Haivision Systems Inc.

Ladies and gentlemen, thank you for standing by and welcome to the High Vision Systems second quarter fiscal 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Mirko Wiecka, Chairman, CEO, and President, you may begin your conference.

Thank you, Josh, and good afternoon, everyone. Thank you for joining us. I'm excited to be back today to discuss our fiscal year 2022 Q2 results. If you noticed our results, we just posted a little while ago. We announced earlier today, demands for our products remain strong, and our business fundamentals have never been stronger. Now, let me just start with the amazing Q2 revenue results, $29.9 million, which exceeded all previous quarters and represents a 36.8% growth over last year's Q2. I do want to remind everyone that this time last year, we had a very strong Q2 also. So to grow 36.8 over that quarter is an amazing back-to-back impressive financial result as we continue to deliver on our promise to increase top-line growth. I'll bite the acquisitions. and build operational efficiency into our long-term business model. Now, we also delivered, get this, our 34th consecutive quarter of positive adjusted EBITDA. Now, pretty rock-solid performance, right? When you look around the tech world and see many companies in turmoil and ones that still haven't made any money. So delivering 2.6 million of adjusted EBITDA given all the headwinds in industry is pretty awesome. Now the current market is pummeling stocks and we're in a downturn or bear market. I firmly believe that companies that are profitable and have fundamentally strong business models and don't spend crazy money just to get top line growth at the expense of huge losses will always prevail and come out of this stronger. And that's exactly the high vision story and strategy. So as you can appreciate, we're very, very proud of our results. Now, let me begin, actually, with refreshing everyone's understanding on who is HiVision or what does HiVision do. I think this is important. Simple. We strive to be the most trusted video network supplier for everything remote. I mean, our customers depend on HiVision to provide them with video networks to solve their mission-critical needs. And this is what differentiates us from other companies. And we know security, compliance, performance, quality, reliability. And we continue to invest in differentiating developments, such as the FedRAMP for the government, the full-time mitigation for a secure facility in Atlanta, compliance and certification testing. All of this is supply secure, and as I like to kind of say, bulletproof or trusted systems for large enterprise government and defense deployments. I mean, this is the future of high vision. Large, programmatic, multi-year, multi-site opportunities that will separate high vision from all other players. I can't think of any competitors in our space that have a similar approach. The world is becoming a more dangerous place. We know that. Video plays a huge role in this. I mean, consider emergency management, ISR, security operations, public safety, cybersecurity. I mean, everyone today needs fully secure systems to deliver and monitor mission-critical video. And our goal is to make the world a safer place. We focus on video networks, video infrastructure, security systems, and critical collaboration for large global accounts, corporate America, and governments worldwide. In fact, they used to say one day, remember, nobody gets fired for buying IBM? Well, I think today we can see that nobody gets fired for buying Hivision for the video network needs. Let me briefly discuss a few key Q2 highlights. Number one. The AviWest acquisition closed at the beginning of April. Well, it's only 10 weeks ago, right? AviWest is a phenomenal addition to the HiVision portfolio and enables us to be the only provider and vendor to deliver ultra-low latency wired and wireless streaming technology. This is huge, right? As HiVision will be looked upon to help solve the most complex and difficult contribution, streaming, and remote production solutions in industry. As I mentioned, it's only been 10 weeks since closing and our global sales integration is complete. Customers are excited to see how our products will integrate and provide an unparalleled portfolio of products under one roof. In fact, we already share many accounts where they use HiVision to land-based and wired needs and AppUS for the remote mobile or cellular bonding systems. So we see this as an amazing opportunity to strengthen our global customer presence. The AWS acquisition is extremely synergistic in all key areas of sales, geographical expansion, technology synergies, and helping to solve our customers' challenges. This new combination will continue to fuel our growth well into the future. In fact, we also demonstrated our companies working together at the NAV show in April, and all customers applauded us for the synergistic acquisition. We believe it will make a huge difference in providing a single vendor solution for the broadcast market that everyone has been looking for. Number two, in May, we actually also acquired the assets of Dazzle, largely a pre-revenue SaaS platform