Haivision Systems Inc.

Ladies and gentlemen, thank you for standing by. Today's conference will begin in approximately five minutes to allow as many participants as possible to join. Until that time, your lines will again be placed on music hold. We thank you for your patience. Hello, and welcome to the HiVision 3Q 2023 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 1 on your telephone keypad. I will now turn the conference over to Mirko Wicca. Please go ahead.

Thank you, Sarah, and good afternoon, everyone. Thank you for joining us today to discuss our third quarter results in the first nine months of our fiscal year 2023. As demonstrated by the results we announced earlier today, demand for our products not only remains strong, but our business fundamentals have never been better. We achieved a record Q3 revenue of $35 million, which represents an 18.2% growth over Q3 of last year, as we continue to deliver top-line is inclusive of the revenue reduction we took because of exiting the House of Worship vertical. Now, we also achieved a record first nine-month revenue of $104.2 million, which represents an 18.6% growth over last year, first nine months. Again, this is inclusive of the revenue reduction of the House of Worship vertical that we have now completely exited from. And our gross profit for Q3 grew 30% from last year's Q3, which is pretty impressive. And we delivered an adjusted EBITDA of 4.3 million for Q3, which represents a 12.4% operating margin. Now, this is compared to last year's Q3 adjusted EBITDA loss of 1.5 million. This represents an increase of 387%. For the first nine months of the year, our adjusted EBITDA was $9.1 million, representing an increase of 193% from last year's nine-month performance. As a reminder, we have always said that it's typical 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, which the Q3 results have clearly demonstrated. We expect Q4 to follow this trend. Now, in addition, our gross margins in Q3 have increased to 71.9% from last year's Q3 of 66.1. Now, as we mentioned several times on our previous earnings calls, this was always our 2023 plan, and I'm very happy to say that we delivered what we said we would. And I believe that this is only the beginning of what's to come in the future quarters. Our focus has been and continues to be profitability and EBITDA performance. We clearly made the right decision last October to exit the House of Worship managed services market, which has been successfully completed end of April, and is now starting to show in our P&L as promised. I should, however, mention the strong Q3 we just announced did include a significant $2.5 million investment U.S. government programmatic order that was originally scheduled to come into our Q4 as part of our government year-end planning. Obviously, it's always good news when orders come earlier than expected. With this movement, we do expect our Q4 to be adjusted by this amount than previously planned, meaning we won't be seeing a typical hockey stick effect to our Q4. And we remain confident with our year-end projections that Dan will be discussing. Now, Q4 has always been the highest quarter by far in all of our fiscal years. In fact, last year's Q4 was very, very high. In fact, if I recall, it was almost 39 million due to an unusually strong U.S. government quarter. Now, interestingly enough, this year we have seen a more balanced and consistent quarterly performance. In fact, in Q1 of this year, if you remember, we did 34 million. In Q2, we did 35 million. And now in Q3, we delivered, again, $35 million. I expect this to continue into 2024, as we are finding that our three main verticals, our defense, our broadcast, and enterprise, balance each other out globally and give us better business predictability. Now, in addition, it's interesting to note, the U.S. government has been slowly moving to a multi-quarter purchasing cycle, and not only depending on the year-end, September-October timeframe, which always falls in our Q4. And we are also seeing strong demand for our global security operational centers within the global financial banking industry, cybersecurity, police centers, federal installations, public safety, and all defense sectors. The need to have real-time mission critical and secure access all your video sources and assets for real-time analysis or situational awareness is becoming more paramount. And we are now the leading vendor delivering the entire contribution, distribution, and visualization ecosystem in this critical area. 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. Now, in closing, despite the economic headwinds and continued supply chain challenges we keep hearing about from other companies, I believe that Hivision has weathered the storm better than most. And we expect our Q4 to be strong and consistent with our strategic plan and feel very comfortable with our year-end projections. Dan will discuss our guidance for the remainder of the year shortly. And we're also very confident in our strategic plan. and expect to demonstrate revenue growth and significant profitability growth in 2024. Finally, as we previously mentioned, we are moving quickly towards achieving our longer-term goal of delivering 20% EBITDA performance. So to this, Dan, please continue with the financial details. Thank you, Mirko.

