Earnings Call: Q2 2021

Aug 17, 2021

And welcome to the McLeod Technologies Second Quarter 2021 Earnings Conference Call. At this time, I will turn the call over to Wayne Andrews, McLeod's Head of Investor Relations. Thank you, operator. Today, we will discuss the unaudited results for the 3 6 months ended June 30, 2021. Presenting from mCloud is Russ McMeekin, our Chief Executive Officer and Chantal Schultz, Our Chief Financial Officer. Before we proceed further, please note that remarks made on this conference call may contain forward looking statements about mCloud Technology's current and future plans, expectations, intentions, results, level of activity, Performance, goals or achievements or any other future events or developments. Forward looking statements are based on information currently available to management And on investments and assumptions based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurances that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, Achievements, future events or developments could differ materially from those expressed or implied by the forward looking statements. As a result, mCloud Technologies cannot guarantee that any forward looking statements will materialize, and you're cautioned not to place undue reliance on any forward looking statements. Except as required by law, MCloud Technologies has no obligation to update or revise Any forward looking statements is a result of new information, future events or otherwise. For additional information on these assumptions and risks, Please consult the cautionary statement regarding forward looking information contained in the company's most recent MD and A available on sedar.com. I will now hand the call over to Russ McMeekin, our CEO. Please go ahead, Russ. Thank you, Wayne, and good morning, everyone. Let's move to the first content slide, please. Highlights for the first half Despite pandemic restrictions, Asset Care revenues were up 102%. So we're $14,400,000 in the first half compared to $7,100,000 in the first half last year. The recurring revenue or asset care over time was $12,600,000 revenue Versus 3,700,000 in the same period last year, so robustly up. Overall revenues were 15,600,000 Compared to $11,600,000 so up 34%, that's with a major decline in technical services. Those are project activities primarily in the province of Alberta. Alberta and parts of the United States in May June were heavily restricted. Alberta was certainly very restricted in May June. Recently, I've been to Saudi Arabia. We're very I'll discuss this in some future slides, but we're very well positioned there in the Middle East in the second half. We are beginning to see Asia Pacific starting to pick up and that's the whole region. We're very pleased with that. And this morning, we announced That we filed our 40 F, which is a major milestone towards the NASDAQ listing. Move to the next slide. We continue to make progress, albeit slow this quarter towards connected assets. We ended Mid year was 62,508. Our near term goal before year end with a very strong backlog to achieve it It's 70,000 connected assets and then we move on to next major milestone and that is 100,000 connected assets. Moving to the next content slide. AssetCare overtime revenues on a quarterly basis continues to grow. If we look back to Q1 2020, you see a nice progression. Year on year, we're up 140%. At this point, I'm going to turn the call over to Chantal. Please move to the next slide. Thank you, Russ, and good morning, everyone. Total revenues for the first half of twenty twenty one We're $15,600,000 and this is a 34% increase compared to $11,600,000 for the same period a year ago. Can we move to the next slide, please? Revenue in the second quarter was 7 point $2,000,000 versus $5,000,000 in Q2 2020. This represents an increase of 44% year on year Despite the fact that asset initializations were delayed due to pandemic restrictions, primarily in Alberta, q2 gross margins in 2021 were 64% compared with 62% for Q2 2020. Gross margins increased resulting from 90% of our revenues coming from Asset Care over time. We can go to the next slide, please. Pandemic restrictions continue to hamper our ability to connect assets, Such that our asset care over time recurring revenue has not exceeded our direct expenses at this juncture as anticipated. We are working diligently to achieve our near term goal of 70,000 connected assets, the inflection point where recurring revenues will exceed direct And we're expected to reach our objective in the second half of this year. Next slide, please. In July August, we began to see collections improve. In the same period, we saw extensive increase in planning for new asset care initializations, which we believe will commence to make traction post Labor Day. Sorry, just going backwards here for a minute. I apologize. Customer collections were slower than normal in Q2. Growth in new connections impeded in May June, expected to make return in the second half of twenty twenty one and twenty twenty two. Our ATB facility currently is only 50% utilized with facility expected to be Fully available in the second half of twenty twenty one. As Russ previously mentioned, our Asia Pacific saw growth in business activity in the first half 2021 and both Asia Pacific and the Middle East expected to make meaningful contributions in the second half of twenty twenty one. Next slide, please. So some of our major expenses for This period, in Q2, as at April 23, we had cash of 14,400,000 And as at June 30, this was $6,500,000 Cash used in the period was approximately $7,800,000 And about 70% of that was from extraordinary non recurring items, such as professional service fees related to financing, Audit and legal, that was $2,100,000 loan repayments of $2,200,000 3rd party IP, licensing and R and D of about $1,100,000 As previously mentioned in the second half of this year, we expect to have the Full availability of the ATB credit facilities, that's $2,500,000 and a pickup in Noting the change in our cash position since our April Approximately 70% was not related to operations. I also direct you to Page 33 in the MD and A, where we Present our pro form a balance sheet as at June 30, 2021. This was done to illustrate the impact The conversion of the 2021 debenture liability, which has been approved for conversion to equity effective post financial State and MD and A approval on August 13, 2021. I'd also like to point you to the press we put out this morning, as Russ mentioned, Communicating that we have filed our 40 F. This represents a major step forward in our efforts to list on the NASDAQ. I'll send things back to you now, Russ. Thank you, Shaw and Tal, and I'm going to take The call now to a forward looking view. Slide With the $80,000,000 TCV, please. So looking at the segments for the $80,000,000 of TCV, that is the goal we have set for ourselves Cumulatively by year end 2021, 1st major segment is HVAC with a pretty Powerful pull on the indoor air quality side of things and I'll discuss that in more detail in a future slide, as well as asset care in oil and gas and industrial Around ESG. So this is what will make up from a segment point of view the bulk of our TCV trajectory for the second half of twenty twenty one. Next content slide. I was asked on previous calls about To break things up from a TCV perspective in 2 ways, 1 from a segment point of view And the other from a regional point of view. So if you look at this $80,000,000 of TCV, if you break it up, as I mentioned, industrial or Oil and Gas primarily is about half of the TCV segment in that $80,000,000 and most likely In 2022, the pie chart will look very similar. Buildings approximately 34% and then 20% of it is a combination of wind And AssetCare Mobile. So I've combined those here for illustration purposes. Most of the connected mobile assets are in the industrial side, however. By region, North America makes up the largest component of our TCV. Middle East, I will discuss in the next slide, It's picking up to be quite a sizable component of the overall mix. UK and EU, which is primarily wind for now, It's about 15% and then Asia Pacific as Chantal and I mentioned is beginning to pick up quite nicely. Moving to the next slide. I was recently in the Kingdom of Saudi Arabia for over a week. As you saw, we announced a very strategic partnership with Herbsoft. To do business in the kingdom, you need a licensed agent within the kingdom. This agent and our partner there is very well connected with Aramco, which is the largest company on earth. We had a number of brilliant meetings with them as well as Aramco, our Saudi Arabia is known for Aramco, but as you can see on this slide, there are numerous other major operators that own significant footprint of buildings, Large petrochemical and refining companies. And so the focus in Saudi Arabia obviously is Aramco, but it's far beyond simply Aramco. We have a President there now in the Kingdom of Saudi Arabia. You'll see a lot more discussion in the second half of twenty twenty one Around Middle East, but very specifically Saudi Arabia. So we expect this to be a significant component going into 2022. Moving to the next slide. For those who are watching the presentation via screen, you can take your smartphone and Point your camera towards this QR code. In the indoor air quality space, we are not only making them indoor air quality As you can see in the bottom right hand side, as you've seen before, where indoor air quality exceeds the levels Affected by a number of regulators or a number of health and safety standards. By turning on this by clicking on this QR code, you can see the actual health of the building you're walking into. So if you're walking into a office building and you're an employee And you want to see and we have customers including our own offices that have this. You will see the state of the indoor air quality before you enter. Similarly, you can apply this to schools, you can apply this to retail locations as well as restaurants. So we believe our QR code certainly Was very well received in the kingdom, very well received here in BC. We expect it to be very well received in Ontario, Where this QR code is not just some kind of insignia of what could be, but in actual data and facts of the state of the indoor quality of your building. So I hope those of you who were able to, were able to click on this QR code. Next slide. ESG, Fugitive Gas and the tracking and reporting around ESG is a big topic. It's one that our customers We have an upcoming mCloudConnect. We expect to have about 500 people around the world. ESG is one of the top hot topics. You'll see the speakers from Microsoft's Chief Environmental Officer. You'll see a number of people. We have numerous customers of major companies on panels That will be presenting at the Asset Care Connect. And the predominance of the discussion will be either ESG and ESG reporting Or indoor air quality. So you'll see a lot of discussion around these topics. You'll see real demos, see real technology. So Things in the second half are really well poised to move. Next slide. In summary, Asset Care continues to grow Nicely, up 102%. Our backlog continues to grow. We expect after AssetCare Connect, which is coincidental after Labor Day, where a lot of customers Have started to put schedules in place to do things post Labor Day. We expect things to begin to lift quite nicely. We also expect the challenges in Alberta to begin to lift And therefore back to work there and doing a number of things. We forecast in the second half that a number of locations in the United States will also be in good shape. Southeast