Evertz Technologies Limited (EVTZF) Management on Q4 2020 Results – Earnings Call Transcript


Evertz Technologies Limited (OTCPK:EVTZF) Q4 2020 Earnings Conference Call June 30, 2020 5:00 PM ET

Company Participants

Brian Campbell – EVP of Business Development

Doug Moore – CFO

Conference Call Participants

Thanos Moschopoulos – BMO Capital Markets

Robert Young – Canaccord Genuity

Paul Treiber – RBC Capital Markets

Bill Zhang – Raymond James

Steven Li – Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the Evertz Q4 2020 Conference Call. As a reminder, today’s conference is being recorded. It is Tuesday, June 30, 2020.

At this time, I’d like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, Mr. Campbell.

Brian Campbell

Thank you, Brett. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our fourth quarter ended April 30, 2020, with Doug Moore, Evertz’ Chief Financial Officer; and myself, Brian Campbell.

Please note that our financial press release and MD&A are now available on SEDAR. Doug and I will comment on the financial results and then open the call to your questions.

Before delving into our recent business results and outlook, I’d like to briefly address the extraordinary COVID situation. Evertz is a technical innovator delivering operational excellence a fundamentally sound business committed to protecting our people, our partners and supporting our customers. We’re proud of the role we play as an essential service provider and critical supplier, enabling vital telecommunications, broadcast and new-media services worldwide.

We’re appreciative of continuing strong partnerships with our customers and for the extraordinary efforts made by our employees to continue to support our customers and drive our business forward.

Turning now to Evertz’s results I’ll begin with select annual and fourth quarter highlights following which Doug will provide more digital. First off I am pleased to report sales for the fiscal year totaled $436.6 million, driven by the adoption of Evertz’s new technologies.

Annual net earnings were $69.2 million resulting in fully diluted earnings per share of $0.90 for fiscal 2020. Liquidity and capital resources remained robust with cash at $75 million at April 30, after the return of $124.3 million by a special and quarterly dividends to shareholders.

Investment in research and development totaled $90.8 million for fiscal 2020 further reinforcing Evertz’s commitment to R&D. Moving on to the fourth quarter, operations were impacted by the global COVID-19 pandemic. We moved quickly to implement a number of actions including work place best practices from national and local authorities, implemented the avoidance of essential travel, we scaled work from home protocols and worked closely with our customers to provide service and support via online tools to the maximum extent possible, all while maintaining our manufacturing capabilities across multiple sites.

Turning to the financials, sales in the fourth quarter were at $92.2 million. Gross margin for the fourth quarter was $52.1 million or 56.5% of sales and foreign exchange for the fourth quarter was a gain of $6.1 million. Net earnings for the fourth quarter were at $16 million while earnings per share were $0.21.

At April 30, 2020, Evertz’s working capital was $223.7 million. We attribute our solid annual and resilient quarterly performance despite the onset of this unprecedented pandemic to Evertz’s fundamentally sound industry and financial position, the ongoing technical transition in the industry, channel and video services proliferation, the increasing global demand for high quality video anywhere, anytime and specifically to the growing adoption of Evertz’s IP-based software defined video networking solutions, Evertz’s IT and virtualized cloud solutions, our immersive 4K ultra HD solutions and our state of the art to our IP replay and live production suite.

Our sales base is well diversified with the top 10 customers accounting for approximately 42% of sales during the year with no single customer over 7%. In fact we had 443 customer orders of over $200,000 a modest increase over the $425 customer orders received last year.

In addition at the end of May the purchase order backlog was in excess of $94 million and shipments during the month were at $16 million. In response to the current uncertainty in an environment dominated by COVID-19 and by the desire to maintain the financial flexibility of the company the Board has declared a dividend of $0.09 per share, which is reduction in the regular quarterly dividend.

I’ll now hand over the call to Doug Moore, Evertz’s Chief Financial Officer, to cover our results in greater detail.

Doug Moore

Thank you, Brian. Good afternoon, everyone. Sales were at $92.2 million in the fourth quarter of fiscal 2020 compared to $107.2 million in the fourth quarter of fiscal 2019 which represent a decrease of $50 million and 14%. Sales for the 12 months ended April 30, 2020 were at $436.6 million compared to $443.6 million in the same period last year. This represents a decrease of approximately $7 million or 2%.

The decrease in sales was largely attributable to projects put on hold or cancelled in the fourth quarter as a result of the COVID-19 pandemic. US Canada region had sales for the fourth quarter of $58.7 million compared to $63.6 million last year, a decrease of 8%. Sales in the US Canada region were $289 million for the 12 months ended April 30, 2020 compared to $297.8 million in the same period last year. This represents a decrease of $8.8 million or 3%.

International region had sales for the quarter of $33.5 million compared to $43.7 million last year, a decrease of $10.2 million or 23%. Sales in international region were $147.6 million for the 12 months ended April 30, 2020, compared $145.8 million in the same period last year representing an increase of $1.8 million. International segment represented 36% of total sales in the quarter and 34% of total sales in the year as compared to 41% and 33% in the same respective periods last year.

Gross margin for the fourth quarter was approximately 56.5% and gross margin for the 12 months ending April 30 2020 was 56.9%, both of which were with the company’s target range. Selling and administrative expenses were $15.4 million for the fourth quarter, a decrease of $2.6 million from the same period last year. As a percentage of revenue, expenses were approximately 16.7% consistent with the same period last year.

A decrease in selling and administrative expenses was driven by the cancellation of trade shows and reduced trial and selling cost as a result of the pandemic. Selling and administrative expenses were $67.6 million for the 12 months period ending April 30, 2020, a decrease of $0.2 million from the same period last year. For the year, selling and admin expenses as a percentage of revenue were approximately 15.5% compared to 15.3% last year.

Research and development expenses were at $21.2 million for the fourth quarter which represents a $0.6 million decrease from the fourth quarter last year. For the year, research and development expenses were $90.8, which represents an increase of $5 million for over the same period last year. Research and development expenses were up for the year which is predominantly a result of an increase in R&D, salary and broadcast and headcount.

During the year $4.2 million in government assistance related to COVID-19 programs was deducted from expenses. Up to that $3 million was deducted from the fourth quarter R&D costs. Foreign exchange for the fourth quarter was a gain of $6.1 million compared to a gain of $1.9 million in the same period last year.

A gain $6.1 million was driven by the increase in the value of the US dollar against the Canadian dollar between January 31 and April 30, 2020. Foreign exchange for the 12 months ended April 2020 was a gain of $3.5 million or a gain of $3.4 million in the prior year.

Turning to a discussion of the liquidity of the company, cash as at April 30, 2020 was $75 million as compared to $104.6 million at April 30, 2019. Working capital was $223.7 million at April 30, 2020 compared to $282.5 million at the end of April 30, 2019. For the year, the company generated cash from operations of $109.3 million which includes $21.6 million change in noncash working capital and current taxes.

The effects of the change in non-cash working capital and current taxes are excluded from the company’s operating cash flows, the company would have generated $87.7 million in cash from operations. For the year, the company paid approximately $124.8 in dividends and acquired $10.1 million in capital assets.

Now looking specifically at cash flows for the quarter ended April 30, the company generated cash from operations of $47.1 million which includes at $25.5 million in noncash working capital and current taxes. The effects of the change in non-cash working capital and current taxes are excluded, the company would have generated $21.6 million cash from operations for the quarter.

The company used $3.1 million for investing activities which was principally driven by capital asset purposes. The company used cash from financing activities of $17.7 million which was principally driven by dividends paid of $13.8 million and capital stock repurchased under NCIB for $2.4 million.

Finally I’ll review our share capital position as of April 30, 2020. Shares outstanding were approximately $76.4 million and options outstanding were approximately $1.6 million. Weighted average shares outstanding were $76.6 million and weighted average fully diluted shares were also $76 million for the year ended. This brings to a conclusion of the review of our financial results and position for the fourth quarter.

