DATA Communications Management Q2 2024 Earnings Report

DATA Communications Management EPS Results

• Actual EPS: C$0.07
• Consensus EPS: C$0.02
• Beat/Miss: Beat by +C$0.05
• One Year Ago EPS: N/A

DATA Communications Management Revenue Results

• Actual Revenue: $125.75 million
• Expected Revenue: $134.85 million
• Beat/Miss: Missed by -$9.10 million
• YoY Revenue Growth: N/A

DATA Communications Management Announcement Details

• Quarter: Q2 2024
• Date: 8/7/2024
• Time: N/A
• Conference Call Date: Thursday, August 8, 2024
• Conference Call Time: 9:00AM ET

DATA Communications Management (TSE:DCM) Corp is a communication solutions partner that adds value for major companies across North America by creating more meaningful connections with their customers. It pairs customer insights and thought leadership with cutting-edge products, modular enabling technology and services to power its clients' go-to market strategies. The company helps its clients manage how their brands come to life, determine which channels are right for them, manage multimedia campaigns, deploy location-specific and 1:1 marketing, execute custom loyalty programs, and fulfill their commercial printing needs all in one place.

DATA Communications Management Q2 2024 Earnings Call Transcript

Key Takeaways

• Integration synergies are ahead of plan, with a target of $30 million–$35 million accelerated to be realized by end of 2024 at a best-in-class 1:1 cost-to-synergy ratio.
• Q2 revenue rose 5.7% year-over-year to $126 million while adjusted EBITDA grew 22% to $17 million and gross margin improved to 27.3%.
• The AI-enabled SaaS product “Assemble” launched in Q2 alongside DCM Flex wins expected to drive at least $6.5 million of technology-enabled revenues across six verticals.
• Net debt has been reduced by almost 48% since the MCC acquisition, down approximately $70 million, and continues to be paid down through free cash flow.
• Organic revenue was slightly negative in Q2 due to integration and ERP migration activities, but the company expects a return to positive organic growth in Q3 and Q4.

Presentation

[James Lorimer, CFO at Data Communications Management Corp.]

Ladies and gentlemen, and thank you for standing by, and welcome to the Data Communications Management Corp. second quarter fiscal 2024 financial results conference call. My name is James Lorimer, the CFO of DCM, and I'm pleased to be hosting today's call. Joining me on the call today is Richard Kellam, our President and CEO. Following our prepared remarks, we will be moderating a Q&A session. As a reminder, this conference call is being broadcast live and recorded. We'd also like to remind everyone that Richard and I can be available after the call for any follow-up questions that you might have. Before we begin, I'd like to remind everyone that we will be referring to forward-looking information on today's call.

[James Lorimer, CFO at Data Communications Management Corp.]

This information is subject to certain risks and uncertainties, as outlined in the forward-looking information disclosure in our press release, and more fully within our public disclosure filings on SEDAR+. We will also be referring to certain non-IFRS measures and accounting measures, which are more fully defined in our public disclosure records as well. We've posted a brief message from Richard, along with a summary of our results and key initiatives for the quarter and the coming year, on our website in the form of an infographic. Our detailed information is also available on our website and SEDAR+. Please follow us on LinkedIn to keep up to date with other business developments. I'll now turn the call over to Richard.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Thank you, James, and good morning, and good afternoon, good evening to anybody joining us from other time zones or overseas. Thank you for joining us today. We're super excited to talk about our quarter. Today's agenda, we're gonna quickly look at highlights of the quarter and the first half. We'll talk about some balance of the year priorities, and we'll turn it over to attendees to ask any, any questions. So looking at highlights for the first quarter and first half, we call it, we've been executing our game plan one quarter at a time, and we've made some tremendous progress. Tremendous progress, especially around integration, execution. We've advanced our consolidation planning and systems migration.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

