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Edited Transcript of PTG.V earnings conference call or presentation 14-Nov-19 1:30pm GMT

Q3 2019 Pivot Technology Solutions Inc Earnings Call

TORONTO Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Pivot Technology Solutions Inc earnings conference call or presentation Thursday, November 14, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Toews

Pivot Technology Solutions, Inc. - CFO

* Kevin A. Shank

Pivot Technology Solutions, Inc. - President, CEO & Director

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Conference Call Participants

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* Gianluca Tucci

Echelon Wealth Partners Inc., Research Division - Research Analyst

* Keith Schaefer;Investing Whisperer;Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Pivot Technology Solutions Third Quarter Results Conference Call. (Operator Instructions) This call is being recorded on Thursday, November 14, 2019. Your host today are Kevin Shank, President and Chief Executive Officer; and David Toews, our Chief Financial Officer.

Before we begin, I am required to provide the following statements respecting forward-looking information, which is made on behalf of Pivot and all of its representatives on this call.

All statements made on this call will contain forward-looking information. Actual results could differ materially from the conclusion, forecast or projection in the forward-looking information. Certain material factors and assumptions are applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and material factors or assumptions that are applied in drawing a conclusion or making a forecast or a projection as reflected in the forward-looking information are contained in Pivot's filings with Canadian provincial securities regulation -- regulators. During today's call, our figures are in US dollars unless otherwise stated. And with that, I'd like to turn the call over to Mr. Shank.

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [2]

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Thank you, operator. Good morning, everyone, and thank you for taking the time to participate on today's call. I'll begin with some high-level comments, Dave will provide the financial updates, and then I'll conclude with some thoughts about our strategies, the Smart Edge transaction and our outlook. Gross profit margins and adjusted EBITDA margins, both showed significant improvement in the quarter and highlights the improved efficiency of our business. We are pleased to report solid growth in our Pivot Provided Services organization this quarter and see new opportunities for positive results in all 5 service channels as we move forward. In addition, our recently announced preferred channel partnership agreement with Intel positions us to capitalize on the growing enterprise demand for communication and compute solutions at the edge.

Our third quarter adjusted EBITDA improved from $4.2 million last year to $6.3 million this year. As anticipated, adjusted EBITDA benefited from the efficiency plan that we initiated in the second half of last year. Gross margin increased from 12.7% to 14.7%, a 16% improvement, primarily driven by cost reductions and service-related costs of sales, as well as the shift in volume between our major and non-major customers. We are pleased that our financial results are showing the expected benefits from our initiatives and reduced overhead expense, as part of our transformation plan. The goal of this ongoing approach is to accelerate our commercial transformation, cover the impact of ongoing pressure on the product business and invest in growing areas of our business such as managed services, software-defined technologies and edge solutions.

Looking at top line performance. Total revenue was $269.6 million compared to $321.4 million last year due to lower product sales. Our product business experienced an 18.8% or $53.6 million reduction in revenue compared to last year, again, driven primarily by the drop in our product sales to major customers. As noted previously, product revenues are difficult to predict due to the transactional nature of that part of our business.

Moving to our service business. Service revenues were $37.9 million or 5.2% or $1.8 million higher compared to last year. This reflected a $1.5 million or 6.8% increase in Pivot Provided Service revenues, and a $326,000 or 2.4% increase in revenues from third-party maintenance and support contracts. The increase in Pivot Provided Services is primarily due to a new deployment project, partially offset by our workforce services contract which was winding down in the prior year quarter. The transformation plan that we initiated last year has positioned Pivot to be more effective and efficient in executing our strategy. We've recently promoted Scott Ward to the newly created position of Chief Revenue Officer to further drive our integration and growth initiatives. At a higher level, our strategy continues to focus on building our core products and professional service business while enhancing our services and solutions capabilities. We will continue to invest in areas of our business where we see the opportunity for accelerated growth.

