final transcript

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final transcript - RDM Corporation

FINAL TRANSCRIPT RDM Corporation Fiscal 2015 Third Quarter Results Conference Call Event Date/Time: July 23, 2015 — 9:00 a.m. E.T. Length: 28 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
July 23, 2015 — 9:00 a.m. E.T.
RDM Corporation Fiscal 2015 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 Pardeep Sangha PI Financial — Analyst Gabriel Leung Beacon Securities — Analyst Frank Pratt Private Investor "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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July 23, 2015 — 9:00 a.m. E.T.
PRESENTATION Operator Good morning, ladies and gentlemen. Welcome to the RDM Corporation Fiscal 2015 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. "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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I would like to remind everyone that this conference call is being recorded on Thursday, July 23, 2015, at 9:00 a.m. Eastern Time. 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 is Rui Malhinha, our Chief Financial Officer. Earlier this morning we released our results for the fiscal 2015 third quarter ending June 30, 2015, and I hope by now you’ve had a chance to review them. I'll begin the call today with a summary of our operational highlights, and then Rui will discuss the financial results in a little more detail. And finally I'll return with a few concluding remarks before opening up the call to questions. Looking at our performance for the quarter, we continued to build on our positive first‐
half results. We had organic growth across the business with both our Payment Processing revenue and Digital Imaging revenue up 3 percent and 6 percent, respectively. However, within the Payment Processing revenue our recurring Payment Processing revenue was up 11 percent over Q3 of last year. This increase contributed to substantial improvement in profitability as operating income increased 61 percent and adjusted EBITDA increased 39 percent over the prior 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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We added 4,269 seats exclusively from our existing customer base, bringing us to a total of 44,046. This increase is larger than our organic run rate of 1,200 to 1,500 seats per quarter. The additional increase is a result of end user licensing review with certain of our customers. The review found that a number of customers were not in compliance with the licensing terms. This led to an increase of approximately 2,600 end users during the quarter. We’ve seen the lion's share of the benefit from the compliance initiative taken this past quarter, and we expect to complete the review process in the coming months. In addition to the 2,600 seats added under the compliance review, we experienced approximately 1,600 new seats from existing customers, which is relatively consistent with what we've seen on a quarterly basis. If you recall, we mentioned last quarter that two financial institutions had selected RDM to replace their existing RDC providers. We're working through the final stages of contract negotiations with these institutions. The negotiations are taking longer than anticipated, mostly due to the internal processes of the institution and the extensive approval process required as a result of the regulatory review that the customers undergo. However, we are confident that we'll be finalizing the contracts with them shortly. During the quarter we also won another smaller regional bank, bringing the total to three customer wins so far this year. We should on board most of these end users over the next six to eight months. "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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We continue to be active on the RFI front and are also participating in a couple of RFPs for our mobile offering with some larger banks. The initial mobile opportunities would be smaller in scale; however, it is a chance for us to start building relationships with these larger financial institutions, potentially opening up the door for larger opportunities for our core desktop offering. Furthermore, our increasing traction with our mobile solution is a testament to the success of the innovation of the product and market acceptance in the mobile space. Our mobile offering enables businesses to take advantage of the traditional benefits associated with RDC, and in addition our mobile offering integrates seamlessly into our desktop platform, providing quick start‐
up and all the benefits of our desktop workflow. The more financial institution customers that launch our mobile application that integrates with our desktop solution, the stronger our overall competitive position becomes. Sales of our Digital Imaging products grew year over year, up $123,000. While software services are our primary driver for profitable growth, there still remains an opportunity for us to continue to grow profitably in the digital imaging market. Our total cost of sales came down from Q3 from 2.4 million in 2014 to 2.2 million in 2015. This was largely a result of a decrease in royalty payments relating to a settlement for third party licensing fees, which Rui will discuss 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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Driven by the combination of the increase in