Evertz Technologies Limited

Good day, ladies and gentlemen, and welcome to the eBirds Second Quarter 2020 Conference Call. As a reminder, today's conference is being recorded. It is Thursday, December 12, 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, Chantal. Good afternoon, everyone, and welcome to eBirds Technologies Conference Call for our Fiscal 2020 second quarter ended October 31st, 2019 with Doug Moore, Ebert's Chief Financial Officer, and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on CDAR on the company's investor website. Doug and I will comment on the financial results and then open the call to your questions. I would like to start with a few highlights, and then Doug will provide additional details. First off, I'm pleased to report sales for the second quarter totaled $120 million, up 7% from the prior year. This increase was driven predominantly by the adoption of Everett's new technologies and products and by the strength in the U.S.-Canada region, which had sales for the quarter of $88.6 million, an increase of 14% from the prior year. Our base is well diversified. with the top 10 customers accounting for approximately 49% of sales during the quarter and with no single customer over 12%. In fact, we had 124 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $69.3 million, up for 57.9%, which is within our target range. Investment in research and development during the quarter totaled $22.9 million. Net earnings for the second quarter were $20.5 million, while fully diluted earnings per share were $0.27. Ebert's working capital was $222 million, with cash of $5.4 million as of October 31, 2019. Operational highlights for the second quarter include Ebert's strong presence at the International Broadcast Conference, where Group M6 Paris Headquarters Modernization II IP with Ebert's was featured in the IBC IP Showcase Theater. This master control and play out IP migration is a leading deployment of SEMT 2110, leveraging Ebert's pioneering software-defined video networking technologies. In addition, during the quarter, it was announced that CBS partnered with EBRITS to launch Dabble, CBS's new lifestyle channel, hosted completely in the public cloud using EBRITS Mediator X and Overture Playout solutions deployed within Amazon Web Services public cloud. At the end of November, EBRITS purchase order backlog was in excess of $97 million and shipments during the month were in excess of $39 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog 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 Evert's IP-based software-defined video networking solutions, Evert's IT and virtualized cloud solutions, our immersive 4K Ultra HD solutions, and our state-of-the-art Dreamcatcher IP replay and live production suite. Today, ERIP's Board of Directors declared a regular quarterly dividend of $0.18 per share, payable on or about December 20th. I will now hand over to Doug Moore, ERIP's Chief Financial Officer, to cover our results in great detail.

