NTG Clarity Networks Inc. (NCI.NE) Earnings Call Transcript & Summary

Good morning, and welcome to NTG Clarity's Q3 2025 Earnings Conference Call. My name is Ali Farouk, analyst at NTG Clarity. On the agenda for today's call, we'll start with management's prepared remarks on our financial and operating results for the 3 months and 9 months ending September 30, 2025. We'll then have a Q&A period answering questions from covering analysts and investors. Note that the full published report with audited financial statements, notes and management discussion is available on SEDAR and our website at www.ntgclarity.com. This presentation aims to highlight and summarize the key information already reported there. We will be posting both the slides and a recording of the presentation on our website following the call. So make sure to subscribe to our mailing lists on our Investor page on our website to get notified when those are available. If you have a question that doesn't get answered, please reach out to [email protected], and we will get you an answer after the call. With that said, I'll be welcoming management for remarks shortly. But first, I'll start with a quick disclaimer. Certain statements in this presentation other than statements of historical fact are forward-looking information that involves various risks and uncertainties. Such statements relating to, among other things, the prospects for the company to enhance operating results are necessarily subject to risks and uncertainties, some of which are significant in scope and nature. These uncertainties may cause actual results to differ from information contained herein. There can be no assurance that such statements will prove to be accurate. Actual results and future events could differ materially from those anticipated in such statements. These are -- all subsequent written and oral forward-looking statements are based on the estimates and opinions of the management on the dates they are made and expressly qualified in their entirety by this notice. The company assumes no obligation to update forward-looking statements should circumstances or management's estimates or opinions change. In this presentation, we will also make reference to non-IFRS or non-GAAP financial measures that management believes are useful supplemental measures but not alternative to net income and operating cash flow. Please see non-IFRS measures section towards the end of this presentation, our press release and our MD&A for details and reconciliation of non-IFRS measures to IFRS measures. With that, I'd like to invite Adam Zaghloul, Vice President, Strategy and Planning, to begin his remarks.

