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

Good morning, and welcome to NTG Clarity's Q1 2025 Earnings Conference Call. My name is Ali Farouk, an analyst at NTG Clarity. And on our agenda for today, we'll start with management's prepared remarks on our financial and operating results for the 3 months ending March 31, 2025. We'll then have a Q&A period answering questions written in ahead of the call. 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 list on our Investor page on our website to get notified when those are available. 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 involve 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 and 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 statements, estimates or opinions change. In this presentation, we also make reference to non-IFRS or non-GAAP financial measures that management believes are useful supplemental measures but not alternatives to net income and operating cash flow. Please see the 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 & Planning to begin his remarks.

All right. Thank you very much, Ali, and thank you to everybody who is tuning in for this Q1 2025 earnings conference call. Q1 definitely was another amazing quarter for NTG Clarity. We really saw the whole NTG team fire on all cylinders to keep the momentum that we saw in 2024, continue forward into 2025. And I think we can call that a success as well. Our key market of the Kingdom of Saudi Arabia, where 95% of our revenue still originates, is continuing to invest heavily into digital transformation and software development as a part of their Vision 2030 plan. and the Kingdom is really recognizing the importance of software development and technology as key pillars in diversifying their economy away from the oil and gas cycle. So due in large part to the growth that we saw in the Saudi market, revenues for Q1 are up 68% year-over-year to $19.7 million for the quarter. So that marks 16 consecutive quarters of last 12 months revenue growth and 10 consecutive quarters of record-setting revenue for NTG. So with approximately $100 million in backlog purchase orders and contracts that are on hand and unbilled, we're expecting the strong revenue growth to continue on as we finish out 2025 and beyond into future years as well. Really, the investments that we've been making into our talent pipeline, the relationships and really business development in Saudi Arabia are really paying dividends in the results that we've been seeing recently for sure. So I would say that a key component to our success in Q1 is really the dedication and performance and focus of our team in executing all of our key strategic initiatives going into 2025 and it's 3 key initiatives and priorities. The first one being really deepen our relationships and our engagements with a lot of our customers and become a bigger part of their digital transformation strategies. Looking into -- or looking back on Q1, our customers are showing a consistent trend of trusting NTG with larger and larger parts of their ever-growing digital transformation budgets, both from the sense of on-site and offshore professional resources. Our customers are really resonating with our ability to provide quality work while still coming in at competitive prices, flexible engagement terms as well as operational and cultural fit with that talent force being based out of Egypt as well right across the Red Sea from Saudi Arabia. Now this is definitely evidenced especially in our offshoring software development model, where this quarter, Q1, we saw a 260% increase in revenue from offshore software development, making it now our largest part of our business at about 50% of our revenue. So our customers are really resonating with the same quality service that you get, but at up to 50% savings when you compare to hiring locally on site in Saudi Arabia for sure. So overall, our customers are continuing to realize the value that NTG provides for their business and increase the size of their engagements. And that leads to Q1 having an increase in average contract size of about 62%. Our second priority for the year is definitely continuing to win new customers using our land and expand sales model. So definitely, referrals and word of mouth are a large part of why we get a lot of our new customers. This quarter, we signed 2 new clients. And even though their initial engagements are relatively minor when it comes to revenue, we definitely understand that this is the first step in building those long-lasting large engagements as we begin to -- we start with a small engagement with our clients and then our dedicated account managers will work with them to find areas that NTG can add further value in their business, either on the software product side or on the resources side as well and look to expand those engagements over time as we continue to work together and grow with our client success. The third priority is to further increase the adoption of our proprietary software product, NTGapps. And definitely, over the course of 2024, our team did a great job sort of recruiting our existing customers into starting trials and proof of concepts with NTGapps to the point where at the end of the year 2024, almost half, 47% of our customers were at least running a proof of concept with NTGapps that way. Now in 2025, we're starting to see early feedback that those trial engagements are converting into full-on contracts. So far in Q1, we've booked a 150% increase in NTGapps' revenue. And when it comes to -- so I guess that's also noteworthy that, that 150% growth is the first time that NTGapps' growth has outpaced the company as a whole. And we've also billed about $2.5 million of NTGapps revenue this quarter, making it already about 60% of the whole year 2024 NTGapps billings as well. So overall, we're continuing to be really excited about NTGapps providing not only some revenue growth in the future, but also some margin expansion from the software side of the business as well. So I'll move to the financials now. So I'll talk about revenue and gross margin. In Q1 2025, we saw a 68% year-over-year growth in revenue, like I mentioned, to $19.7 million of Q1 revenue. Now our gross margin came in at just about 34%. Now that is a little bit below our historical typical gross margin of between 35% and 40%. But there are 2 main temporary reasons of why that's the case. The first one is some ramp-up costs associated with new contracts. So it could be traveling and relocation for some on-site contracts, but also a lot of work to put together renovated office space for our new and expanded engagements from the offshore software development side. Now those expenses would fall into cost of goods sold as they support our offshore revenue generation as well. The other contributing factor was definitely some year-end bonuses that we gave to our technologists that was booked in Q1 for the year 2024. And together, these factors combined add about 200 basis points of drag to our gross margin. Now like I mentioned, these are pretty temporary pressures, and we're expecting to recover back to our more typical 35% to 40% gross margin range as we continue through the rest of the year. Moving on to operating expenses. Now as you can probably tell, comparing this quarter's results to our full year adjusted EBITDA guidance, for example, this quarter has what we see as probably the high point in our operating expenses. I'll start off with the G&A line. Comparing this year, Q1 2025, G&A represented about 13% of revenue. Now that's down from a proportion of 16% last year, but there still is a large absolute value climb when it comes to G&A expenses. And the reason behind that is really our focus on being able to scale our workforce to meet the demand of the clients that we see right now. So over the course of Q1, our G&A roster increased by headcount by about 15%. And our focus right now is really on scaling with quality employees. So we want to be doing that recruiting, that hiring, that onboarding, that training of skilled employees to have them on our roster to deploy for customers in the future and get them to be booked as billable and cost of goods sold later on down the line. So we definitely laid the groundwork with a lot of G&A hiring of skilled talent this quarter. Moving