mdf Commerce Inc
TSX:MDF
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mdf Commerce Inc
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Good morning. My name is Sylvie, and I will be your conference operator today. Before we begin, I will be reading the company's standard disclaimer. This conference call will contain certain forward-looking statements with respect to the corporation. These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those expected by these forward-looking statements. We consider the assumptions on which these forward-looking statements are based to be reasonable, but caution the listener that these assumptions regarding the future events, many of which are beyond our control, may ultimately prove to be incorrect since they are subject to risks and uncertainties that affect us. We disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable securities legislations. Unless otherwise indicated, all amounts are in Canadian dollar. At this time, I'd like to welcome everyone to Mediagrif's Conference Call on the Results for its Second Quarter of Fiscal 2020. [Operator Instructions] Thank you. Mr. Filiatreault, you may now begin the conference.
Well, thank you, Sylvie, and good morning, everyone. A pleasure to be here with you on the phone. And for those of you who have known Mediagrif for some time, this is -- it's not a first, but it's been a long time tradition that hasn't happened. I'm being told that the last time we held a post-quarterly announcement call was somewhere around 10 years ago. So I'll -- I know I won't get a break, but I'm still going to ask for it. We're getting organized, and there's lots of moving parts and changes happening at Mediagrif in the last 2 months. And so we'll do our best to give you a sense of direction of what's happening and what's going on and answer your questions. And obviously, we will get better as we go in preparing some further materials for this call. So obviously, we published our results, and I'll certainly let Paul comment on those in just a few minutes. But we also very, very shortly after published the -- the announcement of the acquisition of k-eCommerce, which is really what I'd like to give a few remarks on. And in following with what we had announced at the assembly, the General Assembly that was held September 11, just less than 2 months ago now, we had said that we would definitely invest in our B2B operations, namely in Strategic Sourcing and in our commerce division. And I think that we wanted to really send a strong signal to the market that we're very serious about getting back in growth mode and really working on strategically positioning these 2 divisions, these B2B divisions where this acquisition I think totally confirms both in terms of the size, the sector in which it operates, the strengthening of our offering in the commerce field and also the speed at which we executed on this. So I believe that proves the pudding and is a strong indication of what you can expect from us in the coming quarters. So a few words on k-eCommerce, great business, mostly a SaaS type of business with, as you saw in the press release, some 600-ish customers, centered around a complete commerce offering which is tied to both Microsoft Dynamics and SAP Business One ecosystems. So k-eCommerce is very present in the U.S. market. About 70% of their customers are in the U.S. And with a strong, strong tie in B2B types of operation. They do have some retail operators, but they kind of concentrate mostly on manufacturing and distributing. So been growing very nicely, very strongly. Last 5 years is a CAGR of about 17%, so we're very happy to see that. And that's again an indication of what we want to bring in terms of behavior and style of what's going to happen in the upcoming quarters at Mediagrif. Paul, any further comments? Or did you want to maybe give us a few highlights on the last quarter?
For sure, Luc. Thank you. Just I'll go -- well, first of all, good morning, everybody. Welcome from my part for the conference call. Just quickly go through our results of the second quarter of fiscal 2020 as we reported them yet last night. As you've seen, revenue totaled $18.2 million in the quarter, of which $16.9 million came from our B2B businesses. That's 93% of our total revenues for the quarter. On top, our B2B businesses were up 5% when we compare those numbers to the corresponding quarter last year. B2C business revenue on their side totaled $1.3 million in this quarter, slightly lower versus the corresponding quarter last year by about $100,000.Our EBITDA reached $3.7 million or a 21% margin, with no debt. Included in our EBITDA this quarter is the additional or increased investments of an amount of about $700,000 in both sales and marketing and also in technology. Obviously, those additional investments are in line with our growth strategy, refocusing our operations on Strategic Sourcing and unified commerce respective market. Finally, during the quarter, we reduced down debt by $2.4 million and ended up the quarter with a net cash position of $2.7 million.So going quickly through those results, I'll turn the meeting over to Luc for additional comments.