As previously announced, subsequent to the quarter end, we closed on the sale of Smart Edge assets to Intel. Part of this transaction, we entered into a preferred partnership agreement with Intel that designates Pivot as a nonexclusive preferred system integrator and channel partner for the Smart Edge-based solutions. Under this agreement, Pivot will market the Smart Edge software solution and provide customers with edge services, including consulting, integration, deployment, monitoring and support services. We believe, Intel is the right company and more importantly, the right brand to advance the Smart Edge software solution. Our partnership agreement with Intel leverages Pivot's core strength as a technology integrator and service provider to drive the adoption and development of the Smart Edge platform. This was an excellent transaction for Pivot shareholders. By monetizing our investment with Smart Edge for $27 million, we have improved our financial flexibility while simultaneously eliminating ongoing development costs associated with the platform. In addition to these benefits, we have retained the ability to sell the Smart Edge solution and the adjacent services, which aligns nicely to our existing core service capabilities. We continue to see growing interest and demand for these newer edge-based solutions, and we believe there are vast opportunities for growth leveraging our edge expertise. I will now turn the call over to Dave to provide a quick update.

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David A. Toews, Pivot Technology Solutions, Inc. - CFO [3]

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Thanks, Kevin, and good morning, everyone. Third quarter results continue to show signs of the progress we've been making with our commercial transformation. During the third quarter, the company continued its integration activities and is finalizing plans to combine certain U.S. wholly-owned subsidiaries and related business units into a single Pivot brand. This integration is expected to generate additional cost reductions while improving controls and allowing the company to be more efficient. We will continue to manage cost while investing strategically in areas where we see opportunities to grow such as the edge and cloud services. Third quarter revenue was $269.6 million compared to $321.4 million in the comparative period. And gross profit was $39.5 million compared to $40.7 million in Q3 2018.

As Kevin mentioned, the gross margin percentage improved year-over-year increasing from 12.7% to 14.7%. Margins were assisted by cost reductions in service-related cost of sales and the reduction in sales to major customers. The company continues to focus on increasing service revenues, which generally have better growth profit margins than product sales. Major customers generate lower gross margins due to their volumes so this had a positive impact on margin percentage but a negative impact on revenues and gross profit dollars. While we continue to look for opportunities to grow our share with our major customers, we are planning the business assuming continued reduced volumes in this area, our strategy is not dependent on our major customers.

Third quarter SG&A was $33.2 million, a 9.1% or $3.3 million decrease from Q3 of last year. This decrease is due to a number of factors. Net spending on Smart Edge development decreased by $486,000 quarter-over-quarter as the company is capitalizing certain qualified development costs since the start of 2019. The total amount capitalized in Q3 was $1.1 million. Gross spending on Smart Edge increased by $629,000 compared to the prior year period. Excluding the impact of Smart Edge, employee compensation and benefits decreased by $816,000 or 2.9% compared to the prior year, due to the cost reduction efforts we initiated.

Rent expense decreased by $1.4 million, primarily due to the implementation of IFRS 16 and also due to reductions in our facility footprint. Under IFRS 16, certain facility leases are capitalized and depreciated, and this resulted in an increase in depreciation expense of $1.1 million and finance expense of $309,000. Even with the 16% reduction in revenue in Q3, gross profit was fairly stable, declining only 2.9% or $39.5 million. Adjusted EBITDA increased by $51.3 million to $6.3 million from $4.2 million in Q3 of last year. This performance was supported by our cost reduction program and the change in accounting for leases. On a year-to-date basis, adjusted EBITDA is up 80% from $10.8 million to $19.3 million.

Moving down the income statement. Depreciation and amortization increased year-over-year by $820,000, largely due to the adoption of IFRS 16. Finance expense decreased by $72,000 or 4.7% to $1.46 million due to decreased average borrowings, which fell to $107 million compared to $121 million last year. The decrease in finance expense was partially offset by increases in LIBOR and U.S. prime interest rates, which caused an average increase of 0.7% in related interests and fees charge on the JPMorgan facility. Also, increase in finance expense was the adoption of IFRS 16, as I mentioned earlier.

