Earnings call transcript: Data Communications misses Q2 2025 forecasts

Data Communications Management Ltd (DCM) reported its second-quarter earnings for fiscal year 2025, revealing a miss on both earnings per share (EPS) and revenue forecasts. The company posted an EPS of $0.07, falling short of the $0.08 forecast. Revenue came in at $113.79 million, below the expected $124.34 million. Following these results, the company’s stock experienced a decline of 3.27% in after-hours trading, closing at $1.48, down from the previous close of $1.53. According to InvestingPro analysis, DCM appears undervalued at current levels, with the stock trading near its 52-week low of $1.08 and offering a notable dividend yield of 6.54%.

Key Takeaways

• EPS missed forecast by 12.5%, with actual EPS at $0.07.
• Revenue fell short of expectations by 8.48%, totaling $113.79 million.
• Stock price dropped 3.27% in after-hours trading.
• EBITDA margin improved to 14.6% despite revenue decline.
• Tech revenues increased by 16%, driven by digital solutions.

Company Performance

Data Communications Management faced a challenging quarter with a 9.5% year-over-year revenue decline. Despite this, the company managed to improve its EBITDA margin to 14.6%, up from 13.4% in the previous year. The company is navigating a competitive market with economic uncertainties impacting client spending and inventory levels. However, the growth in tech revenues by 16% indicates a positive shift towards digital solutions and innovation.

Financial Highlights

• Revenue: $113.79 million, down 9.5% year-over-year.
• Earnings per share: $0.07, missing the forecast by 12.5%.
• EBITDA: $16.6 million, representing 98.2% of the prior year’s performance.
• Gross Margin: 26.8%, slightly down from 27.3%.
• Net Debt: Reduced by 40% since the Moored Canada acquisition.

Earnings vs. Forecast

The actual EPS of $0.07 was below the forecasted $0.08, resulting in a negative surprise of 12.5%. Revenue also missed expectations by 8.48%, coming in at $113.79 million compared to the anticipated $124.34 million. These results mark a significant deviation from the company’s historical performance, where it has often met or exceeded forecasts.

Market Reaction

Following the earnings release, DCM’s stock dropped by 3.27% in after-hours trading. This decline positions the stock closer to its 52-week low of $1.46, suggesting investor concerns about the company’s ability to meet financial targets amidst market uncertainties. InvestingPro analysis indicates the stock is currently in oversold territory, with additional technical indicators suggesting potential value opportunities. For deeper insights into DCM’s valuation and 10+ additional ProTips, subscribers can access the comprehensive Pro Research Report, part of InvestingPro’s coverage of 1,400+ US equities.

Outlook & Guidance

Looking forward, DCM is focusing on profitable organic growth and improving gross margins. The company has identified potential mergers and acquisitions in packaging, labels, and retail sectors, supported by over $36 million in available capital. Future EPS forecasts for upcoming quarters range from $0.04 to $0.07, with annual projections of $0.18 for FY2025 and $0.29 for FY2026. InvestingPro data shows the company maintains a FAIR Financial Health Score of 2.39, with particularly strong metrics in relative value (3.71) and growth potential (2.76), suggesting resilience despite current challenges.

Executive Commentary

CEO Richard Kellam highlighted the company’s resilience, stating, "We’ve delivered solid performance amidst some pretty challenging market conditions." He also emphasized the growth in the sales pipeline, which has reached unprecedented levels, and the company’s readiness for strategic acquisitions, noting, "We’re well positioned to pursue opportunistic M&A."

Risks and Challenges

• Economic and tariff uncertainties affecting business confidence.
• Competitive pressures in the commercial print market.
• Reduced client spending and inventory drawdowns.
• Need for continued operational efficiencies to maintain margins.
• Dependence on successful integration of tech solutions to drive growth.

Q&A

During the earnings call, analysts questioned the impact of market uncertainty on client spending and inventory management. The company’s strategies for cross-selling tech solutions and paper sourcing were also discussed, as well as growth opportunities in packaging and labels. Executives provided insights into their approach to navigating these challenges while capitalizing on emerging opportunities.

