Evertz Technologies Limited

Good afternoon, ladies and gentlemen, and welcome to Evert's first quarter 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, Konstantin. Good afternoon, everyone, and welcome to Everett's Technologies conference call for our fiscal 2025 first quarter, ended July 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 Ebert's results, I'll begin by providing a few highlights, and then Doug will provide additional detail. First off, sales for the first quarter totaled $111.6 million, including $55.9 million in software and services revenue. Our sales base is well diversified, with the top 10 customers accounting for approximately 50% of sales during the quarter, with one customer accounting for approximately 14% of sales and a second customer at 11%. In fact, we had 94 customer orders of over $200,000. Gross margin in the quarter was $45.4 million, or 59.4%, up from 57.3% in the prior year. Net earnings were $9.7 million, resulting in fully diluted earnings per share of $0.13 for the quarter. Investment in research and development totaled $37.3 million. Year over year, our cash position strengthened, closing Q1 2025 with $91 million in cash and in cash equivalents. compared to $48.9 million a year ago, and up $4.7 million in the quarter. Everett's working capital was $197.7 million as of July 31, 2024, down $3.7 million from July 2023. At the end of August, Everett's purchase order backlog was more than $302 million, and shipments during the month of August were $33 million. The solid financial performance, including the robust purchase order backlog and shipments, continues to be driven by channel and video services proliferation, the ongoing technical transition in the industry, increasing global demand for high-quality video anywhere, anytime, and specifically by the adoption of Everett's solutions, such as Everett's IP-based software-defined video networking solutions, Everett's IT and cloud-native solutions, our immersive 4K ultra-high-definition solutions, and 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 quarterly dividend of $0.195 per share payable on or about September 17th. I will now hand over to Doug Moore, Evert's Chief Financial Officer, to cover the results in greater detail.

Thanks, Brian. Good afternoon. Starting with revenues, sales were $111.6 million in the first quarter of fiscal 2025 compared to $125.8 million in the first quarter of fiscal 2024. Hardware revenue declined quarter over quarter from $81.4 million to $55.7 million, while software services revenue increased 26% to $55.9 million. Revenue from the software services portion represented approximately half the total revenue in the quarter. Looking at regional revenue, quarterly revenues in the U.S.-Canadian region were $73.9 million compared to $87 million in the prior year, while quarterly revenues in the international region were $37.7 million compared to $38.8 million in the prior year. International segments represented approximately 34% of total sales in the quarter compared to 31% in the prior year. Gross margin for the quarter was 59.4% as compared to 57.3% in the prior year and within our target range. Looking at selling administrative expenses, S&A was $17.6 million in the first quarter. That's an increase of $1.2 million from the same period last year. and represented approximately 15.8% of revenues as compared to 13% last year. Research and development expenses were $37.3 million for the first quarter, which represents a $5.4 million increase over the same period last year and $600,000 sequentially, approximately $600,000. Year over year, the increase includes $3.2 million in increased salary costs within North America and $800,000 in increased salary costs internationally. ITCs for the quarter were $3.8 million compared to credits of $3.4 million in the prior year, first quarter of last year. Foreign exchange for the first quarter was a gain of less than $100,000 compared to a foreign exchange loss of $2.1 million in the first quarter of last year. Looking at liquidity of the company, cash as of July 31st, 2024 was $91 million as compared to cash of $86.4 million as of April 30th, working capital was $197.7 million as of July 31st, 2024, compared to $201.4 million at the end of April 30th, 2024. Looking at cash flows for the quarter ended July 31st, the company generated cash from operations of $22.5 million, and that is net of $8.9 million change in non-working capital and current taxes. Though the effects of the change in non-working capital and current taxes are excluded, the company generated $13.6 million in cash from operations during the quarter. The company used cash of $2.3 million for investing activities, which was principally driven by the acquisition of capital assets. The company used cash in financing activities of $16.8 million, which was principally driven by dividends paid of $14.9 million. Finally, looking at our share capital position as at July 31st, 2024, shares outstanding were approximately 76.1 million, and options and share-based restricted insurance outstanding were approximately 5.6 million. Weighted average shares outstanding were 76.1 million, and weighted average fully diluted shares was 77.3 million at the period end of July 31st. That concludes the review of financial results and position for the first 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 within the Canadian Securities Commission. Brian, back to yourself.

Thank you, Doug. Constantine, 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 number one on your touchstone phone. Hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speaker's phone, please make sure to lift the handset before pressing any keys. Your first question comes from the line of Thanos Machopolis from BMO Capital Markets. Please go ahead.

Hi, good afternoon. Brian, I guess we recognize that you've got some quarterly volatility in your business, just given the project nature of some of the work. But that said, the second consecutive quarter of revenues being down year over year, and I think looking at the shipments number, that might be the case for the upcoming quarter as well. Can you clarify for us whether you're seeing some industry dynamics here? Is there a macro issue? Is there customer caution with respect to spending? Or from your perspective, may it have more to do with just the timing of projects?

From our perspective, it does have more to do with project timing. As you'll note, we still have a very robust order backlog and a solid shipments number. So, you know, totaling $335 million, which is up roughly $8 million from the prior quarter. So we're sequentially up. There is a bit of timing in this quarter. But that said, we're looking forward to going to IBC in Amsterdam over the weekend to see many of our customers and channel partners and are looking forward – good things in our fiscal 2025.

Okay. From an OPEX perspective, anything to call out this quarter or anything we should note as we think about the upcoming quarter?