on to the sales and marketing line. So sales was about 7% of revenue in Q1 2025 compared to 6% of revenue last year. But that came with it, again, another absolute value climb. And similar reasons for that as the G&A are that we are actively expanding the footprint of our sales team. The sales team increased by -- headcount by about 10% this quarter as well. And a large part of the increase is providing some of our larger accounts with dedicated account managers and account coordinators who are basically working with them full time to understand the demand and the capacity that these customers need, being able to forecast and plan what resources will need to be placed with what clients in the future and also learn where maybe NTGapps can be a fit in their digital transformation strategy as well. So we're definitely laying the groundwork to continue our growth throughout the rest of the year and into next year as well with these sales and marketing investments. The last piece that played into sales and marketing was, again, as a thank you and thanks for a job well done to our sales team, we booked some year-end bonuses for the performance in 2024 because the team really rise (sic) [ rose ] to the occasion and drove the amazing growth that we saw over the year in 2024. But that being said, those bonuses did put some temporary pressure, onetime pressure on the operating expenses as well. So that plays into the quarter's profitability. For Q1 2025, net income before taxes was $3.2 million. That's up from about $2 million in 2024, which is about a 56% increase. But that being said, in Q1 2025 is, of course, the first time where we will have officially run through our accumulated historical tax losses. So we've, for the first time, needed to provision taxes for Canadian corporate tax in addition to the Saudi corporate tax that we were already paying. So the combined tax provision was $1.2 million, and that's about a 600 basis point impact to our net income margin. So this is definitely an area that we're striving to improve on, and we're working pretty closely with our tax advisers to figure out the best way to mitigate the combined impact of both Saudi and Canadian corporate taxes as well. But after taxes, net income came in at about $2.1 million or about 11% of revenue and earnings per share was about $0.05. Now the difference between net income and adjusted EBITDA for NTG primarily is, number one, taxes, which I just mentioned, but also foreign exchange on the difference between our primary operating currency of the Saudi riyal, which is pegged to the U.S. dollar and some of our other operating currencies like the Egyptian pound and the Canadian dollar. For Q1, foreign exchange was a bit of a tailwind. We picked up some dollar value on the foreign exchange, which has been typical in the past few quarters for sure. But at the end of the day, that was not included in the adjusted EBITDA, which came in at about 15% of revenue. Now understanding that, that 15% of revenue is slightly below our target range for the year of 16% to 20%. It really is a case of us making some investments into, like I mentioned, our G&A, our roster of employees to be deployed with customers in the future, but also our sales team in order to be able to sustain our growth going forward and even drive it even further. So we're expecting that as we continue through the year, we'll see our operating model return to the -- I guess, you can say the prime example that we set in Q4 with adjusted EBITDA margins being closer to 20%. Moving to the cash flow. In Q1, we booked about $2.5 million in operating cash flow before the change in net working capital. And when it comes to the main driver in that change of working capital, I'm going to sound repetitive definitely from Q4 and previous quarters, but it is the growth in our accounts receivable, which is, of course, a natural byproduct of the rapid revenue growth that we've been seeing recently. To dive a little bit deeper into the accounts receivable, we can take a look at our days sales outstanding, so the average amount of time between when we book revenue and when we actually collect the cash, still sitting at a relatively consistent 75 days. So it's clear to say that within a quarter, we're generally collecting. And when we take a look at our aging of our accounts receivable, we can see that 91% of receivables were, in fact, billed in Q1 and another 5% were billed in Q4. Now both of those bills are market improvements over Q4 as well. Now there are about 4% of receivables that were billed prior to Q4. But I can say that so far, what we've seen is that collections have been pretty strong in Q2, and we're looking forward to our more moderate revenue growth, reducing our drag in accounts receivables and letting some more cash flow come through. All that being said, our total operating cash flow for the quarter is sitting at about $400,000. And below the operating cash flow line, I also want to point out that we're continuing to earmark in the range of about $150,000 to $200,000 per quarter of continued long-term debt repayment to really have that slow and steady drip of improvements to our balance sheet going on into the future. We'll talk about revenue guidance. Coming into the call and coming into this earnings release, we had guided for $75 million of top line revenue. Q1 definitely has been an amazing quarter for NTG. Our customers are continuing to show strong demand, not just for our professional services, but also more and more for our software products as well. So that combined with our already strong and consistent backlog of purchase orders and contracts on hand of about $100 million and makes us confident to modestly increase our revenue guidance for the year from $75 million to about $78 million. And that brings our targeted revenue growth for the year to be approximately 40% year-over-year growth. On the cost side, Q1 is definitely characterized by investments, both into, as I mentioned, the resources and the talent that we're going to be placing with our clients in the future, but also into our sales team who's going to be able to get out there and not only get new clients, but also expand the engagements with our existing clients as well. But that being said, again, like I mentioned, we're expecting operating expenses to be tapering off towards the end of the year, similar to what we did in 2024. So we're confident enough to reaffirm our guidance of adjusted EBITDA in the range of about 16% to 20% as well. But overall, I really just want to echo how proud I am of the whole NTG team and how amazing of a quarter Q1 was. We're continuing to take advantage of our customers' demands for quality professional services when it comes to software development and our software products as well. Our entire team is really executing on our strategic priorities. We're deepening our relationships with all of our existing customers to a large extent as well as really having that word of mouth that worked for us in the sense of new customers signing on with us and then those dedicated account representatives working with them to identify areas where we can do some more work for them. We can add some more value for them, both on the resource side and on the software side. And of course, that software side is becoming more and more relevant with NTGapps now reaching up to 9% of our revenue and looking like it can be a source of continued revenue growth and margin expansion into the future as well. All that said, there really is a huge growing opportunity in front of us. There really is a worldwide trend of continued digitization and increase in automation and that's especially the case in Middle East -- in the Middle East and especially Saudi Arabia, where there are large government investments into digital transformation and software development and diversification of the economy. So it really -- the ball really is in NTG's court. All we have to do is keep doing what we're doing, providing value to our customers and keeping our costs under control. But with all of that said, thanks again for tuning in. I'll now open up the floor to questions that were written in from the audience just ahead of the call. So I'd like to invite Ali back to the stage to start us off with the first question whenever you're ready, Ali.

