final transcript

Transcription

final transcript - RDM Corporation

FINAL TRANSCRIPT
RDM Corporation
Fiscal 2016 Second Quarter Results Conference Call
Event Date/Time: April 28, 2016 — 9:00 a.m. E.T.
Length: 21 minutes
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FINAL TRANSCRIPT
April 28, 2016 — 9:00 a.m. E.T.
RDM Corporation Fiscal 2016 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
Gabriel Leung
Beacon Securities — Analyst
Warren Goldblum
Private Investor
Richard Stoneman
Private Investor
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April 28, 2016 — 9:00 a.m. E.T.
Call
PRESENTATION
Operator
Good morning, ladies and gentlemen. Welcome to the RDM Corporation Fiscal 2016
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 could differ materially from those anticipated in these
forward-looking statements.
The risk factors that could affect results are detailed in RDM's periodic results and public
filings, which you can access in SEDAR's database found at www.sedar.com.
Please note that RDM disclaims any obligations to update any forward-looking statements
discussed today, and investors are cautioned not to place undue reliance on these statements.
At this time, all participants are in 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 call is being recorded on Thursday,
April 28, 2016, at 9:00 a.m. Eastern Time.
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Call
I would now like to turn the meeting over to Randy Fowlie, President and Chief Executive
Officer. Please go ahead, sir.
Randy Fowlie — President and Chief Executive Officer, RDM Corporation
Thank you, Operator, and good morning, everyone, and thanks for joining us on the call
today. With me on the call is Rui Malhinha, our Chief Financial Officer.
Earlier this morning, we released our fiscal 2016 second quarter results, and I hope you've
had a chance to take a look at them.
Today I'll begin the call with a summary of our operational highlights for the quarter, and
then Rui will discuss our financial results in a little more detail. After that, I'll return with a few
concluding remarks, and then we'll open up the call for questions.
This quarter we continued the successful transition to a recurring revenue business model.
Again this quarter we executed on continued growth opportunities within our Payment Processing
business.
Following last quarter's 15 percent growth in our recurring revenue, we once again
achieved a 15 percent year-over-year increase in our recurring revenue this quarter, which drove
expanded overall gross margins, strong cash from operations, and a healthy bottom line.
We started this transition a few years ago, and Payment Processing now represents 74
percent of total revenue for first six months of this fiscal year.
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Call
We added 1,280 new end-user seats during the quarter to reach a total count of over
46,700 at the end of the quarter. This represents an increase of 17 percent over the prior year and 3
percent over the prior quarter.
The new seat additions were essentially all through expansion within our existing
customer base, as the deployment with Santander, a new customer, has been pushed into the
May/June time frame to deal with a few internal issues that they're dealing with.
During the quarter, we had a number of other successful initiatives with our existing
customers. For example, US Bank launched a branded mobile deposit application for their small
business market; we enhanced the integration of our offering within the internal systems of a major
broker dealer, which will provide them the opportunity now to expand the offering out to their
remote dealer network; we commenced beta testing with a new risk monitoring offering for our
financial institution customers; and we signed a renewal of our master services agreement with one
of our largest customers. In addition, we've got a strong sales pipeline of new opportunities with
financial institutions.
However, in our Digital Image business, the challenges we faced last quarter persisted this
quarter, and with that, our Digital Imaging revenue was softer than we would have liked.
As discussed last quarters, one of our primary distributors underwent a restructuring and
displaced a number of the sales reps and resellers that they had serviced. It's been turning out to be
difficult to find the resellers that were previously serviced by this distributor, and in addition, it's
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April 28, 2016 — 9:00 a.m. E.T.
Call
currently difficult getting new resellers to focus on RDC products due to a move to implement EMV,
or the chip and PIN technology in the United States.
This is proving a short-term driven opportunity for the resellers to provide the EMV POS
hardware to the retailers as they're looking to move over. This should ease shortly.
As we said last quarter, we've taken a number of steps to offset the impact, and
specifically we've increased our internal sales force for Digital Imaging, and are working to expand
our distribution network and add software partners to enhance the overall channel.
We're confident these efforts will get the business back on track, but they need longer
than the one quarter that we originally anticipated. And we expect the second half results to be
stronger than the first half in our Digital Imaging business.
