Evertz Technologies Limited

Good day, ladies and gentlemen, and welcome to the Q2 of fiscal 2023 investor 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 0 for the operator. This call is being recorded on Tuesday, December 6, 2022. I would now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Please go ahead.

Thank you, Michelle. Good afternoon, everyone, and welcome to Everett Technologies' conference call for our fiscal 2023 second quarter ended October 31, 2022. With Doug Moore, Everett's 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. Turning it now to Irit'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 $113.2 million. an increase of 5.6% compared to $107.2 million in the second quarter last year. Our base is well diversified with the top 10 customers accounting for approximately 55% of sales during the quarter with no single customer over 15%. In fact, we had 98 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $67.5 million, or 59.6%, which is within our target range. Investment in research and development during the quarter totaled $29.6 million. Earnings from operations were $28.4 million for the quarter, a 20% increase from the prior year. Net earnings for the second quarter were $20 million, while fully diluted earnings per share were $0.26. Everett's working capital was $154.1 million, with bank indebtedness of $4.2 million as at October 31, 2022. Operational highlights for the quarter include Everett's stellar presence at the International Broadcast Conference. where Evert's XPS compact encoding decoding platform with 5G wireless won a TV tech best of show award along with Evert's reflector cloud video platform or cloud video processing platform. And Evert's IO stream was recognized with a TVB best of show award. This revolutionary new cloud-based software as a service video platform combines the technological and feature requirements of traditional broadcast channels, conventional OTT channels, and free ad-supported TV fast channels into a single platform that supports file-based playout, advanced live events, and a wide range of streaming inputs and outputs, including 4K UHD with HDR. In addition, September 15th was a historic night which saw the NFL kick off its first-ever broadcast package carried exclusively on a streaming platform with Amazon Prime's Thursday Night Football. The broadcast also marked the launch of Prime 1, arguably the most state-of-the-art mobile broadcast units built around a SMPTE SD2022-7IP routing core. Prime 1 is fully redundant, and that redundancy starts with a pair of Evert's 400-gig EXE IP routing cores, managed by Evert's Magnum control, monitoring, and analytics software. In addition, all the edge routing is handled by Evert's award-winning Nadex fabric switches. At the end of November... Everett's purchase order backlog was in excess of $149 million and shipments during the month were $39 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog to HD channel proliferation, the emergence of 4K Ultra HD and increasing live content, increasing global demand for high-quality video anywhere, anytime, the ongoing technical transition to IP, IT, and cloud-based architectures, 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, 8K UHD solutions, and our state-of-the-art Dreamcatcher IP replay and live production with Bravo Studio Virtual Production Control Suite. Today, Everett's Board of Directors declared a regular quarterly dividend increased to $0.19 per share, payable on or about December 22nd. I will now hand over to Doug Moore, Everett's Chief Financial Officer, to cover the results in greater detail.