company for cloud production. Cloud production allows event producers really to mix multiple remote video sources and apply graphics, right, to create a rich, compelling broadcast for streaming. And we were fortunate to acquire this technology, including six great software engineers based in Rennes, France, which is actually close to our new Abbey West office, which is also based in Rennes. The Davos team will join Data Valley West as we repurpose this technology to really support the Connect platform in the enterprise market going forward. Our advanced cloud and fast video distribution platform, Hydrogen Connect, continues to receive very positive feedback from the House of Worship and faith clients. We have now reached 100 clients using High Vision Connect as part of our transition to this new platform, including some of the largest multi-campus ministries in the United States. We've also secured new victories against the competition. A couple of them are New Life Spokane and Hope Channel International. I mean, this network actually operates globally with 67 Hope Channels worldwide, each providing programs contextualized to the language and culture of their audience. And as we continue transitioning all our paid clients to this new innovative platform, we have also recently released the advanced VOD features that everyone has been anticipating. It's been a major development effort and represents the last step to enable all the key accounts to transition their entire workflows to Connect. We expect this to continue until the end of the calendar year. Now, our cloud-based video stream routing technology, the HiVision Hub, now has 45 active clients as we introduce our new appliance attachment features. These new features enable full management and device control of HiVision endpoints, such as the Makita encoders, the HiVision gateway, giving users powerful control of ultra-latency cloud routing of video securely from anywhere to anywhere globally. We have signed a Fortune 500 enterprise soccer company, and they use Hydrogen Hub for distributing video feeds for corporate events, training, and town halls. One of the largest European sports broadcasters is using Hub to manage Makito X4 encoders, which are sent to stadiums or racetracks for contributing streams to the main facility for remote workflows. Hydrogen Hub Cloud Routing is also being used to distribute feeds from stadiums to broadcast rights holders for European Soccer League. Now, we've also announced a strategic partnership with Grass Valley, if you haven't seen the announcement earlier. The Grass Valley Media Universe is intended to bring existing and new technologies together in ways that generate new opportunities for Grass Valley customers. HiVision video encoding technology offers the ultimate combination of low latency and stream synchronization required for high-quality live cloud production. Now, HiVision, as a member of the Grass Valley Media Universe Alliance, helps create a digitally connected community that combines the on-premise, hybrid, and public cloud technologies. This also allows new options for producing content in live production environments from wherever Grass Valley customers are working. And finally, our percentage of international revenue has increased in Q2 to represent about 22.6 of our global revenue. mainly due to the addition of the international weighted Abbey West revenue. Now, this will increase going forward as we only recorded one month of Abbey West revenue during Q2. Now, I'd like to maybe discuss some additional selected Q2 sales highlights. Let's talk about broadcast. PGA Golf is using our X4 decoders to receive multi-viewer feeds from NEP trucks equipped with our Makito X4 encoders at the remote location and feeding back to the production crew locally to PGA's centralized broadcast facility, allowing the production of live events without the PGA Tour people having to travel. They have also use the Mikito X4 decoders in the field to receive a large number of feeds from their AWS cloud production infrastructure for use in the local production compound or throughout the venue for hospitality needs. In Thailand, the Southeast Asian Games are using Mikito X4s for contribution and remote production. In Japan, we've got Hulu TV now using MX4s, Mikitos, for transporting and streaming video content within Japan. A really cool one, the Olympic Broadcast Service, or known as OBS, has seen a spectacular pickup of SRT use by a major Tokyo broadcast rights holder and 20 broadcast rights holders in Beijing. OBS has set up a thorough test program in investing in equipment and technology to address the fast growth of receiving SRT streams by broadcast rights holders all over the world. In fact, even here closer to home, MediaPro Canada are using us for the Canadian Premier League soccer, using our Makito to do remote productions, using our multi-camera synchronization. They are feeding from the trucks at the venue and then backhauling to the master control room where they are producing the feeds for distribution. A&E, another big client, are using our equipment for remote over-the-shoulder workflows. Streams coming out of Avid players are being sent to