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

Good morning, everyone. Welcome to the D-BOX quarterly earnings webcast for the quarter ended December 31, 2024. I am Elisabeth Hamaoui, IR Advisory, 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 that were submitted. 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 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.

Thank you, Elisabeth. This was another great quarter for D-BOX, achieving a record quarterly sales performance of $13.3 million, coupled with strong EBITDA and net profit. We believe this is a confirmation that our strategy is effective and our decisions are paying off. Strong revenue growth of 65% reflects the theatrical industry recovery, which was negatively impacted the prior year quarter due to the Hollywood strike. This said, looking at our growth over the last 2 years, our sales were up 27%, confirming that not only we are benefiting from a more favorable backdrop, but our strategy is working. We are gaining traction and delivering results. I'll provide more details on top line for the quarter in a moment. Turning to profitability. We achieved EBITDA of $2.6 million or an adjusted EBITDA margin of 19% and net income of $1.5 million. We are leading a successful transformation of the D-BOX economic model. Higher sales, higher gross margin, operating efficiency as well as favorable FX all contributed to a strong bottom line. Our performance also drove significant cash from operating activities in the quarter, bringing our year-to-date total to $5.4 million. Moving on to detailed revenues. System sales reached a quarterly record of $10.1 million, driven by growth in both entertainment markets. Theatrical and sim and racing together were up $3.7 million or 82%. This was slightly offset by a decrease in our sim and train market. Theatrical system sales were driven by 51 new net screen installation, reflecting improvement in capital spending capacity. Setting aside the industry challenge from the previous year, we nearly doubled the number of installations compared to the same quarter 2 years ago. Additionally, we installed over 100 net screen throughout calendar 2024 despite a challenging environment. Our performance in sim racing reflected our strong business relationship with sim racing Canada and the appetite for sim racing centers. We are pleased also to mention the opening of a new sim racing centers in Washington, a new location as part of F1 Arcade multisite project. Sim and training system sales were soft in the quarter as many of our industrial customers are transitioning to a new generation of the D-BOX product. Looking at royalties stemming from box office ticket sales, we generated $3.2 million. This 123% growth reflected our increased global footprint with now more than 1,000 screens globally, including 200 in Germany as announced earlier this year. Furthermore, movie blockbuster have experienced a comeback over the last few months. For D-BOX, Q3 royalties were significantly boosted by several major franchisees, including Moana, Sonic the Hedgehog, The Lion King and Venom. Momentum in the moviegoing experience is on the rise and our premium offering are delivering strong results. Finally, favorable FX exchange movement also contributed to our strong quarter. While we are proud of our performance, we want to underscore that it's important to look at our business from a year-to-date or last 12-month perspective. For fiscal 2024, which ended last March, we surpassed the inflection point, driving a positive bottom line. Now as we approach our year-end, we're seeing favorable trends over the past 12 months with adjusted EBITDA and net income growing at a faster rate than sales, thanks to the strategic levers we've pulled. We are executing on the strategy we started implementing in 2020. This strategy is all about focusing on our best-performing commercial market, those that align with our unique IP and platform, while optimizing operation for cost efficiency. I would like also to remind everyone that we have also exited lower-margin market early 2024 calendar. In the third quarter, we also improved our cost of capital by paying down $1 million in higher cost debt. We are maintaining a strong balance sheet with a strong liquidity position of over $14 million. D-BOX is well positioned and focused on maintaining sustainable profitable growth, advancing a strategic initiative and navigating potential risks and uncertainties. Next slide. Looking at our priorities on the sales and marketing front, we continue to roll out system to major theatrical partners. Similarly, for sim and racing, we are working with F1 Arcade on their multisite expansion with new location planned in Philadelphia, Denver and Las Vegas. Additionally, our new collaboration with Mercedes has officially launched. We are rolling our modular motion platform and generating our first revenue in the current quarter. In sim and training, we have new talents to help us implement our strategic initiative and transition some of our industrial customers to our next generation of products. More broadly, our goal is to pursue a customer-centric mindset, expand our customer base, solidify our partnership and further expand our product offering. On the finance side, we have generated $5.4 million in cash from operations year-to-date, enabling us to pay down debt and improve our cost of capital. and we will continue to prioritize a prudent approach to our balance sheet, providing flexibility during uncertain times. This brings me to the U.S.-Canada tariff dispute and the anticipated imposition of a 25% tariff on Canadian import to the U.S. The situation is still fluid, but we are proactively assessing the impact on our business and seeking potential contingency measures to mitigate any impact. I always like to end with a word on the theatrical landscape in the near future. While the industry still has challenges, data tracking consumer enthusiast for moviegoer is trending positively. And we anticipate a good and improved movie slate for 2025 with a scheduled blockbusters such as Captain America: Brave New World, Mission: Impossible, Lilo & Stitch, Jurassic World Rebirth, Superman, Wicked: For Good, and Avatar: Fire and Ash. This concludes our presentation. I will be happy to respond to a few questions.

