Avante Logixx Inc

XTSX:XX

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Avante Logixx Q4 Fiscal '21 Earnings Call. [Operator Instructions] This call is being recorded on Wednesday, July 21, 2021. I would now like to turn the conference over to management. Please go ahead.

[Stephen David Rotz, Chief Financial Officer]

Thank you. During today's conference call, management will be making forward-looking statements that constitute future-oriented financial information as such term is defined in securities regulations. Listeners to this call should read the company's forward-looking disclaimers contained with each of the filings related to this fiscal period. We have posted an Investor Relations presentation to our website. We encourage you to review this now at avantelogixx.com under the Shareholders tab. I will now turn the call over to Craig Campbell, CEO of Avante Logixx, Inc.

[Craig Bradley Campbell, CEO, CEO of Avante Security & Director]

Thank you, Steve. Good morning, everyone, and welcome fellow shareholders to the Avante Logixx's Q4 2021 Earnings Call. I am joined today by Steve Rotz, the company's Chief Financial Officer. Today, we report Avante's financial results for the fourth quarter ended March 31, 2021, and we will provide an update on our continuing focus on execution and our strategic priorities. I am very pleased to report our financial results for the fiscal year-end March 31, 2021. We delivered record revenues of $91.7 million, representing 84% growth and adjusted EBITDA of $6 million or $0.285 per share for the year. Year-over-year, our fourth quarter revenues increased 45% to reach $24.7 million. While top line growth is important, it is not as important as the improvements that we have made to our bottom line and cash flow generation. Adjusted EBITDA was $2 million during the fourth quarter. This represents a year-over-year improvement of $2.5 million and a sequential improvement of $400,000. Our resulting solid cash flows throughout fiscal 2021, combined with reduced funded debt levels, has led to a much stronger balance sheet and positions us well for the future. I am proud of our entire team that has contributed tremendously to such strong performance during these challenging times. Q4 and the full year once again shows the strength of our business, our strategy and the industry as we continue to execute. Consistent with my remarks over the last several quarters in which I provided some historical context that will underscore the importance of this year-end and fourth quarter outcome. In 2018, I laid out a clear vision forward for Avante with a goal to grow acquisitively as well as organically from a small regional boutique business into a national platform with scale. Today, our quarterly revenues are now in excess of the revenues during all of fiscal 2018, a year before I joined the company. Since 2018, we've completed 5 acquisitions. We have grown our revenue by a factor of 4x, and expanded the team to better manage scale while transforming the company's systems and infrastructure. Our investments in people, process and technology over the last 3 years were absolutely fundamental to laying the foundation for today's results and for the future quarters to come. Once again, this quarter reveals the fruits of our labor. I believe strongly that the foundation is in place to continue executing on our vision of becoming a much larger, well-diversified business that owns best-in-class security businesses, delivering long-term value and sustainable competitive advantage. We are focused on building long-term value by investing in this growing, fragmented but ever important industry that consistently proves its resiliency. We are doing that by owning and managing great businesses with empowered and aligned teams of owners, and we are doing it with a long-term vision and disciplined views on capital. Through the year, we had total revenue growth of 84%. We delivered organic growth of 50% after adjusting the prior year for 12 months of ASAP. As we communicated before, even without acquisitions, our team is focused on continuing to deliver impressive organic growth. We have great people and great teams in place. We continue to operate our business with a continuous improvement approach, driving cost out while enhancing our customers' experience, and we are confident that we will deliver improving results in coming quarters. I'd like to remind you that direct operating expenses includes our pursuit cost. Such costs include our executive team, corporate development function and public company costs. These expenditures have remained flat. And at this scale, we are appropriately sized to absorb such costs in pursuit of larger market opportunities. However, we remain confident that as we execute on our organic growth, these costs are fixed, and each dollar of organic growth will continue to improve and impact the company's earnings in a positive manner. Our portfolio is exceptionally strong, backed by exceptional brands and a solid base of recurring and contractual revenues from high-quality customers. This has been improving through our resiliency during the COVID-19 pandemic, and as demonstrated by our financial results achieved during fiscal '21. Lastly, I want to remind you that our named executive officers and directors collectively own 16.6% of all of the shares outstanding, and this includes the share purchases that we made during fiscal 2021 by members of management and our Board. That is to say, we have alignment with all of you as shareholders. In future quarters to follow, you can expect continued and focused execution around strategic priorities of our XX 2.0 plan. Recently, our focus has been weighted on 2 prongs of our strategy that was build and generate cash. We are always receptive to acquisitions that are accretive to shareholders and that further our long-term strategy. We will continue to be patient and wait for such transactions that make sense to all parties. I will now turn the presentation over to Steve Rotz to discuss our Q4 and fiscal '21 financial performance. Steve?

