Ladies and gentlemen, and welcome to Calyen's Third Quarter Results Conference Call. As a reminder, this conference is being recorded. I would like to turn the conference over to Mr. Kevin Ford, Chief Executive Officer. Please go ahead, sir.
Thank you, Dory, and good afternoon, ladies and gentlemen. With me today is Patrick Houston, our CFO. We'd like to welcome you to Calyant's Q3 2019 conference call. I was very happy with our results this quarter as they demonstrate the strength of our diversity and the effects of our long term growth objectives. We again posted Calyant's largest quarterly revenues in the company's history, with revenue growth of more than 20% from the same period a year earlier.
The broader team continues to execute our growth plan with innovation and global market opportunities in view. We closed our 1st global acquisition of the Germany based Satservice at the start of the quarter and are proceeding with our integration plan. Satservice is a solid player in the European satellite ground systems market. This business will support Calion SED's expansion in the European market with turnkey satellite solutions as well as products. I had the pleasure of visiting the service facility recently.
I was very impressed with their team their support for CaliEN's innovation agenda. We look forward to using this new foothold in Europe to explore potential opportunities with new customers and markets. We continue to see growth across the majority of our services while investing in our long term growth posture. We had a very strong quarter for revenue growth, while EBITDA growth was mixed. At Cali and SED, we successfully closed some projects in the quarter.
However, SED results were affected by some delays and other projects and some overruns in our complex engineering programs related to our innovation agenda. This was offset by an excellent quarter for Intragrain, Calyant's AgTech solutions provider, which the company acquired last year. Intragrain contributed robust revenue and bottom line results as its seasonal business came to fruition. The stability of Calyen's diversified engine was evident this quarter with our VTS division and contributing strong revenues and earnings growth. This stability supports our ability to focus on organic and inclusive growth, innovation and positioning into global markets.
I will now ask Patrick to view the quarterly numbers. Over to you, Patrick.
Thank you, Kevin. Our growth continued across both divisions, including a strong contribution from our recent acquisition, Integrane. For the Q3 of 2019, revenues set quarterly record of $88,800,000 representing a 21.6% increase from the previous quarter. With today's results, we have now reported record revenues for 4 consecutive quarters. Gross margin on a consolidated basis was down slightly when compared to the previous quarter.
Margin in our BTS division is up due to continued execution and diversification of our customer base. As Kevin mentioned, margins at Cali and SED were affected by overruns in our complex engineering programs relating to our long term innovation agenda. We continue to seek ways to increase our consolidated gross margins through the introduction of new products and acquisitions. EBITDA in the quarter was $6,700,000 up from $6,100,000 in the same quarter of the previous year. Operating expenses are up when compared to the same quarter in the previous year.
Increased are the result of the acquisitions of Intragrain and SaaS Service, which were not part of Calyen at this time last year, as well as investments in capacity and innovation across the entire organization. We continue to seek ways to manage operating expenses and seek efficiencies while ensuring we invest where required to position the company for continued profitable growth. Net profit for the Q3 was $4,300,000 up from $3,900,000 in the same quarter of the previous year. This includes a one time gain in the quarter of $700,000 related to the acquisition of SecureTech and their 1st year earn out. We generally structured the earn out targets to be based on growth from their trailing EBITDA performance and payment only begins once they achieve a minimum of 75% of that target.
SecureTech was a strong contributor during the 1st year and their inclusion has allowed our entire cyber practice to grow and reach new customers and markets. We continue to see them as a key part of our success in the growing cyber services and product segments. Earnings per share in the quarter was $0.54 increasing from $0.50 per share in the previous quarter. On a year to date basis, EPS was $1.55 per share basic compared to $1.47 in the prior year. Our cash position was $18,000,000 at June 30.
This was down $9,800,000 from the previous quarter, but included the repayment of $5,000,000 of our line of credit. We'll continue to use the line of credit to support acquisitions and working capital expansion to support our continued growth, while maintaining an efficient cost model. Cash position in the coming year will be impacted by additional working capital requirements at FCD and earn out payments due on recent acquisitions. Continue to maintain our dividend posture currently at $0.28 per share as we continue to expect solid performance from both divisions as well as our recent acquisitions. You'll see we've narrowed our guidance as we enter our Q4 fiscal period.
