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

Good morning, everyone, and welcome to NTG Clarity's Q2 2026 Earnings Conference Call. My name is Ali Faruk, 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 on the geopolitical situation and our 2026 outlook. We will be giving our financial and operating results for the 3 months ended June 30, 2026, starting with an update on the geopolitical situation and our 2026 outlook. 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 the 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. If you have a question that does not get address, please reach out to adam@ntgclarity.com, and we'll 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 and 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 and necessarily subject to risks and uncertainties, some of which are significant in scope and nature. These uncertainties may cause actual results to differ from the 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 date 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 also make reference to non-IFRS or non-GAAP financial measures that management believes are useful supplemental measures but not alternatives to 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 schedules. With that, I'd like to invite Adam Zaghloul, Vice President of Strategy and planning to begin his remarks.

All right. Thank you very much, Ali, for the introduction, and thank you to everybody who is tuning in for our Q2 2026 earnings conference call. I want to start off the call before I get into the financial operating results. I want to announce that we are unfortunately withdrawing our fiscal financial guidance, and that includes both the $90 million revenue floor and the 13% to 16% adjusted EBITDA margin range. We're not going to be able to issue any sort of replacement guidance at this time. But the outlook that we posted towards the beginning of this year assume that clients would continue to renew and release their contract project work throughout the rest of 2026 at the pace similar to what we've seen historically. But while revenue was stable from March, April, and May. In June, clients definitely slowed their project releases and decision-making, and June billings were below our expectations. So the outlook was last reaffirmed in late May before that operation had -- before that observation or had been taken place. So the geopolitical situation in the Middle East is definitely the driving force behind this, and I'll speak a little bit more about that in a moment. But without any sort of clarity on when this conflict is going to be resolved, and when the Saudi economy can return to growth, really, it's hard for us to forecast our customer needs and our customer behavior. So some clients have continued full steam ahead on their plans or even expanded their renewed and even expanded their engagements with us. But others have taken a much more cautious and conservative approach. Our profitability is really dependent on the utilization of our resources as well as top line revenue. So any change in that sort of revenue profile really has a disproportionate impact on our adjusted EBITDA margins and our profitability. And that revenue trend throughout the rest of the year will be the main driving force behind our behind our profitability or adjusted EBITDA. I also want to highlight that while there was a little bit of a down trend in June, really consequent quarter end in July, we had much stronger revenue billings and collections. So the reason behind withdrawing the guidance really is due to the uncertainty and not being able to put forward guidance that we can confidently stand behind and not because we're seeing a consistent downward trend. So I just wanted to make that clear off the top. I'll talk about the geological situation specifically, basically in late February, the conflict escalated and crude exports from the Gulf region. We're pretty severely disrupted. The initial concern was a direct operational impact to our own Saudi work, but that did not happen. Our delivery teams really operate out of Egypt primarily, but even the ones in Saudi are operating outside of the affected areas, and we've been able to continue our work without interruption. What has happened is really the fiscal picture has changed. Saudi oil activities fell to 25% and year-over-year in the second quarter. And Saudi real GDP fell by almost 5%. Now we're not technically an oil business, but there really are a few businesses in Saudi Arabia that are immune to this kind of impact. Non-oil activities actually grew in Q2, about 0.6% year-over-year, but that's 2.9% in the first quarter, and it really was down on a sequential basis for non-oil activity. Oil receipts fund the government and government affiliated technology budgets that we serve. So really, these oil receipts set the large budgets that our customers are setting for technology and it's usually a tailwind for the economy that we've seen really in recent years. But when those receipts fall like we've seen this year, our customers definitely get more cautious with cash. They extend their projects and payment time lines, and we've seen both of that in both of our revenues and collections this quarter. We're still receiving renewals and new purchase orders with our customers, and we're still receiving customer payments as well. Third quarter specifically, purchase orders to date are about $33.4 million, more than the whole of second quarter by a large margin. And both revenue and collections were much were materially higher in July than in June, as I mentioned on the last slide, too. But what we're seeing is a much more cautious approach to forecasting at both the duration and the possible conclusions to the conflict in the Middle East. So with that level of uncertainty really around, we don't think it's prudent to issue an updated guidance at this time. So we'll move over to the financial results here. Q2 revenue was $20.1 million, up 6.4% from $18.9 million in Q2 2025. So -- in 1 sense is reassuring to point out that NTG's revenue are growing year-over-year faster than the Saudi economy as a whole, the first half revenue was $41.4 million, up 7.3% year-over-year. That is a first half record for the company and another quarter of last 12 months revenue growth. However, revenue declined by about $1.2 million sequentially from Q1 to Q2. And back in Q1, we had a decline as well, which I had attributed to basically, the slowdown around the holiday season, Ramadan and Eid-al-Fitr. And we guided back in Q1 that revenue would recover a little bit back in Q2 and we returned to sequential growth. But that didn't materialize? -- really due to a slowdown in the conversion of purchase orders issued against both our framework agreements and renewals and new work really in the last month or so of -- now I mentioned before a couple of times now, revenue in July was materially higher than our June revenue, and we really are maintaining a strong base of work with our existing customers and even getting new work from new customers. So I want to stress that our withdrawal of guidance really is due to the uncertainty around the