires to run their practice, saving our customers time and money and providing real operational cost efficiencies as well as access to the latest technologies in the market, including generative AI. The results of our investments speak for themselves. For the 3 months ending March 31, 2024, ARR was $126,000,000 which represents an 85% year over year growth. Additionally, compared to the previous 3 months ended December 31, 2023, I. E.

Speaker 1

Last quarter, ARR grew by 12% in 1 quarter alone. We targeted to have ARR make up 30% of our revenue by June 30, 2024. That means as of March 31, we'd achieved that target ahead of plan and we're still targeting to achieve 50% of our revenue being ARR just over 24 months. As many of you know, the current quarter we are in is traditionally the strongest quarter for our business. That's Q4 and we have a June 30 year end.

Speaker 1

However, we're excited more than usual by the very strong momentum we're seeing in the current quarters. As a result, we believe we're setting up for one of the best quarters on record. The key drivers behind this performance include, 1st, the large updraft in ARR that we're driving. I just mentioned the trajectory. 2nd, really strong transactional revenue primarily coming from property conveyancing and related due diligence being carried out in our applications.

Speaker 1

This is of course due to recovery in domestic and global real estate markets. We continue to make investments and drive strong revenue performance, while at the same time remaining disciplined around cost. Rather than embarking on large scale cost cutting campaigns, as you would have seen other technology companies undertake in recent days, we believe that consistent attention when it comes to managing cost is a much more healthy and effective way of managing our business. This management philosophy is reflected in our adjusted EBITDA performance. We generated adjusted EBITDA of 60,000,000 in the Q3 of fiscal 2024, an increase of 11% compared to the same period last year, taking into consideration the selling of PMG.

Speaker 1

Financial flexibility and a strengthened balance sheet remain a key priority for us at Daimler. In this regard, in April, we completed a series of refinancing transactions with $1,200,000,000 which strengthened our balance sheet and improved our capital stack, while lowering our expected cash interest payments by approximately $20,000,000 a year next fiscal year on a like for like basis. Prior to the positive impact of refinancing, cash from operations in the quarter was up 26% versus fiscal 2023 and adjusted EPS was up 36%. Additionally, this afternoon we also announced $185,000,000 substantial issuer bid to retire remaining 2026 convertible debentures. As we scale our business, it is important to us to continue to work on deleveraging the business and bring our net debt to approximately 4 times adjusted EBITDA or less.

Speaker 1

What truly excites me is how we're thinking about the business going forward, positioning the company to outperform based on a superior product offering. Additionally, we're committed to acting in the best interest of all the company stakeholders and we'll continue to welcome the opportunity to engage in good faith with all stakeholders going forward. Before I pass it over to Frank, I just want to reiterate how pleased we are with the business performance in Q3 and the results of our current strategy as well as the current trajectory we're seeing in the business in the current quarter and moving forward. I'll now turn it over to Frank to discuss the financials.

Speaker 3

Thank you, Matt, and good evening, everyone. This evening, we reported our Q3 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 and enhance our practice management offering. We have reduced our reliance on real estate transactions and increased our annual recurring revenue, which has already achieved our full fiscal year target in Q3 earlier than expected, primarily through growing our proxy managed solutions.

Speaker 3

Our annual contracted revenue remains robust, driven by both our practice management and our payments infrastructure service lines. Revenue exposed to real estate transaction globally in Q3 was 43% compared to 50% in the same period of fiscal 2023. While revenue exposed to real estate transactions in Canada was only 20% compared to 26% in the same period of last year. Keep in mind that a portion of our real estate exposure in Canada includes refinancing transactions. As a result, our actual exposure to these transactions is even lower than 20%.

Speaker 3

Annual recurring revenue contracted was 30% as of March 31, 2024 compared to 19% in the same point of 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. These are included in annual contracted revenue and in the Q3 this was 53% inclusive of ARR compared to 37% in the prior year. We reported revenues of $107,300,000 during the Q3, an increase of 16% compared to the same period last year taking into consideration the sales team on August 3, 2023. Revenue grew 3% year over year, including the impact of TM in the prior period, mainly as a result of organic initiatives.

