Dye & Durham Limited (DND) Earnings Call Transcript & Summary

Good afternoon. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dye & Durham Fourth Quarter and Fiscal Year 2023 Earnings Call. I would now like to turn the call over to Ross Marshall, Investor Relations on behalf of Dye & Durham. Mr. Marshall, you may begin your conference.

Thank you, Jenny, and good afternoon. Welcome to the Dye & Durham conference call. Before we start, we'd like to remind you that all amounts discussed on this call are denominated in Canadian dollars, unless otherwise indicated. Please note that statements made during this call may include forward-looking statements and information and future-oriented financial information regarding Dye & Durham and its business and disclosure regarding possible events, conditions or results that are based on information currently available to management, which indicates management's expectation of future growth, results of operations, business performance and business prospects and opportunities. Such statements are made as of this date hereof, and Dye & Durham assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws. Such statements involve significant risks and uncertainties and are not a guarantee of future performance or results. A number of these risks or uncertainties could cause results to differ materially from the results discussed today. Given these risks and uncertainties, one should not place undue reliance on these statements and information. Please refer to the forward-looking statements and information and future-oriented financial information section of our public filings without limitation our MD&A and our earnings press release issued today for additional information. Joining us on the call today are Matt Proud, Dye & Durham Chief Executive Officer; and Frank Di Liso, Dye & Durham, Chief Financial Officer. A question-and-answer session will follow the formal remarks for research analysts. I now turn the call over to Matt for opening remarks.

Thanks, Ross, and good afternoon, everyone. The business performed well in the quarter, and we either delivered or exceeded on what we said we would deliver. Our performance once again demonstrates the strength and resilience of our business as well as the significant efforts we have made to diversify our revenue base and grow our contracted revenue. As many of you know, we sell software to law firms globally. We remain focused on expanding our wallet share across this large and growing market. In fiscal '23, we made significant product investments, which have accelerated our go-to-market strategy, in turn, rapidly accelerating the amount of ARR in our business. As a result, we've grown our ARR from basically nothing 18 months ago to over CAD 100 million today and growing. In the fourth quarter, we surpassed our revenue guidance coming in above the top end of the range with more than CAD 120 million in revenue. We achieved our guidance on adjusted EBITDA with nearly CAD 66 million in the fourth quarter up almost CAD 10 million compared to the third quarter of fiscal '23. It goes to saying that year-over-year comparisons with respect to revenue and adjusted EBITDA are less favorable, reflecting lower transaction volumes driven by challenging macroeconomic conditions and uncertainty regarding inflation and rising interest rates. Frank will give you some more details on that in a moment. Our stated goal as a company is to lead the global legal software industry. This week, we marked a major milestone in this journey, where we announced the upcoming launch of our global Unity platform. This one-stop shop will bring together all our full product suite in a single destination with 1 sign-on and 1 bill for our over 60,000 customers around the world. While we've always operated a well-oiled back-end platform into which we integrate the businesses we acquire, our new global Unity platform is a result of a dedicated effort to integrate all of our customer-facing applications on the front end, enabling our customers to access all of our capabilities from 1 frictionless destination. This is a first of its kind and truly disruptive offering for the legal professions and is unmatched by any other provider in the market today. We're launching the Global Unity platform in the U.K. in the coming few weeks. Canada later this year and Australia, Ireland in calendar 2024. Our global Unity platform project is part of a larger product development strategy at Dye & Durham that supports our goals. In the past, we received questions from the investment community regarding our total product investment. During fiscal '24, we intend to invest more than CAD 60 million in product innovation and R&D to further enhance our industry-leading practice management capabilities across the markets we operate. In addition to the global Unity platform project and enhancing our practice management capabilities, the team is actively working on AI applications for our practice management software specifically in the form of document generation for law firms. This fall, our first degenerative AI-enabled capabilities will significantly streamline and improve how law firms can create an initial draft of a will. When opening will matters in our practice management software, users will seamlessly interact with a generative AI-enabled capability that through a multiturn or chat or conversational experience will, in seconds generate an initial draft of a will. Through generative AI, Dye & Durham will have reduced 2 seconds, a task that used to take hours of manual work or 30 minutes or so even using our traditional questionnaire style workflows. Our strategy to diversify our revenue streams across a larger total share of wallet that legal market spends can be seen in our results. As of June 30, 58% of our revenue in the quarter was related to law firms conducting matters on behalf of their clients using software, which is a significant decrease from the 68% in the same period the prior year, and that's our software. More importantly, as I've previously mentioned, ARR has grown. Growth has increased by 117% since the start of last fiscal year. We also materially strengthened the company's executive leadership team this quarter with the additions of David Nash as Chief Product Officer, and Aaron Eichenlaub as Chief Revenue Officer. Both David and Aaron have deep software experience with growing and innovating companies that deliver enhanced value to their B2B customers. With respect to our capital allocation priorities, we intend to drive our total leverage ratio, including the convertible debenture below 4x adjusted EBITDA. However, we believe we can walk and chew gum at the same time, and we must balance deleveraging with our stated growth objectives. Therefore, we'll also continue to be disciplined and prudent in our acquisition strategy. As many of you know, we have a strong track record of acquiring assets and rapidly -- and deleveraging what we drive revenue and cost synergies to get to a post synergy goal. We've established clear goals for the business. We have a set target of annually delivering 20% to 25% adjusted EBITDA growth, consisting of approximately 50% organic meaning economic growth, wallet share growth and pricing power and 50% from M&A. An important aspect of achieving this goal is building more predictable recurring revenue streams and diversifying our revenue mix across our customer base. We have a set goal of 50% recurring revenue within 3 years. We also have a goal of diversifying our exposure to real estate transactions to less than 33%. We've built a world-class software business of scale. It's a business that can generate strong top line growth with stable cash flows and very healthy margins. We look forward to updating you on our progress as we continue to grow, optimize and diversify our global business. I'll now turn it over to Frank to review the financials. Frank?

