DIRTT announced its financial results for the three months ended September 30, 2019. All financial information in this release is presented in U.S. dollars, unless otherwise stated.
Third quarter 2019 vs. Third Quarter 2018
Revenue of $65.4 million vs. $73.9 million (down 12%)
Gross Profit Margin of 38.1% vs. 40.7%
Adjusted Gross Profit Margin1 of 41.8% vs. 44.0%
Operating expenses of $17.6 million2 $30.4 million
Net income of $5.8 million or $0.07 per share vs. net loss of $(1.4) million or $(0.02) per share
Adjusted EBITDA1 of $8.1 million vs. $13.1 million
Adjusted EBITDA Margin1 of 12.3% vs. 17.7%
(1) See "Non-GAAP Financial Measures"
(2) 2018 Operating expenses include a $6.1 million impairment, $2.2 million reorganization costs and $2.0 million of stock-based compensation expense. 2019 Operating expenses include a $2.4 million recovery of stock-based compensation
Third Quarter 2019 Results
Kevin O’Meara, DIRTT’s chief executive officer, stated: “Our third quarter revenue of $65.4 million was 12% below the same quarter of 2018. Several factors continue to impact our 2019 revenue, including the disruption to our salesforce and distribution partner network from 2018’s management transition, the impact of an immature go-to-market approach, an inadequately supported sales force working on a long sales-cycle, as well as the revised timing of various projects and the loss of certain expected projects. It has become clear as the year progressed that the sales and marketing organization with which we entered 2019 has been unable to deliver on the opportunities identified and on which our prior guidance was based, and therefore, we anticipate fourth quarter revenue to be lower than expected. This has been driven largely by a historical lack of training, individual accountability and necessary processes and tools. Our belief in the size of our market opportunity — and the resonance of DIRTT’s value proposition within it — remains unchanged. Accordingly, we have embarked on a comprehensive transformation of these functions that we believe will create a scalable platform from which to generate profitable growth.
“During the quarter, we took significant steps to establish DIRTT’s commercial function. We began implementing our comprehensive sales and marketing strategy, which includes newly established sales roles to support growth, dedicated resources to strategic national accounts, and the creation of marketing programs, systems and communications to drive lead generation. Our commercial function is being spearheaded by our new chief commercial officer, Jennifer Warawa, who joined DIRTT effective September 16, 2019. While the expected benefits of these initiatives take time to realize, we believe they are the foundation of a robust and sustainable approach to generating future sales growth.
“Brandon Jones has joined DIRTT as vice president of strategy, effective September 30, 2019. He will be responsible for the project management of DIRTT’s commercial strategy implementation, supporting Ms. Warawa. Mr. Jones was most recently a project leader for the Boston Consulting Group. He has a mechanical engineering degree from the University of Southern California and an MBA from the University of Chicago. He also served as a commercial general contractor for eight years prior to earning his MBA.
“In our manufacturing operations, we have been moving ahead with a metrics-based approach to lean manufacturing within our facilities, with a focus on Safety, Quality, Delivery, Inventory and Productivity (SQDIP). This approach is being implemented in all our facilities, along with related systems, and has begun to yield improvements. These improvements were offset, however, by lower leverage on fixed manufacturing costs and underutilized labor capacity from lower than expected revenue. Adjusted Gross Profit Margin decreased to 41.8% in the third quarter of 2019, compared to 44.0% in the third quarter of 2018. Accordingly, Adjusted EBITDA also decreased comparatively to $8.1 million, or 12.3% of revenue, reflecting both the lower sales and decreased gross margin, offset by a $1.3 million reversal of a claims provision.
“Moving forward with our manufacturing capacity expansion, in early October we entered into a lease agreement for our previously announced combined tile and millwork factory. The new facility will be located in the Charlotte metropolitan area, less than 30 minutes from the Charlotte Douglas International Airport in North Carolina, and will include a world-class DIRTT Experience Center (DXC). Charlotte Douglas is one of the busiest airports in the United States, and the new DXC will serve as our east coast sales and marketing hub.
“We expect the total cost of this new facility to be approximately $18.5 million, excluding the cost of the DXC, for which planning is currently underway. In August 2019, we paid $1.6 million to equipment suppliers for customized equipment for this facility that has an anticipated delivery in the second half of 2020. We expect this new location to maximize DIRTT’s production efficiency, allow us to better serve our customers geographically, and afford us the capacity to support growth while maintaining our rapid manufacturing lead times. We expect commercial operations to begin in the first quarter of 2021.
“Trading of our common shares on The Nasdaq Global Select Market (“Nasdaq”) commenced October 9, 2019. As a result of the listing, DIRTT’s financial statements are now reported under the accounting principles generally accepted in the United States (“GAAP”) and in U.S. dollars. We also ceased our offering of a cash-surrender option for employee stock options. Year-to-date one-time costs of the Nasdaq listing are approximately $2.5 million, and we expect to incur approximately $0.5 million of additional costs in the fourth quarter of 2019.
“Within the area of product development, Geoff Gosling, director of innovation, has decided to retire. Mr. Gosling, who ceased to be an executive officer earlier in the year, was one of DIRTT’s founders and our first leader of product development, and was one of the principal inventors of DIRTT’s solutions. His retirement will allow for him to spend well-deserved time with his family.
“Colin Blehm, who has been with DIRTT for over 15 years and has led the product development team for the last nine months, has been named vice president of product development and will continue reporting to me in this capacity. Mr. Blehm led the development of the groundbreaking Reflect™ ultra-minimalist wall we announced in October, and he is also responsible for leading efforts on a number of product innovations that resulted in patents for DIRTT. Prior to joining DIRTT, Mr. Blehm worked with Evans Consoles in the areas of product development and research and development.
“We began this year with the expectation that our fiscal 2019 revenue would be 5% to 10% higher than our 2018 revenue, with corresponding increases in net income and adjusted EBITDA. With increasing recognition of challenges associated with the overall management changes and the immature nature of our commercial function, we revised our expectation downward as the year progressed. In addition, we said that we expected Adjusted EBITDA to be impacted by certain one-time costs related to the sales and marketing plan, Nasdaq listing, and operating consulting costs. Management now expects 2019 revenue to be 7% to 10% lower than 2018 revenue, which equates to estimated fourth quarter revenue of between $52 million and $60 million. Management also expects Adjusted EBITDA to be negatively impacted by deleveraging of fixed costs on lower revenue.”
Mr. O’Meara added: “While 2019 has been a challenging year and we are clearly not satisfied with the results, it is a transition year. We have made significant strides toward enhancing our management team, our commercial organization and marketing strategy. Despite the revenue decline and associated one-time consulting and listing costs, we expect to exit 2019 in a strong financial position with a net cash balance at least equal to last year and increased liquidity from a larger credit facility.”
We have made significant strides toward enhancing our management team, our commercial organization and marketing strategy. — Kevin O'Meara, DIRTT CEO
The Company’s Analyst Day for institutional investors and securities analysts is scheduled for November 12, 2019 in New York City. At that time, DIRTT’s management team will present the Company’s long-term growth strategy, including revenue and Adjusted EBITDA targets the Company is working to achieve by the end of 2023.
DIRTT is a global leader in industrialized construction. Its system of physical products and digital tools empowers organizations, together with construction and design leaders, to build high-performing, adaptable, interior environments. Operating in the commercial, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule, and outcomes. Headquartered in the US and Canada, DIRTT trades on Nasdaq under the symbol “DRTT” and on the Toronto Stock Exchange under the symbol “DRT”.