Finally, I would like to remind you that some of the statements presented are forward-looking subject to a number of risks and uncertainties and we refer you to the risk factor described in the Annual Information form, official reports filed with the Canadian Securities Commission. Brian back to you?

Brian Campbell

Thank you, Doug. We’re now ready to open the call to questions.

Question-and-Answer Session

Operator

[Operator instructions] Our first question comes from Thanos Moschopoulos with BMO Capital Markets.

Thanos Moschopoulos

Hi. Good afternoon. Brian, can you give us a little bit more color in terms of the current demand environment. Clearly, shipments were weak for May. Can you comment on whether there has been an improvement in June and on what you’re hearing from your customers as some economies, globally, are starting to reopen?

Brian Campbell

So the way it looks currently May was a low points and we’re seeing solid quotation activities, quarter intake and yes customers are trying to move back. You see sports leagues starting to restart. That activity does involve oftentimes Evertz’s sales and solutions. So we’re seeing an uptake in activity.

Thanos Moschopoulos

And generally speaking, can you comments in terms of the weakness you’ve been seeing whether has had more to do with logistical issues be it customers having their facility shutdown or not being able to get it in the cross boarders or supply chain issues or live events not happening versus lower macro activity I guess weaker macro spending environment, I guess where we’re going with this is as we think about the recovery you know is it more a function of just you having some of the logistical things being addressed or we also have to see a stronger macro backdrop especially from the spending coming back?

Brian Campbell

I’ll address the first part of it. So yes our delivering inflations were definitely impacted by the boarder closures, shelter in place restrictions in geographies, state of emergencies in various states and countries. So as we said, we’ve worked to the extent possible remotely for both providing service and deployment of new installations and that involves trying to ensure that solutions can be very efficiently installed.

But again if the customers facility is closed, that’s closed the systems integrators and their staff as well too who are involved in deployments and you still need to have your systems integrators or others rack equipment, fun fiber and cables and the customer engineering staff available as well too. So the revenue is against that backdrop.

Thanos Moschopoulos

Okay. And from an OpEx perspectives, should we think about OpEx being similar to Q4 levels in the short-term? Have you done the headcount reduction at this point, are you contemplating any headcount reductions?

Brian Campbell

What I can speak is we’ve applied for different COVID related government assistance programs. During the quarter, we would have had $4.2 million a reduction in costs associated with those programs including the Canadian wage subsided as well as others. The month to month it’s conditional application but that has allowed us to maintain the vast majority of our headcount.

Thanos Moschopoulos

Okay. And then it might be hard to pin this down, I guess given where revenue might land, but how should we think about gross margins in the near term? I mean even on a much reduced revenue base, should we still expect margins stay above 50%? Or is that really give you comfortable revenue lens?

Brian Campbell

Our gross margin stated range is 56% to 60%. In the quarter, we’re at 56.5% which is well within the range then we haven’t announced any changes to that range.

Thanos Moschopoulos

Okay. I’ll pass the line. Thank you.

Brian Campbell

Thanks, Thanos.

Operator

Thank you. And we’ll take our next question from Robert Young with Canaccord Genuity.

Robert Young

Hi, good evening. You haven’t had any interruption in manufacturing. I don’t think I might have missed that in the prepared remarks.

Brian Campbell

Robert, that’s correct. We’re an essential service provider, our manufacturing operations have remained open, working, we’re delivering to customers on a daily basis around the globe.

Robert Young

Great and then I don’t want to read too much into the wording of that press release, but the dividend reduction, the way you described, it appears to be a temporary measure you’re going to revisit the decision in September maybe if you could talk about the process around the decision to reduce it. And then what decision points might be in the future?

Brian Campbell

So the decision process culminates with the board meeting and it’s a board decision. And as stated in the press release, it was a dividend reduction to maintain financial flexibility. Clearly, we don’t know the duration of the pandemic, we’re well positioned to work through it. The financial flexibility also enables us to keep our powder dry to look at opportunities for business developments and then in fact, we’re quite active on that front, currently.

Robert Young

Okay, so do you expected valuations in the sector will be attractive in the near-term? I guess the inference there might be that there’s a lot of businesses that you compete against that are on less stable financial terms than yourself?

Brian Campbell

Correct. Yes, there are and we remain very disciplined acquirers and we’re recipients of numerous phone calls from folks who are considering their strategic options. And our phone is open.

Robert Young

Okay. It might be helpful to, you haven’t done this in the past, but if there was any information you could give us into the composition of the backlog which remain relatively strong. But is there any way to understand how much of that backlog would convert in the near-term versus longer-term contracts or anything around the probability or lack of probability that backlog could be unbooked? The example I might think of there was the Olympics, would there be work related to the Olympics which might be unbooked for the backlog? Could you give any information on the backlog competition, that’d be very helpful.

Brian Campbell

So the backlog is composed of purchase orders and signed contracts. So there’s no pipeline at all in it. The composition does include some longer-term contracts not all that will be delivered in Q1 and Q2, but the majority would be.

Robert Young

Okay, if just to push a little harder on that, is there would it be I mean 50% of the backlog would convert inside of 12 months or is there any help you can provide along that line of question?

Brian Campbell

Not this time, Rob.

Robert Young

Okay. And then maybe last question for me will be you mean all the cultural changes we’re seeing, are you seeing any increase demand around IP infrastructure, cloud? Maybe just talk about any changes in the way that your customers are thinking about those new technologies. And I’ll pass on?

Brian Campbell

So Rob, definitely our customers are thinking about IP and cloud based solutions. That’s been the driving force for either it’s sales and sales growth in previous years. With respect to IP and our software defined networking solutions, we’ve had tremendous up tick globally, that continues to progress. And similarly with cloud based virtualized solutions, again we continue to have very strong position and innovative products for public cloud, private cloud and hybrid cloud solutions. Those do continue to deploy.

If anything, I think you’re going to see the mindset change of customers to be more proactive or continue to push their initiatives in that front into migration to the newer technologies, IP based infrastructure and cloud-based solutions. That said, we’re currently seeing strong up tick of our baseband solutions as well to some of which address UHD Immersive Solutions.

Robert Young

Okay, thanks a lot.

Operator

Thank you. We’ll take our next question from Paul Treiber with RBC Capital Markets.

Paul Treiber

Thanks very much. Good afternoon. Just in regards to what you saw in terms of demand in the quarter, was it fairly evenly spread across your customer base? Or was it weighted to any particular group or region, particular group customer group in terms of like live sports or broadcasters versus others. And also could you speak to just a regional mix and the demand trends there?

Brian Campbell

So with respect to the regional trends, the U.S. continues to be a very strong base for us, not only in sales, but also in quotation activity as well too. Similarly, you saw the international results were up this quarter marginally.

So we’re having strong International quotation activity as well too with respect to live sports where we have very strong customer base in basketball, baseball, football, soccer, in European football. And there we continue to deploy, those deployments are slowed down by COVID and the travel restrictions and the onsite customer access availability as well too. So we’re working through that, we actually have deployment teams and service people deployed, continuing to implement infrastructure solutions in North America less so internationally, but that is we’re continuing to work through and push deployments and help our customers deliver on their business plans.

Paul Treiber

Okay. And in the prepared remarks, you mentioned order cancellations. Could you speak to the terms in your contracts, if you typically receive any penalties, if there are cancellations or what’s sort of the business negotiations that you see when order cancellations come up?

Doug Moore

It’s not a heavily prominent thing, but it’s really dependent on the arrangement. So the broader discussion, I mean we’ve had cancellations with understanding that replacements will come in the future We’ve had cancellations that are associated returns or restocking fees and things like that, but of the postponements and cancellations with it, it’s more heavily weighted towards the postponements or the delays as opposed to actually receiving cancellations which is a rare event. It’s a rare event.