[Stephen David Rotz, Chief Financial Officer]

Thank you, Craig, and good morning, fellow shareholders. Year-end financial statements and MD&A are filed on SEDAR. A reminder that our fiscal year-end is March 31. We operate through 2 platforms, consisting of Logixx Security and Avante Security. Logixx Security serves enterprise customers across Canada. While Avante Security services ultrahigh net worth families in Toronto and Mascota. A good portion of year-over-year comparisons prior to Q4 are explained by the December 2019 ASAP acquisition. So I'll focus my remarks related to Logixx Security on Q4 sequential comparisons versus Q3 and Q4's year-over-year performance. Avante Security does not have acquisition-related impacts. I will refer to prior quarterly performance in context of continuing operations. That is without Citywide, which we sold on September 30, 2020. Let's begin with a few key financial highlights for Q4. Cash flow from operations before working capital was $1.8 million during Q4 and $4.9 million during the full fiscal year period. Organic revenue growth was strong within Logixx Security business on a year-over-year basis, and Avante Security enjoyed sequential and year-over-year growth during Q4. Direct OpEx decreased during Q4 versus Q3 and continued its positive trend versus revenue. Adjusted EBITDA was $2 million during Q4, a positive swing of $2.5 million versus last year's Q4 and $0.4 million on sequential improvement during -- versus Q3. We reduced senior funded debt during the fourth quarter by $0.9 million and by $2.4 million since the prior year-end. Adjusted EBITDA during fiscal 2021 was $6 million, a significant improvement over fiscal 2020 and highly supportive of our $6.9 million in senior funded debt. The quality of our balance sheet has improved over the last 12 months, and I'll speak to this later in my remarks. Turning first to the income statement. Total revenue during Q4 was $24.7 million versus $25.2 million in Q3. The sequential decline is largely explained by 2 fewer business days, and January representing a slower time for our retail customers versus the holiday buildup during Q3 ending December 31. Compared to last year, Q4's revenue was stronger by 45%. Within Note 6 of the financial statements, we disclosed revenue split by service type within each division. From this, you can see why our gross margins evolve quarter-to-quarter, depending on the relative concentration of the different business units and services. Similar to Q2 and Q3, the fourth quarter benefited from COVID-19 specials that offset a reduction of regular revenues. However, in a COVID-free world, we anticipate that those regular revenues will return and some so-called COVID specials might remain. Our largest platform is Logixx Security, representing 81% of consolidated Q4 revenue. Logixx Security saw reduced sequential revenues during Q4 by 4.1% or $0.9 million. While it benefited from additional work from existing and new customers, Logixx Security revenues are driven by hourly billings, and there were 2 fewer days during Q4 versus Q3. Logixx Security's year-over-year revenue growth was 50% during Q4, reflecting organic growth in COVID-19 specials. Avante Security represented 19% of consolidated revenue. Its revenues grew on a sequential and year-over-year basis. In the MD&A, we provide additional disclosure of our revenue layers by summarizing recurring monthly revenues and contractual recurring revenues. The total of these were $17 million during Q4 versus $17.2 million during Q3. This decline mainly relates to having 2 fewer business days -- 2 fewer days in Q4 versus Q3. Compared to a year ago, Q4 recurring revenue increased by $325,000 or 15.8%. Further, contractual revenues grew by $2.1 million or 16.3% during Q4 versus last year. We are focused on continued compounding of both recurring and contractual revenues over the coming quarters and years. Blended gross margins were stable and in line with expectations. Our blended gross margin was 21.7% during Q4. During Q1, our plans to implement higher-margin services within both Logixx Security and Avante Security were negatively impacted by COVID-19. Customers were not willing to allow our technicians into buildings to install new equipment. During late Q1 and into Q2, we saw technology implementation orders, and these began to be implemented during Q2. As Q3 came to close, we had similar lockdown conditions in parts of the country that stalled installation of technology. During Q4, regular electronic service revenues were less than we would like within Logixx Security as COVID-19 conditions delayed customer decision-making. However, we began to see traction in these types of revenues during late June to early July of this fiscal year, particularly within the Logixx Security segment. Such installations are important to our long-term strategy of increasing gross margin dollars during implementation and RMR dollars after installation. In terms of direct operating expenses, we saw a reduction in total expense during Q4 versus Q3. Recall that we recorded a restructuring charge of $0.8 million at the end of Q4 of fiscal 2020. This contributed to improved OpEx throughout fiscal 2021. Lastly, declining direct operating expenses combined with growth in revenues, resulted in direct OpEx as a percent of revenue declining