remote editors for post-production and live studio production review. Finally, I'd like to say the Philadelphia Eagles are using us for remote multi-camera sync for their away game production. They're actually feeding multiple cameras back from away games to the Philadelphia Eagles control room, and they are then switching and producing all the content of their pre- and post-game shows that are being sent to YouTube and Facebook and the Eagles website and mobile apps. So very, very robust broadcast business there. Now, within our enterprise government defense protocols, High Vision, or as we say, High Vision MCS, that we renamed Cinemassive, if you recall, has been at the heart of organizations addressing the growing threats related to cybersecurity and security in general. There are many systems involved in a comprehensive cybersecurity plan. All that must meet an organization's strict system security governance requirements. These systems span monitoring and alerts-related networks, firewalls, databases, communications, and even extend to simple physical security. The high-vision MCF solution manages the aggregation and presentation of any source so that decision-makers can make complex environments and react to unforeseen events that may shake the foundation of their organizations. In this quarter, we've established or extended multi-site deployments of our mission-critical solutions at some of the world's most important organizations, including additional global operations centers for Facebook, Cormeda, and adding the Sydney Security Operations Center for Salesforce. I mean, these are significant multinational accounts for Hivision. We continue to install a high-vision media platform and the keto edge devices into new sites and expanding sites in the US Chase Department embassies in Manila, London, San Salvador, and Nairobi. We installed a very large emergency operations center for the Department of Energy Los Alamos National Laboratory. Actually, a pretty exciting win was a significant multi-year, multi-site programmatic opportunity with the Alert Wildlife Emergency Operations Center in Sacramento. They actually provide fire watch cameras and tools and information coordination between many states like Colorado, Utah, Nevada, Idaho, Oregon, Washington, and California for wildlife response. Hydrogen MCS has been selected as the operation center platform. It will be rolling out new regional op centers about 14 regions over the next several years. I mean, this really shows the strategic importance of the acquisition of Cinemassus and the programmatic nature of the business to fuel much higher growth. In fact, we also installed a major operations center at the Philadelphia Office of Emergency Management. I mean, this continues our strength in Philadelphia Public Safety, right? They actually coordinate the emergency response across multiple agencies in Philadelphia and surrounding counties. And this adds to our success with multiple op centers for the Philadelphia Police Department and the Delaware Valley Intelligence Center. And we also expanded, actually, our installations within our key customers, SpaceX, Blue Origin. I mean, they both depend on performance, quality, and reliability of our Mikito X4 Edge devices to do their work on pretty cool accounts. Now, just before I pass it to Dan, our CFO, for a more detailed analysis on our second quarter results, I would like to reiterate that significant headwinds still exist, which do affect business and growth. And the world continues to deal with an unprecedented supply chain and component shortage. And now the added cost of labor is making it difficult to hire or retain people. And we also see a return to travel and trade shows. and increasing costs as our vendors increase their costs to us. This is expected to continue well into 2023, but we are building contingencies into our business model going forward, understanding that these are significant pressures to profitability levels. Our teams are working hard to mitigate these, but these issues are not without a cost to the business. Dan will speak to this in more detail. On summary, we have delivered, as promised, two strategic acquisitions in the first 17 months since going public with another small technology pickup for remote cloud production. We'll continue to focus on the integration of these acquisitions and prioritize a plan for operational efficiencies. We've increased our headcount significantly and need to absorb all the people, the products, and synergies before embarking on any new acquisitions in the near term. We will reevaluate additional opportunities sometime in fiscal 2023. But right now, it's all about integration, execution to deliver a platform for growth and prepare for a very strong fiscal 2023. I could not be prouder of the Hydrogen team and what we have accomplished since the IPO has truly been an amazing ride since becoming a public company, which has exceeded our expectations thus far. Finally, I just want to thank all our investors and analysts and shareholders. on the line today for their continued support of HivVision and look forward to speaking with many of you shortly. Dan, I'll pass it to you.

