Evertz Technologies Limited

Good day and welcome to the Everts fourth quarter 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 of Business and Development. Please go ahead, sir.

Thank you, Todd. Good afternoon, everyone, and welcome to the Everts Technologies conference call for our fourth quarter and April 30th, 2021 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. Turning now to Everett's results, I'll begin with a few annual and fourth quarter highlights, following which Doug will provide greater detail. First off, I'm pleased to report Sales for the fiscal year totaled 342.9 million, driven in part by the adoption of Everett's new technologies. Annual net earnings were 42 million, resulting in fully diluted earnings per share of 55 cents for fiscal 2021. Liquidity and capital resources remain robust with cash of $108.8 million as at April 30th, after the return of 41.2 million quarterly dividends to shareholders and special dividends. Investments in research and development totaled 80.2 million for fiscal 2021, further reinforcing Everett's commitment to R&D. Operational highlights for 2021 include, first, the acquisition of EaseLive, a direct-to-consumer interactive graphics company. Second, securing the ShotTracker $11 million financing led by Everts and Ryzen Ventures. The funding will support accelerated deployment across the NCAA basketball conferences, Expand remote live sports production in the cloud with 5G-enabled technology. And third, a strategic asset acquisition of the iconic Studer Audio brand technology and related assets from Harman International, a Samsung company. Moving on now to the fourth quarter, sales were $93.3 million. Gross margin for the quarter was $55.6 million, or 59.6 percent of sales. And foreign exchange for the fourth quarter was a loss of $5.1 million. Net earnings were $9.8 million, with fully diluted earnings per share of 13 cents in the quarter. As at April 30, 2021, Everett's working capital was $214 million, with 8.8 million cash. Purchase order backlog at the end of May was a record high of $139 million and shipments during the month of May were $27 million. We attribute Ebert's resilient quarterly performance and solid annual performance despite this unprecedented pandemic 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 state-of-the-art Dreamcatcher IP replay and Bravo live production suite. Our sales base is well diversified with the top 10 customers accounting for approximately 40% of sales during the year with no single customer over 10%. In fact, we had 353 customer orders of over $200,000 during the year. Today, ERIT's Board of Directors declared a quarterly dividend of $0.18 per share, which will be paid on or about July 2, 2021. I'll now hand the call over to Doug Moore, ERIT's Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. Good afternoon, everyone. Starting with revenues, sales were $93.3 million in the fourth quarter of fiscal year. 2021 compared to 92.2 million in the fourth quarter of fiscal 2020. That represents an increase of 1.1 million or a percent. Sales for the 12 months ended April 30th, 2021 were 342.9 million compared to 436.6 million in the same period last year. This represents a decrease of approximately 93.7 million or 21%. A decrease of sales during the year was largely driven by projects put on hold or interrupted as a result of the COVID-19 pandemic. For regional revenues, the U.S.-Canadian region had sales for the fourth quarter of $63.6 million compared to $58.7 million last year, an increase of 8%. The international region had sales for the quarter of $29.7 million compared to $33.5 million last year, a decrease of 3.8 million or 11%. Back to the fiscal results for sales. Sales in the US-Canadian region were $222.7 million for the year ended April 30th, 2021 compared to $289 million in the same period last year. That represents a decrease of $66.3 million. Sales in the international region during the year were $120.2 million compared to $147.6 million in the same period last year, which represents a decrease of 27.4 million. The international segment represented 32% of total sales in the quarter and 35% of total sales in the year. That's compared to 36% and 34% in the same respective periods last year. Turning to margins, gross margin for the fourth quarter was approximately 59.6% compared to 56.5% in the fourth quarter of fiscal 2020. Gross margin for the year was 58.2%, compared to 56.9% in fiscal 2020. Both Q4 and fiscal 2020 gross margin rates were within the company's target range. For operating costs, selling and administrative expenses were $13 million for the fourth quarter, a decrease of $2.4 million from the same period last year. As a percentage of revenue, S&A expenses were approximately 13.9%, Selling administrative expenses were $49.4 million for the year ended April 30, 2021, a decrease of $18.2 million from fiscal 2020. For the year, selling administrative expenses as a percentage of revenue were approximately 14.4% compared to 15.5% last year. Research and development expenses were $22.5 million for the fourth quarter, which represents a $1.3 million increase from the fourth quarter last year. For the year, research and development expenses were $80.2 million, which represents a decrease of $10.6 million compared to the same period last year, the decrease being driven by assistance recorded as a reduction in costs. Foreign exchange for the fourth quarter was a loss of $5.1 million compared to a gain of $6.1 million the same period last year, The loss of $5.1 million was driven by a significant decrease in the value of the U.S. dollar against the Canadian dollar from January 31st to April 30th, 2021. And foreign exchange for the year ended April 30th, 2021 was a loss of $14.9 million compared to a gain of $3.5 million in the prior year. The loss again was driven by a significant decrease in the value of the U.S. dollar compared to the Canadian dollar over that period. Turning to a discussion liquidity of the company, cash as at April 30th, 2021 was 108.8 million as compared to 75 million as at April 30th, 2020. Working capital was 214.5 million as at April 30th, 2021 compared to 223.7 million at the end of April 30th, 2020. Regarding quarterly cash flows, the company generated cash from operations of $33.6 million, which includes a $21.2 million change in non-cash working capital and taxes. If the effects of the change in non-cash working capital and current taxes are excluded, the company generated $12.4 million in cash from operations during the quarter. The company used $4.1 million from investing activities, which was principally driven by capital asset purchases. And the company used cash for financing activities of $15.2 million, which was principally driven by dividends paid of $13.8 million in the quarter. Regarding fiscal cash flows, for the year, the company generated cash from operations of $101.0 million, which includes $42 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, the company generated $59.0 million in cash from operations. Now during the year, the company paid approximately $41.6 million in total dividends, acquired $9.6 million in capital assets, and completed investments for $9.1 million which includes an investment in TD Sports or otherwise known as Shot Tracker for $7.8 million. Finally, I'll review our share capital position as at April 30th, 2021. Shares outstanding were approximately $76.3 million and options outstanding were approximately $5.9 million. Weighted average shares and weighted average fully diluted shares were both 76.4 million of standing at the year end. This brings to a conclusion the review of our fiscal results or financial results and position for the fourth 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? yourself.