All right. Thank you, Brian. Good afternoon, everyone. Sales were $119.8 million in the second quarter of fiscal 2020, compared to $112.3 million in the second quarter of fiscal 2019. This represents an increase of $7.5 million, or 7%, over the quarter-to-quarter. Sales were $223.2 million for the six months ended October 31, 2019, compared to $215.4 million in the same period last year. This represents an increase of approximately 4%. The U.S.-Canada region had sales for the quarter of $88.6 million compared to $77.5 million last year. This represents an increase of $11.1 million, or 14% quarter over quarter. Sales in the U.S.-Canada region were $160.8 million for the six months ended October 31, 2019, compared to $152.7 million in the same period last year. This represents an increase of $8.1 million, or 5%. The international region had sales for the quarter of $31.2 million compared to $34.8 million last year. The international segment represented 26% in total sales this quarter as compared to 31% in the same period last year. Sales in the international region were $62.4 million for the six months ended October 31, 2019, compared to $62.6 million in the same period last year. This represents a small decrease of $0.2 million. Gross margin for the second quarter was approximately 57.9% and within the company's historical range. Gross margin for the six months ended October 31st was approximately 57.6%, also within the historical range. Filling and admin expenses were $18 million for the second quarter. That's an increase of $1.6 million for the same period last year. Selling and admin expenses as a percentage of revenue were approximately 15% compared to 14.6% for the same period last year. Selling and admin expenses were $34.3 million for the six months ended October 31st, an increase of $2 million from the same period last year. For the first two quarters, selling and admin expenses as a percentage of revenue were approximately 15.4% compared to 15% the same period last year. Research and development expenses were 22.9 million for the second quarter, which represented a 1.8 million increase from the second quarter last year. For the six months ending October 31st, research and development costs were 45.6 million, which represented an increase of 3.2 million over the same period last year. Foreign exchange for the second quarter was a loss of 1.1 million compared to a gain of $0.8 million in the same period last year, or in exchange for the six-month end of October 31st, was a loss of $2.9 million, compared to a gain of $1.9 million in the same period last year. The six-month loss was predominantly a result of the decrease in the value of the U.S. dollar since April 30th. Turning to a discussion of liquidity of the company, cash as at October 31st, 2019, was $5.4 million, as compared to $104.6 million, at April 30th, 2019. Working capital was $222 million at October 31st, 2019, compared to $282.5 million at the end of April 2019. Looking now specifically at cash flows for the quarter, the company used cash in operations at $12.9 million, which is net of $36.8 million in change in non-working capital and current taxes. If the effects of the change in non-cash working capital and current taxes were excluded, the company generated $23.9 million cash from operations in the quarter. The change in non-cash working capital is largely driven by an increase in accounts receivable of approximately $39 million between July 31st and October 31st. It's worth noting that collections of AR substance quarter ends have driven an increase of cash from $5.4 million at October 31st to approximately $29 million at the end of November 2021. Back to the cash flow in the quarter, the company generated cash from investing activities of $1.8 million, as marketable securities were disposed for proceeds of $4.1 million, partially offset by the acquisition of capital assets of $2.2 million. The company used cash in financing activities of $81.9 million, which was principally driven by dividends paid of $83.4 million, including a special dividend of $69.1 million. That was all partially offset by the issuance of capital stock pursuant to the company stock option plan of $3.4 million. Finally, I'll review our share capital position at October 31, 2019. Shares outstanding were approximately $76.8 million, and options outstanding were approximately $1.1 million. Weighted average shares outstanding were $76.7 million, and weighted average fully diluted shares were $76.8 million for the quarter ended October 31, 2019. This brings to a conclusion the review of our financial results and position for the second quarter. Finally, I would like to remind you that some of the statements presented today are forward-looking, subject to a number of risks and uncertainties, and we refer you to the risk factors described in the annual information forum and official reports filed with the Canadian Securities Commission. Brian, back to you.

Thank you, Doug. Chantel, we're now ready to open the call to questions.

Thank you. If you'd like to ask a question, please signal by 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, please press star 1 to ask a question. We will now take our first question from Thanos Moscapolo. Please go ahead.

Hi. Good afternoon. The gross margin was quite strong this quarter. Can you provide some color on that dynamic?

Yeah, so it's a function of our product mix, but it's also assisted by the increased revenues that's driving down the impact of fixed costs. And also, we have really strong revenue in North America, which there's a strong correlation there.

And would some of it also be due maybe to a higher software mix versus prior quarters? Not necessarily.

So, downloads are... Software and next generation products are definitely a very significant component of the product mix, and that does aid our gross margin.

Okay. And then looking at the regions, your North American growth obviously has consistently outpaced your international growth over the last couple of years. Can you provide your thoughts on that dynamic? I presume that's because North America has further had the curve in IP adoption, and if that's the case, as you speak to your international customers and look at the pipeline, when do you think we might start to see international growth catch up and accelerate to kind of the growth we're seeing in North America?

So, Thanos, yes, the North American, and specifically the U.S. environment, has been very robust and healthy for us. As you can tell from our 2019 fiscal year where we had very significant large U.S. network uptake, and we're continuing in fiscal 2020 to see very strong uptake of our STDN, IP, and virtualized products. And again, strength has been with some of our larger customers. The second part of your question was within the international markets. On a six-month basis, we're basically flat year over year in terms of revenue. We are absolutely seeing good, strong uptake of our software-defined video networking solutions and our cloud-based virtualized solutions. That said, we absolutely would like to see more growth internationally. Yes, we are seeing marquee installs, and some of those hopefully will be able to cross-release in the near future, but the growth has been flat year over year.