So let's talk numbers. Revenue for this third quarter of fiscal 2023 was 35 million. That's an increase of 5.4 million or 18.2% from the prior year comparative period. The revenue increase is notable for a number of reasons. First of all, the revenue comparison is an apples to apples comparison as revenue from AviWest is included in both periods. Revenue from just the products increased by 28.8% in the quarter. This impact also is reflective of the $1.9 million decrease in cloud solution revenue when compared to last year. We saw fantastic revenue growth despite our decision to exit the managed services space that focused on the House of Worship market. Even our maintenance and support revenue saw double-digit growth, growing 15% year over year. This recent quarter did represent a record performance in terms of third quarter revenue, which historically tended to be a slower period for the company. Hope to see more of these types of records in fiscal year 2024 and beyond. Revenue for the nine months ended July 31st with $104.2 million. That's an increase of $16.3 million or 18.6% from the prior year comparative period. Note that year-to-date results included Abby West performance for the entire nine months, whereas in the prior year comparative period, year-to-date results included Abby West for only four months. On the other hand, this year-to-year performance reflects our exit from the managed services market in April. For the nine-month period, we saw cloud solution revenue decline by $2.8 million when compared to the prior year period. So with that said, we are seeing huge growth. And we see huge growth in maintenance and support revenue, which also grew by 23% year over year. Recurring revenue, which we defined as our cloud solutions and our maintenance and support was 5.6 million, or about 16% of total revenue in this recent third quarter. And it was about 20.3 million, or 19% of total revenue on a year-to-date basis. We anticipated that our recurring revenue would decrease as a percentage of our total revenue once we exited the managed services business. With that said, we do expect maintenance and support revenues to continue to grow robustly going forward. For this quarter, our gross margins were 71.9%, and that compares to 66.1% in the prior year comparable period. Further, this quarter's gross margin were an improvement from the 68.9% realized last quarter, that's our second quarter this fiscal year, and an increase from the 66% in the quarter before that, our first quarter this fiscal year. As discussed in our last earnings call, we anticipated margins to improve in this third quarter and even suggested that the impact could be as much as 200 basis points. Well, we certainly exceeded that expectation. The managed services business had about $600,006 costs related to platform license fees, third-party add-ons, and minimum bandwidth commitments. Said another way, the managed service business tended to be a below-the-average performer in terms of gross margin. Further, supply chains appear to be reverting to more normal delivery schedules. We did incur just over $300,000 in additional costs related to hard to procure componentry that was consumed in the quarter. On a year-to-date basis, the additional cost for this componentry was approximately $950,000, or about 100 basis points. These extra costs were approximately half of the costs that we incurred last year, which impacted margins by over 200 basis points. We expect this extra expense to continue to dissipate going forward with a next year expectation for these costs to be half of the costs that we incurred this year. And just to complete the thought, there really wasn't much variation in overall mix throughout the year. Thus, these gross margin improvements are real improvements. Total expenses for this quarter were $25.6 million. an increase of $1.2 million when compared to the same period in the prior year. However, in this quarter, total expenses included a non-recurring restructuring cost of $1.5 million. We essentially completed the restructuring exercise that was initiated in the fourth quarter last year. The result is that we ended the quarter with 374 employees compared to 418 employees a year ago. and that compares to the 389 employees at the end of second quarter. Generally speaking, approximately 75 percent of our cost structure is related to compensation expenses and related social charges, unless you can put the math together. I should mention that since the most recent restructuring was largely completed in the second half of this quarter, there may be additional opportunities for OpEx savings in this fourth quarter. However, next week is our second largest trade show, the International Broadcasting Convention, or IBC, and it may result in incremental marketing spend in this fourth quarter. On a year-to-date basis, total expenses were $74.4 million, an increase of $9.1 million when compared to the year-earlier period. As a reminder, the Abby West transaction was consummated in April of 2022, which implies it was only part of our cost structure for four months in the comparable period last year. Thus, it is impacting year-over-year comparisons. Abby West added approximately 80 people last year. If we were to isolate the reason for the increase Compensation-related expenses added approximately $4 million in total expenses, most of which would be attributable to the timing of the Abby West acquisition. Increases in depreciation and amortization expenses related to acquired assets and intangibles added an incremental $2.3 million in total expenses. Increased travel expenses