situation and the difficulty in forecasting. Also, gross margin for the quarter was 33.5%, that's up from 33% in Q1, but it is down year-over-year as we've seen customers push for better pricing terms with the conflict backdrop really. We'll move on to profitability. Q2 adjusted EBITDA was about $5,000, effectively 0% margin. That compares to about $800,000 in Q1 2026. And that compares to about $3.8 million in Q4 of 2025. So really operating leverage is the main driver behind our adjusted EBITDA. Across these 3 quarters, our total cost base. So that is the cost of sales plus the G&A plus the sales and marketing really were effectively flat. You can see $20.1 million, $20.6 million, $2.2 million. But really, over the course of those 3 quarters, we saw a little bit of a revenue decline from $23.9 million in Q4, down to $20.1 million in Q2. So that $3.8 million roughly $1 million revenue decline against a flat cost base is really the entire movement in our adjusted EBITDA. So at the end of the day, over about $1 million per month of salary costs are currently sitting in G&A, because those staff are not assigned to billable work with our customers. When those resources are signed, they're reclassified to cost of sales, and there's no incremental expense for us to begin billing revenue. It's cost that we are already carrying -- but that really is consistent with what we've seen over the last 2 or 3 quarters, where deleveraging of our revenue really impacts the adjusted EBITDA line, basically on a 1:1 basis. Also talk about net income. Net income for the quarter was about $2.3 million. And that figure includes approximately $1.8 million of tax recovery from the conversion of our Saudi branch into an LLC. And that's basically to avoid having to pay double tax in Saudi Arabia and in Canada. That is really nonoccurring so it shouldn't be taken as any sort of operating performance. We also benefited from foreign exchange a little bit in Q2, and that is also backed out of our adjusted EBITDA as well. Now our Q2 profitability really begs the question why are we carrying so much nonbillable delivery capacity. And for that, we have to explore our order, I mentioned Q3 saw a great deal more POs than Q2. Q2 purchase order announcement was about $12.3 million. Third quarter announcements today were about $33.4 million -- that includes some of the first purchase orders against that new framework agreement that we signed in March with a large real estate developer in Saudi Arabia, following basically their full proposal and evaluation process. So engagements like that really start with a relatively small placement and grow over the course of their lifetime. And our thinking is guidance effectively needs us to be able to forecast when work is going to be built. But holding our capacity really only requires a view on cash flow and whether or not the work exists in the first place, right? We've signed these multiyear agreements with purchase orders still to come. We've got this $33.4 million to purchase orders announced over the course of the quarter. And it's important to note that our backlog of purchase orders and contracts on hand has actually grown from $73 million in Q1. And to about $80 million where it sits today. So that's definitely a positive leading indicator on our future work. So that's really what gives us the confidence to maintain our current delivery capacity. We're winning engagements with some of the large companies in Saudi Arabia. These are ones that we have experienced growing from a small amount to even tens of millions of dollars annually. They still have long-term robust digital transformation road maps ahead of them and we're eager to work with them on that. Now the macro environment is really undoubtedly negative right now. and that's driven primarily due to lower oil revenue and the sort of follow-on impact on to the economy because of that. But the region's ambitions to modernize, digitize, diversify its economy really have not gone anywhere. And we really believe that our onsite and offshore delivery models can help deliver on some of these road maps even if the time lines have been shifted slightly. So I'll turn to the cash flow now. Q2 operating cash was an outflow of about $4.6 million. And again, we're seeing our customers push billing really to the extent that they're allowed to under the terms of their contracts. That includes delaying the release of invoices, which we see reflected in a little bit of growth in our contract assets line, to unbilled revenue line recently. But as of now, management has begun working with clients directly in sort of a focused effort to speed up those collections. And as a result, subsequent to quarter end in July, we collected about CAD 8 million and that's approximately half of Q2's total collections. So that includes also the majority of accounts receivable each over 60 days as of the report of Q2. So our focus is definitely on repeating that result every month until the end of the year to sort of moderate that impact on our working capital there. So that brings me to where our attention is for the rest of the year. First, just doubling down on the point from the last slide, we want to convert the receivables focus on converting those receivables. Collections moved really to escalation at the client level, direct executive negotiations, including new contracts, we want to offer a little bit of early payment incentive on future work. The key metrics that we're going to be keeping our eyes on are really how that account you will move day sales outstanding, how much of receivables from last quarter we're going to collect in this quarter, for example. Our second focus is going to be on converting the order book and returning to our growth trajectory. We're going to be watching purchase orders received. We definitely got good signals so far in Q3 and really watching to see that total contracted backlog grow, which so far, it's a positive signal that it's growing from Q1 to Q2 as well. So our operating model is proven in the past, our fixed costs are there. So accelerating revenue to really get that sort of 1 to 1 profitability leverage really our top of mind. And our last focus -- or our last top priority is hold our expenses against our cash, right? So we're keeping our delivery capacity in place, as I mentioned, and we're reviewing it against cash every month. If collections don't support that sort of cost base or if any of our client negotiations sort of stall, we're going to have to explore cutting costs for sure. So we're going to watch the cost base against revenue and cash collections really every month. Well, that brings me to the end of prepared remarks. I want to thank you for taking the time to listen to it. We're now going to open things up to a Q&A session. We're going to start with questions from our covering analysts and then move on to a few questions written in from investors ahead of the call. So if -- again, like Ali mentioned at the beginning of the call, if you don't get your question answered, feel free to reach out to me, my e-mails on the screen, adam@ntgclarity.com, and I'll be happy to respond to you via e-mail.