We expect revenue to be $3.35 to $3.55 for the year, EBITDA per share will be $3.40 to $3.65 and EPS of $2.05 to 2.25 dollars We've reduced the EBITDA range slightly as some customer opportunities we anticipate to book and ship in our Q4 will shift to coming quarters. Finally, 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 materially different from actual results. I'll now turn it over
to Kevin. Thank you, Patrick. We continue to invest prudently and work creatively to support our innovation agenda. On June 12, I joined a gathering of accounting staff at our headquarters in Ottawa and with our team in Saskatoon, watched the Radostat Constellation mission launch. We watched live as the SpaceX rocket carried away 3 next generation satellites to support this flagship mission and Earth observation for the Canadian Space Agency.
The constellation of 3 satellites will provide daily images of Canada's vast territory maritime approaches as well as images of the Arctic up to 4 times a day, build access to 90% of the world's surface. A team of over 45 people at Cali Anissedee from satellite engineers to operations controllers to ground systems analysts were among the first line personnel supporting this mission. Our team was directly involved with the preparations and operations for the mission as well as testing and commissioning that follows the launch. It was a proud moment for us to watch the launch and know that we helped make that happen. Across our divisions, the company continues to invest in products and solutions.
Example, the Systems Engineering division continues development of its new carbon fiber antennas. This new line of advanced radio frequency antenna provides cutting edge performance for the most demanding satellite system applications, particularly as satellite communication networks move to higher frequency ranges like the Q and D bands. The KLA and SED team continues to develop this product line with plans to roll out additional aperture sizes. At our BTS division, there's been a focus on products and solutions applicable to military training and emergency management environments. A word about customer retention, which is the 1st pillar backstopping Callion's 4 pillar growth strategy.
I'm happy to report that we re won another key contract in the quarter. Our training services team renewed a multiyear $17,000,000 e learning contract with the Department of National Defense. And this contract continues a training relationship we've had with the Army Link Support Centre located in Gagetown, New Brunswick since 2007. We're proud to have supported the men and women of the Canadian Armed Forces with Calhoun's advanced training simulation services for more than 2 decades. I'd also like to take this opportunity to mention one of our very successful social responsibility programs, the Military Family Doctor Network or MFDN.
This network fulfills a specific need. Members of Canadian Armed Forces received complete healthcare from the Department of Defense. However, many people do not realize that their family members rely on the provincial health systems. This presents a unique challenge for military families who relocate frequently due to postings. To help address this challenge, we created the MFDN in 2016 in partnership with the Military Family Services, a division of the Canadian Forces Morale and Welfare Services.
MFDN leverages our network of health clinics to help connect military family members with family physicians after these families relocate around the country. Over the past few years, County's dedicated staff has successfully matched these families with participating physicians in our network of primacy health clinics. I'm very happy to report that this initiative marked a significant milestone in July with more than 2,000 military family members who have now been referred to family doctors through this program. In closing, from a strategic perspective, management continues to evaluate our go to market approach. As I have previously stated, I believe it is time to evolve our approach as we have grown the 2 divisional construct we report to the markets today.
It's time for us to look at aligning our corporate structure and brand to our main service lines in support of our long term strategic growth objectives, and we will continue to up to shareholders as our analysis progresses. With strong cash flows and innovation agenda and a dedicated employee base, I continue to be excited about this company's evolution and growth potential. Lastly, the traditional markets in which Callian operates are stable and management expects organic revenue and earnings growth in most or all of its service lines through the successful execution of our growth strategy. However, we must caution that revenues realized are ultimately dependent on the extent and timing of future contract awards as well as customer utilization of existing contract vehicles. Based on currently available information on our assessment of the marketplace, we expect revenues for fiscal 2019 to be in the range of $335,000,000 to $355,000,000 EBITDA per share in the range of $3.40 to 3 $0.65 and net profit in the range of $2.05 to $2.25 per share.