revenue and decrease in cost of sales, we experienced margin expansion across both product lines. This led to growth in overall gross margin to 62 percent, up from 56 percent in Q3 of 2014. I'm also pleased to report continued improvements in bottom line profitability, with adjusted EBITDA increasing 39 percent and operating income growing by 61 percent over the prior year. We did benefit from some onetime items that bolstered our bottom line results for the quarter, which Rui will discuss; however, our overall performance continued to demonstrate the organic growth opportunities available to us and the resulting profitability in our business. In line with the Company's dividend policy, the Board also approved a quarterly dividend of $0.15 per common share payable to common shareholders. That covers the highlights of the quarter, and now I'll turn it over to Rui to talk about financial results in a little more detail. Rui? Rui Malhinha — Chief Financial Officer, RDM Corporation Thank you, Randy. Good morning, everyone. Our Q3 results highlight our success in growing the business within our existing customer base. We continued to drive top line improvements across our business, with total revenue increasing 243,000 year over year. The increase was driven by 11 percent growth in recurring Payment Processing revenue, growth in total Payment Processing revenue of 3 percent year over "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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year to 3.7 million from 3.6 million in Q3 2014, and growth in Digital Imaging revenue of 6 percent to 2.1 million from 2 million in Q3 2014. As Randy mentioned, we continued to build on our ITMS business, recording an 18 percent increase in total number of seats compared to Q3 2014. Recurring Payment Processing Services revenue increased 11 percent to 3.6 million for Q3 2015 compared with 3.2 million for the same period in fiscal 2014. This quarter we recorded only a small portion of professional services and custom development revenue related to Payment Processing. We earned 129,000 this past quarter compared to 377,000 in Q3 2014. We achieved a further year‐over‐year increase in gross margin for our Payment Processing product line, recording a gross margin of 77 percent, up from 67 percent. Improvement is due to a reduction in the cost of network operations, our fixed cost nature of expenses while growing revenue, and a continued weakness in the Canadian dollar. We also benefitted, as Randy mentioned, from a reduction in technology licensing fees paid to a third party. One of our customers settled with a patent holder, and as a result we are no longer required to pay the licensing fees. This is not a cost we'll incur in the future. Gross profit for Payment Processing services for Q3 2015 increased by 17 percent to 2.9 million from 2.4 million in Q3 2014. "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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Digital Imaging revenue was 2.1 million for the quarter, a 6 percent increase compared to the third quarter of 2014. We shipped 5,659 units of proprietary scanners, up from 4,295 units in Q3 2014. We recorded gross margins of 35 percent in Q3, more or less in line with the same quarter in 2014. Gross profit for our Digital Imaging product line was 736,000 compared to 701,000 for the same period in 2014. Overall, operating expenses were comparable year over year, coming in at 2.4 million. It is important to note that the Company's financial results are affected by volatility in the Canadian/US dollar exchange rate. The average US dollar exchange rate for the quarter was CAD 1 for US 0.81 compared to CAD 1 to US 0.91 for Q3 in 2014. As a result of a portion of operating expenses being incurred in Canadian dollars, the Company's expenses were favourably impacted by exchange rate movements. Of total operating expenses, approximately 2 million was denominated in Canadian dollars. The Company enters into forward contracts as a hedge against fluctuations in the exchange rate. Had we not hedged our exposure to exchange rate and the average exchange rate remained consistent between the two periods, total operating expenses for Q3 2015 would have been approximately 199,000 higher than what we reported. "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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Sales and marketing expenses decreased to 729,000 in Q3 2015 from 807,000 for the same period in fiscal 2014. R&D expenses were also down slightly at 1.1 million compared to 1.2 million in 2014. General and administration expenses increased from 462,000 in Q3 2014 to 526,000 in 2015. The increase was predominantly a result of retainer fees paid to an investment bank, additional staff salaries, and increased stock compensation related to recent additions. The Company recorded other income of 451,000 in Q3 2015 compared to other expenses of 153,000 in Q3 2014. The increase was due to a reversal related to third party licensing fees of patents for technology used in products and services. This is the same case as we both discussed earlier, which had a positive impact on cost of sales. The Company had estimated liability of 266,000 prior to 2015. This liability was reversed in the quarter to reflect a settlement between one of our customers and a third party. We also recorded in other income investment tax credits of 185,000 which we earned in prior periods to 2015, but