Thank you, Matt, and good afternoon, everyone. This afternoon, we reported our fourth quarter and full year 2023 results. I am pleased to report that we achieved the guidance we provided to you in May. Our results continue to demonstrate the resiliency and consistency of the business despite the challenging market conditions and significantly lower real estate transactions we've had to navigate during the past 12 months. This consistency that demonstrates how we're able to manage through market cycles while still delivering shareholder value. Our diversification strategy and build-out of our proposing solutions are working as we continue to increase our annual recurring revenue contracted and reduce our exposure to real estate transactions. Annual recurring revenue contracted was 19% as of June 30, 2023, compared to just 10% in the same period last year and revenue exposed to real estate transactions volumes globally in Q4 was 58% compared to 68% in the same period of fiscal '22. While revenue exposed to real estate transactions in Canada was 33% compared to 45% in the same period of last year. We reported revenue of CAD 120.2 million during the fourth quarter, an increase of CAD 16.1 million or more than 15% compared to the third quarter of fiscal '23. On a sequential basis, you could see the market has improved from the lows we saw in the second and third quarter periods of fiscal '23. Now keep in mind, our fiscal Q4 period is typically a stronger seasonal period for us. However, we are not back to normalized levels at this stage. Fourth quarter revenue decreased by CAD 9.5 million or 7% in the same period last year. The change is primarily related to market conditions leading to lower real estate transactions versus the prior year. Fiscal year 2023 revenue was CAD 451 million, a decrease of CAD 23.7 million or 5% from fiscal '22. The change is primarily a result of more conditions I referenced earlier. We generated adjusted EBITDA of CAD 65.7 million in the fourth quarter of fiscal '23, an increase of nearly CAD 10 million or 17% compared to the third quarter of fiscal '23. Adjusted EBITDA decreased by CAD 9.5 million or 13% compared to the same period last year. We continue to maintain our strong EBITDA margins coming at 55% this quarter, which is in line with our target range of 50% to 60%. Adjusted EBITDA for fiscal '23 was CAD 243.8 million, a decrease of CAD 23 million or 9% compared to fiscal '22. The change is primarily a result of lower revenues, partially offset by lower operating costs, net of acquisition impact. Adjusted EBITDA margin was [ 54% ] for the entire fiscal '23. Total operating costs, which includes direct costs, technology operations costs, G&A and sales and marketing expenses were CAD 54.5 million for the quarter or 45% of revenues, which is in line with the prior year period. Net of the impact of expenses from fiscal '23 acquisitions, our operating costs for the quarter were CAD 49.7 million, which demonstrates improvements from our cost reduction initiatives implemented earlier in the fiscal year. As we acquire assets, we continuously look for ways to drive cost synergies and eliminate redundancies. We expect our ongoing operating cost to be within the 40% to 50% range of revenues. Net finance costs for the quarter were CAD 37 million compared to CAD 14.4 million in the same period of last year. The increase is due to an increase in interest rates and lower favorable noncash impact from the change in fair value of our convertible debentures and [indiscernible] considerations and loss on the settlement of loans as compared to the prior period. As a reminder, IFRS accounting implies us to mark-to-market or fair value of these instruments each quarter, so we do expect this variability in our finance cost to continue. Acquisition and restructuring and other costs for the quarter were CAD 9.2 million or CAD 8 million, excluding noncash items. This was a decrease from CAD 16.4 million in the fourth quarter of fiscal '22, primarily related to the TM Group and Link transactions being behind us, and we anticipate downward trend to continue. We announced the sale of TM Group subsequent to the end of fiscal '23. As part of the transaction, the company received CAD 75.6 million cash at closing on August 3, net of transaction costs incurred with up to CAD 70.9 million in potential additional earn-out payments between 2023 and 2026. During the fourth quarter, we recorded a noncash impairment charge on the sale of CAD 66.7 million, which impacted net income for the period. Now turning to our balance sheet. As of June 30, 2023, we had approximately CAD 132 million of liquidity. This liquidity consists of cash, the revolving credit facility and the delayed draw term loan. Our leverage ratio based on fiscal 2024 consensus and excluding the impact of the convertible debenture is currently 3.7x as of June 30. Subsequent to the end of the period, we use the upfront net proceeds from the divestiture of the TM Group and cash operations to pay down CAD 84 million in debt. During the same period, we also drew CAD 43.5 million from the delayed draw term loan to fund acquisitions. The net result of this is that we have reduced our debt by approximately CAD 41 million. This afternoon, we announced a normal course issuer bid as the existing program terminates on September 29, 2023. The NCIB will allow us to acquire up to 2.75 million outstanding common shares or approximately 5% of the total 55 million issued outstanding shares as of September 13, 2023. We view our shares as a great opportunity in the market available to us. We'll continue to be disciplined in our approach to capital allocation as we grow the business. With that, I'll turn it back to the operator for Q&A. Jenny?