Paul Treiber

Okay. And last one for me. During typical seasonality heading into Q1 and then do you think at this point like ultimately, any seasonality will be overshadowed by the macro-economic environment where like the reopening of the economy and obviously live sporting events and other events?

Doug Moore

Evertz financial results have not shown a great degree of seasonality. So if there were any, it would be dramatically overshadowed by the COVID pandemic. But currently, we’re making very good strides. We’re pushing ahead with our business. And the main focus is delivering to our customers in support of their business plans in light of the restrictions and constraints that we’re dealing with.

Paul Treiber

Okay, thanks for taking my questions.

Operator

Thank you. We’ll take our next question from Bill Zhang with Raymond James.

Bill Zhang

Hi, guys. So I have a question related to operating margin trends. Should we expect some pressure during this pandemic period?

Doug Moore

Could you repeat that question for me, please?

Bill Zhang

So it’s related to operating margin trends. Should we expect some pressure during this pandemic period?

Doug Moore

Sorry, are you referring to gross margins at a cost — sales perspective or operating expense?

Bill Zhang

Operating.

Doug Moore

So, what I would reiterate is two components here. One that we did have government assistance or assistance programs that we would have recorded offset to operating expenses in the fourth quarter. We expect that to continue to occur in the first quarter of the next fiscal year, unable to quantify as a whole because it’s a month-to-month calculation, but then the impact of our inability to travel to certain regions would inherently reduce the associated costs of travel expenses.

Bill Zhang

Okay, thanks.

Doug Moore

So we remain solidly above a 20% operating margin, in fact for the year was 21.5%.

Operator

Thank you. And we will now take our final question. Our final question comes from Steven Li with Raymond James.

Steven Li

Hey thanks. Hey Brian, I joined a little late but I did say you speak of May as a low month with quotation activity having picked up. How about actual deployments access to customer premises, has that eased up May to June?

Brian Campbell

Yes, so with border restrictions open, Evertz is an essential service provider, so we can across the border for those customers where we have designation, that activity has been occurring and you’re seeing geographies, states and other locations try to open up and either resume their seasons or other activities. So that is reflected in our deployment activities as well too.

Steven Li

But compared to your normal state, I mean are there still restrictions impeding deployments at this stage?

Brian Campbell

Yes, absolutely. Yes, so it’s better than it was. But we continue to deal with local jurisdictions where various states have in the United States have different regulations. Some are more open, others have restrictions and we work within the regulatory environment for those locations. And so yes, we are deploying. And yes, we have to plan around those deployments. And we’re constrained by onsite access as well to in certain areas.

Steven Li

Okay, got it. Thanks.

Operator

Thank you. That concludes today’s question-and-answer session. I would now like to turn the conference back to Mr. Brian Campbell for any closing or additional remarks.

Brian Campbell

Thank you, Brett. I’d like to thank our participants for their questions. We reiterate that we’re encouraged by the company’s solid performance in fiscal 2020, achieving sales of $436 million delivering pre-tax earnings of 21.1% through disciplined cost control, all while investing $90.8 million in R&D to build future growth. While the company believes the COVID pandemic to be temporary, the situation is fluid and the impact of the pandemic on operations and results, including the impact on overall customer demand is uncertain at this time.

While the company is an essential service provider, widespread customer shutdowns and travel restrictions and the postponement or cancellation of sporting events as well as other live events and various other related projects will have an adverse effect on the company’s revenue and financial results in the first quarter and potentially the second quarter of 2021. Notwithstanding the uncertainty, the company believes the situation is temporary, and we’re well positioned to benefit from an economic revival and the industry transition to IP and Cloud based solutions. We’re cautiously optimistic as we enter the first half of 2021 with a combined purchase order backlog plus May shipments totaling $110 million and a pristine debt free balance sheet with over $75 million cash and equivalents, providing the financial flexibility needed to fund working capital and investment opportunities.

With our significant investments in software defined IP, IT virtualized and cloud technologies, industry leading deployments and the capabilities of our staff, Evertz is well poised to build upon our position as one of the largest pure players and leading innovators in the broadcast and new-media technology sector.

We’re confident that we will get through this together, emerge stronger, and we wish everyone the best during this difficult time. Thank you and good night.

Operator

Thank you. Ladies and gentlemen, this concludes today’s call. We thank you for your participation. You may now disconnect.





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SS&C Technologies: Steady Dividend Growth With Potential M&A Upside (NASDAQ:SSNC)


Overview

We maintain our overweight rating on SS&C Technologies (SSNC), a company developing various software solutions for financial institutions. In our first coverage on the stock last December, we highlighted the company’s strong balance sheet and moat, driven by its presence in a high-barrier and low-switching cost financial industry market. Furthermore, DPS (Dividend Per Share) has also been growing steadily, even during the recent crisis. Against the challenging macro backdrop, SS&C will expect a bit of a slowdown in new sales for the full year. Nonetheless, some catalysts, such as more tuck-in M&As, cost-saving initiatives, and a resilient revenue stream, should allow SS&C to maintain its consistent growth and profitability profile.

Catalyst

SS&C beat its guidance in Q1 and also announced three tuck-in acquisitions, Vidado, Capita, and Innovest. As stated in the company’s presentation, the guidance for the full year has not yet incorporated the revenues from these newly acquired companies.

(Source: Company’s earnings call slide)

Considering that Capita and Innovest generated $42 million and $20 million of revenues in 2019, the full-year revenue should see at least an additional +$62 million upside. Therefore, we think that the revenue outlook for the full year should look even better than the guidance. Despite the lower guidance outlook, profitability for the full year also looks solid across all the recovery scenarios.

Net Income and EPS

(Source: Company’s earnings call slide)

Even under the worst-case scenario, in which SS&C will realize a ~$1 billion net income, the company will still maintain its earnings, EPS, and net margin figures from last year. Furthermore, SS&C can also reportedly take another $50 million to $70 million out of its cost structure, which, in addition to the lowering of its credit facilities’ LIBOR rates from 2.25% to 1.75%, should provide another profitability upside. Nonetheless, we believe that Q3 and Q4 recoveries should look more likely and conservative enough. In June, for instance, SS&C has continued landing key deals such as Mid Atlantic Group, which has chosen SS&C to automate its FINRA reporting.

Revenue Retention Rate

(Source: company’s earnings call slide)

As such, we also believe that SS&C is well-positioned to maintain its resilience during a challenging time. As per the management comment in Q1, the majority of SS&C revenues come from the recurring business, which has been less impacted by the crisis. The ~96% revenue retention rate has also been in line with the historical average, while SS&C’s strong cash flow generation and balance sheet should allow it to reduce its leverage and acquire new companies going forward. In Q1 alone, OCF (Operating Cash Flow) increased by 7.5% to ~$148 million. As the company should expect ~$1.25 billion of OCF for the full year, we think that other acquisitions may be on the map considering SS&C may now have enough room to lever up after paying down its debts. In Q1, SS&C finally completed +$2.1 billion of debt payments related to its takeover of DST Systems in 2018, which ended up reducing its secured net leverage ratio to 2.67x EBITDA.

Risk and Valuation

The lower rates environment is favorable to SS&C, given that it can lever up at a lower cost of capital to engage in potential M&As. However, we think that the situation will also be favorable to both its competitors or potential high-value targets, which should now have an easier time raising growth capital. With that in mind, we believe that key acquisitions will not be as straightforward as expected, despite the potential $5.8 billion dry powder.

SS&C Share Price YTD

(Source: Seeking Alpha)

SS&C share price has been under pressure in recent times, primarily due to the downward revision of the full-year revenue outlook to $4.5-4.6 billion from the previously $4.7 billion. The stock is currently trading at ~$55 per share, down ~20% from its YTD high, which we think presents a good entry point.