Thank you, Mirka. So let's get into the numbers. Revenue for the second quarter of fiscal 2022 was $29.9 million, representing an increase of $8 million, or 36.8% from the same period in the prior year. Revenue for the six months ended April 30th was 58.2 million, representing an increase of 13.4 million, or 29.8% from the same period last year. Obviously, much of the year-over-year growth can be attributed to the acquisitions of HiVision MCS, formerly known as Cinemassive Displays, which was completed in August of 2021, and more recently, Abbey West in April of 2022. Historically, our traditional business had an interesting seasonal pattern to it. Our first quarter was traditionally our smallest quarter, representing about 20% of our overall revenue. Our fourth quarter, which was commensurate with the US government year end, was traditionally our largest quarter, representing about 30% of our overall quarter. With the onset of COVID, we did begin to see client purchases become more ratable throughout the year, and we began to see significant purchases in our first quarter. As an example, revenue for first quarter of 2021 grew 18.4% when compared to the prior year period. With COVID seemingly behind us, we seem to be reverting back to our historical seasonal patterns. Complicating matters, the seasonal patterns for both high vision MCF and Abby West tend to be disproportionately slanted towards the end of the calendar year. As an example, nearly 40% of Abby West's revenue was realized in the calendar fourth quarter of last year. Thus, I would caution investors from coming to conclusions based on current performance. Our business remains healthy, and it's expected to continue to grow from these levels. Recurring revenue, which we define as our cloud solutions and maintenance and support, continues to be robust. Recurring revenue was $6.6 million and represented just under 22% of this quarter's total revenue. This compares to our recurring revenue in the same period last year, which was about $5.2 million. But then it represented just over 24% of second quarter fiscal 2021 total revenue. Obviously we are disappointed that our recurring revenue isn't growing in concert with our overall revenues, but it speaks to the opportunities before us as we conform our maintenance and support options and offer our cloud solutions to high vision MCF and Abby West customers. So this quarter gross margins were 71.4%, which were an improvement from the 69.4% realized last quarter. margins are very much in line with expectations given our recent acquisitions. Our supply chain experts have done a phenomenal job ensuring that we can continue to supply our customers with their mission critical needs. But it hasn't been without some additional costs in terms of higher component costs, and in some cases, expediting costs. To give you a sense, this second quarter of fiscal 2022, we incurred approximately $450,000 in additional componentry costs, and on a year-to-date basis, approximately $900,000 in additional componentry costs. Had these incremental component costs not have been incurred, we would likely have been seeing total gross margins to be 1% to 2% higher than where they are today. As presented, total expenses for the second quarter were about $21.2 million, an increase of $6.6 million when compared to the same period in the prior year. And on a year-to-date basis, total expenses were $41 million, an actual decrease of $2.5 million when compared to the same period in the prior year. As we've discussed on previous calls, in the first half of last year, total expenses included $14.1 million of a non-recurring share-based expense resulting from the exercise of options related to our legacy employee stock option plan. When we normalized for share-based payments, total expenses on a year-to-date basis were $39.5 million, an increase of $11.2 million when compared to the same period last year. As we've said in the past, our cost structure is largely made up of people costs. In fact, approximately 70% of our total expense consists of labor and related benefits. Now, it shouldn't be a surprise that much of the increase in total expenses is directly related to headcount. At April 30th, 2022, our total headcount was 417 people. That's up 70% from the 245 on staff as of April 30th, 2021. Much of the year-over-year headcount increase is directly the result of recent acquisitions. High Vision MCF added 64 people, while the Abby West added another 81 people. Further, the acquisitions resulted in us acquiring assets and intangibles that impacted financial performance. Amortization and depreciation expenses this fiscal year were $2.4 million higher than the same period in the prior year, and we also incurred $700,000 in transactional expenses during the period related to our acquisitions. Further, we are seeing headwinds that are impacting our labor costs, our travel and marketing expenditures, and the cost of just about everything else. I'll touch on that, the impact of these headwinds, in just a few moments. Adjusted EBITDA for the quarter was $2.6 million. Now, that's a decrease of $1 million compared to the same period in the prior year. And adjusted EBITDA for the six months was $4.7 million, a decrease of $2.4 million from the prior year. With the high-vision MCS acquisition and the more recent Abby West acquisition, we have a lot of initiatives underway. And I will touch on where we stand in regards to integrations a bit later. But EBTA margins have compressed a bit in recent periods due to a number of factors. As I mentioned before, supply chain issues cost us about $900,000 on a year-to-date basis. Transactional costs related to recent acquisitions cost us about $700,000 on a year-to-date basis. We've had increasing labor