Evertz Technologies Limited

Good afternoon, ladies and gentlemen, and welcome to the Evert second quarter 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 zero for the operator. I would now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Please go ahead.

Thank you, Jenny. Good afternoon, everyone, and welcome to Everett's Technologies conference call for our fiscal 2024 second quarter ended October 31, 2023, 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 now to Everett's results, I'll begin by providing a few highlights and then Doug will provide additional details. First off, sales for the second quarter totaled a record high $30.7 million, up 15% compared to $113.2 million in the second quarter of last year. Our base is well diversified with the top 10 customers accounting for approximately 48% of sales during the quarter with one customer accounting for approximately 11.4%. In fact, we had 100 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $78 million or 59.7% which is at the upper end of our target range. Investment in research and development during the quarter totaled $33.2 million. Net earnings for the second quarter were $22.3 million, while fully diluted earnings per share were 29 cents. Evert's working capital was $191.3 million, with cash of $55.9 million as of October 31st. Operational highlights for the quarter include Evert's stellar presence at the International Broadcast Conference, where Evert's EV670 virtualized media processing platform won a TV Tech Best of Show, and the Evert's Reflector cloud video processing platform was recognized with a TVB Best of Show award. This software-as-a-service SaaS platform for media transcoding is helping customers optimize their operations by leveraging adaptable cloud-based workflows. At the end of November 2023, Ebert's purchase order backlog was in excess of $324 million and shipments during the month were $48 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation, increasing global demand for high-quality video anywhere, anytime, the ongoing technical transition to IP, IT, and cloud-based architectures in the industry, and specifically to the growing adoption of Evert's IP-based software-defined video networking solutions, Evert's IT and cloud solutions, our immersive 4K, 8K, ultra-high-definition solutions, our state-of-the-art Dreamcatcher IP replay and live production with Bravo Studio featuring the iconic Studer audio. Today, Everett's Board of Directors declared a regular quarterly dividend increased to 19.5 cents per share payable on or about December 21st. I will now hand the conference over to Doug Moore, Everett's Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian, and good afternoon. Starting at looking at revenues, sales were $130.7 million in the second quarter of fiscal 2024, compared to $113.2 million in the second quarter of fiscal 2023. That's an increase of $17.5 million, or 15% quarter over quarter. Where the six months ended, October 31, 2023, sales were $256.6 million, compared to $214.8 million in the same period last year. That represents an increase of $41.8 million or 19%. As it relates to revenues in specific regions in Canada and the U.S. combined, they had sales for the quarter of $74 million compared to $88.3 million last year. That represents a decrease of $14.3 million or 16% quarter over quarter. Sales in the U.S. and Canadian region where $161 million for the six months ended October 31, 2023, compared to $166.5 million in the same period last year, a decrease of about 3%. International regions had sales for the quarter of $56.8 million. That's compared to $24.9 million last year. It represents an increase of $31.9 million quarter-over-quarter, or 128%. The international segment represented 43% of total sales in the current quarter. For the six months ended October 31st, international sales were $95.5 million compared to $48.3 million in the same period last year, an increase of $47.2 million or 98%. Gross margin for the second quarter was approximately 59.7% compared with 59.6% in the prior year quarter and within our target range. For the six months ended, October 31st, gross margin was approximately 58.5%, also within our target range. Turning to selling and amending expenses, selling and amending was $17.5 million in second quarter. That's an increase of $2.8 million from the same period last year. Selling and amending expenses as a percentage of revenue were approximately 13.4%, as compared to 13% for the same period last year. Selling and amend expenses were $33.9 million for the six months ended October 31, 2023, an increase of $6.2 million for the same period last year. As a reminder, the prior year expenses in Q1, so Q1 prior year, included a $3.8 million recovery that didn't reoccur in the current year, and that partially explains the large increase six months, over six months. Selling and amend expenses as a percentage of revenue were approximately 13.2% over the period as compared to 12.7 for the same period last year. Research and development expenses were $32.2 million for the second quarter. That represents a $3.5 million increase from $28.7 million in the second quarter last year. As a percentage of revenue, R&D expenses was 24.6% compared to 25.3% in the prior year. For the six months ended October 31st, Research and development expenses were $64.2 million. That represents an increase of $7.1 million over the same period last year. And the increase includes approximately $5.5 million in increased salary costs. Research and development expenses as a percentage of revenue were approximately 25% over the six-month period, as compared to 26.6% for the same period last year. Foreign exchange for the second quarter was a gain of $2.9 million when compared and that's compared to $3 million in the same period last year. The current period gain was predominantly driven by approximately a 4% increase in the value of the U.S. dollar, as of October 31, 2023, compared to July 31, 2023. Foreign exchange for the six-month period ended October 31, 2023, and was a gain of $0.9 million. That's compared to a gain of $4 million in the same period last year. Turning to a discussion of liquidity of the company, Cash as at October 31st, 2023 was $55.9 million as compared to net cash of $6.5 million as at April 30th, 2023. Working capital was $191.3 million as at October 31st, 2023 compared to $171.4 million as at the end of April 30th, 2023. Looking now at cash flows. The company generated cash and operations of $20.3 million which is net of $10.6 million change in non-working capital and current taxes. That includes a quarterly decrease in accounts payable of $28.8 million. If the effects of the change in non-cash working capital and current taxes are excluded from the calculation, the company generated $30.9 million in cash from operations during the quarter. Looking at investing activities, the company generated cash of $4.1 million, which was predominantly driven by proceeds from disposal of investments of $6.3 million. This was partially offset by cash used for the acquisition of capital assets of $2.3 million. The company used cash in financing activities of $17 million, which was principally driven by dividends paid of $14.5 million. Finally, I'll look at our share capital position as at October 31, 2023. Shares outstanding were approximately 76 million, and options and equity-based restricted share units outstanding were approximately 6 million. The weighted average shares outstanding were 76.1 million, and the weighted average fully diluted shares was 76.7 million for the quarter ended October 31st. That brings to conclusion the review of our financial results and position for the second quarter. And 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 with the Canadian Securities Commission. Brian, back to yourself.