All right. Thank you very much, Ali, and thank you to everybody who is tuning into our Q3 2025 earnings conference call. I'm coming to you live from NTG's office in Riyadh, Saudi Arabia to really give an update on what we see as another strong quarter of growth. Q3 marked 18 consecutive quarters of last 12 months revenue growth. Our rolling 12-month -- last 12-month revenue reached $77 million. So we're definitely well on our way to meeting our full year guidance of about $78 million. But what comes with this 18-month track record is reflected -- or at least a reflection of our reputation and sustained demand for digital transformation really across Saudi Arabia and all of our Gulf markets that we serve as well. So I think that the growth that we've seen this quarter and really over the last 18 quarters really demonstrates our client relationships and the importance that our clients put on the work that NTG does for them or the work that NTG's resources does for them as well. I also want to just say a big thank you to the whole NTG team. 18 consecutive quarters of last 12 months revenue growth is a great achievement, and it wouldn't have been possible without all the hard work that people at Egypt, people here in Riyadh, everybody in all of NTG's offices is contributing to. So my hats off to the NTG team as well. Over the course of the year-to-date, we have been trying to stay focused on what we see as 3 key strategic priorities. And we really have been executing on all of them successfully, especially this quarter and year-to-date as well. But the first one is to continue to, I would say, solidify ourselves as a trusted partner in digital transformation for some of our existing customers and expand our engagements with them. And that's been showcased in really the amount of customers that we're working with that have increased their engagements with us. So far year-to-date, 63% of our customers have actually increased the scope of their engagement. They've been giving us more work. They've been trusting us and the quality of services that we've been providing, and we're very eager to grow with them for sure. The second key priority is to expand our customer base. It's to win new customers. A lot of the times, that's through referrals and word of mouth from existing satisfied customers. But so far, this quarter compared to last quarter, as in Q3 2024, we saw a 10% increase in the absolute number of accounts that we're servicing. Now, I'd caveat by saying that these accounts don't meet the $100,000 per year threshold that we use to consider accounts, clients in our metrics or customers in our metrics, but they are important first steps in getting those early-stage engagements going, even if they're smaller scale, to be able to scale them to the level that some of our other customers have scaled to. So we're really excited to be onboarding new customers. An example of a new account is, this quarter in Q3, back in September, we signed a 3-year frame agreement with a brand-new customer to provide digital transformation services. And it's noteworthy because it's probably the first time that a new customer has been comfortable signing a 3-year engagement. It really goes to show just how our reputation precedes us in the market and how a lot of customers are eager to work with NTG. The third focus of the year is going to be really driving an increase in business to our NTGapps proprietary software line of business. And of course, what comes with that is, yes, some great new revenue growth, but also potential margin expansion for higher-margin software activities. So far, for the Q3 2025, we saw an over 650% year-over-year increase in revenue, and that brings the year-to-date increase in NTGapps revenue specifically to 562%. So we're really excited to see the NTGapps line continue to be attractive to a lot of our customers. So really, definitely, what's been the case in Q3 is, we've made evident a lot of our work towards a multiyear strategy to diversify our revenue base sort of beyond Saudi Arabia, while also scaling up our ability and our -- our ability to deliver our delivery infrastructure to support the growth really across the entire Gulf region. Now, our Egypt-based delivery model is something that we see as equally applicable to other countries in the Gulf outside of Saudi Arabia. And some of these other countries in the Gulf are pursuing digital transformation strategies for their economy just like Saudi Arabia is. I can give a couple of examples. The UAE has what they're [ billing ] as We the UAE 2031. A big part of that is economic diversification and focus on technology. Iraq as well, where we're already doing some business, has what they're [ billing ] as their national development plan for 2024 through 2028. And they explicitly state that their goal is to digitize services and leverage technology to increase productivity in sectors like manufacturing and agriculture and really industry as a whole. So there are huge market tailwinds supported by the government into digital transformation. So to capitalize on these, in Q3, we established an office in Baghdad, Iraq and a legal entity. It complements our existing presence in the north of Iraq in Sulaymaniyah. But this expansion positions us to capitalize on the excelling digital transformation in Iraq's government sector, telecommunications and finance sectors as well in Baghdad as well. In the UAE, we also established a corporate entity in Dubai to pursue some opportunities with some organizations in Dubai and Abu Dhabi. We're working on proof of concepts, specifically using our AI technology around testing automation and AI-based testing as well, which we're really excited about. Just at a more high level, over the quarter, we've also expanded our brands' reach by attending some regional technology conferences. These include ITEX in Baghdad, Iraq, GITEX in Dubai and the Global Health Exhibition in Riyadh. So we're really focused on strengthening our brand awareness and recognition across all of these markets that we're targeting. In the quarter, the rest of Middle East revenue that we see here, so that's revenue coming from outside of Saudi Arabia, grew 50% year-over-year, a little bit faster than the company as a whole, representing approximately $900,000 for the quarter. And it's still a relatively small contributor, just under 5% of our total revenue, but it's encouraging to see this sort of promising early traction from this side of things. So that's the sales side. On the delivery side, we're also expanding the scale of our Egypt offshore center. Through expansions throughout the quarter, it brought us to 9 total floors of office space across 4 different locations in Cairo. So we definitely are expanding our footprint in Cairo for sure, and in Egypt. But we're also starting to think about other places where it starts to make sense to have a delivery center as well. In Q3, we opened an office and began hiring some resources out of Medina, Saudi Arabia, on the West Coast there. And the idea behind this is Saudi's Vision 2030 is part focused on digitizing every aspect of its economy, right, and driving economic diversification. But a key pillar is going to be employing, training, educating Saudi locals to be able to fill these technical roles. So you'll actually be able to find a lot of benefits and subsidies in hiring Saudi nationals. And we're intending to use our Medina office as a sort of pilot operation for a Medina nearshore office. So we're hiring Saudi nationals, giving them the training, benefiting from the sort of government benefits. And through those benefits, we're able to maintain cost effectiveness and cost competitiveness as well. So looking forward to sharing some further updates in the future about expanding our delivery center as well. But overall, I would say these investments in both the sales side and the delivery side are pretty deliberate in our long-term growth strategy. We want to reduce geographic concentration, take advantage of all of the tailwinds in the region and really expand our addressable market to maintain our status as the sort of Middle Eastern digital transformation pure play. So I'll start talking about the financials. So revenue for the quarter came in at $20.9 million, which is a 42% year-over-year increase. Revenue growth was definitely led by our really increasingly popular offshore services, which came in at an 82% year-over-year