All right. Our first question is written in from [ Mac ], a private investor. With oil prices at $60 a barrel, are you seeing declining budgets from your Saudi clients?

That is a really good question. Thank you, [ Mac ]. So yes, we'll talk about Saudi funding right now. I think one of the core strong suits of our offering and our business right now is that a lot of our customers are not in the oil and gas businesses themselves. They are telecom operators, they are banks and financial institutions that's the primary customer, also system integrators, they have revenue that's not at least directly derived from the oil and gas cycle. But that being said, of course, there are large government investments that are largely funded by oil and gas. But another strong suit of our operating model and our business model is that definitely, the Saudi government recognizes that investment into technology and software development is one of those core pillars that's going to get their economy diversified away from that oil and gas and really get them away from being beholden to that cyclicality in the oil and gas cycle. So what we're seeing is there are no impacts from what we can tell on our clients' budgets for digital transformation. Where the government maybe is scaling back funding is on those more higher prestige projects, those infrastructure projects that can be scaled back a little bit more. But again, what we work on really is the core to the digital transformation of the Saudi economy, which again is core to their Vision 2030.

All right. Awesome. Our next question comes in from Aravinda, an analyst from Canaccord. Do you expect working capital to balance out for the rest of the year? It was still an issue in Q1, resulting in less cash flow. But with more moderate growth this year, are you expecting improvements?

