DATA Communications Management Corp. (DCM) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the DATA Communications Corp. Second Quarter Fiscal 2026 Financial Results Conference Call. My name is James Lorimer, CFO of DCM. And I'm pleased to host today's call. Joining me is Richard Kellam, President and Chief Executive Officer; and Lee Berger, Managing Director of Octacom. After our prepared remarks, we will open the call for Q&A. As a reminder, this conference call is being broadcast live and recorded. Richard and I can also be available after the call for any follow-up questions. Before we begin, I'll remind everyone that today's call will include forward-looking information. This information is subject to risks and uncertainties described in our press release and in our public disclosure filings on SEDAR. We will also be referring to non-IFRS standard measures. The details and reconciliations of which to IFRS measures can be found in our most recent public disclosure which is also filed on CARs. Presentation recording and transcript will be available on our website following the call. Additional information relating to DCM is available on our website and on SEDAR plus. We also invite you to follow DCM on LinkedIn for updates on our business developments. And I'll now turn the call over to Richard.

Thank you, James, and good morning and good afternoon and good evening to any shareholders joining us from other markets or other time zones. As you -- as many on the call of likely already reviewed the press release, our second quarter results were generally in line with what we expected. While revenue remained slightly below prior year levels. Our sales activity did remain very robust. We generated strong free cash flows. We continue to pay down debt quite significantly in the quarter, and we completed, of course, this very strategic acquisition to and we're going to spend a majority of our time on the call today reviewing that acquisition. So I'll move pretty quickly through the quarter. As noted on our press release, moving through the third quarter and into the second half of the year. We are seeing very encouraging signs, including an expected return to positive year-over-year revenue growth a more favorable business mix contributing to improved gross profit, a continued momentum in new business development, which I'll talk to you on the next page. And then, of course, continued strong free cash flows. In addition, of course, the Octacom acquisition is going to deliver enhanced revenue and earnings contribution through the balance of the year, and we'll talk a little bit more detail as we progress through the call here today. So again, I'm going to move fairly quickly on the numbers for the quarter because I do want to spend the majority of our time with Lee on this fantastic acquisition of Octacom. So as I said, kind of in line with what we expected revenue decelerating on the quarter, and we're seeing that continue to stabilize, and we'll see that obviously, stability as we progress into quarter 3 and quarter 4. From a new business development standpoint, our revenue from new logo wins did accelerate significantly actually, much higher rate than a year ago. And plus the average value per client is considerably higher. Obviously, this business as well and why we're confident we're going to see that return to growth in quarter 3 and quarter 4. Our tech-enabled service hardware and revenue from software continues to grow, up 10.4% in the quarter, we're now about 7.3% of total revenue. Gross profit was in line with what we expected in the quarter. And our SG&A, we continue to build a better business. And you can see that our SG&A continues to decrease over a year ago. and adjusted EBITDA in line, just under 13% of total revenue. And again, we'll see that progress as we move into quarter 3 and with the base business as well as the addition of Octacom. Free cash flow is extremely strong, up $15.7 million in the first half of 2026. And it's about a $16.3 million swing versus a year ago. So very solid free cash flow delivery. Net debt, we're very pleased with our continued progress on reducing debt. Obviously, this is prior to the to the Octacom acquisition, which we'll see included into our quarter 3 results. We're down 26% of the year, and it's the lowest leverage we've seen in 3 years. So real good progress on continuing to pay down debt. And then, of course, we returned a solid amount of capital to shareholders, about $3.4 million in the quarter. So again, in line with what we expected and kind of decent progress through the quarter. So I -- as I said at the top of the call, we do want to spend a majority of this call with reviewing the Octacom acquisition. Lee Berger sitting beside me here, our new Managing Director, managing the Octacom division of DCM. And Lee is going to provide you with an update of the Octacom business. So a good overview of the Octacom business. He's going to talk about the intelligent document processing market, the size and growth of that market, why the market is growing so quickly. is going to also talk about opportunities for Octacom and IDP is now being part of DCM. So we're -- listen, we're very excited about the acquisition. You read the press release, and you can hear my excitement in the call today. It's just a month ago. It's actually a month and two days since we completed the acquisition. And we're already off to a great start. But I want to be clear to shareholders that the IDP or intelligent document processing market is not new to DCM. We started down the path about two years ago with very serious intentions to build a business here in IDP. We saw a lot of kind of inbound coming from clients, and we've already built a small -- much smaller obviously than Octacom, a small piece of business than IDP. That is a fast-growing piece of business. So it's not new to us. And the addition to Octacom obviously just allowed us to get there a lot faster buying versus building and buying one of the fastest-growing IDP companies in Canada. So we're very excited, and it certainly makes us a much stronger competitor in this space right from day 1. So I'm going to turn the call over now to Lee. So Lee, welcome to your first earnings call here and excited to care about Octacom.

