Data Communications Management Corp.

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the DCM third quarter fiscal 2025 financial results conference call. My name is James Lorimer, the CFO of DCM, and I'm pleased to be hosting today's call. Joining me on the call today is Richard Kellum, our president and chief executive officer. Following our prepared remarks, we will be moderating a Q&A session. As a reminder, this conference call is being broadcast live and recorded. We'd also like to remind everyone that Richard and I are available after the call for any follow-up questions that you may have. Before we begin, I'll remind everyone that we will be referring to forward-looking information on today's call. This information is subject to certain risks and uncertainties as outlined in the forward-looking information disclosure in our press release and more fully within our public disclosure filings on CDAR+. We will post a brief message from Richard along with highlights of our results on Q3 2025 on our website in the form of an infographic. This presentation will also be added to our website for your reference along with a post view recording and transcript. Our detailed information is available on our website and CDAR+. Please follow us on LinkedIn to keep up to date with other business developments. And I'll now turn the call over to Richard.

Thank you, James, and good morning to our shareholders, any shareholders that are joining us from other markets. Good afternoon, good evening as well. The plan to do today is just hit the highlights of the results. As James said, all the details will be up on our website. Talk a little bit about new business development, have a look at our continued priorities through 2025, and then turn it over to Q&A. So I'm going to look at a A summary or highlights of our quarter, say overall the results are very much in line with what we forecast and what we expected as we continue to manage through some market uncertainty. Looking at this first column on the left here, highlights of our Q3 adjusted EBITDA was in line with what we expected. Margin came in a little higher than a year ago, 11.7% versus 11.6%. And overall EBITDA value was 12.3% versus 12.6%. So pretty much in line, as I said, with what we expected. And our revenue was slightly off versus a year ago, but it was significantly decelerated, shall we say, versus quarter two. Even with the sustained macro headwinds, we were minus 3.1%. So again, pretty much in line with what we had forecasted. Gross margin slightly lower than a year ago, and that's really due to the reduced fixed cost overhead recovery we get in our factories. We'll see that snap back as we get revenue back into our facilities. The market uncertainty continues to remain. Certainly the economic and tariff uncertainty is negatively impacting our business confidence. Several, I'll call it discretionary marketing events or marketing spend has been reduced during the year. Again, we'll see that confidence kind of rebuild as we progress into next year. There's been a direct and an indirect impact from the Canada Post labor disputes. Canada Post is a large client of ours, so that's the direct. The indirect, obviously, are other clients that are using mail as part of their marketing efforts, especially direct mail and personalized direct mail. So the rotating strikes that we're now in are certainly not helping that. Air Canada, another client of ours, obviously that strike impacted some of our workflow, especially on the operational side on the quarter. But what I can tell you is the team has done a fantastic job at managing overhead and really mitigating the impacts of lower client spending. You'll see that in our favorable SG&A. Over to the third column, we are advancing our digital and our AI platforms, our CCM, our customer communication management platform. was named on the Aspire leaderboard. So a lot of confidence in that platform. I'll show a little bit more detail later. We launched our AI-powered content cloud digital asset management solution, and we're getting some good success with that early stage in the market. And then we've picked up a couple of new Flex customers, one significant financial services client that we're just working to onboard now. So some good... Definitely some good momentum in our digital solutions. And then M&A remains a focus for us. The pipeline continues to grow with market activity that remains robust. Certainly the macro uncertainty is creating opportunities and providing some incentive on the sell side. Seeing a lot of that activity in the market right now. and we are uh and james will show you a little later on the deck that we'll capitalize to transact if we see opportunities that uh we want to act on okay so a little bit more detail just kind of unpacking the highlights a little bit you know said revenues uh pretty much in line with what we expected deceleration over the prior quarter from a decline perspective minus 3.1 uh percent uh we were about 3.4 million uh shy of a year ago uh as i said of the air canada the canada post events uh certainly impacted that but um pretty much uh pretty much what we forecasted and certainly the new business development efforts that we have in market you know offset any other headwinds that we experience from other clients and again we're uh we'll talk about that a little bit later in the deck here on the progress we're making on on new business Overall gross profit, as I mentioned, really due to reuse volume in our facilities affected our fixed cost overhead recovery, hence the margin at 23.4 versus 25.8. So again, slightly down versus what we delivered a year ago, but pretty much in line with what we had forecast for the quarter as well. Adjusted EBITDA, 11.7 versus 11.6, as I mentioned earlier. Slightly down over a year ago. Slightly opposite percentage than slightly down over a year ago. So pretty decent EBITDA delivery given some of the headwinds that we experienced on the revenue line.

