final transcript

Transcription

final transcript - RDM Corporation

FINAL TRANSCRIPT
RDM Corporation
Fiscal 2016 Third Quarter Results Conference Call
Event Date/Time: July 28, 2016 — 9:00 a.m. E.T.
Length: 18 minutes
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FINAL TRANSCRIPT
July 28, 2016 — 9:00 a.m. E.T.
RDM Corporation Fiscal 2016 Third 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
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July 28, 2016 — 9:00 a.m. E.T.
PRESENTATION
Operator
Good morning, ladies and gentlemen. Welcome to the RDM Corporation Fiscal 2016 Third
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 obligation 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 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 call is being recorded on Thursday,
July 28, 2016 at 9:00 a.m. Eastern Time.
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July 28, 2016 — 9:00 a.m. E.T.
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, and good morning, everyone, and thanks for joining us on our call
this morning. With me today is Rui Malhinha, our Chief Financial Officer.
Earlier this morning, we released our fiscal 2016 third quarter results, and I hope you've
had a chance to take a look at them.
I'll begin the call with a summary of our operational highlights, and then Rui will discuss
the financial results in a little more detail. After that, I'll return with a few concluding remarks
before opening up the call to questions.
This quarter we generated continued growth in our recurring Payment Processing business
with a 7 percent increase over last year. The increase this quarter is despite a delay in the rollout to
Santander’s customer base.
The 7 percent growth this quarter is representative of the annual growth that we can
generate from our existing customer base on a regular basis. We generally average 5 to 7 percent
annual organic growth from existing customers and another 5 to 8 percent growth from the rollout
to new customers. And had Santander rolled out, started in the originally scheduled time, our total
growth this quarter would have fit that model.
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Payment Processing revenue represented almost 75 percent of total revenue this quarter,
and this helped drive additional margin expansion for the Company. Year to date, our recurring
Payment Processing revenue is now up 12 percent over the same period last year.
We increased end user seats during the quarter to reach a total count of 47,500, an
increase of 8 percent over the prior year and 2 percent over the prior quarter.
As mentioned, the new seats added this quarter were all through growth within our
existing customer base, as the deployment with Santander was delayed from May until the
beginning of August. And this delay was due to an internal resource issue at Santander.
The new deployment date is now scheduled for the first week of August, and we estimate
that it'll take between three and six months to fully deploy the 2,000 seats with Santander.
In our Digital Imaging business, we continued to make progress towards offsetting the
impact of losing one of our primary distributors, specifically increasing our internal sales force,
expanding our distribution network by adding a new reseller, and adding software partners to
enhance our overall channel.
We did record an increase in Digital Imaging this quarter over last quarter. Unfortunately,
we had an order of over 200,000 delayed right at the end of the quarter on us. We would have
delivered it this quarter; however, the customer had a last-minute change to its shipping request,
and rather than shipping everything to one location of theirs, they requested that we ship to
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multiple locations, and as a result we had to delay the delivery and now plan to deliver against that
PO in Q4.
While our recurring-revenue Payment Process business is our key long-term growth driver,
Digital Imaging has also been a good steady base business for us, and we're confident we're getting
it back on track and we expect to continue this progress into the fourth quarter.
With Payment Processing gross margins at 78 percent this quarter and a 2 percentage
point year-over-year improvement in Digital Imaging gross margins, we delivered strong overall
gross margins of 68 percent this quarter. This is compared to 62 percent for Q3 of last year.
We also maintained strong adjusted EBITDA of 1.4 million, which is an increase over last
quarter. And cash flow from operations was 4.3 million for the first three quarters of this year, up
from 3.2 million in the first three quarters of last year.
That covers the highlights for the quarter, and now I'll turn the call over to Rui to talk
about our financial results in a little more detail. Rui?
Rui Malhinha — Chief Financial Officer, RDM Corporation
Thank you, Randy. Good morning, everyone. We recorded total revenue of 5.2 million
versus 5.8 million in Q3 of last year, a decrease of 572,000, which as Randy mentioned, is on
account of lower Digital Imaging hardware sales.
Total Payment Processing revenue increased 291,000, or 8 percent to just shy of 4 million
from 3.7 million a year ago. We saw year-over-year improvements in both areas of our Payment
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Processing business in the quarter. Our primary growth driver, recurring Payment Processing
revenue, was up 274,000 or 7 percent, increasing to 3.8 million from 3.6 million in Q3 fiscal 2015.
Professional services and custom development revenue, which as you know vary from
period to period, were up 44,000, increasing to 173,000 from 129,000 in Q3 2015.
