Evertz Technologies Limited

Good afternoon, ladies and gentlemen, and welcome to the Everts Q3 2025 conference 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, Andrew. Good afternoon, everyone, and welcome to Ebert's Technologies conference call for our fiscal 2025 third quarter and January 31st, 2025, 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 will begin by providing a few highlights and then Doug will provide additional details. First off, sales for the first quarter, for the third quarter, totaled $136.9 million, up 9% sequentially from the prior quarter and 1% year over year. Revenue included $99.1 million in the U.S.-Canada region up 23% sequentially. Recurring software services and other software revenues increased 6.3% year-over-year, totaling $55 million in the quarter. Our base is well diversified, with the top 10 customers accounting for approximately 48% of sales during the quarter, with no single customer accounting for over 10% of sales. In fact, we had 115 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $79.1 million, or 57.8%, which is within our target range. Investment in research and development during the quarter totaled $36.6 million. Net earnings for the third quarter were $21.1 million, while fully diluted earnings per share were $0.27. Everest working capital was $207.9 million, with cash of $96.3 million as of January 31, 2025. At the end of February, 2025 Ebert's purchase order backlog was in excess of $269 million and shipments during the month were $39 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation, increased global demand for high-quality video anywhere, anytime, the ongoing technical transition to IP, IT, cloud-based architectures in the industry, and specifically to the growing adoption of Everett's IP-based software-defined video networking solutions, Everett'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 of 20 cents per share payable on or about March 20th. I'll now hand it over to Doug Moore, Everett's Chief Financial Officer, to cover our results in greater detail.

All right. Thanks, Brian. Good afternoon. Starting with sales, revenue was a record $136.9 million in the third quarter of fiscal 2025. as compared to $135.3 million in the third quarter of fiscal 2024, an increase of $1.6 million, or just over 1%. For the nine months ended January 31st, revenue was $373.8 million, compared to $391.8 million in the same period last year, with a decline of $18 million, or approximately 4.5%. Looking at revenues in specific regions, the U.S. and Canadian region had revenue for the quarter of $99.1 million, compared to $80.5 million last year. That represents an increase of $18.6 million, or 23% quarter over quarter. Revenue in the U.S. and Canadian region for $267.9 million for the nine months ended January 31st, 2025, compared to $241.5 million in the same period last year, an increase of $26.4 million, or 11%. The international region had revenue for the quarter of $37.8 million, compared to $54.8 million last year, a decrease of $16.9 million, or 31% quarter-to-quarter. The international segment represented 28% of total sales in the quarter. For the nine months, end of January 31, 2025, international revenue was $105.9 million, compared to $150.3 million in the same period last year, a decline of $44.4 million, or Around 29.5%. Looking at the, we'll call it class of revenue. Hardware revenue in the three-month period into January 31st, 2025 was $81.2 million. That's compared to $82.8 million in the same period last year. While software and services revenue was $55.7 million in 2019. the quarter ended January 31, 2025, compared to $52.4 million in the same period last year. For the nine months, hardware revenue was $207.4 million, while software and services revenue were $166.4 million. Now looking at gross margins, gross margin for the third quarter was approximately 57.8%, compared with 58.9% in the prior year quarter. The gross margin was within our target range, albeit slightly lower than the past few quarters. The comparative decrease was largely driven by the product mix we delivered in the quarter. For the nine months ended January 31st, gross margin was approximately 58.8%. As noted, both quarterly and year-end to date margins were within our target range. Turning to selling and admin expenses, S&A was $19.2 million in the third quarter, That's an increase of 0.9 million from the same period last year. And S&A represented approximately 14% of revenue compared to 13.5% in the same period last year. For the nine months, period ended January 31st, selling and amending expenses were $55.2 million, increase of 3 million from the same period last year. And selling and amending expenses as a percentage of revenue were approximately 14.8% over the period. Now, research and development expenses, they were $36.6 million for the third quarter. That represents a $2.6 million increase from $34 million in the third quarter last year. The increase includes $1.7 million in increased salary costs and $0.9 million increase in a combination of higher software, prototypes, and material costs. As a percentage of revenue, R&D expenses were 26.7% compared to 25.1% last year. For the nine months, research and development expenses were $110.2 million. That represented an increase of $12.1 million over the same period last year. The increase included an increase of $5.7 million in North American salaries and another million in overseas salaries. Research and development expenses as a percentage of revenue were approximately 29.5% year-to-date. Foreign exchange for the third quarter was a gain of $3.9 million. compared to a loss of $2.9 million in the same period last year. The gain in the quarter was largely driven by the U.S. to Canadian exchange rate. So we closed January 31st at approximately $1.45 to $1.00, so $1.45 Canadian to $1.00 American. That's compared to $1.39 in October 31st. Foreign exchange, the nine months ended. January 31st was a gain of $4.7 million. That's compared to a loss of $2 million in the same period last year. Looking at liquidity of the company, Cash as at January 31st, 2025 was $96.3 million as compared to net cash of $86.3 million as at April 30th. Working capital was $207.9 million as at January 31st compared to $201.4 million at the end of April 30th. For cash flows, the company generated cash from operations of $53 million, which includes a $24.8 million change in non-cash working capital and current taxes. That change includes a quarterly decrease of inventory of approximately $11 million, which was split relatively evenly between finished goods and raw materials, as well as an increase in accounts payable of $7.4 million. If the effects of the change in non-cash working capital and current taxes are excluded, the company generated $26.8 million in cash from operations during the quarter. The company used cash of $1.1 million from investing activities, that's principally driven by the acquisition of capital assets, And the company used cash and financing activity of $17.2 million, which is principally driven by dividends paid of $15.1 million. Finally, looking at our share capital position as of January 31st, shares outstanding were approximately $75.9 million, and options and equity-based restricted share units outstanding were approximately $5.1 million. The weighted average shares of standing were 76 million, and the weighted average of fully diluted shares were 77 million for the quarter ended January 31st. That brings to a conclusion the review of financial results and position for the third 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 with the Canadian Securities Commission. Brian, back to yourself. Thank you, Doug.