As a result of the decline in Digital Imaging revenue, our total revenue for the quarter was
down year over year. However, our growth in our Payment Processing was a strong offset.
As our high-margin recurring revenue accounted for 75 percent of total revenue this
quarter and our Digital Imaging gross margin held relatively steady year over year, we did deliver
strong gross margins at 69 percent. This is an increase of 9 percentage points versus Q2 last year.
We also maintained strong bottom line results and generated significant cash flow from
operations at just shy of $2 million, which is an increase of more than 200 percent year over year.
That covers the highlights for the quarter, and I'll now turn the call over to Rui to talk
about our financial results in a little more detail.
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April 28, 2016 — 9:00 a.m. E.T.
Call
Rui Malhinha — Chief Financial Officer, RDM Corporation
Thank you, Randy. Good morning, everyone. As Randy mentioned, total revenue was
down in the quarter on account of lower Digital Imaging hardware sales.
We recorded total revenue of 5.1 million versus 5.8 million in Q2 of last year, a decrease of
619,000.
Total Payment Processing revenue increased 419,000 to approximately 4 million from 3.5
million a year ago. This was fuelled mainly by growth in our recurring Payment Processing revenue.
This is an increase of 12 percent.
Professional services and custom development revenue were down, but just slightly year
over year. Keep in mind, Payment Processing, professional services, and custom development
revenue vary from period to period. It is our recurrent Payment Processing revenue that is the key
indicator of our continued growth.
Recurring Payment Processing revenue for the quarter was 3.8 million, a 490,000 increase
over the 3.4 million we recorded in Q2 fiscal 2015. This is an increase of 15 percent.
The gross margin for Payment Processing continued to increase year over year. At 78
percent for Q2 fiscal 2016, it was up from 72 percent the year before. The improvement was due to
a larger proportion of recurring revenue; a reduction in the cost of network operations; reduction in
third-party technology licensing fees; and the fixed-cost nature of expenses while growing revenue.
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April 28, 2016 — 9:00 a.m. E.T.
Call
The gross profit for Payment Processing services increased by 20 percent to 3.1 million
from 2.6 million in Q2 fiscal 2015.
Digital Imaging revenue was 1.2 million, down 1 million from 2.2 million a year ago. We
shipped just over 2,500 units or scanners versus just over 5,400 in Q2 2015. As Randy mentioned,
this was largely due to operational changes with one of our distributors, which we continue to work
to offset.
We recorded a gross margin for Digital Imaging of 38 percent for the quarter, essentially
consistent with 39 percent in Q2 2015. Gross profit was 448,000, down from 867,000 a year ago.
Overall, operating expenses increased 232,000 year over year to 2.6 million compared to
2.4 million.
Looking at the details, sales and marketing decreased to 678,000 from 737,000. R&D was
1.3 million, up from 1.1 million as we made investments in our software to support various delivery
models that prospective customers may ask for in the future, including cloud-based, on-premise, or
a combination of both. We also upgraded our US-based backup facility to be a full production
facility.
G&A was up to 665,000 compared to 497,000 a year ago as a result of an increase in stockbased compensation expense related to grants under a newly implement cash-settled restricted
share unit plan.
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Call
As Randy discussed, the growth in our Payment Processing business helped offset the
softness in our Digital Imaging business, translating into healthy bottom line results. However, we
still saw a slight decline year over year in profitability.
We recorded adjusted EBITDA of 1.4 million, essentially flat, as it was only down 63,000
from a year ago. Net income was 669,000, down from 789,000 in Q2 fiscal 2015.
Year over year our income tax revision was consistent. We plan on using available
investment tax credit carryforwards to offset federal taxes payable. However, we are in a taxpayable position in the Province of Ontario for fiscal 2016.
From a liquidity standpoint, we generated strong cash flow, recording cash from
operations of close to 2 million, which is up significantly from 621,000 in Q2 last year. And we exited
the quarter with cash and cash equivalents of 29.1 million.
With expectations of continued growth in our Payment Processing business and an
improvement in our second-half performance for our Digital Imaging business, we are confident
that we can deliver strong full year 2016 results.
With that, I'll pass the call back to Randy. Randy?