growth, as well as the NTGapps growth that I mentioned before, year-over-year, up 685% for the quarter. Now, we're pretty happy with these trends for sure, trending towards our higher-margin lines of business, especially NTGapps, which now makes up 13% of year-to-date revenue compared to just 3% for the same 9 months in the previous year. On the gross margin line, we saw gross margin come in at just about 35%, driving overall gross profit up about 32%. Now, the gross margin came in at the low end of our typical mid-to-high 30s gross margin historical range, primarily due to the mix of revenue. We have fewer software implementation projects and sequentially fewer NTGapps projects as well. But needless to say, it's still well within the expected band that we can look to expect in the future for sure. So with that in mind, I'm very happy to reaffirm the revenue guidance that we put out. We are well on our way to meeting our full year revenue guidance. So again, that guidance is $78 million for the year 2025, which represents about 40% year-over-year growth, as well as about $20 million more in annual revenue. I'll turn to the operating expenses next. What we have -- what we've seen in operating expenses is an increase to about 24% of revenue, up from about 17% of revenue a year ago. The largest driver is definitely G&A expenses, which increased to approximately 17% of revenue, up from 11% last year. And last year was definitely closer to our optimal cost structure with almost all of our technologists being billable and deployed, not very many resources sitting on the bench. As we talked about previously, we've been strategically hiring, extending our talent pool to staff some major projects that we see coming down the pipeline and we anticipate to close soon. We've got what we would say is strong visibility on them, but it is taking longer than maybe expected to sign off on these contracts longer than we had anticipated. But that being said, we are still fully confident in these contracts closing and being signed off in the very near future. Aside from talent pool expansion, we also invested in geographic expansion that I mentioned in one of the previous slides. These costs are a mixture of both onetime legal fees and office setup costs, but also some ongoing office and support staff costs that are going to hit us going forward. But in the long term, we really expect these investments to pay off in growing in an ever-digitizing Middle Eastern economy for sure. I will talk about the sales and marketing side as well. G&A was definitely the driver of increased OpEx, but our sales and marketing is sitting at a pretty sustainable level. This quarter, we were only slightly above our target range of what we see being 5% or 6% of revenue. Moving on to profitability. The net income for the quarter before taxes sat at about $2.4 million compared to $2.1 million the quarter before. Of course, in 2025, we are paying both Saudi and Canadian income tax, bringing the net income down to $1.9 million. Adjusted EBITDA for the quarter came in at about 12% of revenue. And of course, the major difference between adjusted EBITDA is taxes. And just a quick note that there were some expenses this quarter around consultants related to our tax planning situation. I have no real material update on our plan to reduce our overall tax burden, but just know it is in progress, and I hope to share an update soon, but taxes on the first hand and also foreign exchange. It's worth noting that the significant downward impact that we experienced due to foreign exchange in Q2 has returned to being the slight positive tailwind that we have seen historically. So, that is very reassuring to see. I'll talk about adjusted EBITDA guidance. So for the first 9 months of the year, we're sitting at an adjusted EBITDA margin of about 14%. And just admittedly, it's below our previously guided range of 16% to 20%. I think it's important to realize that the slightly lower adjusted EBITDA isn't to do with anything structurally wrong with our business or anything being changed in our business. It really reflects a timing issue. We basically made a calculated bet, for lack of a better term, right, to hire ahead of contracts that we saw coming down the pipeline, secure talent in a competitive technology market. The contracts, like I mentioned before, they're still progressing, and we are confident that they're going to be signed in the very near future. But I think we, as management, have to admit and own up to the fact that we probably could have been more conservative on the hiring that we did ahead of these contracts. But I think one more important thing to note is that the extended timelines on the signatures of the projects definitely show the scale and complexity and maybe even size of the contracts that we see coming down the pipeline. They require senior resources that are a little bit harder to find and a little bit more expensive to hire. And they also require very onerous decision-making and sign-off processes from some of our customers, which are taking longer than we expected. But all of that to say, we're revising our 2025 full year adjusted EBITDA guidance to be in the range of about 12% to 16%. And we think that this gives us the flexibility to hold those resources and continue investing in future growth, both in Saudi Arabia and abroad. Long term, I think it's important to stress that this doesn't change the potential profitability of our company, which I think we showcased very well in 2024. Again, it really is a matter of timing on the contracts that we see coming down the pipeline and not any changes in the underlying business for sure. On the cash flow side of things, we generated $2.3 million in operating cash flow before changes in net working capital. After those changes, it was a cash flow -- outflow, a cash flow use of $3.4 million. Now, this was primarily driven by growth in accounts receivable and more specifically in the contract assets line, right? Our contract assets for the quarter -- at the quarter-end came in close to $8 million. It's almost twice the size that it was at the beginning of last quarter. But it's not because of any sort of payment delay or aged receivables. It really is, we reached milestones on some of our projects, especially some larger milestone-based software development projects to the point where we had to recognize the revenue, but we hadn't received customer milestone approval and the go-ahead to invoice those customers yet. So it resulted in an expansion of our accounts receivable through those contract assets. So far post quarter, we've seen actually a large amount of those contract assets be billed, moved to invoices. It's probably about 1/3 of them now that have moved on. And on the billing side, I think it's important to recognize that of our accounts receivable, if you look at both contract assets and trade receivables, 97% of them are either sitting as contract assets or are aged below 90 days. Only 3% of them are over. We have no risk of bad debt as of right now. And our customers, once we get those invoices out, are actually very prompt in their payments. So we don't have any pressing concerns on accounts receivable so far. But overall, that's pretty much the highlights for Q3. I think Q3 was another quarter of -- sorry, a little technical glitch there [indiscernible] of live TV. But overall, to summarize, I think that Q3 was another quarter of strong top line growth for sure. It marked our 18 consecutive quarters of last 12 months revenue growth and was another all-time revenue record for NTG. So it's validating our expectations for continued strong growth in the Saudi digital transformation market and really throughout the Gulf as well. This quarter's revenue keeps us on track for that $78 million target for the year. And while adjusted EBITDA margin for the year-to-date is about 14%, slightly below that target that we gave earlier on in the year, we're making the investments that we need right now to continue the growth going strong into future years as well. So we look forward to leveraging those investments to continue building our reputation and capture a larger market share in the Saudi market. So I want to thank you for listening to the presentation, and I'll move on to the Q&A side of things where we'll welcome some questions from covering analysts, as well as a few investor questions that were written in ahead of the call.