to 14.3% during Q4 versus 15.4% in Q3 and 20.8% during last year's fourth quarter. Looking all the way back to Q1 of fiscal 2020, the percentage was 27.7%. This explains why adjusted EBITDA is showing significant year-over-year improvement as growing revenue and related gross margins are falling to the bottom line. As we entered into our new fiscal year, we did see some noncontrollable cost increase pressures due to insurance premiums and audit fees, but we remain committed to holding a line on other operating expenses. Lower operating expenses led to improved earnings on a sequential basis. Adjusted EBITDA during Q4 was $2 million versus Q3 of $1.6 million, an improvement of $0.4 million. Q4 also benefited from an FX gain of $0.2 million versus an immaterial loss of $2,000 for the entire year. Compared to the prior year's Q4 loss of $0.5 million, we showed a $2.5 million year-over-year improvement of adjusted EBITDA during Q4. Most importantly, the company continued to generate positive cash, cash flow from operations before working capital of $1.8 million during the fourth quarter. This represents 4 straight quarters of positive cash flow from operations with $4.9 million generated over the entire year or 81% of our reported adjusted EBITDA. Now looking at the balance sheet. Accounts receivable is an area of focus in our industry. We experienced an uptick in revenues during late Q1 through to the end of Q3, leading to increased AR. However, shown in Note 7 of the financial statements, the aging profile trade receivables showed improvement during the year. Much of this improvement occurred during Q3. Our DSO improved at the end of this year versus last year from 84 days down to 66 days. We want to improve this metric further. We remain focused on customer collections and remain confident in the high-quality of our receivables. Now looking at the company's financing arrangements. Senior funded debt includes bank debt, vehicle loans and a note due to the vendors of ASAP. The total was $6.9 million as of this year-end versus $7.8 million at December 31 and $9.2 million as at March 31, 2020. That is we reduce year funded debt during the most recent quarter by $0.9 million and by $2.4 million over the full year of fiscal 2021. This was due to cash flow from operations. In addition, the sale of Citywide provided cash proceeds on the sale and some debt assumed by the purchasers of Citywide. Senior funded debt of $6.9 million is small in context of accounts of trade accounts receivable of $18 million, inventory of $1.6 million and our annual cash flows from operations. We remain in full compliance with financial covenants of our former and new banking arrangements. 18 months ago, we issued $8.26 million of subordinated convertible debentures. These notes have an interest rate of 7%, a maturity date of November 27, 2024. And a conversion right to common shares for the holder at $1.56 per share. On the balance sheet, the total liability is reported under IFRS as $8.62 million. That is the IFRS reported liability now exceeds the actual liability by $358,000. The difference between IFRS and the face value will merge as maturity date approaches. But the quarterly fluctuations under IFRS can be very wide every quarter. This quarter's IFRS loss on the debentures was $169,000 and $2.1 million over the entire year. Within adjusted EBITDA, we smooth out the quarterly mark-to-market as a related conversion rate that we are required to include income statement for IFRS purposes. The quarterly hypothetical loss or gain is reflected within reported EBITDA each quarter, which is why we focus on adjusted EBITDA to measure quarterly financial performance. At the end of Q4, we were in compliance with the financial covenants in respect to this debenture. During fiscal 2021, amortization expense related to intangible assets was $3.6 million. $2.7 million of this IFRS expense related to trade name intangibles, which are now fully amortized as of March 2021. Therefore, in fiscal 2021 -- '22, we will see much reduced intangible loss amortization expense, leading to favorable comparisons to fiscal 2021 within the calculation of reported IFRS net income. In summary, fiscal 2021 was a successful year, reflecting the benefits of prior year investments in scale, people, processes and technologies. Since the prior year-end, Avante has a much improved balance sheet with lower debt, reduced intangible assets, improved AR aging and solid liquidity. Fiscal 2021, reporting now includes segmented earnings and service-type revenue disclosures to provide enhanced insight into our financial performance. Cash flow was strong through fiscal 2021 as well as adjusted EBITDA and both metrics were much improved versus the prior year. Senior funded debt reduced during 2021 in both dollar terms and in comparison to adjusted EBITDA on our cash flow. During fiscal 2021, we sold an asset that we deem to be on core at a fair price. This simplified our corporate and operational structures. Avante has recurring revenues and contractual revenue streams, and management is committed to growing both of these. Finally, as of June 30, Avante has more flexible and expanded credit facilities available to the company. The plumbing is now in place to fund our organic and strategic growth objectives. I will now turn the call back to Craig.

