Evertz Technologies Limited

Good afternoon, ladies and gentlemen, and welcome to the Everts Q3 investor call. At this time, all lines are in 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, Eric. Good afternoon, everyone, and welcome to Everett's Technologies conference call for our fiscal 2024 third quarter, ended January 31st, 2024, 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 will begin by providing a few highlights and then Doug will provide additional detail. First off, sales for the third quarter totaled $135.3 million, an increase of 22% compared to $110.9 million in the third quarter last year. Our base is well diversified with the top 10 customers accounting for approximately 35% of sales during the quarter and with the single largest customer totaling approximately 5%. In fact, we had 110 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $79.7 million, or 58.9%, which is within our target range. Investment in research and development during the quarter totaled $34 million. Net earnings for the third quarter were $19 million, while fully diluted earnings per share were $0.24. Evert's working capital was $199.6 million as of January 31st, and at the end of February, Evert's purchase back order was in excess of $292 million, and shipments during the month were $40 million. We attribute the 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 in the industry, and specifically to the growing adoption of Everett's IP-based software-defined video networking solutions, Everett's IT cloud solutions, our immersive 4K ultra high-definition solutions, and Everett's state-of-the-art Dreamcatcher IP replay and live production Bravo Studio featuring the iconic Studer audio. Today, Everett's board of directors declared a quarterly dividend of 19.5 cents per share payable on or about March 29th. I'll now hand over to Doug Moore, Everett's chief financial officer, to cover results in greater detail.

All right, thanks, Brian. Good afternoon, everyone. I'll start by looking at revenues. Sales were $135.3 million in the third quarter of fiscal 2024 compared to $110.9 million for the third quarter of fiscal 2023. That's an increase of 22% or $24.4 million quarter over quarter. For the nine months ended January 31st, 2024, sales were $391.9 million compared to $325.7 million in the same period last year. That represents an increase of $66.2 million, or 20%. Looking at specific regional revenue, the US-Canadian region had sales for the quarter of $80.5 million, compared to $71.2 million last year. That represents an increase of $9.3 million, or 13% quarter over quarter. Sales in the US and Canadian region were $241.5 million for the nine-month period ended January 31, 2024, compared to $238.2 million in the same period last year, an increase of $3.3 million, or 1%. In the international region, revenues for the quarter were $54.8 million, compared to $39.6 million last year, an increase of $15.2 million quarter-over-quarter. The international segments represented 40% of total sales this quarter as compared to 36% in the same period last year. For the nine months ended January 31, 2024, sales in the international region were $150.3 million compared to $87.5 million in the same period last year. That's an increase of 72% or $62.8 million. Gross margins for the third quarter were approximately 58.9%, compared with 59.2% prior and within our target range. For the nine-month period end of January 31st, gross margin was approximately 58.6%, and that's also within our target range. Turning to selling and amend expenses, S&A was $18.3 million in the third quarter. That's an increase of $2 million from the same period last year. Selling and amending expenses as a percentage of revenue were approximately 13.5% as compared to 14.7% in the same period last year. Selling administrative expenses were $52.2 million for the nine months ended January 31, 2024, an increase of $8.2 million from the same period last year. Selling and amending expenses as a percentage of revenue were approximately 13.3% over the period compared to 13.5% for the same period last year. Research and development expenses were $34 million for the third quarter. That represents an increase of $3.8 million from $30.2 million in the third quarter last year. Investment tax credits relating to R&D expenses were $4 million in the quarter, compared to credits of $3.6 million in the third quarter last year. For the nine months ending January 31st, Research and development expenses were $98.1 million. That represents an increase of $10.9 million over the same period last year and includes an increase of $7.8 million associated with salary costs. Research and development expenses as a percentage of revenue were approximately 25.1% over the period compared to 26.8% for the same period last year. Foreign exchange for the third quarter was a loss of $2.8 million. The quarterly loss was predominantly driven by the decrease in value of the U.S. dollar against the Canadian dollar from October 31st, 2023 to January 31st, 2024. Foreign exchange for the nine-month period ended January 31st with a loss of $2 million compared to a gain of $1.7 million in the same period last year. Turning to a discussion of liquidity of the company, cash added at January 31st, 2024 was $69.7 million as compared to cash of $12.5 million at April 30th, 2023. Working capital was $199.6 million as at January 31st, 2024, compared to $171.4 million at the end of April 30th, 2023. Now look at the cash flows. The cash generated cash in operations from $30.2 million, which is net of $5.2 million change in non-cash working capital and current taxes. The effects of the change in non-cash working capital and current taxes were excluded from the calculation. The company generated $25 million in cash from operations during the quarter. The company used cash of $0.6 million for investing activities, which was principally driven by the acquisition of capital assets. And the company used cash in financing activities of $16.1 million, which was principally driven by dividends paid of $14.8 million. Finally, our share capital position as of January 31, 2024, shares outstanding were approximately 76.1 million, and options and share-based RSUs outstanding were approximately 5.7 million. Weighted average shares outstanding were 76 million, and weighted average fully diluted shares was 77 million for the quarter ended January 31, 2024. That concludes the review of our financial results and position for the third 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 the annual information form and the official reports filed with the Canadian Securities Commission. Brian, back to you.