Well, I guess maybe just to expand, would you say that is it more a function of the macro environments being softer internationally than the U.S., or is it more of a function of where customers are on the technology adoption curve?

It may be a bit of both. It may be partially our own execution sales-wise as well, too. It's, you know, all of that kind of... We have aspirations to do much better internationally.

Okay. And then finally, Bill did obviously announce you're looking at Express Valley. I have to imagine that can only be a good thing for you competitively. Have you started to see some positive impacts from the announcements in your pipeline and win rates, or maybe not a lot incrementally given that you're already outcompeting them, especially on IP?

We continue to have very good success. and have in the past years with our software-defined networking and our virtualized cloud-based solutions. So our traction in those areas has been very good before and after the announcement.

Okay, fair enough. I'll pass the line.

We'll now take our next question from Robert Young with Canaccord Genuity. Please go ahead.

Another factor in the gross margin, I think last quarter you said there was a slip order that you're expecting to have a positive impact on margins this quarter. Is that correct? Do I understand that correctly? Would that have been a positive factor on gross margins?

It's certainly a positive effect on revenue. There's not a material impact on the margins.

I mean, there was an interview with one of your competitors that said that they'd seen a pretty significant kick up in IP. And so maybe just to stay in the last question, just talk about where your IP deployments are. If there's any update you can give us on any numbers there and maybe update us on the overall competitive landscape in the IP transition, that'd be really helpful.

Yes, Rob. So we are well over 400 IP-based SDN installations, and, again, those include the largest-scale installations in the industry. So we continue to do very well with our customers deploying, you know, numerous projects. So again, we are doing very well with the STBN deployments. What was the second part of your question?

I was just looking for an update on the competitive dynamic. Like the last question, Tano's question about Belden, are there any other factors that we should think about as the IP transition moves forward? How has the competitive environment changed?

Well, we continue to lead the largest deployments in the industry of software-defined video networking, the largest SMPTE 2110 deployments, and also the largest cloud-based deployments. deployments as well too. So the competitive dynamic is still very similar to what it was before with Ebert's taking a leadership position on those fronts.

Is there any way to frame up where you think penetration of IP in the market is now and how that might develop over the next couple of years?

With respect to penetration, again, that's more of an industry research question, so I can't provide any additional color other than the large deployments that we have press released and the IP showcases that we participated in speaks to very good penetration in the early days with the some significant customers. WarnerMedia has announced several times their move to IP in multiple locations with Ebert's. M6 France, another marquee customer, European one, progressing very nicely. Channel One, Russia as well, too, has been press released very significant deployments of our software-defined networking and solutions for an immersive 4K experience as well, too.

Another announcement was Fox and AWS. Is Eberts involved in that one? Is there anything that you can talk about related to that deal announcement?

No, Eberts has not made any press release there.

I guess that's all I've got for you tonight. I'll pass the line.

Thank you, Rob. We have no further questions at this time. I'd like to turn it back to Mr. Campbell for any additional or closing remarks.

Thank you, Chantal. I'd also like to thank the participants for their questions and to add that we're very pleased with the company's performance during the second quarter. which saw fiscal 2020 results. Strong quarterly sales of $120 million, in particular strength in the important U.S.-Canada region, where sales rose 7% from the prior year. Earnings from operations before foreign exchange of $28.4 million, 7% year-over-year. Solid gross margins of 57.9% in the quarter. We're entering into the second half of fiscal 2020 with significant momentum, including a strong cash position of $29 million as at November 30th of 2019. A combined purchase order backlog plus November shipments totaling in excess of $136 million. And by growing adoption, and successful large-scale deployments of eBirds IP-based software-defined video solutions 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 live production suite, With Everett's significant investments in software-defined IP, IT, and virtualized cloud technologies, the over 400 industry-leading IP, SDN deployments, and the capabilities of our staff, Everett's is poised to build upon our leadership position. Thank you, everyone, and good night.

This concludes today's call. Thank you for your participation. You may now disconnect.