Evertz Technologies Limited

Good afternoon, ladies and gentlemen, and welcome to the Everts Q4 investor conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. Today's call is being recorded June the 23rd, 2022. And I would now like to turn the call over to Mr. Brian Campbell, Executive Vice President of Business and Development. Please go ahead, sir.

Thank you, Michelle. Good afternoon, everyone, and welcome to the Everts Technologies conference call for our fourth quarter ended April 30, 2022, with Doug Moore, Everts Chief Financial Officer, and myself, Brian Campbell. Please note that our financial press release and MD&A are now available on CDARF Doug and I will comment on the financial results and then open the call to your questions. Turning now to Evert's results, I'll begin with a few annual and fourth quarter highlights, following which Doug will provide more details. First off, I'm pleased to report sales for the fiscal quarter totaled $441 million, driven in part by the adoption of Evert's new technologies. Annual net earnings were $72.7 million, resulting in fully diluted earnings per share of $0.94 for fiscal 2022. Investment in research and development totaled $102.4 million for fiscal 2022, further reinforcing Evert's commitment to R&D. Moving on to the fourth quarter financials, sales in the quarter were $116.1 million, up 24% year-over-year. Gross margin for the fourth quarter was $68.3 million, or 58.9% of sales. And foreign exchange for the quarter was a gain of $1.1 million. Net earnings for the fourth quarter were $19.2 million, with fully diluted earnings per share of 25 cents. At April 30, 2022, Everett's working capital was $158.9 million, with $33.9 million in cash. The purchase order backlog at the end of May was in excess of $148 million, and shipments during the month of May were $26 million. We attribute our solid annual and quarterly performance to the ongoing technical transition in the industry, channel and video services proliferation, and 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 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 6%. In fact, we had 475 customer orders of over $200,000, a 35% increase from the 353 customer orders of over 200,000 received last year. Today, Everett's Board of Directors declared a quarterly dividend of 18 cents per share, which will be paid on or about July 7th. I will now hand over the call to Doug Moore, Everett's Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. Good afternoon, everyone. Starting with revenues, Sales were $116.1 million in the fourth quarter of fiscal 2022 compared to $93.3 million in the fourth quarter of fiscal 2021, which represents an increase of $22.8 million, or 24%. Sales for the fiscal year ended April 30, 2022, were $441 million compared to $342.9 million in the same period last year. That represents an increase of approximately $98.1 million or 29%. Regarding regional revenues, the US-Canada region had sales for the fourth quarter of $77.8 million compared to $63.6 million in Q4 last year. That's an increase of $14.2 million or 22%. The international region had sales for the quarter of $38.2 million compared to $29.7 million last year an increase of $8.5 million, or 29%. Back to fiscal results. Sales in the U.S.-Canadian region were $299.4 million for the year ended April 30th, compared to $222.7 million in the same period last year. This represents an increase of $76.7 million, or 34%. Sales in the international region were $141.7 million for the year ended April 30, 2022, compared to $120.2 million in the same period last year, representing an increase of $21.5 million, or 18%. Fortunately, the national segment represented 33% of total sales in the quarter and 32% of total sales in the year, compared to 32% and 35% in the respective periods last year. Turning to gross margins, the gross margin for the quarter was approximately 58.9% compared to 59.6% in the fourth quarter of fiscal 2021. Gross margin for the year was 57.9% compared to 58.2% in fiscal 2021. Both the Q4 and fiscal 2022 gross margin rates were within the company's target range. For operating costs, Selling and administrative expenses were $16.1 million for the fourth quarter, an increase of $3.1 million from the same period last year. The increase is inclusive of a $2.1 million increase in travel, promotion, and trade show costs when compared to Q4 of 2021. As a percentage of revenue, selling and admin expenses were approximately 13.9%. Selling and administrative expenses were $60.9 million for the year ended April 30, 2022, an increase of $11.5 million from the same period in fiscal 2021. For the year, selling administrative expenses as a percentage of revenue were approximately 13.8% compared to 14.4% last year. Turning to R&D, research and development expenses were $27.3 million for the fourth quarter, which represents a $4.8 million increase from the fourth quarter last year. The increase in R&D expenses is driven by an increase in net salary costs. Unlike Q4 last year and Q4 of 2022, there was no reduction in costs associated with government assistance. As a percentage of revenue, R&D was approximately 23.5% in the quarter as compared to 24% for the same period last year. For the year, research and development expenses were $102.4 million which represents an increase of $22.2 million over the same period last year. R&D expenses as a percentage of revenue were approximately 23.2% for the year compared to 23.4% last year. Foreign exchange for the fourth quarter resulted in a gain of $1.1 million compared to a loss of $5.1 million in the same period last year. The gain of 1.1 million was driven by the increase in the value of the U.S. dollar against the Canadian dollar between January 31st and April 30th, 2022. Foreign exchange for the year ended April 30th, 2022, resulted in a gain of 6.5 million compared to a loss of 14.9 million in the prior year. The gain was driven by an increase in the value of the U.S. dollar compared to the Canadian dollar over that period. Turning to a discussion of liquidity with the company, Cash as at April 30, 2022 was $33.9 million compared to $108.8 million as at April 30, 2021. Working capital was $158.9 million as at April 30, 2022 compared to $214.5 million at the end of April 30, 2021. Regarding quarterly cash flows, the company generated cash from operations of $21.5 million which includes a $2.4 million net change in non-cash working capital and current taxes. If the effects of the change of non-cash working capital and current taxes are excluded from that calculation, the company generated $23.9 million cash from operations in the quarter. In the quarter, the company used $1.3 million from investing activities, which was principally driven by capital asset purchases. and the company used cash from financing activities of $15 million, which was principally driven by the dividends paid of $13.7 million. Regarding fiscal cash flows, for the year the company generated from operations cash of $68.7 million, which is net of a $24.3 million change in non-cash working capital and current taxes. The change in non-cash working capital was driven by a $26 million increase in accounts receivable over the year, a $25 million increase in inventory, partially offset by a $16 million increase in deferred revenue over the year. If the effects of the change of non-cash working capital and current taxes are excluded, the company generated $93 million cash from operations. Regarding financing activities, during the year the company paid approximately $131.4 million in dividends, which includes a special dividend of $76.3 million. Finally, Looking at our share capital position as of April 30, 2022, shares outstanding were approximately 76.2 million, and options outstanding were approximately 5.1 million. Weighted average shares were 76.3 million, and weighted average fully diluted shares outstanding were approximately 76.6 million for the year ended. That brings to a conclusion the review of our financial results and position for the fourth quarter and fiscal year end. And finally, I would like to remind you that some of the statements presented here and 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 Securities Commission. Brian, back to yourself.

