Price ($) Volume (M) Equity Research June 2, 2016 Research Update PIVOT TECHNOLOGY SOLUTIONS, INC. ARC Operational Update Selling Direct a Better Opportunity! EVENT PTG was notified that its distribution, administration services and license agreement with Austin Ribbon & Computer ( ARC ) will terminate August 31, 2016. BOTTOM LINE Direct to Customer is Better. Austin Ribbon is a historically underutilized business ( HUB ) focused in Texas. In Q1/16 and F2015, PTG gross revenue associated with ARC was $24.1M (~7% of sales) and $120.2M (~8% of sales), respectively. While $120.2M could be the maximum annual revenue loss from this agreement, we believe PTG is very well positioned to leverage geographic footprint, capabilities, and networks of the wider Pivot organization, to sell direct into the Texas government and SLED markets - generating more than $120M in annual revenue. We maintain a BUY rating, and our TP of C$1.50. FOCUS POINTS Q2/16 Preview. PTG expects a typical Q2 in-line with historical market activity. We believe Q1 should mark the bottom in quarterly revenues for the year. Gross Margins. Gross margin saw an uptick in Q1/16 given PTG sold less to its two major customers. We see upside in the margin story as emphasis is placed on services sales and new product sales to non-major customers. Customer Concentration. PTGs top ten customers accounted for 52% of total revenues in Q1/16, vs. 47% in Q1/15 and 52% in Q4/15. We expect Q2/16 to be in the 48-53% range which should help margins. NCIB. PTG is able to repurchase a maximum of 8,389,331 common shares under its NCIB. No purchases have been made as of Friday May 27, 2016. Recommendation: BUY Symbol/Exchange: PTG/TSX-V Sector: Technology IT Services All dollar values in US$ unless otherwise noted. Current price: C$0.41 One-year target: C$1.50 Dividend / Yield $0.04/9.9% Target return 270% Financial summary Shares O/S (M) 171.4 52-Week Range C$0.36 - C$0.62 Market Cap (C$M) 69.4 Avg. Weekly Volume (M) 2.36 Net Cash ($M) (146.5) Fiscal Year End 31-Dec US$M 2015 2016E 2017E 2018E Revenue 1,489.0 1,579.9 1,685.5 1,798.4 Revenue (YoY % ) 9.5% 6.1% 6.7% 6.7% Adj. EBITDA 31.4 45.0 50.6 59.3 Adj. EBITDA margin 2.1% 2.8% 3.0% 3.3% IFRS EPS (Basic) 0.02 0.10 0.13 0.17 IFRS EPS (Diluted) 0.02 0.10 0.12 0.17 Shares O/S (Diluted) 156.6 175.5 175.5 175.5 EV / Revenue 0.13x 0.13x 0.12x 0.11x EV / EBITDA 6.3x 4.4x 3.9x 3.4x P/E 17.9x 3.2x 2.5x 1.9x Source: Cantor Fitzgerald Canada $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Jun/15 Aug/15 Oct/15 Dec/15 Feb/16 Apr/16 Company profile: Pivot designs, sells, integrates and supports IT solutions - including hardware, maintenance and support - engaging clients in all aspects of their IT Lifecycle Management, including infrastructure investments. 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Ralph Garcea, MBA, P.Eng. Gianluca Tucci rgarcea@cantor.com gtucci@cantor.com (416) 849-5004 (416) 350-2177 Sales/Trading Toronto: (416) 363-5757, (866) 442-4485 See disclosure and a description of our recommendation structure at the end of this report. 1 of 6
