D-BOX Technologies Inc. (DBO.TO) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the D-BOX quarterly earnings presentation for the quarter ended September 30, 2024. I am Elisabeth Hamaoui, Investor Relations. And joining me today is Sebastien Mailhot, President and CEO of D-BOX. He will be taking you through the results for the quarter in a moment and address some of the questions we received. Before we begin, I'd like to remind everyone that certain statements made during today's call may be forward-looking and are based on our current expectations and assumptions. These statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied. For further details on these risks and reconciliation to non-IFRS measures, please refer to our public filings available on the corporate website and on SEDAR+. With that, I will now turn the call over to Sebastien Mailhot to begin with a review of the company's performance for the quarter. Go ahead, Sebastien.

Thank you, Elisabeth. So hi, everyone. Really pleased to be there. So as a CEO, sometime we have ups and down, but definitely, I'm really proud to be with you and present the result of this quarter. This was an exceptional quarter for D-BOX, marking the best performance in the company's history on several metrics we believe this is a confirmation that our strategy is effective and our decisions are paying off and delivering results. As you can see, there is growth on the revenue side on the system. You have definitely, and we had discussed that in the past that at a certain level, that the business profitability would jump higher. So you see that multiplication on the EBITDA is more than triple. And more often, after last year, during the first year ever in net income, really pleased as well that the net income level has multiplied that more than 5x. It shows as well that all the significant impact of all the businesses on the profitability with growth in every segment. Furthermore, we want to emphasize that it's not just top line growth that's driving the margin. And again, interesting always to repeat, looking at last year's results, while sales have been relatively flat, we are still able to drive efficiency, with now year-to-date EBITDA of 15%, up 4% year-over-year. Let's move more on the detailed revenue. So first, let's remember our commercial focus, as we know. So we have -- we are playing in the entertainment market when we have the segment of theatrical and as well as sim racing and in the more industrial, we're having the simulation and training. So on the detail, we achieved record sales despite what remains a soft environment, really important to remember, and despite the $1 million impact of exiting the direct-to-consumer hardware market, as previously communicated. If we take a look at system sales and if we strip again out the direct-to-consumer figures, we had growth in all 3 key commercial markets. So theatrical and sim racing together are up 21%, and simulation and training are up 3%. If we give a bit of color, definitely, theatrical has been mostly to continue the rollout with our current partners. And remembering that our focus, again, in theatrical is definitely the domestic market, so U.S. and Canada, but as well as Europe. On the sim and training, definitely, our partners are continuing to grow. But one of the segments that we're always remembering that has definitely some good traction is all sim racing centers, so commercial area where people are putting simulator to be able to [ yield ] the real-life racing. On the sim and training, again, remembering, we're mostly in the driving and as well into heavy equipment, the growth has been coming by continuing order for current customer. On that realty, again, we benefited from both the increase of D-BOX footprint. As we know, we're adding more than 100 screens a year and the strong success of Deadpool & Wolverine that kill it at the box office. All these factors combined together help us to generate 12% revenue growth. Moving to the next slide. So doing 1 good quarter is really good. But as we know, what we're trying to get is to have a sustainable, profitable growth. So while we are proud this quarter, we want to underscore it's important to look at our business from a year-to-date on the long-term perspective. In fact, looking through this lens, the company has been consistently delivering positive net income on the rolling last 12-month basis for the last 5 quarters. So I know shareholders have been more than patient after 20 years, but now we're getting at that level to bring sustainable profitability. While we have been driving positive EBITDA for much longer, we have achieved and surpassed revenue required to drive a positive and solid bottom line. As you know, any company, it's important we have some salary to pay. We are operating in many countries. But well after that, you are able to drive revenue above your cost structure, that's where profitability improve, and that's why we like all those results. Next slide, please. Another thing that happened, as you know, is at our last AGM, so shareholders' meeting, it resulted that there's been new independent director that has been put on the Board. So we now have a refreshed Board and as well with additional expertise around the table. This is really important. As you know, D-BOX is a complex business operating in multiple countries. So that range of expertise from governance, strategy, finance, marketing and operation is really key for the success of the business. We still have -- we had one of the member, Zrinka Dekic, that was nominated but unfortunately had to step down as a recent appointment to another role, unfortunately, prevented her from serving on the Board of a publicly traded company. We have started a search for the replacement. So right now, as you're saying, and I see that positively, all-new Board bring fresh eyes to the business, and we have started the onboarding of all new members. And again, I'm really happy so far. So with our positioning into the haptic market, our commercial positioning, again, the focus of whether we're seeing theatrical, sim racing and professional simulation. We are paying more time with the Board, but I'm really happy with the discussion and the alignment we have found together. But of course, we'll have more discussion, and I look to the Board to bring, of course, also those tweaking and wisdom that can continue to improve the business moving forward. Last thing as well that is important, it's important. We're all looking together with the Board to continue to enhance governance and driving value for all stakeholders. Next slide, please. So turning for key priority. As you know, with all that strategic pivot that we do, we have announced previously the arrival of Jean- François Gagnon, our new Senior Vice President and started the onboarding in Q2, and is going to be leading the company in the commercial effort. One of the things that we did as well is to combine the sales and marketing position under one leader, again, to improve the efficiency and the impact of our action. Another thing as well that is important is the cost discipline and other efficiency that we drove. So we increased our cash flow from operation. Note that we generated $3 million year-to-date and our recent debt restructuring, we are gaining greater flexibility. We are currently assessing our capital allocation strategy, looking to support growth across key markets, maintain a strong balance sheet and exploring other opportunities. Yes, shareholders, we are now happy to be in that situation about being able to drive revenue, additional cash and to be able to consider a new option. That's a nice position to be in. So to comment a bit on our H2, our fiscal year 2025. So definitely, as you know, we're not providing guidance, but I'll bring you some kind of colors. So the good news is, as you see, the industry is getting momentum. So if we think about theatrical, COVID is behind, the strike is behind. So that's why we see with the movie slate, everything is improving, so that's really important. [ Segmenting ] as well. There's more visibility for some of those segments. So yes, we have challenges, still some lingering effect, but it's positive about what we see the business going. Again, movie slate. So we all feel that if you look at various article in the newspaper, people feel really confident and happy with the movie slate moving into calendar '25 and beyond. We are back at normal time in the theatrical industry. And as well for all other segments as well, the visibility that we're having right now is continuing to push consumer buying more. This concludes our presentation. I'll be happy to respond to questions we have received following our earnings release.

