Haivision Systems Inc.

Ladies and gentlemen, good morning and thank you for standing by. Today's conference call will begin momentarily. Until that time, your lines will again be placed on music hold and we thank you for your patience. Thank you. Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the High Vision Systems Incorporated second quarter 2023 earnings conference call. Today's conference is being recorded and 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 that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you. And I will now turn the conference over to Mirko Wiecha, Chairman and CEO. You may begin.

Thank you, Abby. And good afternoon, everyone. Thank you for joining us today to discuss our second quarter results. and the first six months of our fiscal year 2023. I'm actually joining you from Bangkok, Thailand this evening as I'm attending our APAC Summit. And that's really the reason why this call is early in the morning Eastern time as compared to our normal schedule after the market closes. So I apologize to everyone for the early start. The good news is that we're actually having an amazing event over here this week with over 100 people attending, includes 36 of our strategic channel partners throughout the entire APAC region. So a very successful event so far with another day to go. It's also the first summit together with all the HiVision and AviWest partners in the region and all sharing our combined sales successes. I mean, everybody is excited as you're representing a combined company technologies to tackle the broadcast contribution market as leaders in both the fixed and wireless encoding space. So very, very cool event all week, and glad to see so many new partners as well. Now, demonstrated by the results we announced earlier today, demand for our products remains strong, and our business fundamentals have never, never been better. As you've seen, the press release that went out yesterday, the company achieved a record revenue, of $35.1 million, which represents a 17.5% growth over Q2 of last year, as we continue to deliver top-line growth. This is inclusive of the much reduced revenue from the House of Worship vertical we have exited from as of April 30th. The company also achieved a record first six-month revenue of $69.2 million, which represents 18.8% growth over the last year's first six months. And we delivered an adjusted EBITDA of 2.6 million for Q2, which represents a 7.5% operating margin. And for the first six months of the year, our adjusted EBITDA was 4.7 million, representing an overall 6.9% operating margin. It's difficult for our OPEX to be front-loaded and we expect a much stronger EBITDA and operating margin performance in the second half of the year, especially with our reduced COGS. Our transition away from the household worship market, managed services market, has actually been very successfully completed. As mentioned in our previous earnings call, we will begin to see the results of this initiative mainly in our reduced COGS and, to a lesser extent, our OPEX during the second half of the fiscal year. And the overall reduction should amount to approximately half a million dollars per quarter. This will set up a stronger operational performance, as I mentioned, in the second half of the year, and really prepare us for a very exciting fiscal 2024. We believe that our company has a bright future ahead, and we are committed to maximizing long-term value for all our shareholders. We are confident in our ability to execute on our strategic plan and deliver continued growth and success. The company remains focused on executing its growth strategy, expanding its market presence, and delivering innovative solutions to its customers. In closing, before I hand it to Dan, despite the economic headwinds and continued supply chain challenges, we expect our Q3 to actually be strong and consistent with our strategic plan and feel very comfortable with our 2023 direction, delivering between $134 million to $135 million in revenue, with a very good visibility to double-digit adjusted internet performance for the full year. We are very confident in our strategic plan and expect to show growth in both our revenue and profitability in 2023, and are preparing for an even more exciting 2024. Our Q3 results will be the first indication of the reduced cause of OPEX, with the synergies derived as a result of our operational realignment, we implemented during the past six to nine months. As discussed previously, we are moving quickly towards achieving our longer-term goal of delivering 20% EBITDA performance. I'll pass it on to Dan, please. Continue with all the detailed financials, and then we'll be back to me to close it up after the questions.