We successfully completed the integration or consolidation of our Thistle facility that was in Don Mills here in Toronto into our Vaughan facility, about, what, James? About 7 or 8 kilometers down the road, right? That was completed in June. I was actually out of the facility a couple of weeks ago, and things are going fantastic there. Our Trenton and Brampton consolidation is on path to be completed before year-end, and our Fergus into Drummondville consolidation is also due to be completed by year-end. We've also accelerated our capital investment. We'll talk a little bit about it later. Synergies are ahead of plan. As presented last quarter, we're targeting CAD 30 million-CAD 35 million, versus our original plan of CAD 20 million-CAD 25 million, so certainly on track for solid synergy delivery.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

They're actually gonna be ahead of schedule. So originally, we were planning completion of our synergy work by mid 2025. That will happen by end of 2024. And then our cost of integration is tracking at 1x the synergies anticipated, which is a best-in-class return. So very good progress on our integration effectiveness. Focusing on profitable growth has been a key theme for us through the year. Really, you know, driving transitioning from low client, you know, low-margin clients to high-margin client, improving work around which we call strategic revenue management. So that's really kind of optimization client by client. We've secured a lot of new logo wins for the first half of the year. We'll talk about that in a minute.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Our gross margin or gross profit is certainly moving in a very favorable direction, which we'll get into in a couple of minutes here. Very good progress in terms of our building our growth platform. In terms of new business development, we've secured 30 new client wins in the first half of the year, roughly CAD 4.2 million in revenue. Now, that CAD 4.2 million in revenue gives us a lot of opportunities to what we call land and expand, so we'll see that expand over time. Our wins, our client wins have been across multiple verticals, some significant wins in government, in loyalty, in grocery, healthcare, and utilities. One, maybe honorable mention here is automotive, which has typically been an underserved vertical for us.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

We've really moved into strength in that vertical, and we've picked up a few large automotive clients, and they're very well set up for success over time. So we're really understanding how to win in that automotive vertical. From an expansion revenue standpoint, as we call it, or wallet share increase, we've generated CAD 19.2 million. Not all that flows in the quarter, obviously, that flows into quarter three and quarter four. But some good expansion revenue. And to remind shareholders, when we talk about expansion revenue, that's new services we're bringing to existing clients, right? A new product and new sales we're bringing to existing clients. And again, you'll see that's across multiple verticals, from government, transportation, lottery, retail, finance, healthcare. So good diversification in that wallet share expansion as well.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

We're also making fantastic pace on contract renewals. We have 100% of the contracts that came up for renewal so far this year. We have renewed and retained on the government side, CAD 12 million in revenues through the next one to five years. That's across two clients in government, so 100% retention there. On healthcare, we renewed two client contracts, terms between one and three years, about CAD 9 million in revenue over that time frame. From a financial standpoint, we've retained four clients across different FIs, notably one large bank. We certainly secured a retention between two and three years. And then transportation, really, that's a courier, two clients.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

One is a large kind of courier, and a large airline, and those contracts have been retained as well. So 100% retention, team's doing a fantastic job of continuing to add value within our existing client base, and that's certainly been reflected in the contract renewals. From a revenue perspective on the quarter, we're up 5.7%, about CAD 126 million, and you know, a lot of positivity reflected from that MCC acquisition. Looking at revenues by reported segment, you know, we've been breaking this out for the last couple of quarters for shareholders. You can see our product sales, about CAD 110 million, up 1.3% versus a year ago. Our technology services, CAD 4.4 million in revenue.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

You can see that's up significantly. I'll talk about that in a minute, 111% increase. Our freight team has done a great job making sure we're recovering and generating revenue from freight. It's about CAD 4 million, up 14%. Warehousing up 73%. So again, we're generating a lot of revenue from warehousing and kitting and fulfillment from a client perspective. That's at CAD 4.4 million. Our tech-enabled hardware, so think of that as some of the digital displays that we're selling, as well as some of the purchases and scanners that we're reselling for healthcare. That's up 32% on the quarter. And our marketing services, again, you know, pretty strong, the value we're bringing to clients for some creative and development work and strategy work, about 16% growth.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

