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Dye & Durham Ltd
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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 orientated 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 indicate 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-orientated 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's Chief Executive Officer; and Frank Di Liso, Dye & Durham's Chief Financial Officer. A question-and-answer session will follow the formal remarks for research analysts.
I'll 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 delivered or exceeded 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 have grown our ARR from basically nothing 18 months ago to over CAD100 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 CAD120 million in revenue. We achieved our guidance on adjusted EBITDA with nearly CAD66 million in the fourth quarter, up almost CAD10 million compared to the third quarter of fiscal '23. It goes without saying, the 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 on this journey while 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 one sign-on and one bill for our over 60,000 customers around the world.
While we've always operated a well-oiled backend 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 one frictionless destination.
This is a first-of-its-kind and truly disruptive offering for the legal profession 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've received questions from the investment community regarding our total product investment. During fiscal '24, we intend to invest more than CAD60 million in product innovation and R&D to further enhance our industry-leading practice management capabilities across 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 managers software specifically in the form of document generation for law firms. This fall, our first Generative 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 Generate AI-enabled capability that through a multi-turn or chat or conversational experience well in seconds generates an initial draft of a will. Through generative AI, Dye & Durham will have reduced to seconds a task that used to take hours of manual work or 30 minutes or so even using our traditional question-your-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 30th, 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 previously mentioned, ARR has grown. Gross 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 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 4 times 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 will 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 delivering rapidly - and deleveraging while 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 three 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 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'm 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 just demonstrates how we are able to manage through market cycles while still delivering shareholder value.
Our diversification strategy and build-out of our practice management 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 transaction 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 CAD120.2 million during the fourth quarter, an increase of CAD16.1 million or more than 15% compared to the third quarter of fiscal '23. On a sequential basis, you can see the market has improved from the lows we saw in the second quarter 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're not back to normalized levels at this stage.
Fourth quarter revenue decreased by CAD9.5 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 CAD451 million, a decrease of CAD23.7 million or 5% from fiscal '22. The change is primarily result of some of the conditions I referenced earlier. We generated adjusted EBITDA of CAD65.7 million in the fourth quarter of fiscal '23, an increase of nearly CAD10 million or 17% compared to the third quarter of fiscal '23.
Adjusted EBITDA decreased by CAD9.5 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 CAD243.8 million, a decrease of CAD23 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 and tax. 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 CAD54.5 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 CAD49.7 million. This demonstrates the 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 costs to be within the 40% to 50% range of revenues.
Net finance costs for the quarter were CAD37 million compared to CAD14.4 million in the same period of last year. The increase is due to an increase in interest rates and lower favorable non-cash impact from the change in fair value of our convertible debentures and contingent considerations and loss on settlement of loans as compared to the prior period. As a reminder, IFRS accounting applies just to mark to market on or fair value these instruments each quarter. So we do expect this variability in our finance cost to continue.
Acquisition restructuring and other costs for the quarter were CAD9.2 million or CAD8 million excluding non-cash items. This was a decrease from CAD16.4 million in the fourth quarter of fiscal '22, primarily related to the TM Group and Link transactions being behind us and we anticipate the 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 CAD75.6 million in cash at closing on August 3rd. The net of transaction costs incurred with up to CAD70.9 million into potential additional earn-out payments between 2023 and 2026.
During the fourth quarter, we recorded a non-cash impairment charge on the sale of CAD66.7 million, which impacted net income for the period. Now, turning to our balance sheet. As of June 30, 2023, we had approximately CAD132 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 3.7 times as of June 30. Subsequent to the end of the period, the upfront net proceeds from the divestiture of TM Group and cash from operations to pay down CAD84 million in debt. During the same period, we also drew CAD43.5 million from the delayed-draw term loan to fund acquisitions. The net result of this is that we have reduced our debt by approximately CAD41 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 through 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. Please ask your question.
Hi, good afternoon. With respect to M&A, it seems like you completed CAD42 million of M&A this quarter, CAD55 million in the first quarter end. Any color 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 in relation to practice management software for law firms.