Great. Thank you, Sebastien, for the highlights on the quarter. Let's turn to a couple of questions. The first one on everybody's mind is on tariffs. Can you tell us what the company's exposure is relating to the U.S.-Canada tariffs? And do you have the same exposure in all 3 commercial markets?

Thanks, Elisabeth. So of course, D-BOX is doing business in more than 40 countries with a focus on Americas and Europe. We are clearly monitoring the U.S.-Canada tariff situation as well as other potential impact from U.S. tariff with other countries. We also have ongoing discussion with key customers and D-BOX is working hard to find solution to mitigate the risk as the situation evolves. But yes, tariff would create a headwind to the business, but it's too early for us to provide more detail on the impact and on our plans.

Okay. Thank you. Sebastien, the pandemic hurt movie theaters perhaps more than other industries with the consumer shift to streaming. And then the industry was hit last year by the impact of the Hollywood strikes, which halted and delayed some movie productions. You say the industry has improved in your press release and in your comments a little bit earlier, but some theaters are still struggling. Can you provide your view on where things stand today and where it's heading?

So yes, it's been challenging for theaters over the past few years. However, the recovery is taking place. People are going back to the movies. The recovery started late 2024, and we expect continued improvement into 2025. And I think most importantly, there's an opportunity for operators to rethink the moviegoing experience. We are seeing investment in premium large format screen, improving sound, picture quality, seating and, of course, motion. D-BOX is contributing to enhance the offering. So it's been a rough few years, but I'm positive we can be part of this transformation. I think what is also important to keep in mind is that we have diversified our revenue stream. Theatrical is a key market, but we have two other key commercial markets, sim and racing and sim and training, where we continue to gain traction.

Okay. Staying on this topic, can you share your thoughts on the outlook for the company in the near term, so Q4, your current fiscal quarter and maybe on the year ahead?

Sure. So Q4 is underway. And as we have communicated, our business can be lumpy from quarter-to-quarter given the impact of seasonality. I think the tariff situation is also creating uncertainty, which can also impact the timing of order. This said, again, we have a diversified business now, which is contributing to mitigate some of the headwinds and from timing and seasonality. We also encourage the market to look at our business on the last 12 month or full year basis, and we're happy with our performance through fiscal 2025 and the progress we are making on top and bottom line. Now if we look ahead, the transition to the next generation of D-BOX product for our sim and training customer is expected to be a tailwind. We will continue to roll out our sim and racing system, including the Mercedes platform. And on the theater side, a strong movie slate is expected in 2025, as I mentioned earlier. So overall, we remain cautiously optimistic and continue to focus on executing our strategy.

Okay. Thanks. That's great. Lots of good color. Keep up the good work. This concludes our presentation for today. I invite you all to contact us with any follow-up questions at the address shown on the screen to Josh Chandler, our CFO, or myself. [Foreign Language].