Evertz Technologies Limited

Good day, ladies and gentlemen, and welcome to the EVIRT's Q1 2021 conference call. As a reminder, today's conference is being recorded. It is Wednesday, September 9th, 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, Jonathan. Good afternoon, everyone, and welcome to the Ebert's Technologies Limited conference call for our fiscal 2021 first quarter ended July 31st, 2020 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. 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 pandemic. The pandemic has created headwinds and significant challenges, delaying customer deliveries, installations, and impacting customer operations around the globe. That said, our customers are fundamentally healthy, and Everts has a unique and powerful technology position. Everts is a technical innovator and fundamentally sound business committed to protecting our people and supporting our customers. We're proud of the role we play as an essential service provider and critical supplier, enabling vital communications, telecommunications, broadcast, and new media services worldwide. We are appreciative of the continuing strong partnerships with our customers and for the extraordinary efforts made by our employees in these challenging times. Turning now to Evert's results, I'd like to begin by providing a few notes and then Doug will go into greater detail. First off, sales for the first quarter fiscal 2021 were $56.3 million, down as compared to $103.4 million for the first quarter last year. Our sales base remains well diversified with the top 10 customers accounting for approximately 44% of sales during the quarter and with no single customer over 9%. In fact, we had 91 customer orders of over $200,000. Gross margin in the quarter was $32.2 million or 57.2%. Investments in research and development totaled $16.6 million, net of $6.7 million in wage subsidies. further reinforcing Everett's commitment to R&D despite these challenging times. Net earnings for the first quarter were 0.6 million dollars and fully diluted earnings per share were one cent in the quarter. Everett's working capital was approximately 218.8 million with 102 million in cash as at July 31st, 2020. The purchase order backlog at the end of August was in excess of $118 million, a record high, and shipments during the month were $36 million. Today, Everett's Board of Directors has declared a quarterly dividend of $0.09 per share payable on September 18, 2020. I will now hand over to Doug Moore, Everett's Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. Good afternoon, everyone. Sales were 56.3 million in the first quarter of fiscal 2021 compared to 103.4 million in the first quarter of fiscal 2020, a decrease of 47.1 million. The U.S.-Canadian region had sales for the quarter of 35.9 million compared to 74 million last year, a decrease of 51%. The international region had sales for the quarter of 20.4 million compared to $29.4 million last year, a decrease of 31%. The decrease of revenues was due to widespread customer shutdowns, travel restrictions, and projects on hold as a result of the COVID-19 pandemic. Gross margin for the first quarter was approximately 57.2%, consisting with 57.2% in the prior year. While the gross margin was adversely impacted by low manufacturing volumes, Offsetting the negative impacts was $3.6 million of wage-related government assistance, which is recorded as a reduction of salary costs within cost of sales. Selling and administrative expenses were $11.9 million for the first quarter, as compared to $16.3 million in the same period last year. Selling and administrative expenses as a percentage of revenue was 21.2% compared to 15.8% in the same period last year. The decrease in expenses was driven by $1.9 million reduction in travel and promotion costs associated with reduced selling activities and travel restrictions associated with the COVID-19 pandemic. Selling and administrative expenses also included $1.3 million in wage subsidies that was recorded as a reduction in the costs and costs in the quarter. Research and development expenses were $16.6 million for the first quarter, which represents a $6.1 million or 27% decrease from the first quarter last year. Decrease is predominantly a result of 6.7 million of wage subsidies recorded as a reduction in cost in the quarter. Foreign exchange loss was 3.1 million as compared to a foreign exchange loss in the prior year of 1.8 million. The loss was predominantly a result of the decrease in the value of the US dollar as at July 31st, 2020, when compared to April 30th, 2020. Turning to a discussion of the liquidity of the company, Cash as at July 31, 2020 was $102 million as compared to $75 million as at April 30, 2020. Working capital was $218.8 million as at July 31, 2020 compared to $223 million as at April 30, 2020. The company generated cash and operations of $36.3 million, which is gross of a $32.2 million change in non-cash working capital and current taxes in the first quarter. If the effects of the change in non-cash working capital and taxes were excluded from the calculation, the company generated $4.1 million in cash from operations. The company acquired $1.8 million of capital assets. The company used cash from financing activities of $8.3 million, which predominantly consisted of the payment of dividends of $6.9 million. Shares outstanding were approximately $76.4 million, and options outstanding were approximately 5.6 million as at July 31st, 2020. Weighted average shares outstanding and weighted average fully diluted shares outstanding were both 76.4 million for the quarter ended July 31st, 2020. This brings to a conclusion the review of our financial results and position for the first 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 our annual information form and the official reports filed with the Canadian Securities Commission. Brian, back to you.

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

Thank you. Ladies and gentlemen, at this time, we will open up the floor for questions. If you would like to ask a question, please. Press the star key followed by the one key on your touchtone phone now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the question in queue, press star two. Again, to ask a question, please press star one now. We'll take our first question from Thanos Moshkapoulos of BMO Capital Markets.

