Evertz Technologies Limited

Good afternoon, ladies and gentlemen, and welcome to the Everts Q2 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, John. Good afternoon, everyone, and welcome to Ebert's Technologies Conference call for our fiscal 2025 second quarter, ended October 31st, 2024, with Doug Moore, Ebert'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 $125.3 million, up 12.2% sequentially from the prior quarter, and revenue in the US-Canada region was 94.9 million, up 28.2% sequentially. Recurring software services and other software revenue increased 23.7% year-over-year, totaling 54.8 million in the quarter. Our base is well diversified, with the top 10 customers accounting for approximately 45% of sales during the quarter, with no single customer accounting for over 16% of sales. In fact, we had 134 customer orders of over 200,000 in the quarter. Gross margin in the quarter was 74.3 million, or 59.3%, which is within our target range. Investment in research and development during the quarter totaled 36.3 million, Net earnings for the second quarter were $15.9 million, while fully diluted earnings per share were $0.21. Everett's working capital was $199.8 million, with cash of $61.7 million as at October 31, 2024. Operational highlights for the quarter include Everett's stellar presence at the International Broadcast Conference, where Everett's RF over IP platform was recognized with a TVB Best of Show Award, and Evert's Dreamcatcher Bravo Studio won a TV Technology Best of Show Award. Dreamcatcher's advanced data-driven co-pilots provide the ability to automatically create clips, playlists, and stories using AI with large language models and deep machine learning technologies. making live productions even more creative and efficient. At the end of November 2024, Everett's purchase order backlog was in excess of $298 million and shipments during the month were $50 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog to Everett's channel and video services proliferation, increased 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 network solutions, Evert's IT and cloud solutions, our immersive 4K video 8K ultra-high-definition solutions, our state-of-the-art Dreamcatcher IP replay and live production with Bravo Studio featuring the iconic Studio Audio. Today, Everett's Board of Directors declared a regular quarterly dividend increase to $0.20 per share, payable on or about December 24th. I will now hand it over to Doug Moore, Everett's Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. Good afternoon. Looking at sales, revenues were $125.3 million in the second quarter of fiscal 2025 compared to $130.7 million in the second quarter of fiscal 2024. That's a decline of $5.4 million or 4% quarter over quarter. For the six months ended October 31st, revenue was $236.9 million compared to $256.6 million in the same period last year. That represents a decline of $19.7 million, or 7.7%. As it relates to revenues in specific regions, the U.S. and Canadian region had revenue for the quarter of $94.8 million compared to $74 million last year. That represents an increase of $20.8 million, or 28% quarter over quarter. Revenues in the U.S. and Canadian region were $168.8 million for the six months ended October 31, 2024, compared to $161 million in the same period last year, an increase of 7.8 million, or 5%. The international region had revenues for the quarter of $30.4 million, compared to $56.7 million last year. That's a decrease of $26.3 million, quarter over quarter, or 46%. The international region represented 24% of total sales this quarter. For the six months ended October 31st, international revenue was $68.1 million compared to $95.5 million in the same period last year, a decline of $27.4 million or 29%. Gross margin for the second quarter was approximately 59.3% compared to 59.7% in the prior year quarter. And for the six months ended October 31st, gross margin was approximately 59.3%. Both the quarterly and year-to-date margins are within our target range. Looking at selling and administrative expenses, S&A was $18.4 million in the second quarter, an increase of $0.9 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 14.7% as compared to 13.4% for the same period last year. For the six months ended October 31st, Selling and administrative expenses were $36 million, an increase of $2.1 million from the same period last year, and selling and admin expenses as a percentage of revenue were approximately 15.2% over the period. Research and development expenses were $36.3 million for the second quarter, which represents a $4.1 million increase from $32.2 million in the second quarter last year. The increase includes $1.9 million in increased salary and benefit costs, and .6 million in specialized service costs. Just to provide a bit more color on the specialized service costs, that relates to the modernization of certain IP and code that we purchased from Harman a couple years ago. That project is now substantially completed from an external cost perspective. As a percentage of revenue, R&D expenses were 29%. That's compared to 24.6% in the prior year. For the six months ended October 31st, research and development expenses were $73.7 million. It represents an increase of $9.5 million over the same period last year. And research and development expenses as a percentage of revenue were approximately 31.1% over the period compared to 25% over the same period last year. Foreign exchange for the second quarter was a gain of $0.8 million. That's compared to a $2.9 million gain in the same period last year. The relatively nominal gain this quarter is driven by a slightly stronger U.S.-Canadian dollar between July 31st, which we closed at approximately 1.38 to 1, and October 31st, which we closed at approximately 1.3 million Canadian dollars to U.S. dollars. Foreign exchange for the six months ended October 31st was a gain of 0.8 million. That's compared to a gain of 0.9 million in the same period last year. Looking at the liquidity of the company, cash as of October 31st was $61.7 million. That's compared to net cash of $86.3 million as of April 30th, 2024. And working capital was $199.8 million as of October 31st, compared to $201.4 million at the end of April 30th, 2024. Now looking at cash flows, the company used cash from operations of $9.6 million. That is net of a $31.5 million change in non-cash working capital and current taxes. And that includes a quarterly decrease in accounts payable of $21.8 million and a decrease in deferred revenue of $7.4 million. If the effects of the change in non-cash working capital and current taxes were excluded from the calculation, the company generated $21.8 million in cash from operations during the quarter. Looking at investing activities, the cash used... The company used cash of $1.4 million, which was predominantly driven by the acquisition of capital assets. And the company used cash in financing activities of $18.7 million, which was principally driven by dividends paid of $14.8 million, and the purchase of capital stock under our NCIB for $1.8 million subsequent to the quarter. That NCIB has since expired, but we did renew for a new NCIB effective November 27th. Finally, looking at our share capital position, as at October 31st, 2024, shares outstanding were approximately 76 million, and options in equity-based restricted units outstanding were approximately 5.5 million. The weighted average of shares outstanding were 76 million, and weighted average fully diluted shares was 76.8 million for the quarter ended October 31st. That brings us to the conclusion of the review of our financial results and position for the second 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 official reports filed with the Canadian Securities Commission. Brian, back to yourself.