Asia, Japan, a number of places where we have active contracts going on, we expect them to pick up quite nicely in the second half. And as I mentioned before, specifically in Saudi Arabia, we expect this to be a material contributor in the second half of twenty twenty one. Next slide and final slide. In summary and final summary, exceeding 70,000 in the near term continues to be our goal And we will be achieving that before year end. 100,000 connected assets will be the next milestone. If you look at our recurring revenue, our asset care overtime run rate. At this point in 2020, the run rate was approximately $8,000,000 on a run rate basis. If you look at today, 2021, our run rate of the same category of revenue is 25.2%, so a 2 15% increase In a very strategic and important segment. And obviously reaching or exceeding the 70,000 connected assets and as Chantal mentioned, the recurring revenue And the overall revenues exceed our direct operating expenses and therefore puts us in a positive operating EBITDA position is our focus. I will now turn the call back to the operator and open up for questions. Thank you. Thank you. Ladies and gentlemen, we will now begin the question and answer session for analysts One moment for your first question. Your first question comes from Brian Kinstlinger with Alliance Global. Please go ahead. Hey, guys. Sorry, I didn't have the privilege of watching the slide deck. So I apologize for some of the questions. And I guess in the future, I'd suggest Making it available separate from the webcast because you and all are listening live. Can you give us the total number of connected assets today? I think I heard you say $80,000,000 in backlog. And first, how many are in Alberta? And recently we saw Alberta Get back to additional restrictions after easing restrictions. So maybe talk about the environment there and What the backlog is specifically in Alberta? Yes. So when you do get a chance to get the slides and I'll sent it to you directly, the slide. So if you look in Page 12, anyway, so Alberta within the 40% of North America is about half Of the North America backlog. So 40 percent of $80,000,000 which is about half of that we have already in Booked. The other half is in the second half of which of that half, about a half is Alberta. And yes, We did see on Friday that the Premier extended the lockdown. We expect, however, some of our customers, we know some of our customers on the industrial side Are getting back that this extended restriction will not apply to them. So we're hopeful that that won't impact that Therefore, the industrial side of Alberta will be fine. So half of the backlog is industrial and about half of the backlog is North America, Of which half of the half is Alberta, Brian. Got it. And to be clear, to date, Actually in the Q3, you haven't connected many new assets in Alberta, is that right? Almost 0 in Alberta. May June was completely locked down. Yes, that's correct. Yes. And what is your total connected asset today? Yes. And you gave the quarter end. Yes, 62,508. That was it today, not at quarter end? No, quarter end. That's at the end of June 30th, yes. Right. I'm wondering mid August, where are you? Can you provide that? No, it's not a published number. Actually, I don't even have it close to me, but Alberta would continue to be near to 0. So it's where we've picked up is some in the U. S. For sure in New York, None in California yet, some in Asia and none yet in the Middle East, but soon in the Middle East. But we're really relying on the back half of August, but more importantly September. Got it. And then in terms of Asia Pacific and Middle East again, sorry, but Can you provide the percentage backlog that you have there? And are you already delivering on Getting all the assets live or does something need to happen between now and some point in time to start picking that up? So 20% is Asia Pacific to answer your question. The offshore platforms are proceeding without any challenge because we're doing it remotely regardless. So pandemic restriction doesn't really apply. A portion of that backlog is connected worker, Brian. So that is kind of less So 20% of it is Asia Pacific and we're less impeded certainly than we are in Alberta or North America with the customers we have in Asia Pacific. And Middle East? We're just signing TCVs now. So there's no the reason we're not connected is not due to any impediment. It's just You got to sign the contracts before you start, but I would expect something by September and definitely nice activity in the Q4. That's not a pandemic issue because their policies are pretty clear. If you have a vaccine, you can do pretty much anything. So and you can't get into the country without a vaccine. So it makes it pretty simple. Yes. And your workers, are they coming from North America to the Middle East and to Asia Pacific to do the installations or are they local? Local, very local. Yes. Okay. And then last quarter you talked about 3 new partnerships, Con Edison, Present automation, BC Hydro. Can you talk about how do you today, connecting assets or today Adding and signing assets to backlog. Con Edison definitely connecting and I think you'll see some of that discussion at AssetCare or mCloudConnect. And BC Hydro starting to connect, likely some discussion at mCloudConnect, but definitely that connection not just Signing TCV. And then lastly, in terms of after I heard that the debentures are going to convert. So, will the short and long term debentures go to 0? If not, what portion? And then, what will be the total shares Added to the Q2 show count. So we added in yesterday's or Friday's conversion about 6,400,000 shares. So we were at 34.7x at 6.4x gives you the share count in treasury. The $23,500,000 debenture that which is due next year, this time next year or actually May