Thank you, Doug. Todd, 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 were 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 take our first question from Bill Zhang with Raymond James.

Hi, guys. Just a couple questions for me. Starting with the cash on hand, you talked about the liquidity. It's a little over $100 million at the end of this quarter. Any uses there or plans to increase the dividend?

So, Bill, in terms of the dividend policy, that's set by the board. There's been no changes, so it's stated currently that... We're paying an 18 cent quarterly dividend, and as you can tell, we have more than sufficient capacity to sustain that. We are looking at opportunities, assessing the market for M&A transactions as well, too. As you saw through the year, we had been busy in the second half of 2020. 21 with closing of investments and acquisitions. And the deal flow opportunity does continue to present itself to us.

Okay, great. And a follow-up to that. So on the acquisition side, could you just give us an update on Stutter now that you have like a full quarter of results? How has the integration been? What are some of your expectations there?

So with respect to the investment in Shot Tracker, that's an ongoing relationship that is working out very nicely for us. And Studer, we closed the acquisition of those assets in February, and we are still in transition. The transition agreement included manufacturing, continuing at Harman's facility in Pesh, so that will ultimately transition to Everts, and we're still in that process. But things are moving ahead smoothly for us.

Okay, great. And just the last one for me. Will this be the last quarter for government assistance programs? I know you mentioned on the last comment. This might be the last one.

I'll comment to that. We can't assert anything in the sense of it's based on monthly revenues, of course, in Canada. There's global policies, but just focusing on the Canadian one. Now, it's winding down through over the summer, really. That's subject to change by government policy and the rules they make. So we would be open to receiving more through the first quarter, depending on our revenues in each individual month. So there's a possibility we will get some more assistance in the first quarter, but it's dependent on revenues.

Okay.

That'll be all for me. Thanks. Thank you. We'll take our next question from Thanos Mostopoulos with BMO Capital Markets.

Hi, good afternoon. Just in that last point, did you actually break out the level of government assistance you received this quarter?

No, our financial statements disclose the amount of government assistance received globally during the fiscal year. In this past quarter, we would have, again, through various global programs received around 4 to 5 million.

Okay. And then gross margins were strong. I know that, you know, it's within your targeted range, but, you know, higher than we've seen in many recent quarters. Is that just a function of mix, or is there another dynamic you can call out there?

Yeah, I think it's fair to say there's definitely a mixed component to that. There's also, inherently, so with the government assistance, some of that goes through to inventory when that inventory is sold. Inherently relates to a slightly larger margin, but that would be, it could impact it by a percent or so. I don't have the exact figure in front of me, but there would be associated benefit with the assistance as well. But the product mix is definitely, has an impact there.

And Brian, can you comment on the environment and how that's been evolving, I guess, both on the demand side and also in terms of your ability to implement projects? I mean, revenue was sort of flattish sequentially from last quarter, so the implication that the implementation constraints were still very much in effect during Q4, and if that's the case, how are things shaping up on that front now?

The situation is continuing to improve with the rollout of vaccines across the world that is potentially going to open up borders for us. We are definitely still in a constrained access environment in terms of our ability to get on-site with customers. That said, we have on-site teams internationally in the U.S. and domestically in Canada as well, too. So we do continue to cross-borders as essential service providers to the telecom and broadcast industry. And to the extent possible, we're remotely commissioning new systems. But again, too, it is a logistics challenge for those enterprise and broadcast customers as well to deploy some of their solutions. But our team's done, you know, extremely well, you know, throughout the period, getting on site since the onset of the pandemic, where we saw the biggest impact in Q1.

