Echelon...A LOOONG one Part I
Performance Perspective: The strength of Pivot Services for Q220 supported a modest $600K EBITDA gap versus our forecast at $8.0M despite significant COVID-19 headwinds on low margin product sales. PTG realized strong momentum booking y/y revenue and profit gains against high-water benchmarks through the end of March. However, the subsequent impact of COVID-19 headwinds mapped against a record Q219 lead to a tough y/y revenue comparison with revenues at $332.1M materially below our forecast at $382.2M and down 27.8% y/y. Fortunately, low margin sales to large customers were the primary factor in the decline as reflected in the gross profit at $50.2M (margin 15.1%) against $60.M (margin 13.1%) y/y while cost efficiencies further narrowed the gap at the EBITDA level where PTG reported $7.4M (margin 2.2%) against $12.9M (margin 2.8%) for Q219 (Q218 $5.1M) and our forecast at $8.0M (margin 2.1%). The profit and EBITDA resilience during a tough quarter leaves Pivot’s $0.16 dividend fully funded with our full year payout put at 32.5%. Our PT move reflects our $3.1M 2020 EBITDA revision recognizing the tough external environment.
Product sales are known to be volatile about quarters under standard conditions. With COVID- 19, Pivot faced additional supply chain challenges that lead to delayed deliveries ($30M) and non-quantified deferrals such as one example where a delay in a minor component lead to the delay of a multi-million contract. Management is encouraged that supply chain issues have been largely addressed with manufacturing capabilities in some cases shifted to different regions. We remain cautious towards Q320 product sales while looking for continued double-digit y/y growth in Pivot Supplied Services throughout the year. On the quarter, product revenues amongst major clients declined $71.5M or 69.9% y/y to $31.9M while sales to non-major clients declined 15.8% to $298.9M. We note that the record Q219 quarter included a non-recurring $41M non-major customer contract.
Overall service revenues declined 2.1% y/y to $50.2M following a robust 16.3% y/y gain for Q120 with the higher margin Pivot provided services gained 12.1% y/y to reach $29.9M in contrast to the third party services revenue decline of 17.5% y/y to $20.3M. The strength in Pivot provided services was a clear highlight for the quarter given the COVID-19 headwinds and as noted, looking forward we expect solid double-digit y/y growth within the sub-segment. The higher margin PTG provided service revenues clearly moderated the gross profit and EBITDA declines.
The momentum behind Pivot provided services stands out during a quarter where the Company’s inability to access client locations and supply chain issues lead to deferred sales bookings and deliverables. While not yet able to disclose details or partners, the Company is bullish on its SmartEdge business services related to Intel amongst other clients. PTG announced during the quarter that it had partnered with OARO to deliver advanced digital identity and access management related deployment using OARO’s facial recognition, thermal imaging, artificial intelligence and blockchain identity management. The data intensity of these services creates significant opportunities for Pivot given its SmartEdge experience. The focus on edge service deployments received a boost as PTG was chosen as Intel’s (INTC-Nasdaq, NR) national Go-to-Market partner for the year.
Valuation: PTG is currently trading at an EV/2020 Sales, EV/2020 EBITDA, P/2020 E of 0.17x, 7.2x, and 9.5x, respectively, versus its comparables average of 0.73x, 11.5x, and 20.9x, respectively. We place significant value on its FCF yield where despite COVID-19 headwind PTG’ 2020 FCF yield is put at 25.4% (2021 29.1%) and its $0.16 dividend (yield 8.3%) represents ~20% of its cash from operations. We look for Pivot's continued growth into higher margin services to support positive revaluation considerations. As highlighted below, IT Service provider valuations are closely linked with profit and EBITDA margins. As we look for the migration, we continue to see PTG's dividend and FCF yields as key valuation drivers.
PT, Forecast Revisions: We moved our 2020 revenue/EBITDA from $1,601M/$37.1M to $1,456M/$34.0M awaiting confirmation of strengthening demand and deliverability given the impact of COVID-19 on customer access and supply availability. Consequently, we reduced our PT to $2.40/shr from $2.50/shr previously. We see continued strength in Pivot provided services, the potential for Intel related SmartEdge deployments and higher product sales as potential catalysts.
Pushing the Edge: Management discussed edge applications where COVID-19 is seen to drive demand for new data-intensive applications such as thermal cameras where we wait for announcements in the near future. We believe the focus on edge applications extends to working with Intel for Smart Edge deployments. We would expect announced pilots and/or deployments working with Intel to be a positive catalyst for the shares. The Company had previously highlighted the growth opportunities around SaaS, cybersecurity, AI, and cloud support. Acquisitions in these areas would have the potential to build service scale, bring reference accounts, strengthen sales reach, and thus further accelerate the move to service provisioning. With successful execution, these moves support positive revaluation considerations moving forward.