But I think we'll get things started with covering analysts. I see [ Amar Razzaq ] from Canaccord Genuity is on the line. Amar, are you ready for any questions?

Can you hear me?

Yes, we hear you.

Adam, I want to start with the guidance. Last call, you guys went from characterizing, I guess, the $90 million revenue guidance is a $4 million that was largely supported by POs already in hand -- and I do fully understand the geopolitical situation and the elongation of cycles. But I'm wondering what specifically changed in June relative to May then conversely, can you speak to why, in your opinion, July improved materially.

Yes, that's definitely a really good question. And it's worth exploring a little bit more as we had expected. And when we think about our revenue guidance, let's say, it's based off of the POs and contracts that we have on hand, but also renewals that we have a very high confidence in converting. And definitely, in June, was when a decent amount of let's say, renewals came up for conversion. And like I was mentioning maybe a little bit briefly on the call. Definitely, what we saw happen in June as that sort of Q2, let's say, reduction in oil activity, reduction revenue in Saudi happened was our customers were more hesitant to renew their engagements at the same level that it was before. So I think it's important to stress that -- this isn't a huge trend that's across all of our customers. Some customers are continuing ahead with their road maps. They're continuing their engagements. They're expanding the sizes of them. Other ones either renew food at a rate less than we had seen historically or took their time to renew, so we couldn't recognize revenue or bill some of our resources against them. But thankfully, coming into July, we did see some of those renewals come through. I think some of those POs that we announced had a heavy renewal component, and we were able to get those resources billable again and see the revenue rebound that way. So I just want to stress that to withdrawal of the revenue guidance, especially really is in the face of uncertainty and not necessarily because we see a sustained down trend going forward. But that's a really good question. Thank you.

Okay. And maybe to follow up on that last point you made, like you guys announced like the $33 million of POs in Q3, which sounds very strong relative to Q2. But help us understand how much of that is truly incremental work versus renewals or replacements of expired POs, then how much would you expect to actually recognize as revenue during Q3 and for -- or is that harder for you guys to estimate at this point?

Yes. It's definitely not something that I give a precise number on, but I understand for modeling like it's a really important point to get some clarity around how we think about it internally is -- these PO announcements that we put out typically are on the duration of about 1 year. So any POs that are going to come around the midpoint of the year you can very roughly assume that about half is going to be built -- there's basically going to be a flat billing profile to it. So about half is going to be built in the remaining year. and half the subsequent year. And what we also try to do with those releases is break out how much of it is new work versus customers renewing and expanding their engagements, so that can sort of be built into the model as well. Just to take an example of the POs that were issued with this release the same as the quarter. It was about $1 million of truly new work and the remainder being renewals and expansions of some of our existing customer contracts. So I think that's the best way to think about it.

Okay. Then I just -- like on your last point, on the last slide, like I fully understand that you guys have a strong backlog, and this might be a conceptual question, but what is the trigger for you guys deciding that you've waited long enough and need to rightsize the cost base -- is it a specific cash balance utilization level or a time frame? Help us think of that, please?