costs, which are almost impossible to calculate, and we've had increases in travel and marketing spend, which exceeded last year's spend by $800,000 and $500,000, respectfully. Nevertheless, this quarter now represents our 34th consecutive quarter of positive adjusted EBITDA. With that said, net loss for the quarter was $400,000 compared to a net income of $1.2 million for the same period last year. In addition to the headwinds I should just discuss, this quarter's net income was impacted by the additional amortization and depreciation expenses that I spoke of just a tiny bit earlier. Obviously, these are non-cash expense. But nevertheless, they have a profound impact on net income. On the other hand, our net loss for the six months was only $800,000. And that's a $10 million improvement from the same period last year. Again, a significant component of the variance is related to that share-based payment. And as I mentioned before, we incurred a share-based payment of about $14.1 million related to the legacy employee stock option plan. But that represented the culmination of a 14-year program. Normalized for these share-based payments, we did see an increase in overall labor costs related to recent acquisition and increases in what I'm calling headwind expenses that impacted gross margin and overall costs. And as I mentioned before, net income was also impacted by the additional amortization and depreciation expenses related to the acquisition. Looking at the balance sheet, we ended the quarter with a cash balance of $12.8 million, but much of that was funded through our credit facility, which had $13 million outstanding at the end of the quarter. Obviously, the big news for the quarter was the consummation of the Abby West transaction in early April. iVision acquired 100% of the shares of AviWest on a cash-free and debt-free basis for cash consideration of 20.5 million euros. That's approximately 29.6 million Canadian. But it was subject to a customary adjustment. So the transaction actually consumed 21.9 million in cash, and we assumed 5.5 million in their term debt. In terms of the term debt, The terms of the term debt vary, and it includes non-interest-bearing debt and interest-bearing debt up to an interest rate of about 2.71%. Now, in addition, we do have an obligation to pay an additional $2.7 million in two future payments. That assumes Abby West has no obligations under any indemnities. Total assets at quarter end. were $146.1 million, an increase of $23.7 million from fiscal 2021 year end. The increase in assets is largely the result of the Abby West transaction. We assumed assets of $11.7 million, including inventories, receivables, property equipment, and right of use assets, And we also inquired intangibles of 13.3 million and goodwill of 9.7 million. These working capital increases were offset by a 2.8 million decrease in cash in the quarter. Total liabilities at quarter end were 56 million, an increase of 22.4 million from fiscal 2021 year end. And again, The increases in liability is largely the result of the Abby West transaction. We assumed $5.8 million in liabilities related to trade payable, deferred revenue, deferred taxes, and the like. We assumed $5.5 million in term debt, and we assumed $1.4 million in lease liabilities. So let's talk about where we are on integration plans. As we have discussed, one of HiVision MCF's key assets, albeit a non-financial asset, is their facility security clearance. Our commitment at the time of the acquisition was that we wouldn't make any structural changes to the business until such time that we have mitigated all foreign influence. Some of you may be familiar with the term foci mitigation. And once we execute a special security agreement, or SSA, along with several other documents, then we will be in a position to implement more integration changes. All of our documentations have been provided to DCSA, and we await their response. Now, although our commitment was to maintain the status quo until we received formal approval, We have had constant dialogue with BCSA and they have provided us advanced approval of several of our planned initiatives. Said another way, we have not been sitting still. Nevertheless, we are disappointed that we have yet to exploit all of the synergistic opportunities in front of us, for sure. However, we have focused on key elements of the integration plan, like integrating the sales teams, upgrading the payroll function, migrating high vision mcf to a common accounting system and implementing procurement best practices to reduce the order to cash cycle time the good news is that we still have vast opportunities still in front of us fortunately the abbey west acquisition hasn't had the same government encumbrance the integration has been less complicated and progress has been swift Now, after all, we just closed on the transaction about 10 weeks ago, but our sales team have been fully integrated, and Abby West is operating under a common sales management system. Technologies are already being integrated. As announced yesterday, Abby West's IP video contribution solution supports the SRT protocol, allowing interoperability with the HiVision product portfolio and other SRT-enabled solutions. Our next areas of focus are improving the flexibility of Abbey West supply chain, porting Abbey West to a common accounting system, and bringing Abbey West products to North America. Mirko mentioned significant headwinds, so I want to touch on that just a bit. Our supply chain specialists have addressed all issues for the current quarter, and the number of issues for fourth quarter are very limited. However, our successes are not without some real costs to the company. In the past quarter, as mentioned already, we incurred approximately half