Pivot Technology Solutions, Inc. Reports Third Quarter 2016 Results

TORONTO, Nov. 28, 2016 /CNW/ - Pivot Technology Solutions, Inc. (TSX-V: PTG), a leading provider of IT infrastructure solutions and services, today reported its financial results for the three months ended September 30, 2016 and provided an update on the delivery of its value creation strategy. All figures are in US dollars unless otherwise stated.

Results for the third quarter and first nine months of 2016 were significantly affected by the previously announced termination of the Company's distribution, licensing and administrative services agreement with Austin Ribbon & Computer Supplies Inc., now known as GTS Technology Solutions, Inc. ("GTS"). Through the termination process, Pivot determined that a loss of control occurred effective July 1, 2016. As such, the assets and liabilities of GTS were derecognized as of that date. A loss of $7.2 million was recorded in the third quarter of 2016 and a related impairment charge of $0.9 million was taken. Total impairment charges for 2016 related to this termination were $4.8 million. The Company has commenced a lawsuit seeking damages and other relief for breaches of various contracts, statutory violations and torts against GTS.

Third Quarter Overview

• Revenue was $365.5 million, 11.8% lower than in Q3 2015 or 4.0% lower excluding GTS
• Gross profit of $42.9 million was up 5.4% over Q3 2015 or 17.9% excluding GTS
• Gross profit margin was 11.7% compared to 9.8% in Q3 2015 and was 11.7% compared to 9.5% in Q3 2015 excluding GTS
• Adjusted EBITDA¹ was $6.3 million, flat with Q3 2015, while Adjusted EBITDA¹ excluding GTS was 11.0% higher than a year ago
• Net loss was $3.2 million ($0.02 per share) primarily as a result of GTS compared to a net loss of $2.6 million in Q3 2015 ($0.02 per share)
• The Company declared and paid a quarterly common share dividend of C$0.01 on September 15, 2016

First Nine Months Overview

• Revenue was $1.1 billion, unchanged from 2015 and was up 4.6% excluding GTS
• Gross profit of $127.5 million was up 7.9% over the same period of 2015 or 12.9% excluding GTS
• Gross profit margin of 11.9% was up from 11.1% in the same period of 2015 and was 11.9% compared to 11.0% a year ago excluding GTS
• Adjusted EBITDA¹ was $16.9 million, 3.8% below the same period of 2015, while Adjusted EBITDA¹ excluding GTS was 0.9% lower than a year ago
• Net loss was $7.2 million ($0.04 per share) primarily as a result of GTS, compared to a net loss of $3.1 million ($0.02 per share) in the same period of 2015

^{1 Non-IFRS Measure. See Non-IFRS Measures Section of this news release}

Management Commentary

"Despite the significant impact of GTS, Pivot's gross profit and gross margins increased and we made good progress in advancing our services strategy," said Kevin Shank, President and Chief Executive Officer. "Based on customer receptivity to our offerings, and our growing services pipeline of opportunities, we are confident that we can enhance longer-term performance by aggressively applying our strategic plan."

Central to the Company's plan to drive longer-term growth and earnings is its services strategy, which encompasses four disciplines (end user, network, data centre and collaboration) and five channels: fulfillment services, professional services, deployment services, workforce services and managed services. In the third quarter, services revenues increased 10.9% over the third quarter of 2015 excluding GTS

"Pivot is in transition and is making progress toward entrenching the new disciplines that are necessary to deliver better and more consistent performance in our services business and across all operations," said Brian Kyle, Chief Financial Officer. "A key objective is to add more recurring revenue – with a better margin profile – as a means of driving free cash flow and reducing our sensitivity to customer capital spending cycles. In this context, third quarter services revenue was a step in the right direction and we have a roadmap we're following to create sustainable momentum. "

Third Quarter Summary
(In thousands of $US except per share amounts)