Well, guys, as you've been made aware, I've been present at the helm of Mediagrif now for 58 or 59 days, maybe. I kind of lost count over the last few days, which all seem to be one. And so obviously, not much impact on those results, right? It's -- I think they're in line with the traditional results that you've seen at Mediagrif. Strong quarter, strong profitability. And we're kind of turning the corner into saying, yes, now it's time to get into an investment mode where we will be growing our top line, acquiring more companies and really positioning ourselves as a commerce company, where our new mission is to enable the flow of commerce. Our new direction is to really focus in B2B. And of course, it's going to take a little bit of time to see some tangible results in the quarterly results. We tend to have -- and that's often forgotten. We have more than 80% of our revenue which is recurring. It gives us a very strong base to work from. However, before you see a material difference, right, it also means that we need to significantly add some top line for it to show in our quarterly results. The acquisition of k-eCommerce will show some tangible stuff right away next quarters. We will be showing that. And hopefully, we will also gain some more market share in our traditional businesses. Just as a quick reminder, in our Strategic Sourcing business, we currently serve a little more than 120,000 various suppliers of various goods and services to which we continue to add. And we're really getting some good business from that, and we're currently looking at how to grow that franchise much faster than it had grown in the past. I think at this point, the best is to turn it over to you for some questions, and obviously, comments are welcome. So over to you, guys.
[Operator Instructions]And your first question will be from Amr Ezzat at Echelon Partners.
Congratulations on the acquisition, guys. I've got a few questions. Let's start with the B2B growth, 5% year-on-year this quarter, compares favorably to last quarter. I think you guys were at 3%. But I think historically, it's been more of a high single-digit business. And I think, namely, that's because of tremendous growth we've seen at InterTrade the past couple of years. I'd be interested to get your thoughts on what to expect going forward. Do you expect that the 5% is a good organic growth rate for you guys to target now, excluding acquisitions? Or is there some sort of targets you guys are looking to achieve?
Thanks for the question, Amr. Really appreciate it. And we've -- with me starting just 2 months ago, we're kind of revisiting right now many of the fundamental strategies. We are working with an outside firm on defining a stronger growth strategy. And there's still unfortunately some work to be done before we can do that. As a general statement, I'd say we don't provide any forward-looking statements.And what I can say, however, is we're absolutely looking to grow these 2 lines of business, both in Strategic Sourcing and unified commerce so you will definitely hear more and see more as we gain -- I would say, we have the opportunity to complete those strategies where we certainly are going to try to bring the ship into much stronger growth than it was before.
Okay. Great. That's helpful. I guess on the acquisition like k-eCommerce, can you share with us, at least at a high level, some of the financial metrics of k-eCommerce? I know you mentioned the revenue CAGR. So like can you speak to what the revenues are? Then as a follow-up to that, can you speak to how you expect to integrate it within your current operations, and what sort of synergies we can see?
So the number I might be able to share at this point is their trailing 12-month revenue is $8 million, and as I mentioned earlier on this is a SaaS business. So it is in a position where it earns new clients on a very fast pace, and that's really one of the great benefits that shows a traction of their technology and the, I would say, strong go-to-market strategy. In terms of integration, as you probably know, we have a division currently which offers also an e-commerce solution but much more targeted at enterprise level, typically more retail, highly customized and numerous complexities. And we're going to look at both sides of that equation to better our platforms on both sides, gain speed and ease of implementation on our current enterprise-level offering and also add functionality and a bit more personalization to the more mid-sized ERP ecosystem type. So those are the current plans. As you know also, right, we are in a growth mode. We currently are looking for quite a few new people to join the company, if you just go on our website, and you see the number of people that we need to currently answer the current level of business that we have. We're not expecting to have lots of headcount, I would say, synergies because we are in a growth mode and we expect to be offering more to the various customer segments that we're currently serving.