SS&C Dividend Growth

(Source: Seeking Alpha)

As we have discussed, SS&C remains a financial software giant with strong bottom line and cash flow profitability, both allowing the company to grow its dividend and acquire attractive M&A targets. SS&C has acquired companies like Intralinks and DST Systems, which provided a significant boost to revenue growth in the past. On the other hand, SS&C also maintains its $0.125 quarterly dividend payment even during the crisis. At ~3x P/S, the price is fair given the catalysts. We feel that the P/S can always retrace the ~4x-6x levels seen in recent times upon the DST System takeover, potentially once SS&C announces another key M&A deal down the line.

(Source: Stockrow)

On a more speculative note, SS&C remains in a good position to do another M&A this year given the $5.8 billion dry powder, though management has indicated that it will only selectively aim for one with a strong EBITDA in addition to revenue to ensure moving the needle on both ends. Conservatively, assuming SS&C can acquire an M&A target that allows it to maintain TTM growth at ~13% (higher than the previous FY 2020 guidance, but lower than the inorganic growth upon Intralinks, DST Systems, and EZE integrations), SS&C will be looking at a potential target with ~$600 million of revenue, which is a smaller business than either DST System or Intralinks. Furthermore, assuming the unchanged ~27x P/E, SS&C should then trade at a forward PEG of ~2x, making it equally attractive from this standpoint.

Disclosure: I am/we are long SSNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Slack Technologies: When Great Isn’t Good Enough (NYSE:WORK)


In the market, stellar performance from a fundamental perspective is often rewarded with a high and rising share price. Sadly, this is not always the case. Growth companies, because of the high expectations put upon them, can come out with extraordinary news, even surpassing management’s prior expectations, and still the company’s shareholders can be punished. Such is the case at the moment regarding Slack Technologies (WORK). The company, by essentially every measure, fared well in the current environment, but that was not enough to prevent investor confidence from plummeting. This illustrates a key risk associated with growth investing, but at the same time, it could present investors with a good opportunity to get in now at a discount compared to where the business was trading just a day earlier.

Stellar performance

Investors in Slack should be proud of the company’s performance. According to management, the firm did extremely well in what was the first quarter of its 2021 fiscal year. Based on the data provided, revenue at the firm came in at $201.65 million. This represents a gain of 49.6% over the $134.82 million the firm generated the same quarter a year earlier. Such a high growth rate, particularly for a firm with a market capitalization of $22.4 billion before reporting the news, is difficult to come by.

This surge in sales was supported by attractive user adoption statistics. According to management, the number of organizations using Slack grew to more than 750 thousand in the first quarter. This was up 13.6% compared to the more than 660 thousand seen just one quarter earlier. Another way to gauge performance is to look at paid customer statistics. Management stated that in the latest quarter the firm had 122 thousand customers paying for its services. This was up from 110 thousand one quarter earlier and it was up from 95 thousand in the first quarter of last year. Numerically, this is great, but there is a bit of a concern regarding the growth rate.

*Taken from Slack Technologies

As the image above illustrates, the actual growth rate seen by the firm, as a percent, has been weakening. Though the growth rate in the latest quarter of 28% exceeded the 25% increase seen one quarter earlier ago, that’s not much of a bump considering the shift of millions of workers from the office to home in light of the COVID-19 pandemic. It’s also lower than the 42% growth seen a year earlier. A similar relationship, actually, can be seen by looking at the number of large clients. These are clients that generate sales for the company of $100,000 or more per year. This number in the latest quarter was 963, up from 893 a quarter earlier and quite a bit higher than the 645 seen the same time last year. Even so, the growth rate, while still robust, is weakening.

*Taken from Slack Technologies

Another interesting tidbit to discuss here relates to Slack’s concentration of these major clients. It’s great for the company to have big clients because they serve as a source of stability and they likely create for the business significant feedback that it can use for its other users. Having said that, as the concentration of big clients rises, so too does the chance of an exodus of a few clients having a material impact on the business. A year ago, 43% of Slack’s revenue came from these large clients. Today, that number is 49%. It’s likely that this trend will continue for the foreseeable future. It’s not necessarily bad, but it’s not wholly good either. But it is important for investors to keep an eye on.

*Taken from Slack Technologies

Slack is a large company by this point. The firm has over 2,200 apps listed in its directory and it has more than 650 thousand custom apps and integrations applied by users to its system. There are, however, some things that investors are likely worried about. The biggest thing of note is the firm’s net loss in the latest quarter. This loss came out to $74.43 million, which was more than double the loss of $31.88 million seen the same quarter last year. In management’s defense on this, share-based compensation at the firm did rise by more than $50 million year-over-year, so a better way of looking at things might be through the lens of cash flow. Operating cash flow during the quarter was $8.73 million. This was better than the $14.13 million net outflow seen a year earlier. Free cash flow, meanwhile, was $3.68 million, up from -$34.20 million in the first quarter of its 2020 fiscal year.

*Taken from Slack Technologies

Due to strong results in the first quarter, management now has higher expectations for the company for the current fiscal year. Now, instead of generating revenue of $852 million at the midpoint, management is forecasting that the figure will be about $863 million. Due to this, operating losses will narrow by $20 million to $105 million, though free cash flow should still be -$10 million for the year. If there is any point where bears are right to complain, it probably is on this front. While growth at the firm is robust, how valuable is a firm that’s generating consistent losses?

*Taken from Slack Technologies

Takeaway

This recent downturn in pricing caused by investor pessimism could make for a good time for investors to consider buying into Slack. The company’s growth rate in recent quarters has been impressive and it’s clear the business is experiencing a growth spurt that should continue for some time. The fact that growth is slowing is worrisome, but it’s still robust. With $1.56 billion in cash and cash equivalents on hand, the company still has plenty of liquidity to deal with during this time as well. Investors are right to be concerned about where this will end, though. If the firm grows out of its valuation, the bulls will have won, but if we assume that growth grinds to a halt in the foreseeable future, the business, with a market cap of $22.4 billion and net losses, is definitely overpriced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Social-distancing smart watches and plexiglass beach boxes: Old and new technologies are being employed to keep people apart


As countries emerge from lockdowns there is a worldwide rush to fit shops, offices, and public places with the tools needed to enforce social distancing.

Sales of plexiglass screens have surged and technologies from social distancing wristbands to scanners tracking the capacity of rooms are in high demand as people look for safe routes out of lockdown.

The U.K. government announced on Monday that lockdown measures would further ease from the beginning of June, opening car showrooms, outdoor markets, and all shops later in the month. Meanwhile all 50 U.S. states have begun reopening leaving businesses looking at measures to keep workers and customers safe.

While high-tech solutions are proving popular, simple see-through plastic sheets have seen surging sales and plexiglass sheet manufacturers have reported demand rocketing.

Supermarkets, cinemas and even airplanes are introducing plastic sheets to keep customers and employees apart.

An Italian company made headlines in April when it unveiled plans for plastic booths on beaches in which families could sunbathe while socially distanced.

A man and a woman demonstrate dining under a plastic shield Wednesday, May 27, 2020 in a restaurant of Paris.


Associated Press

German-based Röhm, which produces Plexiglas branded plastic sheets, said from mid-March its demand had been as much as 12 times higher than normal. Schweiter Technologies
SWTQ,
+0.55%

owned competitor Perspex said it has tripled production to meet the unprecedented demand fuelled by coronavirus.

Many restaurants are relying on plastic screens to protect customers, but some have gone further to ensure social distancing remains possible, blocking seats with stylish mannequins or making customers don pool noodle headgear to keep them apart.

Read: Mannequin mates, ‘noodle’ hats and greenhouse get-togethers: creative approaches to social distancing in restaurant settings

Higher-tech social distancing solutions include wearable Fitbit-like gadgets that communicate with each other and vibrate if two users come too close.