[Operator Instructions] Your first question is from Thanos Moschopoulos from BMO Capital.

With respect to M&A, it seems like you completed CAD $42 million M&A this quarter, CAD 55 million post quarter end. Any color that you can provide in terms of the nature of the assets or geographies that were acquired?

Yes. The acquisitions this quarter were in the United Kingdom, and it was -- it's in relation to practice management software for law firms.

Okay. And what about the CAD 55 million post quarter end, can you comment on that?

Yes. So I think when Matt said this quarter, he meant this current quarter, Q1 panels, In Q4 we would have done the GhostPractice acquisition that was announced. That was announced -- that was in the -- mainly geography of South Africa, that we were able to complete in, I believe, May of 2023.

Okay. And with respect to the new launch of Unity, just given that you're letting some common R&D across the geographies. As that platform fully rolls out, may there be some incremental cost synergies from an OpEx perspective or a gross margin perspective that we might take.

I mean, look, long term, we always look for margin improvement and efficiencies of scale, and we will get that. We do have duplicate cost bases in a lot of places. But it does take time to realize that. So yes is the answer, but that will take time.

More broadly on synergies. I mean, you've obviously been cutting costs through the downturn. Would we have seen the full impact of recent cost-cutting initiatives in the June quarter results? Or might there be some incremental benefit in that regard that will flow through into Q1?

