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spk04: Good morning, ladies and gentlemen, and welcome to the Callion third quarter 2022 conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Kevin Ford, CEO and President. Sir, the floor is yours.
spk02: Thank you, Ali, and good morning, everyone. I welcome you to Callion's Q3 fiscal year 2022 earnings call. from Callion's headquarters here in Ottawa, Ontario. With me is Patrick Houston, our Chief Financial Officer. Please note that certain information discussed today is forward-looking and subject to important risks and uncertainties. The results predicted in these statements may be material different from actual results. I'm pleased to report another very strong quarter for Callion across several key performance metrics. Despite the pandemic, the Ukraine conflict, and supply chain shortages, Calend continued our growth momentum. In Q3, we achieved our highest quarterly revenue to date. We achieved record gross margins. We continued to expand into the US and Europe, and we continued our journey to diversify our customer base. So let me elaborate. Gross margins this quarter were 30%. This is an all-time high and represents a significant milestone. Two years ago, our gross margins were 21%, and through our efforts organically and through M&A, we have made significant progress. Revenue was also at an all-time high level of $150 million. This performance was even more impressive given supply chain slowdowns and project starts being delayed. You've heard me speak frequently about our efforts to diversify our revenue both geographically and by sector. Just a few years ago, more than 70% of our revenues came from Government of Canada. As of this quarter, commercial revenues have outpaced government revenues and our expansion into the US and Europe continues to go very well. We were able to do this while continuing to grow our legacy Canadian government business. Each of these milestones is a significant indication of our strategy in action and further motivates our team to continue to execute against our plan. As a reminder, our four-pillar growth strategy consists of innovation, continuous improvement, customer retention, and customer diversification. Last quarter, we launched our innovative digital health platform. In Q3, we partnered with a precision healthcare company that will leverage our digital healthcare platform to deliver the product to Canadians. More on this later. You've also heard me speak about our goal to be a billion-dollar company, and we continue to improve and invest in technology that helps us scale and grow our organization in an efficient manner. Our customer retention efforts are the foundation of our business. In Q3, our ability to re-win mandates with existing customers remained strong. Of the $190 million in new contract signings, 90 million were customer renewals. As mentioned, our customer diversification strategy continues to achieve momentum this quarter, and the contributions of Computex and Simfront posted impressive results, which helped us expand our revenues into the US and Europe. Our four-person engine model offers diverse solutions to markets around the world. Our four-person engine consists of advanced technologies, health, learning, and IT and cyber solutions. Advanced technologies and health faced headwinds in Q3, whilst our learning and ITCS clearly had tailwinds. It showed the strength of our diversification this quarter again and still generated record revenues and record gross margins, despite those headwinds. I will now share an update on each of our segments. The ITCS segment posted impressive revenue growth of 109% this quarter, and a 76% increase for the nine-month period ended June 30, 2022. Gross margins increased 15 percentage points, and profitability increased 115% in the three-month period. Our strategy to first become a leading provider of information technology and cyber, and to be able to meet customers' needs across Canada and the United States is delivering results and resonating with the customers. We are also increasing our reoccurring revenue streams as more customers adopt our managed services platforms. I'd like to share a few of the customer stories to demonstrate our ability to provide high-quality services across many IT sectors and help those customers execute their business objectives. Katerra Energy is a U.S.-based gas and exploration company that is quickly expanding. We have partnered with them to support several initiatives from hardware infrastructure and network support to more recently rolling out our security operations center. Our SOC as a service offering for Katerra provides them with artificial intelligence and human integrated threat hunting, awareness training, and most importantly, remediation when a cyber tactic happens and is available 24-7. Omni Logistics is a rapidly growing global supply chain logistics company in a very competitive and intense supply chain management sector. Omni partnered with Calion as we understood the complexities of a global environment and offered them the ability to quickly bring on new logistical sites as their business expanded. Calian experts met with the Omni team to evaluate current and future needs and help them construct a comprehensive plan to support their fast-paced journey. We are now building, configuring, and deploying the first phase of the solutions for Omni Logistics. These customer