Evertz Technologies Limited

Good day and welcome to the Q3 2021 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, sir.

Thank you, Cody. Good afternoon, everyone, and welcome to the Everts Technologies conference call for our fiscal 2021 third quarter and January 31st, 2021, 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 on the company's investor website. Doug and I will comment on the financial results and then open the call to your questions. I will begin by providing a few highlights, and then Doug will go into greater detail. First off, sales for the third quarter totaled $92.8 million. Our base is well diversified. The top 10 customers accounting for approximately 34% of sales during the quarter with no single customer over 6%. In fact, we had 89 customer orders of over $200,000. Gross margin was 56% for the quarter. Net earnings for the third quarter were 10.4 million and fully diluted earnings per share was 13%. Ebert's working capital was $221.6 million, with $94.1 million in cash as of January 31, 2021. Operational highlights for the third quarter included, first, securing the Shock Tracker $11 million financing led by Ebert's and Verizon Ventures. This funding will support accelerated deployment across NCAA basketball conferences, expand remote live sports production in the cloud with 5G-enabled technology, and second, the announcement of a strategic asset acquisition of the iconic Studer Audio brand technology and related assets from Harman International, a Samsung company. The acquisition was successfully closed on February 9th, at which time members of Studer's talented staff joined Evers. Moving on, the purchase order backlog at the end of February was a record high, $125 million, and shipments during the month were $25 million. We attribute this solid 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 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 Bravo live production suite. Today, Ebert's Board of Directors declared a dividend of 18 cents per share payable on March 25th, 2021. I will now hand over the call to Doug Moore, Ebert's Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. Good afternoon, everyone. Sales were $92.8 million in the third quarter of fiscal 2021, a decrease of $28.4 million compared to $121.2 million in the third quarter of fiscal 2020. Sales for the nine months ended January 31, 2021, were $249.6 million compared to $344.4 million in the same period last year. That represents a decrease of approximately 28%. The decrease in revenues during the nine-month period were due to travel restrictions and projects on hold as a result of the pandemic. Looking at specific regions, the US Canadian region had sales for the quarter of 56.3 million, a decrease of 13.2 million or 19% compared to 69.5 million in the same period last year. Sales in the US Canadian region were 159.1 million for the nine months ended January 31st, 2021, compared to 230.3 million in the same period last year, a decrease of 71.2 million, or 31%. The international region had sales for the quarter of $35.5 million, compared to 51.7 million last year, a decrease of 15.2 million, or 29%. The international segments represented 39% of total sales this quarter, as compared to 43% in the same period last year. Sales in the international region were $90.5 million for the nine months ended January 31, 2021, compared to $114.1 million in the same period last year. That represents an increase of $23.6 million, or 21%. Gross margin for the third quarter was approximately 56%, consistent with the third quarter ended January 31, 2020. Gross margin for the nine-month end of January 31st was approximately 57.6% and within the company's historical ranges. For operating expenses, selling and administrative expenses were $11.7 million for the third quarter, a decrease of $6.2 million from the same period last year. Selling and administrative expenses as a percentage of revenue were approximately 12.6% as compared to 14.7% for the same period last year. The decrease in S&A expenses in the quarter was driven by $2.7 million decrease in net salary expenses and $2.0 million decrease in travel and promotion costs, both due to the pandemic. Delegate amended expenses for $36.4 million for the nine months ended January 31, 2021, a decrease of $15.8 million for the same period last year. For the nine-month period ended, or sorry, nine-month period, Selling and admin expenses as a percentage of revenue was approximately 14.6% as compared to 15.1% in the same period last year. Turning to R&D, research and development expenses were $21.4 million for the third quarter, which represents a $2.6 million decrease from the third quarter last year. For the year, research and development expenses were $57.7 million, which represents a decrease of $11.9 million over the same period last year and driven by Government assistance recorded as a reduction in costs. Foreign exchange for the third quarter was a loss of $5.3 million compared to the gain of $0.3 million in the same period last year. The loss was driven by a substantial decrease in the value of the U.S. dollar to Canadian dollar between October 31st and January 31st. Foreign exchange for the nine-month end of January 31st was a loss of $9.8 million compared to the loss of $2.6 million in the same period last year. It's driven by the decrease in value of the U.S. dollar since April 30, 2020. Turning to a discussion of liquidity of the company, cash as of January 31, 2021, was $94.1 million compared to $75 million as of April 30, 2020. Working capital was $221.6 million. as of January 31st, 2021, compared to $223.7 million at the end of April 30th, 2020. Looking specifically at cash flows for the quarter, the quarter ended January 31st, the company generated cash from operations of $10.3 million, which is net of a $6.1 million change in non-cash working capital and current taxes. If the effects of those changes in non-cash working capital and current taxes are excluded, the company generated $16.4 million cash from operations for the quarter. The company used cash from its foreign investing activities of $10 million in the third quarter ended January 31st, which was principally driven by the acquisition of capital assets of $2 million and an $8 million Canadian investment in TD Sports or otherwise known as Shot Tracker. The company used cash from financing activities of $15.5 million which was principally driven by dividends paid of $13.7 million and $1.1 million in principal payments on capitalized leases. Finally, I'll review our share position as of January 31, 2021. Shares outstanding were approximately $76.3 million, and options outstanding were approximately $5.9 million. The weighted average shares outstanding were $76.3 million, and weighted average of fully diluted shares were $76.4 million. That brings to a conclusion the review of our financial results and the position for the third 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 the official reports filed with the Canadian Security Commission. Brian, that's you.