Other expenses were $565,000 in Q3 2019 compared to $1.8 million in the prior year period. The change is due to a number of factors, including foreign exchange gains associated with the weakening Canadian dollar compared to the U.S. dollar; restructuring costs, which were $300,000 compared to $1.1 million in the prior year period; and increased transaction costs related to the sale of Smart Edge and the GTS lawsuit. The company expects to incur further restructuring cost as we complete the U.S. entity mergers.

Overall, third quarter loss per share was $0.01 compared to a loss of $0.07 in the prior year period. Cash used by operating activities increased by $85.4 million compared to Q3 2018. This performance primarily reflected the timing of noncash working capital items, including accounts receivable, inventory and accounts payable. We finance working capital through our revolver so fluctuations in cash from operations are normal and they're generally offset by changes in the credit line, which are captured in financing activities. Q3 cash from financing activities increased by $77.9 million compared to last year, driven by movements in net borrowing associated with our secured borrowing arrangements and changes in bank overdrafts. As I mentioned, our revolving credit line tends to fluctuate inversely with the changes in working capital and cash from operations.

Q3 cash use in investing activities increased by $1.25 million compared to last year, primarily driven by the capitalization of Smart Edge development costs in 2019. From a collections perspective, day sales outstanding stood at 57 days for the third quarter, while days payable was consistent at 57 days. These figures also tend to fluctuate from quarter-to-quarter based on timing and customer and vendor mix.

Looking forward, from a borrowing perspective, we continue to have the capacity to fund growth under our bank facilities and a considerable amount of liquidity. Our undrawn availability on existing secured facilities at September 30 was $51.2 million.

At quarter end, announced on -- under our revolving credit facilities were $121.7 million compared to $99.1 million at December 31, 2018. As always, the timing of noncash working capital items will affect our net debt position going forward. As we've mentioned previously, our revolving loan is classified under IFRS as a current liability. We do not have any long-term bank debt. While the facility does not expire until 2024, this classification gives us a negative working capital amount on the balance sheet. It's important to note that the company uses its -- use its revolver to fund its acquisitions since inception and has determined that this continues to be the most cost-effective way to finance the business.

Management is very comfortable with the current level of debt. The recent sale of Smart Edge assets will improve our financial leverage metrics while providing the company with the options and the flexibility to reduce its debt levels, look at strategic investments and buyback shares under the NCIB. Cash provided by operating activities before changes in noncash working capital balances is $10 million for the 9 months ended September 30, 2019. During that same period, our capital expenditures, excluding the Smart Edge capitalized development, was $884,000 and our common share dividends paid were $3.6 million. At our recent Board meeting, the Board of Directors declared a common share dividend of CAD of 0.04 per common share payable on December 16, 2019, to common shareholders of record on November 29, 2019. We continue to believe that the dividend payment is a key part of shareholder value creation. Now I'll turn it back to Kevin for his closing comments.

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [4]

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Thank you, Dave. Our financial results continue to show the benefits of the plan we initiated latter part of last year. Gross profit margins, adjusted EBITDA and net income have all improved dramatically compared to Q3 of last year. With the Smart Edge sale, we generated significant cash proceeds and will still be able to drive the sale deployment and management of the edge solution. We are excited to work with Intel on the services and management of all these edge opportunities. We remain committed to our strategy and are very excited about the opportunities in front of us. This prepares (sic) [concludes] our prepared remarks. Operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Gianluca Tucci from Echelon Wealth Partners.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [2]

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I guess, I'll start on the product side. So continued pressure here in the quarter. Can you walk me through the dynamics at play? And if I recall, your Q2 was pretty strong on a product perspective. Did Q2 pull any product sales ahead from Q3?

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [3]

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Okay. So -- in the first part of your question, got a little garbled up, Gianluca. But I think you said, pressure on the product side. Is that what you said?

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [4]

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Yes. Correct. Just to talk about the dynamics at play in the quarter.