	Three months ended September 30,						Nine months ended September 30,
	(unaudited)						(unaudited)
	2016		2015		2016*	2015*	2016		2015		2016*	2015*
Revenues	365,473		414,517		365,473	380,866	1,071,968		1,068,772		1,024,743	979,323
Cost of sales	322,616		373,866		322,616	344,517	944,472		950,623		903,163	871,664
Gross profit	42,857		40,651		42,857	36,349	127,496		118,149		121,580	107,659
Selling and administrative expenses	36,540		34,320		36,540	30,658	110,605		100,589		104,901	90,837
Adjusted EBITDA	6,317		6,331		6,317	5,691	16,891		17,560		16,679	16,822
Depreciation and amortization	2,345		3,409				8,203		9,694
Transaction costs	347		289				702		431
Interest expense	1,173		1,789				3,358		5,457
Impairment	950		-				4,788		-
Change in fair value of liabilities	(488)		930				217		1,768
Loss of control	7,249		-				7,249		-
Other expense	88		2,624				1,101		2,737
Loss before income taxes	(5,347)		(2,710)				(8,727)		(2,527)
(Recovery) of provision for income taxes	(2,108)		(104)				(1,518)		523
Net and comprehensive loss	(3,239)		(2,606)				(7,209)		(3,050)
Net loss per share:
Basic	$	(0.02)	$	(0.02)			$	(0.04)	$	(0.02)
Diluted	$	(0.02)	$	(0.02)			$	(0.04)	$	(0.02)
Cash and cash equivalents	7,537		12,543				7,537		12,543
Total assets	447,121		491,472				447,121		491,472
Total long-term financial liabilities	-		-				-		-
Cash dividends declared on preferred shares	-		-				-		461
Cash dividends declared on common shares	1,292		950				3,553		-
Note:  Amounts presented are in thousands of U.S. dollars, except per share amounts
*Amounts exclude the activity of GTS

Total third quarter revenues of $365,473 decreased 11.8%, or $49,044 compared to Q3 2015. Excluding the quarter-over-quarter impact of the loss of control over GTS, total revenue in the quarter decreased $15,393 or 4.0%, primarily due to a decline in product revenue, partially offset by higher service revenue.

Product revenue of $327,528 decreased $45,429 in the third quarter or 12.2% compared to Q3 2015. Excluding the quarter-over-quarter impact of the loss of control over GTS, total product revenue in the third quarter decreased $16,805 or 4.9% compared to the same period in the prior year due to a decline in revenues to major customers.

Service revenues of $35,537 declined by $1,520 or 4.1% in the third quarter of 2016 compared to the same period of 2015. Excluding the quarter-over-quarter impact of the loss of control over GTS, third quarter 2016 service revenues increased $3,507 or 10.9% compared to the same period in the prior year due to the timing of deployment of service-related activities.

Other revenue of $2,408 for the third quarter decreased 46.5% compared to the comparable prior-year period primarily due to lower product revenue. Other revenue was not impacted by the loss of control over GTS in the quarter or for the year to date.

Excluding the impact of the loss of control over GTS, the ratio of revenue attributable to major and non-major customers in the third quarter of 2016 was 35:65 versus 46:54 in the corresponding period of 2015. The change was primarily due to timing of revenue to large customers.

In general, changes in revenue quarter over quarter are attributable to a number of factors, including, but not limited to, timing of major projects and replenishments, vendor incentive programs, competitive pressures in the market and timing of service delivery.

Third quarter 2016 cost of sales of $322,616 decreased by $51,250 or 13.7% quarter over quarter, while gross profit of $42,857 increased $2,206 or 5.4%. Excluding the impact of the loss of control over GTS, cost of sales was down 6.4% quarter over quarter while gross profit increased $6,508 or 17.9% primarily due to changes in product mix, margin expansion, customer concentration changes and timing of recognition of manufacturers' rebates.  Quarter over quarter, gross profit margins increased to 11.7% from 9.8%. Excluding GTS, gross profit margin in the third quarter of 2016 increased to 11.7% from 9.5% in the same period in the prior year. 

Adjusted EBITDA (see non-IFRS measures) for the third quarter of 2016 of $6,317 decreased by 0.2%. Excluding the quarter-over-quarter impact of the loss of control over GTS, adjusted EBITDA increased by 11.0% primarily due to an increase in gross profit from margin expansion activities.

Net loss for the third quarter was $3,239 (loss of $0.02 per share) compared to a net loss of $2,606 (loss of $0.02 per share) in the same period of 2015.

Cash dividends declared on common shares in the third quarter amounted to $1,292 ($0.01 per share) compared to $957 ($0.01 per share) in the third quarter of 2015.

As at November 25, 2016, 2,784,500 shares have been repurchased under the Normal Course Issuer Bid. As at November 25, 2016, the Company had 167,976,626 common shares issued and outstanding. 

Looking Forward

"The global economic environment is uncertain and some customers remain cautious in their approach to IT investments at this stage of the business cycle," said Mr. Shank. "Even so, we believe there are significant opportunities to create shareholder value through our product and services strategy and through the recent acquisition of TeraMach. As well, the secular trends driving IT spending and particularly spending on service are broadly positive in segments that we target. Our job is to execute our stated strategy and in this regard, we are making early progress. We have recruited a number of talented leaders who have proven managed services experience and we're preparing to engage customers on a more strategic basis."