had not recognized until this quarter. This quarter we determined that there was reasonable assurance that the ITCs will be used this fiscal year. We recorded a tax revision of 265,000 in Q3 2015 compared to 24,000 for the same period last year. With our continued improvement in profitability we expect to be in a taxable position this year; however, we have investment tax credits available to offset taxes payable. Therefore, we do not expect to pay cash taxes in 2015. "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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Overall, operating performance translated into increased profitability. We recorded adjusted EBITDA of 1.5 million, up from 1.1 million in Q3 2014. Net income was 1.6 million before taxes compared to 0.6 million in the same period last year. From a liquidity standpoint we generated strong growth in cash flow, generating cash flow from operations of 1.6 million during the quarter. We exited Q3 with cash and cash equivalents of 24.7 million. As we look to the remainder of the year, we will continue to focus on profitable growth. We'll also work to improve our top line growth across both areas of the business, as well as continuing to deliver strong cash flow generation. With that, I'll pass the call back to Randy. Randy? Randy Fowlie Thanks, Rui. Overall, we are very pleased with the operating results this quarter. We moved into the second half of 2015 with continued improvements in our top and bottom line, as well as generating strong cash flows from operations. We are enthused by the growth achieved in our Payment Processing business this quarter, which remains a key growth driver for us. We'll continue to focus on providing our customers with high‐value services to deepen these relationships and expand this part of our business. Furthermore, we continue to see an active deployment pipeline moving through the remainder of this year as we on board the three new bank 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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As demonstrated by our performance this quarter, Digital Imaging products remain an important pillar for our business as well. Combined, Payment Processing and Digital Imaging offer excellent profitable growth opportunities for us. We are winning with our existing customers, and we continue to build a pipeline for new business opportunities. We also continue to evaluate opportunities to complement our organic growth and drive increased value for our shareholders. And I'd like to thank all of our employees for their tremendous effort over the past quarter and all of our shareholders for their continued support. And I’ll look forward to updating you on the progress of our business at our next quarterly call when we release our full year and fourth quarter results for 2015. That concludes our prepared remarks, and now I'll turn it back over to the Operator to poll participants for questions. Thank you. Q&A Operator If you would like to ask a question, please press *, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Pardeep Sangha from PI Financial. Your line is open. "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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Pardeep Sangha — PI Financial Hi. Good morning, and thank you for taking my call. I want to start with the small regional bank that you signed in the quarter. Can you give us a sense of kind of what sort of seats we're talking about? Less than 500? Or what sort of... Randy Fowlie Pardeep, it would probably be less than 500, yes. Pardeep Sangha Okay. And any additional commentary with regards to the two that you signed last quarter? It's taken a little while here to sort of get them going here in terms of your final contracts. Can you just give us some more indication of sort of what kind of happened and why it's taking this long? Randy Fowlie I don't know if there's anything specific that I can point to. Large banks right now are offering an RDC offering, and it is considered to be a risk product offering that banks have by the regulators because it electronically processes cheques from remote locations. The regulators are always concerned about so‐called bad people using systems like that to launder money, so they undergo heavy regulatory review. For us to get through the whole contract process we go through a myriad of groups inside the bank from their IT group to their risk management group, their operations group, and then their "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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legal group at the end of the day. It sometimes unfortunately can just take a long time to get through all of the groups. Pardeep Sangha Now the one that you just signed this quarter, you don’t expect that one to take as long as well do you? Or is there a reason why one would take longer than another? Randy Fowlie I would say that sometimes larger banks, Pardeep, go through longer processes, but that's—I can't sit and tell you that the new bank won't have the same kind of review process. We don't expect it to take that long, but… Pardeep Sangha Okay. I think last quarter you mentioned you're expecting pretty active bid activity till the end of the year, and you had some comments, like similar comments in your prepared remarks. Just give us a sense sort of towards the end—by the end—in the fall sort of to the end of this calendar year, let's say the end