James, you want to talk about our balance sheet? Sure. Good quarter in terms of free cash flow. Our net debt came down from $87.5 million at the end of quarter two to $80.6 million. Our net debt to EBITDA just below 1.9 times, actually 1.87 times. So nice improvement there. Our excess availability under credit facilities increased nicely as well. We had just about $17 million of excess availability, as well as $3.7 million of cash. um with the accordion facility we have that's undrawn we have over 40 million dollars of total credit available so we believe we're we're well capitalized not only for our operations but also to pursue m a opportunities okay having uh having a look at new business first i'm gonna just talk a little bit about our ccm 360 platform this is customer communication management platform um we've uh

We've been working on this for about seven or eight months and getting good traction in the market right now. It does everything from electronic form capture, intelligent document processing, digital data, document routing, secure encryption, robust composition engine, and data-triggered customer communication. So you think of a full loop, we call it 360, right, from capture to delivery. and it's a fully ai enabled solution the electronic capture is ai enabled the intelligent document processing backbone is all ai enabled the digital data document routing is ai enabled so really using ai capabilities to simplify this workflow and more importantly to be able to capture you know information effectively and be able to use it for uh you know for effective marketing programs so we're starting to get some very good client traction the recent win we secured is as a result of this um uh this uh this product that we've uh that we've built um it's a great uh great success we'll see a lot of more a lot more that um uh as we progress into this quarter and importantly into next year we've got a very active pipeline As I mentioned, we launched our Content Cloud, which is a fully AI-enabled digital asset management solution. We had launched a product called Assemble about a year, year and a half ago, and this is a rebranding with some significant additional features and functions. It's very active on intelligent automation and some agentic AI as well. So new to market, we've already secured a few clients on this platform and we've got a very active top of funnel program right now. So we'll be able to report a lot more activity on this as we progress through the next couple of quarters. So very excited about this launch and off to a great start. We shared this with our shareholders I think the last couple of quarters. We are all in on growth and again that decline of around minus three would have been far greater if we hadn't have built this growth muscle. So we're getting some good momentum on new wallet share. uh as well as new business uh uh new logo um you know penetration as well our team is uh is all in on growth uh we've got a lot of active opportunities uh high number of proposals out there our number of valuants has gone up but 22 of our value and opportunities have come from new logos Our win rate has certainly accelerated versus 2004. We'll say that time to revenue in our business is long. So you'll see some of that revenue flow in end of year and importantly in the next year as well. I mean, if we win a deal now, we wouldn't see revenue till next year as an example, especially if it's large enterprise. So we're pleased with the progress we're making. And as I mentioned, our tech or our AI rather enabled solutions, we've got Top of funnel right now, around $7 million in opportunities in funnel for those digital solutions that we see down in the bottom right of this slide. So good progress on our new business development and our all-in on growth initiatives. Priorities for 2025. Again, we've unpacked these with shareholders several times. We're consistent with what we reported last quarter, maintain focus on profitable organic growth. deliver return on new capital investments, continue to drive gross margin improvements through operational efficiencies, and we've delivered several operational efficiencies. And again, once we see revenue flow back into our facilities, we'll see that gross margin improve, and then demonstrate our agility and adaptability to navigate these uncertain environments, leveraging our scale, increasing our or managing that capacity we've got in our network and then expanding our product mix and skills and capabilities to drive that profitable growth over time. Those are our priorities. And you want to talk about our return to shareholders?

Sure. We recently declared our third quarterly dividend of two and a half cents per share. That'll be payable at the end of December to shareholders of record in mid-December. This, of course, in addition to the special dividend that we declared earlier this year of 20 cents per share. Current price, we're trading about a seven and a half percent dividend yield based on the annualized quarterly dividend that we've been declaring.

Okay, so closing, we are certainly in very good control of our business. You can see that our SG&A has improved considerably despite some of the headwinds that we're experiencing in the marketplace. But again, we've all lived through tough environments before and we will see that turn. We've got a great new business development effort, new business development program in place. We've got strong operational performance. Our cash flows are solid, as you saw from James. Our new business development, as I said, our initiatives are kind of the best we've had in years. We're all in on growth. We certainly have a proven track record of execution. We are well positioned to pursue any opportunistic M&A that may come our way. Of course, we've got an experienced leadership team, kind of best in class or world class in the industry. And we're well capitalized, as James said, with over $41 million in available capital. So we're well positioned to take advantage of market opportunities as they arise. And certainly, we'll see some of the headwinds we've experienced turn at some point. And we'll be able to capitalize on those opportunities. All right, so that's the summary of the quarter and we'll turn it over to any questions that our shareholders may have.