Excellent. Thanks, Richard. Thanks, James. Glad to be here with everybody on today's call. And what I plan to do is provide an introduction on Octacom, an introduction to the IDP market as it is probably a relatively new market for some investors here on the call, as well as talk a little bit about how we are collaborating already with DCM and the acceleration of our go-to-market plans now that we're united here. From an investment standpoint, there's some highlights you'll see there on the slides. Ultimately, Octacom is a scaled operation. In the trailing 12-month period, we've generated just over $23 million of revenue. we would be 1 of the leading IDP players here in Canada, and we deliver our solutions through a combination of different technology platforms, largely built in-house that allow us to deliver really efficient, automated end-to-end solutions for our customers. And what that results in is very high recurring revenue, high churn, the ability to augment our solutions over time and drive strength in margins and ultimately drive strong free cash flow. Octacom has been in this market for the last 50 years. I've been with the company for the last 10, driving the latest stage of growth. and we see a tremendous amount of opportunity ahead as we join the DCM team and accelerate our go-to-market plans. So takeaway here really profitable growth, fast-growing business, sticky customer base, proprietary technology that we continue to augment and intend to augment even faster with the strength of DCM behind us. Moving to the next slide, a little bit of an overview of what IDP is. So there's really a couple of different use cases for as many use cases for IDP, but there's a couple of different solutions that land in the IDP beer and the most comprehensive of those solutions is a workflow that you'll see up on your screen right now, which really entails automating complex document intensive processes, which are the backbone of a large number of large enterprise and government customers and prospects that exist out there. So this is really leveraging a multistep process to intake, extract, classify and feed downstream systems with relevant data that's been extracted and validated in the document-intensive workflow. And so that involves a capture stage, a classification stage, an extraction stage, a validation stage, typically some form of workflow automation, whether it be within our Otis platform, our proprietary web-based platform where clients can interact with documents, workflow them, drive automated rules and ultimately, through system integration between Otis and multiple different types of downstream systems. In our process, we use a combination of different innovative tools to drive automation. We use OCR, ICR, we use AI. We use machine learning. We use natural language processing. We use a series of different intelligent tools and really AI-augmented tools to allow us to deliver our solutions both efficiently from a delivery time perspective as well as from a cost perspective. With a little bit of a background on what it is that we do, and we're sort of that solution provider behind the scenes within lots of organizations that we would all be familiar with. It's important to understand what does this market look like? And as we displayed over the last 9 years -- 9 or 10 years of ownership, we're able to grow at a very rapid rate, taking advantage of both rising tide in this IDP market as well as this ultimate digitization wave that we're seeing from a lot of our clients. And so as we look at the market, looking forward, we're seeing that 30% plus compound annual growth rate continuing. There's a number of drivers for that. There's AI drivers and sort of richness and value and legacy information, should it be not yet digitized. There's rising rates in digital adoption in terms of taking physical processes, converting them to digital or bridging the gap, having hybrid environments where there's both digital input and physical input. And ultimately, we do stand out in the field of data sovereign team and our services being performed in Canada, in secure facilities across both the Octacom and the DCM network, and we're going to talk a little bit more about that in the next few slides. From a market driver standpoint, really cost is probably what matters most to investors, manual data entry is generally expensive for large enterprise and government. There's a lot of automation opportunity that exists within these specific spheres that are our target market. IDP can cut the cost of that entry from $5 to $25 a document down to much more diminished rates of between pennies and the dollar per document. And so it allows us to go into new opportunities with a cost lens or an ROI lens that is rather accelerated, and that has been part of what has helped us in our growth trajectory to this point. But ultimately, there's lots of market drivers that are presented to you up on screen there, but lots of unstructured data that clients are looking to structure, extract, validate and use for inputs to data models or otherwise. We're able to leverage in our environment, various different AI models to augment our processing. That has been a boon for us and an area in which we've been able to take advantage of AI innovation and changes that are taking place in the market, and building a rather modular platform that allows us to plug and play different models for different use cases to be that compliance layer while delivering value to our clients. And there's a series of other drivers. I mean, I mentioned a few moments ago, general digital transformation. When we look at the Government of Canada, the provincial government and municipalities, for instance, we see massive archives of physical information. The same holds true in the health care space as