So I'd like to invite Aravinda Galappatthige from Canaccord to the stage to start us off with questions. Aravinda, [ feel free ].

So maybe I just wanted to circle back on the accounts receivable. So you're saying that there's a portion of the ARR that's actually contract assets and not sort of standard receivables. Is that correct?

Yes, that is correct for sure. I mean, this quarter, it was definitely an anomaly. It's probably twice the amount of contract assets than we had previously seen. But it really is, just like I was mentioning before, a factor of we're in the business where every month, you can think of it like we have to report to the customer on what we've done, have we reached the milestone. Once we reach that milestone, they will accept our work and give us the go-ahead to issue them an invoice. That's usually how the process goes. This quarter, we basically had to recognize some revenue that the customer hadn't signed off on. But it's all business as usual stuff. It just happened to be a larger contract this quarter.

And you said 1/3 of it has already moved out, meaning sort of -- I didn't catch whether you said 1/3 has kind of -- it's been reduced by 1/3 or it's down to 1/3 post quarter. I just want to...

Yes, reduced by approximately 1/3 post quarter.

Okay. Post quarter. Okay. Got it. Okay. So that's significant. And then on NTGapps, obviously, you continue to make pretty good progress there. Is it fair to say that -- like, I guess, put differently, what proportion of these NTGapps contracts are coming from existing customers? Are you in a place where you're perhaps winning mandates from customers that never sort of subscribe to your more standardized IT services offerings?

Yes, that's a good question for sure. It's always good to keep an eye on where the pipeline of NTGapps business is coming from. I would say, to date, the vast majority of our NTGapps projects and definitely, if not all of the revenue for all intents and purposes, comes from some of our existing services customers. There are some small engagements that we won and we're testing proof of concepts, those kind of things. There are a couple of exciting projects in Dubai, for example, where we're running up some proof of concepts on our software platform for new customers. But if you speak on a revenue basis, the vast majority is from existing customers. We're finding an opportunity to work with our customers when they come with us, thinking that they need a bespoke software solution. We're able to instead basically counter with an NTGapps implementation. It saves them time on resources and development and deployment. And at the same time, it's a higher-margin business for us, so wins all around. But all that is to say, yes, NTGapps business typically comes from existing customers and cross-sell, upsell.

Okay. And then, just sticking with that, I mean, it does look like -- I mean, the quarterly numbers as strong as they are, obviously, on a year-over-year basis, are a little choppy. And I know that sort of really breaking out what's recurring, what sort of implementation is not necessarily straightforward, but how should we think of sort of the run rate from here on? Is there any kind of indication that you can give investors as to how they should think of this line item?

