DIRTT Reports First Quarter 2023 Financial Results
DIRTT Environmental Solutions Ltd. (“DIRTT” or the “Company”) (Nasdaq: DRTT, TSX: DRT), a leader in industrialized construction, today announced its financial results for the three months ended March 31, 2023. All financial information in this news release is presented in U.S. dollars, unless otherwise stated.
First Quarter 2023 Highlights
- Revenue decreased 4% to $36.7 million for the quarter, compared to the prior year’s first quarter.
- Gross Profit margin improved by 1,507 bps from the first quarter of 2022 due to previously implemented price increases and reductions made to our fixed cost structure.
- Net loss improved by $11.6 million to $(11.4) million, or 50%, from the prior year’s first quarter loss of $(23.0) million.
- Adjusted EBITDA(1) improved $8.4 million, or 70% year over year, despite lower revenue.
- Unrestricted cash of $8.1 million compared to $10.8 million at December 31, 2022.
- Liquidity of $13.3 million compared to $16.1 million at December 31, 2022.
- Twelve-month forward sales pipeline of $252 million as of April 1, 2023, an increase of 2% from January 1, 2023, and a 4% increase from January 1, 2022.(2)
- On May 9, 2023, DIRTT entered into an agreement with Armstrong World Industries Inc. (AWI) related to the co-ownership of certain intellectual property rights in a portion of the ICE software for cash consideration.
(1) See “Non-GAAP Financial Measures”(2) In the first quarter of 2023, we changed our methodology for calculating our forward twelve-month pipeline. We now report the number of qualified leads separately and no longer include the value of qualified leads, calculated as qualified leads multiplied by average project value, in the calculation of our forward twelve-month pipeline. For additional information, refer to our Quarterly Report on Form 10-Q filed with the SEC on May 9, 2023.
Management Commentary
Benjamin Urban, chief executive officer, remarked “I am proud of the way our team has responded to increased economic uncertainty and volatility within our first quarter pipeline. While our first quarter revenue performance does not meet our expectations, we are already seeing the results from our commercial reorganization undertaken earlier in the year. We have experienced an increase in both our order pace and pipeline beginning in April, being awarded several large projects with Bechtel, Apache and Visa that are expected to deliver $10 to $15 million in aggregated revenue this year. DIRTT is also excited to establish a deeper collaboration with AWI and believes it will provide additional resources and investment to move the ICE software forward, while leveraging the relationship to identify and capitalize on new commercial opportunities and possible revenue growth capabilities”.
Bradley Little, chief financial officer, added “The pricing, cost reduction and cash initiatives implemented over the previous six to nine months have served to mitigate against market uncertainty and delayed project schedules during the first quarter. This resulted in improved margins and improved Adjusted EBITDA year over year on lower volumes. This improved cost structure provides us with a solid platform that we believe will enable us to deliver profitable growth in the future. We are making good progress on our non-dilutive strategic cash initiatives, which are expected to deliver meaningful cash proceeds to the Company in 2023”.
First Quarter 2023 Results
First quarter 2023 revenues were $36.7 million, a decrease of 4% over the first quarter of 2022. The decrease was driven by a reduction in volume, offset by the favorable impact from pricing increases. The volume decrease is primarily the result of delays in certain project completion and lower average order size, believed to be primarily driven by current macroeconomic conditions, including layoffs in the tech sector and rising interest rates.
First quarter 2023 gross profit and gross profit margin was $8.7 million, or 23.7% of revenue, an increase of $5.4 million, or 164%, from $3.3 million, or 8.6% of revenue, for the first quarter of 2022. The increase in gross profit margin was a result of realization of our price increases and improved labor efficiency. Materials, transportation and other variable costs, as a percentage of revenue, improved from prior quarter and prior year as the previously announced price increases contemplated the rising material and other input costs. Gross profit for the first quarter of 2023 benefited from the impact of the weakening Canadian dollar on U.S. dollar reported results, which is included in the above variances.
First quarter 2023 Adjusted Gross Profit and Adjusted Gross Profit Margin (see “Non-GAAP Financial Measures”) were $10.5 million and 28.5%, respectively, or an increase of $3.7 million and 55% compared to the prior year’s first quarter. Adjusted Gross Profit excludes depreciation and amortization costs of $1.8 million, or 4.9% as a percent of revenue in the quarter ended March 31, 2023, and $3.5 million, or 9.1% as a percent of revenue for the first quarter of 2022.