And then from a demand perspective, I mean, how have things been evolving just the last, you know, probably three or four months as the, you know, vaccine situations are improving? Okay.

The demand situation continues to be very robust. We are at our 139 million backlog. That is a record high for us. Customers continue to adopt our solutions. It's incumbent on us to deliver to them to help them with their business models moving forward. We're an integral part of many of the largest broadcast and new media companies' plans for the future. So the demand has been quite robust. You can see, as I said, with the $139 million backlog, plus this first month's shipment of May of $27 million. So that total is very strong.

Great. I'll pass the line. Thanks.

Thank you. The final question goes to Robert Young with Canaccord Genuity.

Hi, good evening. Maybe I've pushed you a little farther on that gross margin question, particularly strong, and I understand there's some benefit, maybe some assistance in there, but are you seeing any benefit from shift to cloud or some of the newer products? Is there anything in there that's more sustainable? And what is the target range, if you can remind me again?

So the target range, Rob, is 56% to 60%. And, yes, the cloud-based solutions, the software-as-a-service solutions are higher margin, candidly, as are most of the newer Evers products. So the... that mix does tend to increase our gross margin.

Great. And then the backlog increase, you know that it's a record. It has been inching up. And so maybe talk about the drivers of that larger backlog. Is it just longer duration? Is it these cloud products that are – maybe sold on a recurring agreement, or is there some deferred revenue associated with that that's growing in the backlog? Maybe if you could just help us understand why the backlog has been growing substantially the last couple of quarters.

That is a part of it, but we do have very significant infrastructure rollouts as well, too, of some of the newer products that are being delivered in this quarter, the next, and then through the fall, just in terms of the access to customer sites, multiple sites, and rolling out in numerous locations. So there is a significant component to it of large infrastructure build-outs that are SDBN-related or compression solutions as well, too. But yes, there also are... cloud-related deferred revenue components to it, and Doug can speak to that.

Yeah, so there is some of those cloud-based, depending on the nature of the contract, some of those contracts get deferred until their acceptance is achieved, or certain milestones are met, so they can take a lot longer to roll out than the simple equipment that, you know, ship and bill kind of thing. That can drag on a bit longer, just given the nature of them.

Okay, and so larger projects, you have to get some sort of acceptance, and then you're able to bill it. Are there any large projects that are coming close to, you know, a milestone that might drive revenue in the short run?

Sure, so I mean, there's a lot of different projects ongoing at once, right? So there's some that inherently some get closed each quarter, but, and sorry, in your comment regarding the billing, sometimes the billing can even be a portion up front and some, we may bill based on milestones, just to clarify your point there, but that's been ongoing for quite a while in the sense that those projects, acceptance happens on various ones through each quarter.

Okay, so nothing out of the ordinary. Fair. And then maybe just a broader question on, you know, the resumption of live sports. You know, you talk about whether there's, you know, broadening opportunities to support some of these events that are starting to come online. I guess we don't know what's going to happen with the Olympics. But maybe just if you could talk about that environment, that would be helpful. I'll pass the line.

So Rob, yes, there are improving opportunities there. Everett has been an integral supplier to major North American sports leagues that you see that have been providing entertainment throughout the pandemic. So we continue to deliver infrastructure to many of the leagues and to many of the stadiums and locations. So our people have been traveling and we have been delivering solutions throughout. So that is an important and valued customer set for Everts.

Is there any commentary that you can provide around improvement or lack of improvement in the short run going forward? Are you seeing anything that's manifesting in better bookings for you or better conversion of shorter-term revenue opportunities?

We're seeing significant revenue opportunities, and that is reflected in both the $139 million backlog and also future opportunities. So, as I said, we're optimistic that as the borders free up, in multiple locations and we get greater access. We're looking at a positive environment going forward for ourselves.

Okay, thanks. Thank you. That concludes our questions. I'll turn it back to Brian Campbell for closing remarks.

Thank you, Todd. And I'd like to thank our participants for their questions. As I said, we're encouraged by the company's solid performance in fiscal 2021, achieving sales of $342.9 million, delivering pre-tax earnings of 16.3%, all while investing $80 million in R&D to build future growth. We're optimistic as we enter the first half of fiscal 2022, fueled by a record high purchase order backlog plus 27 million May shipments totaling in excess of $166 million. That's a 48% sequential increase year over year, or sorry, year over year, and a 8.3% sequential increase from the prior quarter. The growing adoption and successful large-scale deployments of Uber's IP-based software-defined video networking and virtualized cloud solutions by some of the largest broadcast new media service provider enterprise companies in the industry and government, and by the financial strength and flexibility of a pristine debt-free balance sheet with over $108 million of cash and by the growing adoption and successful deployments. With our significant investments in software-defined IP, IT, virtualized and cloud-based technologies, Everts industry-leading deployments and the capabilities of our staff, Everts is poised to build upon our leadership position in the broadcast and new media sector. Thank you and good night.

this concludes today's call thank you for your participation you may now disconnect