Speaker 3

Keep in mind that the Q2 and Q3 periods of our fiscal year are typically the weakest from a seasonality perspective, whereas Q4 and Q1 in that order are typically our strongest periods. As we reach the midpoint of our 4th quarter, we are seeing positive signals based on current market activity, which provide a tailwind for us to finish the year with positive momentum. We generated adjusted EBITDA of $59,800,000 in the Q3 of fiscal 2024, an increase of 11% compared to the same period last year, taking into consideration the sale of TM Group and grew 7% or $3,700,000 including the contribution of TM Group versus the prior year. The improvement is primarily a result of the growth in organic revenues as well as the impact of our business improvement plan and lower direct costs. We continue to maintain our strong EBITDA margins coming in at 56% this quarter, which is in line with our target range between 50% 60%.

Speaker 3

Total adjusted operating expenses, which include direct costs, technology costs, G and A and sales and marketing were 47,600,000 percent of revenue. Adjusted operating expenses for the quarter were lower by approximately 1% from the prior year, including the impact of acquisition operating costs acquired over the last 12 months, which demonstrates the improvements from our business improvement plan. Net finance costs for the quarter were $30,100,000 compared to $40,300,000 in the same period of fiscal 2023. The improvement was primarily due to the revaluation of the convertible debentures, offset partially by the higher interest expense and loss on discontinuation of hedge accounting on our interest rate swap. Acquisition restructuring and other costs for the quarter were 7,100,000 dollars This was a decrease from $15,800,000 in the Q3 of fiscal 2023 or 55 percent and we believe we could deliver additional improvements in this cost item over time.

Speaker 3

As Matt mentioned earlier, we have taken actions to increase our cash flow performance with a greater emphasis on this measure. Our business improvement plan generated more than the targeted $70,000,000 in annualized free cash flow improvements on a run rate basis as we exited the 3rd quarter, which includes the impact of the recent refinancing transaction. Our Q3 cash flow operations was CAD35 1,000,000 in the quarter, up 24% compared to the same period last year, mainly as a result of lower acquisition costs and lower amount of taxes paid. On a year to date basis, taxes paid reduced by 63% or 15,700,000 dollars largely as a result of legal entity consolidations and other tax planning measures. Basic adjusted net income per share was up 36% to $0.19 in Q3 compared to $0.14 in the same period of last year.

Speaker 3

As a reminder, basic adjusted net income per share mainly adjusts for non cash items such as amortization, stock based compensation and financing gains and losses, which is the closest measure to cash flow per share that we report. Turning to our balance sheet, our net debt excluding the convertible debentures stood at approximately $948,000,000 as of March 31, 2024, which has been reduced by approximately $102,000,000 since June 30, 2023. Subsequent to the end of the period, we repaid all of our amounts standing under the Ares credit facility with the proceeds from the refinancing transaction. The refinancing transaction in Canadian dollars consisted of approximately 760,000,000 dollars of senior secured notes due 2029, approximately $479,000,000 in a senior secured Terminal B facility due 2,031 and $105,000,000 revolving credit facility. These refinancing transactions significantly improve our capital structure, eliminated the springing maturity provisions of the Ares facility and results in an estimated $20,000,000 of net interest savings on an annualized basis.

Speaker 3

We understand the importance of reducing our leverage and we have set a clear target to reduce it before 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 flows. We built a business of scale that's mission critical to small and medium sized law firms and financial institutions all over the world. Our financial results and the recent actions we've taken demonstrate the consistency of the business and the opportunity that is in front of us.

Speaker 3

With that, I'd like to turn it over back to the operator for Q and A.

Operator

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

Speaker 4

Hi, good evening. A couple of questions. First one, you said that you're setting up for one of the best quarters on record. You didn't give any guidance for the quarter, but I think you said that it's a large updraft in ARR in the quarter and then strong transactional revenue from conveyancing and due diligence. And so I'm curious if you could provide a little bit of additional detail around those components.

Speaker 4

Should we be expecting fiscal Q4 to be up quarter over quarter? Seems likely any other context there would be very helpful.

Speaker 1

So yes, I mean, I think you correctly categorized the drivers we reflected. So yes, I mean, as you know, Q4 is traditionally our strongest quarter. We still have approximately half of our business, which is transactional today and with overages even beyond that. So yes, we're expecting a very strong quarter that will be up versus the current quarter

Speaker 4

the difference between those two figures, ARR at 30% and contracted revenue over 50%. Is the bulk of that overages, if you could talk about the difference between those two figures? Is that what's where this confidence is coming from? Is it overages on contracted minimums?