Thank you, Doug. John, 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. You will 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're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from the line of Thanos Mastropoulos from BMO Capital Markets. Your line is now open.

Hi, Gachman. There's a significant discrepancy in the growth rate between the North American region and international. I'm fully aware that you have a project-based business and you can have some quarterly lumpiness, but just is there anything else to call out in terms of the difference in growth rates between the regions?

One thing I could note is in Q2, we did have last year, I should note in Q2, We did have a large project for approximately $15 million in revenue that related to something we had press released about a year and a half ago. There was a bit of a large spike in Q2, Q3, some of that related to that project. That's one thing to call out when looking at year-over-year comparables.

That's helpful. Brian, anything that you would say more generally in terms of the spending environment as a status quo, or are you seeing any – significant difference versus, say, the prior quarter in that regard?

So internationally, as Doug said, it's more project-related. However, we are seeing very robust quotations and purchase orders in our North American region.

Okay. And if we look at the November shipments, And I mean, just kind of comparing it to last year, is the implication that, you know, revenue for the upcoming quarter should be likely to be up substantially from what we saw in Q2?

We are starting with a, you know, very strong, you know, first month shipments, the November shipments that equals the highest that we've had in a disclosure period for monthly shipments. So we've got a very good Q3 start. And we're sitting on a very solid backlog at 298 million. Again, so the combination of backlog and shipments is very solid.

Okay. From an OpEx perspective, any thing you'd call out as we think about the near-term trajectory, I mean, aside for the $0.6 million related to, you know, the harm and cost you called out?

Yeah. So, I mean, just looking sequentially, I mean, this quarter we did have IBC, as Brian mentioned. We attended there. So, if comparing Q1 and Q2, we're up around $0.8 million. I mean, The largest increase being $700,000 to $800,000 in trade show and promotion costs, which is largely attributed to IBC, frankly. So that's one thing to call out. Obviously, we still have trade shows in that in Q3, but that is a bit of a spike on the SNA side. On the R&D side, we're actually down a bit sequentially. So we're down just around $1.1 million in About $500,000 of that relates to in Q1, we have a lot of summer co-ops that joined that didn't occur in Q2, and that wouldn't increase in Q3, but would reoccur in a future year. That and, yeah, so other than that kind of special project, we're working on some modernization of IP being done, is to be done. Yeah, that's all I have to call out, really.

