Evertz Technologies Limited

Good day, ladies and gentlemen, and welcome to the Everts Q4 2020 conference call. As a reminder, today's conference is being recorded. It is Tuesday, June 30th, 2020. At this time, I would like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, Mr. Campbell.

Thank you, Brad. Good afternoon, everyone, and welcome to the Everts Technologies conference call for our fourth quarter ended April 30th, 2020. with Doug Moore, Everett's Chief Financial Officer, and myself, Brian Campbell. Please note that our financial press release and MD&A are now available on CDAR. Doug and I will comment on the financial results and then open the call to your questions. Before delving into our recent business results and outlook, I'd like to briefly address the extraordinary COVID situation. Ebertz is a technical innovator delivering operational excellence, a fundamentally sound business committed to protecting our people, our partners, and supporting our customers. We're proud of the role we play as an essential service provider and critical supplier, enabling vital telecommunications, broadcast, and new media services worldwide. We're appreciative of the continuing strong partnerships with our customers and for the extraordinary efforts made by our employees to continue to support our customers and drive our business forward. Turning now to Ebert's results, I will begin with select annual and fourth quarter highlights, following which Doug will provide more detail. First off, I'm pleased to report sales for the fiscal year totaled $436.6 million, driven by the adoption of Ebert's new technologies. Annual net earnings were 69.2 million, resulting in fully diluted earnings per share of 90 cents for fiscal 2020. Liquidity and capital resources remain robust with cash of 75 million at April 30th after the return of 124.3 million via special and quarterly dividends to shareholders. Investment in research and development totaled $90.8 million for fiscal 2020, further reinforcing Ebert's commitment to R&D. Moving on to the fourth quarter, operations were impacted by the global COVID-19 pandemic. We moved quickly to implement a number of actions, including workplace best practices from national and local authorities, implemented the avoidance of essential travel, we scaled work-from-home protocols, and worked closely with our customers to provide service and support via online tools to the maximum extent possible, all while maintaining our manufacturing capabilities across multiple sites. Turning to the financials, sales in the fourth quarter were $92.2 million. Gross margin for the fourth quarter was $52.1 million, or 56.5% of sales. And foreign exchange for the fourth quarter was a gain of $6.1 million. Net earnings for the fourth quarter were $16 million, while fully loaded earnings per share were $0.21. At April 30, 2020, Ebert's working capital was $223.7 million. We attribute our solid annual and resilient quarterly performance, despite the onset of this unprecedented pandemic, to Ebert's fundamentally sound industry and financial position, the ongoing technical transition in the industry, channel and video services proliferation, the increasing global demand for high-quality video anywhere, anytime, and specifically to the growing adoption of Everett's IP-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 live production suite. Our sales base is well diversified, with the top 10 customers accounting for approximately 42% of sales during the year, with no single customer over 7%. In fact, we had 443 customer orders of over $200,000, a modest increase over the 425 customer orders received last year. In addition, at the end of May, the purchase order backlog was in excess of $94 million and shipments during the month were $16 million. In response to the current uncertainty in an environment dominated by COVID-19 and by the desire to maintain the financial flexibility of the company, the Board has declared a dividend of $0.09 per share, which is a reduction in the regular quarterly dividend. I will now hand over the call to Doug Moore, Everett's Chief Financial Officer, to cover our results in greater detail.