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [5]

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Okay. So specifically on the product business, as we've been reporting, our pressure, if you will, on the revenue side of the product business is really tied to our major customers. If you look at our non-majors, plus one customer we exited on a mutual basis, if you look beyond those couple of customers, our core business grew 7% -- our core product business grew 7%. So it's not a company-wide item that we're managing through. It's just a couple of customers who are classified as majors who are going through volume changes with us and I believe, decreasing spending in general. But it's -- from my viewpoint, it's making the business stronger over time as you drive down your revenue concentration on your largest customers. But it's big enough volumes that we've adjusted the business and we're now managing in a very positive direction at the current volume. So if we see a rise in the future, which we can't predict, that would be pretty much just all a premium we've added to our performance of the business. But from a overall company perspective, the product business is probably much healthier than you might see from the top line results.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [6]

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Okay. Great. And -- because I recall that your Q2 on the product side, it did outperform. Did it -- like, was any handful of product behind it?

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [7]

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No. That's a good point. That's a great point. The second half of your question was, did we pull some Q3 volume into Q2? I would say we may have gotten lucky with some shipping that got pushed forward by some of our OEM partners. I don't have a number to confirm that. But we did have a very good Q2, actually, now I think we did over $9 million in earnings for Q2 and -- which as far as I could tell is the highest number since I've been around the company. So our Q2 was a top-performing quarter. I don't have a metric of how much has been of Q3 business flowed back in Q2. But I can tell you that a lot of times when certain OEMs close a quarter and they're aligned with us, you might see them do a lot better job in getting shipping out, because we don't recognize revenue until it's received by the customer in most cases. So sometimes those OEMs will push product a lot harder at their quarter end and we get the benefit of that timing.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [8]

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Okay. That's great color. And just on services, good overall growth and -- in the Pivot direct. Is it fair for us to assume this kind of expansion to continue in the near term? And secondly, talk to me about your pipeline on services at the moment and the types of margins with this business.

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [9]

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We were pleased to see the growth return back in the Pivot Provided Services and overall service business. We -- we're getting better and better and better as an organization in managing our service business. I'll highlight the fact that not only did revenue increase 7%, but I believe the profitability or margin associated with that same business grew by 30% or more. So not only are we growing, but we're growing margin at the same time, we're growing revenue. So certainly, part of our strategy. It's certainly something that we hope to drive. I can't -- obviously, we don't give forward guidance on these kind of metrics, but we're bullish on the changes we're making in some of the customers we're developing. The big part of my job and the newly appointed Chief Revenue Officer, Scott Ward, is to get that service mindset driven further and deeper across the entire business. And when we do that, that's when you'll really see a jump in the service volumes in our results. And we work on that every day. We work on that every day and it's really important to us. But the key thing, it not only is the service business, not only that we've grown in Q3 but profitability grew faster, which means we're getting more efficient and we're signing better quality deals and we're managing that business a lot better. And now we just need to scale it out and grow it, which is definitely part of our strategy.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [10]

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Okay. That's great. And on seasonality, I mean the company's history indicates that Q4 is typically the strongest quarter of the year. Do you expect that to hold firm again this year?

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [11]

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Again, we don't give guidance. But I can tell you that between -- usually between Q2 and Q4 are usually our strongest quarters of the year. I think -- can't think of one other time where we had a Q2 that was better than Q4. But Q4 is generally a good quarter because that's when the budgets of your customers are being utilized, any excess funds that they want to spend. Sometimes they wait till the last minute to spend those dollars, and companies like ours get the benefit of that. I can't predict -- it comes down to shipping and it comes down to a lot of different factors in terms of how we recognize revenue. We have some customers that shut their docks down in the second week of December. So even though, you've got an order and you've got the ability to ship it, they won't accept it. So we can't comment. It is so many factors. It's hard to predict, but certainly with the end of the year and with the past performance, Q4 should be a decent quarter.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [12]

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Okay. Now changing gears to Smart Edge. I guess, like, walk me through how your talks, they develop, like with Intel? And so on the edge acquisition and how you plan to go-to-market together and help them deliver on the services side of edge deployments?