Thanks, Richard. We'll now take questions from the audience. If you have a question and you're accessing the call through Teams, you can either use the raise your hand feature or you can use the chat feature and we'll respond to chat questions as well. We'll unmute your mic when we do cue you into the call.

Please introduce yourself once you've joined the session. All right, we have a couple questions here. Let me go with Noel Atkinson, please.

Hi, this is Noel Atkinson from Clara Securities. Good morning, Richard and James. Thanks for taking our questions this morning. Nice to see that, you know, like the year-over-year results are starting to go the right way here. You mentioned in your prepared remarks about the deep new business pipeline. um is that mainly print uh and can you talk about like what what are you seeing by like areas or verticals and you know are you winning market share from foreign providers or weakened competitors or whatever you can provide for detail and not that be helpful yeah i'll provide as much detail as i can noel uh uh good to hear from you uh great question so it is uh we we have an active

uh a crm uh pipeline i won't tell you the value of it but it's sizable and uh it it's across our print our tech enabled uh solutions as well as our pure play sa solutions and digital signage as well as part of it as well as resales you know we buy you know printers and scanners for hospitals as an example so it's it's all that together uh print obviously being the sizable portion of it um And on the print side, I'll tell you where the biggest opportunities are. Certainly, labels. We've had really good success on labels, and that's a growing sector in the marketplace. Large format, which has been a growing business for us in 2025. And we see a lot of new business development opportunities there as well as we close out this year and move into next year. And we've won several this year as well. uh packaging especially on the folding carton or paperboard side we're quite small in it but it's a growing opportunity for us um so those would be you know kind of three and then of course digital but those would be three or four areas that uh are very active in our pipeline right now our uh our forms business uh is uh And declining slightly, not a whole lot of new business opportunities and forms. That's a business that we kind of managed for cash flow. No, good business for us and it spins off some good cash flow, similar to our roles business. And... Yeah, as I said, we've got to, you know, I already gave you the number on our pipeline for some of our pure SaaS and digital solutions. So I don't know if that answers your question. Maybe second, I think you had a second question, which is around verticals. Obviously, given large format, a lot of it is in retail and QSR. So a lot of opportunities there in our pipeline to build that out over time. And then, interestingly enough, our BCS business, that's the kind of transactional mail business, James, it's roughly kind of flat two year ago. which is understandable. And that's an opportunity for us to kind of win or grow share as that market certainly has some headwinds. You know, transactional ML is not growing from an industry perspective. It's sort of declining at low single digits, but we've maintained pretty flat there or directly flat as a result of some share gain. So hopefully that gives you a little bit of color.

Yeah, that's great. One more quick thing, just in terms of if you're winning RFPs, you know, taking share here, you know is it foreign providers or weakened competitors or you know your digital capabilities like what's what's been driving the winds here for you want to talk about james yeah i'd say you know the the

RFPs are typically pretty complex, long processes, very detailed responses. Typically, there's a lot of requests around information security and what we're doing from a SOC 2 compliance perspective. We believe the investments we've made in the past several years, but particularly in the last couple of years have really position as well in that market. And given our scale, it's certainly harder for some smaller players to have the same kind of IT security and infrastructure investments that we've been making. We have recently won some smaller jobs, some smaller business from some poorer, less well capitalized, smaller players in the market. So that's been a positive We have seen a little bit of kind of international, you know, some participants in a couple of sectors, pretty isolated to kind of one or two sectors, but typically most of the competition is domestic. We are exploring a little bit more expansion into the U.S., leveraging some of our kind of unique capabilities across the border. So we expect that that could help offset some declines that we've seen and some of the kind of longer run kind of forms, types of businesses that we're in. Hope that helps.

Yeah, a little bit of business we picked up, Noel, on retailers. U.S. retailers that may have been servicing their Canadian business out of the U.S. that, given some of the uncertainty of tariffs, want to service that business in Canada. So that's led to some opportunities. And as James said, one of the areas we We are most successful in our, you know, clients that have a lot of complexity in their workflow, and they're maybe using multiple providers, and we can help them simplify that complexity with a, you know, some type of digitally enabled, you know, workflow solution, and then consolidate that work into our environment. That's where we sort of find the most success. And then, as James said, security is obviously, you know, an important one, right?

Okay, great. Just one more for me. On the M&A side, are you looking for tuck-ins or transformational transactions? And then, you know, can you talk about, you know, are you looking to add, you know, do these transactions to add customers or capabilities or geographies?