Yes. I think definitely, it's important to balance the sort of view of new work coming down the pipeline with just the realities of the cash flow as it stands right now. So the balance that we're always trying to strike is -- we put a lot of time and effort into recruiting the talent pool that we have right now. Certain resources have been instrumental in NTG's growth and have proven themselves with many client engagements. And a lot of our customers especially are looking for this type of senior experienced resources to work on their engagements really for the long term. So what we're constantly looking at is the cash balance that we have at the end of each month versus the bench staff that we have. Definitely, right now at $1 million per month, I don't think we'd want to be able to go much higher than that. So we've done a pretty good job keeping our cost base staying relatively consistent that is about $1 million per month of incremental resources waiting to be rolled out. But there's always going to be a combination of looking at what customer conversations we have coming down the pipeline as well as new POs that we know are going to be rolling out in the relatively new future before we can make that decision. Because the goal is not to let's say, go into debt to pay for these resources or dilute shareholders to pay for these operating overhead. It really is a balancing act taking a look at operating cash flow and can we support the sort of gap between now and when we expect these contracts to go? Because at the end of the day, I think it's important to point out our delivery, our staff, our technical staff. They are probably NTG's core assets, right? And we don't want to put ourselves in a position where when activity resumes, which we're getting already getting the leading indicators that there's the possibility for that to happen now. When activity resumes, we're not in a position to take advantage of the growth just because we wanted to save the cash flow or profitability of any 1 individual quarter right?

Fantastic. Maybe one last one. I appreciate the color you guys gave on collections. I think you guys were saying $8 billion of collections in July and receivables declined by more than $2 million as at July 31. Wondering if -- given that we're now end of August, can you give us an update on where August collections and where the receivables stand in cash?

Yes, I think that's definitely a good question. The reason behind July is a good example is just as typically, right, at the end of the month is really when we see a lot of the invoices go out and the cash collections come in. So it really is less of a useful marker to say, take a look at August 15 through August 21, the cash balance and receivables balance just because I think it's pretty similar in any line of business. The end of the month really is when things are in a much more stable position. So I take your point, and I think it would probably be useful going forward over the next few quarters to give more regular updates about cash balances, but I think they would have to going forward be as of the end of the month. Okay. We'll move forward. And I see that we have Nich Cortellucci on the line from Atrium Research. So Nick, if you're ready, I'll hand it off to you.

The first thing I wanted to ask about was, what do you see as baseline margins, looking back to 2025 or even going back to 2024, what do you see as kind of normal for you guys?

That's definitely a good question, Nick. Thanks I think historically, what we had put forward as our goal around -- we can start at the gross margin line and then move maybe to the adjusted EBITDA is sort of that mid- to high 30% gross margin range. And then ideally, the bottom line being in, say, the mid-teens, even getting up to 20% in an ideal world. And that's what we saw really as we -- as we exited 2024 into 2025. But this is definitely a to the reason why we're withdrawing our guidance and not giving an updated range at this time is the -- especially the profitability is hugely dependent on that sort of incremental revenue profile. We saw really over the last 2 or 3 quarters, a decrease in $3.8 million of revenue roughly had the exact same amount of impact on our adjusted EBITDA line just because of the cost base staying the same. I think maybe longer term, those are goals that we want to get back to. But in the short term, we definitely can't give any sort of guidance for the next few quarters. And that is because, a, we're carrying that cost base to pair ourselves for more stability and when contracts hit the ground again, but also be, as I mentioned in the presentation, even on the gross margin line, we're sort of seeing a shift from that mid- to high 30% range really towards the low to mid-30% range because of the pricing that customers are negotiating for in lieu of sort of cautious approach to cash that they're taking in the region right now. So I would say we've got long-term work cut out for us, but of course, we can't issue any sort of near-term guidance for this year.

Yes, got it. Okay. And then just on the G&A because it increased quarter-over-quarter, maybe just what's been driving that? I know I see the COGS and the S&M declined, but just maybe a bit about the G&A.

Yes, definitely, when you take a look at our cost mix. There really is a lot of carryover between, say, our cost of sales and our G&A. What typically comes along with a reduction in revenue is a movement of resources from the cost of sales line into the G&A line. So to the extent that maybe it's been -- G&A has been up, cost of sales has been down, it largely is attributed to that sort of dynamic of nonbillable resources being in the G&A. And that's part of the reason why, over the last few quarters when we've been talking about our results, we've been breaking it out to show what that total cost base is. Basically, what is our fall intents and purposes, our staffing costs, which has remained relatively consistent over the last few quarters.

Got it. Yes. That makes sense. Okay. And then maybe just more conceptually outside of the Middle East conference, have you seen any clients building their own solutions with AI or cheaper competitors come into the scene -- has that played a role in at all withdrawing the guidance? Or is this solely based on the Middle East?