Thank you, Brian. Good afternoon, everyone. Looking at revenues, sales were $113.2 million in the second quarter of fiscal 2023 compared to $107.2 million in the second quarter of fiscal 2022, an increase of $6 million quarter over quarter. Where the six months ended, October 31st, 2022, sales were $214.8 million compared to $204.4 million in the same period last year. That represents an increase of $10.4 million or 5.1%. As it relates to revenues in specific regions, the U.S.-Canadian region had sales for the quarter of $88.3 million compared to $78.2 million last year. This represents an increase of $10.1 million or 13% quarter-over-quarter. Sales in the same region, U.S.-Canada, were $166.5 million for the six months ended October 31, 2022, compared to $142.6 million in the same period last year. an increase at $23.9 million or 17%. The international region had sales for the quarter $25 million compared to $29 million last year, a decrease of $4 million quarter to quarter. The international segment represented 22% of total sales this quarter. For the six months ended October 31, 2022, sales in the international region were $48.3 million compared to $61.7 million the same period last year, decreased to $13.4 million. Gross margin for the second quarter was approximately 59.6% compared with 57% in the prior quarter and within our target range. When the six months ended, October 31st, gross margin was approximately 58.7% and also within our target range. Turning to selling and admin expenses, S&A was $14.7 million in the second quarter, a decrease of $0.1 million from the same period last year. Selling and Amend expenses as a percentage of revenue were approximately 13% as compared to 13.8% for the same period last year. Selling and Amend expenses were $27.7 million for the six months ended October 31, 2022, a decrease of $1 million from the same period last year. Selling and Amend expenses as a percentage of revenue were approximately 12.9% over the as compared to 14.1% for the same period last year. Research and development expenses were $29.6 million for the second quarter, which represents a $5.2 million increase from $24.4 million in the second quarter last year. Investment tax credits related to R&D expenses were $3.2 million in the quarter, compared to credits of $2.9 million in the second quarter last year. For the six months ending October 31st, Research and development expenses were $57 million, which represents an increase of $7.9 million over the same period last year. R&D expenses as a percentage of revenue were approximately 26.6% over the period, as compared to 24% for the same period last year. Foreign exchange for the second quarter resulted in a gain of $3 million, compared to a gain of $2.2 million in the same period last year. The quarterly gain was presumably a result of the increase in the value of the US dollar against the Canadian dollar between July 31st and October 31st of 2022. Foreign exchange for the six months ended October 31st, 2022, with a gain of $4 million. That's compared to a gain of $3.6 million in the same period last year. Turning to a discussion of liquidity of the company, bank indebtedness as of October 31st, 2022, was $4.2 million. That's compared to cash of $33.9 million as at April 30, 2022. Working capital was $154.1 million as at October 31, 2022, compared to $158.9 million at the end of April 30, 2022. Looking now specifically at cash flows, the company used cash in operations of $7.7 million. which is net of $33.1 million change in non-cash working capital and current taxes. That change including a quarterly increase of inventory of $7 million and a combined decrease in accounts payable and deferred revenue of $25 million. If the effects of the change in non-cash working capital and current taxes are excluded from the calculation, the company generated $27.5 million in cash from operations during the quarter. The company used cash of $5.6 million for investing activities in the quarter, which was principally driven by $2.4 million in acquisition of capital assets and $3.2 million in purchase of investments. The company used cash in financing activities of $16 million, which was principally driven by dividends paid to $13.7 million. Finally, I will review our share position as at April 31st, 2022. Shares outstanding were approximately 76.2 million and options outstanding were approximately 4.9 million. Weighted average shares outstanding were 76.2 million and weighted average fully diluted shares outstanding were 76.4 million for the quarter ended October 31st. That 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 in the official reports filed by the Canadian Securities Commission. Brian, back to you.

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

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Thanos Maskopoulos of BMO Capital Markets. Please go ahead.

Hi, good afternoon. Brian, could you comment on the spending environments? I mean, obviously, you had a nice uptake in revenues this quarter versus the prior quarter. You know, backlog and November shipment seemed healthy. But more broadly, I mean, given that there's a lot of macro uncertainty out there, how are your customers responding? Have you seen any change in customer behavior in recent weeks? Or has it been kind of status quo in that regard?

Yeah. Overall, Our demand environment continues to be very robust. You can see that we have a solid order backlog of $149 million, along with our 39 million shipments in the first month. So we're cognizant of the macro environment as our customers. However, we're very well positioned with an extremely robust business model and a large backlog to be able to handle macro uncertainty. With respect to the international, it's down quarterly, year over year, but strong trailing 12 months and up sequentially. So that's a good solid indication for us as well too.

But on that point, I mean, clearly international, you know, has been significantly lagging growth you've seen in North America. Would that be a function of maybe a different macro dynamic? Is that just, you know, lumpiness in the projects that they kind of come? Is it deployment issues still with lingering COVID restrictions? What would you attribute that to?

It's actually all of the above factors that you've noted have contributed to, you know, We've got a solid international business in certain regions specifically. There is definitely lumpiness to the delivery. We've done very well with some large customer orders that you've seen play out, Mediaset being one of them over multiple years, and that's quite a high profile business. delivery that we've had ongoing. And yes, there are continuing to be challenges delivering in certain regions, whether it's due to macro uncertainty or COVID restrictions as well too. So all those things play into it. However, we have had a good solid trailing 12 months. If you look at an average, it can be lumpy quarter to quarter, but it's just under 30% of the revenue in total.

Okay. Has supply chain been getting any better, or would you describe the status being consistent as far as component availability relative to the last quarter?

