Evertz Technologies Limited

Good afternoon, ladies and gentlemen, and welcome to Evert's Q1 investor call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. I would now like to turn the conference over to Ryan Campbell, Executive Vice President of Mistains Development. Please go ahead.

Thank you, Sergio. Good afternoon, everyone, and welcome to the Eberts Technologies Limited conference call for our fiscal 2024 first quarter ended July 31st, 2023, with Doug Moore, Eberts Chief Financial Officer, and myself, Brian Campbell. Please note that our financial press release and MD&A will be 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 would like to begin by providing a few highlights and then Doug will go into greater detail. First off, I'm pleased to report sales for the first quarter totaled $125.8 million, up 23.9% from the first quarter last year. Our sales space is well diversified, with the top 10 customers accounting for approximately 54% of the sales during the quarter, with one customer accounting for approximately 14% of sales and a second customer at 11%. In fact, we had 112 orders of over $200,000. Gross margin in the quarter was $72 million, or 57.3%, which is within our target range. Investment in research and development during the quarter totaled $31.9 million, Net earnings for the first quarter were $15.9 million, while fully diluted earnings per share were 20 cents in the quarter. Everett's working capital was $173.4 million with $48.9 million in cash as of July 31, 2023. The purchase order backlog was over $343 million at the end of August, and shipments during the month were $49 million. We attribute the 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 Ebert's IP-based software-defined video networking solutions, Ebert's IT and cloud solutions, our immersive Ultra HD solutions, our state-of-the-art Dreamcatcher IP replay and live production suite, and Bravo Studio featuring the iconic Scooter Audio. Today, Ebert's board of directors has declared a quarterly dividend of $0.19 per share and will honor about September 29, 2023. I will now hand over to Doug Moore, Chief Financial Officer, to cover our results in greater detail.

All right. Thank you, Brian, and good afternoon, everyone. Sales were $125.8 million in the first quarter of fiscal 2024. That's compared to $101.5 million in the first quarter of fiscal 2023, an increase of $24.3 million, or 23.9%. The U.S.-Canadian region had sales for the quarter of $87 million compared to $78.2 million last year. That's an increase of 11.3%. The international region had sales for the quarter of $38.8 million. That's an increase of $15.5 million compared to $23.3 million last year. Gross margin for the quarter was approximately 57.3% compared with 57.6% in the prior year and within our target range. Selling and administrative expenses were $16.4 million for the first quarter. That's compared to $12.9 million in the same period last year. Selling and admin expenses as a percentage of revenue were 13% compared to 12.7% in the same period last year. It's worth noting the prior year expenses included a $3.8 million recovery that did not reoccur in the current year. Research and development expenses were $31.9 million for the first quarter. That's compared to $28.3 million in the same period last year. Research and development expenses as percentage of revenue were 25.4% compared to 27.9% in the same period last year. We had a foreign exchange loss of $2 million. That's compared to a foreign exchange gain in the prior year of $1 million. the loss being predominantly a result of a 3% decrease in the value of the U.S. dollar as at July 31, 2023, when comparing it to April 30, 2023. Turning to discussion of liquidity of the company, cash as at July 31, 2023 was $48.9 million. That's compared to $12.5 million as at April 30, 2023. Working capital was $173.4 million as at July 31, 2023. compared to $171.4 million at the end of April 2023. The company generated cash and operations of $60 million, which is gross of $40.1 million change in non-cash working capital and current taxes in the first quarter. If the effects of the change in non-cash working capital and taxes were excluded from the calculation, the company generated $19.9 million in cash from operations. During the first quarter this year, deferred revenue increased by approximately $23 million, and accounts receivables decreased by $23 million as well. That results in a combined $46 million in increased cash from working capital in the quarter. During the quarter, the company acquired $3.2 million of capital assets, and the company used cash from financing activities of $17.2 million, net of $5.9 million that was previously presented as bank indebtedness, That predominantly consisted of the payment of dividends of $14.5 million. Shares outstanding were approximately 76.1 million and options and equity-based restricted share units outstanding were approximately 6.2 million as at July 31st, 2023. Weighted average shares outstanding were 76.1 million and weighted average fully diluted shares outstanding were 76.5 million for the quarter ended July 31st, 2023. That brings to a conclusion the review of financial results and position for the first quarter. 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 our annual information form and the official reports filed with the Canadian Securities Commission. Brian, back to yourself.