Samsung
SMSN,

has combined its Galaxy smart watches with an app promising to “take the guesswork out of social distancing.” A similar solution is on offer from Belgian-based Rombit and U.K.-based Tharsus’s Bump, which will allow workers to return to offices and construction sites minimizing the risk of contracting coronavirus.

Bump is worn as a lanyard, which Tharsus said makes it more accurate and safer as two people with outstretched arms could breach social distancing rules without a wristwatch noticing.

Bump hangs around an employees neck and alerts wearers when they are breaching social distancing guidelines


Tharsus

A spokesperson told MarketWatch it has seen significant interest from companies in construction and warehousing to corporate offices that are “keen to use this kind of system to help get working again.”

It is the company behind Ocado’s
OCDO,
+2.33%

warehouse robots, which are programmed not to bump into each other.

Other solutions are enabling offices and shopping malls to measure the crowdedness of rooms and ensure social distancing with depth sensors and thermal cameras.

San Francisco-based Density offers a more hands-off tool offering a safe return to work by tracking the capacity of rooms and letting people know if they are safe to enter. It will also chart the usage of rooms like offices and bathrooms to ensure regular cleaning when needed.

From March to April it had seen twice as much businesses as it did in the whole of 2019, and its chief marketing officer, Aleks Strub, told MarketWatch it was growing quarterly by 500%.

“You need to just give people the power to make choices,” she said. “We’re actually telling people what’s best for them and for global public health, and we have to trust that people will use that information that data to make great choices.”

In offices with Density installed people will be able to check how busy a room is before entering


Density

She thinks the approach is more empowering than social distancing tools: “Are you going to have a megaphone that goes off every time someone infringes on six feet or that zaps somebody? Yeah, no.”

Inurface Group tracks people coming in and out of buildings to stop overcrowding and its cameras also take temperatures, ensuring potential coronavirus cases are spotted.

Read:What is social distancing? This practice is key to slowing the coronavirus, public health experts say

Inurface founder and chief executive Josh Bunce told MarketWatch that tech-based solutions might not stop coronavirus spreading completely, but will have important psychological benefits and help control the virus nonetheless.

“It is about trying to make these environments as safe as possible, and whether it’s a workplace or whether it’s a public space, it’s just about doing everything you can,” he said. “You’re not going to cure it overnight until you’ve got a vaccine.”



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mCloud Technologies Corp. (MCLDF) CEO Russ McMeekin on Q4 2019 and Q1 2020 Results – Earnings Call Transcript


mCloud Technologies Corp. (OTCQB:MCLDF) Q4 2019 and Q1 2020 Results Conference Call May 26, 2020 5:30 PM ET

Company Participants

Russ McMeekin – Chief Executive Officer

Chantal Schutz – Chief Financial Officer

Barry Po – Chief Marketing Officer

Conference Call Participants

Kevin Krishnaratne – Eight Capital

Steven Li – Raymond James

Operator

Good afternoon and welcome to mCloud Technologies’ Fiscal 2019 Fourth Quarter and First Quarter 2020 Earnings Conference Call. Today, the Company will discuss the audited results for the fourth quarter ended December 31, 2019 and the unaudited results for the first quarter ended March 31, 2020. Joining the call today from mCloud is Russ McMeekin, Chief Executive Officer; and Chantal Schutz, Chief Financial Officer.

Before we proceed further, please note that, the remarks made on this conference call may contain forward-looking statements about mCloud Technologies current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or any other future events or development. Forward-looking statements are based on information currently available to management and on investments and assumptions based on factors that management believes are appropriate and responsible in the circumstances. However, there can be no assurance that, the estimates and assumptions will prove to be correct. Many factors cause actual results, level of activity, performance, achievement, future events or developments to differ materially from those expressed or implied by the forward-looking statements.

As a result, mCloud Technologies cannot guarantee that any forward-looking statements will materialize and you’re cautioned not to place any undue reliance on forward-looking statements. Except as may be required by law, mCloud Technologies has no obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise. For additional information on these assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in the Company’s most recent MD&A available on sedar.com.

At this time, I will turn the call over to Russ McMeekin, Chief Executive Officer of mCloud. Please go ahead, sir.

Russ McMeekin

Thank you and good afternoon everyone. We’re doing this call from multiple locations and in two countries, and we’re going to be using slides. I think, those of you, who have dialed in a webcast, you’ll see the slide. So, we’ll be adding that to our quarterly call methodology now. And also in addition to myself and Chantal, we’ll have Barry speak to two slides in this presentation, so we have a full picture of what’s going on.

So, we reported this and so we go to Slide number 3, FY 2019 highlights. Over 2018, we grew the Company 10-tenfolds, so that’s significant growth, combination of organic and acquired growth. We exited the year with a $12 million run rate of AssetCare recurring revenues, that’s derived by 41,088 connected assets.

In 2019, we did two very transformative transactions, Agnity Global which formed the foundation at AssetCare for AssetCare Mobile, and now, this post-COVID era we’re in, we’re seeing a lot of activity around connected workers and multiple industries, that’s all made possible because of the Agnity transaction.

We did the Autopro transaction in 2019. We’re at the table with a lot of major oil and gas players, who want our technology deployed to remote locations, not just in Canada, but around the world. That’s made possible because of this Autopro transaction, which was very transformational.

Operational enhancements, we’ve got a great bench at the front office, some great salespeople at the back office, great people in finance and reporting, and that puts us in a really great position for enhancing our capital market position both in Canada moving to the Toronto Stock Exchange, we’re well underway there as well as with the NASDAQ, we’re also well on our way there.

Next slide. Q4 2019, a few highlights. For the quarter, we did $10 million, 30% of that revenue was from AssetCare solutions, 30% of that every year in fourth quarter, you will see a pretty robust licensing that’s primarily from Agnity Mobile platform and our NGRAIN 3D technology and precision analytics technology, and then 40% of it came from project services in the fourth quarter, adding up to $10 million. Gross margin for the fourth quarter was 63% and that’s due to the strong contribution from both AssetCare solution and our licensing business in the fourth quarter.

Next slide. In Q1, we saw $6.6 million and again strong gross margins in the first quarter. The AssetCare solutions contributed 60% of the revenues only 5% from licensing. So as you see early in the year, we see very light on licensing, very heavy we saw run rate — our ARR was up 130% year-on-year, run rate about $16 million of AssetCare recurring revenue, and we were right on project services from Autopro obviously in Alberta with COVID-19, we’re very challenged to being able to go to site and so on.

We expect to see also a light second quarter in projects, but AssetCare picks-up the — picks-up the momentum here with driving recurring revenue, it drives big beautiful gross margins, long-term contracts and very sticky contracts. Also in the quarter, we close a 13.3 million special warrant financing, and we just before this call announced an additional 4 million Canadians of a strategic investor a family office in Europe, that is very keenly interested in the growth of the Company in AI and connected technology, also saw the opportunity as a prior to a NASDAQ uplift at participating in a high growth with great multiple expansion as we move to the NASDAQ.

Next slide. I’ll turn this over to Barry to take us through the next couple slides. Barry, over to you.

Barry Po

Thanks, Ross, and good afternoon and good evening everyone. I’d just like to turn our attention to what mCloud has done in response to COVID-19 and the decline in oil prices. I think it’s a good illustration of the versatility of our technology because we’ve been able to apply AssetCare to help many businesses deal with the reality that they’re now in. So, if we take a look at our connected building segment as a good example.

We had success in February and March, helping businesses apply our energy savings AI for restaurant and retail brands to what we call energy hibernation and what that effectively does that allowed, it allowed us to help these restaurant and retail owners reduce their energy costs for operators at 15 major brands by up to 80%. And now, as these businesses are turning their attention to reopening, we’ve turned our own attentions helping businesses reopen their doors by giving them the kinds of capabilities that are going to let them reassure their customers and employees that their buildings are safe to be in.