With that, Dory, I'd like to now open the call to questions. Thank
And we will take our first question today from Benoit Peor. Please go ahead, sir.
Hey, good afternoon, gentlemen. First question, I was wondering if you could provide maybe some color, Kevin, about the potential options that you're looking at for the your corporate structure. What are things that you're looking at right now or the potential options?
Yes. I think for me, Benoit, the what I've learned in my dealings at Steel, the company, both from a customer and shareholder perspective, the PTS SED, I think is confusing. And I think it confuses in the context of not really clearly identifying the 4 distinct service lines that we go to market with in health, training, IT and engineering manufacturing. So what I'm looking at right now is how can we evolve our structures so that it becomes very clear to current and potential shareholders and also as importantly our customers that the business that we're in is in those segments. My main goal is I want to simplify the structure.
I want it to be very easy to comprehend. And I also want to give the opportunity to potentially report against those segments so that we get quite a few questions on our training business, our IT business, engineering business as to what margin profiles, what's the growth potential. So I'm going to try to align the business that we're in today to the corporate structure. So it'll make that much more transparent, also much easier to comprehend and really move away from this BTS, SEV structure. So we're working through that analysis now.
And once we're ready, we'll come back to the markets with an update on that.
Okay. That's really great color, Kevin. And would it be fair to say that there's not additional cost attached to those move in terms of bringing president or extra staff to support those division? It's already in place, right? So
Yes. I would say so, Benoit. And I think actually, I'm cautiously optimistic I can actually see some efficiencies on this. When you look at our 2 divisions and what's entailed in each division, as you know, I created a CIO function for the first time in Calian about 1.5 years ago, looking at the IT infrastructure consistently across the company, obviously, for a whole bunch of reasons. But I believe actually it's not about increasing costs.
I'm hoping that we see some efficiencies in how we operate by looking at the company a bit more holistically across the 4 segments.
Okay, perfect. And if we look at SCD during the quarter, you experienced some delays in project and some over on in the engineering program. So could you provide more color on those projects and whether it will run also in Q4 and next year?
I think right now, as we have some of as you know, we announced about a year ago, our largest ground system project that we've ever had in the company and we're working through that now. So part of the delay in what we're seeing and some of our change in our guidance is just the reality of getting that program ramped up and it's very complex and it's not just obviously our delivery capability, it's our suppliers as well, making sure we line up delivery as people innovate new components for new satellite generation, so very complex. So what you're seeing a bit from the context of our updating guidance is the bit of that program, some of the deliverables moving into next year. We also have some orders that we are waiting literally waiting on daily here right now for other product capability that we have been working on and just literally day by day here trying to assess when they're going to arrive in this quarter or pushed into next year. So it's a bit of delay and programs already won and a bit of delay in just getting some orders that we've been waiting for that we believe will be able to close shortly.
On the overrun side, it's really I just want to be really clear on this. This is not a general statement. We have a specific program that we're looking at that is its complex in the solightcable industry, and we've been working on this now for over a year. And I think for us, we're just experiencing some as we go through testing, we're at the back end of this program. So we're just going through testing now, which is just challenging if you've ever been through this.
So we're just dealing with some more challenges than we expected. But again, the program is going well. It's just taking more capacity than we expected to get through our testing phase.
Okay. And for the large satellite ground system, I know the bulk of the contract was supposed to be in fiscal 2020. So what type of revenue contribution should we now expect in fiscal 2020?
Yes. I mean, it will continue to increase. I mean, probably double the amount that we're doing this year. So we're still expecting next year to be the largest year in terms of that project.
Okay. And this year, would it be fair, Patrick, to say that it's kind of a $20,000,000 contribution?
Approximately, yes.
Yes, it's in that range, Benoit. I think, as Patrick said, we'll see the ramp up next year for sure. And rest assured that our guidance, when we come out of our Q4 call, we'll have a real good assessment of how we're doing against our project schedule on that, and we'll update the markets at that time.