Yeah, I mean, from a quarter-to-quarter basis, it still represents a significant challenge, to be honest. We are seeing some vendors with lead time improvements and, you know, improvements on deliveries, but at the same sense, other ones, we're seeing no improvements at all. So that's really... why we're sitting with 23 million more in raw materials this year ends and even 40 million since the last of October. So we've continued to stockpile raw materials as it continues to be a challenge.

And finally, the gross margin is obviously very strong. Is that just reflective of, you know, the mix during the quarter? Is there anything you'd call out that drove the margin?

Yeah, I mean, as always, you know, there's always fluidity there with the mix. There is some larger projects that are higher margin that were completed during the quarter. You'll see a corresponding decrease in deferred revenue to kind of align with that. But really, it's product mix and what was delivered and signed off in the quarter.

Great. I'll pass the line. Thank you.

Thank you. As a reminder, ladies and gentlemen, if you do have a question, please press star 1 at this time. The next question comes from Rob Young of Canaccord Genuity. Please go ahead.

Hi. Do you remind us what the target range for gross margins is? I think 56 to 60, or just remind me.

56 to 60%, you're correct.

Okay. And then you just said that large project clearing drove, you know, the strength.

Yeah, I mean, there's always some fluidity. There's always some fluidity to it, depending on the mix itself. But if I, you know... There were a couple larger projects that were signed off in the quarter that were higher margin in nature. So that would have been a partial reason of the uptick on the higher end of the range.

Right. Is that like a cost-matching thing, or is it just a mix of the product? Is it more software-related?

Yeah, it's a mix. So whether it's heavier in software, it would be the right path, I think.

Okay. On the macro, are you seeing any delays on signing deals? It sounds like you've got large projects that are closing. Are you seeing any delays on large projects or any reticence on the part of your larger customers that are signing larger deals to sort of get those across the line?

That has been ongoing for the last couple of years that there have been large projects delayed. However, we do have – very significant projects that continue to move forward with our customers, and that's what we're focusing on delivering for them to keep their business plans moving ahead at the pace that they need.

Okay, so it's more consistent with what you've seen over the last couple of years as opposed to any big change?

Correct.

Okay. Maybe you could talk a little bit about access to customer sites. I know that's been an ongoing issue. Has that improved material? Is there anything to call out there?

It remains consistent. In North America, we've had good access. Internationally, it still can be a challenge in certain areas. We've been managing through it and But there has been no significant change since the last quarter.

Okay. Notable, the cash, you have net debt this quarter. I think you have to go back to 2008 or so to see something like that in your financials at the same time that you're raising the dividends. So I'm curious about those two things having the same time. Is there any change in the way you think about your structure of the business? Are you going to carry a larger amount of debt? Or is this out of that $75 million revolver I think you have?

So the $75 million revolver is able to cover the current indebtedness. And there's definitely, like I said, we've stockpiled quite a fair amount of inventory. We've increased raw materials by $40 million in the past 12 months. There's some Timing to the – if you look at our payables deferred revenue, both those came down quite a bit, so there's a cash flow impact there. But the expectation is with carrying on business as is, the indebtedness would go away in the next quarter or so.

Okay, so same as it happened in 2008. Okay, and then the $3.2 million – In acquisitions, I didn't have a chance to go through the MD&A. I don't know if you discussed it in there. Maybe just give some color on what that is.

It's the same. The investments are the same nature as in Q1.

So it's an additional. So these are marketed securities? Yes. So is it the same thing or are you just building a larger position in the same security?

It's 3.2 million additional investments.

All right. All right. I think that's all I've got. I'll pass the line.

Thank you. There are no further questions at this time. I will now turn the call back to Brian Campbell for closing remarks.

Thank you. I'd like to thank the participants for the questions and add that we're very pleased with the company's performance during the second quarter fiscal 2023, which saw strong quarterly sales of 113.2 million, solid gross margins of 59.6% in the quarter. We are entering into the second half of fiscal 2023 with significant momentum fueled by a combined purchase order backlog plus November shipments totaling in excess of $188 million. With Ebert's significant investments in software-defined IP, IT, and cloud technologies, the over 500 industry-leading IP SDVN deployments, and the capabilities of our staff, Ebert's is poised to build on our leadership position in the broadcast and media technology sector. Thank you, everyone, and good night.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.