I guess that's one thing. So if you're looking at it sequentially, of course, we didn't have NAV, right? So NAV, traveling and entertainment costs went down in the quarter. We did do some trade shows, like some road shows, but we do have IBC in Q2. That's obviously not in Q1. From an R&D perspective, there's a couple things I'll call out. One, in the prior quarter, I mentioned that we did some temporary elevated resource costs we incurred in Q4. There's another $400,000 that's in Q1. Additionally, we do take on quite a few co-ops, actually, in the summer from May through to the end of August. I mean, that plus actually two or three more business days in the quarter, this quarter versus last, that equates to almost a million dollars. So there's a couple of different items to touch on that are a bit abnormal.

Okay. Software and services revenue, I appreciate the fact that we're getting the quarter to disclosure now. One question on that is, does there tend to be a lot of seasonality in that revenue line?

So there can be a bit of seasonality depending on when license renewals happen. So if there's a fair amount that might go in December and January, but I don't know that's an extremely significant thing to call out. I mean, there is some milestones that still occur. So in this quarter in particular, there was, I know, a project that had So commissioning completed that had $6 million of released deferred revenue in one project alone. So there could still be some milestones that aren't seasonal but are just a bit fluid depending on timing.

And you will see in the MD&A two years of quarterly segmentation of hardware and services. So that will give you an idea of the volatility, but on a trailing 12-month basis, it's averaged roughly 40%.

Okay, that's very helpful. I look forward to seeing that. Maybe finally, with respect to your markets outside of broadcast, and anything to comment there with respect to the growth and opportunities and pipeline you're seeing?

So we continue to do very well in adjacent markets. However, the press releases are somewhat sparse there, but that continues to be a significant part of our revenue base and backlog.

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

Question comes from the line of Rob Yang from Canaccord. Please go ahead.

Hi, good evening. I'll continue one of Thanos' questions on the software and services. What about 50% this quarter? You said it was 40% on average. And so is that weakness in hardware or is it strength in software? Software is up 26%. So I'm assuming it's strength in software. Will you give us some color on what's going on there? Why such a high percentage?

Rob, it's a bit of both. We have lighter hardware revenues in this quarter, but there is a nice upward trend with the software and services. However, it is volatile quarter to quarter, as Doug noted. Sometimes it has to do with the timing of milestones and licensing contracts.

Right. I guess part of it is that $6 million deferred. That's What drives the volatility there? I guess without that, it would still be above 40%.

Sure. That's just kind of an example of them. So that did happen in the quarter, but as an example. I mean, if you look at the MD&A, I think it highlights it well. There is some weakness in the quarter on the hardware front. So I think that is a fair observation that would obviously push the percentage up.

Is it one strong program, or is it just a general broad set of programs that are doing well in software?

That's been a broad trend.

One reason that's driving it?

No, that's been a broad trend.

Okay, and then... Sorry, keep going.

So, Rob, to put it in perspective, the 40% on a trailing 12-month basis, that's over $200 million revenue in... the recurring software services and other software. So that's very broad-based.

Yeah, okay. But this quarter specifically, is it driven by one region or one customer or one program? I'm just trying to get a sense of... No, no.

Chair, if I just give you figures even up to the past three quarters. So software service revenue in Q1 was $55.9 million, in Q4 was $47.7 million, and in Q3 was $52.4 million. And then Q2 last year was 44.3. So there's not a huge swing from Q4 to Q1. That helps.

Yeah. And then the deferred, the $6 million, I'm assuming that's pure profit. So if I were to exclude that, that probably would have driven your gross margins down towards maybe below the bottom end of your range. So I'm curious about that. the margin structures, particularly given there's a lot of software in the quarter. Is that deferred? First question was deferred. Is that a pure margin? And then what would the margin look like without it?

So sure. So let me start with saying that deferred revenue does not inherently have a hundred percent margin.

And without that 6 million, you would still have been in your gross margin range.

To be blunt, I have not done that calculation.

Okay. The revenue milestones are part of our ongoing business. That's the nature of our financial model. Delivering on software and services milestones and then recognizing the revenue.

Again, too, it's helpful to... serve the business and analyze it on a 12-month basis, fix some of the fluctuation.

Yep, that's fair. And then, as you noted, the cash balance is growing, and I'm curious what your plans are. I believe you raised the dividend this quarter, but what do you expect to do with that growing cash balance?

So we're very cognizant, and the board is aware of the... growing cash balance and we continue to have tremendous confidence in Everett's robust business model and ability to generate cash as we have over the years. So that is a board decision to determine what is done with the cash. We regularly attribute by quarterly dividends. We also have a normal course issuer bid in place and we're in tune with acquisition opportunities as well.

Okay, last question for me would be on the backlog. Sometimes you give us the percentage that's going to convert in the next fiscal year or next fiscal month.

It's approximately 45% that's more than a year.

Okay, so 55% within the next 12 months. Okay, thank you. I'll pass the line.

There are no further questions at this time. I would like to turn the call over back to Brian Campbell for closing remarks. Sir, please go ahead.

I'd like to thank the participants for their questions and to add that we are pleased with the company's performance during the quarter, which saw sales of $111.6 million, including $55.9 million in software and services revenue, strong gross margins of 59.4% for the year, up 57.3% in the prior year, along with continued investment in R&D, totaling $37 million. We closed the first quarter of Vivert's fiscal 2025 with significant momentum fueled by a combined purchase order backlog plus August shipments totaling in excess of $335 million. By the growing adoption and successful large-scale deployments of Vivert's IP-based software-defined video networking and cloud-native solutions by some of the largest broadcast, new media, service provider, and enterprises in the industry, and by the continuing success of Everett's dream catcher, Bravo, our state-of-the-art IP-based replay and production suite. With Everett's significant investments in software-defined IP, IT, and cloud-native technologies, the over 600 industry-leading IP 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. We look forward to having many of you join us on Wednesday, the 2nd of October, at our annual general meeting. Good night.

Ladies and gentlemen, this concludes today's conference. Thank you very much for your participation. You may now disconnect.