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [13]

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So first, that was a great question. And I think based on the people I've interacted with in the industry and other partners, many were very appreciative of the accomplishment there that we've reached with Intel. I got to be careful. I don't represent Intel on this call, I'm not trying to do that. So I want to make that statement upfront, too. But we worked a long time on this. Well over 9 months we were in talks with Intel. They very much appreciated the wonderful technology that was created by our Smart Edge team. And they had an appreciation for the broader capability for Pivot. From my perspective, which I can talk in granular about, I saw our business just have a great golden nugget there of technology and capability, not our traditional core businesses, develop software and -- but I saw a demand for it and I saw customers very interested in it. But what was holding it back in my humble opinion was the fact that Pivot is not a software company. It's not known as a software company. And when I was working with our friends at Intel, I believe, this is the pace where if Intel is -- own that software, accelerating the development of it, blending it in with other key products and services they have, that would accelerate the market acceptance of the technology with the Intel brand behind it. And then Pivot still gets to sell that solution. Intel -- unless Intel changes its business -- I'm not making a statement about what Intel is going to do here, but Intel would traditionally move any of its products through partners like us.

And so we have the ability to still sell the solution and most importantly, perform our core services on the solution. That's planning and design work, professional services, it's the integration activity using our expanded and very large set of capabilities around integration. It's deploying technology and then most importantly, creating a new type services around that deployed solution for monitoring and onboard management and support. That's what we want to do. And so I think we've created a tremendous win-win scenario with Intel in our partnership agreement, where Intel can take the software and take it to the next level, integrate it with other big plans they have. And if you've been reading the press, you'll see Intel is very bullish on the edge and what it means to them in the broader business. And I think this allows Pivot to do what we do best, which is our core services as well as retail technology solutions. So we see it as a tremendous win-win.

Also the -- you didn't ask about the share of our spend. I mean $27 million to our company is a very big deal, especially when you look at the fact that we had expensed all of our efforts up until 2019 and the proceeds from this are significant. Dave talked about the debt and our asset-based lending agreement. And it was really treated as a current liability. There's no long-term debt. So as we receive this cash, it immediately goes to pay down the line. So it's fully impacting the debt of the company. And when you look at -- when you take out the effects of payables, receivables and inventory and traditional working capital and you look at the real debt of the company, this is a significant pay down of that debt. So we're very, very pleased with what it means to the company, what it means to our ability to continue to pay our dividends, our ability to invest in any other strategic initiatives, to buy back stock. We've got a lot of options at our fingertips now that this deal affords us. And we're very pleased with it. We feel very, very good about the transaction and what it means to our shareholders.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [14]

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So excellent commentary. Intel has been talking -- I was on their last earnings call and the CEO, Bob Swan there did talk quite at length about edge and how they plan to focus on that area as the next growth cow for the company. Have they, like, given you time lines in terms of expected deployments or expected go-to-market of the Smart Edge, I guess, platform?

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [15]

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No, no, they haven't. I mean, I think -- I got to be careful I don't get outside my boundaries here. We're still actively meeting and exploiting the preferred partnership agreement. Those meetings will -- are very much happening at the same pace they happened before we sold the software. So we're in business as usual with Intel on the pursuit here and development of pipeline and pursuit of opportunities and supporting the initiative. So we're heads down operating just like we did prior to the divestiture.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [16]

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Okay. Great. And on the edge sale, I guess, you're now saving about $6 million in annual OpEx. Do you have plans to deploy that savings elsewhere in the company? Or talk to me about how you plan to use the proceeds on the edge sale? I guess, you pay down debt. But is there any potential to raise the common dividend or to increase the size of the buyback given your current valuation?

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [17]

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So I would -- so I'm going to -- I want to give you a little bit more color on the data that gets through out there. So I think we reported our 2018 costs, our investment in Smart Edge at like $5.1 million. This year, because we have capitalized a portion of it, I think the net spend was around $2.3 million. And we'd capitalized just over $3 million. So those would be the changes in kind of run rate costs as we look forward, with that -- those costs and that burn going away. The burn definitely is around the $6 million burn of cash that goes away. So it's, again, a very positive outcome for the business in terms of that.