Andrew, 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 number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number 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 is from Robert Young from Canaccord Genuity. Please go ahead.

Good evening. I think probably the most relevant question is to dig into the impact or the potential impact from tariffs on your business. I know that may be difficult to answer, but, um, if you just give us a summary of, you know, how the manufacturing footprint is split and what you think the exposure is and what you're doing to mitigate it, whether that might be through pricing or whether you believe pricing can be passed through to your customers, just a general overview of how you think you might deal with tariffs.

Sure. It's a question I'm obviously expecting, of course. Um, So in regards to U.S. tariffs, I mean, this is obviously a fluid situation. We've been actively monitoring it, you know, frankly hoping they wouldn't transpire, but planning for their implementation nonetheless. As you know, we have significant sales in the U.S., both domestically therein and, you know, the ones domestically therein obviously not impacted, but we also have manufacturing facilities in Canada that we sell to the U.S. So I will highlight, however, that we currently have multiple development and manufacturing facilities in the U.S., Prior to the recent announcements on the U.S. Canadian tariffs, we have been actively adding to our manufacturing capabilities within the U.S. The rationale then was primarily focused on addressing U.S. government opportunities, but that process has been accelerated to try and lessen the potential exposure to the new tariffs on their U.S. customers. We have completed the initial stages of our expansion, largely focused in our Indiana, Pennsylvania facility. Our intention is to continue to expand our manufacturing capabilities there and processes within the U.S. They're targeting specific products and customers to start, lessen that tariff exposure. I will, obviously, as we add capabilities in the U.S., I will highlight that. We remain committed to maintaining our significant Canadian manufacturing. But we do expect some negative impact in the near-term margin. I mean, whether it's tariff-related or As we increase capabilities in the U.S., there will be some operational redundancies, we'll call them, between, say, Burlington and Pennsylvania. But I can't really give you a specific, specifically quantify the impact, you know, whether it's either as a margin percentage or a monetary amount. But, you know, because obviously it's going to be, specific impacts will be dependent on a number of factors, obviously the speed at which we continue to ramp up our manufacturing in the States. the product mix, specific customers we end up selling to, and of course, you know, if there's any changes to the tariffs or duties that are put into place. That's a long-winded answer.

Thanks for the color. I think, well, you had a strong quarter for revenue and the backlog dropped quarter to quarter. So should we think of that as front-loading in front of the application of tariffs? Is that a one-time benefit that might not repeat going forward?

No, I don't think we've seen a lot of... Have you seen any front-loading? I don't think we've seen a material amount of front-loading from customer orders, to be fair. I think it's not at any material level, no.

And then, to address it, do you think that you have the ability to... absorb it? I mean, we see gross margins down a little bit quarter to quarter. I guess it wouldn't be from this impact.