Thank you, Doug. Sergio, 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 one. If you want to withdraw your question, please press star two. Your questions will be pulled in the order they are received. If you are using a speakerphone, please lift the handset before placing any keys. One moment, please, for your first question. Your first question comes from Thanos Machopoulos from BMO Capital Markets. Please go ahead.

Hi, good afternoon. Um, Brian, clearly it was a strong quarter and, uh, seems like, uh, you know, uh, shipments for progress were also very strong. Um, can you just comment on, on maybe the spending environment to some of that string, you know, supply chain easing is some of that, um, you know, some, um, uh, pent up, uh, demands, um, or, you know, more specific project based. I mean, what do you think as far as environment?

So from the Evert's perspective, yes, it's been a very good solid quarter in terms of delivering to our customers and securing new orders. So specifically, we do continue to win very good profitable business and larger contracts. So whether that's a broader spending implications or whether it's specifically with the customer sets that Everts is addressing, you'd have to look at the rest of the industry to see what their order intake looks like.

Okay. But I guess from an Everts perspective, directionally, does it feel sort of status quo or feeling a bit better versus a few months ago within your own business directionally?

What do you think? Definitely, we're continuing to address a very significant order backlog multi-year, and we are well-positioned to deliver that to our customers. So we're continuing to work through the very substantive backlog that we have and to bring a new business as well, too. So from our perspective, it's a very... good, solid environment. And that's going to continue for the next foreseeable quarters as we're working through this very large backlog.

Great. The writer and actor strike, if it drags on, is that going to have any impact? I mean, on the one hand, maybe that might cause more investment in life production. On the other hand, does it cause some of the customers to be more mindful about their capex spending. Any thoughts in that regard?

That's definitely a factor in the industry, but we are continuing to secure significant orders. There's no crystal ball as to how long this will play out, but currently our order backlog is very strong and our order book has been continuing to build.

Okay. The gross margin was within your targeted range, although a bit lighter than we've seen in recent quarters. Was that just reflective of maybe having a couple of larger deals in there or any other dynamic you want to?

I'll address that. So it really is just a product mix. I would say I would highlight that we do have a bit of a larger international segment revenue in the quarter, but it really is a – a general product mix and not really necessarily a specific contract to point to.

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

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

Hi, good evening. You announced a couple of larger deals going back, I think, in April, and so I was curious. I think you said the largest customer is 11%, if I heard that right? Maybe just talk about whether either of those deals fell into the quarter, if there were a contributor this quarter.

I can take that. So the largest press release we did with the approximately $150 million order, in the quarter there's about $6 million of revenue recognized therein. Looking at the next 12 months, we're estimating it's a big range. It's $22 to $35 million. It's huge. dependent on certain cloud deliverables and milestones, relatively linear after the next 12 months. But in the current quarter, there's about $6 million in Q1. On the approximately $25 million international order we previously press released, there would be very limited, if any, revenue in this quarter.

Okay, that's helpful. The change in the cash, I think you highlighted working capital, if I heard right, deferred revenue. There's a big increase. Maybe just talk about the drivers there. What's behind that? Maybe if you just go through the different pieces of the working capital that caused that.

Yeah, sure. So, I mean, the simplest half of it is just AR is down. So, I mean, we've been running the last few quarters at a relatively high AR level of over $100 million. It's not totally abnormal to have closer to 80s and the 80s kind of accounts receivable, so we've collected an additional $20 million there. On the deferred revenue side, there's about $20 million in cash we've received up front ahead of revenue. So if you're looking at a specific contract, The large one referenced, there's about $15 million of that that we would have received cash but not recognized that's sitting in deferred revenue. That's the biggest piece to the increase there, while the collections in AR are more broad-based across multiple customers. But that explains the AR question.

Great. And is that just typical, like a large project, you collect a certain amount up front, or is that because, I think you said it was driven by cloud and services? Is there just a change in that?

Yeah, it's really the components to it, but it's the nature of the project, I would say. So the order as a whole, where there's, unlike a typical just shipping of hardware, where sometimes you receive funds up front, many large customers get some terms. When it's more of the service or cloud-centric projects, there will be an up-front cash outlay towards us that will often result in deferred revenue.