Understood. That's helpful. Then I guess when I'm thinking about -- and that was before your time, Luc, but when Orckestra was announced, you guys gave some sort of like target dates for it to go profitable. Is there -- are you guys like speaking to that for k-eCommerce? Like when do you guys expect it to start contributing to your profitability as well? Or that's not the goal right now? You'd just like to grow it as fast as possible?
I would say that again I'm going to ask for a little bit more time. We're still working and finalizing the plan. And because -- we're going to be probably looking at little closer integration than we were in the past, right? We typically acquired businesses that had not much in common with one another. In this situation, there are some -- and I hate the word synergies because it typically means job losses. There are some positive synergies between the 2 companies. There's some upsell opportunities on both sides. We've already talked to some customers on both sides, and they kind of like what they see. I met earlier this morning with some of our current customers, and already, they're saying, "Oh, geez, could I get this?" Right? So we're still modeling that. But definitely, profitability is a concern of ours, right? We are going to be investing in various elements on our various franchises. But maintaining a good level of profitability is absolutely in the works, right? We don't intend to go Lightspeed-like or Shopify-like and start to burn money. That's not at all what the track -- the trend should be.
Understood. And what do you call a good level of profitability, I guess?
Yes. Again, give us a little bit of a break. We're still working on that plan.
Yes. We have to close the deal, too. Finally.
Yes. I guess like when I'm thinking about your pace of investments in your operations, I actually expected your OpEx to be higher than what you guys reported. It's down $1 million sequentially despite some one-timers in the quarter. So going forward, we should -- what I understand is expect that number to go up.
Well, if you look at -- Amr, if you look at the -- sequentially, it's normal that OpEx reduced a bit because of the summer period, the vacation period.
Summer, yes. Yes.
Yes, so that's about -- that's close to $800,000 to $900,000 that reduced OpEx during Q2 every second quarter of the year. So that's why you see a small decrease in the -- despite that we've increased manpower during the quarter, you see a small decrease in Q2 versus Q1.
Understood. And are you guys like publicly like giving some sort of like range of like -- I know you don't want to commit to like one number and you're still like doing like your work. But are you guys like giving a range of like EBITDA or profitability that you guys are going to maintain, i.e. between like 16% and 20% like EBITDA margin? Like this quarter, you guys were at 22.7%. Or is there a level where you're saying, well, we don't want to go like below this even if we do invest aggressively or...
Yes. We're not, I would say, announcing any numbers at this point. And again, I'm going to use the privilege of only being here 2 months, and that growth strategy has been -- I would say, started to gel together and be formalized less than just a few weeks ago. So maybe over time, when we have a better handle on everything, we might want to start to do that. But for the next few quarters, we're still, I would say, in the transformation stage so it's going to be hard to give you numbers. We might have to incur some various levels of adding groups of people and possibly changing missions of certain groups of people. So we're still in the works of doing the detailed planning on that.
Great. Maybe one last one. On the M&A environment, I guess do you see a lot of opportunities to buy companies like k-eCommerce? Or is it like extremely competitive out there? Then like what sort of criteria are you looking at? I mean, like you spoke to growth, you spoke to recurring revenue. Is there anything you're looking at in terms of like size and like the pace of acquisitions as well?
There are 2 major, I would say, threads that will underlie our acquisition strategies. You mentioned some of them, SaaS, growth, ideally profitable but not far from profitability and with a clear path to profitability. We're not going to acquire startups that are burning immense amounts of money. One thing that is absolutely clear is we are going to acquire in the lines of business where we see growth. We want to focus, and right now, there's 2 focuses that are interesting for us. Think about Strategic Sourcing and think about commerce, right? And we don't want to go into acquiring businesses and getting into a holding type of -- financial holding type of companies. We're mostly operators. And in order to give good levels of profitability, you need to be good at operating. And if you try to operate too many different things, it's just very hard to make a lot of money out of it. So focus, focus, focus I think is the main thing. And we don't have unlimited amounts of money. I mean you see our balance sheet. You see where we're going. So we're not looking to make acquisitions in the hundreds of millions of dollars, unless, I don't know, something very, very, very special. But you can expect that the types of k-eCommerce would be -- we might want to have a few of that size at a faster pace than just wait for the larger ones that could meet all of these criteria because as you said that the environment is highly competitive.
