Pivot Technology Solutions Reports First Quarter 2014 Results

Company reports strong revenue growth

CARLSBAD, CA, May 30, 2014 /CNW/ - Pivot Technology Solutions, Inc. ("Pivot" or the "Company") (TSXV: PTG), today publishes its results for the first quarter ended March 31, 2014.

Financial highlights Q1 2014

• Revenues of $319.3 million, up 25.6% compared to Q1 2013, driven by new accounts, growth of the Company's services business and further penetration of existing accounts.
• Product revenues up 22.0% to $283.7 million compared to Q1 2013.
• Service revenues up 78.0% to $33.5 million, compared to Q1 2013.
• Gross profit up $5.6 million, or 18.7%, to $35.5 million from the same period in the prior year, representing 11.1% gross margin, down from 11.8% for Q1 2013, due to lower gross margin on product sales.
• Adjusted EBITDA* came in at $6.2 million, up 82.0% from $3.4 million for the same period last year.
• Strong performance at ARC and Sigma and revised estimates relating to the amount of contingent consideration payments relating thereto, resulted in a $3.8 million charge against change in fair value of liabilities.  The charge resulted in a consolidated net loss for the period of $1.0 million, as compared to a net loss of $4.8 million for Q1 2013.
• Interest expense was reduced by $1.2 million from Q1 2013, resulting from the conversion of debentures into Series A Preferred Shares.
• Series A Preferred Share dividends of $0.7 million were declared during Q1 2014.
• On May 7, 2014, the Company reached an agreement with the former owners of Sigma, fixing the undiscounted value of the remaining contingent consideration at $7.5 million.
• Adjusted for changes in non-cash working capital balances, the Company generated $4.2 million in cash from operating activities, as compared to $0.0 (nil) million for the same period last year.

Management commentary

Warren Barnes, CEO of Pivot, commented, "We are pleased with our performance this past quarter. Even though Q1 of last year was a relatively soft comparable, the fact that we achieved nearly 42% organic growth beyond our two largest customers is an indicator of positive momentum in the business. Even more importantly, we are pleased to have recorded Q1 revenues and adjusted EBITDA at levels exceeding our own internal expectations. In addition to continued strength in our services business, we also saw a substantial contribution to growth from product sales. In general, we made good progress with adding new accounts, as well as growing revenues from existing accounts across the entire business."

Kerri Brass, CFO of Pivot, added, "While we saw growth in gross profit in absolute terms from Q1 2013, the contribution from higher-volume, lower-margin product sales more than offset gains from our higher margin services business, resulting in a lower consolidated gross margin for the quarter.  We saw significant (82%) growth in adjusted EBITDA*, which in part is a reflection of the relatively soft prior year comparable.  The particularly strong performance at ARC and Sigma resulted in a charge against the change in fair value of liabilities related to these operating companies.  Although negatively affecting our bottom line this quarter, this charge actually reflects an upwards revision in our estimates of these businesses' future performance."

Mr. Barnes continued, "We believe that our current positive performance is the result of the diligent execution of our MVSP strategy.  This has resulted in a strengthening brand and growing market recognition.  Vendors, for instance, increasingly regard Pivot as a meaningful partner representing critical new sales channels.  This was recognized by Cisco, among others, who awarded us with the South Area Commercial Partner of the Year accolade for the second year running."

He concluded, "Internally we will continue to roll out our integration efforts. This includes a growing conversion of cross-selling opportunities for both products and services. More than most of our other integration efforts, cross-selling is a matter of momentum. We are really only beginning to scratch the surface of our potential."

Q1 2014 Financial Review

Revenues came in at $319.3 million, up 25.6%, or $65.0 million, from Q1 2013.  Q1 2013 revenues were relatively soft due to lower revenue from a major customer, as reported on extensively throughout 2013.  Over the past year, Pivot has put considerable effort into mapping new products to this customer, and Q1 2014 revenues from this customer that had previously transitioned to a technology platform for which Pivot was not the designated supplier were $15.4 million above those for Q1 2013.  Excluding the Company's two largest customers, Pivot achieved organic growth of 41.9% compared to Q1 2013.  Revenue growth was driven both by an increase in product sales (up 22.0% vs. Q1 2013) and continued growth of the Company's services business (up 78.0% vs. Q1 2013).  Revenues were down 5.5%, or $18.7 million, from Q4 2013, consistent with historical seasonal patterns for Q4 versus Q1.

Gross profit of $35.5 million was up 18.7%, or $5.6 million, from Q1 2013.  Compared to Q4 2013, gross profit was down 2.4%, or $0.9 million.  Both year-over-year and sequential changes in gross profit were consistent with revenue movements.

Gross margin for the quarter came in at 11.1%, down from 11.8% for Q1 2013, attributable mainly to lower overall margins on product sales due to customer mix, and partially offset by growth of the Company's higher-margin services business.  Gross profit was up marginally from 10.8% for Q4 2013.

The Company recorded adjusted EBITDA* for Q1 2014 of $6.2 million, up 82.0%, or $2.8 million, from the same quarter last year, and down 19.6%, or $1.5 million from Q4 2013. Changes in adjusted EBITDA* were in line with movements in business activity, as reflected in gross profit, as well as the result of our ability to leverage the Company's operational cost base.