So solid, solid growth across all of our six segments. Notably, the technology services segment, as I said, CAD 4.4 million in revenue, up 111%. Maybe, James, you just jump to the next slide. We're happy to announce that we have just launched ASMBL. I'm sure shareholders saw the press release the other day. We've actually been working on this platform for the last couple of years and really, you know, kind of full-time development over the last 11 or 12 months. It's now live in market. It's our first pure play SaaS product that we have moving out of DCM here into the marketplace. It's a fully AI-enabled product, extremely user-friendly with high UX.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

We have a very unique route to market because we're talking to 400 of the largest enterprise clients in Canada with 63 or 64 of our sales reps, so certainly we'll leverage that route to market. And we've got a strong integration story with our DCM Flex platform, and we've got a fantastic, you know, kinda onboarding and support model. So we're very excited to get this to market, and we're already active. We launched a couple of weeks ago, and we're already active with a lot of demos set up with clients. And it is a very, you know, highly competitive product to what other DAMs are out there from a marketing perspective. Okay? And the AI is incredible that we've incorporated in the platform.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

So we're really pleased with the team and really excited about the future of that platform. From a tech-enabled service win, so think of this as our DCM Flex platform, which does a whole lot of things, kinda workflow automation and customized and personalized communication. A lot of recent customer wins. The team's doing a fantastic job. Customer wins across alternative lenders. We picked up a large bank, one of the largest banks here in Canada, that will be now using the platform for all other workflow. Again, automotive, you know, those automotive wins I talked about from a new client perspective, those are all tech-enabled. We picked up two providers of loyalty services, one a retailer and one a pure loyalty provider.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

We picked up a couple of airlines as well, actually one airline and one airport that's using our platform for all of their workflow, and a couple of new clients in healthcare. One, notably, that's using the platform for email communication, customized and personalized email communication distribution. So a lot of good wins. You know, some of these, obviously, wins will generate revenue for the Flex platform, but also downstream revenue for print and email distribution. In fact, in total, it's about CAD 6.5 million in revenue that this technology enables across these six verticals that we've secured wins in. So very good momentum, pleased with the progress that the team is making here, and great support from the clients.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

You know, once we get this in front of clients and they, they understand, the power of Flex, it's, it's a pretty, compelling sales show, we say. Year-to-date revenue is at thirty point or up 30.7% over a year ago, but CAD 255 million, so we're CAD 60 million up over the same period year ago. Gross profit, I like to say to James, it's always, easy math here, my simple marketing math. If, if gross profit is growing faster than revenue, then you know your gross margin is moving in the right direction. That's certainly our strategy. So as I said, revenue growing 5.7%, gross profit growing 7.2%, about CAD 34 million on the, on the quarter.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

You can see our gross margin; it's at 27.3%, up 0.4 versus a year ago. So well on track to get back up into that 30 level, which is where we were prior to transacting or prior to acquiring MCC. Year-to-date, we're up 28.4% in gross profit. You can see our gross margin is at 28.1. It's obviously down versus year, but that's really strictly due to the overlap of not having MCC in our world. So a higher margin in that first half last year, and now obviously consolidating a lower margin business into our work. So you'll see that correct itself as we move through quarter three and quarter four, now that we're, you know, fully one company in those quarters. Okay? So that was exactly the plan.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

In fact, we're ahead of what we planned from, you know, from a gross margin perspective, okay, overall on the half. Adjusted EBITDA, you know, very strong at, up 22%, just under CAD 17 million, up CAD 3.1 million over a year ago. And you can see that we're 13.4% on our, on our path to 14, which we kind of stated as our five-year goal, so well on track to deliver that up from 11.6%, in the quarter last year. And on the half, we're up close to 34%, about CAD 35 million or CAD 36 million in growth, and or CAD 36 million in total, rather, CAD 26 million or CAD 27 million in growth.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

You can see, you know, I talk about that 14.5, we're at 13.9, so we're approaching that 14 zone, which we're very comfortable in crossing that in the next couple of quarters. Okay? So very good progress on our year-to-date Adjusted EBITDA as well. Now I'll turn it over to James to just talk about our one-time restructuring and some of our debt as well. James?

[James Lorimer, CFO at Data Communications Management Corp.]

