Data Communications Management Corp.

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Data Communications Management Corp. Fiscal 2025 Financial Results Conference Call. I'm James Larmer, 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 could be available after the call for any follow-up questions that you might have. Before we begin, I will 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+. This presentation will be added to our website for your reference, along with a post for you recording and transcript. Detailed information is also 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.

Good morning and good afternoon, good evening to anybody joining from other time zones. Our agenda this morning is very clear. We're just going to hit the highlights of 25, talk about some capital allocation, I'll look at our priorities and turn it over to Q&A. So thank you, James. First, I've got a summary of our highlights. And let's say anybody look at this slide. Our key theme on the year was controlling the controllables. And there was a lot of controllables we need to control. Looking at revenue results. Everybody saw that our release, read our release came out last night. The revenue decline was pretty much in line with consensus at minus 0.6, 0.2% on the year. And that really was reflecting lower spend on several large enterprise accounts. As shareholders know, about 93%, 94% of our revenue comes from large enterprise, so a lot of those large enterprise accounts obviously had some headwinds, and we did not offset that with new customers, although we did bring in several new customers, just given time to revenue, which, as you know, is long in our business. With that said, we did a very good job controlling the controllables, and our adjusted EBITDA came in at $60.4 million and 13.4% margin, and that was really due to the spending discipline mitigating the declines in some of the gross profit and obviously the revenue headwinds we experienced. We also generated strong free cash flow well up over a year ago. You'll see that in a chart coming up shortly of $13.4 million. And we've done, I'd say, a very good job returning capital to shareholders. And, again, you'll see a chart coming up. Our capital return to shareholders is about $17.6 million in the year. On the uncertainty side, again, we worked hard to manage through some market uncertainty, and you saw that through the quarters. The tariff uncertainty and, you know, that impacting budgets in large enterprise accounts. We obviously had the uncertainty and the unexpected headwind from the Canada Post labor disruption. Canada Post is a large client of DCMs, as well as the knock-on effect to all the other clients we service from a mailing perspective. So that certainly impacted our year. Thankfully, that's behind us, as we'll talk about in the E26 Outlook. And we did a very good job, as I said earlier, of managing and mitigating some of the revenue headwinds with operational efficiencies and driving SG&A productivity. And you'll see in a chart coming up that we actually reduced SG&A by $7.8 million in a year. On the digital and AI activities that we're delivering to the business, we've had some very good success in the year. We actually grew our tech services revenues by 4.2%, so obviously well above what we experienced on our core print business. We're now about $21 million in tech services revenues, and that's almost 5% of total revenue. Shareholders may remember that we launched Content Cloud, our AI-powered digital asset management solution, so we're proud of that. getting that to market, the success we're delivering. We've got good momentum with several verticals, but one in particular are the government and municipal services. And we were just up against a pretty large RFP and pretty large competitive shootout, and we secured a good piece of business there on government. So we're kind of coming – we're finding our lane and securing some good wins there. And then from an operational perspective and from a commercial perspective, a lot of AI in our workflows today to drive productivity improvements. So I'd say we're all in on AI from an operational perspective and from a commercial perspective as well. And finally, We've been building a good, solid M&A pipeline now that all of our restructuring integration, IT integration is behind us. We can now look to opportunities for M&A, and we've been building that pipeline. The market is good. Certainly the macro uncertainty is creating some opportunities on the sell side, and we're well capitalized to consider any M&A as we work through 2026. So overall, we managed well through the market uncertainty we experienced. The team did an excellent job to kind of manage those headwinds and maintain profitability while also returning significant cash to shareholders. That's kind of the overall highlights, and we're going to do a few details as we flip through the file here. Okay. From a revenue perspective, as I said, uh minus 6.2 percent for all the reasons i said but if you do look at this chart and you look over five years you can you do see you know despite the revenue headwinds we experienced in 2025 we're still managing a business that is twice the size almost twice the size of what it was in 2023 uh and um and managing it quite successfully. So obviously, you know, we'll see those revenue headwinds turn to tailwinds, and then we'll have a nice, you know, kind of virtual circle over time as well. But business is still solid. There's been no material losses in clients. And, again, you can see from this chart that we're still managing a very sizable business north of $450 million in revenues. Gross profit, obviously, with factory overhead recoveries and utilization was impacted. And you can see that just around $117 million in gross profit, gross margin of around 26%. And, again, we'll see that come back as revenue growth returns. We've built a perfect – footprint, operational footprint to now grow from, and we'll see that naturally kind of return to historical levels as we have revenue come back into our business, revenue growth come back into our business. Adjusted EBITDA, as I said earlier, you know, we're happy with the delivery of $60 million. It's pretty much in line with consensus. Still slightly down versus a year ago. A year ago was our high watermark, of course, and down for all the reasons I said due to the headwinds. But again, if you look at over the course of the last five years, we're up 70% over that horizon. And as I said earlier, with the operational efficiencies, the consolidation of our network that we've completed, and the return to revenue, you'll see that turn into a nice kind of virtuous circle, as we call it, where margins will improve. Not a lot of restructuring in our plans, so you'll see a natural improvement in EBITDA as that revenue comes back into our mix. James, free cash flow?

We had a solid year in terms of free cash flow. We delivered $13.4 million, up about 145% over last year. A lot of the CapEx that we invested in, particularly in 2024, to modernize and upgrade some facilities following the MCC acquisition and integration is largely behind us. So we see CapEx kind of being in similar levels to what we saw in 2025 going forward. A solid balance sheet, we continue to pay down debts, our leverage just below two times net debt to EBITDA at the end of the year, and that's down 2.2% on a net debt basis compared to last year, and significantly almost 50% since the MCC acquisition. And this is despite the returns to shareholders that we, or in addition I guess, complementing the returns to shareholders that we completed last year. Credit facility, we have solid lines and certainly a good balance sheet to pursue M&A activity and continue our capital return plans.