added an incremental $1.5 million. And the Canadian dollar's exchange rate impact on U.S. dollar denominated assets and liabilities added an incremental $1 million to total expenses. When we normalized total expenses for share-based payments, depreciation of fixed assets, the amortization of intangibles, and restructuring costs, total expenses were $20.8 million, a decrease of $400,000 from the prior year. The result of the higher revenues, better gross margins, and a decrease in OPX is that adjusted EBITDA for the quarter was 4.3 million. That's an increase of 5.9 million when compared to the adjusted EBITDA loss of 1.5 million for the same period in the prior year. The adjusted EBITDA margin for this quarter was 12.4 percent. That margin compares quite positively to the 7.5% in the prior quarter and the 6.2% in the quarter prior to that. In prior calls, we had certainly been signaling our belief that the third quarter would be somewhat of a watershed event. I believe now you are beginning to see the full benefit of our restructuring plan, and as there's still some additional opportunities to increase EBITDA margins going forward, we should see this continuing. We should see gross margins continue as we absorb the remaining higher cost componentry and as we continue to migrate the two acquisitions to a common ERP platform. And as I explained earlier, we should see additional OPEX savings in the fourth quarter based on the timing of our restructuring exercise completed in June, albeit with this cautionary note that we do have our second largest trade show in this fourth quarter as well. Adjusted EBITDA for the nine-month period was 9.1 million. That's an increase of 5.9 million when compared to adjusted EBITDA of 3.1 million for the prior comparable period. The adjusted EBITDA margin for this nine-month period was 8.7 percent, but that compares quite favorably to 3.6 percent for the prior year comparable period. We also saw a significant improvement in the net loss for the quarter. The net loss for this quarter was only 900,000 compared to a net loss of 4.2 million for the same period in the prior year. That 3.4 million improvement is largely related to the 5.4 million increase in revenue and the improvement in gross margin contributing 5.6 million in incremental gross profit. Now, these increases were offset by the 1.2 million in incremental expenses, and we did get some benefit from income tax recoveries of 900,000. Net loss on a year-to-date basis was 3.8 million, but that too compares quite favorably to the net loss of 5.1 million for the prior year comparative period. With respect to the balance sheet, we ended the quarter with a cash balance of 7.5 million, a modest increase of 200,000 from the prior quarter end. However, we also ended the quarter with only 5.5 million outstanding on the credit facility. That's a reduction of $4.5 million from prior quarter end. And we reduced our term loans by an additional $1 million. Total assets of July 31st were $133.9 million. That is a decrease of $14.7 million from the end of fiscal year 2022. And the decrease in assets in the nine-month period largely relate to a $7.6 million reduction in trade and other receivables. a $5.8 million reduction in intangible assets, and a $2.4 million reduction in inventory. These decreases were offset by the $1.7 million increase in our cash balance this fiscal year. Total liabilities at quarter end were $46.1 million. That's a decrease of $12.2 million from the end of fiscal 2022. The decrease in total liabilities for the nine-month period included a $5.5 million decrease in the line of credit, a $4.8 million decrease in trade and other payables, $1.2 million decrease in our lease liabilities, and again, a million-dollar reduction in the amount of term loans outstanding. With respect to the remaining integration plans, For AviWest, we have completed the move of AviWest to a common accounting system, and we just completed AviWest's move to a common ERP system. With this enhanced visibility to AviWest inventory, we hope to increase the flexibility of AviWest's supply chain and reduce direct product costs to increase gross margins. Our focus in the near term will be to sell more of AviWest's products in North America. At HiVision MCS, progress is also accelerating. Our current focus is to fully integrate development teams, and we expect this to be completed this month. Our next major focus is integrating production capabilities and migrating MCS's ERP system to a common platform. The pace of integration is increasing over the remainder of the year. Just on an aside, this week we also had our 12th ISO 9001 audit, and we're pleased to say that once again, the auditors found our quality management system to be fully effective. In fact, with outstanding ratings on most benchmarked activities. In terms of expectation for the remainder of the year, we have completely transitioned out of the household worship 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 our managed services revenue, is now expected to be a bit higher. We had suggested that revenue for the year would be between $130 and $135 million, with the high end of that range being increasingly in sight. We are now forecasting revenue for the full fiscal year to be somewhere between $135 and $140 million this year. We also expect to see continued expansion of our adjusted EBITDA margin as we continue to exploit synergistic opportunities and achieving double-digit adjusted EBITDA margins. That concludes my prepared remarks, so I'm passing the microphone back to you, Mirko, and then we'll open the floor to questions.