Doug Moore Thank you, Brian. Good afternoon, everyone. Sales were $92.2 million in the fourth quarter of fiscal 2020 compared to $107.2 million in the fourth quarter of fiscal 2019, which represents a decrease of 15 million or 14%. Sales for the 12 months ended April 30, 2020 were $436.6 million compared to $443.6 million the same period last year. This represents a decrease of approximately 7 million or 2%. The decrease in sales was largely attributable to projects put on hold or canceled in the fourth quarter as a result of the COVID-19 pandemic. The U.S.-Canada region had sales for the fourth quarter of 58.7 million compared to 63.6 million last year, a decrease of 8%. Sales in the U.S.-Canada region were 289 million for the 12 months ended April 30, 2020, compared to 297.8 million in the same period last year. This represents a decrease of $8.8 million or 3%. The international region had sales for the quarter of $33.5 million compared to $43.7 million last year, a decrease of $10.2 million or 23%. Sales in the international region were $147.6 million for the 12 months ended April 30, 2020, compared to $145.8 million in the same period last year, representing an increase of $1.8 million. The international segment represented 36% of total sales in the quarter and 34% of total sales in the year, as compared to 41% and 33% in the same respective periods last year. Gross margin for the fourth quarter was approximately 56.5%, and gross margin for the 12 months ending April 30, 2020 was 56.9%, both of which were within the company's target range. Selling and administrative expenses were $15.4 million for the fourth quarter, a decrease of $2.6 million from the same period last year. As a percentage of revenue, S&A expenses were approximately 16.7% consistent with the same period last year. The decrease in selling and administrative expenses was driven by the cancellation of trade shows and reduced travel and selling costs as a result of the pandemic. Selling and administrative expenses were $67.6 million for the 12-month period ending April 3, 2020, a decrease of $0.2 million from the same period last year. For the year, selling and admin expenses as a percentage of revenue were approximately 15.5% compared to 15.3% last year. Research and development expenses were $21.2 million for the fourth quarter, which represents a $.6 million decrease from the fourth quarter last year. For the year, research and development expenses were $90.8 million, which represents an increase of $5 million over the same period last year. Research and development expenses were up for the year, which is predominantly a result of an increase in R&D salary costs and headcount. During the year, $4.2 million in government assistance related to COVID-19 programs was deducted from expenses. Of that, $3 million was deducted from the fourth quarter R&D costs. Foreign exchange for the fourth quarter was a gain of $6.1 million compared to a gain of $1.9 million in the same period last year. A gain of $6.1 million was driven by the increase in the value of the U.S. dollar against the Canadian dollar between January 31st and April 30th, 2020. Foreign exchange for the 12 months ended April 3, 2020 was a gain of $3.5 million compared to a gain of $3.4 million in the prior year. Turning to a discussion of the liquidity of the company, cash added on April 30, 2020 was $75 million as compared to $104.6 million on April 30, 2019. Working capital was $223.7 million at April 30, 2020, compared to $282.5 million at the end of April 30, 2019. For the year, the company generated cash from operations of $109.3 million, which includes $21.6 million change in non-cash working capital and current taxes. The effects of the change in non-cash working capital and current taxes are excluded from companies operating cash flows, the company would have generated $87.7 million in cash from operations. For the year, the company paid approximately $124.8 million in dividends and acquired $10.1 million in capital assets. I'm looking specifically at cash flows for the quarter ended April 30th. The company generated cash from operations of $47.1 million, which includes a $25.5 million in non-cash working capital and current taxes. The effects of the change in non-cash working capital and current taxes are excluded. The company would have generated $21.6 million cash from operations for the quarter. The company used $3.1 million for investing activities, which was principally driven by capital asset purchases. The company used cash from financing activities of 17.7 million, which was principally driven by dividends paid of 13.8 million, and capital stock repurchased under an NCIB for 2.4 million. Finally, I will review our share capital position as of April 30, 2020. Shares outstanding were approximately 76.4 million, and options outstanding were approximately 1.6 million. Weighted average shares outstanding were 76.6 million, and weighted average fully diluted shares We're also 76.9 million for the year ended. This brings to a conclusion the review of our financial results and position for the fourth quarter. Finally, I would like to remind you that some of the statements presented herein are forward-looking, subject to a number of risks and uncertainties, and we refer you to the risk factors described in the annual information form in the official reports filed with the Canadian Securities Commission. Brian, back to you.

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

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Thanos Moskopoulos with BMO Capital Markets.

Hi, good afternoon. Brian, can you give us a little bit more color in terms of the current demand environment? Clearly, shipments were weak for May. Can you comment on whether there's been any improvement in June and on what you're hearing from your customers as some economies globally are starting to reopen?

So, The way it looks currently, May was a low point. We are seeing solid quotation activities, order intake, and yes, customers are trying to move back. You see sports leagues starting to restart. That activity does involve Oftentimes, Evert's sales and solutions. So we are seeing an uptake in activity.

And generally speaking, can you comment in terms of the weakness you've been seeing, whether it has had more to do with logistical issues, be it customers having their facilities shut down or not being able to get equipment across borders or supply chain issues? or live events not happening versus lower macroactivity, I guess a weaker macro spending environment. I guess where I'm going with this is as we think about the recovery, is it more a function of just having some of these logistical things being addressed or will we also have to see a stronger macro backdrop to see some of the spending coming back?

I'll address the first part of it. Yes, our delivery and installations were definitely impacted by border closures, shelter-in-place restrictions in geographies, state of emergencies in various states and countries. As we said, we've worked to the extent possible remotely for both providing service and deployment of new installations. And that involves trying to ensure that solutions can be very efficiently installed. But again, too, if the customer's facility is closed, that's closed to systems integrators and their staff as well, too, who are involved in deployments. You still need to have your systems integrators or others rack equipment, run fiber and cables, and the customer engineering staff available as well too. So the revenue is against that backdrop.

Okay. And from an OpEx perspective, should we think about OpEx being similar to Q4 levels in the short term? Have you done any headcount reductions to this point, and are you contemplating any headcount reductions?