Full transcript - Data Communications Management Ltd (DCM) Q2 2025:

James Lorimer, CFO, Data Communications Management Corp (DCM): Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Data Communications Management Corp second quarter fiscal twenty twenty five financial results conference call. I’m James Lorimer, CFO of DCM, and I’m pleased to be hosting today’s call. Joining me on the call today is Richard Kellam, our president and chief executive officer. Following our prepared remarks, we will be moderating a q and a session.

As a reminder, this conference is being broadcast live and recorded. We’d also like to remind everyone that Richard and I can be available after the call for any follow-up questions that you might 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 SEDAR plus. The highlights of our results will be posted on our website in the form of an infographic along with other material.

This information will or this presentation will be added to our website your reference along with the post view recording and transcript. Our detailed information is also available on SEDAR plus. Please follow us on LinkedIn to keep up to date with other business developments. With that, I’ll now turn the call over to Richard.

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): Thank you, James, and and good morning, everyone. And I know we might have some people in Europe listening, so good afternoon to you as well. Wanna quick look at today’s agenda. We’re gonna hit the highlights and results of the quarter, talk a little bit about some new business development opportunities, priorities for 2025, and then we’ll turn it over to q and a. So starting off the highlights and results, I guess our key theme before I get into the highlights is that we’ve delivered solid performance amidst some pretty challenging market conditions, which I’ll get into in a little bit more detail.

Looking at this slide, kind of four highlights here. First pillar is the q two twenty twenty five results. Our adjusted EBITDA beat consensus. EBITDA margin was 14.6% versus thirteen four, and our value was sixteen six versus 69. So sort of essentially flat a year ago, 98.2% index over a year ago.

So very, very good solid EBITDA despite revenue being below expectations, really given the the stronger than planned macro headwinds that we experienced. Again, a little bit more detail in a minute on that. Gross margin held pretty solid given the revenue revenue headwinds at 26.8 versus twenty seven three. And, you know, despite, again, despite that that decline in revenue, so just a fixed cost overhead recovery. Obviously, we couldn’t recoup as a result of the the revenue decline, but good solid gross margin performance despite that.

Market uncertainty, and I think the keyword is uncertainty that we’re experiencing here, remains. The economic and tariff uncertainty has certainly negatively impacted business confidence. That obviously has resulted in less or smaller orders, so fewer smaller orders, and then some inventory drawdowns as well. And then, of course, we had the both the direct and indirect impact from Canada Post. The ongoing labor disruptions started back in November, continued through until the summer, and they’re still not settled.

Doesn’t seem to be any any strike action right now, but certainly still unsettled given the contract is not completed. And then, however, with all that, I’d say the team has done a great job managing overhead to mitigate impacts of a lower client spending, and you see those results in our financial results. On the, on the third pillar here, our new business development, and outlook, our sales pipeline continues to grow, and it has reached the highest level that that we’ve seen in years. Give you a little fact here. We’ve actually won 45 new logos in the first half of the year, and that’s equivalent about 9,000,000 in annualized revenue.

So new logo development is certainly is certainly far surpassed where we were in the last couple of years. So we’re all in. We have a phrase all in our growth. We’re all in our growth, and we’ll expect to more fully realize these opportunities as market conditions improve. And the final final sort of outlook on new businesses, I can tell you that we have had no material client losses.

Our top 10 enterprise clients are still the same. Our top 20 or top 30. It’s just the, it’s just the the order flow and and, and work that they’re doing has obviously been impacted given the, uncertainty in, in tariffs economy and postal postal disruptions. But no material losses at all in clients. And then from an m and a perspective, certainly coming into focus for us.

Industry dynamics are are are creating more opportunities, I’d say. So our activities increased quite significantly. We’ve got a very robust m and a pipeline. And as you’ll see later in the presentation, we’re well capitalized to take advantage of opportunities in the marketplace. So some of the highlights, I’ll get a little bit more detail as we progress through the deck here.