Thanks, Richard. We had about CAD 1.3 million of restructuring and one-time charges in the quarter. As we've noted before, most of our heavy restructuring charges were taken in 2023, and so we see kind of similar levels going forward in Q3 and Q4, but most of the significant charges are now nicely behind us. Year to date, you know, certainly down considerably versus last year. And just to remind everyone that in the fourth quarter, we did take charges for Fergus and Trenton, and those will be closed later this year. The reason we took the charges in the fourth quarter last year was because with our contracts and union agreements, we substantially were able to determine what the cost of closing those facilities would be.

[James Lorimer, CFO at Data Communications Management Corp.]

Of course, we're pleased to announce that we do expect those to be fully completed by the end of this year, and we've already been advancing workflow out of those plants to the Brampton and Drummondville plants, which are gonna be receiving that work. Net income CAD 4 million, which was up from a negative net loss last year. EPS as well, CAD 0.07 versus a negative CAD 0.06 loss last year. Year to date, we're up about CAD 200,000, so adjusted net income is about CAD 4 million, and adjusted EPS is about CAD 0.07.

[James Lorimer, CFO at Data Communications Management Corp.]

The one line item that's making a little bit of noise is the fair value adjustment for our long-term compensation, and we've seen some share price decreases this year, where... So that's been actually a benefit to us from a P&L perspective. Last year, we saw some significant increases in our share price, so that was kind of a larger expense last year. Year-to-date income, net income, CAD 5.5 million, up from a, you know, significant loss of about that amount last year, and EPS up to CAD 0.10 versus negative CAD 0.11 last year.

[James Lorimer, CFO at Data Communications Management Corp.]

You don't see as much in kind of the adjusted net income because we're tax affecting that net fair value gain and loss, but certainly with restructuring and one-time charges behind us, you should start to see, you know, net income and adjusted net income more closely aligned going forward. From a synergies perspective, we're maintaining our target of CAD 30-35 million in annualized synergies. We do expect to have most of our major consolidation and initiatives completed by the end of this year. So we expect to pretty much fully complete those synergies. The big contributors are gonna be the ultimate final closures of our Fergus and Trenton facilities later this year.

[James Lorimer, CFO at Data Communications Management Corp.]

Net Debt, we're pleased to you know, continue to pay down Net Debt even since the first quarter, despite some increased investment in plant equipment and capital equipment. Our Net Debt was down a little over CAD 3 million compared to the quarter, and since the acquisition, we're down CAD 70 million, or almost 48%. So, you know, we're continuing to focus on paying down debt. Our Fiera Private Debt CAD 50 million facility, which we put in place for the acquisition, is now amortizing, so we are seeing kind of regular monthly payments on that, as well as the other Fiera piece that we have in place, which was about CAD 7 million at the end of the quarter.

[James Lorimer, CFO at Data Communications Management Corp.]

So, you know, continued path there to paying down debt through free cash flow. Do you want to talk about SG&A, Richard?

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Yeah, sure. SG&A, you can see the slide here, we're just under CAD 24 million, so we're operating at negative overhead growth, 'cause you can see we're at CAD 25.4 million over a year ago, which was on plan, and we're at the 19% range. You know, we'll see that, excuse me, as we continue to operate at negative overhead growth, and we continue to grow our revenues to see that number decline or that percentage of revenue come down over time as well. So exactly what we planned. Our year-to-date, we're at CAD 49.2 million. You know, obviously, we're up over a year ago, and that's just the effect of the timing of the acquisition, right? We didn't have it. You know, we didn't have MCC in our world in the comparative period.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Now we do, but, you can see that the percentage is up slightly as well as a result of that. And again, if you look at that quarterly trend, you'll see it kind of normalize in quarter three and quarter four as we are now, you know, fully one company. So it's just some, some noise in comparables versus a year ago, but overall, great improvement in driving on that in a negative overhead growth agenda. And you can see that on the next slide. If you look at our headcount, our headcount count's gone down from roughly 1,900 to 1,673. We'll see that decrease as we close a couple more facilities. And you can see our productivity per associate or revenue per associate has improved up to just under CAD 304,000 per associate.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Again, you'll see both these heading in, in the right direction as we get into quarter three and quarter four as well. So great improvement from an SG&A perspective. Want to just talk capital, James?