Results: PTG reported Q220 revenues of $332.1M (-27.8% y/y/-11.9% q/q) significantly underperforming compared to EWP estimates at $436M (-5.2% y/y/+15.7% q/q). Within the segments:
Product sales were reported at $281.9M (-30.7% y/y/-13.9% q/q) which was ~$100M below our estimates at $382.2M (-6.0% y/y/+16.7% q/q). The decrease can be attributed to the $71.5M y/y decline in contracts from major customers, a $41M non-recurring revenue from a non-major customer in Q219 and over $30M of revenue slipped from Q220 to Q320 with customer delays and product shipment delays related to COVID-19. The decline was partly softened by a favorable fx effect of $10.3M. Major customers in Q120 represented 10.0% of the revenue compared to 9.6% in Q120 and 22.8% in Q219. Notably, sales to non-major customers declined by 15.8% on the quarter to $298.9M from $355.2M while sales to major clients declined by 68.2% to $33.3M from $104.7M.
PT, Forecast Revisions: We moved our 2020 revenue/EBITDA from $1,601M/$37.1M to $1,456M/$34.0M awaiting confirmation of strengthening demand and deliverability given the impact of COVID-19 on customer access and supply availability. Consequently, we reduced our PT to $2.40/shr from $2.50/shr previously. We see continued strength in Pivot provided services, the potential for Intel related SmartEdge deployments and higher product sales as potential catalysts.
Pushing the Edge: Management discussed edge applications where COVID-19 is seen to drive demand for new data-intensive applications such as thermal cameras where we wait for announcements in the near future. We believe the focus on edge applications extends to working with Intel for Smart Edge deployments. We would expect announced pilots and/or deployments working with Intel to be a positive catalyst for the shares. The Company had previously highlighted the growth opportunities around SaaS, cybersecurity, AI, and cloud support. Acquisitions in these areas would have the potential to build service scale, bring reference accounts, strengthen sales reach, and thus further accelerate the move to service provisioning. With successful execution, these moves support positive revaluation considerations moving forward.
Results: PTG reported Q220 revenues of $332.1M (-27.8% y/y/-11.9% q/q) significantly underperforming compared to EWP estimates at $436M (-5.2% y/y/+15.7% q/q). Within the segments:
Product sales were reported at $281.9M (-30.7% y/y/-13.9% q/q) which was ~$100M below our estimates at $382.2M (-6.0% y/y/+16.7% q/q). The decrease can be attributed to the $71.5M y/y decline in contracts from major customers, a $41M non-recurring revenue from a non-major customer in Q219 and over $30M of revenue slipped from Q220 to Q320 with customer delays and product shipment delays related to COVID-19. The decline was partly softened by a favorable fx effect of $10.3M. Major customers in Q120 represented 10.0% of the revenue compared to 9.6% in Q120 and 22.8% in Q219. Notably, sales to non-major customers declined by 15.8% on the quarter to $298.9M from $355.2M while sales to major clients declined by 68.2% to $33.3M from $104.7M.
PT, Forecast Revisions: We moved our 2020 revenue/EBITDA from $1,601M/$37.1M to $1,456M/$34.0M awaiting confirmation of strengthening demand and deliverability given the impact of COVID-19 on customer access and supply availability. Consequently, we reduced our PT to $2.40/shr from $2.50/shr previously. We see continued strength in Pivot provided services, the potential for Intel related SmartEdge deployments and higher product sales as potential catalysts.
Pushing the Edge: Management discussed edge applications where COVID-19 is seen to drive demand for new data-intensive applications such as thermal cameras where we wait for announcements in the near future. We believe the focus on edge applications extends to working with Intel for Smart Edge deployments. We would expect announced pilots and/or deployments working with Intel to be a positive catalyst for the shares. The Company had previously highlighted the growth opportunities around SaaS, cybersecurity, AI, and cloud support. Acquisitions in these areas would have the potential to build service scale, bring reference accounts, strengthen sales reach, and thus further accelerate the move to service provisioning. With successful execution, these moves support positive revaluation considerations moving forward.