I would say in terms of our strategic initiatives, we're very consistent. We've reported these in the past. I think delevering the company, continuing to pay our dividend, I don't see it's increasing it. But I think continuing to pay the dividend is definitely part of our strategy. Buying back shares is certainly something that we could do with proceeds. It's an option. And then you could look at some very, very strategic potential acquisitions that would fit our capability, our need that we have. And we've got a few in mind, I'm not going to go into what those are because we have competitors that join this call. But I have some very good ideas on some capabilities that I think would be wonderful to add to our arsenal of services. So those are all options to us. And with the relationship and the transaction we just did with Intel, it does position us very well to go after those things. All of the above.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [18]

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Great. And just lastly from me here, I guess, for Dave. On the planned combination of your subs in the U.S., how is that -- how should we think about that? And expectations in terms of timing, charges and savings from this consolidation in the U.S.?

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David A. Toews, Pivot Technology Solutions, Inc. - CFO [19]

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So the timing is that the mergers of those entities will be at the end of the year. So the end of the calendar and tax year is when we'll do that combination. We'll see some restructuring-related costs tied to that in our Q4, and I would expect some of that will bleed into Q1. And we'll see -- we did a lot of the centralizing of functions already in our last 12 months activities, but there'll be some continued consolidation. We'll get some continued savings. We are looking at whether we drop that savings to the bottom line or use that to drive some of our strategic initiatives that we're looking at already. So between the Smart Edge cost reduction and this integration, we're going to reduce our OpEx, but we will have to reinvest some of that in some growing areas that we mentioned around the edge, around cloud services, et cetera.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [20]

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Okay. And just one more. So the total savings today, like, from your program still is around $8 million?

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David A. Toews, Pivot Technology Solutions, Inc. - CFO [21]

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Yes. And to the integration, just to be clear, Gianluca, the mergers, et cetera, that we're doing at the end of the year will be incremental to that.

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [22]

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And just -- and Gianluca, one other point to what Dave said, $8 million is the right guess, correct. Just a reminder that, that's a combination of both cost of sales and improvement of our margin of the service business as well as reduction in SG&A as well.

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Operator [23]

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Your next question comes from the line of Keith Schaefer from Investing Whisperer.

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Keith Schaefer;Investing Whisperer;Analyst, [24]

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A couple of quick questions. One is like, so on our top line revenue, is there any idea -- are you able to give any elucidation to the market here when that stops? Like what -- is there a level of top line revenue that you think you can stabilize out at? Or are we having such a big -- especially reinventing the company into a services company that it's pretty much impossible to gauge where top line ends up? Where the -- and then I guess the secondary question will be, on the IT side, where you guys are having clearly some success, you're making the company more efficient, your service revenue is growing a bit here. So would you be able to give the market idea on, like, what's your competitive edge? What's your story on the services side? What are you -- is there a vertical you're focusing on? Is there something that you're doing better than your competitors? What would you tell the market as your competitive edge on the new IT side that's driving the EBITDA efficiencies?

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [25]

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So on the top line side, Keith, yes, it's very difficult to predict those revenue swings. They're very, very large customers and order sizes for those customers can be in the tens of million. So if you get it -- if you get the order, it's -- you feel really good and if you don't then you miss a lot of revenue. The key part of that, though, is it's the lowest margin business we sell. So it -- from a bottom line perspective, the large revenue swings affect the gross profit less. And that's what we're really saying. If you understand this industry, especially the whole technology world and where it's going, everything from Cisco, HP, Dell EMC, I've spent time with all of them over the last month. There's going to be a major shift in what is called base acquisition technology and it's not going to be about top line. It's going to be about gross profit generation and reoccurring, and I think that's rationally correct. And if you've followed me in this company, I've been talking about those same (inaudible) when we get to a more reoccurring revenue and we get to more stability in those swings of those profit generation, then you can really plan more and more and more for your company more strategically. And so we're working on those things.

So the top line is going to -- it's going to go up and down based on a lot of factors, including the majors. What's driving down the top line revenue, though, is clearly our 2 major customers have gone through quite a bit of change. We're still -- they're still customers of ours, and we have still a very favorable relationship with them. But we cannot predict how much volume we're going to get from them, because I'm not sure they always know based on their own business condition. So what Dave alluded to in his portion of the remarks is smart enough to get this business in a position that we're not dependent on that volume. When I got here, the business was dependent upon a lot of that major volume. And if you look at it, even with the change in the volume, we've got a lot more efficient and effective and we can manage through those swings in volumes, if you will.