a million in additional direct product costs directly related to the worldwide shortage in components. And on a year-to-date basis, we incurred approximately $900,000 in those additional component costs. To secure our six-month needs for parts and components, we have increased our deposits with our contract manufacturers by approximately $1.5 million. We've also made $2.4 million in component purchases to secure the high-value, long lead time components necessary to keep the revenue line moving. We've also reduced cost of goods sold with the insourcing of mechanical assemblies, We have redesigned certain of our boards to accommodate more available componentry. We've invested in new systems to provide real time assessment of our supply chain resiliency. And we are constantly qualifying alternate manufacturers for difficult to procure electronic components. Like I mentioned, there is little risk in this third and fourth quarter. However, despite all of these initiatives, we recognize that we still have additional work. particularly in securing an acceptable level of safety stocks necessary to grow revenues for AviWest products. We still don't know when we might see our supply chains reverting back to historical levels. Nevertheless, we are beginning to see a degree of stabilization, albeit at a level with unacceptable long lead times and unacceptable high component costs. Nevertheless, the worst appears to be behind us. Those were a lot of words to say that our supply chain experts seem to be well on top of this issue. The people side of the equation continues to be a challenge. Labor costs are continuing to increase. We are in a difficult hiring environment, and retention continues to be a challenge. To give you a sense of the challenge, At the beginning of the fiscal year, High Vision re-evaluates compensation and overall increases at that time averaged over 6%. To further frame the impact for fiscal 2021, labor was about $40 million. So a 6% increase amounts to an additional $2.5 million in added out that. Adding to the challenge, the cost of fringe benefits are increasing at an average weight of over 10%. Despite attempts to sweeten our compensation packages, including company incentives to participate in our employee share purchase plan, the overall environment to attract and retain employees remains challenging. Adding to that challenge, we have always believed that our culture was a key contributor to our ability to attract and retain employees. Obviously, the work from home environment has complicated matters and our established culture is being diluted. We have since encouraged our staff to return to the office two to three days a week. We have not mandated it, but candidly, the idea of returning the office has made high vision less compelling in the eyes of some, particularly those people who have been hired in the last two years who never were the beneficiary of seeing our culture in action. It's definitely a confusing time for employers and employees. However, labor and supply chains are just part of the overall equation. We are yet again seeing an overall change in our business since the pandemic. And things have taken a new form. Our vendors are beginning to pass their higher cost structures on to us, their customers. We have anticipated that travel would be coming back. we knew that nothing really can substitute for face-to-face interaction with our customers or between our colleagues. Further, with two companies to integrate, the need to interact in person has never been more important. But we also believe that our experiences with Teams, Zoom, Slack, et cetera, would mitigate some of the need to travel. Well, we couldn't have been more mistaken. And for anyone who has booked a trip in the last month or two, the cost of airfares have more than doubled and it's getting more difficult to find a reasonably priced hotel room. In the six months that just passed, as an example, our travel expenses amounted to $900,000, of which $700,000 was unrelated to our professional services practice, which has continued to travel during the pandemic, albeit at reduced levels. This compares to just $100,000 in travel spend in the same period last year. What's more is that we are seeing a real return to trade show at levels that we had not anticipated. To illustrate, on a year-to-day basis, we had spent $600,000 in trade shows and advertising compared to just $100,000 in the prior year period. And we don't see this being mitigated any time in the future. Quick note about currency. In the instance when we provide guidance, we really do not consider the potential impact of foreign exchange gains or losses as we do not attempt to estimate future movements in foreign currency rates. In terms of expectations for the remainder of the year, we are a B2B provider to enterprises around the world, and certainly our customers have been facing the same headwinds that we have been experiencing. The stock market is in territory, and our customers are definitely feeling some pain. Although we've not lost any business to date, we are beginning to hear of projects moving to the right, and there has been some reservation for purchases pending more clarity on the economy. Thus, in the interest of conservativism, we are revising our revenue target for the full year to between $123 million and $127 million, and are expecting our adjusted EBITDA margin to be between 8% and 11% of revenue. There is upside in both the revenue and EBIT side of the equation, And although still a bit early, we have already begun to work on our plans for 2023 and are quite buoyant on the industry and our position within this industry. Thus, we are still forecasting EBITDA in the mid-teens for next year. That said, we are now ready to take questions.