stories demonstrate our ability to provide high-quality services which gains customers' trust to partner on additional capabilities in our broad product portfolio. Today, our ITCS offers cybersecurity to enterprise cloud migration to manage services, We listen to the complex challenges that our customers face and then offer them solutions, solutions that cross all four of our operating segments. For example, our ITCS segment, our health segment, are a great example of how we work together to cross-sell. The two segments came together and invested R&D in a virtual care delivery platform, and we're honored to be recognized in this quarter by Microsoft Canada, who awarded Calion their 22 Healthcare Impact Award. Moving on to health. Our health segment saw tremendous demand at this time last year as we helped Canadians respond to COVID-19. As that work ended, the demand normalized. Our ability to replace that revenue with contributions from different parts of our business, like the ITCS segment, speaks to the success of our four-fisted engine and diversification agenda. Revenue contribution from the health segment was $40 million, which was down 22% from this time last year. 14% of that decline was attributed to the reduced need for COVID-related services. In addition to the decline in COVID-19 response engagements, the company saw slow demand for patient support programs and clinical research as projects came to an end and new initiatives have yet to kick off. Despite the reduction in revenue during this transition period, we remain optimistic about our market position and have a three-pronged approach to drive future growth. The first is technology. Calion Nexi is an example of innovative technology that resonates in the healthcare market. It transforms healthcare delivery using automation, analytics, and machine learning, and actually can enable the healthcare industry to be more productive as it deals with less resources. The second is further focused on the pharmaceutical market. This quarter, Ciantra Inc. announced that Callion will provide the technology platform and nursing network for the mobile test administration of Ciantra's innovative blood test that can identify breast cancer. As pharmaceutical companies develop innovative and life-changing solutions, Calium is well-positioned to help them develop and bring those medications to market. The last is diversification. We are expanding our current offerings into the U.S. and looking for M&A targets to further accelerate our market traction. Before we move on to the next segment, I want to reiterate and say how proud I am of our efforts from our team that they've demonstrated over the last few years of COVID as they helped Canadians respond to the pandemic. Callion and our staff remain on ready so that we can step up quickly to help Canadians again if needed. For advanced technologies, we saw this segment revenue decrease 11% year over year. We ended the quarter with revenue of $39 million. In our space division, we have seen the timing from RFP to contract awards and project commencement lengthen. As we near the conclusion of some of our existing contracts, new initiatives have yet to begin. We have partially offset this by increased demand for our software services, which now has the largest backlog of work that we have ever recorded. Despite this, we have managed to replace these revenues with sales at significantly higher gross margins in our terrestrial division. Our entry into the GNSS and tennis sector continues to be the highlight in Q3. Demand in multiple markets, including electronic vehicles and mining, continue to be very strong, with an increase of 57% compared to the same quarter of the previous year. Our nuclear business continued to do well in Q3. We're also working with customers on new mandates, including analysis of small modular reactor technology. Part shortages continue to be an issue, slowing down our delivery speed for our hardware-based solutions. Our teams are working hard to find the solutions to bring those key parts into practice and catch up on our backlog. Moving forward, we will organize the advanced technology segment to ready ourselves to respond to ever-evolving market demands. The segment is now organized into three areas of business, space, defense, and terrestrial, as we believe this focus will support our growth objectives and provide focus on key market segments. And finally, our learning segment showed considerable revenue and margin expansion in the quarter. Revenue increased 23% compared to last year and closed the quarter at $22 million. In the last 12 months, Learning has achieved a revenue of $87 million. It is on track to break the $100 million year level for the first time in the company's history. This has been the result of our expansion to Europe, as well as expansion of our services to introduce more technology assets into our trusted and experienced delivery methods. Gross margins continue to track in the right direction, ending at 26%. This compares to 23% in fiscal 21. Our acquisition of SimFront and SimWave continues to be a highlight. Technology assets and synthetic learning environments, as well as our virtual reality and augmented reality, have allowed us to expand our Canadian presence within militaries and commercial customers. Now, our Chief Financial Officer, Patrick Hewson, will discuss results and key performance indicators. Over to you, Patrick.