of December, you're expecting like what sort of range? Is it two? Three? Four? Five sort of RFPs that will be active? Or what kind of number are we expecting? Randy Fowlie No, I would say we would expect maybe two to three more mobile RFPs that we would be involved in between now and the end of the year. Pardeep Sangha "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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Okay. And finally lastly, just a bit of an update in terms of M&A pipeline. I mean I think you started doing some process, some work on that side building out a bit of pipeline in terms of your M&A potential. Any updates on that? Randy Fowlie Not specifically because we don't have anything concrete. There's no definitive agreement with anybody. We've got a pipeline of activity we're reviewing. We also look at other opportunities where we invest money periodically in opportunities to grow our business in foreign marketplaces, and we've got a couple of those underway. We just try and make sure that we're looking at all avenues to create value for shareholders. Pardeep Sangha Okay. Thank you. Operator Your next question comes from Gabriel Leung from Beacon Securities. Your line is open. Gabriel Leung — Beacon Securities Good morning, guys, and congrats on the quarter. Couple of questions here; first in terms of the, what was it, 2,600 seat, I guess, catch‐up in the quarter. Those are not just onetime catch‐up revenues, right? They're ongoing revenues? 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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Yes. They're ongoing revenues, yes. Gabriel Leung Okay. Perfect. Just wanted to confirm that. Secondly, just in terms of the gross margins, you talked about the various factors that drove the Payment gross margins up to about 77 percent. Is that a—all else being equal, is that a good base gross margin assumption to move forward with for our financial models? Rui Malhinha No. I think we are more inclined to model gross margin in the low 70s… Gabriel Leung Okay. So… Randy Fowlie Part of the reason… Rui Malhinha Part of the reason for the 77 percent was the onetime reversal of royalty fees, licensing fees we had paid in prior quarters. I wouldn’t count on 77 percent… Gabriel Leung Sorry, sorry. Okay. That was in the cost of goods. What was the actual dollar amounts in the cost of goods? Rui Malhinha "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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About 70,000. Gabriel Leung Seventy thousand. Okay. Perfect. And then likewise on the hardware gross margins, it’s sort of been sort of skipping all over the place in the last few quarters. What’s sort of your base assumption for gross margins on hardware? And I know that really it depends on the mix of the product itself, but what’s the sort of gross margin assumptions you guys are thinking is a good number to go with? Rui Malhinha Low 30s and that could vary from quarter to quarter, depending on product mix, but low to mid 30s. Gabriel Leung Right. Okay. And then last thing just in terms of the, I guess, the RFP environment. Has there been a change since—I mean there’s been some M&A in your activity. I mean even late last year one of your main competitors got taken out. Have you seen an increase in banks sort of looking to potentially switch providers so maybe we’ll see a bit more activity, whether it’s early part of next year or sort of mid next year? Randy Fowlie I would say, Gabe, that banks are looking at switching providers more from the functionality of an existing provider. I don’t really think that the—and I think maybe you’re talking "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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about Deluxe acquiring Wausau—I don’t think that in and of itself will generate additional activity. But I think it’s just from the banks looking at the functionality and their competitiveness in the marketplace drives that more than that. Gabriel Leung Okay. That’s perfect. Actually that’s it for me. Thanks a lot, guys. Randy Fowlie Okay. Thanks a lot. Operator Once again, if you’d like to ask a question, please press *, then the number 1 on your telephone keypad. Your next question comes from Frank Pratt from personal. Your line is open. Frank Pratt — Private Investor Hi, Randy. Randy Fowlie Hi, Frank. Frank Pratt Randy, on this M&A activity—because you know my feeling on this—like if we’re going to make any significant improvement in the top line at least we’ve got to sign somebody. Would it be worth our while to go out and have somebody take charge of this for us like a Goldman or "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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somebody who can hunt out the possibilities; do something on a little more structured basis than looking at it ourselves? Randy Fowlie So, Frank, that’s exactly what we did last quarter. And so we have somebody working with us on a more structured basis to build a bigger pipeline than we had internally. And that’s the process we’re going through now. Frank Pratt Okay. Well, that’s a positive thing. When are we getting—are they giving us a report as to possibilities? Or like is there a time line on this? Randy Fowlie Well, you can’t set a time line to say when somebody else is going to be willing to sell, but the answer is yes. We go through some, on a fairly regular basis, reviews and some calls