Pivot Technology Solutions, Inc. June 2, 2016 ARC OPERATIONAL UPDATE Austin Ribbon & Computer ( ARC ) is a historically underutilized business ( HUB ) focused in Texas. In Q1/16 and F2015, PTG gross sales associated with Austin Ribbon was $24.1M (~7% of sales) and $120.2M (~8% of sales), respectively. While $120.2M could be the maximum annual revenue loss from this agreement, we believe PTG is very well positioned to leverage the geographic footprint, capabilities, and networks of the wider Pivot organization, to sell direct into the Texas government and SLED markets - generating more than $120M in annual revenue. The agreement with Austin Ribbon was mainly a products distribution agreement and carried low margins. Kevin Shank, PTG CEO, expressed on the past two earnings calls his strong intentions of focusing growth on higher margin managed services business. We believe PTG has the scale, brand and footprint (with Sigma Solutions - here) to sell direct in Texas. ARC s main markets are government and education (SLED), areas PTG already has strong exposure in (see here). We estimate the impact of the $120.2M in F2015 ARC revenues had on adj. EBITDA was ~$1.2M (3.8% of total adj. EBITDA). PTG is holding its AGM on Tuesday, June 21, 2016 at 10:00 AM ET at the Offices of Borden Ladner Gervais, Elliot Room; 40 King Street West, 44 th Floor. A taped replay of the Q1/16 conference call can be accessed at http://www.pivotts.com/investors/events-presentations/. PTG announced Q1/16 earnings last Friday - please see our earnings note here. For now, we are not making changes to our model. PTG has enough time (3 full months) to either settle the dispute with ARC or move to a direct sales model in the region - in which case margins should expand. We will update our model, if necessary, after the AGM, where we expect to have a further update on the situation. We do not expect this dispute to have any impact on the dividend or cash flows. Exhibit 1. Summary of Estimates Forecasts Q415 Q116 Q216E Q216E % Diff. Q316E Revenue ($M) $420.2 $332.8 $375.4 $430.8 Adj. EBITDA ($M) $13.89 $1.45 $10.51 $15.51 Basic EPS $0.04 ($0.02) $0.02 $0.04 F/D EPS $0.04 ($0.02) $0.02 $0.04 Source: Cantor Fitzgerald Canada, Company Documents Ralph Garcea, MBA, P. Eng. 416-849-5004 2 of 6
US$000 EBITDA Margin Pivot Technology Solutions, Inc. June 2, 2016 Longer term we continue to look for organic rev growth of ~4-7% and EBITDA margins to trend towards the 4% level. Exhibit 2. Revenue by Segment and EBITDA margins 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Product sales Service revenues Other revenues EBITDA Margin 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: Cantor Fitzgerald Canada, Company Documents RECOMMENDATION AND VALUATION We are maintaining a BUY recommendation and our C$1.50 TP. On our estimates, PTG currently trades at a C2016 EV/Sales of 0.13x and EV/EBITDA of 4.6x vs its VAR comparables at an average of 0.28x and 7.1x, respectively. Exhibit 3. Global Value Added Resellers (VARs) Comparables Price Mkt Cap LTM Rev EV/Sales EV/EBITDA P/E Ticker (Local) (Local) (US$) GM 2015 2016 2017 2015 2016 2017 2015 2016 2017 Pivot Technology Solutions, IncPTG-CA 0.41 70 1,525 10.7 0.13 0.13 0.12 6.3 4.6 4.1 11.1 2.4 2.0 Ingram Micro Inc. Class A IM 34.86 5,178 41,718 6.4 0.12 0.13 0.13 6.9 6.8 6.2 13.3 13.6 12.4 Tech Data Corporation TECD 76.36 2,682 26,456 4.9 0.08 0.08 0.08 6.1 5.8 5.6 13.2 12.4 11.9 Avnet, Inc. AVT 41.37 5,317 26,789 11.5 0.24 0.26 0.26 6.1 6.5 6.5 9.2 9.5 9.3 SYNNEX Corporation SNX 92.60 3,676 13,262 8.7 0.29 0.29 0.27 8.1 8.2 7.4 14.7 15.2 13.6 Insight Enterprises, Inc. NSIT 27.32 1,003 5,322 13.4 0.20 0.20 0.15 6.3 5.9 4.6 12.9 12.0 9.2 ScanSource, Inc. SCSC 38.53 989 3,519 10.3 0.32 0.29 0.28 9.0 8.5 7.7 14.8 13.2 12.3 CDW Corp. CDW 42.64 7,062 13,350 16.4 0.79 0.72 0.68 9.9 9.4 8.9 14.6 13.0 11.8 PCM, Inc. PCMI 10.65 123 1,864 13.7 0.18 0.13 0.13 15.6 7.1 4.2 56.1 8.0 6.7 PC Connection, Inc. PCCC 23.61 626 2,565 13.0 0.21 0.20 0.19 6.2 5.8 5.2 13.4 12.6 11.4 eplus inc. PLUS 87.31 627 1,197 20.8 0.49 0.50 0.50 7.3 6.9 6.9 13.8 14.1 12.8 AVERAGES: 11.9 0.29 0.28 0.27 8.1 7.1 6.3 17.6 12.4 11.1 Source: Cantor Fitzgerald Canada, FactSet Ralph Garcea, MBA, P. Eng. 416-849-5004 3 of 6