Next question will be from Maher Yaghi at Desjardins.
I think it's a great change of -- nice idea to organize these conference calls for everybody to listen to, and I welcome it. Definitely, I think a lot of investors welcome this proactiveness. So you shared with us some metrics on the top line. Can you -- when it comes to k-eCommerce, can you mention -- if you don't want to get into the details in terms of profitability, trying to understand maybe some of the contribution it will have on the P&L in terms of EBITDA or some of the cost side, just trying to figure out how to forecast some of your P&L metrics going forward with this acquisition. Can you maybe help us figure out a little bit how the -- we should look at it in terms of P&L?
Well, I think we've -- good question, Maher. Yes, I think you know part of the answer. I mean we've given a bit more than we thought at the beginning, talking about the last 12 months in terms of revenues of $8 million and the CAGR over the last 5 years on their recurring revenue. And 66% of those revenues are recurring revenue type. And at this stage, it's too early to talk about that or disclose any type of number in terms of EBITDA or -- contribution at this point.
Okay. That's fair. Can I ask if it was a profitable company or not?
Well, depending on the year. They've made real good growth. I mean if you wanted to grow on a CAGR basis, again, of 17%, you have to do...
You have to invest, yes.
You have to invest. And then in the past few years, they were close to that, definitely.
One thing I want to really emphasize is k-eCommerce is a perfect, almost textbook SaaS business, right? It takes a critical mass of customers to get to profitability. I would be happy to share, and I'm sure you guys on the line all have that, the SaaS metrics types of models. And we have looked into that. And when you start to grow a SaaS business, you necessarily -- because you're only recognizing 1/12 of the revenue of any given customer per month, you're necessarily incurring expenses before you can benefit from the revenue, right? It's just the way it is. So that's why an EBITDA question on k-eCommerce at this point is just not the right way to look at it. However, this being said, they're absolutely not in any big burning at all, right? They're very, very, very close to reaching that critical mass, and we think that's going to be in the very, very short-term future that -- and it's really -- if you boil it down to its simplest expression, it's the number of customers that they sign up. Well, the net number of customers that they sign up, which is obviously the net new minus churn. So those are...
Those are the metrics, Luc, that I was actually trying to figure out by my asking the question, and you're going around. And yes -- no, I fully understood. The question I'd like to ask is when you look at k-eCommerce, do you believe there is a potential for you guys to add growth to the business that they were not able or could not maybe grow the business as fast as they wanted because you needed to keep investing more and more and growing the client base. And as you say, you only generate part of the revenue upfront. So are you going to invest more in the business to try to grow it faster or you're happy with that kind of growth?
Again, we definitely will contribute to the continued acceleration of the growth, right? When you see a business that, in a relatively short time, was able to sign up some 600 customers without committing or anything at this point on how many it can serve, it becomes a question of selling, right? And we're still tweaking those SaaS metrics. But you just know that the technology is valid, the technology works, the technology is efficient. There might be some improvements and some innovations we could help. But once you have the right set of metrics and the right set of model, it becomes a question of growing that number of customers, and that's what we're going to focus on. And there is some cross-selling with our other lines of business that we also want to look at, which should, again, ease and accelerate the speed of acquisition of new customers and possibly even help to reduce the customer acquisition cost. So as Paul just said, right, it's a little early to tell at this point. We just need to work on that plan much, much deeper than we were able before actually announcing it yesterday, right? There's only a limited amount of people that we can involve in the conversations, and there's still some work to do.
Okay. One last question on this, I promise. What kind of payback time you're looking at in terms of -- if you include the churn of the customer base in terms of revenue, are you looking into the 18 months- to 24 months-type payback on revenue to get a client or it's longer than that?