Look, as we buy business and we continue to do that. We continue to take cost out. We'll always -- we're always looking for that downward trajectory. Do we have any kind of large programs to take costs out right now? No. But we're always looking to be efficient with our cost structure.

Maybe last question for me. Obviously, last quarter, you had given us some quarterly guidance. As we think about the September quarter, obviously, some [indiscernible] parts, no one has a crystal ball, but any broad parameters we can think of in terms of as you look at the volume of business that you're doing currently. Directionally, would you expect EBITDA be similar, up or down? Any color you can [indiscernible] in that regard?

Well, look, I mean, given we sell software to law firms and given [indiscernible], they open is real estate commencing transactions, Q4 is generally our strongest quarter. But I mean, we're seeing generally in line with that we expected. You'll see a bit of softening in Q1 because that's just cyclical. But it should be generally in line where we are now. Yes, generally.

Your next question is from Robert Young in from Canaccord Genuity.

Maybe I'll start off with a couple of clarifications from the prepared comments. I think you said that you intend to drive total leverage, including the convert below 4x. And then later in the call, you said that the leverage is 3.7x. I assume that's without the convert or it's a different frame. Maybe just clear that discrepancy for me.

Yes, Rob. When I mentioned below 4x, that was included in the convert. And when Frank talked about senior leverage, that was without the convert.

Okay. And maybe if you could just elaborate on what the -- what levers you have to drive leverage below 4x. I assume growth in EBITDA is one, but are there any other plans to reduce debt or through free cash that you're generating or through maybe some divestiture, if you just maybe walk through the different levers you have there?

Look, the primary focus is growing the business. And as we do that -- as we grow our earnings, we will naturally delever the business and so that remains our focus. Being prudent with our capital also helps the business does generate a lot of cash. And yes, of course, if we wanted to make any rapid decrease in that, we could always look at getting rid of noncore or nonstrategic assets, but our primary focus is growing the business.

Okay. The second thing I want to clarify, I'm making sure that I heard it correctly. I think you said that the ongoing operating cost was 40% to 50%? Or were you saying that the ongoing operating margin was to be 40% to 50%. I just want to make sure I'm clear on that.

Yes. No, it's the operating cost as a percentage of revenue, it's 40% to 50% or reversely, the margin would be 50% to 60%.

Okay. And when I map that to EBITDA, is that sort of consistent with the previous guidance you've given in the past?

Yes, there's no -- there's been no change to that, Rob.

Okay. Great. And maybe next question, I think it suggested that special charges might be lower in the coming period just because you're moving to a period with less activity with TM Group and Link in the past. I think you'd said that CAD 8 million of excluding noncash, I mean, maybe like if you could give us just a sense of what that quarterly special charge -- how should we think about that decline -- what would a normal rate be for Dye & Durham?

Yes. So I mean you would have seen the large reduction we had in Q4. As I mentioned, reported was CAD 9.2 million, but excluding the noncash items, it was CAD 8 million for the quarter, and that compares to CAD 16.4 million just a year ago. So those 2 transactions are behind us. Going forward, we do expect like obviously, with those 2 transactions behind us, we don't expect the same levels of spend that we've done in the last 12 months, and we'll continue to drive that number down.

Okay. And then last question for me would just be around the new sales strategy. You talked about the new hires product management and sales. I think you talked about expansion of Unity into the U.K.. I think last quarter, you were talking about moving into the U.K. with the current sales effort bundling practice management. So maybe you could just give maybe a quick summary of how that practice management bundling strategy is moving forward, maybe the time line if it's tied to Unity, and then I'll pass the line.

Yes. 2 different concepts here, Rob. We talked about our Unity global platform. That is single landing page, single place to access all our applications regards what geography you're in, 1 bill, 1 view for the customer. As it relates to our practice management system, which you see -- for clarity, was traditionally called Unity, but Unity practice management, we have been in Canada bundling that with our accounting module and other capabilities we have, which has significantly helped us in our take-up in ARR as we sell that by us -- by contractual offering. We're in the process of scaling up our team in the U.K. to roll that out. That actually -- we haven't started rolling that out yet in that market, but that's something we're in the process of doing. And likewise, we've just started in Australia to sell a subscription offering that is very similar to what I just talked about. So again, very early days, but we have started in Australia and U.K. will be next.