Okay. Now question on organic growth. You disclosed some very good color in your MD and A with respect to BTS. I understand it's more specific to IT division. So how should we be thinking about the organic growth for each business segment, BTS and ACD, in the quarter and maybe so far this year?
Is it something that you have in your hands?
Yes. So basically, I would say that if you look at the BTS division, the organic growth posture is really being driven across all three segments there. So our healthcare business right now continues to grow based on 2 fundamentals. 1 is increased demand on our legacy healthcare contract with Defense, which now includes RCMP and Veterans Affairs. So we are seeing increased demand on that contract.
And we're also increasing our customer base within healthcare nationally. The contracts, the amount of contracts we're managing now continues to increase. So I think it's showing our diversification is working there. And our IT business, it is 2 things. It is really continued win and expansion in our government segments, where we continue to win in new vehicles, new projects, new opportunities within federal government and in other areas like in Toronto.
And then our cyber business as well with the STI or Secure Technologies acquisition, we continue to see very good opportunities for growth and increased growth there. And that is both combination of services and also products now as we are platinum level partnerships with many key cyber products globally now. So that's exciting. And in our training business right now, just a continued push with the pace of military training as well as expansion in the new markets, specifically with our emergency preparedness offerings. Unfortunately, as you know, the increase in natural disasters and terrorism, we continue to get more exposure as the companies come forward for that type of service.
So I would say all of those cylinders are firing organically for sure. And healthcare has definitely been picking up the pace, I would say, if you look at the results for this quarter and followed by IT and then training.
Okay. And I understand that we are almost close to the fiscal year end, only 1 quarter to go. Any color so far? Or what how should we be looking at fiscal 2020 next year in terms of kind of revenue growth, margin and bottom line? Any kind of color you could give us at this point, Kevin?
Yes, great question. I think for me right now, when I look at the fundamentals in the business and the factors that affect our momentum, I'm seeing a lot of positives with regard to if you look at government spending, you look at defense spending, you look at the success of our customer diversification, you look at the success of our innovation agenda. So I'm expecting that we will continue on a growth posture for sure. Again, obviously, depending on we're waiting on the election. We've got to get through the election phase again.
But I really think right now, Benoit, I'm pretty optimistic about next year as far as maintaining a growth posture. Now the extent of that growth posture, we'll update in our guidance as we come out as we get through the election. But I'm really not seeing anything that's a major impediment to us keeping the growth pace that we've been on. As a reminder, I'm trying to set this company on a 5% organic, 5% including M and A, so double digit growth company. And I think if you look at the last 2, 3 years, we've been keeping on that pace, and I really don't see a slowing down anytime soon based on what I know today.
Okay. That's great color. I'll get back in the queue. Thanks for the time.
Thanks, Benoit.
And our next question comes from Deepak Kaushal. Please go ahead, sir.
Hi, guys. Thanks for taking my questions this evening. Kevin, I just had some follow ups to Benoit's question on SED. Just wondering on the record contract, did you recognize material revenue on that in this quarter? Or is most of the increase sequentially coming from Intragraine and Sat Service?
Yes, Intragraine was the big contributor this quarter just because in the previous quarters, it was fairly low just of the seasonality. So some of the I'd say the majority increase was Integrain and we had some on the legacy SC.
And then Sat Services, our Q1 having an impact. So definitely, they supported our achievement at STD for the quarter. But they also are we're ramping up operations with them as well. So it wasn't as significant for the Q1 for their Q1.
Okay. And just to be clear, the cost overruns, they're not related to satellite business, correct, in terms of the record contract or the manufacturing of the new carbon fiber satellites. Is that right?
That's correct. Yes, that's correct. It's new sectors that we're innovating around with regard to areas such as cable industry in that. So it's a net new projects for us, net new innovations, I would say, for us.
Okay. And so in terms of the cost overruns themselves, related to the test of that product, Is that being booked in gross margin or cost of goods sold? Is that against an order? Or is this capitalized R and D? How does it flow through?
And where do we see the costs?
Finally, funded customer project. So these are costs that we're incurring towards the end of the project to bring it to completion. So we're booking against cost of sales.
