Evertz Technologies Limited

Good day and welcome to the Everts Q2 2021 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Campbell, Executive Vice President, Business Development. Please go ahead, sir.

Thank you, Brandon. Good afternoon, everyone, and welcome to Everts Technologies conference call for our fiscal 2021 second quarter ended October 31st, 2020. With Doug Moore, Everts Chief Financial Officer, and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on CDAR and the company's investor website. 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 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 a fundamentally strong business committed to supporting our customers and protecting our people. 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 are appreciative of the continuing strong partnerships with our customers and for the extraordinary efforts being made by our employees in these challenging times. Turning now to Ebert's results, I'll begin by providing a few highlights and then Doug will provide additional detail. First off, Sales for the second quarter totaled $100.5 million, an increase of 78% compared to $56.3 million in the first quarter of this year. The strong sequential rebound from our first quarter of fiscal 2021 was experienced across all geographic regions and was driven predominantly by the adoption of Everett's new technologies and products. Our base is well diversified with the top 10 customers accounting for approximately 55% of sales during the quarter and with no single customer over 25%. In fact, we had 70 customer orders of over 200,000 in the quarter. Gross margin in the quarter was $59.7 million or 59.4%, which is within our target range. Investment in research and development during the quarter totaled $19.7 million. Net earnings for the second quarter were $21.2 million, while fully diluted earnings per share were $0.28. Ebert's working capital was $231.2 million, with cash of $110 million as of October 31st. Operational highlights for the second quarter include the addition of EaseLive OTT Interactive Graphics Software as a service technology platform and their talented engineering team. At the end of November, Evert's purchase order backlog was in excess of $106 million and shipments during the month were $23 million. We attribute the strong financial performance and robust combined shipments and purchase order backlog to the ongoing technical transition in our industry, channel and video services proliferation, increasing global demand for high quality video anywhere, anytime. And specifically to the growing adoption of Ebert's IP-based software-defined video networking solutions, Ebert's IT and virtualized cloud solutions, our immersive 4K Ultra HD solutions, and our state-of-the-art Dreamcatcher IP replay and Bravo live production suite. Today, Ebert's Board of Directors declared a regular quarterly dividend of 18 cents per share payable on or about December 23rd. I'll now hand over to Doug Moore, Ebert's Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. Good afternoon, everyone. Sales were $100.5 million in the second quarter of fiscal 2021, compared to $119.8 million in the second quarter of fiscal 2020. That represents a decrease of $19.3 million quarter over quarter. Sales were $156.8 million for the six months ended October 31, 2020, compared to the $223.2 million in the same period last year. That represents a decrease of approximately 30%. Decrease in revenues has been driven by travel restrictions and projects on hold as a result of the pandemic. As it relates to revenue-specific regions, the U.S.-Canada region had sales for the quarter of $66.9 million compared to $88.6 million last year. This represented a decrease of $21.7 million, or 24% quarter over quarter. Sales in the U.S.-Canadian region were $102.8 million for the six-month period ended October 31st. compared to $160.8 million in the same period last year, a decrease of $58 million, or 36%. The international region had sales for the quarter of $33.6 million, compared to $31.2 million last year, an increase of $2.4 million quarter over quarter. The international segment represented 33% of total sales this quarter, as compared to 26% in the same period last year. Sales in the international region were $54 million for the six months ended October 31st, compared to $62.4 million in the same period last year, representing a decrease of $8.4 million. Gross margins for the second quarter, which inclusive of $2.2 million in wage subsidies, was approximately 59.4% and within the company's historical range, while gross margin for the six months ended October 31st was approximately 58.6%. Turning to selling and administrative expenses, S&A was $12.8 million in the second quarter, a decrease of $5.2 million from the same period last year. Selling and administrative expenses as a percentage of revenue was approximately 12.7% as compared to 15% for the same period last year. Decrease in expenses was driven by a $3.2 million reduction in travel and promotion costs associated with reduced selling activities and travel restrictions. Selling and administrative expenses were $24.7 million for the six months ended October 31, 2020, a decrease of $9.6 million from the same period last year. For the first two quarters, selling and administrative expenses as a percentage of revenue was approximately 15.8% as compared to 15.4% for the same period last year. Research and development expenses, which netted $3.2 million in wage subsidies, was $19.7 million for the second quarter, represented a $3.2 million decrease from the second quarter last year. For the six months ended October 31st, research and development expenses were $36.2 million, which represents a decrease of $9.4 million over the same period last year. Foreign exchange for the second quarter was a loss of $1.3 million compared to a loss of $1.1 million the same period last year. Foreign exchange for the six-month period ended October 31st was a loss of $4.4 million compared to a loss of $2.9 million in the same period last year. The six-month loss was predominantly a result of the decrease in the value of U.S. dollars since April 30, 2020. Turning to a discussion of liquidity of the company, cash as at October 31, 2020, was $110 million, as compared to $75 million at April 30, 2020. Working capital was $231.2 million at October 31, 2020, compared to $223.7 million at the end of April 2020. Looking now specifically at cash flows in the quarter, the company generated cash in operations of $20.8 million, which is an add of $5.3 million change in non-cash working capital and current taxes. If the effects of the change in non-cash working capital and current taxes are excluded from the calculation, the company generated $26.1 million in cash from operations during the quarter. During the cohort quarter, the company used cash of $2.9 million for investing activities, which was principally driven by the acquisition of capital assets of $2.1 million and $0.8 million in the investment in E-Live AS. The company used cash in financing activities of $10.4 million, which was principally driven by dividends paid at $6.9 million, $1.1 million in principal payments on capitalized leases, and $1.7 million in the purchase of capital stock. Finally, I will review our share capital position as of October 31st, 2020. Shares outstanding were approximately 76.3 million and options outstanding were approximately 5.5 million. Weighted average shares outstanding were 76.4 million and weighted average fully diluted shares were also 76.4 million as of October 31st. 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 form and the official reports filed with the Canadian Securities Commission. Brian, back to you.