Okay. And what about the CAD55 million post-quarter end? Any comment on that?
Yes. So I think when Matt said this quarter, he meant this current quarter Q1, Thanos. In Q4, we have done the GhostPractice acquisition that was announced. That was mainly in the 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 leveraging some common R&D across the geographies. As that platform fully rolls out, but there'll be some incremental cost synergies from an OpEx perspective or a gross margin perspective that we might say?
Look, long term you'll 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 the incremental benefit in that regard that will flow through into Q1?
Look, as we buy businesses and continue to do that, we continue to take costs out. We're always looking into that downward trajectory. Do we have any kind of large program to take costs out right now? No, but we're always looking to be efficient with our cost structure.
Last question from me. Obviously, last quarter you had given us some quarterly guidance. As you think about the September quarter, obviously since it's been 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 to be similar up or down. Any color you can find in that regard?
Well, look, I mean given we sell software to law firms and given great call on advocate they opened is real estate conveyancing 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 to be generally in line where we are now, but generally.
All right. I'll pass the line. Thanks.
Thank you. Your next question is from Robert Young from Canaccord Genuity. Please ask your question.
Hi, good evening. 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 4 times. And then later in the call, you had said that the leverage is 3.7 times. I assume that's without the converter, it's a different frame, may be just clear that discrepancy for me?
Yes, Rob. When I mentioned below 4 times, that was including the convert we did and what Frank talked about senior leverage that was without the convert.
Okay. And maybe if you could just elaborate on what levers you have to drive leverage below 4 times? 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 can 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 then we could always look at getting rid of non-core or non-strategic assets, but our primary focus is growing the business.
Okay. The second thing I wanted to clarify and make sure that I heard it correctly, I think you'd said that the ongoing operating costs 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 costs percentage of revenue, 40% to 50% or conversely, 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 been no change to that, Rob.
Okay, great. And maybe the next question, I think you suggested that special charges might be lower in the coming period, just because you're moving into a period with less activity with TM Group and Link in the past. I think you've said that CAD8 million of excluding non-cash, maybe like if you could give us just a sense of what that quarterly special - how should we think about that declining? What would a normal rate for Dye & Durham?
Yes, so I mean you would have seen the large reduction we had in Q4. As I mentioned, the report, it was CAD9.2 million, but excluding the noncash item it was CAD8 million for the quarter, and that compares to CAD16.4 million just a year ago. So, those two transactions are behind us. Going forward, we do expect like obviously with those two 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. We talked about expansion of Unity into the U.K., but I think last quarter you were talking about moving into the U.K. but with the current sales effort bundling practice management. So maybe you could just give a may be a quick summary of how that Practice Management bundling strategy is moving forward, maybe the timeline, if it's tied to Unity? And then I'll pass the line.
Yes. So two different concepts here, Rob. We talk about our unity global platform, that is a single landing page, single place to access all our applications for what geography you are in. One Bill, one view to the customer. As it relates to our practice management system, which 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 to buy a contractual offering. We're in the process of scaling up our team in the U.K. and roll that out. Actually, we haven't started rolling that out yet in that market, but that's something we're in the process of doing.
Likewise, we have just started in Australia to sell to sell a subscription offering that is very similar to what I just talked about, so again very, 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? And then I'll pass the line.
Well, I can say, we've not launched yet in the U.K. where it's pending, we're going to roll out shortly. In Australia, I mean it has already been starting to take up. I mean it's just launched in the last kind of month or so. So we're already seeing takers, so look the value prop as we've talked about previously is real and it's demonstratable and tremendous for the customer.
And as you saw in Canada, we're able to drive significant uptake from customers are willing to contract with us given the value proposition we bring to the table.
Good. Thanks a lot. Thanks for taking the questions.
Thank you. Your next question is from Kevin Krishnaratne from Scotiabank. Please ask your question.