At this time, I would like to remind everyone, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Robert Young with Canaccord. Your line is open.

Hi, good evening. Maybe the first place I'll start is gross margins. You already gave us a lot there, but I think you suggested that the supply chain or component cost was relatively stable in Q1 and Q2, and you don't see a lot of risk in Q3 and Q4. Is that to say that you think it'll be $450,000 impact on each quarter going forward. Should we expect gross margins around this level? Gross margins are a little stronger than we expected. So should we expect it to improve from here with the integration activities or maybe is this a good level?

I would not make the assumption that we're going to be seeing gross margins improve from here. In fact, I would say that as Abby West comes into bear, we may actually see it come down a little bit because their gross margins are a little bit below what our legacy business has been. But I want to make sure I am specific about your sort of your preamble here. We incurred additional costs related to componentry in the first quarter and the second quarter. we don't expect that those costs are going to disappear in the third or fourth quarter. In fact, we don't see those costs disappearing until mid 2023 earliest, right? So what I was trying to suggest is that whereas every week we were coming across components that were becoming more unavailable, we're not seeing that kind of sentiment. And every week where we used to see lead times increasing, we're not seeing that happen anymore either. So things have sort of stabilized, albeit at a long lead time construct and with high additional costs, but we're not seeing it get worse from here.

Okay. That's great, caller. Thank you. The second question would be around just at the end of your prepared remarks highlighted that there were some indications they might see some programs delaying. I know last quarter it said that you expected a little weaker government spend from some lumpiness, you know, in some of the programmatic revenue and slower ISR spend. And so is that the source of these project delays that you're getting a suggestion of? Or maybe... Maybe if you could expand on that, if that's the case.

Yeah, I can expand on that, Robert. It's actually, and that's what Dan was referring to, is actually not the defense or government space. It was more on the commercial enterprise space, addressing the enterprise B2B type of a mode. And we're seeing that some of these enterprise clients are starting to feel a pain of the market. And that's what he's referring to. In fact... from the ISR government defense sector, we actually feel pretty bullish for Q3 and Q4, because as we said earlier, remember, we did have some stuff pushed from Q1 and Q2, but we also, given the recent developments in Ukraine and the NATO expansion, has buoyed some of our programs and actually brought some stuff forward as well. So we actually feel pretty good about Q3 and Q4, and it is the government year-end on top of that. So we're pretty bullish on that. It's really more the commercial enterprise sector that we're a bit concerned right now.

Okay, great. So relative to last quarter, I guess the government spend you're a little more confident on. I think you also said some had some concerns about Russia, Ukraine, Saudi, Turkey, a group of companies you thought might be headwind. Is that a little better now, or is that kind of tracking the way you thought?