spk06: Thank you, Kevin. This quarter saw balanced performance across the four segments. when put together resulting in several of our key performance indicators at all-time highs. Revenue was up 10% versus the same period last year. This is in line with our objective to deliver consistent double-digit growth. But perhaps more importantly, we've been able to expand our margins ahead of our revenue growth. This has been through multiple initiatives which have offset cost pressures we have seen due to current economic environment. We also managed to record $190 million in net new contract signings, which will help us as we enter FY23 starting in October. This also continues our recent trend of new signings exceeding our revenues and maintaining a strong backlog position across all four segments. As Kevin mentioned, our diversification efforts are showing meaningful progress quarter over quarter. Both our legacy government business and our commercial business are now equal contributors and we still see the ability to grow both of these in coming years. Business outside Canada now has reached 33% of overall revenues. We continue to seek M&A opportunities to help our efforts to grow business in Europe and the United States. Our recent acquisitions in cyber, learning, and GNSS antennas are performing above expectations and delivering strong results. This has helped offset revenue reductions year-over-year due to COVID response work coming to an end in our health segment. Our cash performance was strong this quarter. Cash flow from operating activities was just under $20 million. This was through strong business performance as well as positive working capital of $8 million. After earn-out payments of $5 million and dividend in CapEx, we ended the quarter up $9.4 million on net cash as compared to Q2 of this year. This puts us in a strong balance sheet position to continue to execute our strategy of organic and acquisitive growth with committed debt and cash on hand of over $120 million and the ability to further expand this liquidity with our current lending syndicate. This balance sheet strength and track record of profitability and excellent cash flow conversion will be an asset as we continue to allocate time and effort on our M&A agenda. With one quarter remaining in our 2022 fiscal year, we're still on track for another record year, our fifth consecutive all-time high performance. We have adjusted revenue down to reflect a few factors, the first being delays and signings of new work in our space division of advanced technologies and our health segment, and the second being supply chain delays preventing us from fulfilling orders in advanced technologies and ITCS. We now expect revenue in the range of $560 million to $585 million. We have maintained our EBITDA guidance, reflecting stronger gross margin momentum as seen in this quarter's performance, as well as pacing our investments on various organic growth initiatives. EBITDA remains in the range of $61 million to $65.5 million. Adjusted net income has been increased to reflect more favorable tax effects as our business expands internationally, as well as reduction in costs below EBITDA. We now expect adjusted net income in the range of $44 to $48 million. Finally, I must caution that revenues and profitability realized are ultimately dependent on the extent and timing of future contract awards, customer realization of existing contract vehicles, and any impacts due to COVID-19 and the conflicts in Ukraine. Our guidance does not incorporate any additional M&A activity, and should we close any new opportunities, their contributions would be incremental. Please see our press release and MD&A for a detailed reconciliation of our guidance. I'll now turn the call back over to Kevin.