Speaker 1

Yes. So we have like really 3 buckets of revenue, I'll call it. One is traditional kind of more legacy per transaction revenue and that's really generally open by law firms purchasing per matter or per transaction products on our software. The other bucket is kind of ARR and that consists of minimum spend contracts as well as traditional subscription licenses. And then the third is overages and that really makes up 2 things.

Speaker 1

It's the overages on the minimum spend contracts that you referenced, but it's also we have a lot of contracts or all our banking business has contracts with very large financial institutions. And a lot of that is while very stable, predictable revenue, it is still revenue under contract with the bank. So those are the 3 buckets that make it up to answer your question.

Speaker 4

Okay. And then, I noticed in the prepared remarks and the release there wasn't any update on that strategic review of non core assets. Is there any updated status you can provide on that?

Speaker 1

Not at this time.

Speaker 4

Okay. And last question for me. The substantial issuer bid, can you give us any context around the math or the thought process behind the $900 bid there? And then I'll pass the line.

Speaker 3

Yes, Rob, this is Frank. The $900 is our best offer that we've made throughout the SIP process. It reflects what we believe is the underlying premium to the underlying value. More details will follow with our SIB offering that will come out later this week.

Speaker 1

Okay. That's fine. Thanks.

Operator

Thank you. And your next question comes from the line of Thanos Mosheopoulos from BMO. Please go ahead.

Speaker 5

Hi, good afternoon. You specified your objective of working down your leverage. But just for context, how should we think about how you're going to prioritize that relative to perhaps additional M and A over the next while? I think this is the Q1 in some time that you didn't execute on M and A, but just as we think about the near term, what are your thoughts on M and A versus deleveraging?

Speaker 1

Okay. I think as we've always said, Tannis, it's a balance. We've purposely been focused over the last 12 months, 24 months on integrating the business, making substantial investments in the things I talked about and really also driving ARR. We believe in the long run having I said 50, but the long run also a lot higher amount of kind of very predictable under contract ARR revenue. That said, we'll still continue to tuck in some time to time where it makes sense, as we often have the ability to augment our product stack or acquire market share, by an acquisition where it makes sense.

Speaker 1

So again, highly focused and really want to get that leverage down. But if there's an accretive acquisition makes sense, we have to balance that too.

Speaker 5

Okay. As far as the improved transaction volumes and momentum you're seeing, is that across all your 3 key geographies or is it more weighted to 1 versus the others?

Speaker 1

It's primarily across Canada and Australia. We're seeing it the most. The UK market still seems to lager a bit, but yes.

Speaker 5

Okay. Working capital was a significant use of cash during the quarter. Can you just expand on that? I mean, is some of that related to restructuring related payments? Or what's the dynamic?

Speaker 5

And what should we expect? Perhaps maybe a quick

Speaker 3

question

Speaker 5

from working capital perspective?

Speaker 3

Yes. Hey, Thanos, it's Frank here. What you would have seen in working capital this quarter would have been a use from a prepay of about $5,000,000 that was related to our refinancing transaction as we essentially incurred some of those charges in late March. And then on the AR side, there would have been a use of about $9,000,000 That reflects a few buildings that came in late in the quarter that we since recovered. So we do expect some reversal of that into Q4.

Speaker 1

All right,

Speaker 5

I'll pass the line. Thanks.

Operator

Thank you. And your next question comes from the line of Kevin Krishnarantin from Scotiabank. Please go ahead.

Speaker 6

Hey there. Good evening. Just on the organic growth 4%, wondering if you could dig in there a bit more maybe by geography. I'm just looking at your financials. Canada on a reported basis is up 10%, Australia was down a little bit.

Speaker 6

I'm just wondering if you can give a bit more color on sort of what you're seeing organic growth wise across different geographies and what are the drivers there?

Speaker 1

Look, I mean, I think we talked about all the drivers there. Kevin earlier. A lot of the drivers are coming from on the legal side of the business. We don't disclose it by geography. But so I think we kind of covered it off in our remarks

Speaker 6

earlier. Okay, fair enough. Maybe just a bigger picture question then. With Unity, if you take a typical small law firm in Canada you're serving here, say look at their revenue per year, how does that compare to a law firm in the UK or Australia? And just how do you think about the opportunity for cross selling with Uniti to close that gap?

Speaker 1

It's really the same thing, right? Like if you look at the kind of the 2 key things we do globally, we do have auxiliary products, but it really is we're selling practice management, legal practice management systems, which really is the central operating system for a law firm as well as their data insight applications provide legal due diligence. The intersection of those 2 products in all markets really is key to our ability to A, drive extreme stickiness with our clients, but also drive back cross sell. I'd say over and beyond that, adding on auxiliary products, whether it's accounting module or whatever it may be that we know what law firms require to manage their practice every day, the strategy remains the same in all markets.

Speaker 6

And with you're rolling out Unity into the I can't I think it was in the UK, are you seeing like a lift in ARPUs in law firms? Are you actually seeing that materialize? Do we see that benefit into the next quarter?

Speaker 1

So we only started early this year selling contracts in the UK. And it's a great trajectory so far. We're really starting to see some momentum in customers signing up contracts. So and across sell as well as we kind of go to market with both the practice standard offering as well as all the diligence capabilities under one platform. So that cross sell has been very real and very good to see.

Speaker 6

All right. Okay. Thanks, Matt. I'll pass the line.

Operator

And your next question comes from the line of Stephen Volund from Raymond James. Please go ahead.

Speaker 7

Okay. I guess I'll be the one to ask the question, Matt. What can you talk about with Engine Capital? I know there was probably dialogue earlier. Now it seems to have gone into a more formal press release type of relationship.

Speaker 7

Is there ongoing dialogue with them or is you're just going to be waiting for the meeting to occur?

Speaker 1

Yes. Look, I mean, happy to take that question. And thanks for putting on the table. Look, we're willing to talk to all shareholders and have a constructive dialogue. It's always good to listen and hear people to say.

Speaker 1

And you often hear you often get good feedback from all shareholders, including Enjin. We've had some very constructive conversation with them on adding to the business and we'll continue that again, Enjin and all shareholders. That said, we're continuing to run the business. We're very happy with the performance. The trajectory we think is extremely strong.

Speaker 1

So that's our main focus. And we'll continue to engage, yes, with all shareholders.

Speaker 7

Okay. There was a slide in the deck that was somewhat new, just on the product side. And it talked about some of the fastest growing segments. And I guess, practice management, I understand, but analytics is another one that you're offering. Could you just explain what legal firms are doing, what analytics they're using?

Speaker 1

Yes. So for what our customers do, I mean, it's risk it's analyzing risk, right? If you're doing legal due diligence as a law firm on behalf of your clients, we provide the software that enables them to assess risk on really any given corporate transaction or property transaction. We'll go to their clients and say, hey, this is a risk associated with transaction and provide insight into that risk. And so again, we're Citi, you look at like the key growth areas, practice management, analytics.

Speaker 1

These are core competencies at Daimlera. So as this market globally looks to expand from almost double from kind of $26,000,000,000 to just under $50,000,000,000 by 2,030. We're very well positioned, particularly given our existing market share and where we're focused on growth in capturing that market that market share uplift.

Speaker 7

And then the last piece of there was the legal research. Maybe just if you could explain to me what that is? And is this something that you're going to need in the next couple of years to be offering?

Speaker 1

No, we don't see ourselves, I mean, today getting into legal research. It's a market that's fairly well dominated by the likes of Thomson Reuters, LexisNexis, probably the 2 largest legal tech companies in the world. They service it very well and do a very good job of again servicing the customers in that market. So we don't see ourselves trying to break into that market. It's not a focus ours.

Speaker 7

Okay. I'll sneak one more. Just I know your focus has been on the balance sheet, but certainly, I know you've got a large pipeline of deals or always looking at or evaluating. Is it fair to say that you maybe you saw a company or 2 that you like, but you just thought the timing isn't right? Or is it just been nothing out there that you've seen that really fit your appetite?

Speaker 1

Good question. I kind of answered it earlier like we'll transact if we see something, but again, we're really focused on getting that leverage down. Look, we're we believe leverage remains a drag on the valuation of the business. We have the slides in our deck. We looked at kind of since IPO how this performed and we're doing good.

Speaker 1

We think we'd be a lot better. We think leverage remains one of that main drag. So a key priority of us is getting that leverage down. We have a near term goal of below 4 times. But obviously longer term, we kind of be down closer to at least 3, kind of operating in between that 2.5 to 3.5 for the long run.

Speaker 1

So again, can't take our eye off that ball, but again, you also you got to balance it.

Speaker 7

Appreciate the comments.

Operator

Thank you. And your next question comes from the line of Scott Fletcher from CIBC. Please go ahead.

Speaker 7

Hi. Just a couple of follow ups for me. On an earlier question, so when you announced the new debt package, you called out a run rate adjusted EBITDA number of $278,000,000 With Q4 being the seasonally strong quarter, should we be expecting adjusted EBITDA above the sort of $70,000,000 quarterly run rate implied by that $278,000,000 number?

Speaker 1

No. So the $278,000,000 was, I mean, we call it further adjusted EBITDA and really a lender metric. It's the kind of forward looking outstanding synergies left in the business. And we kind of there was probably 27,000,000 dollars remaining from our December 30 1 LTM versus the remaining synergies. There's a $27,000,000 difference.

Speaker 1

Look, we said by end of December calendar year 2024, we would capture most of those synergies. And we will have from an execution perspective, had a lot of them kind of actioned on by the end of this quarter, early Q1. So feeling really good or making really good trajectory on kind of taking those costs out of the business. So that's what that kind of relates to. As of Q4, we look our business the trends in our business, the drivers, what we're seeing both from a macro perspective and what we're driving internally is really, really promising.

Speaker 1

And so if you look at our historically Q4 has been a very strong quarter and we think this one will be set up to be one of the strongest so far.

Speaker 3

Okay. Thanks. One of the factors Scott Yes, one of the factors, Scott, in that Q4 was the there is an increase in the amount of business days relative to a previous year. So that's just the timing of the Easter holiday, just as another fact pattern.

Speaker 7

Okay, thanks. And then just on the deleveraging note, obviously, you're freeing up some free cash excess free cash with the renew with the new debt. Should we be does that give you does the new package give you flexibility to make regular repayments on either of the new facilities?

Speaker 1

As we would have seen in the disclosure, it's obviously a lot easier to prepay the loan versus the bond. The bond has a call protection on it that's quite substantial, but it's pretty straightforward to repay the loan should you wish to. Okay, thanks.

Operator

Thank you. And your next question comes from the line of Robert Young from Canaccord. Please go ahead.

Speaker 1

Rob?

Speaker 4

Sorry about that. Just a follow-up. Trying to understand the positive comments on Australia and the trends there. But in the quarter, the revenue was down. I think you someone asked the question, but I didn't catch the answer.

Speaker 4

I was wondering if you could touch on that. Just trying to understand that difference.

Speaker 1

Yes. No, I was more talking about it and I probably pivoted more to drivers. A lot of that is due to FX as well. All of it or all

Speaker 4

of it or what maybe we break down the pieces there?

Speaker 3

Rob, the FX had a portion of the change year over year. But we can't disclose the pieces of specifically the what's FX versus the business. So but we just want to mention that the FX was one of the major drivers of the decline.

Speaker 1

Okay, thanks.

Operator

Thank you. There are no further questions at this time. I will now hand the call back to Mr. Hass Hirji for closing remarks.

Speaker 2

Great. Thanks all for attending and we look forward to connecting with you during our Q4 full year results, to be held in September. Until then, have a great day and speak soon.

Operator

Thank you. That concludes our conference for today. Thank you for participating. You may all disconnect.

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Key Takeaways

  • For the three months ending March 31, 2024, revenue was CAD $107.3 million, a 16% increase year-over-year after adjusting for the TM Group divestiture.
  • Annual Recurring Revenue (ARR) reached CAD $126 million, up 85% year-over-year and 12% quarter-over-quarter, with ARR now representing 30% of total revenue—hitting the mid-year target ahead of plan.
  • Adjusted EBITDA was CAD $60 million (56% margin), up 11% year-over-year, supported by disciplined cost management; cash from operations rose 24% and adjusted EPS increased 36%.
  • In April, the company completed a CAD $1.2 billion refinancing, cutting annual cash interest by CAD $20 million and announced a CAD $185 million issuer bid to retire convertible debentures, advancing toward a net debt/EBITDA target below 4x.
  • Q4 is poised to be one of the strongest quarters on record, driven by a significant ARR up-draft and a rebound in conveyancing transaction volumes as investments in the Unity Global Platform and generative AI bolster the SaaS offering.
A.I. generated. May contain errors.
Earnings Conference Call
Dye & Durham Q3 2024
00:00 / 00:00