Revenues, as I said, impacted by client budget reductions, delayed orders, inventory drawdowns due to market uncertainty, the macro economy, of course, and the Canadian labor disruptions. And you saw that in our numbers we reported, down 9.5%, down about 12,000,000 versus a year ago. K? Gross margin decline really is all due to the headwinds we experienced in in revenues, and really it’s around not being able to get some of the fixed cost overhead recovery. So we’ll see that improve considerably when we, when we move back into positive momentum.

Okay? And you can see the gross margin, profit’s down about 3.8% or 11% and about 50 basis points. But, again, no kinda underlying issues with gross margins really just related to the the headwinds in in revenues. K? We’re actually very pleased with our financial performance despite the revenue headwinds.

As I mentioned earlier, our adjusted EBITDA is is at 16,600,000.0, so essentially flat to year ago or 98.2% index. I guess we call that close to flat to year ago. Right, James? And adjusted EBITDA margin of 14.6%. So clearly, can see that we benefited from all the hard work that we’ve done to kinda restructure and integrate the acquisition we did a couple of years ago, And that’s certainly putting us in a in a good solid kind of financial position as we manage through some of the market uncertainty.

So we’re proud of of the team here and what we’ve accomplished from an EBITDA perspective. Revenue by reported segment, we broke this into kind of four segments here. Product sales, you can see our minus 9.1, so very consistent to the minus nine five in the quarter. Logistics are quite interesting. So in our logistics numbers, we have warehousing and and distribution or freight, and you can see that it’s down 22.7%.

And that really reflects a comment I made earlier on inventory drawdowns. As there’s inventory drawdowns, obviously, that affects our warehousing revenue, and, that’s what we’re seeing the logistics, the logistics headwinds at a higher rate than our product sales headwinds. So, again, you’ll see that kinda all correct as we get back into positive momentum. Very positive progress on tech revenues. Tech revenues were up 16%.

That’s really due to the progress that we’re making on assemble, on savvy, and our DCM Flex platform and and our our whole kind of workflow optimization for clients, which we’re getting return on. And then our tech hardware is down about 23 over a year ago, and that’s really just a year ago overlap a timing overlap. We had a a large digital signage install for a a pretty large automotive client a year ago, and we’re overlapping that. But we’ll see that we’ll see that that turn as we progress through the year because we’ve a lot of good stuff happening on our digital our digital signage business. Okay?

James, you wanna talk productivity?

James Lorimer, CFO, Data Communications Management Corp (DCM): Sure. Productivity, proxy we use as revenue per employee was just under $300,000. You know, our target is $350,000 and and greater. So, despite the lower revenue, we certainly are are kinda close to our minimum threshold there and look to see this grow in the future. From a balance sheet perspective, our net debt came down a little bit compared to the first quarter, and we’re down about 40% since our Moored Canada acquisition.

That’s despite the 20¢ special dividend we did earlier this year and and holding up nicely with the kind of free cash flow that we’re generating. You know, overall credit availability, very strong, over 35,000,000. We had 12 and a half lowered almost $13,000,000 in in excess availability under a credit facility, an extra $20,000,000 accordion facility that we can draw upon, and we had about $3,000,000 of cash on the balance sheet. And I’ll turn it back to you, Richard.

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): Okay. Thank you, James. I mean, quick look at new business development. We have a theme. We call it all in on growth, and that’s been our our theme for the last year, knowing that we were coming in some uncertain times in the economy.

We’ve got an exceptional new business development focus on retention, obviously. And as I said, we’ve had no material losses at all in clients. Focus on wallet share or we call that expansion revenue and then new logos. And our pipeline is prime to deliver with with market improvements. So as we see the market improving, it will improve at some point.

We will see a lot of these new business development opportunities come into our come into our workflow. Got a lot of active opportunities. Our proposals are up quite significantly, and our number of value wins are up. As I mentioned, we’ve won 45 new logos year to date. On an annualized basis, that’s about 9,000,000 in revenue.

We’ll see that continue to increase as well. But 27% of our opportunities are from new logos, 73% are from existing clients, which is good a good sign that, you know, we retained all of our clients, and there’s opportunities for expansion revenue as we progress and the market improves. We’ve also so it’s fair bit of our businesses are, and and our win rate is accelerated in RFPs up over a year ago. And as I said, we’ve had no material client losses at all. Our our top 10 enterprise clients are still the same top tens, still the same top twenties, top thirties, so no material client losses.