The gross margin for Payment Processing was strong in the quarter at 78 percent for Q3
2016, up from 77 percent year before. The improvement was due to a reduction in the cost of
network operations, as well as growing revenue on a fixed-cost expense base.
Gross profit for Payment Processing Services increased 9 percent to 3.1 million from 2.8
million in Q3 fiscal 2015.
Digital Imaging revenue in the quarter, as Randy noted, continued to reflect the impact of
operational changes in one of our distributors, which happened in Q1. At 1.3 million for the quarter,
Digital Imaging revenue was down 863,000 from 2.1 million a year ago. We shipped just over 2,500
units versus a little more than 5,600 in Q3 2015.
However, as Randy noted, with our efforts to add new distributors and increase direct
sales, we expect improvements in the Digital Imaging business going forward.
We recorded a gross margin for Digital Imaging of 37 percent for the quarter, up slightly
from 35 percent in Q3 2015. Gross profit was 466,000, down from 736,000 a year ago.
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On the expense side, overall operating expenses increased 289,000 year over year to 2.7
million from 2.4 million. Looking at the details, sales and marketing was relatively flat at 734,000
compared to 729,000 in Q3 2015.
R&D was 1.3 million, up 147,000 from 1.1 million. This was chiefly for two main reasons:
one, continued investments we're making in architecting our software to support various delivery
models, including cloud-based, on premise, and a combination of both, and we have filled some
personnel vacancies which had been outstanding for a period of time.
G&A was up to 713,000, 137,000 increase over 576,000 a year ago as a result of an
increase in stock-based compensation expense related to grants under our cash settled restricted
share unit plan which was introduced in February of this year.
As Randy discussed, the growth in our Payment Processing business helped offset the
softness in Digital Imaging. This translated into healthy bottom line results.
We recorded adjusted EBITDA of 1.4 million, down 125,000 from 1.5 million a year ago.
Year to date, adjusted EBITDA is at 4.5 million, a 5 percent increase from 4.3 million in the first nine
months of 2015.
Net income was 602,000, down from 1.4 million in Q3 2015. In 2015, the Company
recorded 451,000 in nonoperating income related to the recognition of investment tax credits, a
change in an estimated royalty liability, and final accounting for a legal settlement.
In Q3 2016, the Company did not record any onetime income items.
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The year-over-year income tax expense was fairly consistent with the prior year. As
mentioned previously, we are using available investment tax credits to offset federal taxes payable.
However, we are in a cash tax payable position in the Province of Ontario for fiscal 2016.
From a liquidity standpoint, we generated cash from operations of 881,000 during the
quarter. Year to date, the Company has generated 4.3 million in cash from operations compared to
3 million for the first three quarters of 2015. We exited the quarter with cash and cash equivalents
of 29.5 million.
With expectations of further improvement in our Digital Imaging business and continued
growth in Payment Processing, we're 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. Overall, we are very bullish on our business going forward. Results for the first
three quarters have been strong despite the decline in our Digital Imaging revenue.
We're starting to see improvements in the Digital Imaging business, and expect this
progress to continue into Q4. And we remain very positive on the outlook for our Payment
Processing business.
Santander will get underway in the beginning of August, and we're targeting 800 to 1,000
seats deployed this quarter and the remainder in the following quarter. And then we've got another
smaller deployment of approximately 300 seats to a smaller bank in Q4 as well.
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In addition, our pipeline for our Payment Processing business sales opportunities
continues to expand. We've recently submitted two RFPs, and we expect to be included in two more
before the end of October. Three of these RFPs are desktop-related and one is for our mobile
offering.
The desktop opportunities are all at large banks with in excess of 4,000 seats available at
each of the opportunities. The pipeline momentum continues into 2017 as well, and we already
have insight into two or three more RFPs that we expect to be participating in the first three
quarters of 2017.
With all of these factors at play, growth in our Payment Processing business, driven by
growth with existing customers, the deployment of Santander, and our strong pipeline of
opportunities, combined with the continued improvements in our Digital Imaging business, we’re
confident in our ability to deliver solid fourth quarter results. And with a strong pipeline of Payment
Processing opportunities, we also believe we're well-positioned for solid growth and continued
success in fiscal 2017 and beyond.
And on that note, I'll turn the call over to the Operator to open up the line for questions.
Operator?
Q&A
Operator
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July 28, 2016 — 9:00 a.m. E.T.
And at this time, I'll just remind everyone if you'd like to ask a question, please press *,
then 1 on your telephone keypad. And I’ll pause for just a moment to compile the Q&A roster. And
again, that's *, 1 to ask a question.