Results: PTG reported Q220 revenues of $332.1M (-27.8% y/y/-11.9% q/q) significantly underperforming compared to EWP estimates at $436M (-5.2% y/y/+15.7% q/q). Within the segments:
Product sales were reported at $281.9M (-30.7% y/y/-13.9% q/q) which was ~$100M below our estimates at $382.2M (-6.0% y/y/+16.7% q/q). The decrease can be attributed to the $71.5M y/y decline in contracts from major customers, a $41M non-recurring revenue from a non-major customer in Q219 and over $30M of revenue slipped from Q220 to Q320 with customer delays and product shipment delays related to COVID-19. The decline was partly softened by a favorable fx effect of $10.3M. Major customers in Q120 represented 10.0% of the revenue compared to 9.6% in Q120 and 22.8% in Q219. Notably, sales to non-major customers declined by 15.8% on the quarter to $298.9M from $355.2M while sales to major clients declined by 68.2% to $33.3M from $104.7M.
PT, Forecast Revisions: We moved our 2020 revenue/EBITDA from $1,601M/$37.1M to $1,456M/$34.0M awaiting confirmation of strengthening demand and deliverability given the impact of COVID-19 on customer access and supply availability. Consequently, we reduced our PT to $2.40/shr from $2.50/shr previously. We see continued strength in Pivot provided services, the potential for Intel related SmartEdge deployments and higher product sales as potential catalysts.
Pushing the Edge: Management discussed edge applications where COVID-19 is seen to drive demand for new data-intensive applications such as thermal cameras where we wait for announcements in the near future. We believe the focus on edge applications extends to working with Intel for Smart Edge deployments. We would expect announced pilots and/or deployments working with Intel to be a positive catalyst for the shares. The Company had previously highlighted the growth opportunities around SaaS, cybersecurity, AI, and cloud support. Acquisitions in these areas would have the potential to build service scale, bring reference accounts, strengthen sales reach, and thus further accelerate the move to service provisioning. With successful execution, these moves support positive revaluation considerations moving forward.
Results: PTG reported Q220 revenues of $332.1M (-27.8% y/y/-11.9% q/q) significantly underperforming compared to EWP estimates at $436M (-5.2% y/y/+15.7% q/q). Within the segments:
Product sales were reported at $281.9M (-30.7% y/y/-13.9% q/q) which was ~$100M below our estimates at $382.2M (-6.0% y/y/+16.7% q/q). The decrease can be attributed to the $71.5M y/y decline in contracts from major customers, a $41M non-recurring revenue from a non-major customer in Q219 and over $30M of revenue slipped from Q220 to Q320 with customer delays and product shipment delays related to COVID-19. The decline was partly softened by a favorable fx effect of $10.3M. Major customers in Q120 represented 10.0% of the revenue compared to 9.6% in Q120 and 22.8% in Q219. Notably, sales to non-major customers declined by 15.8% on the quarter to $298.9M from $355.2M while sales to major clients declined by 68.2% to $33.3M from $104.7M.
PT, Forecast Revisions: We moved our 2020 revenue/EBITDA from $1,601M/$37.1M to $1,456M/$34.0M awaiting confirmation of strengthening demand and deliverability given the impact of COVID-19 on customer access and supply availability. Consequently, we reduced our PT to $2.40/shr from $2.50/shr previously. We see continued strength in Pivot provided services, the potential for Intel related SmartEdge deployments and higher product sales as potential catalysts.
Pushing the Edge: Management discussed edge applications where COVID-19 is seen to drive demand for new data-intensive applications such as thermal cameras where we wait for announcements in the near future. We believe the focus on edge applications extends to working with Intel for Smart Edge deployments. We would expect announced pilots and/or deployments working with Intel to be a positive catalyst for the shares. The Company had previously highlighted the growth opportunities around SaaS, cybersecurity, AI, and cloud support. Acquisitions in these areas would have the potential to build service scale, bring reference accounts, strengthen sales reach, and thus further accelerate the move to service provisioning. With successful execution, these moves support positive revaluation considerations moving forward.
Results: PTG reported Q220 revenues of $332.1M (-27.8% y/y/-11.9% q/q) significantly underperforming compared to EWP estimates at $436M (-5.2% y/y/+15.7% q/q). Within the segments:
Product sales were reported at $281.9M (-30.7% y/y/-13.9% q/q) which was ~$100M below our estimates at $382.2M (-6.0% y/y/+16.7% q/q). The decrease can be attributed to the $71.5M y/y decline in contracts from major customers, a $41M non-recurring revenue from a non-major customer in Q219 and over $30M of revenue slipped from Q220 to Q320 with customer delays and product shipment delays related to COVID-19. The decline was partly softened by a favorable fx effect of $10.3M. Major customers in Q120 represented 10.0% of the revenue compared to 9.6% in Q120 and 22.8% in Q219. Notably, sales to non-major customers declined by 15.8% on the quarter to $298.9M from $355.2M while sales to major clients declined by 68.2% to $33.3M from $104.7M.