No, this quarter is not to do with that at all. You know, what we're going to focus on, if we can make something and ship it from the States to our customers in the States, we will, where we can.

And if you can't, will you absorb it in pricing, or do you think you can pass the pricing through to your customer?

That is going to be very dependent on the arrangement we have with that customer.

Last question then on this would be the backlog where you have deals in play. Would those be impacted? Would the pricing on those be impacted? Or should we think of any change related to tariffs on past deals?

So on things in our backlog, again, if we're able to manufacture in the States and ship to a customer in the States, we will do so. And as to whether or not the additional tariffs apply to the U.S. entity that receives the goods, the customers, whether it's absorbed or not, that's going to depend on the arrangement we have with that customer. That's why it's very difficult to specifically quantify an impact.

Maybe another way to ask it. Are you the importer? Are you paying the tariffs or not? on a deal that's in your backlog or is, you know, is your customer going to pay for that tariff as an importer?

Rob, Doug has answered that it depends on the customer arrangement.

Okay. Like our goal here is to, again, if we can manufacture in the States and ship to a customer in the States to lessen the impact of tariffs, we will. And it, In the long term, we expect this to level out, quite frankly.

Right. Okay. And in the short run, you're shifting manufacturing to the U.S. as much as you can, but you're at the early stages of that shift. Is that a good way to think of that?

Yeah, we had started this before. Again, the intention wasn't... Before we heard of anything about tariffs or whatnot, there was a focus on government opportunities that would be manufactured in the States. This has... escalated that ramp up. So it's not the first step, but earlier days, but not, you know, we didn't just start this a month ago.

Okay, great. Okay, thanks. Thanks for all the color. I appreciate it. It's hard questions to answer. I'll pass the line.

So our next question is from Thanos Methopolis from BMO Capital Markets. Please go ahead.

Hi, good afternoon. It might be too early to say, but should we anticipate a meaningful uptick in CapEx associated with building up more capacity in the U.S.? And if so, any way to think about that quantitatively?

Yeah, I mean, we've been planning this for quite some time. So from a materiality perspective, we could have CapEx of $2 to $5 million type of a thing that costs over the next six to 12 months, but we're not going to double our capital assets or anything like that. That's kind of how we quantify that, $2 to $5 million of extra capex. Okay.

Is this already a topic that's coming up in customer discussions, or is it just so early days that your customers are also scratching their heads trying to make sense of it?

This has been a topic with customers, I would say, since the initial discussions of this well over a month ago.

All right. Maybe on a different topic, the international business, obviously, year-to-date has been down significantly. And I realize that that can be dependent on maybe some projects in the year-ago quarter that didn't repeat. But just in general, is there anything else to point to in terms of the growth challenges international has had, not only over recent quarters, but also kind of more broadly in recent years relative to North America, anything you'd call out?

I mean, international revenue. So year over year, we did have a large project we press released that went out in the prior year. That was around $25 million approximately at a macro level to call out. I don't have a specific item to call in a macro level.

Okay. Generally speaking, anything of note that you'd call out as far as the overall spending environments, be it either across, you know, either of the key geographic regions?

Donald, could you repeat that question you broke up at the end?

Yeah. Yeah, just asking whether there's anything you'd call out as far as the spending environments. Would you characterize the status quo or any changes you've seen in be it in Europe or North America, as far as overall demand?

Overall demand for E-Risk products remains very robust. That said, there is uncertainty around the current tariff situation. We are very much looking forward to having close contact in April at NAB, our largest annual trade shows. So that will definitely help us continuing those relationships and continue to build our strong backlog and order book.

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

There are no further questions at this time. Mr. Campbell, please proceed with closing remarks.

Thank you, Andrew. I'd like to thank the participants for their questions and to add that we are very pleased with the company's performance during the third quarter of fiscal 2025, which saw record high quarterly sales of $136.9 million, solid gross margins of 57.8% in the quarter, which together with Everett's disciplined expense management yielded basic quarterly earnings of 28 cents per share. We're entering into the last quarter of fiscal 2025 with significant momentum fueled by a combined purchase order backlog plus February shipments totaling in excess of $308 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 enterprises in the industry. and by the continuing successive 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 technologies, the over 600 industry-leading IP SDN deployments, and the capabilities of our staff, Everett's is poised to build upon our leadership position to provide innovative solutions to customers and deliver to shareholders. 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.