final transcript

Transcription

final transcript - RDM Corporation

FINAL TRANSCRIPT RDM Corporation Fiscal 2015 Second Quarter Results Conference Call Event Date/Time: April 30, 2015 — 9:00 a.m. E.T. Length: 23 minutes "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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FINAL TRANSCRIPT
April 30, 2015 — 9:00 a.m. E.T.
RDM Corporation Fiscal 2015 Second Quarter Results Conference
Call
CORPORATE PARTICIPANTS Randy Fowlie RDM Corporation — President and Chief Executive Officer Rui Malhinha RDM Corporation — Chief Financial Officer CONFERENCE CALL PARTICIPANTS Pardeep Sangha PI Financial — Analyst Gabriel Leung Beacon Securities — Analyst "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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PRESENTATION Operator Good morning, ladies and gentlemen. Welcome to the RDM Corporation’s fiscal 2015 second quarter results conference call. Before we begin, I would like to remind everyone that certain matters discussed in today's conference call, or answers that may be given to questions asked, could constitute forward‐looking statements that are subject to risks and uncertainties relating to RDM's future operational results or business performance. Actual results may differ materially from those anticipated in the forward‐looking statement. The risks and uncertainties could affect results that are detailed in RDM's periodic results and public filings, which you can access at SEDAR’s database found at www.sedar.com. Please note that RDM disclaims any obligation to update any forward‐looking statements discussed today, and investors are cautioned not to place undue reliance on those statements. At this time, participants are in a listen‐only mode. Following the presentation, we will conduct a question‐and‐answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press *, 0 for Operator assistance at any time. I would like to remind everyone that this conference is being recorded on Thursday, April 30, 2015, at 9:00 a.m. Eastern Time. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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I would now like to turn the meeting over to Mr. Randy Fowlie, President and Chief Executive Officer. Please go ahead, Mr. Fowlie. Randy Fowlie — President and Chief Executive Officer, RDM Corporation Thank you, Operator. Good morning, ladies and gentlemen, and thank you for joining today's conference call. With me on the call this morning is Rui Malhinha, our Chief Financial Officer. Earlier this morning, we released our results for the fiscal 2015 second quarter ended March 31, 2015. I hope you've had a chance to review them. I'll begin the call today with a summary of some of the operational highlights for the quarter, and then Rui will discuss the financial results in a little bit more detail. And then finally, I'll return with a few concluding remarks prior to opening up the call for questions. Overall, we’re pleased with our second quarter results and they continue with the positive results from our first quarter this year. We had solid year‐over‐year growth in both our recurring Payment Processing revenue and our Digital Imaging revenue this quarter. And this led to the strong financial results again this quarter. Year over year, total revenue was up 11 percent and net income increased 21 percent. We added 1,700 new ITMS new end‐user seats in the quarter. And the result of growing our footprint within our existing client base, this drove a 9 percent year‐over‐year increase in our recurring Payment Processing revenue. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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We continue to see strong market acceptance of our RDC offering as two new financial institutions selected RDM to replace existing RDC providers this quarter. One of them was a top 30 bank in the US and it was one of the RFPs that we had mentioned last quarter. This, being a top 30 bank, is an exciting win for RDM. It’ll lead to a substantial deployment which we expect to complete over the next four to eight months. The second win is with a large international bank for its Payment Processing Services and Remote Deposit Capture business in the US. While it’s a large international bank, the US scale is a smaller scale, and the deployment will be quite a bit less than the top 30 bank that we had won, but it’s a testament to the value that we can bring to our customers. Both wins were the result of an RFP and we won that based on the breadth of our functionality and superior product capabilities. Sales of our Digital Imaging products this quarter were strong with a 41 percent increase over the prior year. And while software services is a primary driver of future growth in the Company, there remains an opportunity for us to grow in our Digital Imaging space as evidenced this quarter. Gross margins remained strong, and our Payment Processing gross margin improved almost 3 percentage points year over year to 72 percent, while our Digital Imaging gross margins remained steady. Rui will discuss our margins in a little bit more detail. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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Over the long term, we believe that we’ll continue to see revenue from our recurring Payment Processing Services continue to increase as a percentage of our total revenue and drive continued gross margin expansion in the future. The growth in our recurring revenue, coupled with the increase in our Digital Imaging revenue, drove substantial improvements in our profitability this quarter. Adjusted EBITDA was up almost 50 percent compared to last year. And despite a substantial increase in the tax provision this quarter, which again Rui will discuss in a little bit more detail, net income increased 21 percent. The increased profitability continues to generate sustainable cash flows for us. And the Board approved a $0.015 per share dividend payable to the common shareholders. Overall, looking at our Q2 performance, our recent wins, and our continued optimism around the future growth opportunities in front of us, we see positive results through the remainder of fiscal 2015. That covers the highlights for the quarter. And now I’ll turn it over to Rui to talk about the financial results in a little bit more detail. Rui? Rui Malhinha — Chief Financial Officer, RDM Corporation Thank you, Randy. Good morning, everyone. As Randy pointed out, our fiscal 2015 second quarter results highlight our success in delivering growth across both Payment Processing Services and Digital Imaging. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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Year over year, total revenue increased 11 percent to 5.8 million. We continue to record strong and steady growth in the number of end‐user seats on our ITMS network with over 1,700 seats added this quarter. There was a 15 percent increase year over year and a 4 percent increase over the prior quarter. Reflecting the growth in ITMS end‐user seats, we recorded 3.4 million in recurring revenue for the quarter, up from 3.1 million last year. Our total Payment Processing revenue for the quarter was 3.5 million, down slightly from 3.6 million in the same quarter last year. The decrease is due to lower custom development and professional services revenue, which varies quarter to quarter and accounts for only a small portion of our total Payment Processing revenue. In Q2 2015, this revenue totaled 188,000, while in Q2 2014 it was 524,000. Once again, this quarter we continued to realize improving gross margins for our Payment Processing Services. Gross margins were 72 percent, up from 69 percent last year. The increase is a result of a reduction in the cost of network operations, the fixed costs nature of expenses, and growing revenue. The overall gross profit from Payment Processing Services increased to 2.6 million, up 4 percent from 2.5 million in Q2 last year. Our fiscal 2015 Digital Imaging revenue was 2.2 million or 41 percent increase over Q2 fiscal 2014. We shipped 2,100 more scanners that we did in the same quarter last year. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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The gross profit for our Digital Imaging product line was 867,000, up from 611,000 in Q2 fiscal 2014. As a percentage of Digital Imaging revenue, gross profit was constant year over year at 39 percent. Overall operating expenses, for the quarter, decreased by 84,000 year over year. Sales and marketing expenses for the quarter were up slightly. However, this was more than offset by year‐
over‐year decreases in research and development and general and administrative expenses. The weakening Canadian dollar did have an impact on operating expenses. The Company earned substantially all its revenue in US dollars, while a portion of its expenses are incurred in Canadian dollars. The Company’s functional and reporting currency is the US dollar. As a result, the Company benefits from lower reporting operating expenses when the Canadian dollar weakens relative to the US dollar. The Company incurs approximately $10 million a year in Canadian‐denominated expenses. The Company does hedge a portion of its exchange exposure to fluctuating exchange rates through the use of forward contracts. As of the quarter end, as of March 31, 2015, the Company had outstanding US dollar forward contracts totalling US 1.5 million at a rate of Canadian $1.19 to US $1. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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Worth noting, had we not hedged our exposure to fluctuations in the exchange rates for the quarter, and the average exchange rate stayed the same between years, our Q2 2015 operating expenses would have been $204,000 higher. With growing revenue and gross margins, combined with stable operating expenses, we continue to deliver improved profitability. We recorded adjusted EBITDA of 1.4 million, up 47 percent from 952,000 in Q2 2014. Our adjusted EBITDA margin for the quarter was 24 percent versus 18 percent in Q2 2014. We recorded income before taxes of 1 million for the quarter versus 676,000 in the prior year. This quarter, we recorded a 255,000 tax provision. This is compared to a $24,000 tax provision in Q2 2014. With the Company’s profitability over the last few years, and this year continuing, the Company expects to exhaust its loss carryforward and SR&ED carryforwards and be in a taxable income position for the 2015 fiscal year. The Company does have investment tax credits available to offset taxes payable and does not expect to pay cash taxes in 2015. However, come 2016, we could start paying cash taxes in the Province in Ontario at a rate of 11.5 percent. We expect the Company to record a tax provision of approximately 15 percent for the balance of 2015, and going into 2016 record a tax provision at a rate of 26.5 percent. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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Even with our increased tax provision, we recorded an improvement in bottom line net income year over year. We generated net income of 789,000 or $0.04 per share, up from 652,000 or $0.03 per share in Q2 2014. And looking at our results from a liquidity standpoint, in the second quarter we generated 621,000 in cash from operations for a total of 1.4 million year to date. The Company could have generated more from operations. However, approximately 700,000 in overdue accounts receivable from a large customer remained outstanding at the quarter‐ end. The overdue accounts were paid in full the first week after the quarter‐end. We ended the quarter with 23.4 million in cash and cash equivalents. Our Q2 fiscal 2015 results highlight our ability to drive higher margin revenue, which when combined with our commitment to managing our cost base continues to translate into improving profitability. With that, I’ll pass the call back to Randy. Randy? Randy Fowlie Thanks, Rui. As I mentioned, we continue to see growth opportunities in our cloud‐based processing services in the US. Again, as mentioned, we were selected in the quarter by two new financial institutions to replace incumbent providers. We continue to see opportunities for organic growth through our existing client base and these two new financial institution wins. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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ITMS remains the key long‐term growth driver for our business. However, the Digital Imaging products remain an important pillar for our business as well. We continue to see favourable broad industry trends, which in combination with greater scrutiny from incumbent suppliers are coming—sorry, the greater scrutiny incumbent suppliers are coming under from banks, we continue to see increased opportunities. We continue to evaluate opportunities to complement our organic growth opportunities, and overall our strategy on this front has not changed. Looking to the second half of fiscal 2015, we’re optimistic about the opportunities in front of us, and I look forward to speaking to you again when we release our 2015 results. With that, I’ll turn it over to the Operator to poll the participants for questions. Q&A Operator At this time, I would like to inform everyone in order to ask a question press *, 1 on your telephone keypad. Our first question comes from Pardeep Sangha from PI Financial. Your line is open. Pardeep Sangha — PI Financial Hi. Good morning, and thank you for taking my call. Just with the two new customers you mentioned, just trying to better understand kind of the rollout and sort of what we can expect here. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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I think in the past you’ve sort of roughly given sort of an estimate of 2,000 seats per large bank. And is that kind of the scope of magnitude we should be expecting from these types of two rollouts? And also should we—as you increase the—and you start rolling out here, should we expect an increase in kind of hardware at the front end of that? Can you just answer those two questions? Randy Fowlie Sure. So I would say, Pardeep, on the one financial institution which was a top 30 bank in the US, we would expect that to be somewhere between 1,700 and 2,000 seats. Yes. The second bank, while it was a large financial institution, international financial institution, its footprint in the US is a little bit smaller so that one is going to be a lot closer to 250 to 300 seats. And it would be a much quicker rollout. We would roll that one out probably within three months. We have to finish concluding contract negotiations with the two banks before we begin rollouts with them. Pardeep Sangha And should we expect kind of a hardware bump in the beginning of the rollouts? Randy Fowlie So I would say that I would not expect a particular hardware bump from those. Because we’re replacing incumbent providers in those banks, a lot of their customers will already have the scanning devices necessary. So it’s not like it’s going into a complete set of new corporate customers where there would be scanning devices deployed. So I wouldn’t expect a significant bump in hardware sales just from the rollout to these two customers, new customers. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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Pardeep Sangha Okay. In terms of additional customer pipeline, I think you mentioned there’s probably some two or three more by the end of, I guess, let’s say by the end of December? Randy Fowlie Yes. Yep. No. We’re—continue to be active in three or four sales processes that are either in the initial phases of RFIs leading to RFPs that we do expect to have. I can’t tell you exactly what the timing will be. But certainly one or two of them will probably close before December 31st. Pardeep Sangha Okay. And also, last quarter you mentioned one RFP was—that you had one was put on hold. Randy Fowlie Yep. Pardeep Sangha Any more visibility as to when that would come back? Is it possible to come back before December 31st? Randy Fowlie There’s always a possibility. The issue with that bank turned out to be that they were replacing their core operating system. And—or not operating system, but processing system. That takes a substantial amount of time for them to do. So we won’t have an opportunity to get that "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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back on the table until they’re done with the implementation of their new core processing system. That could be anywhere between June and October of this year before they’re complete with the implementation of that. Pardeep Sangha So it could very likely come in before December 31st? Randy Fowlie I’m not going to say it’s likely. I’m just going to say that