spk02: Thank you, Patrick. I want to once again thank our staff at Callion for the amazing efforts over the past couple of years through pandemics, conflicts, economic uncertainty, I am extremely proud of this amazing team for their dedication and commitment as we execute and work hard to deliver yet another record year for Calient. From time to time we receive questions about our ESG strategy and we're looking forward to publishing our inaugural ESG report later this year along with our Q4 results in November. We have a strong balance sheet to execute capital deployment on our M&A agenda and as I look forward we will definitely be leveraging that position of strength. We will continue to introduce technology across all of our existing customer base, new market verticals to differentiate our offerings and maintain the gross margin record that we set this quarter. We will continue to increase our recurring revenue models across all of our segments. And we are going to continue to expand into new markets across Canada, demonstrate market leadership across all of our four segments, and will lead to significant cross-sell opportunities in the future, and we've seen those opportunities daily. Speaking of leadership in the future, I'd like to take this opportunity to give you an update on our management team. Jerry Johnson, our CIO, has decided to retire from Callian. His many contributions to Callian have been significant across many of the leadership roles he has performed for Callian. I also want to personally thank him for his support to me in my transition as CEO, as well as his valued input and guidance since my arrival at Kalyan. All of us at Kalyan wish Jerry a healthy and happy retirement. I'm happy to announce today that replacing Jerry will be Michael Muldner. Mike will begin in September and brings with him a host of technology international business experience, and we really look forward to his leadership in the CIO role. Welcome, Michael, as I know you're listening. Gordon McDonald, president of our health segment, has recently announced his plans to retire in 2023. We will shortly begin a search for Gordon's successor, and while Gordon continues to lead our health segment until a suitable successor is found. And again, more to come on this, but again, Gordon, thank you for your leadership over the years, and I look forward over the next nine months to work with you on a successful transition. And with that, Ali, I'd like to now open the call to questions. Please open the call for questions, Ellie.
spk04: Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. Our first question is coming from Amir Azat with Echelon Park. Please go ahead.
spk03: Good morning, Kevin and Patrick. Thanks for taking my questions. Can you give us a breakdown of the main moving parts that resulted in the revenue guidance revision? Does it mainly stem from the space division, which could be very lumpy, or are there other areas that caused that guidance revision?
spk06: Yeah, I think space, certainly, there's two major factors, Amber. The first one, space, obviously, that is a lumpier business with bigger projects, generally lower margin profile. So we did see some of those, which we expected to start in Q4, have gone to the right. And in health, we have won some new contracts this year, but the pace at which they've started has been slower than expected. So I think those two things kind of contributed to a pretty slight reduction in our revenue. I think we're still going to finish strong in Q4, and we offset that, obviously, with higher margin.
spk02: And, Amrit, to Kevin, too, I just want to comment, because Patrick's bang on. The other element we're dealing with, frankly, we have a backlog of stuff to ship here, both in advanced tech and ITCS, and we're literally waiting for parts. So, again, I wanted to take a conservative posture on the revenue guidance. If these parts and everything comes in, I'm confident we're going to continue on our growth momentum on revenue, but the one thing I've always promised shareholders is honesty in the context of transparency. So right now I'm just concerned on the supply chain and some of that backlog. So we do have quite a bit of backlog. I'm just not confident we're going to be able to relieve that backlog between now and Q4, hence why I wanted to bring down that revenue guidance slightly.
spk03: No, that makes sense. I mean, what's pleasantly surprising to me, at least, is that you've maintained your EBITDA guidance despite being in a very high inflationary period. Can you comment on that? What's surprising you to the upside? Is it really the IT side, which continued to perform extremely well?
spk06: Yeah, absolutely. IT's been performing well and helping on the margin side. I mean, we are seeing some of the cost pressures. I mean, we're not unique or anything from that perspective. But I think all those initiatives we've been talking about, working hard to bring those margins up, have more than offset kind of any of those costs right now. So I think we're just focused on continuing to deliver those initiatives and make sure that that keeps happening.
spk03: Okay. So on IT specifically, when we look at the gross margin, obviously there's Computex, which I think is higher GM but heavier on OPEX. the 40-ish percent gross margin that you guys delivered is that sustainable? How do I think about this number? Are there any sort of one-offs in there?
spk06: No, I think for the short term, it's sustainable. The mix wasn't unusual or anything this quarter, so I think it was the first full quarter, I think, for having Computex in there. And then our Toronto-based iSecurity-type business is also performing very well. So I think it's a good benchmark here, and I think obviously we'll keep, as we expand, keep trying to improve there.
spk03: Okay, maybe one last one. How do I think about fiscal 23 growth in terms of organic versus acquisitive growth? And I'm obviously not looking for a number here, but from where you stand, do you feel that it continues to be a lower organic growth year and most of the growth driven by M&A? Is that fair?