[James Lorimer, CFO at Data Communications Management Corp.]

Yeah. Capital investment, the first half of this year has been a big focus on, integration, planning, and readiness for some of the big moves that are happening this year. As we previously noted, the Thistle and Vaughan closure happened, and so, a significant piece of the PP&E investment so far was related to that, closure. We upgraded the facility, and most of those PP&E investments are related to either preparing facilities with electrical or HVAC or otherwise. We've also been making equipment investments. You'll see on our cash flow statement, year to date, we're about CAD 6.9 million of capital investment. We do see that kinda tapering off through the balance of the year.

[James Lorimer, CFO at Data Communications Management Corp.]

We still probably have CAD 2 million of capital investment on the PP&E side. There's about CAD 6.5 million of, I guess the technical term is kinda construction and process for equipment that we ultimately plan to lease. But given the some of the timing of the equipment, we had advanced deposits. We will be getting that capital back from the leasing companies. Have actually received some of it already in July. As that equipment gets refinanced, we intend to lease a lot of that kind of new capital that's sitting in a kind of a, let's call it a temporary holding account for now, but it'll ultimately flow into lease liabilities as we install that equipment.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Yeah, and I'd just say that, I'd just add that, you know, I've been around the network and have a look at the new capital that we're investing in. We have really built a world-class factory, world-class network here that is gonna allow us to grow quite significantly off of this new platform. So really proud of the team in terms of what they've accomplished, in terms of the consolidation, the new capital, new capital deployment, and it's gonna be, you know, fantastic for our clients in the market here. So, yeah, congrats to the team for a lot of hard work, but again, we've really optimized the network very effectively.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Just having a look at our sustainability effort here, you know, as shareholders know, we reforest 100% of the paper that we use on behalf of clients. So think of it, every 83 pounds of paper we use in client workflow, we put a tree in the ground for that client, and the client takes advantage of that credit in their ESG efforts. So you can see on the quarter, we reforested 244,000 trees, and I'm happy to announce we're gonna do a little celebration in September that we've actually crossed 2 million trees since we commenced the program, kinda mid to late 2022. Looking at the balance of the year priorities before we turn it over to Q&A.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

You know, any shareholders joining us, this page should look familiar and intentionally familiar, because, you know, our priorities haven't changed. You know, we're driving hard on the MCC integration. Quarter three and quarter four will be the first full quarters that we're fully integrated as one company. A lot of harmonization, obviously, in back office, and I already referenced the plant consolidations, which will be complete by year-end. So thanks to the entire team for all the work, the heavy lifting and work that's happening here. We're running a business as we integrate a business. We're building a bigger business as we build a better business at the same time. So some great work happening across the organization. We're relentlessly focused on improving gross margin and getting to pre-acquisition levels.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

That's through what we call our strategic revenue management process. You know, driving those lower overheads and operating costs, you know, we already talked about the capital, which is gonna significantly improve our productivity and effectiveness, which obviously flows directly into gross margin, and then driving hard on the operational efficiencies. And again, a ton of work across the network. We've obviously built a perfect platform for growth, and we're seeing that in new business development. So as we're building a better business, we're not forgetting about going out and winning new business and securing new business in the market. You know, the 30 new clients kinda speak to that.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

We've built a real solid growth muscle, and our 63, 64 frontline salespeople, as well as all of our sales leaders, you know, wake up every morning and they dream about growth. And I can tell you that the conversations are fantastic. We see a very bright future, lots of opportunities in the marketplace.... lots of opportunities around cross-selling and upselling. You know, I talked about some vertical focus. You know, I said automotive, but there's other verticals as well that we're penetrating. And then great pace on our digital acceleration and, you know, really pleased with the progress we're making on Flex. And again, the launch of ASMBL, which we'll see, you know, great results as we move through quarter three, quarter four, and into next year. And then, we're generating...