In terms of the services and what we're focused on and how we want to differentiate. Again, when we got here, there really wasn't a company-wide portfolio of capability, which is great technologies and great technical minds, some really, really high-end professional services, especially around the storage world. Our company, when it comes to our product business and our networking business, storage, networking and compute are the 3 areas where we really shine. We have some tremendous technical talent in our professional resources that have been very enhanced. So our collaboration area, customer interactive solutions, all are very key areas for us in the marketplace. And now, more recently, because of Smart Edge and because of our -- the technology and the adjacent services we've built around that edge technology, we clearly see ourselves as a leader in edge and edge compute. And that is going to be a key differentiator for us. We are going to go after that with guns blazing as we move into 2020 and beyond. That edge market is where Pivot can really build a brand for itself and be recognized separate from a lot of our competitors.

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Keith Schaefer;Investing Whisperer;Analyst, [26]

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So Kevin, is there any way, like, again, so the IT, that's again, higher-margins, it's been going gangbusters. You've been doing a great job transitioning the company. And I just think for investors that they just kind of feel like they can wait to buy the stock until this transition is done? Or is there any kind of, like -- in that business, is there any kind of operating leverage, like, is there a certain revenue number where all of a sudden EBITDA margins really kick in? Or really, it's more just getting more contracts? And if that's the case, what size of contracts are we getting? Are we -- did we start off a couple of years ago in the -- just on a sub million, now we're in the millions, and we're hoping to get to the tens of millions. What do you see is driving -- how does this company get to $50 million, $60 million EBITDA a year?

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [27]

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Yes, first of all is, there's 2 or 3 great inherent points in there. I know you're joining the calls more recently, but I've talked about this in the past, that you're on the target key. When I got here, the business, again, was very much focused around PS, professional services. They did a fabulous job at it. But PS kind of deals are usually in that $100,000 range to $500,000 range on the high end. And they're great deals, they're high margin and we want every single one of those that we can get. But for you to get to a 10%-plus growth rate in your service business, you've got to get bigger orders and you got to build a pipeline of those deals. So in the last 24 months, we've closed a $3.5 million deployment project in Canada, where we touched, I believe, it was 24 different cities, deploy 8,000 assets over a 3-day period, 400 technicians were working on the project simultaneously. And that was for a very, very large bottling company that everyone in the call would recognize. We've done some -- we did a couple Windows -- Win 10 conversions here in the U.S., one with $5 million -- 2 of them are going to be over $5 million in size. And we've seen an explosion in our retail support business where we have a chance to have an $8 million to $10 million individual service customer next year. And we're -- we fight every day to earn that business. And it will just bring those references and that capability that's being built that can deliver those services will just fuel that snowball and have it -- and will help it grow. But the way we grow systematically 10-plus percent a year, is we need a pipeline of those high-qualified deals where we have credibility and we have recognized capability and credibility to go do those deals. And we're building that. It just takes some time to do it. We've done it without acquisitions and that's a little bit slower way to get it done, but we're seeing a much bigger deals. We're starting to close those deals and deliver those deals and now it's all about more and more and more -- now that's about our Commercial Revenue Officer really driving our sales team to go out and do more and more and more of those deals.

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Keith Schaefer;Investing Whisperer;Analyst, [28]

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Okay. I think it would just help the company into the marketplace if there was a clear delineation of strategy and developing a story around that. So I give that -- management the next quarter. I think that's it for me.

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Operator [29]

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There are no further questions at this time. I'll turn the call back over to the presenter.

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Kevin A. Shank, Pivot Technology Solutions, Inc. - President, CEO & Director [30]

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Thanks, operator. We look forward to providing further updates when we report our Q4 results. We hope everyone has a great holiday season and we'll talk to you in the new year. Bye-bye.

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Operator [31]

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This concludes today's conference call. You may now disconnect.