[Craig Bradley Campbell, CEO, CEO of Avante Security & Director]

Thanks, Steve. We are extremely well positioned to navigate these kinds of volatility. We know that we will have some temporary revenue impacts due to COVID, and we will benefit from some temporary opportunities. Over the year, we grew revenue, generated earnings including record adjusted EBITDA per share, converted those earnings into cash and reduce debt. I'm proud of the team and look forward to the next fiscal year and continued success as we execute on our strategy. We have a resilient business and a resilient industry. This, coupled with an amazing and dedicated team leaves no doubt in my mind that we will continue to demonstrate strong performance over both the short and long term. We will be back to you in the next 30 days to update you on our Q1 fiscal '22 results, and I want to thank and acknowledge the thousands of team members on the front line and in the back office that continue to work tirelessly in delivering our customers their security and piece of mind. In closing, we remain confident in the momentum and resiliency of our business. And this concludes our formal remarks. Operator, Steve and I would be pleased to address any questions at this time.

[Operator]

[Operator Instructions] Your first question comes from Doug Taylor with Canaccord.

[Douglas Taylor, Director]

Congratulations on yet another strong quarter of profitability. A couple of questions for me. The first one, just generally related to the revenue growth expectations. I think the sequential decline in RMR and contractual revenue, I think you usually explained with the fewer days and the retail seasonality. You did have some constructive things to say about the sales and installed pipeline going forward. And there are puts and takes related to reopening. And so my question a long worded, I guess, is as we try to take all this into account, whether the current expectation for 10% organic growth for the Street for next year in terms of top line growth is reasonable? Or conservative? Or perhaps put another way, what you would consider success in terms of organic growth in the year ahead?

[Craig Bradley Campbell, CEO, CEO of Avante Security & Director]

Thanks, Doug. I think I simply -- I would say that we remain confident on where the puts and takes are going to take us. I don't think there would be any reason for me to message anything different than, to your point, that sort of double-digit organic growth remains our target. It remains our expectation. And we -- again, we see things in September starting to come around. We do believe there's some pent-up demand on the systems and technology side of things. So that said, some things are opening faster. Some things are coming online slower. Decisions to put people back in offices remains a moving target. But all of that said, the overall industry and based on our performance of last year in much more uncertain times, I don't think there's any reason for you to -- or for the Street to change their thinking about our ability to deliver strong organic growth.