And the first question is from Gabriel Leung with Beacon Securities. Your line is open.
Gabriel Leung — Beacon Securities
Good morning. Thanks for taking my questions. Just a couple of points of clarification;
sorry, Randy, you'd mentioned you're working on four RFPs, or four RFPS, I guess, over the next
little while. How many of those were with big banks? And you said over 4,000 seats?
Randy Fowlie
So we're currently, Gabe, submitted in two of them, and then we expect to be included in
two more before the end of October. Three of the four are for our distributed desktop platform, and
one is for mobile.
The three that are involved in the distributed desktop platform are all with large banks
that have 4,000-plus seats available with their existing incumbent.
Gabriel Leung
Okay. And so those larger opportunities, if I just did the rough math, those are $1 millionplus opportunities each, right?
Randy Fowlie
They would be in that range, yes. Once they're fully rolled out and on an annual basis, yes.
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Gabriel Leung
Okay. Perfect. And what's your expectations in terms of the timing of the two that you've
already submitted?
Randy Fowlie
We expect sometime between late November and January to hear back on the two that
we're submitted on so far.
Gabriel Leung
And those two are both desktops, right?
Randy Fowlie
They are both desktops, yes.
Gabriel Leung
Okay. Cool. All right. Okay. And then moving on to the, I guess, to the hardware side of
things. I mean if not for the deferral of the shipment, I guess you would have been closer to 1.5
million...
Randy Fowlie
That’s right.
Gabriel Leung
On the hardware side, which matches, I guess, what you did in Q1 of this fiscal year, but
still below the run rate you guys have been running at previously. With the resources you've put in
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internally with your new distribution partner—and I know these things are lumpy—but what sort
timing-wise do you think you can get back to the 2 million-plus quarterly run rate in fiscal '17 on the
hardware side?
Randy Fowlie
I think, Gabe, in fiscal 2017 we can get back to—we'll be back to the 1.8 million to $2
million a quarter. That's our goal, and we believe we've got a plan to get back there.
Gabriel Leung
All right. That's helpful. All right. And you mentioned obviously you're putting more
resources in internal sales and marketing for Digital Imaging, so do you anticipate the sales and
marketing line to continue to increase over the next couple of quarters from the current I think it's
about 735,000 a quarter?
Randy Fowlie
I don't think, Gabe, that we expect it to significantly increase at all. We've got—we’ve
made the changes that we're making in our sales force right now. Depending on how we go with
some of our opportunities we may add another person, but that wouldn't be until next fiscal year.
Gabriel Leung
Right. Okay. And last thing, obviously cash remains a big piece of the balance sheet, and
you're still generating very good free cash flow. And I guess that should improve as the Digital
Imaging side improves and as your recurring revenues pick up. What are the thoughts around—I
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mean I know you guys have the dividend in play—further dividend increases; maybe a onetime
dividend? Or I know acquisitions you guys are always looking at stuff, but just based on where your
stock is currently trading, I know it becomes—it's very difficult for you to pay out for some of the
stuff that's out there. And this has been the case ongoing for several years now, I guess. Are you
now getting close to a turning point where you're just going to sort of bite a bullet and just pay up?
Or are there alternatives you're looking at?
Randy Fowlie
Well, first we've got—just to kind of answer the question in pieces—with our dividend we
do, sitting down looking at the—when we put the program in place we did put it in place with an
intent to look at the dividend annually and increase it as our cash flow is increasing. So I would
expect that there would be annual increases in our dividend.
Onetime dividends, I would say, probably are a little bit secondary. We would probably, I
would say, lean a little bit more towards a substantial issuer bid than we would a onetime dividend
to enhance the value for remaining shareholders in the Company.
And we do, Gabe, we're currently involved in some discussions with some people. I think
that there are opportunities out there for us to use the cash in the acquisition area to enhance the
business, but probably in terms of onetime things that probably would lean a little bit more
towards, but that's ultimately a Board decision, not mine. Mine is just to run the Company as well as
I can.
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But we'd probably lean more towards that than it would be a onetime dividend.
Gabriel Leung
All right. And I think that is it for me. Thanks a lot, guys.
Randy Fowlie
Okay. Thanks.
Operator
And showing no further questions in the queue, but again, that's *, 1 to ask a question.
And I'll pause for just one more moment.
And showing no further questions at this time, I’ll turn the call back to the presenters.
Randy Fowlie
Okay. Thanks, Operator. And thanks, everyone, for joining us on the call today, and we
look forward to providing our full year fiscal results at the end of our fourth quarter.
Thanks very much, and enjoy the day.
Operator
This concludes today's conference call. You may now disconnect.
*****
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