What I can speak to is we have applied for multiple different COVID-related government assistance programs. During the quarter, we would have had 4.2 million reduction in costs associated with those programs, including the Canadian Emergency Wage Subsidy, as well as others. So I think that considered. The month-to-month, it's a conditional application, but that has allowed us to maintain the vast majority of our headcount.

Okay. And then it might be hard to pin this down, I guess, given where revenue might land, but how should we think about gross margins in the near term? I mean, even on a much reduced revenue base, should we still accept margins to stay above 50%, or is that really going to be a function of where revenue lands?

So our gross margin stated range is 56% to 60%. In the quarter, we were at 56.5%, which is well within the range, and we haven't announced any changes to that range.

Okay. All right, I'll pass the line. Thank you.

Thanks, Enos. Thank you. We'll take our next question from Robert Young with Canaccord Genuity.

Hi, good evening. You haven't had any interruption in manufacturing. I don't think, I might have missed that in the prepared remarks.

Robert, that's correct. We are an essential service provider. Our manufacturing operations have remained open, working. We're delivering to customers on a daily basis around the globe.

Great. And then I don't want to read too much into the wording of the press release, but the dividend reduction, the way you described it appears to be a temporary measure. You're going to revisit the decision in September. Maybe if you could talk about the process around the decision to reduce it and then what decision points might be in the future.

So the decision process It culminates with the board meeting, and it's a board decision. And as stated in the press release, it was a dividend reduction to maintain financial flexibility. Clearly, we don't know the duration of the pandemic. We're well positioned to work through it. The financial flexibility also enables us to keep our powder dry. to look at opportunities for business development. And in fact, we're quite active on that front currently.

Okay. So do you expect that valuations in the sector will be attractive in the near term? I guess the inference there might be that there's a lot of businesses that you compete against that are on less stable financial terms than yourself.

Correct, there are and we remain very disciplined acquirers. We are recipients of numerous phone calls from folks who are considering their strategic options and our phone is open.

Okay, it might be helpful to You haven't done this in the past, but if there was any information you could give us into the composition of the backlog, which remained relatively strong, but is there any way to understand how much of that backlog would convert in the near term versus longer term contracts or anything around the... the probability or lack of probability that backlog could be unbooked. The example I might think of there would be the Olympics. Would there be work related to the Olympics which might be unbooked from the backlog? If you could give any information on the backlog competition, that would be very helpful.

So the backlog is composed of purchase orders and signed contracts. So there's no pipeline at all in it. The composition does include some longer-term contracts. Not all of it will be delivered in Q1 and Q2, but the majority would be.

To push a little harder on that, would it be I mean, if 50% of the backlog would convert inside of 12 months or is there any, any help you can provide along that line of question?

Not this time, Rob.

Okay. Okay. And then maybe the last question for me will be, you mean all of the cultural changes we're seeing, are you seeing any increased demand around, you know, IP infrastructure, cloud, Maybe just talk about any changes in the way that your customers are thinking about those new technologies. And I'll pass the line.

So, Rob, definitely our customers are thinking about IP and cloud-based solutions. That's been the driving force for Evert's sales and sales growth in previous years. With respect to IP and our software-defined networking solutions, we've had tremendous uptake globally. That continues to progress. And similarly, with cloud-based virtualized solutions, again, we continue to have a very strong position and innovative products for public cloud private cloud and hybrid cloud solutions. Those do continue to deploy. If anything, I think you're going to see the mindset change of customers to be more proactive or continue to push their initiatives in that front into migration to the newer technologies, IP-based infrastructure and cloud-based solutions. That said, we are currently seeing a strong uptake of our baseband solutions as well, too, some of which address UHD immersive solutions.

Okay, thanks a lot.

Thank you. We'll take our next question from Paul Treber. with RBC Capital Markets.

Thanks very much. Good afternoon. Just in regards to what you saw in terms of demand in the quarter, was it fairly evenly spread across your customer base, or was it weighted to any particular group or region, like particular group, customer group, in terms of live sports or broadcasters versus others? And also, can you speak to just the regional mix and the demand trends there?

So, with respect to the regional trends, the U.S. continues to be a very strong base for us, not only in sales, but also in quotation activity as well, too. Similarly, you saw the international results were up this quarter, so marginally. So we're having strong international quotation activity as well, too, with respect to live sports. We have a very strong customer base in basketball, baseball, football, soccer, European football. And there we continue to deploy. Those deployments are slowed down by COVID and the travel restrictions and the on-site customer access availability as well, too. So we are working through that. We actually have deployment teams and service people deployed, continuing to implement infrastructure solutions in North America and Less so internationally, but that is, you know, we're continuing to work through and push deployments and help our customers, you know, deliver on their business plans. Okay.