So, there’s been a lot of scientific studies showing that indoor air quality and improving indoor air quality is one of the simplest and most effective ways of curbing the risk of infection of viruses like COVID-19. And so throughout the care, we’re helping these businesses bring clean air through proper ventilation, and a partnership with secure air and air filtration provider that let us join forces that way we can actively drive airborne particles to an electrostatic field that effectively kill the viruses.

Next slide, please — oh, sorry, one bigger slide. In our connected industry segment, we also have kind of a major uptick in the demand for remote connectivity that AssetCare provides, especially in many of these kind of heavy industry sites, oil and gas companies, process companies are looking for ways to continue operations when they can’t quite get people on the ground.

So, our mobile capabilities the things that we’re delivering on smart-glasses provided by real work for instance are allowing subject matter experts to work with field personnel on asset maintenance issues, even if they might be thousands of miles away and our 3D Digital Twin capabilities.

Some of which you can see here on the slide are letting teams of people collaborate on asset problems, using large scale 3D models of those assets and helping them solve these problems in a matter of hours rather than waiting for people to come back on site and have those problems take place over the course of days or weeks.

So, next slide, please. So, for those of you who are kind of looking at our latest MD&A, you’ll see that there’s a section that describes some detailed research we undertook this past quarter. What we wanted to do, as we wanted to reliably quantify the full size of the mCloud market opportunity. And that’s what you see here on this slide. It’s a rundown of mCloud Serviceable Obtainable Market or SOM.

And what the obtainable market tells us is that, if we just took directly and immediately connectable assets that mCloud could reach today in the local geographies where we have specific named sales leaders with the defined sales quota. mCloud is claimed to win in a $24 billion market space. That whole market is made up of almost 24 million connected assets, approximately 2 million connectable mobile workers and opportunities to create a little over 300,000 3D Digital Twin.

And so, if you look at the 20 defined local markets that mCloud is addressing, those are really markets across North America, Europe, the Middle East, China and Southeast Asia. Our SOM shows us that we can directly target about 7.3 million commercial buildings, so restaurants midsize retail, long-term and elder care facilities as long as about 35,000 heavy industry sites. So locations like oil and gas facilities, liquefied natural gas and floating processing, storage and offloading sites or FPSOs.

The bottom line is that we’re well positioned to achieve scale in a very large market. And when you look at that combined with the average monthly recurring revenues that we see today are connected asset, we’ve really just scratched the surface of what mCloud is going to be able to achieve at its full market potential.

Next slide, please. Over to you Chantal.

Chantal Schutz

Thank you, Barry. And thank you, Russ. And thank you everyone who’s joined us on the call today. It actually marks the year that I’ve been with mCloud. And I have to say that the financial statements paints an excellent picture of all the exciting things that we’ve undertaken in the last year, and I certainly could have never imagined that it would have been this fun and this exciting. So thank you all for being here.

On this side, what we’re looking at is, our non-GAAP adjusted EBITDA. So, we’ve taken the new guidance in 52-112, the non-GAAP disclosures guidance. And what we’ve done is we’ve added back certain items that you see on our base of our income statement as well as some salaries, wages and professional services and consulting fees to arrive at what we feel is a very fair presentation of our operational EBITDA.

Can we go to the next slide please? Just a couple of comments on our statement of financial position at March 31. As I mentioned, it’s been a very exciting year here at mCloud. We’ve had quite a lot of acquisitions, quite a lot of financings. Our March 31st statement of financial position on the asset side is demonstrating that we closed very significant warrant financing.

We’ve been successfully closing the acquisition of CSA. We have seen some slowdown in collections as it relates to the COVID-19 closures of offices and primarily Alberta, where the processing of those receivables is quite manual still, and those companies not had the opportunity to be as quick with their processing of payments.

We’ve used about $4 million in uplifting fees, working capital for AirFusion, and some other M&A activities including completing CSA as well as going through a due diligence exercise with BuildingIQ. We did advance $0.5 million of an anticipated $1.5 million of working capital to them.

And through the course of our due diligence, we were able to ascertain fairly early on that some of the information we had been given wasn’t accurate and their working capital needs were quite a lot more substantial than what they first explained to us. So, we have filed a lawsuit with them in the Delaware Court, and we do anticipate that we will be able to recover those funds.

Can you go to the next slide please? On this page just a little bit more of our statement of financial position at March 31st. As I mentioned, we did closed our $13 million warrant financing.

I think that’s it for me and I’ll hand things back over to Russ.

Russ McMeekin

Thanks, Chantal. Accelerating our forward-looking growth here, we gave a guidance here of $70 million to $72 million, and that assumes the following things that we’re tracking to; obviously connecting 70,000 connected assets quarter-by-quarter, we must continue and we will continue that connection trajectory and Barry walk you through the various vectors we have to do that.

In addition to that, we’ll be adding Digital Twins. So there will be about $8 million to $10 million coming from things like a 3D Digital Twins and Connected Workers that we didn’t have before as well as we’re seeing some contract activity in the Middle East, Southeast Asia that we’re adding to our fleet or our opportunity.

So, our second half assumes 70,000 connected assets, 3D Digital Twin kicking in and some of the international regions that we’re focused on. And again, all of these are high margin and they drive AssetCare recurring revenues, so there are off the quality that we’re looking for to achieve the $70 million to $72 million of projection that we have.

Also, we’re working as we mentioned already, very actively to list to the NASDAQ and uplift the TSX main board. We’ve got all of the requisite efforts done, documentation and so on. So now that we’ve filed today, that’s the focus of the team to get that past the goal line.

Next Slide? So, in summary here, despite COVID-19, big growth, Q1 we saw nice assets connections despite most of that was done all remotely. We’ve become pretty clever in how to do things remotely. As the Barry mentioned, in fact, some of our customers have in their hand headsets as we navigate them through doing their own on-boarding with us, guiding them with our own headsets is very, the technology we’ve developed with AssetCare Mobile is quite advanced, in fact, the most advantage of any users of RealWear in the world.

So, we’re seeing a lot of people who procured RealWear hardware. Now coming to us saying, we want to do what these other people do, and they’re in markets we would have never thought of pursuing. So despite COVID-19, we’re still pushing forward on finding ways of getting assets connected.

Once that list, we have a pent-up demand of installations that will occur, connecting assets all over the place, Alberta being one key area, Texas is another area. Middle East, we had someone actually went to the kingdom and got stranded there because of COVID and was not allowed to leave the kingdom, was there at Ramco, fortunately recently is now back, but that yielded a huge opportunity for us, same in Southeast Asia, in Malaysia and so on. So, these things are driving our enthusiasm for strong growth in the second half, and that strong growth as we achieved these $20 million to $25 million quarters that drives cash flow positive.

So, everyone’s asking the question, when you get the cash flow positive, quite obvious, when you start generating that kind of recurring revenue, Chantal has walked you through the details of the kinds of expenses we had to get to where we are to get these exchanges done, get these acquisitions done. These things are not recurring. These are not things we do all the time, as they go away and as recurring revenue build, we build a nice profitable cash flowing business.

So now over the next slide, Slide 13. So, the bottom line, AssetCare is at the right place and at the right time. We couldn’t, from a tailwind point of view here with getting things remotely connected, things are actually quite exciting on that front. To do that, however you need talent and we have over 150 highly talented people around the world. We all were developed there — our business practices around being remote using Zoom and things of that nature.

So, we haven’t missed a beat where we’re very deep users of technology, we’re leaders in technology. So, that put us in a very exciting position worldwide. So, despite some of the constraints that we have today or we’ve seen in the first quarter, and we’ll continue probably to see for a few more weeks, we’re very bullish about the second half of 2020 and will turn over for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Kevin Krishnaratne with Eight Capital. Please go ahead.