Thank you, Doug. Eric, 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 the star followed by the one on your touchtone phone. You will hear a prompt acknowledging your request. Should you wish to decline from the polling process, please press the 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 the line of Andy Nguyen with Raymond James. Please go ahead.

Thank you for taking my questions. Going forward, looking forward to 2025, what would you say would be your biggest opportunity?

Andy, we're going to continue to grow our share with our existing customers and add new customers. As you know, our backlog is extremely strong. at $292 million. I believe 48% of it is deliverable within the next 12 months and 52% outside of that. So we're going to be both addressing the backlog, delivering to the customers within that, and continuing to grow the market.

Gotcha. And I noticed the backlog up quite a bit this quarter. Can you share any more comment with us on that

So we had approximately a year ago, we did press release the $152 million five-year cloud software and services agreement with a global media giant. So that did step up our backlog very significantly, along with other large orders that were in and around that time. So approximately a year ago, we did have effectively a step function increase in services. backlog. So we're very pleased to have that type of support, long-term demand from our customers, and we're going to continue to grow the business. Thank you. I'll pass the line.

The next question comes from the line of Thomas Mishopoulos with BMO. Please go ahead.

Hi, good afternoon. Brian, this is, I think, the fourth consecutive quarter you've had a double-digit year-over-year growth. And good to see that the growth this quarter was with a very low level of customer concentration. Just wondering if you have anything specific that you'd point to as far as the growth acceleration over the past year. I mean, I'm sure your strong market position and competitive product offering is a key part of it. But beyond that, is there some dynamic in terms of, you know, the types of initiatives your customers are undertaking or the spending environments, you know, better component availability? I mean, are there other factors you would point to in terms of what's been dropping the acceleration in recent months?

So, you've got a multifaceted question there. I think I'll address the continued growth that we've seen in the U.S.-Canada market. So that has been underpinning our growth historically and very strong. So it's up 12% year-over-year or 13% year-over-year, I believe. And then internationally, we have been delivering larger projects recently. So You do see that internationally our revenues are up very significantly this quarter, but again, too, you should watch on a trailing 12-month basis our revenue in those sectors as well, too, because it tends to – you'll see some spikes in quarters, but on average we're seeing good, solid growth there. But, yes, overall it's – Ebert's market share, our products are leading on multiple fronts. We're having very good success with our cloud-based solutions and candidly, the SD-Band cloud base and also on our traditional baseband SDI products are doing very well.

Okay, that's helpful. And just from a qualitative perspective, I mean, I presume cloud's becoming a growing part of the business. And I appreciate that you can't quantify it for us specifically, but just qualitatively, is it fair to assume that interest in adoption of cloud continues to grow rapidly? Is it a situation where most of the large broadcasters you talk to want the cloud element in the deals, or how would you characterize where the industry is in adoption and how much of a driver it is in contributing to your recent growth?

It's a very significant driver, and it is part of the cloud discussions and the plans of our customers pertaining to their cloud infrastructure. is a big part of many of the conversations with most of our customers. So it's top of mind. And that also is across the industry as well, too. However, we have been deploying very large SD-WAN solutions and very large cloud-based solutions as well, too.

And I know that you've been maintaining your – gross margin target range. Um, but as, as cloud business to become bigger part of the mix, should we think about just the fundamental, you know, gross margin profile, operating margin profile, the business changing appreciably, or do you think that over call for the next two, three years, it should remain in kind of a similar range. Um, even, even as cloud can use to grow.

So I can comment on that. So, so while we have seen, um, Some tick-ups on the higher side of the range. The range is currently as is, so 56% to 60%. I mean, if you look at Q1, they're around 57%, so there's some fluidity to it. So I think at this time, we'll maintain the range between that 56% and 60% as being a reasonable target.

Okay. Right, I'll leave it there. Thanks.

Your next question comes from the line of Robert Young with Canaccord. Please go ahead.