Selling and administrative expenses for Q1 2014 increased by $2.8 million, or 10.5% to $29.3 million, as compared to Q1 2013, attributable mainly to a 3% increase in headcount, lower marketing development funds, and increased commissions attributable to increases in gross profit.

Interest expense of $1.3 million was down $1.2 million from the same period in the prior year as a result of the conversion of the debentures into Series A Preferred Shares at the end of Q1 2013. Compared to Q4 2013, which included charges of $1.9 million relating to the termination of the Wells Fargo borrowing agreement, interest expense was down $2.3 million.

On May 7, 2014, the Company reached an agreement with the former owners of Sigma, amending the asset purchase agreement such that the undiscounted value of the remaining earn-out consideration is fixed at $7.5 million, of which $3.5 million is to be paid by October 31, 2014, and the balance by October 31, 2015.

Series A Preferred Share dividends of $0.7 million were declared during Q1 2014, reflecting a fixed cumulative preferential dividend at the rate of 6% per annum.

Adjusted for changes in non-cash working capital balances, the Company generated $4.2 million in cash from operating activities, as compared to $0.0 (nil) million for the same period last year.  As at March 31, 2014, total cash on hand was $9.6 million, down from $22.0 million for December 31, 2013. The decrease was related mainly to movements in working capital.

Normal fluctuations in revenue performance, which are common place in the industry, drive significant movements in working capital, in particular with regards to accounts receivable, inventory and accounts payable. As such, movements in working capital balances are largely volume related, however, the Company focuses on driving improvement in its business processes to optimize the use of its secured borrowing facilities and effectively manage working capital.

Under the terms of the working capital facility with PNC Bank, the Company is subject to certain restrictive covenants.  As at March 31, 2014, the Company's senior leverage ratio exceeded the maximum senior leverage ratio allowed per the terms of the credit agreement, due to increased borrowing requirements to meet working capital demands related to the volume of business activity at that time.  The Company obtained a waiver from this covenant from PNC in May 2014.  As this was subsequent to the balance sheet date, the entire outstanding senior credit facility balance is reflected as payable upon demand, as a current liability, in the statement of financial position at March 31, 2014.

Conference Call

Management will host a conference call on May 30, 2014 at 11:00 am ET.

Subsequently, a recording of the call will be posted on the Company's website: www.pivotts.com.

About Pivot Technology Solutions, Inc.
Together with its portfolio companies and partners, Pivot delivers solutions that enable organizations to design, build, implement and maintain computing and communication infrastructure that addresses their unique business needs. Pivot's approach supports improvement of business performance, helps organizations reduce capital and operating expenses, and accelerates the delivery of new products and services to end-customers. With over 2,000 customers, many of whom are Fortune 1000 companies, Pivot extends its value added solutions to help organizations of all sizes improve operating efficiency, reduce complexity and enhance service delivery through virtualization and cloud computing. Pivot enables businesses to extend their enterprise through mobility solutions to better connect business partners and customers. Pivot has offices throughout North America and can be found online at www.pivotts.com.

Forward Looking Statement
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 Pivot's future growth, new opportunities, improving results and the assumptions underlying any of the foregoing. Pivot uses words such as "may", "would", "could", "will", "likely", "expect", "believe", "intend" 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, including the assumption that opportunities identified by Pivot may lead to revenue and income growth, that Pivot will be able to continue to realize synergies through the implementation of its integration efforts,  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; delays in the purchasing decisions of Pivot's customers; the competition Pivot faces in its industry and/or marketplace; the possibility of technical, logistical or planning issues in connection with the deployment of Pivot's products or services; and the possibility that Pivot will be unable to capitalize on opportunities it has identified in the manner and timeframe anticipated.  The "forward-looking statements" contained herein speak only as of the date of this press 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.

Pivot Technology Solutions

SELECTED FINANCIAL INFORMATION

Full financial statements and related Management Discussion and Analysis can be found on SEDAR and the Company's website www.pivotts.com

All figures are in US $ '000s, except Gross margin (in % of total revenue).

*Non-IFRS Financial Measures
The Company internally measures its performance and results of initiatives through a number of measures that are not recognized under IFRS and may not be comparable to similar measures used by other companies.

Adjusted EBITDA
In the Company's financial reporting, adjusted EBITDA is a non-IFRS measure which is defined as gross profit less selling and administrative expenses, and corresponds to income before depreciation and amortization, transaction costs, interest expense, change in fair value of liabilities and other (income) expense. Management believes this is an important indicator as adjusted EBITDA excludes items that are either non-cash expenses, items that cannot be influenced by management in the short term, and items that do not impact core operating performance, demonstrating the Company's ability to generate liquidity through operating cash flow to fund working capital needs, service outstanding debt and fund future capital expenditures.  Adjusted EBITDA is also used by investors and analysts for the purposes of valuing an issuer.  The intent of adjusted EBITDA is to provide additional useful information to investors and analysts and is also used by management as an internal performance measurement.  Adjusted EBITDA is not a recognized measure under IFRS, has no standardized meaning and is therefore unlikely to be comparable to similar measures used by other companies.  Readers are cautioned that this term should not be construed as an alternative to net income determined in accordance with IFRS.

The following provides a reconciliation of adjusted EBITDA to income before income taxes: 

SOURCE Pivot Technology Solutions, Inc.