Evertz Technologies Limited

Good afternoon, ladies and gentlemen, and welcome to IVERT 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 0 for the operator. This call is being recorded on Wednesday, June 21, 2023. I would now like to turn the conference over to Brian Kimball, Executive Vice President, Business Development. Please go ahead.

Thank you, Julia. Good afternoon, everyone, and welcome to the Everts Technologies conference call for our fourth quarter and year ended April 30th, 2023, 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 with a few annual and fourth quarter highlights, following which Doug will provide more detail. First off, I'm pleased to report sales for the fiscal year totaled a record $454.6 million. Annual net earnings were $64.6 million, resulting in fully diluted earnings per share of $0.84 for fiscal 2023. Investments in research and development totaled $117.1 million for fiscal 2023. Now moving on to the fourth quarter financials. Sales in the fourth quarter were a record high, $128.9 million, up 11% year-over-year. Gross margin for the fourth quarter was $76.7 million, or 59.5% of sales. And foreign exchange for the fourth quarter was a gain of $252,000. Net earnings for the fourth quarter were $18.6 million, with fully diluted earnings per share of $0.24 in the quarter. At April 30, 2023, Everest Working Capital was $171.4 million with $12.5 million cash. Purchase order backlog at the end of May was a record high, $392 million, and shipments during the month of May were $40 million. We attribute our strong annual and quarterly performance 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 continued adoption of Everett's IP-based software-defined video networking solutions, Everett's IT and cloud solutions, our immersive 4K Ultra HD solutions, and the state-of-the-art Dreamcatcher IP replay and Bravo Live production suite. Our sales is well diversified, with the top 10 customers in the fourth quarter accounting for approximately 43% of sales, with no single customer over 6%. In fact, we had 133 customer orders of over $200,000 in the quarter. Today, ERIS Board of Directors declared a dividend of $0.19 per share, which will be paid on or about July 6th. I will now hand over the call to Doug Moore, Evert's Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. Good afternoon, everyone. Starting with revenues, sales were $128.9 million in the fourth quarter of fiscal 2023, once compared to $116.1 million in the fourth quarter of fiscal 22, which represents an increase of $12.8 million, or 11%. Sales for the fiscal year ended April 30, 2023, For $454.6 million compared to $441 million in the same period last year, that represents an increase of approximately $13.6 million. Regarding regional revenues, the U.S.-Canadian region had sales for the fourth quarter of $98 million compared to $77.8 million last year, an increase of $20.2 million or 26%. The international region had sales for the quarter of $30.9 million compared to $38.2 million last year, a decrease of $7.3 million. Now fiscal results again. Sales in the U.S.-Canadian region were $337.1 million in 2023 compared to $299.4 million in fiscal 2022. That represents an increase of $37.7 million, or 13%. Sales in the international region were $117.5 million for the year ended April 30, 2023. That's compared to $141.7 million in fiscal 2022, representing a decrease of $24.2 million. Proportionally, the international segment represented 24% of total sales in the quarter and 26% of the total sales in the year, compared to 33% and 32% in the respective periods last year. Looking at gross margins, the gross margin for the fourth quarter was approximately 59.5% compared to 58.9% in the fourth quarter of fiscal 2022. Gross margins for the year were approximately 59% compared to 57.9% in fiscal 2022. Both the fourth quarter and fiscal 2023 gross margins were within the company's target range. Looking at operating costs, Selling and administrative expenses were $17.5 million for the fourth quarter. That's an increase of $1.4 million in the same period last year. Selling and admin expenses were $61.5 million for the year ended April 2023. That's an increase of $0.6 million from fiscal 2022. Selling and admin expenses as a percentage of revenue were approximately 13.5% compared to 13.8% last year. Looking at R&D, research and development expenses were $29.9 million for the fourth quarter, which represents a $2.6 million increase from the fourth quarter last year. For the year, research and development expenses were $117.1 million, which represents an increase of $14.7 million compared to fiscal 2022. The key drivers to the increase being approximately $6 million in additional costs from increased headcount to address key R&D initiatives, and approximately $8 million associated with salary increases. R&D expenses as a percentage of revenue were approximately 25.8% for the year, compared to 23.2% last year. Foreign exchange for the fourth quarter was a gain of $0.3 million. That's compared to a gain of $1.1 million the same period last year. Foreign exchange for the 12 months ended April 30th with a gain of $2 million compared to a loss of $6.5 million in the prior year. In both cases, the gains were driven by a change in value of the U.S. to Canadian dollars. Turning to a discussion of liquidity of the company, cash and bank indebtedness as of April 30th, 2023 netted to a total of $6.5 million in cash. That's compared to $33.9 million as of April 30th, 2022. Working capital was $171.4 million as of April 30, 2023, compared to $158.9 million at the end of April 2022. In our quarterly cash flows, the company generated cash from operations of $25.9 million, and that includes a $0.8 million change in non-cash working capital and current taxes. If the effects of those changes in non-cash working capital and current taxes were excluded, the company generated $26.7 million in cash from operations in the quarter. The company generated 3 million dollars in cash from investing activities and the company used 16.5 million in financing activities which is gross of the 5.9 million dollars presented as bank indebtedness on the balance sheet and that was driven by dividends paid of 14.5 million dollars. We have fiscal cash flows For the year, the company generated cash from operations of $53.8 million, and that's net of $37.7 million change in non-cash working capital and current taxes. If the effects of the changes in non-cash working capital and current taxes were excluded, the company generated $91.5 million in cash from operations. As we've discussed in prior calls, the main use of cash in working capital relates to increase of inventory. Regarding financing activities, During the year, the company paid approximately $56.4 million in dividends. Finally, I'll review our share capital position as of April 30, 2023. Shares were approximately $76.1 million, and options and equity-based restricted share units outstanding combined to approximately $6.3 million. Weighted average shares were $76.2 million, and weighted fully average shares, deluged shares outstanding were also 76.2 million for the year ended. That brings to a conclusion the review of our 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 on the Canadian Securities Commission. Brian, back to yourself.