That's a good question. Thank you, Aravinda. So to cover, yes, the working capital aspect of things, I think definitely, you're right to point out the more moderate revenue growth that we've been seeing so far. Typically, just due to the nature of our billing cycle, working capital drag from accounts receivable is about equal in magnitude to the revenue growth. So as we're seeing a more moderate revenue growth, we're expecting that working capital drag from accounts receivable to moderate as well. So as we continue on down the year, we are expecting to see a little bit more cash flow come through. The one caveat I would put on that is that we're coming up next week to the Eid holiday at the end of next week, which we saw last year definitely slowed down the payment cycles for Q2. And that's to be expected. People are off on vacation. It basically is their equivalent of Christmas in the Middle East. So people are taking time off, they're spending time with their families, that kind of thing. But what it can slow down is our signing of new deals temporarily and collections on invoices. But we expect it to be the case that picking up shortly after the holiday in Q3, we'll see a pickup in receivables like we saw last year and also a pickup in new contracts signed. So all that is to say, definitely, we expect to see some cash flow come through towards the midpoint second half of this year.

Awesome. We also have a second question from Aravinda. Gross margin was slightly compressed at 34%. I understand that amortization is now included, but still seems down a little. How should we think about it throughout the year?

That's a good question. Thanks. And so I'll add a little bit more color to the prepared remarks that we went through for sure. You're right to point out that amortization is now accounted for the amortization of our intangible asset, NTGapps. It's now accounted for in the cost of goods sold just due to the amount of revenue that we're deriving from NTGapps right now. So definitely a good problem to have. But you're right to point out that 34% is a little bit below what we typically see from our gross margins in the range of 35% to 40% really was some temporary factors that I mentioned. We were running and gunning just to set up a lot of new offshore offices, a lot of whose expenses will fall into the cost of goods sold. So those are onetime expenses. Also, really bonuses for the tremendous performance of our technologists last year also hit a onetime expense in Q1. So we'd really expect once we get past those into Q2, 3, 4, we'd expect those gross margins to recover by about 200 basis points and even potentially more as we look to get these projects into a more steady state.

All right. Great. Our next question comes in from Doug, an analyst at Beacon. NTGapps was 9% of the revenue versus 6% last year, with Q1 product revenue more than 55% of the entire 2024 product revenue. You had mentioned in prior calls that a number of your clients were trialing NTGapps. Was the growth in product revenue in Q1 due to more revenue from existing clients? Or have some new clients started to issue purchase orders? What is the goal for NTGapps as a percent of revenue by Q4 2025 and for 2026? What would be the impact on gross margins if NTGapps can get to 15% to 20% of total revenue?

Right on. thanks for the questions, Doug. So yes, NTGapps is something that we're really excited about this quarter. That 150% year-over-year revenue growth really is showing that a lot of those proof-of-concept type projects are transitioning into full-on contracts. So to answer that first part of your question, absolutely, our sales strategy has been nurturing existing customers to then grow their engagements with us, a large part of which being that NTGapps software offering. So definitely, the contracts coming through from existing customers on that as we would expect. Now when it comes to projecting out the growth of NTGapps, that's something that's definitely hard to do. It's very beholden to this sort of testing out proof-of-concept pilot project life cycle. But I would say if I were to be optimistic and aggressively forecasting NTGapps, keep the growth going the way that it has been going, we could finish out the year with, say, 12% of NTGapps, just to throw a number out there. And then in 2026, if that grows up to 15% to 20%, that would be great. And what you're right to point out -- asking about the gross margin profile in those cases that this is a software business. It has close to at this time, about 50% gross margins with room for upside after we get some efficiencies of scale going on in that sense. Just as a comparison, our typical services, if it's on-site, maybe it's in the neighborhood of 34% to 36%, offshore can be 36% to 37%, even 40% as well. So if we were to, say, have a 20% revenue mix of NTGapps, that could bring our gross margin up to about 40%, which, of course, is a 600 basis point improvement on this quarter. So yes, I'll just echo the point that we're really excited about the opportunity in front of us about NTGapps bringing some margin expansion for us as well.

All right. He also has a second question. Q1 margins were clearly impacted by an increase in headcount. How long will it take new employees to ramp up their productivity?

Yes, that's definitely an excellent point about increase in headcount. So I think how we can typically think about our billing cycle, right, is that about a 1 quarter lag between rolling out employees. I mean we definitely did a lot of investing, that 15% extra headcount in the G&A line item, a lot of whom are going to be basically technologists on the roster to be rolled out with future projects. I would say if I were to put a target, we would be most of the way there to rolling out these employees by about Q2 and almost all of the way there by the time we report Q3 as well. So I would expect us to mimic the sort of profile that we saw towards the end of 2024 as well.

All right. Awesome. Our next question comes in from Chris, an analyst from Activ8 Capital. Do you think Saudi is being seen as a more stable place to invest and do business in, particularly with the recent publicized improved government relationship between the U.S.A. and Saudi?