Hey, there. Good evening. And just a clarification. You mentioned - I think you mentioned CAD60 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 CAD60 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 CAD60 million on that or just over CAD60 million for that. And one thing, it's related to - it's also related to enhancements in our practice management software as we re-tool and platform it 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.
And - so it's up. 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? Does it kind of like upfront spending weaker quarters, Q1, Q2 and then uplift through Q3, Q4? How do we think about the investment cycle?
Sorry, I don't really understand the question. Can you please repeat that again? I am sorry.
Yes. Are you going to be investing upfront like to Q1 and Q2 sort of go see margins maybe towards the lower end of that?
Yes, so I mean, obviously, 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 very cyclical, I would - I think it may be flat across the year as we kind of spending at that rate today.
Kevin, you would have noticed in Q4, the capital - the CapEx spend ticked up a bit. I think it's roughly CAD9 million amount in Q4, so that's reflective of what Matt was talking about in terms of getting to single sign-on and then the Global Unity platform up and running. So we do expect that to be the current trend, but in over time getting back to more normalized levels that we saw in the past.
Okay, got it. I understand. Thank you. Just the last one from me, if you can help us out. I know you did GhostPractice, you did 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 to modeling going forward?
Sorry, Kevin, we don't disclose that.
All right. No worries. I'll pass the line. Thank you.
Thank you. Your next question is from Gavin Fairweather from Cormark. Please ask your question.
Hey, good afternoon. 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. No, we do anticipate this to be revenue-accretive. It makes the cross-sell easier, the way go to market interact with your customers easier having set of having example, five or six different places to go to back your applications in one market, all available in one place.
And a lot of the use cases, you look at small and medium law, the markets that we serve their need the same products, the same demands as they take on work to their clients and we provide those products too. So having all in place, we think naturally to cross-sell. It also makes it easy to get them under contract, as you have it all available by one plate and one invoice et cetera.
That's helpful. Is this a pretty seamless kind of migration is that kind of switching over 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 cost to support higher volume or any other kind of investment priorities you call 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 is no people involved in processing transactions, it's whatever type of work the clients are doing on the software, the computer does it. You don't need to add bodies as more transactions going through your - to any kind of software application. So that's one of the operating leverage in our business is good from that perspective. The answer is no, nobody seemed to be added.
Okay, that's it from me. Thanks so much.
Thank you. Your next question is from Scott Fletcher from CIBC. Please ask your question.
Hi, there. I wanted to ask a question on the revenue in the quarter relative to the guidance you provided 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 the revenue guidance, I mean probably actually provided a range of 150 to 120. We didn't see strength in ARR as we alluded to previously. Given a seasonal high period of time, we were able to win lots of contracts in the May and June timeframe. And also some of the revenue contribution from the TM was a little higher than expected as well.
Okay, thanks. 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?
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 a year and a half ago, it will be generally in that line.
Okay, understood. And sorry one thing just a clarification, again from the market. 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 CAD59 million that was settled from the proceeds - direct proceeds from the sale of TM and then also subsequent year-end, we paid down an additional CAD25 million in the revolver largely from both the TM proceeds either reimbursements of past costs as well as cash flow from operations
Okay, great. I'll pass the line. Thank you.
[Operator Instructions] Your next question is from Stephen Boland from Raymond James. Please ask your question.
Thanks, guys. Not to beat this to depth, 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 one Dye & Durham website to log in, one Dye & Durham account, one Dye & Durham landing page, and being able to access all the applications that you used to using and more on place.
Okay. And this new - the acquisitions that you did subsequent in this quarter Q1, you did say as 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 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 is 10 times to 15 times. 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 CAD12.5 million of M&A, you're probably going to have to do more M&A, is that a fair assessment as well?
Yes, correct. To get to the 20% you have your 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 expenses being careful, we're being very, very selective. The reality is the market we serve is fast growing has a lot of favorable characteristics to it and we are focusing more on businesses that have steady ARR basis. So look multiples are and 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're going to be very selective, try to use structure where possible to share risks with sellers. But they are still high.
Okay. That's all I have. Thanks, guys.
Thank you. 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. Good night.
Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.