Yeah, good question. Definitely, you know, we're seeing a lot of opportunities on the M&A front right now, Noel. It seems to be a very vibrant market. We're being very selective. The areas that we're really trying to focus in on are some of the growth markets that Richard mentioned earlier. So we think about kind of large format and kind of in-store signage. Think about labels. That's a big market. You know, we have some capabilities in kind of paperboard packaging. You know, we would like to kind of expand that through M&A as well as organically. But those would be probably the top kind of three areas that we're looking at. And then also, you know, just kind of complementary capabilities that might add, you know, some regional strength or regional capabilities to our kind of physical footprint of manufacturing plants.

Okay, great. Thank you very much. Excellent. Okay. We have a question from Chris Thompson. Chris, go ahead and unmute your line. Hey, uh, can you hear me now?

Hi Chris. Yes. Hi Chris.

Great. Uh, thanks. I just want a little more, um, you know, in the general overall Canadian market, your sales market, are you seeing, you know, this, this sales pressure, um, is it look like it's going to be visible say for the next couple of quarters or for the next year? Like what's the uncertainty of your, your sales pipeline and closing deals?

Yeah. Um,

It's, it's, you know, it's a great question, right? We, uh, we, uh, we talk about this every day. It's unpredictable. We could have, we could have a, you know, we have a great month and, you know, we forecast a solid month the next month and we lose a couple of, a couple of large activities out of our workflow. And, you know, obviously, uh, you know, we go backwards on the month. So it's very unpredictable at this point. That's why we kind of, uh, step back on giving guidance, um, until we get more clarity, um, You know, you saw some improvements, obviously, in our quarter versus the prior quarter. That's due to the new business development that we brought in. And, you know, we're very active on doubling down on that new business. But in terms of the market, yes, it's still kind of uncertain and unpredictable at this point.

Okay, thanks. And just looking at your tech-enabled subscription services being one of your focuses, it seems to be growing slightly year over year. It looks like there's a lot of seasonality in it. But do you think you're going to see more of an uptick on this in next year? Or is it just going to be one of these slow growth and then you think you're going to build some momentum and hopefully it takes off more?

Yeah, I guess that's a good question, Chris. There's a number of things that are in that tech services bundle. Some of the offerings are very seasonal, so they tend to kind of ramp up in Q3 and Q4, and particularly in the first quarter. And those largely relate to some of the big, we charge professional services fees for programming and kind of getting ready for tax time. a lot of the big annual statements and programs that run in the first quarter. So that part of the business is a little bit seasonal. The balance, you know, if we look at some of the tech offerings like Content Cloud and Xavi, Those are a little bit more kind of straight line from a from a, you know, we recognize revenue on a kind of a SAS basis for those. So as those businesses grow, you will see an accelerated growth in those in those business lines. And then kind of separate sort of fees is flex fees. And Richard mentioned that we want a new, fairly substantial client. in the quarter, we are in the process of onboarding that, you know, we'll recognize that revenue over the next 12 months. So that'll be a nice little piece of business on top of that. So it'll be a little lumpy in terms of the steps up with some of those larger things, maybe a little bit more gradual with some of the smaller annual license fees from, say, a content cloud or a Xavi.

Okay. That's all my questions. Thanks.

Okay, thanks, Chris. Thanks, Chris. We have a call, a hand up from Daniel Rosenberg.

Daniel, please unmute your mic.

Good morning, Daniel Rosenberg from Paradigm Capital. Hi, James. Hi, Richard. My first question comes around just the flexibility in the business. It was nice to see the G&A come down relative to last year. I'm just curious, how much flexibility is inherently in the business as you think about macro ups and downs?

Yeah, I guess, good question. There's, you know, there's kind of two parts to the business broadly if you think about cost of goods sold and then SG&A. You know, our labour, there's certainly variable components to labour. You know, when we're running hard, we'll add either temporary labour to help, for example, in certain things like kitting and fulfilment and other functions. The kind of the typical kind of fixed labor. So think about kind of Pressman and warehousing and shipping and free press and all those functions. Those are a little bit less variable because you can't really kind of run out and hire or downsize easily because it's a pretty unique skill set. From the SG&A side, we've got a number of levers. We've got a pretty decent sized fixed overhead just from staff levels. We do have some variable components of spend on different functions. I guess practically R&D is kind of one of those. We've been pretty steady from an R&D perspective. uh throughout this year compared to last year uh but you know we're certainly looking as you know we've seen softness in our top line revenue this year compared to last year and um i think we've proven that we're pretty good at uh adapting where we're needed so uh we try to try to be as flexible as we can within typical kind of constraints of um you know uh having good having good people and good talent thanks for that

And just turning to the pipeline, so you mentioned, you know, some sizable activity within it. I was just curious if you could speak to conversion around the pipeline and then as a customer converts, how do you think about selling product sets like one solution versus two solutions versus three and kind of the segmentation of your actual customer base as it fits the product set?