And then the last question for me, just around the shipment figure, like Thanos highlighted, very strong. I think it's the second highest going back. So it's very, very strong. And so is that sustainable? I mean, when we think about how that, the cadence through the quarter, just maybe give us some context around that large figure and whether it's sustainable. Then I'll pass the line.

So I'll start, and then if Brian, you want to go on. So I mean, 49 is certainly a strong month of shipments. I think we've certainly never had 150 million. So that's not fair to prorate that across the board. What I would say is, if you look at our total backlog, approximately 45% is beyond a year. I already kind of mentioned the WBD. and then the, which is, lost my train of thought there.

So, Rob, the very strong shipment is actually, you know, solid overall results, but it's a timing of deliverables as well that contributed to a very significant month of shipments. Okay.

But we shouldn't just multiply that by three. Yeah, I don't think that would be a realistic two. right across.

As you know, we deliver when the customers are ready at times, so that can have shipments delayed in a month and then pile up in a second month. Our August shipments at 49 is an inordinately high number. We can do it, but it's high.

Is that driven by one order or one customer, I mean, this quarter, I think you said top customer is 11%.

Multiple.

Should we expect that to be quite a bit higher next quarter?

Okay. Okay. Could you repeat that for me, please?

Sorry, I was just, you said that the top customer is 11%. Should we expect that to be quite a bit higher next quarter, just given the size of that shipment figure, if it's driven by a small number of customers?

We actually have a 14% and an 11%. as part of the large customers. Okay.

I was more thinking about in the 49 million shipments figure, is that driven by a small number of customers or is it broad and then should we be expecting that top customer figure to be a lot higher in the fiscal Q2?

The 14% of the single customer in the quarter is unusual, and that would be unusual for it to persist for the full year. So the answer is no to that. Okay. Thanks.

Appreciate it.

That's fine. Thank you. Your next question comes from Steven Lee from Raymond James. Please go ahead.

Hey, guys. Given what you just said on the August shipment, that momentum is continuing. I mean, we're not going to multiply by three, but Q2 should be sequentially up from Q1, correct?

That's hard to search.

Say that again? I didn't catch that.

I mean, to say it sequentially, Q2 will be higher than Q1 is hard to assert. So it's a strong start at $49 million. If you look past, we've had $50 million in 2019, I believe, and the final quarter was about $120 million. So I cannot give a specific forecast beyond the first month.

Right. Although your backlog is much bigger, so it should give you a bit more visibility, isn't it?

The backlog is certainly larger.

Once again, Stephen, the deliverables are customer-based as well, too. So we do deliver the products, services as the customers are ready for them. So it's not prudent to extrapolate that number. Okay, that's fair.

Okay, and the R&D, Brian, $32 million, I mean, the sequential increase, is there any one time there, or is that kind of a good level going forward? Thanks.

I can comment on R&D. If you're looking at sequentially, we did bring a fair amount of co-ops on this summer, so additional co-ops, I would say. There's always some co-ops in that that actually equates to approximately a little bit over $500,000. if you're looking at sequentially, there's actually additional business days in Q1 versus Q4, which equates to approximately 500 grand as well. So, yeah, if you use that as kind of a guide, I mean, I don't expect any kind of major decreases going forward.

All right, got it. Thanks, guys.

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

Thank you, Sergio. I'd also like to thank the participants for their questions and to add that we're very pleased with the company's performance during the first quarter of fiscal 2024. We saw strong quarterly sales of $125.8 million, an increase of 24% from the prior year, solid gross margins of 57.3%, which together with Evert's disciplined expense management yielded earnings of 20 cents per share. We're entering the second quarter of fiscal 2024 with significant momentum fueled by a combined purchase order backlog plus August shipments totaling in excess of $392 million. By the growing adoption and successful large-scale deployments of Evert's IP-based software-defined video networking and cloud solutions, by some of the largest broadcast, new media, service provider, and enterprise companies in the sector, and by the continuing success of Evert's dream catcher, Bravo, our state-of-the-art IP replay and production suite. With Evert's significant investments in software-defined IP, IT, and cloud technologies, over 600 industry-leading SDVN deployments, and the capabilities of our staff, EWITS is poised to build upon our leadership position to provide innovative solutions to customers and deliver to shareholders. Thank you. We look forward to having many of you join us on Wednesday, the 4th of October, at our annual general meeting. Good night.

Listen, gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.