Okay. And then the natural follow-on to that is how are your customers reacting to that new offering in the U.K. and Australia, then I'll pass the line.

Well, we're not launched yet in the U.K., it's pending, we're going to roll out shortly. In Australia, means already been take up. And I mean, it's just launch in the last kind of month or so. So we're already seeing takers. So look, the value prop, as we talked about previously, is real, and it's demonstratable and tremendous for the customer. And as we saw in Canada, we were able to drive significant uptake from customers who are willing to contract with us given the value for our props [indiscernible].

Your next question is from Kevin Krishnaratne from Scotiabank.

Just a clarification. You mentioned -- I think you mentioned CAD 60 million in R&D expenses. Did I hear that right? Can you just clarify, is that a repurposing? Is that geared towards AI? Just I can't recall what you said the CAD 60 million was related to.

Yes. So we get a lot of questions, what's your total spend on R&D and software development and so over the next -- this fiscal year, we plan to spend approximately CAD 60 million on that or just over CAD 60 million of that. And so AI is one thing that's related to. It's also related to enhancements in our practice management software as we retool and platform for new markets and consolidate applications, and as we finish the build-out for the Unity global platform for Canada and Australia. So those are the kind of primary uses of those funds.

How does that number compare to what you did in R&D last year?

It would be up.

It is up. And so like, again, I know you kept the guidance for your target range of 50 to 60 on margins. But given maybe some -- is there any sort of cadence to that? Is it kind of like upfront spending, weaker quarters, Q1, Q2 and then uplift through Q3, Q4, how do we think about the investment cycle?

I don't really understand the question. You want to repeat that again? Like I'm sorry, I'm sorry.

Yes. So are you going to be investing upfront like to Q1 and Q2 sort of go -- you see margins maybe towards the lower end of that.

Yes. So I mean, as basically the Unity global platform, a lot of that has already been built. There is a heavy lift as it relates to taking the practice management applications globally. So that's the number we anticipate over the next year. It's not really cyclical. I would say flat across the year as we're kind of spending at that rate today.

Kevin, you would have noticed in Q4 the capital, the CapEx spend tick up a bit. I think there's roughly CAD 9 million amount in Q4. So that's reflective of what Matt was talking about in terms of getting the single sign-on and the global Unity platform up and running. So we do expect that to be the current trend. But over time, going back to more normalized levels that we saw in the past.

Okay. Got it. Okay, I understand. Just the last one for me, if you can help us out, I know you did GhostPractice. You did a few other acquisitions last year, and then you've done the ones that you just talked about subsequent to quarter end. Is there a way you can give us sort of what the total revenue number for all those acquisitions in totality could be just to help us modeling going forward?

Sorry, Kevin, we don't disclose that.

Your next question is from Gavin Fairweather from Cormark.

I thought I'd start out on the Unity global platform. I guess, to what extent do you expect this to be revenue accretive as some of your clients can access kind of more of your products from within a kind of single sign-on environment?

Yes. We do anticipate this to be revenue accretive. It makes the cross-sell easier, the way you go to market, interact with the customers easier. Having -- instead of having -- with example, 5 or 6 different places you go to indd your applications in 1 market, it's all available in 1 place. And a lot of the use cases, you look at small and medium law markets that we serve, they need the same products, the same demands as they take on work for their clients, and we provide those products, too. So having it all in place, we think naturally needs to cross-sell. It also makes it easier to them under contract as you have it all available by 1 place via 1 invoice, et cetera.

That's helpful. And is this a pretty seamless kind of migration? Is it kind of switching over to the UI for the most part? Or is there a decent amount of kind of handholding you need to do as you roll this out?

No, it's seamless. It's very seamless.