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

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer sessions. If you would like to ask a question, please press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. Please stand by while we compile the Q&A roster. Your first question comes from Sanis Mistropoulos of BMO. Please go ahead.

Hi, good afternoon. Brian, there's clearly been a lot happening from a macro perspective, obviously, given rising rates and inflation and war in Ukraine and all that. So, from your perspective, as you look at your business and as you speak to your customers, how would you say the demand environment has evolved over the last few weeks?

Our demand environment still continues to be very robust. We've got a very strong backlog on heading into fiscal 2023. So we're quite optimistic about the outlook going forward. We're very cognizant of the macroeconomics as our customers, but we're well positioned with an extremely robust business model and a very large backlog for the next while.

So overall, it sounds like you haven't really seen much change in customer behavior over the past quarter. Is that fair? Yes, that's correct. In terms of supply chain, any incremental updates there? Has the situation gotten any better or any worse? Obviously, you had some advantage with your in-house manufacturing, but... I would characterize the supply chain dynamic versus what it was previously.

Yeah, I'll comment on that. So, yeah, I mean, sourcing parts continues to be a challenge, right? So a significant challenge. It's one that we're doing our best to mitigate and, you know, can have effects on timing of certain shipments. And there's, you know, quite frankly, I don't know that it's going away anytime soon, but we're doing our best to mitigate and, you know, we just had a pretty strong quarter, 116 million. So I think that's, well, there's certainly challenges and, um, you know, I can't say there's been a significant change in the last two months. It's been going on for the past many months, but it doesn't seem like it's, um, necessarily improving as of yet, but I think we're doing our best to mitigate it.

Um, the gross margin was, uh, obviously strong within your targeted range, but higher than in some of the prior quarters. Anything to call out there?

It's really just driven by a product mix. I mean, we are seeing some part cost increases, of course, just given the supply chain issues. But we've been able to mitigate those. And so really, it's just really been driven by the product mix itself.

Okay. And maybe just the last one for me, I mean, probably safe to assume that inventories will remain elevated for the next while, because clearly that's, you know, one of the ways in which you're addressing the supply chain constraints, right? So we shouldn't expect to see inventory turns improve any time for the next while?