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

Yes, thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the one on your touchstone signs. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Would you wish to cancel your request, please press the star followed by the two. If you're using a speakerphone, please lift a handset before pressing any keys. Once again, that is star one for the list to ask a question. Your first question is from from BMO Capital Market. Please ask your question.

Hi, good afternoon. The gross margin was obviously very strong. I think it might be your best ever. And that's despite a higher international mix. And I know that margins can fluctuate based on the mix in any given quarter, but anything that you would call out as far as that dynamic?

So, I mean, you're right in looking at the history, you see a correlation between international revenue and lower margins. I mean, that's just depending on the projects we delivered in the quarter, it just pushed up the margin. There's not really... any one time or unusual items to point out. It's really just the mix driving it. So, I mean, we are still within our range. I mean, higher end of it, of course, but I mean, that's just the fluidity to it. Not really anything to point to specifically.

Would it be the case though, that perhaps there's like a higher software and or cloud mix in there, which is contributing to the margins?

Again, I'm just going to point to the mix. I guess what I would say is if you look at Q1, it's, you know, 57 and a half. So I think, um, sitting in our target the last couple of quarters. We were at 59 and a half in Q4 last year, so it's been a positive trend there, but it's not really a product mix driven and not really a specific item to point to.

Okay. Brian, any comments in terms of the spending environment? I know that the dynamic and the demand that you see for your products is always somewhat different than what the market as a whole might be doing, but Certainly it seems like there's been an uptick in growth if we look at, you know, the strong growth rate you've had the last couple of quarters and, you know, the strong shipments reported for November. So, you know, might some of this be kind of pent-up demands coming out of, you know, with the component shortages deciding coming out of the pandemic or, you know, anything else that you would – more specific as far as market share gains and any commentary would be helpful.

So, yes, Dan, I was – From Evert's perspective, it's been a very good quarter, both in terms of delivery of projects and revenue and also securing new orders for good, profitable business and large contracts as well, too. So Evert's does see a very good, strong environment for our products, whether that's you know, specific to our customers or an underlying trend for the industry, the industry trend, I'll have to leave that to you. But definitely we're, you know, seeing a very productive environment for ourselves.

Okay. North America was obviously down year over year, presumably more to do with project timing and, you know, maybe a tough year over year comp rather than being indicative of any – in that market.

Yeah, I mean, there's just some natural lumpiness to it, right? So you're on the right path there. It's not really a provisional point, too. It's just the timing of certain deliveries and milestones that went out.