Hi, good evening. You noted earlier that we're coming up on the anniversary of a couple of large deals. I think one was $25 million, the other one $152 million. Both of them happened in April, as I recall. Maybe you can talk about is there some seasonality around April? Should we be thinking of April as a period where you might see large deals? And then maybe a second part to that question is, you know, that $152 million deal, is that just a one-time, you know, best-ever single point-in-time type of a deal? Or are there others that are out there in your pipeline that you're looking at that, you know, might have that type of scale?

So, Rob, so April does coincide as well, too, with NAB. So we're, you know, pleased to go and – meet and host numerous of our customers at our booth at NAB. Meetings are being set now, so that will be a very active time for us. And that is the National Association of Broadcasters Convention historically is April. So, yes, April is a significant time period for us. The second part of your question, could you repeat that again for me?

Yeah, I'm just trying to get a sense of how unusual that deal is. It's been a year now. Are there other opportunities in your pipeline that have that type of scale, or was that a one-time event?

It was a very significant event, most definitely, and it is a five-year transaction. So on an annual basis, you have seen other projects purchase orders or contracts of that magnitude. And we do have other very significant cloud-based projects underway that not necessarily have been press released either, either due to the number of years of the term or how the customer has decided to provide those purchase orders.

Okay. So I guess what I take from that is that that isn't that unusual of a deal. If you look at it on a one-year basis, there are other deals of that scale in the cloud, or are you just talking about deals in general?

Deals in general, there have been other deals of that size for a given year. But make no mistake, signing a five-year long-term contract contract of that magnitude is a significant milestone.

OK. As you're going into NAB this year, are there opportunities of that size and scale that you're looking at hoping to sign?

That scale, definitely. The duration. comes into play as well too. But yes, we're continuing to look at very large, significant deals, contracts, and we are also deploying significant contracts.

Okay. And then also this year, I mean, in the past you've been Not dismissive, but you suggested that Olympic year dynamics don't have that much of an impact on your business. So I'm just curious about this year as we go into an Olympic year after a hiatus from COVID and combined with what's expected to be a pretty active U.S. election year. Are those drivers of the business? Maybe just give us a summary of how those events manifest in Ebert's business.

So, again, too, we're very excited to have the Olympics, and they do absolutely have an impact, and we have revenues associated with it. However, Everett's underlying growth is not as impacted by the major events as other companies who have very significant rental portions of their business.

Right. And so the high level of organic growth we've seen this year, that wouldn't be associated with the Olympic year.

It's associated more with Everett's underlying position with large global broadcast and media players.

Okay. Okay. I think you said that 48% of the backlog is expected to convert in the next 12 months. I think I heard that if that's correct. And then maybe last question would just be, I mean, on that large annual deal, the $152 million deal, should we just think of that as a 30 million contribution per year? Or would there have been an upfront component of that? When I'm looking forward to modeling this year, how much of that contract should I expect in this fiscal year? Then I'll pass the line.

I'll answer that. What I could say is through the first nine months, there's $17 million of revenue from that contract and earnings. Averaging it out would be dependent on certain milestones that are reached that aren't specifically defined to a specific date. Forecasting out, it's logical way to do it, to average it out, but it will ultimately be dependent on certain milestones that are met.

Okay. We may be digging that just a little bit deeper. I guess if it's a cloud deal, I would assume a significant portion would be some subscription or a lease on the software. When you say milestones, is it still being deployed or is it dependent on a volume of transactions or something like that? Maybe just give me a little sense maybe at a high level because you don't want to get into details, just what are those milestones in as much detail as you're willing to share?

Sure. So if there's a component of, it's going to depend on revenue recognition. So if there is a licensing component, it could be when licenses, annual licenses are provided. If it's milestones, there could be certain deployments associated with it. But the The idea of having a linear modeling is a reasonable approximation.

Okay, thank you.

We'll now turn the conference back over to Brian Campbell for closing remarks. Please go ahead.

Thank you, Eric. 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 third quarter of fiscal 2024, which saw quarterly sales increase 22% year over year to a record high of $135.3 million. Strong gross margins of 58.9% in the quarter, which together with Everett's disciplined expense management, yielded fully diluted quarterly earnings per share of 24 cents despite a loss on foreign exchange of $2.8 million in the quarter. We are entering into the fourth quarter of fiscal 2024 with significant momentum fueled by a combined purchase order backlog plus February shipments totaling in excess of $332 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 providers 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 significant investments in software-defined IP, IT, and cloud technologies, the over 600 industry-leading SDN deployments, and the capabilities of our staff, Everts is poised to build upon our leadership position in the broadcast and media technology sector. Thank you, everyone, and good night.

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