there’s an opportunity that it could. Pardeep Sangha Okay. Finally, just a headcount at the end of the quarter? Randy Fowlie 90—oh good ahead, Rui. Sorry. Rui Malhinha Sorry, 97. Yeah. 97 staff. Pardeep Sangha And you don’t anticipate—in order to rollout some of these new customers and stuff, you’re not anticipating any kind of increase and substantial increase in headcount at all? Randy Fowlie "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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I don’t think we’re—I don’t think we’re looking for a substantial increase due to the rollouts. However, I will mention one thing, and that’s while we are at 97 people at the end of the quarter, we do have seven open reqs that we’re looking to hire some development people as we move some development from an offshore area that we’re finding is not as productive as we thought it was going to be back in house. So we are looking to bring on some additional developers in here, which should be partially offset by cost reductions in the services that were provided by the former organization. Pardeep Sangha Okay. Thanks very much for your time. Randy Fowlie Okay. Operator Again, that was *, 1 on your telephone keypad if you’d like to ask a question. Our next one is from Gabriel Leung from Beacon Securities. Your line is open. Gabriel Leung — Beacon Securities Thanks a lot, guys. A couple of things. Number one, just in terms of the two banks that you won, and you mentioned they were displacements of existing providers, maybe you could just talk about some of the key reasons why the banks did decide to go with you versus the other guys, and specifically whether price was involved with the discussions. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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Randy Fowlie So for the first answer, Gabe, is price is generally not involved in the discussion. At some level, price always comes into it, but it’s generally not a determining factor. It’s more the breadth of the—for larger banks, it’s more the breadth of the product offering and the ability for enhanced risk‐monitoring capabilities of banks. We’ve got an integrated mobile offering that integrates directly into our distributed desktop platform. We do a little bit more integration into the corporate receivables than some of our customers do. So it’s a variety of aspects of the product offering, breadth of the product offering that generally wins with larger banks for us. Gabriel Leung That’s great. And secondly, for Rui, I noticed the intangibles—the addition to intangibles, sorry, on the cash flow statement was up quarter over quarter. Was that just a function of what you just talked about? Some of the R&D moving back in house again? Rui Malhinha That was a function of us renewing a licence for software that we use in our product third‐
party licence. Gabriel Leung Okay. So that should come off again in fiscal Q3? Rui Malhinha We’ll amortize it over the next year type of thing. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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Gabriel Leung So what should we expect that line item to be? It’s probably not 200,000 again? Or… Rui Malhinha As an addition to CapEx? Gabriel Leung Right. Rui Malhinha No. It will not. I think we’re done our intangible additions for the rest of the fiscal year. Gabriel Leung All right. That’s perfect. Yeah. And I think, sorry, and do you mind just going back, I missed this part of it, Rui, just in terms of your discussion on the—your expectations of accrued taxes and cash tax payable in the fiscal ‘15 and ‘16. Rui Malhinha Sure. For the balance of 2015, if we see similar profitability, we can expect a tax provision on the income statement of approximately 15 percent because we forecast being in a taxable income position. However, in order to offset taxes payable, we do have investment tax credits that get applied to taxes payable. So we will not be in a taxes payable position in 2015. Going forward, into 2016 we will see a tax provision in the 25 to 27 percent range or so. But taxes payable will only be at a range of 11 to 13 percent or so because we have federal investment tax credits available to "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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offset federal taxes payable. But in Ontario, we’ll run out of those tax credits either at the end of this year or early next year type of thing. Gabriel Leung All right. Perfect. Maybe one last thing, just in light of the fact that you’ve got a couple of new banks to deploy, should we expect that professional services line to have a slight bump over the next few quarters? And that’s it for me. Thanks. Randy Fowlie I think maybe on the larger bank, it might, Gabe; on the smaller bank, not so much. But there might be a small bump in the next couple quarters as we roll out with the larger financial institution, yes. Gabriel Leung That’s great. Thanks very much. Operator There are no further questions at this time. I turn the call back over to the presenters. Randy Fowlie Okay. Well thanks, ladies and gentlemen, for joining the call today. And once again, we look forward to talking to you at the end of our third quarter. Thank you very much. Operator This concludes today's conference call. You may now disconnect. "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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April 30, 2015 — 9:00 a.m. E.T.
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***** "Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript
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