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

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please leave your handset before pressing any keys. One moment, please, for your first question. Your first question comes from Thanos Moscapulos from BMO Capital. Please go ahead.

Hi, this is Steven on for Thanos. Yeah, I was hoping to get a bit more color on the large $152 million contract you announced earlier this quarter. More specifically, is it an existing customer and how is it going to ramp?

Sure, I'll address that. It is an existing customer. That is the first point. The large order is driven by our cloud native technology platform. and services business. The thing I would highlight was how it will flow out and ramp will be dependent on how we meet our deliverables, but I would note that no revenue was taken in fiscal 2023. We estimate it's going to be dependent on our cloud-based deliverables there, but between $25 and $35 million in fiscal 2024 and then carry on throughout the rest of the five years.

Okay, that's helpful. Is there any upfront hardware component related to it?

No.

No, perfect. Okay. And I guess you had a record revenue quarter. With some of your larger customers and POs this quarter, what proportion are opting for the Can you give a little context on maybe how the mix has shifted over the last few quarters?

Yeah, I cannot provide specifics as it relates to how much is on the cloud model. I can see that a significant portion is associated with our cloud data technology business, service business. I can't specifically quantify that. I think if you look at our record backlog, I noted the large order, the $115 million order. There's also approximately $45 million relating to a long-term service contract, which is a licensing and support contract over multiple years, 10 years in fact. Those are, I think, without diving into specific numbers, so that provides some color.

Okay. And my last question, shipments were purchased quite strong in the first month of this quarter. And also you apparently finished out Q4 pretty strongly. Do you see that pace continuing throughout the rest of this quarter?

We do have, we anticipate solid deliveries in the rest of the quarter. And again, too, that depends on the customer's ability for us to deliver in the summer months.

Okay. And would you say that was it easier to deliver to the customer this most Q1 and Q4 compared to the past? Are a lot of the constraints gone by now or are you still experiencing some restrictions there?

I think from a purchasing perspective, from a manufacturing perspective, there's definitely improvements overall in the past three to six months, there's still challenges we deal with, in particular with certain vendors. But we have done our best to mitigate those issues, right? We've stockpiled a lot of raw materials components. Year over year, our raw materials are up 23 million. If you look back two years from April 21, it's up 47 million. I think that's helped us mitigate some of those challenges, but it would be, I could not say they're gone.

And members of on-site access, we're doing very well.

Okay, fantastic. All right, thanks for taking my questions. I'll pass the line.

Your next question comes from Robert Young from Canaccord. Please go ahead.

Part time for Rob. I'm just following on that cloud question there. I'm guessing you're not providing more color on the mix, but As I go back to the AGM last year, I believe a 20% number was mentioned. So assuming the big cloud order should we expect cloud as a percentage to grow over time or kind of stay steady?

The cloud part of the business is definitely a key focus, one we're investing very heavily in terms of R&D and cloud resources, dollars, and people. That definitely is the strategy to ramp up that part of the business. What you're seeing is evidence with the long-term, very large purchase order success in those areas. We've been delivering cloud services to our key customers now since 2016, 17, and that business is definitely ramping up and continues to.

Got it. And then it appears that competition is steadily growing. Grass Valley and Ross put out a couple of announcements. How do you see yourself positioned versus competition?

Well, we're definitely the leader, the global leader. And the announcements, you'd have to read through them through them. Candidly, we're focused on our own business and delivering to customers. And we're delivering and have been delivering at scale to the largest broadcast media players in the industry in North America and internationally.

That's helpful. And then just following up on gross margins, really strong in the quarter. I guess in cloud has a pretty big role to play there. So should we expect you to increase your target gross margin going ahead, maybe beyond 60%?

I think at this time, our target maintains. I would think it wouldn't necessarily just be cloud. So, I mean, there are other high-margin components, whether it's, you know, warranty, licensing, maintenance, other services that are generally higher margin, too. It wouldn't just say it could be isolated to, you know, a cloud-based service. But our target remains the same, the 56 to 60 percent. Male Speaker 1 Got it.

Thank you. And one last one. Any update on the high-vision expression of interest and any update there?

Male Speaker 2 Nothing that isn't in the public domain.

Male Speaker 1 All right. Thank you so much, and I'll pass the line. Male Speaker 2 Thank you.

Female Speaker 1 Brian, there are no further questions at this time. Please proceed with your closing remarks.

Thank you, Julia. I'd like to thank our participants for their questions. We're very pleased by the company's strong performance in fiscal 2023, achieving record sales of $454.6 million, delivering pre-tax earnings of $87.8 million, 19.3% of sales, all while investing $117 million in R&D to build future growth. We're entering the first half of fiscal 2024 with significant momentum fueled by a record purchase order backlog in excess of $392 million, plus 40 million shipments in May, totaling in excess of $342 million. And fueled by the growing adoption and successful large-scale deployments of your IP-based software-defined video networking solutions, cloud solutions, and our cloud solutions by some of the largest broadcast new media service provider and enterprise companies in the industry. With our significant investments in software-defined IP, IT, and cloud-native technologies, industry-leading deployments, and the capabilities of our staff, Everett's is poised to build upon our leadership position in the broadcast and media technology sector. Thank you and good night.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.