Randy Fowlie
Thanks, Rui. In our Payment Processing business we have a robust deployment pipeline,
and continued to expand our relationships with existing customers.
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In addition, our pipeline of sales opportunity continues to get stronger, and we're
currently actively involved in four or five sizeable opportunities.
We've commenced an R&D initiative to increase the flexibility of our delivery model for
our Payment Processing business. We want to get the capability to deploy as a SaaS offering, or as
an on-premise offering or a hybrid, depending on customer needs in the future.
While we faced challenges in our Digital Imaging business this quarter, we remain
confident that they're temporary in nature, and we believe the steps we have taken are the right
ones, and our second-half results will reflect that. We're also extremely confident in our ability to
deliver continued growth in our Payment Processing business, resulting in further strengthening of
our recurring revenue base.
Looking to the remainder of 2016, we're confident in our ability to deliver further growth
in our Payment Processing business and to strengthen our Digital Imaging business.
And on that note, I'll turn the call back over to the Operator to open up the line for
questions. Operator?
Q&A
Operator
At this time, if you'd like to ask a question, *, then 1 on your telephone keypad. Again,
that's *, 1 on your telephone keypad.
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April 28, 2016 — 9:00 a.m. E.T.
Call
And we do have a question from Gabriel Leung with Beacon Securities. Your line is now
open.
Gabriel Leung — Beacon Securities
Good morning. Thanks for taking my questions. Randy, I missed some of your comments in
the beginning of the call. Could you talk again about the—I think you talked about last quarter
finalizing a contract with a larger bank, about 2,000 seats; what the status of that is right now?
Randy Fowlie
So the deployment of it, Gabe, has just been delayed out till May or June of this year. As I
think you're probably aware, there's a number of US banks that are going through some internal
restructuring to deal with profitability. And they've moved out the deployment of this for a—for our
offering for a couple of months to the May/June time frame.
Gabriel Leung
Okay. And it's still expected to be sort of a five- to seven-month deployment, I guess?
Randy Fowlie
Yeah. I would say not seven. I would say probably closer between three and six.
Gabriel Leung
Three and six. Okay. So then if I look at the quarter-over-quarter improvement in the
seats, that was largely within the existing bank base?
Randy Fowlie
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Call
Yes. It is.
Gabriel Leung
Okay. Perfect. All right. And then just in terms of the financials themselves, I noticed that
there was a little bit of a pickup in the—addition to the intangibles. Was that a one-off? Or do you
expect the sort of 230,000 quarterly run rate addition to intangibles to continue for the next couple
quarters?
Rui Malhinha
One-off on an annual basis. That was a renewal of a licence that we renew more or less
annually.
Gabriel Leung
Okay. So just a one-off there. And likewise on the increase in the R&D to sort of that 1.3
million range, is that good run rate to go with going forward?
Rui Malhinha
It should be, yes.
Gabriel Leung
Okay. One last question just around the RFP pipeline; Randy, you talked about, call it, four
to five sizeable, I guess, RFP opportunities you're dealing with. Do you anticipate any of those to be
able to be closed within the current fiscal year?
Randy Fowlie
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April 28, 2016 — 9:00 a.m. E.T.
Call
Yes. We do expect that at least one of them will have a decision within the current fiscal
year. And possibly two.
Gabriel Leung
And when you talk about size, though, can you give us sort of a range of the seat counts
that you're dealing with within that pipeline for those four to five opportunities?
Randy Fowlie
Two thousand five.
Gabriel Leung
So each of them are sort of 2,005?
Randy Fowlie
Each of them are probably 2,000, maybe a little more than 2,000.
Gabriel Leung
Okay. Perfect. All right. Appreciate it. Thank you very much.
Randy Fowlie
Okay. Thanks, Gabe.
Operator
Again, if you have a question, that's *, then 1 on your telephone keypad.
And your next question comes from Warren Goldblum, private investor. Your line is open.
Warren Goldblum — Private Investor
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April 28, 2016 — 9:00 a.m. E.T.
Call
Thanks for taking my call. Just a quick question on the normal course issuer bid. I mean I've
noticed there's been no utilization to date, and also obviously just from the fact that you've got kind
of continuing dilution from obviously options that are exercised on an ongoing basis; maybe just
your thoughts on that?