Thank you, Doug. Brandon, 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 one 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 one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. The first question will come from Thanos Machopoulos with BMO Capital Markets. Please go ahead.

Hi, good afternoon. I realize you don't provide the guidance, but what would be your thoughts, I guess, qualitatively in terms of how would you think about the near-term revenue trajectory? Is it a situation where things are improving as far as customer spending behavior and your ability to implement, or where there may be some one-time factors that benefited Q2, which might make Q3 comparatively a little bit more challenging? Okay.

So I'll break it down into components. We did see good, strong revenue increases in all geographies during Q2. And we also had numerous projects push ahead in the quarter. So we had very strong delivery results as well, too. So definitely we're continuing to experience challenges um getting on site with customers um and uh you know covid shutdowns and lockdowns in various geographies we are working through it you know fairly well as you can tell by the strong financial results um you know q3 again two um you know i can't um forecast um what the global environment is going to look like in terms of our access to be able to get into multiple geographies. That said, we continue to do our utmost to provide remote delivery, commissioning of the services, the solutions that our customers need for their business models to continue to grow and prosper. looking at a very good, solid shipments and backlog. You can see that the shipments are a little lower than the prior entry into Q2, but our backlog is solved.

So, Brian, I mean, the main variable we should think about maybe is just how this new wave of lockdowns may or may not affect implementation. Is that maybe more likely to have an impact on the upcoming quarter rather than the van picture?

That's not something I can forecast. We'll do our utmost to deliver throughout the quarter. So what you have is a good, solid shipments and backlog number that's right in line with our two-year averages, even excluding prior to COVID. So we're sitting well-positioned, entering into Q3, but we're still subject to the global environment for getting access to customer sites. And again, we're doing our utmost to be able to deliver products and solutions remotely, but there's definitely a component of onsite commissioning and other activities that's required for our business.

Can you speak to how the pandemic might be altering customer spending priorities? One of the things we've heard is that you know, some customers are looking to accelerate their plans for cloud adoption. So just curious as to whether you're seeing that dynamic as well. And if that's the case, you know, how might we think about sort of the impact over, you know, the coming quarters in terms of, you know, how that could influence revenue margins if your cloud mix, you know, does shift considerably versus your agro mix.

Doug, I'll let you address the, you know, margin shift?

Yeah, so I guess to kind of divert from the spending environment, but some of the cloud-based solutions are a bit on the higher margin side. I mean, there is hardware components, nonetheless, but a shift in such a nature would lead inherently to a slight uptick in margins.

On the demand side, as we noted, much of our sales are driven by our new technologies, so our SDBN solutions, our Dream Catcher and Bravo replay and live production, and our cloud-based solutions. already experiencing a strong component of the delivery of the type of products that our customers are increasingly adopting. So any changes in our customer spending behavior that you may see in reports align very well with our product suite that we've invested very heavily over the last years and have been deploying in numerous locations.

Okay, you know, and certainly you have some good case studies, such as the good work you've done with Discovery and Warner, among others. But I guess ultimately, would you agree with the notion, though, that the pandemic specifically is accelerating cloud adoption? Does that make sense to you from what you're seeing?

Yes, it is, and it's also accelerating IP infrastructure adoption, well, too.