And then we’re continuing our momentum on our AI enabled solutions, assemble Savvy and DCM Flex. As I mentioned earlier, those you know, our our technology is up about 16% over a year ago. So good progress there, and we expect that momentum to continue. K. Having a look at our priorities for 2025, these same priorities that I’ve reported out to shareholders the last couple of quarters.

We will maintain our focus on profitable organic growth, and you see that in our in our financials. We’re not we’re not racing to the bottom at all. We will continue to remain focused on that profitable growth sector of the marketplace. Deliver return on new capital investments. You know, we made some some investment in some new cap into our factories.

We’re getting good return on that now and continue to drive that return. Continue on our gross margin improvement through operational efficiencies. You know, we pulled that lever hard in 2024, and we continue to progress on that in 2025. And then, of course, demonstrate the agility that we need and the adaptability we need to navigate through these uncertain times in the marketplace. So those are our priorities for 2025.

They remain remain our priorities, and, of course, we’re we’re we’re making good progress against all four, and they’re well embedded into our into our ways of working organization. James, you wanna talk about return on capital? Sure. So we we we did declare another 2 and a half cent per share cash dividend that’ll be

James Lorimer, CFO, Data Communications Management Corp (DCM): payable later in September. Remind shareholders, we did declare and pay a special dividend of 20¢ back in March year. This is the third quarterly dividend we’ve declared and paid, and our current dividend yield based on yesterday’s close is about six and a half percent.

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): Okay. And then in summary, wanna just sort of hit the highlights in terms of how we’re well positioned in the current market environment. We’ve got strong operating performance. You know, you saw that from a financial perspective, solid cash flow generation. As I said, our new business development initiative is best in years.

The entire team is all in on growth, and we’ll see that we’ve already seen the productivity and results. We’ll see that continue to improve. Our track record of execution certainly has we’ve proven that over the last couple of years. And as market conditions kinda turn, we’ll see that that benefit. We’re well positioned to pursue opportunistic m and a.

As I mentioned, the the market is is is certainly is certainly favorable for that right now. We have an experienced leadership team. I’d argue one of the best in the in the industry, and and we’re well capitalized, as James showed you earlier, to to to take advantage of market opportunities. Got over $36,000,000 in available capital. Alright.

So that’s that’s summary of our of our quarter, and we’ll now turn it over to to q and a.

James Lorimer, CFO, Data Communications Management Corp (DCM): Thanks, Richard. We’ll now take questions from the audience. If you have a question and are accessing the call through Teams, you can use the raise your hand feature, and we will queue up questions. Alternatively, you can also use the chat feature in Teams, and we’ll respond to chat questions as well. Please introduce yourself once you have joined the session, and we’ll now open it up for calls.

Looks like, Martin, we have Noel Atkinson on the line. If you could let him in, please.

Noel Atkinson, Analyst, Clarus Securities: Hi, Richard and James. If you can hear me.

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): Hey, Noel.

Noel Atkinson, Analyst, Clarus Securities: Hi. Yeah. It’s Noel Atkinson from Clarus Securities. Thanks for taking our questions this morning. First off, maybe, if you could talk a little bit about whether you think you’re you know, where you are in terms of performance versus the overall Canadian commercial print market?

And then are you seeing competitors getting more aggressive on pricing to win contracts?

James Lorimer, CFO, Data Communications Management Corp (DCM): You wanna take that off? Yeah. You know, the com Canadian the commercial print market is is certainly competitive, Dole. We have seen some competitors that have, struggled. We’ve we’ve we’ve seen a couple, go out of business recently.

We have been fortunate to pick up some business from them. You know, our sales team does get calls on a fairly regular basis from other salespeople, and so we we’re using this market as a bit of a an opportunity to, you know, selectively recruit some of the best. But, you know, overall, you know, we’re we’re we’re really pleased with the capital investment we made in the commercial print business, the consolidation. You may recall we did cup about a year and a bit ago now, both consolidating two large commercial print plants. And so we’ve got that plant running very smoothly.