And in the prepared remarks, you mentioned order cancellations. Could you speak to the terms in your contracts if you, you know, typically receive any penalties if there are cancellations? Or what's sort of the business negotiations that you see when order cancellations come up?

It's not a heavily prominent thing, but it's really dependent on the arrangement. So as a broader discussion, I mean, we've had cancellations with the understanding that replacements will come in the future. We've had cancellations that are – of associated returns or stocking fees and things like that. But of the postponements and cancellations, it's more heavily weighted towards the postponements or the delays as opposed to actually receiving cancellations, which is a rare event. Yeah, it's a rare event.

Okay. And last one for me. Is Is there any typical seasonality heading into Q1? And then do you think at this point, like ultimately, any seasonality would be overshadowed by the macroeconomic environment or like there's a reopening of the economy and obviously live sporting events and other events?

So Evert's financial results have not shown a great degree of seasonality. So if there were any, it would be dramatically overshadowed by the COVID pandemic. Currently, we're making very good strides. We're pushing ahead with our business, and the main focus is delivering to our customers in support of their business plans in light of the restrictions and constraints that we're dealing with.

Okay, thanks for taking my questions. Thank you. We'll take our next question from Bill Jong with Raymond James.

Hi, guys. So I have a question related to operating margin trends. Should we expect some pressure during this pandemic period?

Could you repeat that question for me, please?

So it's related to operating margin trends. Should we expect some pressure during this pandemic period?

Sorry, are you referring to gross margins at a cost sales perspective or operating?

Operating.

Expenses. So what I would reiterate is two components here is one that we did have government assistance or assistance programs that we would have recorded as offset to operating expenses in the fourth quarter. I would expect that to continue to occur in the first quarter of the next fiscal year. I'm unable to quantify as a whole because it's a month-to-month calculation. And then the impact of our inability to travel to certain regions. would inherently reduce the associated costs of travel and expenses.

Okay, thanks.

So we remain solidly above a 20% operating margin. In fact, for the year it was 21.5%. Thank you.

And we will now take our final questions. Our final question comes from Steven Lee with Raymond James.

Hey, thanks. Hey, Brian. I joined a little late, but I did hear you speak of May as a low month with quotation activity having picked up. How about actual deployments, access to customer premises? Has that eased up by May to June?

Yes. Yeah, so with border restrictions opening, Ebert is an essential service provider. So, we can cross the border for those customers where we have designation. That activity has been occurring and you are seeing geographies, states and other locations try to open up and either resume their seasons or other activities. So that is reflected in our deployment activities as well too.

But compared to your normal state, I mean, are there still restrictions impeding deployments at this stage?

Yes, absolutely. Yeah, so it's better than it was, but we continue to deal with local jurisdictions where various states have, in the United States, have different regulations. Some are more open. Others have restrictions. and we work within the regulatory environment for those locations. So, yes, we are deploying, and, yes, we have to plan around those deployments, and we're constrained by on-site access as well, too, in certain areas.

Okay, got it. Thanks.

Thank you. And that concludes today's question and answer session. I would now like to turn the conference back to Mr. Brian Campbell for any closing or additional remarks.

Thank you, Brad. I'd like to thank our participants for their questions. Reiterate that we are encouraged by the company's solid performance in fiscal 2020, achieving sales of $436 million, delivering pre-tax earnings of 21.1% through disciplined cost control. all while investing $90.8 million in R&D to build future growth. While the company believes the COVID pandemic to be temporary, the situation is fluid and the impact of the pandemic on operations and results, including the impact on overall customer demand, is uncertain at this time. Although the company is an essential service provider, Widespread customer shutdowns and travel restrictions and the postponement or cancellation of sporting events as well as other live events and various other related projects will have an adverse effect on the company's revenue and financial results in the first quarter and potentially the second quarter of 2021. Notwithstanding the uncertainty, the company believes the situation is temporary and we are well positioned to benefit from an economic revival and the industry transition to IP and cloud-based solutions. We're cautiously optimistic as we enter the first half of 2021 with a combined purchase order backlog plus May shipments totaling $110 million and a pristine debt-free balance sheet with over 75 million cash and equivalents, providing the financial flexibility needed to fund working capital and investment opportunities. With our significant investments in software-defined IP, IT, virtualized and cloud technologies, industry-leading deployments, and the capabilities of our staff, Everts is well-poised to build upon our position as one of the largest peer players and leading innovators in the broadcast and new media technology sector. We're confident that we will get through this together, emerge stronger, and we wish everyone the best during this difficult time. Thank you and good night.

Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.