Okay. And how long do you expect that to run through? Is that a 1 quarter thing or a 3 quarter thing? How should we think about the timing of this drag?
Yes. I think the project is going to end by the end of probably the end of this fiscal year, maybe early next fiscal year. I mean, I don't think we'll have we're hoping not to have the same kind of impact in Q4. So we're hoping this was kind of a larger increase just to get us over the hump to the end, but obviously we're managing that project pretty closely.
Okay. That's helpful. And then I think, Patrick, you mentioned I don't know if I got confused, but you mentioned the earn out related to SecureTech. Is that the $771,000 onetime OpEx hit that you guys had in the quarter? Or are they 2 separate things?
No. So the $650,000,000 I think you see below the line as a gain. Got it. Yes. So that's the SecureTech.
It's about $800,000 that we owed. So we released that kind of liability and adjusted the intangibles by $150,000 So that was the net 650
And I think for me Deepak, I think as I explained on our M and A front with the way we structure our acquisitions, I want to reassure shareholders what we do is based on earn outs. We're not an all cash pay company for acquisitions. We do structure earn outs and put very aggressive targets in there. And also when you don't make 75%, there's no earn out paid. So that's a one time thing.
That being said, I'm very pleased with SecureTech and all the things that are happening, and I'm confident in year 2 that they're on track to make numbers. But I think it shows the maturity of our M and A model that we actually have built in protection to make sure that if there's any issues with earned achievement that we're not overpaying for these acquisitions.
Okay. That makes sense. I mean, these are minor things. So the 700,000 $771,000 one time OpEx, was that related to SecureTech? And are there more like one timers that we should expect in the near term or?
The $771,000,000 might be I'm trying to think. I think those are the legal costs relating to SaaS service year to date on SG. Okay. Yes. I think that's what it was.
We recognized about $600,000 of it last quarter and then about $100,000 or so this quarter. So that's about $700,000 year to date. Obviously, it was our first international acquisition, so a bit and the language and everything made it more expensive, but obviously we're refining that model as we do more deals that I think it won't be the same level of spending.
Okay, that's helpful. And just more of a bigger picture question, Kevin, on the healthcare side, particularly on the clinic side, great work on MFCN. I'm just trying to think of how else you might leverage your coast to coast clinic network beyond government and beyond things like the military family network. I know in the past you guys have done some stuff in terms of occupational healthcare. Is there anything on the technology side or how else can you leverage this coast to coast footprint to kind of add more value to clinic business?
Yes. I'd say for me, as I tell people, we've gone from having a healthcare contract years ago to having a healthcare business. And the fundamental asset that we have, I think, is still one of the largest national networks of medical practitioners in Canada. There's only one contract in Canada to support the military and we have it. It's 32 bases and 60 different categories of healthcare practitioners.
And we've had to service that now for over 15 years. So from my viewpoint, you tie that in then with the National Health Clinic Network that we work with Loblaws on, I would say that what we're seeing is we've gone from one contract now to almost over 50 contracts in healthcare. And that was just fundamentally changing our thought process around that healthcare contract. So we continue to look for opportunities at the national level. And I use that word purposely, because I think our opportunity to be is one of the largest national healthcare companies in Canada, because we have demonstrated our ability to work in each province to manage each of the complexities regarding working in each province as well as being able to find those tough to find resources in very difficult locations.
So we are continuing to look at it. Deepak, I appreciate the sentiment. The other piece of I think about our HealthTech or Health Business is, frankly, we can only grow that business based on the amount of available resources today. So we are looking very hard at HealthTech and doing a lot of market research right now on what would be a next evolution for Calian to integrate some health technology into our delivery. We've talked about our investment in Cliniconnex in the past.
It's a start up out of Ottawa that's automating the patient interface to the clinics. But we continue to look for those opportunities that will help us scale what we do here in Canada, but also give us opportunity to start looking at the U. S. Marketplace global marketplace in healthcare. So lots of moving parts there, but believe me, we're pretty excited by that national footprint even in Canada where we can go with it.
