Evertz Technologies Limited

Good day, ladies and gentlemen, and welcome to the E-VERTS first quarter 2020 conference call. As a reminder, today's conference is being recorded. It is Thursday, September 5th, 2019. At this time, I'd like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, Mr. Campbell.

Thank you, Cody. Good afternoon, everyone, and welcome to the E-VERTS Technologies conference call for our fiscal 2020 first quarter, ended July 31st, 2019. with Anthony Gridley, Ebert's Chief Financial Officer, and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on CDAR. Anthony and I will comment on the financial results and then open the call to your questions. I would like to begin by providing a few highlights and then Anthony will go into greater detail. First off, I'm very pleased to report sales for the first quarter fiscal 2020 of $103.4 million, a modest increase compared to the first quarter of last year. Our sales base is well diversified with the top 10 customers accounting for approximately 43% of sales during the quarter and with no single customer over 6%. In fact, we had 142 customer orders of over $200,000. Gross margin in the quarter was $59.2 million, or 57.2%. Investment in research and development totaled $22.7 million, reinforcing EBRT's commitment to R&D. Debt earnings for the first quarter were $13.2 million, and fully diluted earnings per share were 17 cents in the quarter. Everett's working capital was approximately $280.1 million with $100.4 million in cash and marketable securities as at July 31st, 2019. The purchase order backlog was in excess of $103 million at the end of August and shipments during the month were $50 million, totaling a record high $153 million combined backlog and shipments. We attribute this solid quarterly performance to the ongoing technical transition in the industry, channel and video services proliferation, increasing global demand for high-quality video anywhere, anytime, and specifically to the growing adoption of Everett's IT-based software-defined video networking solutions, Everett's IT and virtualized cloud solutions, our immersive 4K Ultra HD solutions, and our state-of-the-art Dreamcatcher IP replay and production suite. Today, Ebert's Board of Directors has declared a quarterly dividend of 18 cents per share, payable on or about September 20th, 2019. Furthermore, Ebert's Board also declared a special dividend of 90 cents per share, also payable on September 20th. The special dividend reflects both the strong long-term operating performance of the company and its solid balance sheet, thereby enabling a distribution of cash over and above what is considered necessary to meet known commitments and maintain adequate reserves. I will now hand over to Anthony Gridley, Ebert's Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. Good afternoon. Sales were $103.4 million in the first quarter of fiscal 2020 compared to $103.1 million in the first quarter of fiscal 2019, an increase of $0.3 million. It's worth noting we also had approximately 10 million in orders that shipped in August that would have been expected to ship in July normally. This contributes to the $50 million shipment number in August, which is an all-time reportable high shipment load. The US-Canada region had sales for the quarter of 74 million compared to 75.2 million last year. The international region had sales for the quarter of 29.4 million compared to 27.9 million last year, an increase of 5%. Gross margin for the first quarter was approximately 57.2% compared to 57% in the prior year. Gross margin was within what the company considers to be an acceptable range. Selling and admin expenses were $16.3 million for the first quarter as compared to $15.9 million in the same period last year. Selling and admin expenses to revenue were 15.8% as compared to 15.4% in the same period last year. R&D expenses were $22.7 million for the first quarter, which represents a $1.4 million or 6% increase from the first quarter last year. Foreign exchange loss was $1.8 million as compared to foreign exchange gain in the prior year of $1.1 million. The loss was predominantly a result of the decrease in the value of the U.S. dollar as at July 31, 2019 compared to April 30, 2019. Turning to discussion liquidity of the company, cash and marketable securities at July 31, 2019 were $100.4 million as compared to $108.6 million at April 30, 2019. Working capital was 280.1 million at July 31st compared to 282.5 million at the end of 2019. The company generated cash in operations of 7.9 million, which is gross of a 10.6 million change in non-cash working capital and current taxes. The effects of the change in non-cash working capital and taxes are excluded. The company generated 18.5 million in cash from operations. The company acquired 1.7 million of capital assets. Company used cash from finance activities of $14.3 million, which predominantly consisted of the payment of the regular dividend of $13.8 million offset by the issuance of capital stock pursuant to a stock option program of $0.9 million. Shares outstanding were approximately $76.6 million, and options outstanding were $1.4 million as of July 31, 2019. Weighted average shares outstanding were $76.6 million, and weighted average fully diluted outstanding were $76.7 million for the quarter ended July 31, 2019. This brings to a conclusion the review of our financial results and position for the first quarter. Finally, I'd like to remind you that some of the statements presented today are forward-looking, subject to a number of risks and uncertainties, and refer you to the risk factors described in the annual information form and the official reports filed with the Canadian Securities Commission. Brian, back to you.

Thank you, Anthony. Cody, we're now ready to open the call to questions.

Thank you, sir. If you'd like to ask a question, please see we're pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you'd like to ask a question. And we'll take our first question from Robert Young with Ken Accord Genuity. Please go ahead.

Hi, good evening. First question for me would be around the special dividend. Maybe if you could just talk about the decision to make the special dividend and what the other choices for the use of that cash might have been, particularly M&A. I know there's a fairly well-known that you had a minority position in one of your competitors, and so interesting that you would make the special dividend here.