Thank you, Doug. Cody, 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 that 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. We will take our first question from Robert Young with Canaccord Genuity. Please go ahead, Terry.

Hi. Maybe I'll start. Logistical issues around site access, commissioning, integration, all of that. Is that improving or is it stable? Is there any kind of an update you can provide there more as it relates to going forward?

So it's relatively stable. It's been a little bit more difficult to gain access into certain jurisdictions in Q3 as compared to Q2. But that said, we're still pushing ahead and executing very effectively on our customers' key projects that they wanna deliver. In the salt of revenue numbers, but our backlog is at a record high currently.

Right, is it fair to say that remote commissioning is offsetting some of the impact that you might otherwise have seen?

Yeah, that's absolutely a fair statement. And we do our utmost to pre-configure systems before shipping and also implement remote commissioning as well, too. But numerous of the major installations do require on-site attention from e-works, not just from the systems integrators who rack and install equipment and string fiber and other

Okay. Are those delays like driving the backlog up higher, or would you say that the backlog is being driven by larger deals, you know, demand strength? I think you had a large deal that you announced at the end of January, and last quarter there was one customer that was 25% of revenue. I think you said 6%, so that didn't happen this quarter. But maybe if you could talk about the components inside the backlog. Is that just delays, or is it, you know, good quality? large projects?

It's primarily the timing of large quality projects coming in and also being multi-site deployments. Also, adding to the challenges, not just on our side, but also customer readiness as well, too. The logistics of multi-site deployments is challenging, not only for Ebert's but also for our customers as well.

Okay. And then the Studer acquisition, you said it closed. Is there anything that you can – any guidance or indication you can give us on the potential contribution in the current quarter?

Not this time. We're very excited to have closed the – to have that iconic brand as part of the Everts portfolio and also to have the outfit staff from the team join us as well too. But you'll definitely see more of that in the future. But at this point, there's no financial disclosure on the transaction.

Okay. Maybe the last question for me is just your cash balance is building and you've been more active on M&A, at least in the recent years. Maybe we talk about how you think about that cash balance. Are you going to be more aggressive on M&A, or would you tend to think of it as returning to shareholders through dividends or otherwise? And then if you just maybe comment a little bit on the environment that you're seeing out there for M&A. Is it a good business for sale or valuation is good? Maybe any color you can provide there would be helpful.

Thanks, Rob. So I'll start with you. So we're proud to have the very solid balance sheet and cash position that gives us the financial flexibility to entertain acquisitions or investments. You also see the Shot Tracker was an investment along with Verizon Ventures to fund that very exciting business. So we're looking at multiple fronts, acquisitions and also strategic investments if it aligns very directly with Devers. So the environment for investing is fairly ripe. In terms of acquisitions, we are seeing opportunities. We're looking at them, and we are and continue to be a very discerning purchaser. But we're obviously open for business on that front.

Are you seeing valuations higher than in the past, or is it a stable environment?

It's still a relatively stable environment. The valuations have been relatively high on acquisitions. private companies, it all depends on the state and timing of WIC. The owners of the company want to do or whether they're a public entity as well to evaluations depends on the sector. Are in the context of the public market. So we do absolutely see opportunities that we're investigating.

Okay, maybe the last question, and I'll leave it. I think you talked about government assistance recorded as a reduction of cost. Is there any – I haven't seen a number in any of the disclosure there. Is there a number that you can share, government assistance maybe by R&D and maybe by segment or whatever you can share that would be helpful, and then I'll pass the line.

Yeah, I mean, it's not quite as simple as it's kind of baked into – an inventory as well, but it's come down a lot since the first quarter. It's about, it's less than half of what it was in the first quarter, so, and it'll continue to drop, I think, in the next, going forward, it's going to really start to dwindle down, as you may or may not know. The Canadian program has, I think, goes through June, if I'm not mistaken. It's just three or four months left, but the amounts continue to dwindle away.

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

Thank you. We will now take our next question from Venus Moskopoulos with BMO Capital Markets. Please go ahead.