[Douglas Taylor, Director]

That's very helpful. You mentioned being patient with respect to M&A. But you've got now an expanded and more flexible credit facility. Obviously, the balance sheet is in better shape. And I think we can see from the outside the benefits of what you've been able to assemble to date. So I guess I'll ask whether your appetite for further M&A is increasing with time here and/or what you might be looking for in terms of either your own currency, in terms of your share price or valuations or things like that or just time before pulling the trigger on beginning to resume your M&A program.

[Craig Bradley Campbell, CEO, CEO of Avante Security & Director]

Yes, Doug, I think the key message is, number one, with or without acquisitions, we have a very, very strong business and platform to continue to grow from organically. We remain disciplined capital allocators. And I think the Board unanimously -- we are open. We would like to layer in acquisitions that are accretive. And we remain on the hunt and sort of actively monitoring a number of situations. We'd love to execute a couple of tuck-ins that would be both highly synergistic and strategic to our national platform. And all I can say is that when we do announce something, I hope that it will be seen as accretive and strategic and good for the long term.

[Douglas Taylor, Director]

Okay. Last question for me. I mean you mentioned expectations of a pretty high contribution margin on the future growth -- organic growth, suggesting a relatively flat operating expense base aside from those higher insurance costs. Steve, perhaps, could you help us by quantifying what some of those increased? I think it was insurance and other related costs going into the end of Q1 and into this fiscal year so that we can better model that?

[Stephen David Rotz, Chief Financial Officer]

Yes. I think the best way to look at it is look at the average direct OpEx over the last several quarters and use that as a good basis. We are seeing higher premiums in insurance, I guess, all our competitors are. So it doesn't really bother me too much. But we'll see that higher increase there, but we are working hard on all our other OpEx to mitigate that and doing a good job. So I'm not -- I think in materiality sense, it's probably not that significant in relation to the gross margins that we're putting up.

[Operator]

Your next question comes from Nick Corcoran with Acumen Capital.

[Nick Corcoran, Equity Research Analyst]

Congrats on a solid quarter. Just the first question for me, we're probably through fiscal '22. Can you give any indication of what you saw in the first quarter?

[Craig Bradley Campbell, CEO, CEO of Avante Security & Director]

Sorry, Nick, could I just ask you to ask that again?

[Nick Corcoran, Equity Research Analyst]

Yes. You're probably through fiscal '22. And I was just wondering if you can give any indication of what you saw in the first quarter.

[Craig Bradley Campbell, CEO, CEO of Avante Security & Director]

We would be out in 30 days, but I would suggest to you that business as usual. No wild swings either way, and the business continues to perform very well under current market conditions.

[Nick Corcoran, Equity Research Analyst]

Great. And then with restrictions easing across the country, have you seen any change in your customer behavior, either in Avante or in Logixx?

[Craig Bradley Campbell, CEO, CEO of Avante Security & Director]

I don't think we're seeing any changes in customer behavior other than the previously mentioned, we continue to feel the, I'll call it, the pressure of customers deferring decision-making. So that's on a number of sort of high probability prospects that we have in our pipeline vis-à-vis contract wins. We've been frustrated that a couple of them have just not made the decision or they've deferred the decision for some period of time. So that's really the biggest sort of frustration of customer behavior. But we expect that as people are returning to offices and getting back to work that we're going to see some of those things accelerate this fiscal year.

[Nick Corcoran, Equity Research Analyst]

Great. And this is probably a question for Steve. I'm just wondering how we should think about your maintenance CapEx going forward?

[Stephen David Rotz, Chief Financial Officer]

Yes. Last year was inflated by a couple of things. We completely rebuilt our control center in Toronto. And we had to rebrand all our former acquisition uniforms into the new brand, and that resulted in a lot of uniform expenditures. So I would see last year as abnormally han. I think if you model somewhere in the $200,000 to $400,000 range, you're probably -- it's okay. It's not a bad forecast. And again, it's not hugely material to our business.

[Operator]

There are no further questions at this time. You may proceed.

[Craig Bradley Campbell, CEO, CEO of Avante Security & Director]

Great. Well, thank you to all those who joined the call. We look forward to being back to you in 30-odd days, and we look forward to continued conversation and continued reporting of positive momentum. I wish everybody a happy safe summer, and we'll speak to you shortly.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.