Thanos Moshkapoulos Hi, good afternoon. Brian, can you provide some more color in terms of the current environment and what you're seeing? I mean, obviously, the quarter was quite weak, although your August shipments showed a nice rebound, I guess, almost to pre-COVID levels. How did the environment progress throughout the course of the quarter? what are you seeing currently and to what extent are you still being hampered by maybe challenges in deploying orders that you might have in hand but that you can't actually fulfill because customer sites are shut down?

So, yes, we're definitely still encountering challenges getting access on-site to customer premises and deploying new solutions. So, We are, as a central service provider, we're crossing borders, delivering to customers, but that is definitely hampered by, you know, the various jurisdictions, whatever state they are in, and their rules regarding, you know, sheltering in place, quarantines, and such. We do continue to, you know, As you can see, shipments were quite strong in August compared to prior months. So that's very encouraging. So, yes, the Q1 results were definitely impacted by our ability to get on site and deliver. You can see that also here. has resulted in a record high order backlog as well too. So solid shipments in September is encouraging and the record high backlog does speak for itself in terms of orders, but also is impacted by our delay and postponement in delivery, whether that's our ability to get access on site or the customers delaying those projects themselves.

So if we look at the August shipments number, might you be able to repeat that performance in September, October, November? Was there anything unique about August that you'd highlight that might make that more challenging to repeat that performance?

So we're continuing to get greater access to customer premises as the COVID restrictions relax in regions. But again, too, we're very dependent on what those restrictions are in the various geographies. Our sales team is continuing to do a great job of fulfilling customers' needs in terms of selling solutions to them. Some of those include our view anywhere in conjunction with our Magnum solution, which enables our customers to be able to have operational control from anywhere. So whether that's workers at home or it can be in other rooms in their facility, but we're really trying to enable our customers' ability to operate in a very flexible manner in today's environment and going forward.

Thanks. Are there any supply chain issues, or is that pretty much under control as far as things like component availability?

Our purchasing department has done an excellent job in keeping stock and dealing with any kind of supply chain vulnerabilities. There's nothing material to comment in that regard.

Okay, and then from an OpEx perspective, Should we expect a similar amount of government stimulus to reoccur in the upcoming quarter, or how should we think about that dynamic?

No, you should not forecast it straight across like that. So the majority of the government assistance is the CEWA, the Canadian Wage Subsidy Plan. No, that is the government scaling that back through the coming months through now. I think You know, it's not a linear calculation, but I would expect it to be substantially decreased. You know, I can't give an exact percentage, but, you know, half as much would be reasonable as opposed to the current amount.

Okay. Finally, would you say that the headcount was relatively stable in the quarter versus the prior quarter, or has there been any significant change there?

No, I think the Canadian Waste Subsidy Plan really did what it was supposed to do, and our headcount has remained relatively consistent.

All right, thanks, y'all. I'll pass the mic.

Thank you. We'll take our next question from Robert Young of Canna Corp Genuity.

Hi, good evening. Have you seen any order cancellations? I think you talked about order... maybe delays or have you seen anything cancelled? Have you been unbooking any backlog?

So Robert order cancellation is a fact of life so in every quarter we will have a few not many order cancellations but no there's nothing significant as you can tell from candidly it's a record high backlog and that with our shipments at 110 54 million total is as high as it's been. So we're seeing good, solid customer demand and no exceptional cancellation. Okay.

And then if you were to look at the challenges in the quarter, logistics and site access versus demand dynamics, I mean, which one would have been the bigger challenge?

Site access would be the biggest challenge that we've had, and it's ourselves, our customers, their ability to go on site with us when we're deploying and commissioning systems. And Canada Land Logistics, too, depending on the activity we've got – Folks quarantining upon return in some areas, people have to test in advance of going on site or in the extreme cases, they quarantine on the way in and out as they return. So we definitely have logistic challenges that we're working through.

So from where you stand, it sounds as though the orders, there's not any out of the normal cancellation. And what you're seeing is demand or demand you're just seeing orders pushed out, but you don't have a good sense of visibility into when some of the pushouts might start to move again. It's all dependent on regional rules. Is that a good way to summarize it?

Yes. Yeah. It's dependent on the jurisdiction where we are delivering. That can be, you know, country, state, or, you know, cities as well, too, have different rules. We have, you know, significant and major deployments underway and they're continuing and we're staffing them up to the best of our abilities and ensuring the safety of our staff and customers.

Okay. And then the metrics that you shared at the beginning of the call around the composition of the sales, the percentage related to top 10, the largest customer, And then the customer orders over 200,000. Those all seem to be relatively strong metrics. And so I'm trying to understand how to put that into context with the weak top line. The 91 customer orders over 200,000 is particularly strong. And so is there a group of larger customers that's doing relatively better? And then there's a long tail of smaller customers that you're having more of an issue with. Is there anything that you could call out related to those metrics that would be a good insight.