Sales and marketing expenses for the quarter were $5.5 million, a $1.7 million decrease from $7.2 million in the prior year’s first quarter. The decrease was largely related to lower salary and benefit expenses due to planned headcount reductions as part of our cost reduction initiatives, and lower travel, meals and entertainment expenses due to a focus on cost discipline during the quarter.
General and administrative expenses for the quarter were $5.8 million, a decrease of $2.2 million from $8.0 million in the prior year’s first quarter. The change was due to reductions in salaries and benefits from planned headcount reductions as part of cost reduction initiatives as well as reduced professional fees, as the prior year’s first quarter included $1.5 million of costs related to the contested director elections, and lower depreciation expense.
Operations support expenses for the quarter were $2.0 million, a decrease of $0.5 million from $2.5 million in the prior year’s first quarter. The decrease was due to reductions in salaries and benefits from planned headcount reductions as part of cost reduction initiatives.
Technology and development expenses for the quarter were $1.5 million, a decrease of $0.6 million from $2.1 million in the prior year’s first quarter due to reductions in salaries and benefits expenses as part of cost reduction initiatives.
During the quarter, the Company incurred $1.1 million in reorganization costs, which includes termination benefits incurred on headcount reductions and executive changes, costs incurred related to the closure of our Phoenix Facility in the prior year, executive recruitment fees and other costs.
On March 15, 2023, the Company entered into a Debt Settlement Agreement with a related party for the reimbursement of costs incurred during the contested director election in 2022. $2.1 million of costs have been recognized under this arrangement.
Net loss for the quarter was $(11.4) million compared to $(23.0) million for prior year’s first quarter. The lower net loss is primarily the result of the higher gross profit margin and reduced operating expenses explained above.
Adjusted EBITDA (see “Non-GAAP Financial Measures”) for the quarter was a $(3.5) million or (9.6)%, an improvement of $8.4 million from a $(12.0) million or (31.2)% for the prior year’s first quarter. Improvements in Adjusted EBITDA for the quarter were due to the above noted reasons.
On May 9, 2023, we entered into an agreement with AWI for the partial assignment to AWI and co-ownership of a 50% interest in the rights, title and interest in certain intellectual property rights in a portion of the ICE Software that is used by AWI, as well as the knowledge transfer relating to certain source code of the ICE Software, for cash consideration. Further details on this transaction can be found in our Form 8-K filed with the SEC on May 9, 2023, as well as our website.
Outlook
Our 12-month forward sales pipeline at April 1, 2023, excluding leads, was $252 million, an increase of 2% from January 1, 2023 and a 4% increase year over year.(1)
At April 1, 2023, qualified leads being pursued with expected projects in the next twelve months was 969, compared to 721 at January 1, 2023 and 395 as of January 1, 2022.
Like many other companies, we are impacted by uncertain macroeconomic conditions, including layoffs in the technology sector, reduction in short-term needs for office space, and increasing interest rates impacting borrowings. Certain larger projects that were planned for the first two quarters of 2023 have been deferred or canceled, resulting in muted growth in our pipeline as of April 1, 2023.
In response to these factors, we have taken a thoughtful look at our cost structure over the past three months. During the first quarter of 2023, as we discussed in our previous filings, we took actions to reduce annualized operating expenses by approximately $5.0 million. In addition, during the second quarter to date, we have taken additional actions that we expect to generate $4.0 million in annualized savings, including a planned headcount reduction with annualized savings of approximately $3.1 million exclusive of termination benefits of $0.7 million. These reductions are designed to improve efficiencies and streamline our back office and order fulfillment processes in light of the longer range uncertainty. These actions are not expected to have a material impact on product delivery.
Despite the uncertainty and current economic environment, we are seeing the benefits of the reorganization of our commercial organization and experienced an increase in both our order pace and pipeline beginning in April and May 2023.
(1) In the first quarter of 2023, we changed our methodology for calculating our forward twelve-month pipeline. See prior explanation of such changes.
The full text of DIRTT’s 1Q23 earnings release, including tables, and a replay of the company’s May 10 conference call webcast may be accessed at dirtt.com.
About DIRTT Environmental Solutions
DIRTT is a leader in industrialized construction. DIRTT’s 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 workplace, healthcare, education, and public sector markets, DIRTT’s system provides total design freedom, and greater certainty in cost, schedule and outcomes.
Headquartered in Calgary, AB Canada, DIRTT trades on Nasdaq under the symbol “DRTT” and on the Toronto Stock Exchange under the symbol “DRT”.
FOR FURTHER INFORMATION PLEASE CONTACT ir@dirtt.com