We’re really kind of poised to take on take on new business, and we’ve been working on our costing structure as well and think we’re, you know, very, very competitive in that market. Yeah. I just add to

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): the fact that the market is certainly competitive, Noel, especially in commercial print because there’s capacity in the marketplace. As James said, the new capital we invested in last year allows us to be a little bit more price competitive, yet at the same time get good margin. The other the other, I’d say, thing that’s working in our favor is, you know, the tariffs and the tariff threat where we had a lot of paper coming from The US. We’ve looked to diversify that paper source, and we found some very good sources out in in other countries. I won’t tell you who they are, what countries they are, but other countries that are more economical than the, than the source that we had or the sources that we had in The US, which allows us to be more competitive on pricing in specifically commercial print and still deliver a pretty good margin.

Noel Atkinson, Analyst, Clarus Securities: Okay. Great. And that’s a good segue to talking about your M and A strategy. So it sounds like you’re starting to ramp up your activities there a bit. Can you talk about what types of businesses are you looking at?

Or are you looking at distressed competitors to pick off new clients, fill up your capacity, or are you looking more at, you know, digital expansion?

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): Yeah. I mean, the without being overly specific, obviously, given the competitive nature of the industry, we’re we’re certainly looking to to acquire and and grow sectors of the market. And and certainly, if there’s any distress out there where we can gain clients and bring them into our world and and maybe consolidate some of the, you know, some of the capacity in the marketplace, those would be opportunities as well, though.

Noel Atkinson, Analyst, Clarus Securities: Okay. Alright. That’s good for me. I’ll jump back in the queue. Thanks.

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): Okay. Thanks, Sean. Thanks.

James Lorimer, CFO, Data Communications Management Corp (DCM): We have a question from, Daniel Rosenberg. Martin? Sorry, Daniel. We’re having a little problem letting you in here. Just give us a sec.

Daniel Rosenberg, Analyst: Oh, sorry. Can you hear me now?

James Lorimer, CFO, Data Communications Management Corp (DCM): There we go. Yep. You’re in. Yep.

Daniel Rosenberg, Analyst: Okay. Perfect. Thank you. Good morning. My first question is just around the customer conversations you’re having on spending patterns.

I was just wondering if you have any insight or changes that you’re seeing, you know, based on the sales you had in this quarter versus what that could look like or how that might change in the next six months as you think about commercial print going forward? Yeah.

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): I think I would say the the the key theme, you know, I used the word earlier, uncertainty and, you know, client spending patterns are less than I say a little bit more unplanned or more erratic than we experienced in the past, and, you know, we’re seeing that month by month. We could have, you know, a great month and planning for a a positive month. The next month, we find we’re minus 15 because some clients have canceled activity to, you know, kinda protect their cash flow. So we’re seeing a lot of of the inconsistencies and uncertainty in the marketplace, Daniel, that’s obviously affecting affecting that you know, affecting those budgets. And as I said earlier as well, you know, clients clients that do hold inventory, kinda working that inventory down to to manage cash flow and manage the uncertainty that they’re experiencing.

Daniel Rosenberg, Analyst: K. Appreciate that. And maybe as it relates to it seemed like tech had some nice growth, that you put up in one of your slides. So maybe if you could provide an update on kind of, you know, the initiatives you’re taking on cross selling. Have you spoken to certain clients, expanded conversations, etcetera?

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): Sure.

James Lorimer, CFO, Data Communications Management Corp (DCM): Yeah. You know, definitely, those kind of conversations are are ongoing, Daniel. And we’ve been leveraging, you know, our existing Salesforce and and client base for for, you know, our our, you know, our our assemble and and Zavvy applications. And, certainly, you know, just about all our client conversations lead with, you know, the technology that we can bring to the table to deliver those to our to our, to our clients and and help them, you know, better, understand their their clients and how they how to communicate with their clients. We’ve also had some some good success in what we call the customer communications management space, and that’s, think about, you know, kind of transactional print and the communications that go out to those clients.