Thank you, Robert. So, the dividend is a distribution of excess cash to our shareholders. We have taken profits and exited the EVS position. Everts does remain a disciplined value investor when we're considering M&A transactions, and with the pristine balance sheet and strong operating performance of the company, it does provide us significant financial capacity and flexibility.

Okay, great. Maybe some color on the slipped order. Is there any description of what type of order it is? I'm particularly interested in the gross margin profile of this order. You had strong gross margins despite the lower level of top line, and that's a Florida, and so maybe you could talk about that a bit.

So there's no misconception. It's not an order. It's numerous orders. And the gross margin profile would have been a strong gross margin. So if we had been able to ship the $10 million of multitude of orders, it would have helped our gross margin. It would have improved where we were at.

And since the close of the quarter, those slipped orders are now in the –

Yeah, so they're in the August, obviously not financial number, but they're in the August press release, first month August shipment number. So the way I look at it, if you sort of think of those as being more in July, then that normalizes July, probably adds five or six cents of EPS in July, and then it takes the August number down to a 4D level, which I think is pretty similar to where we were at this time last year, but we have a bigger backlog this year, I think, or similar backlog as well.

Well, the backlog, I think, is tied for record high. It's very high. So maybe you just talk about the composition of the backlog. What's driving the strength there? Is it built into 2020 events, or is it IP? Where is the strength of the backlog coming from?

Rob, our business continues to be driven primarily by our software-defined video networking solutions, our cloud-based solutions, whether they're on-premise or in the public cloud. It is our dream catcher and IP replay and production suite. Those new technologies are driving the predominance of our backlog and also our revenue.

Okay. And last question for me as you head into the IBC conference, maybe you could talk about what you're seeing out there on IP transition and, you know, how Everts is faring competitively there and then also on the cloud transition separately. That would be great. And I'll pass the line.

Thank you, Rob. We're very excited to be heading into IBC with a very strong portfolio of leading-edge products. We continue to see very good uptake in customer receptivity to our software-defined video networking solutions that are deployed at scale in hundreds of installations. And we've also have been very successful with the large scale deployments on premise in the cloud and in the public cloud. The last IBC we press released over 300 channels migrating to the public cloud and we continue to have very strong uptake of those products.

Would you feel comfortable giving an update on the number of IP installations?

Rob, could you repeat that? We couldn't hear it on our end.

Sorry. Would you feel comfortable giving an update on the number of IP installations that you've deployed? I think you've given that in the past.

It generally has come out in a press release, and we do continue to add to that number, but I don't have the total at this time.

Okay. Thanks, guys. I'll pass the line. Thank you. And once again, if you'd like to ask a question, please press star 1. We'll take our next question from Bill Cox with BMO.

Hey, guys. Thanks for taking my question. Just a quick one here. I noticed the international revenue came off upward trends in recent quarters. Just any color around changes on the international front or something that you'd point out?

Bill, thanks for the question. Both internationally and in the Canada-U.S. region, we do have volatility quarter to quarter in terms of revenue. Internationally, we are up year over year in the quarter, but down So, in general, so on a trailing 12-month basis, we would be up on an upward tick. So, we continue to have a good customer base internationally, and of course, we would like to see stronger sustained growth internationally.

Gotcha. And what about at the product portfolio level? Are you seeing any stronger demand for certain types of products on the international scale, maybe relative to North America?

As you can tell, the North American market, we have more large-scale deployments of our software-defined video networking technology. We do have large-scale deployments in Europe and internationally as well, too. But the sheer number is greater in the U.S. So we have had good success, but it isn't at the same level as it is in the U.S. And with the cloud-based deployments, of course, Discovery's U.S. migration to Amazon Web Services with Evers is one of the very high-profile deployments Internationally, we do have those 300 channels also that have migrated to the public cloud on Amazon Web Services with a Everts, Mediator, Overture software stack, and also our SDBN solutions supporting that.

Okay, cool. Thanks. I'll pass the line.

Thank you, and that does conclude today's question and answer session. I'd like to turn the conference back over to Mr. Campbell for any additional closing remarks.

Thank you, Cody. I'd like to thank the participants for their questions and add that we are very pleased with the company's performance during the first quarter of fiscal 2020, which saw sales in the international region increase 5% over the prior year, supported by sequential quarterly sales growth in the U.S., delivering total sales of 103.1 million in the quarter and solid gross margins of 57.2%, which together with Everett's disciplined expense management yielded earnings of 17 cents per share, inclusive of a 1.8 million foreign exchange loss in the quarter. We're entering the second quarter of fiscal 2020 with significant momentum fueled by a record high combined purchase order backlog plus August shipments totaling in excess of 153 million, up 26% year over year. And by the growing adoption of Everett's successful large-scale deployments of Everett's IP-based software-defined video networking and virtualized cloud solutions by some of the largest broadcast, new media, service provider, and enterprise companies in the industry. and by the continuing success of DreamCatcher, our state-of-the-art IP-based replay and production suite. With Ebert's significant investments in software-defined IP, IT, and virtualized cloud technologies, Ebert's leading deployments, and the capabilities of our staff, Ebert's is poised to build upon our leadership position. Thank you. We look forward to having many of you join us on the 9th of October at our annual general meeting. Good night.

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.