Kevin Krishnaratne

In Q1, when looking at AssetCare on a quarter-over-quarter, it looks like a really nice bump there in the ARPU. I mean, you clearly had a very nice strong net add in the quarter, but I’m curious to know what sort of led to the ARPU increase, are you — is there — are you getting a higher level of processes in the quarter relative to prior quarter? Or was there some sort of pricing has been coming off of legacy proceeds? Can you talk about some of the drivers that you saw in Q1?

Russ McMeekin

As we announced, remember in the fourth quarter that we had installed a bunch of oil and gas assets, they are $250 per asset, when you — so the blend moves very quickly, when one asset is 5x the other asset and contribution, right. So, what you’re seeing is that’s the phenomena of the rhetoric. So, for example at the end of March, is when we did a lot of these new connected buildings, so you’re not going to see that impact in Q1, as much as you start seeing the pickup of those in Q2. But conversely, we talked about a lot of stuff going on with the oil and gas operations in Alberta. You started seeing that impact of the ARPU in Q1.

Kevin Krishnaratne

Great, and so I mean, this is the next question launch of the guidance you did indicate that during Q1 that you saw substantial backlog start to develop. I’m assuming that related more — is that related more to the remote worker, the oil and the heavy industry or were you seeing something more in the buildings? And if you can provide any color sort of on, where you see the mix of the 30,000 net adds coming from in 2020, I know you provided some guidance before at the end of last year, I’m referring some change there with regards to the mix of that?

Russ McMeekin

So, let’s take the easy one Connected Workers is not in that additional count. So, that’s additional revenues and as they become more additive in terms of number of connected people, we’re going to have a new metric we will add. So, that makes that one easy. It’s not in the 30,000. Numerically, it’s mainly buildings. However, dollar-wise because of the ARPU value of connected oil and gas and wind turbines, you don’t need many to have material impact to revenue. So, the brand numerically in terms of connected assets is primarily the buildings in the methods that Barry just described to you. But dollar wise, it’s going to be pretty well split amongst them because the dollar impact of oil and gas and the dollar impact of digital twins is pretty significant at when they kick in so.

Kevin Krishnaratne

Got it. Okay, another one for you. And I’m totally excited to hear and I’ve chatted with Barry as well with regards to some of the initiatives in QSR and larger restaurants with, air quality and refrigeration. And, certainly going back a year when mCloud story was more on still continues to be dominated by energy efficiency and, peak power usage. I think broadening off the offering to include some these other items are quite intriguing. So, I’m wondering, though, how you think about the sales cycles, type of sales reps that you’ve got, and sort of channel strategy that you’ve got with [Indiscernible]. And a lot of things that I’ve been asking there, but it doesn’t — it does seem like you’ve got quite a more compelling bundle. I’m wondering if that requires a different type of sales guide, a different type of sales cycle process. Anything you can comment there would be very helpful.

Russ McMeekin

First of all, guys and girls, we have a combination.

Kevin Krishnaratne

Guys and girls?

Russ McMeekin

And I’ll let Barry answer that because that’s a very exciting part. The talent that you’ve brought on, at the front line in business development and their backgrounds from train and carrier, I’ll let Barry address that, but great question, and I’m looking forward Barry’s answer. So go ahead, Barry.

Barry Po

Yes, thanks Russ. And thanks, Kevin, for the question. We’ve assembled a pretty stellar team. All of these folks, men and women, who’ve really been sales leaders at all of the traditional kind of BMS companies across the board. So, places like train, as Russ mentioned, as well, GE and Honeywell and so forth. All these folks who have been involved in the trenches and understand the whole business of building management from the top down are now part of the mCloud team.

And so Kevin, just to maybe pick up your questions specifically about the sales cycle and how we get to market especially given the new additions. What I think is really exciting about that is that the value prop is really easy for the customer to understand, especially in light of COVID-19. It’s really, really easy for customers to understand how important it is to bolster the health and safety of their employees and their customers.

And so what’s really involved in the sales cycle is helping them understand, how AssetCare fits into the picture of these buildings and spaces that we want to connect to, as well as how the business model that mCloud brings. So, completely based on this commercial Software-as-a-Service style approach, that puts us apart from these heavy CapEx retrofit style traditional investments that are very common in the building industry today.

So from that perspective it’s easy for customers to understand the value. And what we really need to do, especially right now is help customers understand that the buying decision is really, really easy. So, it doesn’t really affect our sales cycle then perhaps making it easier for us to get on-prem customers because now they’re not just talking about energy efficiency. It’s energy efficiency and the way that energy efficiency is also going to make your buildings healthier and safer for others.

Kevin Krishnaratne

Thanks for that Barry. It’s very helpful. Maybe one last question for girl on the line just with regards to guidance. You’ve previously given us guidance on normalized net income for the year. I think when you last reported, I’m wondering, if you’re providing any guidance on profitability now?

Chantal Schutz

The guidance that we provided is in the adjusted EBITDA. So, we’re following the guidance that is in 52-112. And we’ve revised that to reflect adjusted EBITDA.

Kevin Krishnaratne

So, $70 million to $72 million of revenue, and what’s the guidance for annual EBITDA?

Russ McMeekin

We haven’t given that yet. We will provide. We just adopted those adjusted EBITDA standards. Until before we run off and give out number, we want to make sure they comply with all the things we’ve adopted. So, TBD is on the adjusted EBITDA, in the same format that we use here using the same methodology. We owe you guys a range of EBITDA for the year.

Kevin Krishnaratne

Okay, thanks for that. We’re very helpful to see that. Thanks a lot.

Russ McMeekin

It may take a bit, but still, let’s let a bunch of things settle, COVID-19, installations, timing of a bunch of things, up listing expenses, all are good stuff. And then we’ll get that. We know that we have that on the to-do-list for sure.

Kevin Krishnaratne

Okay.

Chantal Schutz

And the good news Kevin is that, now set in stone and it will be consistent quarter-over-quarter.

Kevin Krishnaratne

Cool. Awesome.

Chantal Schutz

Yes. All right. I though you would know that.

Kevin Krishnaratne

I like that, yes. Take care.

Operator

Your next question comes from Steven Li with Raymond James. Please go ahead.

Steven Li

Thank you. I want to focus a bit more on the balance sheet. So Russ, this year sure looks like it’s going to be very backend loaded than Q4 heavy. Does that mean cash flow remains negative in Q2 and Q3 before turning into fall?

Russ McMeekin

That’s a fair assumption, yes.

Steven Li

Okay. And the $4 million you raised today is that sufficient to tide you over to Q4?

Russ McMeekin

Yes, it is. Because, we have started collecting receivables from what’s going on. So, assuming people start paying us and I think we’re starting to see that working capital should be okay. I mean we always are looking at doing transactions and deals. There may be others this summer, but if we do nothing else and we just keep operating, that will take us to Q4, yes.

Steven Li

Okay, great. And also, can you give us an update on the term loan in terms of any covenant waivers discussion you might be having? Thank you.

Russ McMeekin

Chantal, go ahead please.

Chantal Schutz

Sure. So, we did received waivers up until June of this year and we have a fairly good or not fairly good, a very good relationship with our lender. We’re actually in the process of looking at redesigning what the covenants are and how we look at the Company as a whole. So, I have very positive feedback and I have a very positive relationship with them. I don’t anticipate that, it will be a problem getting waivers in the future if that’s what’s needed, while we work out what the new, sort of what the new framework looks like. As everyone I’m sure it can tell based on Russ’s presentation, there’s becoming some very, the distinction between Autopro as a standalone entity is becoming less and less every single day that we move forward and it’s time that we started to look at some of these debt covenants in respect to that.

Steven Li

Okay. That’s helpful, and just a clarification on the way you calculate your adjusted EBITDA. You add back about $4 million of salaries and professional services. Do these, any of these trail off or are they expected to recur every quarter?

Chantal Schutz

Do you want me to answer that?

Russ McMeekin

Yes, please.

Chantal Schutz

Yes. No. We do expect that those will remain consistent. Those are sort of expenses that are related very specifically to all the public company, public market works that we do, and that’s the reason that we back them out because they’re not super representative of what’s happening internally from an operational point of view.