I don't have that answer at this point. Just some more work to do for us before we can hint at that.
Okay. Now -- okay, so -- and that's, again, congratulation on the transaction. It's a nice way to get yourself settled in, Luc. One -- the question that I have on the remaining part of the company in -- you talk about the idea of investing to get organic growth improving in the B2C -- sorry, the B2B. How much investment are we talking about in terms of P&L? Again, I'm more -- because I'm trying to figure out what we have to assume in terms of cost for you to get the organic growth rolling again.
As mentioned previously, we're still in finishing the work on the strategy, determining the exact trajectory, the structure, the various people around. And as -- I know you've been following the company for quite some time and you've probably noticed that our sales and marketing expenses were -- if you benchmark us against various competition in that area, you'll know that our sales and marketing was very, very low. We can't catch-up that fast, but we definitely need to do that. However, at this point, I would like to give you a number, but I just don't have it. We need a bit more time.
What the type of organic growth would please you if you wanted to look at -- if you're looking at the business and you say this business should generate this organic growth? What is that metric? Do you have an idea?
Well, it snowed for the first time yesterday, so I guess you're asking me my Christmas shopping list so I can say anything I want.
Yes, yes. What we should be hoping for to see?
I would rather -- to give you a substantiated number. I mean I could give you my wish. I could say, "Hey, a 17% CAGR looks pretty good." Can we emulate that in our current business? I don't know yet. I don't have a substantiated number that I could share at this point. It's just too early.
That's fair. That's fair. One last question on B2C. Any development in terms of divesting of that business at this point in time?
Well, as you know, I mean it's quite a small amount that's left, right? It's Jobboom and Réseau Contact. We're in active discussions with various players, and we're trying to find the win-win solution that suits us the best. This being said, we call them B2C. I would tend to say, yes, they're B2C media type of businesses and media in the traditional media. And as you know, financing media at this point in time is just not super easy. So although there are quite a few suitors, themselves are in situations where it's a challenge to find the appropriate financing. We have a lots of suitors, but they have to have the ability to pay. That's why -- that's what I mean by the win-win situation that we're looking for.
You're looking for cash, obviously.
Well, yes, I can't say we'd be very interested in owning -- in keeping the ownership and not seeing any money. That's -- because these businesses still generate positive cash flows and EBITDAs, so -- and they're not that much of a distraction given now the size -- given that LesPAC is now taken care of. They're not a huge distraction, and we are taking the steps internally to, I would say, address them in the right way. So -- but our most preferred scenario is to find the right suitor as fast as possible.
Next question will be from Nick Agostino at Laurentian Bank.
First of all, I also want to echo the -- thank you for hosting the conference call. I look forward to future calls as well. Just quickly jumping to the acquisition on the k-eCommerce, obviously, a lot of questions asked, and appreciate the answers so far. Just one little bit more pointed question and that's with regards to the 17% CAGR. Can you maybe highlight what the current growth rate is for the last 12 months? Or if not that, at least, what the retention rate is?
Well, we'd have to calculate it. I don't have that number available right now.
Yes. Also number on the retention, by the way, is up to 66% recurring. They were -- the retention rate that we've seen was slightly above 90%.
Okay. Okay. That's helpful. And then, I'll just switch gears, maybe talk a little bit about the current existing business. Just maybe -- obviously, we've seen you guys put out some announcements with regards to contract wins which -- keep them coming, is all I can say. But can you just -- can you guys talk about the MERX operations? Obviously, some -- had some provincial contracts and city contracts. How is that business growing for you guys? And then similarly on the ASC, a nice acquisition in the past. Can you maybe just provide an update on that operation? Obviously, recently, we saw the A&D (sic) [ AMD ] contract. Just wondering how that -- those 2 businesses are progressing?