And I think just as a testament, as I said, one contract is going to almost 50 contracts now, and I think we're just getting started.
Okay. Okay, thank you. That's helpful. I will pass the line. That's it for me.
Thanks Deepak. Appreciate the questions.
We'll take our next question from Jeremy Coleman. Please go ahead, sir.
Good evening, gentlemen. Should I be concerned about the quality of the balance sheet? If you look at the asset side and the noncurrent assets, there's approximately $55,000,000 worth of soft assets, basically intangible assets. And the other thing, looking at the liability side, you've got $12,000,000 line of credit. I've been an investor in Calian for almost 2 decades, And I don't recall ever seeing any debt at the quarter end, such as I see now, dollars 12,000,000 So should I be concerned about the quality of your balance sheet?
How would it compare with comparable companies? I do have it's answered with that. That's basically my question.
Thanks, I mean, I'll let Patrick answer this and I'll
answer it. Yes. I think our balance sheet has evolved really over the last couple of years as we've gotten into much more acquisitive in terms of looking for companies that help us grow. So that's led to the intangibles and goodwill increasing, but we think we've been been buying excellent companies at good prices that have excellent return for the company. So I think those are good.
The line of credit, again, is very inexpensive form of financing that we have. We use it to support those acquisitions and working capital, but we feel we're in a position with our free cash flows to repay that very quickly. So I think you'll see it move up and down. But from stability of the balance sheet, I think our balance sheet is very strong. And certainly one of our attributes when we speak to customers and it resonates with them in terms of our balance sheet and our consistent results that we've posted over 70 plus consecutive quarters and continued growth.
Thank you. Okay. Thanks, Jeremy. And then from my perspective, Jeremy, when I took over as CEO, I'm very cognizant of the as you said, the history of Callion and the no debt posture. And as CEO, as I look at our growth agenda and the opportunities we have in each of the segments, we initially had a $10,000,000 line of credit years ago that we and to your point, we haven't used.
We have increased that to $40,000,000 to just give us some flex in moving in and out, primarily around either working capital requirements for our bigger programs and also the M and A agenda. So it is a bit of a different I wouldn't say it is it's a conscious decision, I guess, is my point, Jeremy, on our posture and not limiting our growth aspects by cash on hand. And again, we're going to continue to manage that prudently so that we're not over leveraging the company in any way. Okay. Dore, is there any additional questions?
Yes, sir. Our next question comes from Chris Martino. Please go ahead, sir.
Good afternoon. Just wondering if maybe you could provide a rough estimate around how much Sat Service and Integrating contributed in terms of sales in the quarter?
They're kind of in the $5,000,000 to $10,000,000 combined range.
$5,000,000 to $10,000,000 combined. Okay. And then with respect to cash flow, can you guide or provide some color into what sort of investment we could see into WIP and inventory over the next few quarters? Maybe what kind of peak WIP we could expect to see on the balance sheet?
Yes. I think the large ground system project will probably contribute about $10,000,000 additional working capital next year at its peak, so probably around Q2 and then start ramping back down. So I think that one's for sure on our radar. And then the rest of the WIP, I think right now is kind of the level it's at and then it'll go up based on just our overall business goes up.
As Kevin mentioned,
we're still pretty optimistic about our growth trajectory and it'll kind of continue. Okay, that's great continue.
Okay, that's great. Thank you.
Thanks, Chris.
And it appears there are no further questions in the queue at this time. Mr. Ford, I'd like to turn the conference back to you for any additional or closing remarks.
Okay. Well, thank you, Dory. And I want to thank you, everyone, for participating in the call. I appreciate the questions. We're very optimistic about where Cayan is going, and I think we're on the right track across each of our segments of our business.
So we look forward to talking about our full year results and our guidance for our next fiscal year in November. And of course, any other questions or any other thoughts, you need to reach out if we can help as people digest our quarterly results or have any other further questions. So with that, Dory, we can close-up the call. And again, thank everyone for the time and enjoy the rest of the day.
And this will conclude today's call. Thank you so much for your participation. You may now disconnect.