Data Communications Management Corp

TSX:DCM

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to DATA Communications' Earnings Call for Q3 2019.[Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to turn the conference over to your speaker today, James Lorimer, Chief Financial Officer. Please go ahead, sir.

[James E. Lorimer, CFO & Corporate Secretary]

Thank you, Julian. Good morning, everyone, and thank you for joining us today for our third quarter 2019 conference call.Speaking on the call this morning will be Greg Cochrane, CEO; and myself. The prepared remarks in today's call will be followed by a question-and-answer period. We'd also like to remind everyone that Greg and I can be available after the call for any follow-up questions that you might have.Before we begin, I will remind everyone that we will refer to forward-looking information on today's call. 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.And with that, I'll now turn the call over to Greg.

[Gregory J. Cochrane, CEO & Director]

Thank you, James. Good morning, everyone.I'd like to provide a third quarter 2019 and year-to-date financial results, our third quarter initiatives and drivers for our business and lastly our management outlook for the near term before we turn it over to questions.So let's review our third quarter 2019 and our first 9 months.Revenues for the quarter were $63.2 million compared to $74.9 million in the third quarter of 2018, a decrease of $11.7 million or 15.6%. Approximately $7.5 million of the year-over-year decrease was primarily attributed to continued production shortfalls in July and August directly related to the launch of our new enterprise resource planning or better known as ERP system in June. We also experienced lower revenues of $1.6 million from certain core customers, which were primarily related to timing issues, and $1.5 million for certain retail customers that have moved to other solutions not offered by our company.Adjusted EBITDA was $2.2 million in the third quarter of 2019 or 3.4% of revenues after adjusting for the impact of adopting IFRS 16, which became effective in the first quarter of this year. This compares to $5.2 million in the third quarter of 2018, representing a $3.1 million or 58.7% decrease compared to last year. Now before adjusting for the adoption of IFRS 16, adjusted EBITDA was negative $600,000 for the quarter ended September 30, 2019. This decrease is primarily due to the continued production disruption we experienced with the launch of our ERP system, in addition to some delay in the timing of work for certain customers.For the first 9 months of 2019, revenues were $211.4 million compared to $241.6 million in the first half of 2018 -- or first 9 months of 2018, I should say, a decrease of $30.2 million or 12.5%. Adjusted EBITDA was $14.5 million or 6.8% of revenues after adjusting for the impact of adopting IFRS 16. This compares to $15.7 million in the first half (sic) [ first 9 months ] of 2018, representing a decrease of $1.2 million or 7.8%. Before adjusting for the adoption of IFRS 16, adjusted EBITDA was $6.4 million for the first 9 months of 2019.Our third quarter initiatives and drivers. Really, I think there's not much to be said concerning our third quarter results, unless it's focused around the significant impact of the launch of our ERP system. As I reported in our second quarter shareholder letter, we weathered the startup phase of the system. The challenge, however, turned out to be far greater than I initially anticipated. During the third quarter, we continued to experience issues associated with the implementation of the ERP, primarily related to data input, production resourcing, shipping, billing and collecting.I'm pleased to report that substantially all of our September and October billings have gone through our new ERP system. Delays in proper invoicing have caused our working capital to increase materially as we've experienced delays in converting accounts receivable to cash. This has caused borrowings under our revolving credit facility to increase towards its current ceiling. Our lenders have been totally supportive and have increased our available borrowings under the facility to help us through the most challenging part of our ERP implementation, which we believe is now substantially behind us. To complete the ERP implementation, our focus for the balance of this year and the first quarter of 2020 will be as follows: ensure all pricing calculations are correct and itemized, ensure all our trade terms with clients are correct and signed off, customer reporting is completed for clients and management reporting systems and dashboards are completed as well.During the last 5 months of this year, our entire DCM team has been diligent and committed to getting us through to a better future. In addition, our suppliers and customers have been patient and supportive. I thank each one personally. We are mission critical to many of our customers' businesses, and it's no more evident than when product delivery disruptions occur. While the ERP implementation has dominated our daily focus, we have not lost sight of the business going forward. While our third quarter revenues were poor, we have made steady progress in capturing the backlog of business which occurred when we launched ERP.Our September revenue numbers were in line with historical norms, and we experienced a strong October. We believe our fourth quarter revenue will be comparably favorable to our 2018 fourth quarter record revenue, which was $81.5 million. In addition, our pipeline for new revenue opportunities is strong. And new business wins for the first 9 months are in excess of $80 million of lifetime contract value, of which we expect approximately $20 million will be recognized in the current fiscal year. What's important with the new wins is that approximately 50% are directly related to our success in pivoting to a marketing and business services solution enterprise.Let's address operations. While gross margins took a hit in the third quarter due to increased costs on overtime and shipping, and we experienced some poor utilization rates in July and August, we expect to see our gross margins improve in the fourth quarter and into 2020. We anticipate that the efficiencies and cost controls we executed in the first and second quarter of the year will pay dividends for us on top of the $3 million to $4 million of post-ERP savings, which we expect will now be realized commencing in early 2020.While we have reduced our full-time employee count by over 200 people in the past few months, the savings of approximately $5 million, which were to be realized in 2019, were partially offset by the addition of temporary staff and overtime required due to ERP implementation. While disappointing, these actions were needed to get us through that implementation. We will, however, recognize those savings in 2020.A couple of corporate initiatives. In September, we bolstered our finance and reporting team by adding Edwina Fung. Edwina is a seasoned professional with deep operational experience in Canada and the U.S. Most recently, she was the Vice President, Finance for a major private food processor. Her prior experience has been with Diageo, the Mars corporation and Spin Master. Edwina is responsible for our entire operational finance and business analyst teams.I'd like to announce our rights offering. Subject to receipt of all necessary regulatory approvals from the TSX, including -- we intend to pursue a rights offering under which eligible shareholders will receive rights to subscribe for common shares of the company. It is expected that our directors and senior officers will participate in the rights offering. Further details of the proposed rights offering were set out in a rights offering circular filed with securities regulatory authorities. The net proceeds from this proposed offering, if completed, will be used to enhance the company's liquidity in the near term. Improved liquidity will support the company's focus on growth initiatives, specifically in the areas of technology and electronic platforms over the longer term.Finally, I'd like to look at a management outlook for our immediate term over the next few months. One, obviously, complete the ERP process and implementation. That's our #1 priority. Secondly, shore up our balance sheet and work with our vendors as we lower our accounts receivable and build our liquidity. And third, continue to focus on our 5 key business principles.We expect our fourth quarter will be strong and in line with the record fourth quarter of 2018. Our objective for 2020 is to return to the path as we set out at the beginning of this year. I thank you for your continued support. Folks, this has not been easy to transform a 6-year-old business, but we are well on our way.For a full description of our financial results for the third quarter and year-to-date of 2019, please refer to our unaudited condensed interim consolidated financial statements for the 3 and 9 months ended September 30, 2019, and related management's discussion and analysis, copies of which are available at www.sedar.com.Thank you. And we'll open up for questions.

[Operator]

[Operator Instructions] And we have no questions. I turn the call back over to the presenters.

[Gregory J. Cochrane, CEO & Director]

All right. Thank you very much. A difficult quarter but certainly green shoots. Our rights offering is in regulatory finalization. And I believe, James, we will have an opinion and pricing on that later this week. Maybe you want to comment on that.

[James E. Lorimer, CFO & Corporate Secretary]

Yes. At the present time, we're working through regulatory process, and we can comment in the near term.

[Gregory J. Cochrane, CEO & Director]

Okay. All right. With that, thank you, folks.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.