Steven Li

Okay, got it. And then, one last question for me. The 3D Digital Twins and then the Connected Workers, which revenue line item will they show up in?

Russ McMeekin

I don’t know which of the two assets, they’ll show up into. So, Chantal, I don’t know if we…

Chantal Schutz

Yes.

Russ McMeekin

We haven’t recognizing that in revenue yet. Go ahead. Yes.

Chantal Schutz

It will depend on the nature of the contract. So, I can’t give you a definitive answer right at the moment, but depending on the nature of the contract with the client, it will be spread between the two. Some of them may be purely long-term perpetual looking type situation and some may not. So each client is kind of coming to us with different needs. So, we will make that determination based on the context of the agreements with them and IFRS-15.

Russ McMeekin

And Steven, an example, if they only have things and all I have to do is enable it, put it in the cloud, have a Digital Twin. It looks like in pure play, looks like Dropbox, right. It’s just basically it’s SaaS the way you go. If they come to you and say, hey here’s my facility, scan it, put it into a digital twin and then I’m going to have you pay your monthly recurring revenue fee for the next three years then there’s an upfront component of it. And so, we have both, some people already have a Aviva scan already, some have nothing, They just have, hey, here’s my assets give them do something for me. That’s why, Chantal, it depends which ones you’re talking about.

Steven Li

Okay, makes sense. And the same thing applies to the Connected Worker, Russ?

Russ McMeekin

Yes, same thing, but they’re always going to be in connected hardware, there’s always going to be a hardware components because I think there’s only one customer up to now that has come to us with their headset, saying please connect me. Most of them is, I want Connected Workers, I have nothing. It’s like showing up at AT&T with no phone and no subscriber service, you want at all versus showing up with your phone saying connect me to a plan. The ladders almost never because nobody has these head mount displays.

Operator

Your next question comes from Jack Vander Aarde with Maxim Group. Please go ahead.

Jack Vander Aarde

Good to see you guys continue to explain that connected asset base. It sounds like you’re pretty confident that you’re on track to reach at 70,000 targets by the end of 2020. So, I guess I’ll start with a question on recurring revenue and AssetCare business revenue. Just hoping to provide more color on all the various and we’re all the various sources of revenue that contribute to that recurring revenue number or is that essentially synonymous with AssetCare revenue at this point?

Russ McMeekin

Pretty synonymous with AssetCare revenue at this point, I mean, that’s the only thing we have right. So, even as we have Digital Twins, there’ll be AssetCare. The contract will be AssetCare contracts, it’s going to be divided over a period, and it’s going to be attributed to a certain asset type. So, they all kind of look the same.

Jack Vander Aarde

And then I apologize if you’ve already touched on this, but maybe I’d like to know, as it relates to your 2020 target for AssetCare revenue. Are you able to provide maybe like a rough breakout of that target AssetCare revenue between what you expect for smart buildings to contribute wind turbines in oil and gas like a rough percentage breakout?

Russ McMeekin

Let’s do that in the next call, so I don’t just make some — what we’re seeing is a transition from –when we came into the year, we’re was going to be 30 million of projects and the rest of it was going to be AssetCare. Now we’re seeing this big up and AssetCare more vanilla flavor AssetCare. Now we’re seeing Digital Twins, Connected Workers and so on. So, it’s all heading in the right direction. But to give you to me — for me to give you something more precisely, we’ll do that as the next call so I can give you. The answer is, yes. Can I do it? Can I give you a good answer? Now, the answer is probably not that great of a distribution, but because there’s a lot more oil and gas happening than we expected. So, I want to give you a good number.

Jack Vander Aarde

That’s fair. And I think you answered my next question. There is, — were there any specific types of assets or verticals that that are exceeding your expectations, it sounds like that’s the oil and gas vertical?

Russ McMeekin

As Barry mentioned, we didn’t expect people to buy. And I think Kevin alluded to the question. When we came into the year, we expected everyone to buy until one hour reduction that drives a cost savings and reduces demand charge. Now, even though it’s still a building air quality fits into the buying decision. That doesn’t change. Well, it changes the buying decision, but doesn’t change our thinking about buildings is important. And we’re going to scale it really nicely.

What has really changed is, people thinking, I don’t need to drive to or fly to oil and gas assets the way I used to. I haven’t been for seven weeks now, but I’m still connected. Why don’t I just do it all that way versus during a five week interruption? Why don’t we just do it that way forever? And that kind of thinking was not a thinking we saw happening coming into this and now that’s happening everywhere.

Everyone’s saying well, if I just didn’t go there for six weeks. And we’re now connecting or connectible, why the hell, we ever go there ever. Why don’t we just do it from here from now on in, just like this conference call. We’re in three cities and two countries right now doing an earnings call that used to all be everyone in the same room.

Jack Vander Aarde

Absolutely, absolutely, it’s crazy times for sure. Maybe as a follow-up on something non- AssetCare related. The press release I know commented that revenue from the legacy technical project services expected to remain a little light until at least in mid-2020. Can you just talk a bit further maybe unlike the specifics of what projects those are or maybe what specific [Indiscernible] is referring to? All Autopro?

Russ McMeekin

All Autopro, we did $2.4 million in Q1. I don’t think we’re going to do much better in Q2 because most of — I mean right now, I think Alberta just allowed people to leave their home a week ago. So projects will be light again in Q2, start picking up. That one’s very dependent on people being able to move around. So $30 million might be 15 out of that $70 million guidance. So, the rest is all AssetCare of the various flavors we talked about.

So, the good news is better margins, creates recurring revenue, blah, blah, blah. Everything we discussed about, but that’s the technical services we’re referring to. And the humans are working on these remote connections. So, they have domain knowledge that’s very helpful for the team. So, they’re doing productive things. So it’s good for us.

Jack Vander Aarde

Okay, great. And just one more for me, back to AssetCare. Specifically, I’d like to know maybe your thoughts on what you’re seeing in China with regard to previous — like previous AssetCare implementations in those large shopping centers from, to people go over a year ago you had a few major press releases there? I guess, just because there, they were ahead of us at least in North America, with a pandemic and the economic shutdown. So what did you experience there? Are there any interrupted AssetCare contracts or in interrupted revenue from those contracts during the January, February, March? And how those rebounded since, if there was impact?

Russ McMeekin

So rebound not so. So our strategy once this started is to focus only on SDN connected malls, and only work through SDN. And fortunately in 2019, they were trained to do what we can do. So, they’re reasonably self-sufficient. That being said this, the malls that were connected prior to the COVID is still only the malls that are connected now.

That being said, as they start getting more bullish, we’re going to see later this year and Barry’s closer than I am. Some additional malls coming on board, but we’re not going to do anything that is not through that channel. We’re not going to deviate from that channel. And we’re going to stay very focused on SDN and SDN malls, which is equal to safe, reliable, and we know what we’re getting involved with, and we’re not going to deviate from that.

On wind turbines, it’s only going to be along a Longyuan near-term. Those were connected and we’re kind of paused their bunch of GE turbines. They’re getting ready to get started again. They’re sending people out in the field to do drone inspections and blades. Again, Longyuan, the largest producer of wind energy in the world, they know us, we know them, and we won’t deviate from that norm, and we’ll stay very focused.

So, what’s changed is we’re going to stay very, very focused and not try to chase what could be a big market. It doesn’t matter if it could be a big market. We’re not going to get distracted by that. We’re going to stay very focused to those things for no other reason that it’s safe on all fronts, if you know what I mean.

Operator

There are currently no further questions at this time. I’ll turn the call back to Russ for any closing remarks.

Russ McMeekin

Well, thank you very much. It was very good questions, very good session, and look forward to the next call. Thank you.

Operator

This concludes today’s conference call. Thanks for joining. You may now disconnect.





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