EV/EBITDA (2016E) Pivot Technology Solutions, Inc. June 2, 2016 Exhibit 4. Global VARs EBITDA Margins Drive Valuation 10.0 9.0 R² = 0.5517 SCSC CDW 8.0 SNX 7.0 IM 6.0 TECD NSIT AVT PCCC 5.0 4.0 PTG - 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 EBITDA % (LTM) Source: Cantor Fitzgerald Canada, FactSet Exhibit 5. Canadian Technology Dividend Stocks Source: Cantor Fitzgerald Canada, FactSet Canadian Technology Dividend Stocks At current share price levels, the dividend results in a yield of ~8.9%. If the yield were to move to the average yield shown below (~2.9%), the shares would be trading at ~$1.38 level. Ticker Price Mkt Cap LTM Rev EV/Sales EV/EBITDA P/E Div (Local) (US$) (US$) 2015 2016 2017 2015 2016 2017 2015 2016 2017 Yield Constellation Software Inc. CSU-CA 534.72 8,651 1,902 4.5 4.2 3.6 17.8 16.7 14.7 22.0 22.3 18.6 0.9% Open Text Corporation OTC-CA 78.31 7,251 1,823 4.3 4.5 4.1 13.0 12.3 11.3 17.4 17.0 15.4 1.5% MacDonald, Dettwiler and Associates Ltd. MDA-CA 86.65 2,398 1,634 1.9 1.8 1.7 11.1 10.5 9.9 14.3 13.8 12.7 1.7% Enghouse Systems Limited ESL-CA 61.42 1,257 224 5.7 5.0 4.4 22.4 19.6 17.0 52.5 40.9 32.9 0.9% Evertz Technologies Limited ET-CA 18.20 1,031 292 3.2 3.0 2.6 11.5 10.0 8.0 18.5 16.4 12.8 4.0% Computer Modelling Group Ltd. CMG-CA 10.00 602 62 8.9 9.2 8.4 19.0 19.6 16.7 31.2 30.7 26.2 3.9% Wi-LAN Inc. WIN-CA 3.61 329 113 2.4 2.6 2.7 4.2 4.4 4.8 5.3 5.5 6.1 1.4% Vecima Networks Inc. VCM-CA 11.16 191 84 2.0 1.7 1.8 6.3 5.1 5.5 15.3 11.4 13.3 2.0% Absolute Software Corporation ABT-CA 6.82 202 90 1.7 2.0 1.9 9.7 15.1 15.3 49.1 19.0 61.3 4.7% Mediagrif Interactive Technologies Inc. MDF-CA 15.80 181 56 3.5 3.4 3.2 8.6 8.3 7.6 13.4 13.1 11.6 2.5% Sylogist Ltd. SYZ-CA 9.30 165 25 NM NM NM NM NM NM NM NM NM 2.8% Pollard Banknote Limited PBL-CA 8.20 147 176 1.2 1.1 1.1 10.0 9.5 8.8 25.6 17.4 14.6 1.5% Calian Group Ltd. CTY-CA 19.26 109 197 0.5 0.5 0.5 7.7 6.7 6.7 13.0 11.1 10.9 5.8% TECSYS Inc. TCS-CA 9.65 91 49 1.7 1.6 1.4 20.0 13.7 10.3 46.8 23.4 14.9 1.0% RDM Corporation RC-CA 4.20 72 22 1.7 2.0 1.7 6.9 6.6 5.5 12.6 21.4 16.9 1.9% Pivot Technology Solutions, Inc. PTG-CA 0.40 52 1,525 0.1 0.1 0.1 6.3 4.6 4.1 14.2 3.0 2.5 8.7% C-COM Satellite Systems, Inc. CMI-CA 1.18 33 8 NM NM NM NM NM NM NM NM NM 4.2% Averages: 2.9 2.8 2.6 11.6 10.8 9.8 23.4 17.8 18.1 2.9% Ralph Garcea, MBA, P. Eng. 416-849-5004 4 of 6
Pivot Technology Solutions, Inc. June 2, 2016 TECHNICALLY SPEAKING. PTG has broken below its channel-up and successfully retested its April $0.36 low, where it found support and bounced off of. Resistance now lies at $0.44 and $0.46, with support at $0.38 and $0.36. Exhibit 6. PTG Technical Chart Source: Cantor Fitzgerald Canada, StockCharts.com Ralph Garcea, MBA, P. Eng. 416-849-5004 5 of 6