That world is is, you know, relatively new to us, came with us came with the more Canada acquisition two years ago. But we’re we’re having some good success in that market as well. And that’s not only kind of a production environment, but it’s also a professional services fee as we onboard new clients and and stand stand them up and do work for them. So so we’re doing some interesting development in that world as well. And maybe just to

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): build on that as well, our two pure kind of SaaS products, the Assemble platform, which is a digital asset management solution, and Zabi are fully AI enabled. And the the the the revenue we’re building around them are mostly coming from cross selling, upselling, or bringing that platform into our existing client base.

Daniel Rosenberg, Analyst: Hey. Good to hear. And I remember in previous conversations, you know, in terms of verticals, think thinking about packaging as potentially a place to explore. Are there any updates on that end, in terms of initiatives around that space?

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): Sort of back to the question that Noel had earlier. You know, what are the sectors in the market that are growing, and we either build our way into them or buy our way into them? Packaging is a very small percentage of our current portfolio or current revenue, so that’s an opportunity for us. We are building our way in right now, but there’s certainly potential to accelerate that by acquisition. Labels is a very active and growing sector of the market and actually a sizable piece of our business on the operations on the operational label side, which we’re pretty active, that’s growing, but there’s certainly opportunities in prime labels.

We do a lot of prime labels, as you know, in the cannabis sector, but there’s endless opportunities for prime labels outside of that sector. And some of the investment we made in capital last year positions us well to build our way into that, which we’re starting to do, but there could be there could be opportunities or potential for m and a in that space as well. So, hopefully, that answers your question. Right? Labels labels and packaging clearly opportunities for us and growing sectors.

Retail in general is growing. And if you look at our business, our large format business is actually very positive this year. Headwinds in our business are really kinda in the, you know, in the what we call a BCS, business communication services business and some of the commercial print. But overall, large format, packaging, labeling, and so they’re all growth sectors of the industry.

Daniel Rosenberg, Analyst: Great. Thank you for taking my questions.

James Lorimer, CFO, Data Communications Management Corp (DCM): Great. We have a a question in the audience here from, Brian Strader. Are you able to maximize paper purchasing from Canada versus The United States to a greater extent than prior to tariff threats from USA?

Richard Kellam, President and CEO, Data Communications Management Corp (DCM): I can I can take that on? Yeah. It’s a great question. I guess there’s good and bad with the tariff threats. You know, the the bad is the uncertainty that it created in the marketplace.

The good is it forced us to look at alternatives worldwide. And maybe just a little background for the listeners about the the paper market is kinda like the automotive market. It’s sort of directly connected north south flow. You’ve got pulp that goes south, and you’ve got it converted to fine paper that then comes north. So a lot of paper production, and paper mills in Canada have closed down and, as a result of, of the the interconnected sort of North American trade.

Obviously, with the tariff threat and the tariff uncertainty you know? By the way, paper’s still covered under Kuzma. So we’re we’re still covered for now, but who knows what happens with that? You know? But as a result of the unknown, we started looking at alternatives in in in other countries around the world.

And our procurement guys have done an incredible job to to to find alternative sources. There’s only so much capacity, by the way, in the Canadian marketplace given, you know, given the mills. Although, some of those mills are actually increasing increasing capacity as a result of the, the uncertainty and this cross border flow. But we, we found some very good alternative sources, very competitive sources in other markets. So that’s the good side of tariffs.

It’s really kind of gotten us to really look at alternative, not rely on on US sources of material for raw materials. And and, again, we’ve got some really, you know, favorable, you know, favorable market conditions in other countries that allow us to be more competitive in the marketplace and still deliver, you know, kind of solid gross margin. So, that answers your question.

James Lorimer, CFO, Data Communications Management Corp (DCM): K. Great. And it doesn’t appear, Richard, that we have any more, questions at this time. Okay. Do you wanna yeah.

Sure. I think, this concludes, the Q and A portion of today’s call. Thank you, everyone, for joining and your interest in DCM. As a reminder, Richard and I can be available after the call for any follow-up questions that you may have. This concludes our call this morning.

Please enjoy the rest of your day, and we look forward to speaking with you in November with our third quarter results. Great. Thank you, everyone.

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