well. We see massive archives of historical information that once did not have the value that it does today, and we're seeing budgets to bear and opening up, allowing us to digitize that information and leverage that information for use cases and feed in certain models to enable these clients to get more value out of the documents and the data that exist and free up that storage physical storage space that that once occupied buildings and buildings with the business. So just looking at where IDP is relevant, it really is across all industries and all verticals more so at the large enterprise, mid-market enterprise, less so at sort of the start-up level as you can imagine. And so as we look at industries with the highest opportunity set and the largest addressable market, we're looking primarily to continue to focus on the government sphere, good examples would be general records modernization, benefits processing, citizen, correspondents, application forms for passports, et cetera, et cetera. In the health care sphere, we do a fair amount of work in this space, medical record digitization and data extraction, claims processing, referral routing is another great example that you'll see up on screen there. On the BFS side, financial services, we see a host of opportunities, probably the largest opportunity set second to government, in my opinion, exists in the financial services space. And this is a space that DCM has a really strong footing in and was really one of the drivers for our collaboration and how we're going to market. Octacom had very little exposure to BFS side, DCM holds tremendous relationships with really all of the -- or most of the financial services organizations in Canada. And so taking our platform and our solution suite over to assist with things like new account opening, loan and mortgage processing, compliance archiving, these are valuable use cases. Digital mailrooms are another good example. And we talked a little bit in our press release, we talked a little bit about a recent announcement that we'll mention on the next slide. These are really high-value, sticky use cases that we anticipate growing across the prospect base that we do have. And finally, transportation and logistics, Octacom is pretty active in this space already have a really solid solution from a proof of delivery management standpoint. This is managing bills of lading, extensive data extraction off of them received and packing slip gathering. We have quite a comprehensive proof of delivery documentation process and solution that's in place, and we see tremendous amount of opportunity scaling that out across the DCM world. I've gotten the question a few times why DCM. And I think it really can be distilled to a couple of key drivers. Octacom really brings a platform, a team in an incredibly strong base of blue chip business. This is a business that strengthened over the years. We've invested, as we profitably grown the business in our technology and our team. and we hit an inflection point where we felt that another organization and it's an institution almost with a broad enterprise client base could help us accelerate the growth of Octacom into this next stage. And so DCM really brings the commercial reach, those enterprise and government relationships that we don't already have, the know-how and the ability to drive outbound pipeline generation in a more scaled manner, and a national infrastructure. And when I talk national infrastructure, I'm really talking about leveraging existing DCM premises to broaden the IDP footprint and service offering. There is somewhat of a local element to some of the IDP services that are provided. And so the ability to have with relative ease, a new facility added and low CapEx, a relatively new -- sorry, a new facility added in several new locations allows us to both drive margin as well as drive top line growth through new customers in those respective geographies. And then between the 2 organizations, there is a -- there really is a tremendous fit culturally and a tremendous moat from a go-to-market standpoint. And that is we have top-tier security compliance and privacy standards across both organizations. So the fit has been incredibly smooth. We also hold between the two organizations, over 70 MSAs with over 70 of the top 100 large enterprise and government organizations in Canada, which gives us a great pool of prospective customers to continue to push our use cases into. And that's really exciting. The last note that I'll throw in there before passing it back or opening an app is we really are off to strong start. We closed, as Richard mentioned, July 8. So not that long ago, lots of integration activities underway, lots of sales and marketing collaboration opportunities that we're deep in pursuit on already, which is fantastic. And as just one case study or case in point was a recent announcement of a Schedule 1 Canadian bank that we are now onboarding and have signed on with for a large broad-based digital mailroom operation that is currently in implementation, and we're incredibly excited about taking our platform into an existing DCM customer and having collaborated on a very quick execution point here that we anticipate replicating going forward. And maybe last point, lots of cross-sell opportunity. I think you probably picked that up for me throughout the discussion over the last 10 or 15 minutes. But ultimately, there's active collaboration with the sales and marketing team here at DCM and across DCM's 2,500-plus customers, we should see a tremendous amount of opportunity to sustain and potentially accelerate the Octacom growth rate looking forward. So I'm incredibly excited about that. I'm excited about being invested alongside you all and the team here in helping drive the future of the business.