spk02: I think for me the goal is to continue our double digit growth posture mixed with both organic and M&A. And as we look at the four segments, clearly with our IT group, our learning group, we're seeing good both M&A and organic growth opportunities. Our health group as well as we re-platform, re-baseline with our Nexi platform, organic growth opportunities and advanced tech. As I mentioned, we do have a strong backlog of opportunities Our software engineering group, as I mentioned, again, has got more backbone than it's ever had. So I'm confident we can continue both AMR. As far as the numbers, we'll tighten that up as we head into guidance into next year. But despite some of the headwinds, I want to reiterate that there's still quite a few tailwinds across all of our segments, and I am confident we're going to keep our double-digit growth posture as we head into next year. That's my commitment and my team's commitment.
spk03: Okay. I'll take that as the stars are aligned for a very big year in fiscal 2013.
spk02: Thanks, Amber. Thanks, Amber.
spk01: I appreciate that.
spk03: Thanks. I'll pass the line.
spk01: Yeah.
spk04: Thank you. Our next question is coming from Deepak Kushal with CMO. Go ahead. Hi.
spk05: Good morning, guys. Thanks for taking my questions. I've got two themes that I want to cover, one on the demand side. So you mentioned delayed projects and projects one, but delayed start. impacting guidance. But I think in the MD&A, in the outlook section, you talked about budget cuts and project cancellations. Where are you seeing that in the business, and is that factoring into some of the guidance conservatism?
spk06: Yeah, I mean, we're seeing, you know, I'd say it's different behavior in different segments, really. I think in the space group, it's been more, you know, given the economic environment, people are looking at their CapEx Their financing costs and kind of trying to re-platform, I think those deals still come. I think it's just been kind of a reset here in the short term. And then we'll see different behavior in health. Availability of resources has really been hard. I think everyone's seen that in the news. We're working extra hard to try to get the resources to fulfill the contracts. So I think it's been a bit of a difference during each of the segments, but we don't think it's a long-term thing. I think it's just as we readjust and be ready, we're still pretty optimistic about the outlook in both of those segments.
spk05: Okay, thanks. So to be clear, are you seeing anything being canceled on the customer side, whether you want it or not?
spk02: Not significantly, no. No, I do back to Kevin's. I think it's more delays where we're seeing, especially if anyone's dealing with any kind of financing elements of their deployment. So we expect more delays, not necessarily cancellations, and that's what we've been seeing. We've got projects we've won, we just have not started as we wait for the customer to resolve any final financing details that they need to do to move forward, especially large capital programs.
spk05: Okay, that makes a lot of sense, and that's helpful, Clark. Thank you. And then just a second question on the gross margin. You're at 30% now. I know there's a lot of moving parts. I'm just wondering the prospect of being able to sustain that through next year and how much of that incremental gross margin you can convert to EBITDA, given the various OPEX profiles of the businesses. So maybe just to start on that, what are the kind of moving parts on gross margin that If you win this, or once this big AT contract comes through, does gross margin come down again? Or can momentum and ITCS keep it up at the 30% level? And then how much of that can you convert to EBITDA?
spk06: Yeah, I mean, we're trying, our objective really going into next year is to maintain or exceed the 30%, so that's our objective going into next year. Obviously, we've got, you know, cost pressures and different mix issues, as you highlighted, but I think we've got a lot of positives as well that could, you know, ITCS momentum with, you know, margins above 30% are strong. So, I think, you know, again, it's balancing the four pistons, bringing all those things, but the objective is not to go backwards here on gross margin. And on a conversion to EBITDA, I mean, you know, that's one thing we have shown our ability to do, right? Take the gross margin, convert it to EBITDA, and convert it to cash flow, which, you know, you really saw this quarter. So I don't think that changes. I mean, I think we continue on that and, you know, do what we're doing now into next year, but at bigger scale.