Yeah, that's exactly part of our strategy of mitigation is we've increased raw materials quite substantially. So I think we're up over 20 million compared to last year. So I would not expect to get decreased. We've taken an approach where we're, quite frankly, stocking more than we did a year ago because we have to given the constraints on lead times. They've gone a lot longer by suppliers, so we are forced to hold more inventory at the time.

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

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star 1 now. Your next question comes from Rob Young of Canaccord. Please go ahead.

Hi, good evening. Maybe the first question for me around the backlog, down quarter to quarter, still up year over year. Seems as though it hasn't continued the recent trend where it's just been inching up. Is there something that is different this quarter or is there some kind of a seasonal factor in the quarter to quarter dip?

So, Rob, we're coming off of two record high quarterly backlog numbers. That said, this is at $148 million. It's a very significant backlog for us. Much of it deliverable within the next 12 months, predominantly. We don't see any real trends there in terms of the order intake, but we have, again, too, had good deliveries in this past quarter, which impacts the backlog.

Okay, so nothing out of the ordinary. And maybe the second question, the deferred revenue group in the quarter, is there anything to call out there and drive her behind that? No.

So, I mean, the increase in deferred revenue is very much a trend in the past, right? So, there is a couple of customers that we have taken deposits from that are pretty large, but it's spread across a little bit broader than that. There's nothing really industry specific, sorry, industry is the wrong word, but specific to highlight there other than it's somewhat of a trend given our business model where we're taking more money up front, paying on milestone payments, and I think it's not really one item to highlight.

Okay. Nothing to highlight around recurring revenue growth or anything like that or anything on subscription or software related?

No, I don't think it's, in this case, it's not quarter over quarter. There's no substantial association with that. There is, quite frankly, again, there's a couple of customers that put deposits on larger projects.

Okay. And then the last, I guess, even two years now, you've highlighted some difficulties getting access to sites and getting into even the geographies that you needed to do the work required. And I was wondering if you could just update us on how that's developing now that everything's opening up a little more. Is that becoming easier?

It is becoming easier. We still do have those challenges in place, but again, we've been working through them for two years, and things are getting better. We do have significant teams deployed in North America and some internationally as well, too. And that's par for the course. So yes, things are gradually getting better.

Okay. Maybe the last question for me is just around, you know, are you seeing any pressure on, you know, wage inflation or return to travel? I know the NEB conference is going to be a little bigger than people thought it would be. And so are you seeing, you know, a return to, you know, trade show expenses or anything, you know, to call out for, you know, the coming year?

Yeah, I think definitely. I think even in Q4, we had comparing, you know, Year over year, for example, attending NAB is not a... There's a cost associated with that. Our staff are traveling a lot more. There is some... Within R&D, there... You know, especially there's some salary costs associated with market adjustments or... But, yeah, associated with S&A, for example, there is... Certainly the return to trade shows and attending more trade shows is... a cost that I think we hope to continue to attend them, so I don't expect them to go away.

Candidly, we're thrilled to be able to attend and see in person the customers again, although we have been visiting them on site where possible, but the opening up of trade shows is definitely a positive for us and the industry.

Should we think of maybe expenses going up as a percentage of revenue in 2023, like operating expenses, or do you think you can... hold them relatively flat despite those extra costs?

So there would be some, they wouldn't be linear, right? So if you're increasing revenue, it wouldn't inherently proportionally go up. But we would expect that with increased selling activity, some of the costs would indeed go up, increase.

Okay, thanks. I'll pass the mic.

There are no further questions from the phone lines. I will like to turn the conference back to Mr. Brian Campbell for closing remarks.

Thank you, Michelle. I'd like to thank our participants for their questions. We're encouraged by the company's strong performance in fiscal 2022, achieving sales of $441 million, and in particular by strength in the important U.S.-Canada region where sales rose 34%. delivering pre-tax earnings of $97.9 million, 22.2% of sales, all while investing $102.4 million in R&D to build for future growth. We optimistically enter the first half of fiscal 2023 fueled by a purchase order backlog in excess of $148 million plus 26 million shipments in May, totaling in excess of $174 million up 5.5% year-over-year, and fueled by the financial strength and flexibility of our pristine balance sheet and by the continued adoption and successful large-scale deployments of Everett's software-defined IP, IT, and cloud-based video solutions, Dreamcatcher, Bravo, IP-based instant replay and live production suite. With our significant investments in software-defined IT, IP, IT, and cloud technologies, industry-leading deployments, and the capabilities of our staff, eROOTS is poised to build upon our leadership position in the broadcast and media technology sector. Thank you and good night.

Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank you all for participating and ask that you please disconnect your lines.