Thank you, Lee. And I'll just add one other point to what Lee said if we don't need to go back to the chart. But if you think about government, BFSI, health care and transportation, and you think about a physical element, when I say physical, physical paper that are now converted through the Octacom IDP process into intelligence. We actually print a significant percentage of those physical forms. So I think of the value we can now bring to our client base, and that's what made this deal kind of super attractive as well. So yes, just closing -- you can see on the left-hand side of the slide here, clearly, Octacom and DCM, we've got a very right future together. It truly allows us to accelerate our IDP leadership in a market that's growing and expanding very quickly. we've got built-in operating leverage with the existing facilities that are fully sort of compliant and very low CapEx. The revenue and the margin and profitability of Octacom coming into DCI world, very strong to build off. Very new complementary business building on the point that I said earlier, serving large regular regulated enterprises and government. And again, we can now offer that value-added service on top of the forms and paper we're producing for these clients. We -- you read in the original release that we have an enhanced credit facility and lots of bandwidth to grow. And then obviously, we're going to continue the commitment to shareholders with quarterly cash dividends. So very, very strong acquisition and certainly a stronger DCM right from day one. Okay. I'm going to close on our priorities for 2026. Obviously, the top left box here, we're going to maintain a high revenue retention and drive new business development. Again, we've been off to a really good run recently on new business, and we're moving to strength to strength there, and we'll see that continue through the balance of the year. We're going to continue to focus on improved gross margins, and those gross margins will flow through, obviously, with the addition of the Octacom acquisition, but importantly, as well as that base business stabilizes to start starts to grow, and we see better utilization of our assets, then that obviously naturally improves gross margin. And then we've been improving mix quite considerably as well. We're going to generate robust cash flow to support our debt reduction. And finally, if you look at that top box there. Our main strategy in addition to obviously driving that base business and that growth and continue to build a better and bigger base businesses to fuel the Octacom's growth by leveraging the DCM commercial reach and the supply chain that we've got. And our team is just there to kind of assist Lee and his team on continuing to accelerate. And as I said, we're off to -- and we said, we're off to a very good start in the first 4 weeks. Look, I'll just close on this page. We'll turn it over to Q&A, building momentum in the second half. Lots of new logos that we've won, a good, healthy pipeline. We're seeing that market stabilize. Obviously, Octacom contributes to the quarter in quarter three, strong cash flow and liquidity to fund growth. and certainly well positioned, as I said, to deliver this expanded IDP opportunity, the operational discipline and profitable growth that we're committed to deliver. We're still committed, obviously, to that quarterly dividend program. And then we will continue, as we always have, to monitor any trade policy or tariffs or macro uncertainty. We're not having any headwinds right now with the recent announcement from south of border, but we'll continue to monitor that, okay? So that's the outlook. And we'll now turn it over to questions.