Those 2 business lines are part of our Strategic Sourcing group that -- we're putting the final touches on how best to really work from -- if we put them all together, we're -- and you probably understand that, that's a supplier-funded type of revenue stream. So although we have sometimes some large customers, the revenue really comes from the -- it's a network effect, right? This is a network of suppliers that interacts with large customers. And it takes time to enable the various suppliers on to the network. And again, it's not a SaaS-based in terms that it's not a licensing technology. It's more of a network impact. So the revenues on a monthly basis from one new supplier are always relatively modest. So it's why it takes some time to grow the actual top line. Now this being said, I think the future in our Strategic Sourcing lies in our ability to offer a lot more functionality to that base of -- if we look at MERX, ASC and BidNet properties together, I think we're above 150,000 suppliers. My main concentration right now with our strat group is to look at -- given that we have access to all this data, and today, we do not really leverage it, if I can find a very small data service and just think for a moment that we can get half of these suppliers to pay -- think of a small number per month, multiply by 75,000 suppliers that find value in that service, which would be something about the data that's in the system. I think that's where you can see and feel that there is an enormous growth potential there, and that's something that hasn't been tapped at all which the Strategic Sourcing group is very actively working on. Again, focus in that, and I hope -- we hope to be showing in the next few quarters some more revenue stream coming from that very large group of suppliers. Not only do we want to continue to add customers and suppliers to the network, but I think this is going to be a big play in terms of adding data, AI, value to the network of suppliers that's hooked to that platform.
And just actually one last question. What's your comfort level now that you guys are levering up the balance sheet a little bit here? What's your comfort level on a net debt to EBITDA basis?
Our comfort level, it depends. Right now, I mean we're entitled to grow a lot more -- a lot higher than where we are right now in terms of multiple. We were still -- at the end of this quarter, we were still below 1x. So there's a lot of room for us to operate. But as Luc mentioned, I mean we're not going to go to a level of the -- that wouldn't be comfortable within the market. We still have some room on that debt level and depending on the business that we find. So that's where we are.
I recognize that you have room. I'm just wondering how high -- how comfortable are you? Like how -- to what level would you take that room before you guys -- before your comfort zone is maybe a little bit disrupted? That's all I'm asking. Is it 2x? 2.5x?
Well, 2.5x is still...
It's a very comfortable range.
It's still comfortable, that 2.5x, for sure. Yes.
[Operator Instructions] And your next question will be from Nick Corcoran at Acumen Capital.
I just have a question on the k-eCommerce. How long have you been looking at the company and maybe how did the transaction unfold?
Yes. I would say, in full disclosure, I've known the company for quite some time from other work that I have done. And -- but we actually only seriously started to look at the company when I started to work at Mediagrif, so that was September 16.
Great. So it came together quite quickly. What do you expect for timing of the closing of the acquisition?
The closing, it's just the typical stuff. We need another couple of weeks, I guess or something like that. Yes, there's no risk or anything. It's more because we've been working at it quite fast, there are some various confirmations and things that we need to obtain.
Understood. And then just one last question for me. What -- or how many other targets do you see in the pipeline?
In terms of acquisition?
In terms of acquisitions, yes.
Well, we're working on numerous fronts at this point. There are, again, various companies that we're looking at, both in Strategic Sourcing, mostly U.S.-focused. And maybe not full commerce but related to commerce. There are also a few other targets that we're looking at.
And at this time, Mr. Filiatreault, we have no other questions registered. Please proceed.
Well, thank you, everybody. Thank you for listening in, and we will definitely, as we organize the next one, add more to it, probably have some slides and -- at some point. I'm looking at people around here. There are probably ways to have this a bit more interactive. Maybe we could do some kind of a web video conference, so it would be good to put some faces on voices. We are a technology company. So this is about -- and I think a lot of people here have heard me say this, it's about drinking our own champagne. We are a tech company. We should have some pretty high-tech type of interactions with people all around the world. We just need the time to put it together. So thank you all, and great having you, and great questions. Thanks for your support. We're looking for a great adventure.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.