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

You know, we wanna continue to focus on generating higher levels of free cash flow. And, you know, as we get through all this restructuring work, we're gonna- we'll certainly see that- we'll certainly see that, you know, into 2025, right? So, 2025 will be a very clean year, as our restructuring will be behind us, our capital will be deployed, and our platform for growth will have been built. It's already been built today. And we'll enter into a, you know, highly productive year as we move forward into 2025. So that's our focus for this year. You know, lots of lots of heavy lifting. The team's done a fantastic job. You know, maybe a big shout-out and thanks to the entire team.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

We couldn't be here without everybody working and heading in the right direction here. So, you know, congrats and thank you for all your hard efforts. So now we'll turn it over to any Q&A that our investors have here.

[James Lorimer, CFO at Data Communications Management Corp.]

Thanks, Richard. We'll now, would now like to take questions from the audience. If you have a question and you're accessing the call through the Teams function, please raise your hand, and we will queue up questions. Alternatively, you can use the chat feature, and we'll respond to chat questions as well. I see a couple of questions here, so I will go to my deck. And, I have a question from Max Ingram. Max, do you wanna go ahead, please?

[Max Ingham, Equity Research Analyst at Canaccord]

Yeah. Can you guys hear me okay?

[James Lorimer, CFO at Data Communications Management Corp.]

Yes, we can. Thanks, Max.

[Max Ingham, Equity Research Analyst at Canaccord]

Okay. Thanks for taking my question. So I have just a couple from me. First one was, it sounds like you're expecting incremental year-over-year growth in Q3, Q4. If I'm thinking about the timing of MCC, this implies a return to organic growth. So I guess my question is, am I thinking about that correctly, and maybe you can touch on what's driving the visibility you have? Because based on my calc, I think organic growth was still negative this quarter.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Yeah, I know. Great question, and you're absolutely right. Your calc is correct. Negative growth... Sorry, organic growth was negative on the quarter, you know, positive, obviously, overall with integration. But that was, that was planned, Max, given all the integration work that we're completing. You know, we've just brought two sales forces together. We've moved books of business across, across our teams. We're going through a massive ERP implementation, MCC and SAP, and DCM Legacy D365. So you can imagine we're working through two systems to bring those together. Those are, you know, kind of planned, planned programs. And you are correct, we are anticipating organic growth in quarter three and quarter four.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Now that we've, you know, kind of settled down a lot of the integration work, our teams, all the books have transferred across to the 63 or 64 frontline salespeople. And we're seeing, you know, lots of opportunities with existing and new businesses as we move into the next couple of quarters. I will remind you as well that quarter four will be a softer comp. I mean, quarter four, you know, we were pretty active, you know, bringing teams together as well. So we're up against... You know, underlying comps were a little stronger in quarter one and quarter two, and a little softer in quarter three and quarter four. So we have that, you know, kind of tailwind as well to our advantage.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

So combination of work that's completed, you know, what we can see in our funnel at this point from existing client workflow and new business development, and then some of the softer comps, we're expecting positive organic growth in 3 and 4.

[Max Ingham, Equity Research Analyst at Canaccord]

Okay. Thanks very much. That's helpful. And then my next question is also sort of related to demand. I know that you guys have been focusing on the higher-margin business, which has caused some customers to fall off, which makes sense.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Yeah.

[Max Ingham, Equity Research Analyst at Canaccord]

And then there's also some deferral in projects to later quarters. So my question is, do you see anything outside of these two dynamics? Like, any comments about softening of the demand, or is demand still strong, and it's just these two factors at play?

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Yeah, no, it's a great question. Overall, we see demand as still strong. We have a couple of anomalies with a couple of large FIs that actually reduced some of their workflow this year. When I say reduced workflow, think of, you know, kind of personalized direct mail campaigns, you know, two fewer campaigns, which were sizable campaigns. We think that's just, timing. You know, we don't think it's anything underlying from a market standpoint. It's just, you know, sometimes you experience those years, year-on-year. You may have a couple of programs in the prior year that don't repeat this year. So we don't think that's anything due to demand. It's just sort of, you know, program timing with clients. And, you know, you always have boosts between clients.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