Yeah, I won't talk specifically to our conversion rates. I guess sort of a competitive advantage that we have, but we certainly have a high conversion rate once we have the right lead. And obviously we work through that lead gen into proposal. I will tell you that one thing we're very good at is cross-selling and up-selling. So we may have... a new client that comes into our organization. It could be, I don't know, a retail client that we're offering in-store solutions to. And then obviously we sell digital solutions or or other print solutions to them as well. So our team is highly skilled at cross-selling and upselling. We don't have sales reps that specialize in one particular print technology. Our guys sell everything, hence the kind of enterprise solution that we bring to clients. So hopefully that answers your question. It's tough for me to be very specific, obviously, given it's certainly a competitive advantage that we have.

I understand, appreciate the color. And then just when you think about the digital products, sounds like you're staying certainly on top of AI implementations. I'm wondering if you could give any insight into, you know, early days, but how customers are adopting usage and does it impact at all how you think about pricing the products given these added features and benefits that AI is offering?

Well, certainly, I mean, if I talk specifically about our content cloud platform, it's fully AI enabled. So our clients that are using that are kind of all in on that AI solutioning. And in fact, I had a talk to a client, a CMO that we onboarded about a couple of months ago and his comment from him as well as his team was like, I can't believe we live without something like this for so long. So we've made it super easy for them to manage their massive asset management base with auto tagging, meta tagging, using AI so they can find and share stuff at ease. and taking a lot of time and waste out. So we've got high level of adoption in the AI solutions that we're bringing to clients today, whether it's in Xavi that helps kind of automate or better understand the effectiveness of social campaigns and provides recommendations to improve, whether it's digital asset management, content cloud, on the whole auto tagging and meta tagging. or whether it's some of the work we're doing on CCM 360, especially the intelligent document processing, you know, being able to look at files and manage them effectively, kind of similar to what we do at Assemble, just a little bit more detail on the CCM 360. So we've got, you know, obviously the market's moving fast, which is obviously leading to a lot of opportunities for us, but high level of interest and high level of adoption once we, the right conversations with the right people thanks for that just it sounds like you're using it really as a differentiator more than any kind of pricing type type thing and um is that how i'm to understand it at this stage at least uh yeah we i mean we don't we don't talk about pricing of course but yeah we certainly allow it we we certainly use it to differentiate our offering in the marketplace but you know there's a lot of there's a lot of

ai activity in the market right now right so for us to keep pace with the market we need to obviously lean into all the ai capabilities and make sure we demonstrate our capabilities in that space great uh last one for me um so it was nice to see kind of the conversion of ubita into strong free cash flow here everything seems to be taking shape as you guys uh worked on integrating the business I was just curious around usage of capital, that M&A pipeline, anything you could say about the size of it or changing valuations. And then also, you know, you yourselves have a stock that's at quite an attractive price here, so usage should be NCIB. If you could speak to that, please, and I'll pass the line.

Thank you. James? Sure. Yeah, I guess first with your last question, we have been kind of active on the NCIB. We bought, I guess, almost 265,000 shares back in the quarter. So we continue to kind of pick away in the market. Priorities for us really in terms of capital utilization are the dividend and continuing that. You know, our CapEx needs are certainly much more modest now that we've integrated the more Canada business. So we'll end up probably about five million dollars of CapEx, give or take a little bit this year and probably similar levels next year. And so, you know, the other kind of kind of key priorities continue to pay down debt. We kind of get feedback a little bit from the market that they'd like to see our net debt come down, but we're pretty comfortable with the path that we're on. So we'll continue to pay down debt as we go. And then opportunities for M&A, we're certainly looking at things that are creative strategically. Given our market price, we're being very selective in terms of growth profiles and market opportunities that we're pursuing, but we do see some pretty interesting things in the market right now.

Thanks for taking my questions.

I have a question from Audrey Pelford.

Audrey, go ahead, please. Can we unmute Audrey's mic? Okay, go ahead, Audrey. Oh, okay. All right, we seem to be having... Oh, there we go. Try now, Audrey. Okay, maybe we can circle up after the call, Audrey.

Sure. I think that concludes the Q&A portion of today's call. Thanks, everyone, for joining and your interest in DCM. As a reminder, Richard and I are available after the call if you may have any follow-up questions. That concludes our call. I hope everyone enjoys the rest of their day, and you may now disconnect your lines. Thank you, everybody.