Thank you, Sebastien, for the highlights on the quarter. Let's go through a few questions. So the first is asking if you can speak a little to the level of profitability seen in the quarter, and the impact specifically coming from royalties on the theatrical systems.

Excellent. Thanks, Elisabeth. So first, it's true that the right for use has an impact, can have an additional impact, right, on the profitability. So as you know, you see that the level is higher. And of course, the cost structure won't be changing. So when we have that, definitely higher, to do it, it has an impact. But it's not just it. So on top of that, definitely, as we know, the profitability is for the increased top line, so our growth of sales as well, the mix of product have an impact. So we had a positive mix that drive as well the gross margin. And as well, we discussed that we got out of some business in the past, so the direct-to-home hardware business that has lower margin. And of course, last thing but not the least is definitely with the cost structure and higher level, definitely, our expense level proportionately is higher. So yes, right for use is there, but there's other business element as well that are contributing to this. We do believe as well that as the revenue will continue to grow, the profitability should continue as well.

Okay. For our next question, with a refreshed Board, can you provide any insight on potential impact to the current strategy, either in the short or in the longer term?

Thanks, Elisabeth. So really important. So as you know, a company like D-BOX has to transform all the time, and I think same thing as well as for a Board. So we had a good Board for up to 4 years. And definitely, with a new strategy, a new direction and again, sometimes as we make change, newest eyes are welcome. So I think the first -- the change of Board members is something that is beneficial to a company. And this is the first thing. Secondly, as well, so we know, so haptic, commercial market or segment, I think this is pretty rock-solid. I said earlier, we have started the onboarding. So I like this discussion we're having. So the purpose of the Board is definitely to drive governance, but the additional scale that we're bringing to the plate as well will contribute to, of course, challenging the executive, looking at things that can create short-term and long-term value, and I see that positively. So again, a couple of weeks down the road. I like the discussion, like the alignment. I like the change that has been made, and definitely looking forward to see how that new mixture is going to be bringing some sparkle to benefit and improve D-BOX strategic plan.

Okay. Our final question, with the improved economics of the business, in particular, cash generation, what are you planning to do with the available liquidity?

So thanks again, Elisabeth. So good news. So we have cash and we can take options. So to be honest, right now, I have nothing to announce. But definitely, right now that we're saying again that D-BOX is in a situation that is not just having positive EBITDA and profitability, but generating discretionary cash flow. So that's where they become interesting at how we can benefit shareholders, the strategic plan but as well as shareholder value. So of course, things that -- a couple of things that might be on the play that I'm not announcing anything, but it's going to be part of the discussion in the upcoming weeks with the Board is definitely okay. With your additional cash, do you increase the speed of growth? Do you want to reimburse debt? Are you considering to return that to shareholders? Is there some partnership we can do with that cash? Can we consider inorganic growth? So I think all those things are things that are on the radar. But again, I think it's fair to say that to take a good short-term and long-term decision, we'll finalize the onboarding with the Board. So we'll finalize the alignment, et cetera. And yes, when we're going to have some decisions taken, we'll share that with the shareholders and with the Street.

Super. Well, this concludes our presentation for today. I invite you to contact us with any follow-up questions at the address shown on screen. [Foreign Language]

Elisabeth, thanks for the shareholder for everything. So bright days are ahead. Thanks.