So what you would look at is with the border restrictions and access to premises during the front end of the first quarter, it definitely impacted the revenue numbers. You saw last quarter the first month's shipment was very low. and that increased but not dramatically during the next two months while we are sitting here with a record backlog. So some of that is reflected in our inability to be able to get on premise or to deploy, whether it's the customer's ability to commission or our ability to execute in those jurisdictions. You know, those two things go hand in glove. So we are currently sitting today with a record backlog and a very solid August shipment date. Now, the environment from August to September has been, you know, pretty consistent. So we are in an improved situation, but, you know, that's dependent upon, you know, the restrictions, the more they relax, the better our ability is to execute on all fronts. Right.

And so if the environment gets a little more easier, if logistics are easier and freedom to operate is better, then you'd expect that maybe there's a little bit of pent-up demand that you would have not been able to take advantage of this quarter that might catch up in the next several months. But there's no way to tell that you don't have a lot of visibility, though.

That's correct. We're doing our utmost to deliver in the jurisdictions where we have the capability to do so. And that does involve cross-border travel. In some instances, we're definitely doing our utmost, again, to deliver and commission solutions remotely. So you know, extensive activity back at headquarters to, you know, pre-commission solutions so that they're, you know, more easily deployed on-site by the systems integrators or the customers. But oftentimes, you know, we have to send our own, you know, staff in as well to do on-site commissioning for larger systems.

Okay. And then last question for me, I mean, last year, you had 20% operating margins despite the more challenged finish. And so, I mean, looking forward into fiscal 21 here, are there any margin targets that you have for the year? I mean, would you be, in the event that there's a wage subsidy slowdown, would you look at headcount? Like at what Is there a target margin, and how would you maintain that if you did have one? Then I'll pass the line.

So in terms of target margin, that's more along the lines of our gross margin, and we're well within our 56% to 60% target gross margin range. You can see with the foreign exchange loss rather than gain margin, and the subsidies that we were a little over $4 million operating profit. And that's at a significantly reduced revenue rate. So it's 56 million revenue for the quarter. And as you're aware, our first month shipment in August is 36 million. So we've got a good start to Q2.

Okay, thanks for taking my questions, gentlemen.

Thanks, Robert.

Thank you. We'll take our next question from Boyang Lee with RBC Capital Markets.

Thanks, guys. So in terms of your conversations with clients, has demand across different products changed from pre-COVID, particularly longer-term deployment projects? So has there been a shift in terms of what clients are asking for in terms of longer-term strategic deployments?

The long-term strategic deployments have not changed to any large extent. We're doing very well with our software-defined networking, IP-based solutions and virtualization. Our dream catcher IP-based instant replay and the Bravo live production suite. So those are all big long-term drivers to the market. In the short term, what we definitely saw were folks looking to access our view anywhere capability to enable their staff to work very effectively from home. So that was more of a short-term shift.

So then it sounds like the long-term competitive dynamics or the competitive environment likely hasn't changed too much, right?

Our long-term competitive position is very strong technologically.

Okay, great. And then I guess the last question from me is in terms of how is the company thinking in terms of M&A? I recall last call you guys mentioned you were receiving some inbound calls. Has that increased, decreased, or changed at all?

There's still a significant flow of inbound calls, and we are looking at opportunities. We have a very strong balance sheet cash position that gives us the flexibility to entertain opportunities.

Thanks. Thanks.

Thank you. Thank you. At this time, there are no further questions in the queue. I would like to turn the floor back over to Mr. Brian Campbell for closing remarks.

Thank you, Jonathan. I'd like to thank the participants for their questions and briefly recap the company's performance during the first quarter of fiscal 2021, which saw total sales of $56 million and gross margins of 57.2% in the quarter, which together with Everett's disciplined expense management yielded earnings of one cent per share, inclusive of a 3 million foreign exchange loss in the quarter. At Everett's, we're an essential service provider, and we've met or exceeded all government health and safety protocols to ensure continued operations, including manufacturing, research and development activities, and the provision of technical services and support to our customers. While widespread temporary customer shutdowns, travel restrictions, and the postponement or cancellation of live events and projects present short-term challenges, we believe Ebert's will emerge from the pandemic very well positioned with our technological leadership and fundamental operational strength. We are entering the second quarter of fiscal 2021 with significant momentum fueled by a record high combined purchase order backlog, plus latest month's shipment totaling in excess of $154 million, up 40% sequentially from our prior quarter. The financial strength and flexibility of a pristine debt-free balance sheet with over $102 million in cash and by the growing adoption and successful large-scale deployments of your IP-based software-defined video networking, virtualized cloud solutions, Dreamcatcher IP-based instant replay, and Bravo live production suite, all by some of the largest broadcast, new media, and service provider companies in the industry. With Everett's significant long-term investments in these software-defined IP, IT, virtualized cloud technologies, and our leading deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position in the broadcast and media technology sector. Thank you, and we look forward to having many of you join us on the 7th of October at our annual general meeting. Please note any changes to the meeting will be announced by way of press release. Good night.

Thank you. That concludes today's conference call. Thank you for your participation you may now disconnect.