Thank you, Mirko. Some of this will be repetitive, but let's get into it. Revenue for the second quarter of fiscal 2023 was indeed $35.1 million, an increase of $5.2 million or 17.5% from the prior year comparative period. As a reminder, we closed the Abby West transaction in April 2022, so second quarter 2023 results include Abby West performance for the entire quarter, whereas in the prior year comparative period, results included a single month of Abby West performance. This recent quarter was the second best quarter in the history of the company, only surpassed by our fourth quarter last fiscal year. Revenue for the six months ended April 30th was 69.2 million, an increase of 11 million or 18.8% from the prior year comparative period. Again, year to date results include Abby West performance for the entire six months, whereas in the prior year comparative period, Its performance only included Abby West for a single month. Nevertheless, this year-over-year performance is even more impressive when you take into consideration our exit from the House of Worship market. Recurring revenue, which we define as our cloud solutions and maintenance and support, was about $7.1 million, or about 20% of total revenue. We anticipated that our recurring revenue would decrease as a percentage of our total revenue once we exited the House of Worship business. The House of Worship managed service business represented about a third of our recurring revenue. On a positive note, the House of Worship revenue was heavily dependent on the price of bandwidth and because of the nature of the business, there was a number of more cost-effective solutions to serve that church market, including free offerings. The business had always been putting downward pressure on the growth in cloud revenues, and resulting gross margins. On another positive note, we have seen our maintenance and support revenue grow even faster than our overall revenue. Maintenance and support revenue grew 33% quarter over quarter and grew 28% on a year-to-date basis. That's largely due to the fact that we've conformed our support offerings across our new properties and we've increased our attention on these renewals. For this quarter, gross margins were 68.9%, down from the 69.4% realized in the same period last year. We anticipated margins to slip from historical experience as margins for the Abbey West offering, and for that matter, the high vision MCS offerings tended to operate below our historical margins. However, this quarter's gross margin was an improvement from the 66.6% realized last quarter, and it surpassed what we did for the full year last year as well. Part of the explanation for the improvement in margins is related to overall product mix. The recently acquired businesses lines have different seasonality, heavily weighted to the end of the calendar year, the November-December timeframe, or what is consistent with our first quarter. Again, discontinuation of the House of Worship business should improve gross margins going forward as that managed services offering tended to be a below the average performer in terms of gross margins. Even in this quarter where we shut down the business, we incurred about $700,000 in fixed COGS related to that business. We should see the full benefit of this incremental savings in the beginning of our third quarter and beyond. Further, although supply chains appear to be reverting to more normal delivery schedules, we did incur between 300 and 400,000 in additional costs related to hard to procure componentry consumed in this quarter. We expect that these types of extra expenses will continue to dissipate as we go forward. Total expenses for this quarter were 25.1 million. That represents an increase of 3.9 million when compared to the same period in the prior year. Now, as we've said in previous calls, our cost structure is heavily weighted towards overall compensation-related expenses. We ended the quarter with 389 employees compared to about 417 employees a year ago. The AviWest transaction, consummated in April, is, in fact, impacting year-over-year comparisons. After all, Abby West added 81 people, 77 of whom are still with us today. Thus, the $3.9 million in year-over-year increases is largely explained by compensation-related expenses adding an incremental $1.7 million, increases in depreciation and amortization expenses related to the acquired assets and intangibles added an incremental $1 million to total expenses. The Canadian dollar exchange rate impacts on U.S. dollar denominated assets and liabilities added an incremental $600,000, and then increased travel expense added an incremental $500,000 to total expenses. With that said, there are opportunities for additional expense savings that we should realize in the third quarter and beyond. For instance, our largest trade show, NAB, is a second quarter event, and we wouldn't expect to incur similar marketing expenses in the third quarter. And our expenses for professional services are disproportionately focused on the first half of the year. They tend to be aligned with our year-end statutory reparting, our annual shareholder meetings expenses, accounting services, and so on and so forth. So we should not see the same level of professional services in the third quarter or the fourth quarter. On a year-to-date basis, total expenses were $48.8 million, an increase of $7.8 million when compared to the prior year comparative period. The reasons for the increases are similar to those that we discussed about the second quarter. Increases in compensation-related expenses, again, mostly attributed to Abby West, added about $4 million in total expenses. Increases in depreciation and amortization expenses related to these acquired assets and tangibles added an incremental $2.1 million. Increased travel expenses added an incremental $1.5 million. And the Canadian dollar exchange rate impact on U.S. dollar-denominated assets and liabilities added an incremental $600,000. When normalized, for share-based payments, depreciation of fixed assets, and amortization of intangibles, total expenses were only 21.7 million. That's an increase from the 2.9 million last year. That's an increase of 2.9 million from the prior year, which is only an increase of about 15%, less than what our revenue growth was. The result is that adjusted EBITDA for the quarter was 2.6 million. That's flat compared to the 2.6 million in adjusted EBITDA for the same period in the prior year. However, that adjusted EBITDA margin for this quarter was 7.5%. Albeit lower than our annual expectation, it does represent an improvement from last year's overall performance of 6.4% and an improvement from the 6.2% realized last quarter. We are really just beginning to see the benefits of our restructuring plan, and as I touched on before, there's certainly additional opportunities going forward. Net loss for this quarter was 1.5 million compared to a net loss of 400,000 for the same period in the prior year. As was the case with EBITDA, this quarter's net income was impacted by increased headcounts, depreciation and amortization, increases in travel, and the exchange rate impact on U.S. dollars in nominated assets and liabilities. On a year-to-date basis, the net loss was $2.9 million compared to a net loss of $300,000 for the prior year comparative period. With respect to the balance sheet, we ended the quarter with cash balances of $7.3 million. That does represent a decrease of $5.4 million from prior quarter ends. However, we also ended the quarter with 10 million outstanding on the credit facility, which is a reduction of 5.2 million from the prior quarter end. Total assets at quarter end were 141.7 million. That is a decrease of 6.9 million from the end of fiscal year 2022. The decrease in assets in the six-month period include a $7.5 million reduction in trade and other receivables, a $2 million reduction in net intangible assets. That represents $4 million in amortization offset by the increase in balance sheet items related to exchange rates. These decreases were offset by the $1.5 million increase in cash and the $2 million increase in receivables related to tax credits. Total liabilities at quarter end were $50.8 million, That's a decrease of $7.2 million from the end of fiscal 2022. This decrease in total liabilities includes a $5 million decrease in trade and other payables. And these trade payables include compensation related accruals like vacation accruals and commission accruals and so on and so forth. We also had a $1.2 million decrease in the line of credit in that six month period. We reduced our term loans by about $600,000, and we decreased our lease liabilities by another $600,000. With respect to integration plans, for AviWest, we have completed the move of AviWest to a common accounting system, and our focus in the near term is, again, increasing the flexibility of AviWest supply chain, courting AviWest to a common ERP system, and bringing AviWest products to North America. For high-vision MCS, although a bit slower than what we had hoped, progress is accelerating. Our current focus has been on fully integrating development teams, and most of the heavy lifting was completed as of this last quarter. Our next major focus is integrating production capabilities, and we have additional opportunities beyond that. And as I mentioned before, the pace of integration should increase over the remainder of the year. In terms of expectations for the remainder of the year, we have completely transitioned out of the House of Worship managed services market. And even after losing that revenue, our overall revenues continue to show growth. Thus, our revenue guidance for the full year, which factors in the reduction in the House of Worship revenue, is still expected to be between 130 and 135, although the top end of the range is increasingly in reach. We also expect to see expansion of our adjusted EBITDA margins as we continue to exploit synergistic opportunities and achieving double-digit adjusted EBITDA margins. So that concludes my prepared remarks. I'm going to pass the microphone back to Mirko, and then we will open the floor to questions.