Hi, good afternoon. Brian, can you comment on, I guess, your expectations with respect to the logistical constraints in the current quarter? Do you think it will be similar, or are there any signs of it improving at this point?

Brian? The current quarter, Q3, is very similar to Q2 in terms of the logistical constraints that we're seeing. But we do have people deployed, rolling out projects domestically in Canada, U.S., and also internationally as well, too.

And sorry, I was referring to Q4 versus Q3. But you commented. for our similar logistic constraints. Okay. And then as far as the demand environment, are you seeing any sort of change there? Clients maybe gearing up for new projects and expectation as things reopen, or has that been pretty consistent? Obviously, your backlog is very strong because you've had good demand throughout, but are you seeing an acceleration in that regard?

So throughout the pandemic, as you can tell from some of the ordered concentration that you would have seen over prior quarters, we continue to have deployments of very significant projects for large customers. And you would have seen the press release in January as well, too, of the $21 million purchase order. So we're definitely seeing a continuation of our traction, adoption of Everett's products within our customer base. So that has been continuing, and we're fortunate to be in that position where we have very strong relationships with our customer base and also very innovative products leading technology portfolios that help them execute their business strategies for the future. So we're continuing to see very good demand. Our sales team have done an excellent job of capturing those opportunities, and we're doing our utmost to execute and deploy, but living within the constraints of the current pandemic-induced situation. restrictions on site access and border crossings and quarantines that happen as a result of crossing international borders.

Okay. And then finally on the ITCs, just remind us, I know that you had a dispute and now you're at a higher level of ITCs. So just on a go-forward basis, how should we think about ITCs as a percentage of gross R&D expense? Should it be similar to this quarter or will it be coming down?

No, so it's actually two separate things. So last quarter, you're right, was the impact of an audit. This is actually, we received additional guidance on how to subsidy impacts the actual ITC where it's more favorable than I originally believed. But if you look at whether it's going forward, it should be more consistent. Maybe we do adjust our assumptions as it relates to audits. We do have accruals we bake in there for audit accruals. Those assumptions may be impacted favorably a bit, but I would say it would be If you use the before Q2 as a guide, it's maybe a little bit better than that, but that's the more comparable than what we are at either this quarter or last quarter.

Okay. That makes sense. Thanks for that, Juan.

Thank you. And we'll now take our final question from Buying Lee with RBC Capital Markets.

Hey, guys. Thanks for taking my questions. Can you talk through the investment in ShopTracker a bit more? Like what's the business opportunity here in terms of product co-development or even cross-selling?

So the investment is actually a financial investment along with Verizon Ventures and other parts. So we are... helping to fund the business opportunity of Shot Tracker. There absolutely is the opportunity for business partnership as well, too, with our Dreamcatcher and Bravo live production and sports replay. So there's the opportunity for increasing automation and saving time cost, and also in the COVID pandemic environment, being safer, having fewer people there as part of the production crew. So it aligns very nicely. And Verizon is a valued customer of Everett, so they are very happy to partner with them as lead investors on this transaction. So it fits very nicely aligning with our sports portfolio and also the customer base.

And thanks for that. And, I guess, how do you see the opportunity in live sports? Do you expect to invest more in sporting-related products?

Could you repeat that for me? You broke up.

Sorry. I just wanted what your – your view on live sporting is, and if you're planning to make further investments in sporting-related products.

Well, we're a huge supporter of technologies for live sports, and we did see this as a really exciting and growing opportunity. So we're thrilled to be an investor and a participant in that Shot Tracker opportunity. We're going to continue to develop products and look for opportunities and be a big part of the infrastructure solutions of many sports leagues around the world who are pushing the envelope for higher resolution content and delivery to multiple parties. So it's front and center in our strategy.

Okay, thanks for taking my questions.

Thank you. That does conclude today's question and answer session. I would now like to turn the conference back over to Mr. Campbell for any addition or closing remarks.

Thank you, Cody. I'd like to thank our participants for the questions and add that we are pleased with company's strong performance during the third quarter, which saw quarterly sales of $92.8 million, solid gross margins of 56% in the quarter, delivering pre-tax earnings of $14 million despite a $5.3 million foreign exchange loss, all while investing $21 million in R&D to build future growth. We're entering the fourth quarter of fiscal 2021 with significant momentum fueled by it. a record high $125 million purchase order backlog, plus 25 million February shipments, totaling in excess of $150 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, and by government, by the financial strength and flexibility of a pristine debt-free balance sheet with over 94 million cash, and by the growing adoption and successful large-scale deployments of eGGRT's IP-based software-defined video networks. With eGGRT's investments in software-defined IP, IT, virtualizing cloud technologies, the over 500 industry-leading IP SDN deployments, and the capabilities of our staff. Evert is poised to build upon our leadership. Thank you, everyone, and good night.

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