Yes. That's a good point, too. And I take your point about how -- as NTG's apps becomes a larger and larger part of our business, it's going to become incumbent on us to be more transparent about targeting and where we expect that line of business to end up for sure. As of right now, it's an interesting situation with NTGapps because the long-term vision is, yes, we want to have a SaaS platform that we can roll out off the shelf and build a strong base of recurring software revenue for. The fact of the matter is that right now, the vast majority of the revenue, I want to say 80%, 90% even, is going to be more onetime implementation base. We really want to get early users of NTGapps, a bespoke solution that works for them. It will be more sticky. It will provide a better reputation for NTGapps that way. And then, later on down the line, we can take those implementations and hopefully roll them off the shelf. So you have things that happen like we saw this quarter. Sequentially over Q2, it was actually down revenue, right? Q2 was NTGapps revenue about 20%. This quarter, just the quarter, was about 10%, averaging out for the year at 13%. And that really is because we had some bespoke software implementations of NTGapps that may be wrapped up in Q2, so the billings ended up being higher. So I can sort of say, looking ahead, the sort of area that we're at right now, 13%, 15% of revenue for NTGapps, I would say that's in line with what our thinking is. We still think that the demand for NTG's services lay in the offshore on-site services bin of things. And it's definitely something that we're going to take away as management and look towards hopefully providing some better guidance towards in the future.

So it's -- right now, it's -- 80% to 90% is implementation. It's -- the rest of it that's...

I would say a very rough estimate, yes, it is in that ballpark, yes.

Okay. And then, maybe just last question for me. There was a press release earlier that you had put out about sort of a 3-year agreement that I think you referred to as well. I know that there haven't been any announced contracts from that client. Is there -- maybe just help us understand what's different about -- if there is anything different, what's sort of unique about that client? I mean, is it just size? I mean, would you say that is -- are you anticipating sort of the commitments from that client to be materially larger than most of the commitments that you get typically? Or I mean, what's different about this one?

Yes. I would say definitely, what's different about that contract is primarily the duration of it, the length, right? It's a 3-year engagement, which we typically don't see from brand-new customers, right? Our typical engagements go -- a customer will start working with us, maybe it might only be for a quarter or 6 months. Maybe they'll sign a 1-year agreement after that. And then after, we've proven ourselves over the course of a couple of years, then they'll be happy to sign one of those larger 3-year engagements. So we're starting to hear more and more, especially when we go to these conferences in other areas of the Gulf, that our Saudi customers are traveling and telling people that NTG is a good customer to work with, and we're seeing people be more comfortable to sign on for longer engagements right from the get-go. So I think that's definitely a huge win from this contract. When it comes to the size, as you mentioned, I don't think that this one is necessarily going to be one of our largest ever contracts just because it is a new customer. I still think that they're going to want to start relatively small and see what the -- what their success is, which I have no doubt we're going to be able to deliver on. Okay. So we'll now move on to a couple of questions that were written in from analysts ahead of the call. So I'd like to welcome back Ali to the stage to start us off with some more of those questions, please.

All right. Our first set of questions are written in from Doug, an analyst from Beacon Securities. First question, what is the current backlog of the company? What's the value of project contracts that are under negotiation?

Thanks for the question, Doug. Yes. So our backlog is about $88 million of contracts and POs that we have on hand as of the end of Q3. And I would say, when it comes to the value of projects and contracts that we have under negotiation, we don't publish publicly a pipeline number per se, but I can sort of give some directional guidance that there are a handful of engagements that are on the same scale of those same 3-year contracts that we have put out over the last 1.5 years or so. But I want to circle back on the backlog item for sure because I want to call out just transparently that the backlog is down sequentially, quarter-over-quarter, and it's important to recognize that. But I think that the backlog is down sequentially for the same reason that we had maybe a little bit tighter of an adjusted EBITDA margin than we had originally thought. Contracts that we've been preparing ourselves for have taken longer to close and therefore, are being added to our backlog, right? Our backlog is only signed POs and contracts that we have on hand. But at the same time, we have been billing against those other 3-year contracts that we've noted. So I would say that the way management is thinking about it right now is this dip in backlog is, again, just a timing issue that we expect to be just a minor blip as we wait for some of these larger contracts that are still very much in play to come through.

All right. Moving on to our next question also from Doug. With the recent hiring [indiscernible] increase short-term costs, what is the expectation that the current overhead structure can generate in revenue when fully productive? At that level of revenue above, what is the expectation for EBITDA margins?

Right on. Yes. So definitely, we did do a lot of work to expand our roster and get ready to hit the ground running on a lot of the new contracts that we see coming down the pipeline. I think longer term, it would be reasonable to scale the existing talent base back to that 20% adjusted EBITDA margin over the long term. I think we can assume that at least for the services side of our business, absent any margin upside, gross margin upside from NTGapps, we can have a consistent mid-to-high 30% gross margin. And definitely, what we see as a possibility is going back to that 20% adjusted EBITDA margin as we look to roll out the resources that we have on staff.

All right. Our next question is also written from Doug. Can you speak to the current cash position and the company free cash flow this past quarter?