Okay, and then finally for me, from an OpEx perspective, I guess the variable there might be whether and to what extent the stimulus repeats next quarter. But aside for that, should we expect OPEX to remain fairly consistent heading into Q3?

Yeah. So I think, first of all, you're correct. There's the variable there that you mentioned in the sense of the wage subsidies. Beyond that, there was also in the OPEX, you'll see a one-time item associated with ITCs that We had a successful audit appeal associated with our shred claims that resulted in a bit of an uptick to $2.5 million. It's kind of a one-time item that was helped out the overall OPEX, and you'll see that through the ITC component. Okay.

All right, thanks, LaBethaline.

Thank you for the question. Again, if you have a question at this time, please dial star 1 to enter the queue. The next question will come from Bo Yang Li with RBC Capital Markets. Please go ahead with your question.

Hey, guys. Thanks for taking my questions. Congratulations on the quarter. Just kind of curious on the shipment number for November. It is down compared to last quarter. I was wondering if you could kind of talk through why that is and maybe how it compared to what your expectations were for the month of November.

The shipments are in line with the variability that we'll have on any month in a given period. It's a reasonably solid shipment level, and that together with our backlog, as I said, we're right on the two-year average for total of shipments and backlog.

Okay, great. And then maybe switching gears here, can you maybe speak to your mix of revenue or orders by customer type? like either traditional broadcasters, production companies, OTT vendors. As a result of the pandemic, have you seen a shift in customer demand across these different customers?

Our customer base has been fairly consistent. So we have the largest global... Broadcast media companies, new media companies as customers, the complexion of them changes in any given quarter, but we consistently have in our top 10 some of the largest broadcast and new media companies in the world. So we haven't seen any significant shifts, just normal changes in spending patterns.

Okay, that's helpful. Pass the line. Thanks.

Thank you. Again, if you have a question, that is star one. The next question will come from Robert Young with Canaccord. Please go ahead.

Hi, good evening. I'm going to try the same question a third time, if you'll forgive me, just on that shipment number for November at 23 million. That's down a lot year over year, as you noted. And so I just try to You know, uh, square up the progression of the quarter, if it started at 36 million in August, and then, you know, to get to the quarter, you'd have to do 30 average, both of the other two months. And then you dropped to 23, which doesn't. Doesn't as far as I remember, just, it doesn't match normal seasonality. And then in this year you would have seen a resumption of sports and you would have seen us election activity. And so I guess the worry is that you would have seen some one-time items from those things that might have driven a higher than normal level of revenue in the last quarter. And so as we look forward into Q3, should we be thinking of that as a quarter that's down quarter over quarter? Or can we kind of think of 100 million type of quarterly pace as back to pre-COVID levels, back to normal?

So Rob, again, to the shipments and backlog level are very good, solid, robust numbers on our average. One of the things with a big election period like that, as you've noted, what happens as well, too, when you've got critical news, customers' networks enter into a lockdown phase where they're not deploying or altering their networks to ensure that there's no outages. So you do have to bear in mind that is a consequence of a news cycle as well, too.

Right. Okay. And so any benefit from that wouldn't have fallen in Q2. It would have fallen in Q1, perhaps, because your customers would have locked down. Is that what you're saying?

During the election period leading up to it. And, of course, as the news cycles progress through, there are periods of lockdown, yes.

Okay. Okay. And then second... Sorry, keep going. Sorry, Brent, and didn't mean to cut you off.

That does have an impact on the ability to deliver for those customers.

That makes sense. Okay. I'm not sure if I caught it in the monologue right or not, but I think you said that the top customer is 25%. I don't think I've seen a number that high as long as I remember, and so any color you can provide around that? That'd be $25 million from one customer in the quarter or something around that number. And so is there any color you can provide there? Was it pent up demand on a delayed project that freed up or something like that? Or did I just hear that number wrong?

No, you heard the number correctly. And that does happen from time to time where customers, business plan and projects drop into one quarter More so, oftentimes it's spread out over several quarters. Timing-wise, that is a significant percentage of the quarter. It does tend to even out over the year, over multiple quarters. But again, too, we're thrilled to have significant customers have the confidence to deploy that level of infrastructure solutions you know, with us, you know, in a challenging time like this in a quarter. So that bodes well for us.

And can we expect that one customer to continue spending at that level? If we were to take that customer out, obviously, it would be a $75 million quarter instead of a $100 million quarter, which jives a little closer with the $23 million first month shipment. And so could that be a reason for the lower shipment number?

We have very good Tier 1 customers who require delivery over multiple quarters. So I do not expect to anticipate to see levels persist at the 25% rate, but this is, again, to a significant customer of ours, a long-term customer.