spk05: Okay. And so just to follow up on that, I think Amir mentioned that the OPEX is high on the Computex side. What's the nature of that and why? Do you get some benefits now that it's part of Cali Group, and what's kind of the magnitude of that?
spk06: The biggest one is on the sales force. I mean, it's a very sophisticated and diverse sales force, which is really driving the revenue growth there. So I think we're glad to bring that in. It's a different model than we've had, but I think it's bringing that diversity and reach in the U.S. So I think we're happy with that, and now we're just optimizing it and pushing as much volume as we can.
spk05: Okay, thank you. That's helpful. I'm looking forward to your Q4 and your guidance for next year. Thanks again.
spk01: That's great. Thanks, Deepak.
spk04: Thank you. Our next question is coming from Michael Kiprios with Desjardins Bank. Please go ahead.
spk00: Good morning, everyone. Thank you for taking the question. My first question is going to be on the health segment. It's a tough comparison. Was there any benefits from COVID last year that impacted such as absenteeism this quarter? And is there any feedback from the launch of your new virtual care products so far? Any additional color, please? Yeah, sorry. Can you just restate your first question? I just want to make sure I understand it. Well, it was a two-part question. Just any benefits from COVID in the last quarter of last year that really saw a difference compared to this year? And were you impacted by any absenteeism in the health sector?
spk06: Yeah, so my 14% of the decrease in health kind of year over year was related to the kind of COVID business that we had last year that obviously isn't happening right now. And then Kevin, you want to speak to the virtual care?
spk02: Yeah, so basically, so we just got going on the virtual care platform. And I would say good discussions happening with customers. There's a funnel being built. So I'm cautiously optimistic. Actually, we'll see good traction there. But I'll update that more as we get into next year. Because as we just launched, I want to make sure I set expectations correctly. But we're excited by it, the Microsoft award. is a demonstration of their support in the context of our virtual care, our Corolla virtual care platform, as well as now our Nexi platform, as well as their health segment as well. So I'm confident both are relevant, both are going to be needed, and I'll update you as we look forward on guidance on our expectations on that. But right now we're just coming out of the box, but so far so good.
spk00: Perfect. Thank you. Maybe just a second one. On M&A, since we finished with a very strong cash position, since the market has seen some depression in the cash capital, past couple of months, have you seen valuations of any possible targets come down or it's really been the status quo?
spk06: I think we've seen a massive readjustment. I think certain sectors where maybe, you know, in health specifically where the valuations were a bit too high last year, I think those have come back. But again, we're looking for, you know, our history has been good acquisitions with strong track record, growth profile. And for those companies, I think, you know, they demand the valuation they do. But we're still confident, you know, we've got a good pipeline and we're confident we can, you know, execute more M&As just like we have here in the next short while.
spk00: Perfect. Thank you for the time and looking forward to Q4. Thanks.
spk01: Thanks so much. If there is no more questions or comments
spk04: I will hand it back to Mr. Kevin Ford for any closing statements.
spk02: Okay, thank you. Thanks, Ellie. And again, thank you everyone for attending today. In my closing thoughts, from my perspective, this quarter was another step on our journey to a billion-dollar company.
spk01: Double-digit revenue growth. Expanding our margins. Diversifying into new markets and customers.
spk02: increasing our cash flows, increasing our recurring revenue streams, and being in a position to continue to execute a creative M&A in support of our profitable growth objectives, I still feel we're well on track to our growth momentum and objective that we set for ourselves. I'm confident in our team. I count on them to not only fulfill our core purpose of helping the world communicate, innovate, learn, stay safe, and lead healthy lives, But based on those last few metrics, I'm also very confident in our ability to sustain our profitable growth momentum. So with that, I'd like to thank you again for joining today. We look forward to talking to you in Q4 for full year results and guidance for next year. And any other questions, please don't hesitate to reach out. And with that, Ali, we can now close the call.
spk04: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day and thank you for your participation.
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