that I entertain with some potential candidates. Frank Pratt Okay. And is there any—it might be of some value to us too for you to talk to the guys at Descartes because, honest to God, these guys they seem to buy somebody every quarter. Now I admit it’s a different business, but obviously there’s something going on there where these guys have developed a fantastic awareness of what’s going on in the market… 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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Sure. I know a— Frank Pratt And they’re just around the corner, so… Randy Fowlie Yeah. And I know a couple of guys at Descartes. We could certainly do that. Frank Pratt And there may be some reason for some of those guys for us to consider putting somebody that’s associated with Descartes on the Board. Now my second area is with the Canadian banks. I know in the past this has been somewhat fruitless for us because they like to do everything themselves. Obviously in the mobile banking area they’re stepping up their efforts, and this appears to become their point of competition these days. I assume we’re still keeping contact with them, though, aren’t we? Even though it hasn’t panned out so well in the past? Randy Fowlie We do continue to try and stay in front of the Canadian banks and especially from the mobile perspective, yes. Frank Pratt Now just as a follow‐up on that, it seems to me from just because as they get bigger with their operations outside Canada, and I know what that involves from a systems standpoint, it might "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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be worth our while to talk to them like TD because of their US operation. Like there’s no—well, there’s virtually no integration between the US and Canada, and it may very well be once again as they get bigger, the systems get bigger and their priorities get more difficult and it may very well be that they may not want to use this in Canada, but they may be very happy to use this in the US. And I would think that would apply to particularly the other banks like BMO and those that have decent retail operations or even back room. Like the Royal bank, for example, has got to be processing a heck of a lot of cheques in their back room within the US. Randy Fowlie So… Frank Pratt So whether it’s worth our while to try to establish contacts with the US operations of these companies and not just count on the fact that the Canadian guys want to do everything themselves. I absolutely guarantee you they know they can’t do everything themselves in their non‐Canadian operations. Randy Fowlie So all I can say, Frank, is that we call on the Canadian banks, the US subs of the Canadian banks, the same as we do all of the other banks in the US trying to opening up doors. They’re the same as most of the other large US banks. They have providers, and our job is to get in there and try "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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at the time when a contract is coming up with a provider to get in front of them to show them the capabilities that we’ve got. So we address subs of Canadian banks in the US the same as we do other large US banks. They’re on our target list. Frank Pratt Okay. Okay. Well, that’s good, and hopefully something will develop there because there’s significant potential there without any question because our Canadian banks are starting to do, as you know, do big numbers in the States. Randy Fowlie Mm‐hmm. Frank Pratt Okay. And congratulations. Considering our existing business, this was a good quarter, but as you know, I’d just like us to make some kind of a significant leap here in the top line and eventually in the bottom line because I feel very confident if we can improve the top line the bottom line will come along with it. You guys have done such a great job of getting current business in the best shape it’s ever been, no question about that. In any case, okay, I’ll give up the line. Thanks, Randy. Randy Fowlie Thanks, Frank. "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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Operator Once again, if you would like ask a question, please press *, then the number 1 on your telephone keypad. Your next question comes from Pardeep Sangha from PI Financial. Your line is open. Pardeep Sangha Hi. Just a quick follow‐up; when do you expect to pay cash taxes? I understand federally with regards to the tax losses and everything, but what about the cash taxes? When do you expect that will kind of kick in? Rui Malhinha Yeah. We’re shielded from federal taxes payable for quite some time due to investment tax credit carryforwards that we have. We will start paying cash taxes, though, in the Province of Ontario starting in 2016, and the provincial rate is 11.5 percent. Pardeep Sangha Okay. Thank you very much. Operator Once again, if you’d like to ask a question, please press *, then the number 1 on your telephone keypad. We have no further questions at this time. I turn the call over to the presenters. 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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Thanks, Operator, and thanks, everyone, for joining the call today, and once again we look forward to talking to you on our next call. Thanks 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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