Okay. Great. And then just as we think about transactions kind of bottom bouncing to potentially starting to rebound, are you seeing any kind of areas in the business where you need to kind of add some costs to support higher volume or any other kind of investment priorities you called out? Just trying to think about kind of operating leverage in a recovery here.

Yes. No, the great thing about our business is it's a fairly fixed cost base. We sell software to law firms. So there's no people involved in processing transactions. It's just whatever type of work the clients are doing on the software, the computer does it. So you don't need to add bodies as there's more transactions going through your -- through any kind of software application. So that's one of the operating leverage of our business is good from that perspective. The answer is no, no [indiscernible] need to be added.

Your next question is from Scott Fletcher from CIBC.

I want to ask a question on the revenue in the quarter relative to the guidance you provided in Q3. You sort of broke out the build into a few categories. Is there a specific category that helped you get to the top end of that guide relative to what you laid out in the Q3 presentation?

Yes. Thanks, Scott for the question. Generally in line, Scott, with sent the revenue guidance that we probably right in the range of CAD 115 million to $120 million. And we did see strength in the ARR as we alluded to previously. Given the seasonal high period of time, we were able to close a lot of contracts in the May and June time frame. And also some of the revenue contribution from TM was a little higher than expected as well.

Okay. And as a follow-up, can you -- is there anything you can give us in terms of numbers of TM in the quarter, just so we can look at modeling going forward?

Yes. Sorry, we don't disclose those numbers, Scott. But you can look back to previous disclosures around percentage of revenue that we previously disclosed about 1.5 years ago. It will be generally that line.

Okay. Understood. And sorry, one thing, just a clarification again from the market. Can you -- can you just walk us through how much you paid down on the term debt, is that subsequent to the quarter?

Yes, for sure. So on the term debt, we paid down roughly CAD 59 million that was settled from the proceeds -- direct proceeds from the sale of TM and then also subsequent to year-end, we paid down an additional CAD 25 million in the revolver, largely from both the TM proceeds, either reimbursement of past costs as well as cash flow from operations.

[Operator Instructions] Your next question is from Stephen Boland from Raymond James.

Not to beat this to death, but the Unity rollout, I just wondered, when you move it over to U.K., Australia. Like all you're doing is basically combining the legacy products that you have with the Unity rollout. So like you said, it's just going to one, you're not actually getting rid of legacy products that are in those other jurisdictions? Is that the right way to think about it?

Yes. All of our products, for the most part, are cloud-based. So you're going to 1 Dye & Durham website to log in. 1 Dye & Durham account, 1 Dye & Durham landing page, and being able to access all the applications that you are used to using and more 1 place.

Okay. And this new -- the acquisitions that you did subsequent to in this quarter, Q1 you did say it's U.K. practice management software, those will all be integrated into Unity as well. Is that correct?

Correct, yes.

Okay. And then I guess my last question, when you mentioned that your goal is that the 25% -- 20% to 25% EBITDA growth, 50% organic, 50% M&A. The 55% that you've spent, if I use multiples that you may have paid in terms of whether it was 10 to 15x, I'm not sure what the multiples are right now in the market, Matt, maybe you could explain that. But basically, the thought is that to get to 12.5% of M&A, you're probably going to have to do more M&A. Is that a fair assessment as well?

To get to -- yes, correct. To get to the 20% you have the M&A, that is correct, yes. .

Okay. And what kind of multiples are you seeing in the market right now, Matt?

Look, it's still expensive. We're being careful. We're being very, very selective. The reality is our -- the market we serve is fast and growing has a lot of favorable characteristics to it. And we are focusing more on businesses that have steady AR basis. So look, multiples are -- they're still in the mid- to high teens often. There's -- sometimes you can find better deals and we look to be as prudent as we can. So you've got to be very selective, trying to use structure where possible. to share risk with sellers, but they're still high.

There are no further questions at this time. I will now turn the call back over to Ross Marshall for the closing remarks.

Thanks, everyone, for joining this afternoon. We look forward to speaking with you in the coming weeks and on our next call in November. Night.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.