Okay. Finally, with respect to cloud, any particular update you can offer? I mean, clearly, there's been a trend of customers you know, larger customers adopting cloud, is that something that you're seeing continue, you know, any update in terms of what you're seeing as far as, you know, be it pipeline, customer discussions and so forth would be helpful?

So our cloud discussions with customers and our deliveries, you know, continue to roll out and be very, you know, encouraging, very strong. And of course, that's anchored by the $152 million five-year purchase order that we received and disclosed. So that is a very significant cloud deployment, multi-year deployment, both in terms of products and services. And that does underpin that sector for us.

All right. All the best of luck. Thanks.

Thank you. Your next question is from Robert Young from Canaccord Genuity. Please ask your question.

Hi, good evening. Nice to see the dividend increase. I was wondering if you could share if there's any policy around that or any way that you're organizing the timing and the quantum of that increase. It looks like you're doing it once a year. Maybe just give me any kind of color you can around that.

Rob, we are... pleased to announce the 19.5 cent quarterly dividend. The board is cognizant of our cash flow and cash buildup, and that increase to 19.5 cents reflects a very strong, pristine balance sheet and our cash flow generation capabilities as well, too. So it is a board-based dividend. discussion.

All right. Maybe a little more on the international growth. You had that $25 million international order in April. I believe the last couple of quarters you said you hadn't seen that past your revenue. Is that the $25 million deal, or is there some part conversion of that here?

Yeah. So, I mean, you're correct in your assertion of the prior quarter. There wasn't any. I mean, there's quite a variety of different projects that happened to get delivered in Q2 here in the international region. I would say that approximately 15 million of that 25 million went out in the quarter, Q2. So, I mean, there's certainly a portion of that associated with that project.

Okay. And that's the large customer, the 11.4%. That's about 15 million.

So that's the thing. Approximately 25 press releases, yeah.

Okay. And then if you give any other color around this 4.1 million, generated in the investment activities. You gave a little bit of color in the prepared remarks, but I missed it. Maybe we could expand on that.

Yeah, sure. So it's 6.3 million is disposal of investments. So on the balance sheet, we no longer have investments. So they're now disposed of. There's $6.3 million that came from there, then partially offset just by a little over $2 million in capital asset purchases.

All right. Okay. Last question for me is just around the backlog trend. You know, it peaked at, I guess, just under $400 million, $394. It's down $70 million in the last two quarters. Still at a very high level, obviously, highest ever. But if you could give maybe just a little bit of context around, you know,

the the trend in the backlog um maybe it gives maybe the moving parts there that would be helpful and then i'll pass the line i guess i could say a couple different things so um i would say that approximately 45 of that or a little above it is just 47 i think is about um expected to be more than 12 months out just to provide a little color in that sense um on the big I'm taking things off on the big $150 million purchase order. To date, in the first two quarters, we've recognized about $11 million. And then, like I mentioned, the other large order that we press release is another $15 million that comes off. If you normalize that a bit, I guess. But to provide color on.

Okay. And you said roughly 47% – sorry, I missed the context there – half of it is within the next 12 months. Is that what you'd said?

So 47% is greater than 12. It was expected to get delivered in more than 12 months from now.

Got it. So that means obviously the other 53% is going to flow through the income statement in the next 12 months. Correct. Yeah. All right. Okay. Thank you. I'll pass the line.

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

Thank you, Jenny. I'd like to thank the participants for the questions and to add that we're very pleased with the company's performance during the second quarter of fiscal 2024, which saw record quarterly sales of $130.7 million, an increase of 15% year-over-year. strong gross margins of 59.7% in the quarter, which together with Everett's disciplined expense management yielded quarterly earnings per share of 29 cents. We're entering into the second half of fiscal 2024 with significant momentum fueled by a combined purchase order backlog plus November shipments totaling in excess of $372 million by the growing adoption and successful large-scale deployments of Everett's IP-based software-defined video networking and cloud solutions by some of the largest broadcast, new media, service provider, and enterprises in the industry, and by the continuing success of Dreamcatcher Bravo, our state-of-the-art IP-based replay and production suite. With Evert's significant investments in software-defined IP, IT, and cloud technologies, the over $600 million industry-leading IP SDN deployments, and the capabilities of our staff, Everts is poised to build upon our leadership position to provide innovative solutions to customers and deliver to shareholders. Thank you, everyone, and good night.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You'll be all disconnected.