Okay, great. That's really good, Collar. Thank you. And then maybe one last question just on the other questions on the trend towards cloud. And maybe you touch a little bit on remote production. I know you've hit on this Bravo product a few times. Maybe you talk about, you know, centralized production and remote production and, you know, how Everts has seen any benefit there. Are you seeing a big, is that a driver in the market today? And yeah.

Yeah, absolutely. The move to remote production is certainly a driver. Our Dreamcatcher IP-based replay and the Bravo live production suites are together. Those are very innovative, groundbreaking products, and you're going to see more of them in the future. Some of the press releases, whether it's the previously CBS dabble or discovery and their ability to be able to more easily spin up channels and do production, innovative productions, that is a wave of the future. And most definitely our Dreamcatcher and Bravo live production suite fits squarely in there.

Okay. Maybe the last question for me is just on, I mean, you're probably saving a lot of money right now, not going to trade shows, uh, which, you know, normally would be a normal course of your business. And so I see you're, you're doing a lot of virtual, uh, trade shows and marketing events. And so maybe if you could just talk about, you know, how that is, um, you know, changing the way you're thinking about your sales and marketing expense going forward, um, will you be leaning more on that less on trade shows? Are you seeing, uh, you know, a good competitive advantage? you know, relative to others, you know, given that these big trade shows are shut down, and then I'll pass the line.

So it's a very good question. So we, you know, our sales team has done an outstanding job of maintaining communications with our customer base. With these interactive programs, we're able to, you know, help introduce new products, show the use cases, and to continue to drive communications purchase orders and delivery of those innovative solutions to our customers. So it's absolutely been very beneficial to us. But candidly, we all love to meet our customers face-to-face to show the products. That's just not possible in today's environment. As the environment changes, we anticipate changes. resuming face-to-face communications, but the lessons that we've learned during these challenging times won't be lost. So numerous folks appreciate the ability to be able to see our products and communicate in a virtual environment as well to supplement our sales and marketing experiences.

Thank you for the question. The next question will come from Steven Lee with Raymond James. Please go ahead.

Hey, thank you. Hey, Brian and Doug. My question is on the gross margin during the pandemic. So the first two quarters of this fiscal year is even stronger than last year, despite the lower revenues. How do you explain that?

I think to properly explain it, you have to include the notation that there is certain costs have been subsidized, so whether it's the wage subsidies or, this is the highlight there, having the biggest component where cost of sales includes, during the year, a little over $5 million in wage subsidies that have been taken as a straight reduction to cost of sales. I think to properly analyze it, you would add that back in a sense. In the first quarter, in fact, actually was with a decrease in selling activity and efficiencies, I guess, with the shutdowns, the margin without that was actually quite weak. It's definitely, in Q2, things have rebounded very strongly. But do you analyze it properly? You need to look at both components.

Got it. And so that $5 million in the first half, is it a similar amount in the second half for subsidies, or is it going to be a much lower number?

No, no, it'll be much lower. So there is a variety of different global programs, but the expectation is it's really even from Q1 to Q2, it's been cut in half, really, and then it's going to be further, you know, maybe a third next time. It's really the actual amount is difficult to forecast as it's dependent on actual sales and other such calculations. But no, it'll be dropping significantly.

Okay, got it. Thanks.

Thank you. As a reminder, if you have a question at this time, please dial the star key followed by the one key on your touchtone phone now. I'm showing no further questions at this time. I'd like to turn the call back over to Brian Campbell for closing remarks.

Thank you, Brandon. I'd like to thank the participants for their questions and add that we're very pleased with the company's performance during the second quarter of fiscal 2021, which saw quarterly sales rebound to $100.5 million, solid gross margins of 59.4% in the quarter, delivering pre-tax earnings of $28.1 million, all while investing nearly $20 million in R&D to build future growth. We're entering the second half of fiscal 2021 with significant momentum fueled by a combined purchase order backlog plus November shipments totaling in excess of $136 million. By the growing adoption and successful large-scale deployments of Evert'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. By the financial strength and flexibility of a pristine debt-free balance sheet with over $110 million of cash, and by the growing adoption and successful large-scale deployments. By Vivert's IP-based software-defined video networking, cloud solutions, Dreamcatcher IP-based instant replay, and Bravo live production suite. With EBRIT's significant investments in software-defined IP, IT, virtualized cloud technologies, the over 500 industry-leading IPSDVN deployments, and the capabilities of our staff, EBRIT is poised to build upon our leadership position in the broadcast and media technology sector. Thank you, everyone, and good night.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect your lines and enjoy the rest of your day. Thank you.