You know, one year, you know, a program may run, the next year it may not, et cetera. But what I can tell you, Max, is, you know, and I referenced it earlier, you know, we see continued opportunities in the market, and that's why we stay growth-obsessed and, you know, bring and hunt for new clients. We've got a very focused strategic leadership model that all of our client reps, you know, work on, if you will... and identify opportunities in the marketplace to secure wins.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

So, you know, if there are any clients where we're seeing some work move between years or programs that may not be repeating, we certainly look to offset that with new business development and expenditure revenue between clients as well. But-

[Max Ingham, Equity Research Analyst at Canaccord]

Okay.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

You know, along the way to answer your question, we're not seeing any significant headwinds from a marketing planning, marketing budget, marketing execution perspective.

[Max Ingham, Equity Research Analyst at Canaccord]

Okay. Thanks, Richard. Thanks, James, for taking my questions. I'll pass the line.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Okay.

[James Lorimer, CFO at Data Communications Management Corp.]

Okay, thanks. We have a question from Noel Atkinson. Hello. Sorry, Noel, I'm having a problem getting you in here. As you wait for Noel to come in, I think there's one other question that I didn't answer of Max's. So, Max, I'm gonna... I just reflecting on this. We have intentionally walked away from some business where we've worked to improve the margin, and, you know, clients have gone elsewhere, and that's okay for us. That was planned, not significant. And we think we've got most of that cleaned up at this point, so we won't see that in our numbers in quarter three and quarter four as well.

[James Lorimer, CFO at Data Communications Management Corp.]

So most of that work, again, has already been completed, at least the sizable, you know, clients that were legacy clients that needed to be, you know, margin approved, shall we say?

[Max Ingham, Equity Research Analyst at Canaccord]

Yeah. Okay, that makes, that makes sense. Thanks.

[James Lorimer, CFO at Data Communications Management Corp.]

Okay, great. And maybe we'll figure out the audio here for Noel. Have a call from looks like Chris Thompson. Chris, if you're dialing in, you can use star five to enable your microphone.

[Chris Thompson, Director of Equity Research Analyst at eResearch Corp]

James, can you hear me now?

[James Lorimer, CFO at Data Communications Management Corp.]

Yes, got you live, Chris.

[Chris Thompson, Director of Equity Research Analyst at eResearch Corp]

Okay, great. How are you?

[James Lorimer, CFO at Data Communications Management Corp.]

Excellent, thanks. Hey, Chris.

[Chris Thompson, Director of Equity Research Analyst at eResearch Corp]

Hey, how are you? Just a quick question on the positive side, just looking at your admin expenses on your expense side. It looks like you've done a good job coming down again quarter-over-quarter. Is that sort of your new benchmark? And I know that you mentioned that the head count will come down probably a little further as the facilities close. So can you just give a little guidance? Because it was a good incremental change, even quarter-over-quarter.

[James Lorimer, CFO at Data Communications Management Corp.]

Yeah, I'd say from an SG&A perspective, the second quarter is a pretty good run rate to use for the balance of the year, Chris.

[Chris Thompson, Director of Equity Research Analyst at eResearch Corp]

Okay

[James Lorimer, CFO at Data Communications Management Corp.]

... most of the kind of additional changes that we'll see through the balance of the year will be more on the cost of goods line, as we finish some of the plant closures in Trenton and Fergus. So that'll be kind of more an impact that we should start to see through Q3 and particularly kind of Q4, and then really kind of a fully loaded improvement in Q1 of 2025.

[Chris Thompson, Director of Equity Research Analyst at eResearch Corp]

Okay. So great, 'cause I did notice that there was a slightly high, lower Gross Margin this quarter, quarter-over-quarter, but you think that that's gonna start turning around towards the end of the year?

[James Lorimer, CFO at Data Communications Management Corp.]

Yeah, a little of the gross margin quarter-over-quarter. Remember, the first quarter is typically very strong, not only for kind of the DCM legacy business, but also it's historically been the MCC legacy business, strongest quarter from a revenue and a gross margin perspective, and that's because of a lot of the transactional print work that's done in the first quarter relating to year-end statements and tax forms, and things like that.