Fourth quarter and 2017 results will be impacted by the previously announced acquisition of TeraMach Technologies Inc. (now operating as TeraMach, A Pivot Company) in early October, 2016. Founded in Canada 20 years ago, TeraMach's dedicated workforce generates annual revenues of approximately C$100 million (with gross margins that are similar to Pivot's) from a diverse customer base that includes various levels of government in Canada and leading corporations. Integration and best practice sharing efforts are now underway. Fourth quarter revenue, on a comparative basis to 2015, will also be affected by the termination of GTS; however, the Company does not anticipate any further charges related to this termination.

"In addition to our capital market strategies, we are committed to strengthening our balance sheet to achieve our ambitions," said Mr. Kyle. "Improving our margins, managing working capital and growing free cash flows are key priorities for our management team as they will enhance our financial capacity and flexibility, support the quarterly dividend and lower our cost of capital."

Third Quarter Conference Call

At 8:00 a.m. eastern Tuesday, November 29, 2016, the Company will host a conference call featuring management's quarterly remarks and follow up question and answer period with analysts. The conference call can be accessed live by dialing 647-427-7450 five minutes prior. 

A telephone recording of the call will be available for one week (until midnight December 6, 2016) by dialing 416-849-0833 and entering passcode 24366288 followed by the number sign.

Quarterly Results Materials

The complete third quarter report for 2016, including MD&A and interim unaudited financial statements, is available at www.pivotts.com.

Non-IFRS Measures
In this news release, management uses certain non-IFRS measures to evaluate the performance of the Company. The terms "EBITDA", and "Adjusted EBITDA" do not have any standardized meaning prescribed within IFRS and therefore may not be comparable to similar measures presented by other companies. Such measures should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS such as net income. EBITDA is defined as earnings from operations excluding depreciation and amortization. Adjusted EBITDA is defined as earnings from operations before items excluded from management's internal analysis of operating results, including non-cash expenses, items that cannot be influenced by management in the short term and items that do not impact core operating performance.  

Management believes that Pivot shareholders and potential investors use these additional non-IFRS financial measures in making investment decisions and measuring operational results as they demonstrate the Company's ability to generate liquidity through operating cash flow to fund working capital needs, service outstanding debt and fund future capital expenditures. 

A reconciliation of EBITDA and Adjusted EBITDA to net income is contained in the MD&A (see "Reconciliation of Non-IFRS Measures to IFRS Measures").

About Pivot Technology Solutions
Pivot is a leading information technology infrastructure and services provider to approximately 2,000 customers, including many members of the Fortune 1000. Founded in 2010, Pivot enjoys relationships with the world's leading IT vendors and generates annual revenues of approximately US$1.5 billion. With approximately 800 employees and offices throughout North America and in Europe, Pivot uses its knowledge and local presence to help corporations, governments and educational institutions design, build, implement and maintain advanced computing and communication infrastructure. For more information, visit www.pivotts.com.

Forward Looking Statements
This news release contains statements that, to the extent they are not recitations of historical fact, may constitute "forward-looking statements" within the meaning of applicable Canadian securities laws. Forward-looking statements include statements regarding growth and value creation opportunities, and the assumptions underlying any of the foregoing. Pivot uses words such as "may", "would", "could", "will", "likely", "expect", "believe", "intend", "anticipate" and similar expressions to identify forward-looking statements. Any such forward-looking statements are based on assumptions and analyses made by Pivot in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors Pivot believes are appropriate under the relevant circumstances. However, whether actual results and developments will conform to Pivot's expectations and predictions is subject to any number of risks, assumptions and uncertainties.  Many factors could cause Pivot's actual results to differ materially from those expressed or implied by the forward-looking statements contained in this news release. These factors include, without limitation: uncertainty in the global economic environment; the possibility that Pivot will be unable to capitalize on opportunities it has identified in the manner and timeframe anticipated, and the possibility that Pivot will not be able to successful in sustaining growth or growing its profitability. The "forward-looking statements" contained herein speak only as of the date of this news release and, unless required by applicable law, the Company undertakes no obligation to publicly update or revise such information, whether as a result of new information, future events or otherwise.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release. 

SOURCE Pivot Technology Solutions, Inc

Brian Kyle, Chief Financial Officer, Pivot Technology Solutions, [email protected], 416 371 8171; Ernie Stapleton, President, Fundamental, [email protected], 905 648 9354