Randy Fowlie
Well, the normal course issuer bid was put in place. Our stock has held up reasonably well
over the last six months, and it's now trading at some multiyear highs. And we just didn't think at
the time that would necessarily be the best use of cash to go out in the market and reduce liquidity.
Warren Goldblum
Okay. Perfect. Oh, sorry, maybe just one other question while I've got you on the line. I
notice in the Digital Imaging business, notwithstanding the revenue declines and the issues
experienced, there was a bit of a tick-up in average revenue per unit, both I guess in the first quarter
and then continuing and accelerating in the second quarter. Can you maybe just talk us through if
there's any kind of a mix effect? I mean you did mention the new products haven't really gained
traction. So I was just trying to get a bit of a better understanding on what was behind that.
Rui Malhinha
Product mix, which varies from quarter to quarter, and in particular like in a quarter we
just had with low overall revenue, there's a certain base of higher-priced units that will pull up the
average.
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April 28, 2016 — 9:00 a.m. E.T.
Call
Warren Goldblum
Okay. Thanks for that.
Operator
As another reminder, if you'd like to ask a question, *, then 1 on your telephone keypad.
And we do have another question from Gabriel Leung of Beacon Securities. Your line is
open.
Gabriel Leung
Hi. Sorry, just had one follow-up. Obviously, the cash balance continues to increase nicely
there. Any thoughts around how—what you want to do with that over the near term in terms of
potential shareholder returns, whether it's increase in dividends? Or one-off dividend? Or maybe a
larger share buyback? Or even M&A? Any thoughts around that?
Randy Fowlie
Yeah. So we're always looking at the best way to deploy the capital resources that we’ve
got, Gabe. We just did increase our dividend by 33 percent last quarter. And the main focus—one of
the main focuses that we've got is continuing to look at the acquisitions, which are at a price to put
that cash to work and generate additional recurring revenue for the business.
Gabriel Leung
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April 28, 2016 — 9:00 a.m. E.T.
Call
And I know historically that M&A has been difficult because of, I guess, where you guys are
trading relative to what companies are looking for in general. Has that changed at all in terms of the
M&A landscape in terms of valuations that you're looking at?
Randy Fowlie
I’d say that there's been—I would say yes, there has been a change, Gabe, in the market.
Especially in the smaller companies, the kind of sub-15 million, $20 million companies in the US
pricing is becoming better, and our multiple has been increasing.
So I think we're certainly getting in ranges where deals can be made.
Gabriel Leung
That's great. Thanks a lot.
Randy Fowlie
Okay.
Operator
And your next question comes from Richard Stoneman, private investor. Your line is open.
Richard Stoneman — Private Investor
Good morning, Randy.
Randy Fowlie
Good morning.
Richard Stoneman
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April 28, 2016 — 9:00 a.m. E.T.
Call
Randy, DataTreasury is having problems with its patents. I understand that you pay a
royalty to them. Could you give us some idea of what the royalty is on an annual basis? And how
much longer you'll be required to pay their patents if nixed by the Patent Review Board?
Randy Fowlie
Yeah. So I can talk at where their patents stand, and maybe Rui can quickly tell us what the
annual amount is that we're paying. So what happened was their patent was overturned by the
Patent Trial and Review (sic) [Appeal] Board, and DataTreasury subsequently has appealed that.
Richard Stoneman
Mm-hmm.
Randy Fowlie
And they're—which has the effect of leaving their patents valid until it goes to another
appeal process. And the DataTreasury patents themselves run to it's either late 2017 or early 2018.
Richard Stoneman
Mm-hmm.
Randy Fowlie
And in some discussions with our patent lawyers in the US, it's highly likely that the appeal
process will go beyond the expiry of their patents anyway.
Rui Malhinha
And as far as what we're paying on an annual basis, Richard, it's approximately 350,000.
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Call
Richard Stoneman
Thank you.
Operator
And there are no further questions at this time. I turn the call back to the presenters.
Randy Fowlie
Thank you, Operator. And thanks, everyone, for joining us on the call today, and we look
forward to presenting our results at the end of the next quarter.
Have a good day.
Operator
This concludes today's conference. You may now disconnect.
*****
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