Okay. And finally, the software and services revenue obviously had some very good growth year over year. Should, I mean, I guess longer term, we should expect that trajectory, I think, to continue as far as becoming a bigger part of the mix. But just when you think about sort of the next couple of quarters, would you also expect a similar dynamic with software and services becoming a higher component or not? As you look at your backlog, is there also a strong hardware opportunity that you're seeing as well in the backlog and pipeline?

We do continue to see strong hardware in the backlog and pipeline. It's a significant component, but definitely the recurring software services component of the business is is one that we're emphasizing and have been growing pretty significantly in the last years. So that trend of us emphasizing recurring software and services and other software is an ongoing push.

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

Your next question comes from the line of Robert Young from Canaccord. Your line is now open. Robert Young, your line is now open.

Sorry, I was on mute. I think you said in the prepared comments that deferred revenue was down. I'm not sure if that's quarter-over-quarter or year-over-year, but if you could just dig into the drivers behind that.

Sure. So it's down quarter-over-quarter, so since July 31st, and also since April 30th, the year end. If you look at the past 12 to 18 months, it ramped up quite a bit. And now it's really, it's a timing of, it's largely services and software solutions. That's the majority of it. And it's been triggered by some milestones being met. So whether it's commission, finalization of commissioning or site acceptance or in some cases just the amortization of cash up front for warranties and long-term services. So That's the broad explanation.

Okay. So more related to long-term projects as opposed to something to do with recurring software or software contracts.

Sorry, those could be the same, right? So you could have a long-term software service contract. Okay. So I'm not clear on the question. That's.

So maybe I'll ask it a different way. Would the deferred revenue, would it be down because of hardware-related or hybrid contracts, or would it be related to something to do with the software growth? Because just given the software growth, seeing the two things at the same time, trying to understand that.

Sure. So what I would say, again, is that the majority of deferred revenue is not all of it, but the majority of it is software or service-related. There's certain large projects in the past year, including the one we press release, that there was a lot of cash up front for a longer term, and some of that is being amortized into revenue over time that is exceeding the cash received.

Okay. I see you raised the dividend. Is there any insights you can give into the you know, the policy or the thought process that the board goes through in making that decision? I guess it's the third year, I believe, where it's been raised annually. So is that the driver? Maybe just give a sense of where the board is thinking.

Yeah, so I guess technically it would be the fourth year, fourth increase that we've had. But yes, the board, you know, looks at the dividend. The business outlook going forward, the strength of our balance sheet and the increasing quarterly dividend does reflect the ongoing confidence of the board and the business prospects for our business.

Would it be fair to say that you intend to raise that dividend annually going forward or is that going to be a decision you make every year?

That's a decision that the board makes every year, but that has been the trend.

Okay. And then the last question for me will just be around the backlog down a little bit, but just give a sense of, you know, how much do you expect that to convert over the next year? That'd be helpful. And I'll pass the line.

Yeah. So the backlog is up sequentially. So we're quite proud of the fact that it's up another $12 million and in the quarter. And, Doug, I believe it's 40% to 45% of the backlog is greater than 12 months out. So the bulk of it is deliverable in the next 12 months.

Correct. Great. Thank you very much. I'll pass the line.

There are no further questions at this time. I will now turn the call back to Brian Campbell for closing remarks. Please continue.

Thank you, John. I'd like to thank the participants for their questions and to add that we're very pleased with the company's performance during the second quarter of fiscal 2024, which saw continued strong quarterly sales of $125.3 million, solid gross margins of 59.3%, in the quarter, which together with Everett's disciplined expense management yielded quarterly earnings per share of 21 cents. We're entering the second half of fiscal 2025 with significant momentum fueled by a combined purchase order backlog plus November shipments totaling in excess of $348 million, up $12 million from the prior quarter. by the continued adoption and successful large-scale deployments of Everett's IP-based software-defined video networking and cloud solutions, by 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 Everett's significant investments in software-defined IP, IT, and cloud 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, everyone, and good night.

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