Thanks, Richard. We'll now take questions from the audience. [Operator Instructions] We have some questions here. Why don't we take Noel Atkinson, please.

It's Noel Atkinson from Clarus Securities. Good morning Richard and James, and welcome, Lee. Okay. First off, just on Octacom. So -- and sort of overall IDP division for DCM. Can you guys talk a little bit about kind of what you've seen for momentum within that division so far in 2026.

For me?

Sure.

Yes. We've No, we really came into the deal on strength. And so our pipeline has been robust through the entire duration of 2026 to date. And continues to be rather robust. The DCM opportunity set that's coming in is really augmenting our pipeline, and we're working on how to scale our ability to manage that pipeline. And so that's where some of our focus has been. It's educating the DCM team on the IDP solution set to help drive opportunities. And then b, to be able to intake, manage and ultimately execute on those opportunities from the Octacom execution standpoint. So I would say we've come in strong. We've continued to be strong. We're seeing substantial growth year-over-year in 2026 over 2025. With Octacom, we do have a fiscal year change. And so we're moving from a May fiscal year to a December fiscal year as we joined the DCM team. And so we're working through sort of singing up all of our KPIs to be able to report that in a way that's valuable to you.

Great. And in terms of like building the sales funnel on -- and this is both for like the DCM guys and for on the Octacom side. So have you been building your sales funnel? Has it been -- you've been outbound marketing through your sales teams? Or has it been inbounds and pursuing RFPs.

I'll -- maybe I'll talk first from the Octacom side, pre-DCM. The vast majority of Octacom's business has come through what I'll call inbound, a combination of quite literally inbound into the website from content we have out there from RFPs and from referrals. So those have really been the core drivers of the Octacom pipeline historically. We have had a candidly little to no outbound targeted effort historically. And that was a function of our lack of scaling our commercial go-to-market team. And one of the reasons for this particular partnership for us believing that there's a tremendous amount of upside here. So yes. No, I'd say it's largely been inbound from the Octacom side. There are certain pockets, certain industries, certain use cases where we've had some marked success. And in those scenarios, we do sort of build a bit of a consultant network for referrals. And at times, we have done outbound campaigns, but we're talking incredibly sparse -- and so this is a lot of the value add that is currently being actioned from the DCM side to help augment that funnel.

Yes. Maybe just building on that. The first thing we did as well, Noel, and shareholders is -- as said, IDP is not new to DCM. We had a leader that was actually reporting directly to me, Andrew Varga, who is our IDP subject matter expert and commercial leader. First thing we did was put him directly into Lee and Lee's team. So we have that conduit now between, call DCM commercial team and the Octacom team. So that's a implemented -- we obviously brought -- we didn't come with an empty funnel either, right? So Andrew was working on a pretty active funnel for the last several months over the last -- well, actually, over the last year. So that funnel is now part of the Octacom world. And then we're just actually preparing for all the marketing optimization outbound programming. So we got the marketing team working on that. So you'll see a lot of activity as we move in progress into quarter 3. Certainly, September, October, so a lot of activity. When you Google intelligent document processing in Canada, you'd see that DCM comes up ranked as #1 or #2. And we're much smaller than Octacom, right? So we know how to kind of optimize and drive marketing optimization. So you'll see that all kind of shift to the Octacom world. As I said, the marketing team is very active on that right now.

And then just lastly for me, going back to the printing segment. Can you guys talk a little bit about how the revenue activity progressed through the quarter? Like were you seeing improved momentum as you got through the Q2?

Yes, you want to talk about that.

Yes. I'd say generally through the second quarter, Noel, we had -- we were tracking quite well. We had a bit of a blip in one of the months. But overall, I'd say we're tracking well, and early stages, but kind of optimistic about Q3 and the balance of the year. As Richard mentioned, the kind of new logo, call it, maybe value and number of opportunities is helping contribute to that. It seems to have accelerated this year compared to last year. And some of the vertical markets that were challenged last year have shown some improvements. We talked about that in our MD&A. So particularly kind of manufacturing, lottery, and a couple of others than other vertical markets largely kind of stabilized and have a positive outlook for the balance of the year. One kind of vertical that has been a little bit tougher for us is the financial services market, but we're hard at work in that market. And as you can imagine, a lot of the IDP opportunities that we had in our pipeline, DCM alone, we're in the financial services market. So we're optimistic there that we'll have good conversion rates.

Next question we have is from Daniel Rosenberg at Paradigm.

My first 1 goes to Richard and Lee. I'm curious on the road map for integration. Are there any milestones, key targets that you guys are hoping to achieve? Is there much work on the integration front? So just any color there would be.

Yes. Maybe I'll just kick that off and then turn it over to Lee. To be clear, Octacom is a division of DCM. So we're not physically integrating Octacom into the into the DCM world for obvious reasons, right? They're a rocket ship in terms of growth. We just want to fuel -- help fuel the growth and provide the services, the commercial services, supply chain services, the financial services, HR services that we have at DCM into the Octacom organization and then -- and a lot of those will be kind of shared services as opposed to embedded services.