Pivot Technology Solutions, Inc. June 2, 2016 DISCLAIMERS AND DISCLOSURE Disclaimers The opinions, estimates and projections contained in this report are those of Cantor Fitzgerald Canada Corporation ( CFCC ) as of the date hereof and are subject to change without notice. CFCC makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and that contain information and opinions that are accurate and complete; however, CFCC makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to CFCC that is not herein. 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Major Institutional Investors receiving this report should effect transactions in securities discussed in this report through Cantor Fitzgerald & Co. This report has been prepared in whole or in part by research analysts employed by non-us affiliates of Cantor Fitzgerald & Co that are not registered as broker-dealers in the United States. These non-us research analysts are not registered as associated persons of Cantor Fitzgerald & Co. and are not licensed or qualified as research analysts with FINRA or any other US regulatory authority and, accordingly, may not be subject (among other things) to FINRA s restrictions regarding communications by a research analyst with a subject company, public appearances by research analysts, and trading securities held by a research analyst account. Potential conflicts of interest The author of this report is compensated based in part on the overall revenues of CFCC, a portion of which are generated by investment banking activities. CFCC may have had, or seek to have, an investment banking relationship with companies mentioned in this report. CFCC and/or its officers, directors and employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. Although CFCC makes every effort possible to avoid conflicts of interest, readers should assume that a conflict might exist, and therefore not rely solely on this report when evaluating whether or not to buy or sell the securities of subject companies. Disclosures as of June 2, 2016 CFCC has not provided investment banking services or received investment banking related compensation from Pivot Technology Solutions, Inc. within the past 12 months. The analyst responsible for this research report does not have, either directly or indirectly, a long or short position in the shares or options of Pivot Technology Solutions, Inc. The analyst responsible for this report has visited the material operations of Pivot Technology Solutions, Inc. No payment or reimbursement was received for the related travel costs. Analyst certification The research analyst whose name appears on this report hereby certifies that the opinions and recommendations expressed herein accurately reflect his personal views about the securities, issuers or industries discussed herein. Definitions of recommendations BUY: The stock is attractively priced relative to the company s fundamentals and we expect it to appreciate significantly from the current price over the next 6 to 12 months. BUY (Speculative): The stock is attractively priced relative to the company s fundamentals, however investment in the security carries a higher degree of risk. HOLD: The stock is fairly valued, lacks a near term catalyst, or its execution risk is such that we expect it to trade within a narrow range of the current price in the next 6 to 12 months. The longer term fundamental value of the company may be materially higher, but certain milestones/catalysts have yet to be fully realized. SELL: The stock is overpriced relative to the company s fundamentals, and we expect it to decline from the current price over the next 6 to 12 months. TENDER: We believe the offer price by the acquirer is fair and thus recommend investors tender their shares to the offer. UNDER REVIEW: We are temporarily placing our recommendation under review until further information is disclosed. Member-Canadian Investor Protection Fund. Customers' accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request Ralph Garcea, MBA, P.Eng. (416) 849-5004 6 of 6