[Chris Thompson, Director of Equity Research Analyst at eResearch Corp]

Okay, and just... I don't necessarily want to continue to talk about this, but, you know, the Q2 of last year was only a sort of a two month of three.

[James Lorimer, CFO at Data Communications Management Corp.]

Yeah.

[Chris Thompson, Director of Equity Research Analyst at eResearch Corp]

But I think, Richard, you don't really see any headwinds. It's just a matter of some timing and a little bit of a change. But I also did notice that even though your tech-enabled subscription fee is up, you know, substantially year-over-year, quarter-over-quarter, it kind of dropped. And I'm just wondering how much of that may have been one-time purchases in Q1 versus other items of a trend?

[James Lorimer, CFO at Data Communications Management Corp.]

Yeah, you, because of the stronger first quarter that MCC typically has, that also has higher programming fees, which fall into that tech services bucket. And so that's why that would typically be stronger in the first quarter as well, Chris. So-

[Chris Thompson, Director of Equity Research Analyst at eResearch Corp]

Right

[James Lorimer, CFO at Data Communications Management Corp.]

... so there are kind of higher programming fees. You, you'll see a bit of a blip in that line in the fourth quarter as well for work that's gearing up for the first quarter. But then also in the first quarter would be kind of the lump of that programming work that gets done for annual annual statements.

[Chris Thompson, Director of Equity Research Analyst at eResearch Corp]

Great. And then sort of my last question is on the equipment purchases. Like Q1, you did CAD 2.2, Q2, you did CAD 4.3. I know you are consolidating, buying new equipment, upgrading to help with the gross margins, which is all great. What are you sort of forecasting for the rest of the year? Similar to Q1, similar to Q2, or where do you see things hitting in?

[James Lorimer, CFO at Data Communications Management Corp.]

Yeah, I'd say Q2 was kind of a big quarter because we certainly advanced payments for a number of pieces of equipment and making ready some of the facilities, particularly the Bond facility, to receive Thistle, but also some other work that was done in Torbram and Drummondville to get ready for the move. So, most of that is now behind us. I see it's kind of more, you know, second and third quarters should look, you know, more like the first quarter, maybe even a little bit lower kind of total kind of purchase of property, plant, and equipment. And, you know, a lot of the equipment that we planned to lease has already been, you know, kind of prepayments and advanced payments have already been made.

[James Lorimer, CFO at Data Communications Management Corp.]

So we're kind of well down that path. Some of that equipment has already been installed in the first and second quarter. Some of that equipment is going to land in, particularly in Brampton, in the third and fourth quarters of this year. Some new label equipment and some other kind of related workflow equipment.

[Chris Thompson, Director of Equity Research Analyst at eResearch Corp]

Okay, great. That's it for me. Thanks.

[James Lorimer, CFO at Data Communications Management Corp.]

Thanks, Christopher. Great. Noel, do we wanna try again, see if we've got our mic working? No luck with Noel?

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

No.

[James Lorimer, CFO at Data Communications Management Corp.]

Okay.

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Okay.

[James Lorimer, CFO at Data Communications Management Corp.]

All right. Well, apologies for that, Noel. It doesn't appear that we have any other questions. Richard, do you wanna have-

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Yeah

[James Lorimer, CFO at Data Communications Management Corp.]

... closing remarks?

[Richard Kellam, President, and CEO at Data Communications Management Corp.]

Yeah, sure. Listen, thank you everybody for joining us today. You know, solid quarter. Looking forward to continuing our, our integration and acceleration journey in quarter three, quarter four. Again, maybe I'll just close on thanking the entire DCM team for the hard work and delivery on the quarter and, you know, look forward to the progress we're gonna make through the rest of the year. Thank you, everybody, and thanks to all of our shareholders for continuing to, to, you know, follow our journey. Appreciate it. Thank you, everybody.

Participants

Analysts

• Chris Thompson, Director of Equity Research Analyst at eResearch Corp
• James Lorimer, CFO at Data Communications Management Corp.
• Max Ingham, Equity Research Analyst at Canaccord
• Richard Kellam, President, and CEO at Data Communications Management Corp.