No, pretty much shut down. It's pretty difficult to sell anything to Russia, Turkey, or Saudis, getting difficult getting permits. And unfortunately, we've had business business development going on. We've got customers obviously in some of these regions. I'm talking about Turkey. I'm talking about Saudi specifically. So that's been frustrating. I don't see that ending anytime soon just because of what's going on in the world right now. But we're hopeful that if the Ukraine thing does settle, I know we've got Biden going over to Saudi and trying to restart the relations. We're hoping that that might help. But from a Canadian, being a Canadian company, we seem to still be stuck in the mud with our Canadian government and some of these other governments. So it's not just a U.S. issue for us. It's actually a Canadian issue.

Okay. Okay. That's great. So it sounds like the government piece is, like I said, a little better than you thought, commercial a little bit worse. And some of this exposure you're just talking about just now, is that more in the broadcast space? Would that be a good way to summarize it?

Exposure meaning, sorry, these other countries? Yes. Well, no, I think it's in those countries specifically, we've actually done business in all the verticals, right? So it's not just the broadcast, right? I think what we're finding in the broadcast is that I think the COVID bubble has, you know, has finally slowed down. in the market across the board. You know, we've had tremendous pickup in 2020 and 21. We're starting to see that slow down to a more normal level. So I would not be expecting massive growth. But the good news is that with Abby West on top of our solution, all of a sudden, that's going to mitigate all of that, what we saw in our traditional business, if you know what I mean. So I see our broadcast revenue actually overall increasing significantly and well into next year.

Okay. Thanks a lot. That's a great caller. I'll pass the line. Thanks.

As a reminder, if you would like to ask a question at this time, please press star and the number one on your telephone keypad. Your next question comes from the line of Nick Corcoran with Acumen Capital. Your line is open.

Just a couple of questions for me. Just the first is the revised guidance for revenue. It sounds like that's being driven by projects maybe being delayed. Can you give a little more color on why you're adjusting the guidance is lower than what you've given in the past?

Well, I think the easy answer is headwinds, right? We're seeing costs increase. We're seeing a return to travel. We're seeing a return to trade shows. And we're still in the process of integrating two companies. And so we're a little bit disappointed that we haven't been able to get DCSA's approval of our operating plan. And that has sort of delayed some of the big moves that we intended to make. But it's going to take us some time to both integrate Cinemassive, HiVision MCS, and Abbey West to derive the operational efficiencies that we spoke of in the last call.

And a related question, I understand you're seeing price increases through your supply chain. Are you having any challenges passing those prices on to your customers? Mirko? No. Yeah, yeah. It's something – well, let's put it this way. We haven't done it yet. We are talking about it. We're discussing it. We have rumors that there are some vendors that are looking at it as well. So, no, we haven't been able to. It's one of those very unpopular things. But the good news is that we are getting feedback now that, customers would be accepting and understand that the supply chain issues are severe, and it's something we absolutely plan to seriously consider. But we have not yet today changed any of our pricing based on that. We're basically absorbing it. Good. And then just a last question for me. You did a small talking acquisition of the software engineers in the quarter. How many more acquisitions like that do you see? At the moment, we have no plans, honestly. That was actually very opportunistic. We're very lucky and fortunate pull that one together with minimal effort and cost, and it was just a perfect time at the right place at the right time, and happened to also be based in Rennes, so it makes it really easy. So we can absorb those engineers in the same office with AviWest. In fact, they're already there and integrated. I do not expect, honestly, to look at any other acquisitions in the near-term future, The priority number one right now is we need to absorb, we need to integrate, we need to right-size properly both from a product offering and people of the company, and we absolutely are planning to make sure that we are back in the mid-teens of EBITDA for next year. And that's part number one. We will start looking at, I mean, we're talking to people, obviously, but I have no intention of doing any acquisitions for the foreseeable future, right? It's really a 2023 kind of a thought. That's great, Collier. Thanks for taking my questions. Okay.

There are no further questions at this time. I'll turn the call back to Mirko. We cover closing remarks.

great thank you josh uh well thanks everybody i i hope you enjoyed the update of q2 and uh really look forward to the second half which i believe is going to be uh a very strong uh half for for high vision and i look forward to uh talking to you the next next earnings update thank you everybody bye this concludes today's conference call thank you for joining you may now disconnect