next year Are not in not yet converted. That we will likely deal with on an EBITDA basis in the second half In 2022, as we pick up EBITDA, our ATB facility and other facilities we have is designed to be sized up Take out that debenture next summer. So just to be clear, the $23,000,000 of the $32,000,000 is what you're saying will still be there? Yes, sir. Great. Okay. Thanks for all your answers and questions. Thank you. Thank you. Your next question comes from Martin Turner with ATB Capital Markets. Please go ahead, Martin. Hi, Martin. Hello, Martin. Can you guys hear me? No, we do. Okay. Well, sorry about that and thanks for taking the question. Just in the PR, it mentions Collections issue and I see that long term portion of trade receivables went up. Just wondering what was going on there? Can you kind of explain that a little bit? Yes, Chantal, go ahead. Sure. Thanks for the question, Martin. It's just simply a slowdown in collections. There's no collectibility issues. A lot Companies have just extended the period over which they are paying their bills. Primarily that's happening in Alberta. Got you. Okay, thanks. Just to confirm, This 70,000 connected assets level, that's where you're kind of roughly breakeven on an EBITDA or a Cash flow before interest kind of basis? Correct. Awesome. It's operating we refer to the term as you see in our investor Presentation, we depict it very clearly. So if you look go to our website, you'll see the impact of $70,000 why that's meaningful. You'll see the operating. So you'll see the revenues, the gross margins and its result and impact to operating EBITDA. Perfect. So the asset you connect at various ARPUs, if I'm right. Just wondering, do you think that the ones you guys connect from here to 70 will be Got a higher on that ARPU number about what you've been doing in the past or something else? No, they'll be they're mainly industrial and there are a lot in Alberta as Brian asked. So those by definition are higher blended value or higher value period. So there'll be a skew towards higher Monthly recurring value per asset based on what's in that backlog. Got it. Great. It sounds like The 1,000 or so connected assets result was mostly a function of lockdowns and inability to reach customers. But was there any churn of note in the quarter? No, we didn't have any churn. No churn, the answer is 0. So We remain very highly sticky, no churn. And on the other hand, we didn't add many new logos to our Portfolio in the Q2, but as I mentioned with the Middle East and Southeast Asia and Asia Pacific, you're going to see a lot of customers with In one case Aramco, you're looking at millions of assets. We will have maybe several 100 Of 1,000,000. So our ability to penetrate a logo and then scale within the logo will be beyond massive, right? So these are big, big logo, big asset customers that will be signing up in the second half. Got you. Interesting. That sounds great. And I'm just wondering on it sounds like the growth In the next couple of quarters, it's going to come more from the industrial side, but just wondering about the state of the Buildings, for the business. Not really on connected assets, no indoor air quality. So you asked me the value, the ARPU value of an industrial asset is 2 Dollars, right. And then ARPU value of an asset in buildings is closer to now actually we're getting away with or shouldn't say getting away with, we're getting higher pricing than $50 So we're seeing good pricing Around indoor air quality, I wouldn't if you look at the distribution, buildings are still a pretty sizable component And that's driven largely by indoor air quality. So if you had a if you weren't at a screen where you're able to see the QR code, You'll see offices in Alberta, offices here in BC, offices in the U. S, soon to have school districts where And I believe with this QR code becoming a reality of the question will become, if you're able to see the state of the quality of air in the building As a policymaker, why in the hell when we do it to all our buildings? So I think that you will see some pretty If you attend mCloudConnect, you'll see what I mean. Awesome. I pulled up the QR code. That's really cool. And so it sounds like you guys are Still very bullish on the buildings opportunity. Just wondering if you have any thoughts on the pace at which That business will reopen. I think it will be big because they're big footprint customers, right? We're not dealing with any customer that only has 5 buildings that I know of or 2 or 3 buildings. They're all in many, many buildings. So it will be a nice pace and because it's distributed, Brian asked the question, are you stuck with 1 central groups flying around the world? The answer is no, it's regional. In building, it's even easier because it's regional And it's not that complex to add. The indoor air quality sensors are off the shelf capable things. The synthesis technology, most Mechanical contractors can do pretty easily. So I think the ability to do and you're talking about California, which is bigger than Canada, Talking about New York State, so these are big geographies, big pull and we're not at the mercy of any kind of special knowledge to do it Because this retrofitting of a building to be indoor air quality or demand response energy efficient, this IoT technology is Pretty straightforward for these mechanical contractors to do, which we don't do. Is that right? Okay, super. That's very helpful and Thanks for taking my questions. Thank you very much. I think at this point, yes, we don't have any more questions, right? There are no further questions at this time indeed. Mr. McMeekin, you may proceed. Yes. So we thank everyone. We'll see you in the Q3 and we look Forward to a very positive and high growth second half. Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask