Haivision Systems Inc.

Same third quarter of this fiscal year represented an increase from the 68.9% realized in our second quarter of this fiscal year. And just to complete the thought, that same second quarter gross margin represented an increase from the 66.6% realized the quarter before that, our first quarter of this fiscal year. We have discussed gross margin expansion in previous calls, but to put an exclamation point on the matter, margin expansion resulted from firstly, our exit from the house of worship business as the vertical was a below the average performer in terms of gross margins. We believe that initiative in it of itself resulted in approximately a 200 basis point improvement in margins each quarter since our exit in April, 2023. Secondly, our supply chains are reverting to more typical delivery schedules and more typical pricing. In this quarter that's just ended, as an example, the additional cost for these difficult-to-procure components was rather de minimis, well under $100,000. And on a year-to-date basis, the additional cost for this component was approximately $950,000, or representing about 100 basis points in our cost of goods sold. The good news is that the extra costs incurred in fiscal 2023 were approximately half of the costs that we incurred in fiscal year 2022, a year in which the gross margins were being impacted by almost 200 basis points. We do expect these extra expenses to continue to dissipate with the impact to this fiscal year's results being approximately half of the expense incurred in fiscal 2023. Lastly, we have completed our migrations of ERP systems at both MCS and AviWest, so our supply chain folks have more visibility to inventory levels, manufacturing forecasts, and purchasing methodologies at both MCS and AviWest. This represents a bit of a greenfield opportunity for further improvements. With that said, and it has and as has been suggested on past calls, our fourth quarters are commensurate with the U.S. government year-end, and we are typically the beneficiary of higher defense spending. This quarter, just completed, is no exception. Thus, the quarter's mix of revenues included a higher percentage of legacy products, which historically operate at a higher overall product margin. Although we do have Opportunities for additional improvements in gross margins, particularly related to the amount of difficult-to-secure inventory consumed in fiscal 2024, and added visibility and control of supply chains. It's the mix of revenues in the next few quarters that may change our gross margin composure. The result of it is that we may see gross margins in the near term and or mid-term reflect the fact that a higher proportion of our revenues are coming from AWS products and MCS products than we had just incurred in our fourth quarter. These gross margin improvements are real, and we should realize the benefits in fiscal year 2024 and beyond. Any variances are likely going to be related more to mix. Total expenses for this fourth quarter were $22.9 million. That's a decrease of $3.2 million when compared to the prior year comparative period. Even more noteworthy is that the quarter just ended included certain performance-based compensation expenses that were not incurred in the prior fiscal year and may not happen in 2024. Much of the decrease in total expenses is related to the restructuring costs of $2.3 million that were incurred in the fourth quarter of our prior year. However, we have essentially completed the restructuring exercise that was initiated in that fourth quarter of fiscal 2022 and completed in the third quarter of fiscal 2023. At the end of this last quarter, we had 359 employees, compared to 393 employees at the same time the prior year. Also know that year end headcount was down from the 374 employees at the end of our previous quarter. That's our third quarter. What is really exciting about our fourth quarter performance is that most of the noise related to restructurings and acquisitions is behind us. And this recent fourth quarter provides a sense of the earning potential of the business. And there may be opportunities for additional OPEX savings in the first quarter of 2024. For the fiscal year, total expenses were 97.4 million. That's an increase of 5.8 million when compared to the prior year. Again, year-over-year comparisons are still impacted by the timing of the Abby West transaction. The Abby West transaction was consummated in April of 2022, which implies that Abby West's cost structure was only represented for seven months in fiscal 22 versus 12 months in the year just ended. But if we were to focus on the $5.8 million increase year-over-year, Compensation-related expenses added approximately 3.8 million, much of which can be attributed to the five additional months of compensation paid based on the timing of the Abby West acquisition. Remember, the acquisition added approximately 80 people to our organization in April 2022. Depreciation and amortization expenses increased by 1.4 million, again, largely the result of the timing of the Abby West acquisition. Travel expenses added an incremental $1.5 million, partly related to the timing of the AWS acquisition, but more related to the growth in MCS that we are seeing. And then, of course, the Canadian dollar exchange rate impact on the U.S. dollar denominated assets and liabilities added an incremental $1.5 million to total expenses when comparing this year to last year. On the other hand, We did successfully reduce our use of independent contractors for our R&D initiatives by about 1.5 million, which was really part of our restructuring initiatives. And restructuring costs in fiscal 2023 were 800,000 less than the fiscal year just completed. I'm sorry, 800,000 less in this fiscal year just completed when we compare it to the prior fiscal year. The results of the better gross margins and a decrease in OpEx was an adjusted EBITDA for the quarter of $5.7 million. That's an increase of $800,000 or 15% when compared to the prior year comparative period. By now, I think we can all agree that we've been conveying our perspective that that third quarter would be a turning point for high vision. and the adjusted EBITDA margin for the quarter just completed was 15.9%. This adjusted EBITDA margin compares quite positively to the 12.4% in the prior quarter, that's our third quarter of fiscal 2023, and compares positively to the 7.5% in the quarter prior to that, our second quarter of fiscal 2023. We have made slow and steady progress to reach our goal of 20% adjusted EBITDA margins, and I believe now you are beginning to see the full benefits of the restructuring plan. We still have additional opportunities to increase adjusted EBITDA margins. We may continue to see modest increases in gross margins as we absorb the remaining higher cost componentry and we apply our supply chain tools to ABVUS and MCF. since they are now on a common platform. We should also see additional decreases in compensation expense in the near term, as we will likely not have the same outsized obligations related to performance-based compensation that we had in 2023. Although our fourth quarter has been traditionally our largest quarter, and as such, our most profitable quarter, that seasonality pattern is less true as the Department of Defense and the U.S. government is tending to buy our gear more radically throughout the year. Further, MCS and Abby West seasonality seems to mitigate the fourth quarter seasonality of our legacy business. But despite all of that, we still believe that our fourth quarter performance is a true indicator of the earning potential of the business. Adjusted EBITDA for the full year was $14.8 million, an increase of $6.7 million, or 83% when compared to the prior year. The adjusted EBITDA margin for this full year was 10.6% compared to only 6.4% for the prior year comparable period. I should mention that we also saw significant improvement in the net income for the quarter. The net income this quarter was $2.5 million compared to a net loss of $1.1 million to the same time last year. That represents a $3.6 million improvement. So quickly, the improved gross margins were more than able to offset the modest revenue differences year over year, generating incremental gross profit of $800,000. And that incremental gross profit was further benefited by 3.2 million decrease in total expenses. On the other hand, income tax cost us an incremental 500,000. For the full fiscal 2023, our net loss was only 500,000 compared to a net loss of 6.3 million for the prior year. This $5.8 million improvement is largely related to the $14.2 million incremental revenues and improved gross margins that resulted in an incremental gross profit of $10.3 million. Now, this incremental gross profit was offset by increases in expenses of $5.8 million and increases in income tax by $900,000. Overall, pretty good performance. With respect to the balance sheet, We ended the quarter with a cash balance of $8.3 million, a modest increase of $800,000 from the prior quarter end. However, we also ended the quarter with only $4.7 million outstanding on the credit facility. That's also a reduction of $900,000 from the prior quarter end, but it's a $6.5 million reduction from the beginning of this fiscal year. Total assets at year end were $144.1 million, That's a decrease of $4.5 million from the prior year end. But this decrease in assets can be attributed to a $4.2 million reduction in intangible assets. Now, just on the side, we amortized $6.8 million in intangibles during the year, but the impact of the amortization was offset by exchange rate impacts on those same assets. We also decreased inventory levels by 2.1 million. Again, that was an initiative that we spoke about in the past and has been a focus much of the year. We reduced right of use assets by 1.5 million, and there was a modest reduction in trade and other receivables. Now, these decreases were offset by the $2.5 million increase in our cash balance this fiscal year and 1.5 or 1.6 million increase in tax credits receivables. The story on the liability side is even more compelling. Total liabilities at quarter end were $49.9 million. That's a decrease of $8.4 million from the end of fiscal 2022. This decrease in liabilities during the year include $6.5 million decrease in the line of credit, $1.8 million decrease in the purchase price table related to the Abby West transaction, 1.4 million decrease in restructuring costs payable, 1.4 million decrease in lease liabilities, and 900,000 decrease in term loans. These five items themselves represent a reduction of liabilities by $12 million. Now, these decreases were offset by 3.3 million increase in deferred revenue. This 30% increase in total deferred revenues is commensurate with the approximate 30% growth in our maintenance and support revenues that we spoke about before. So with respect to the remaining integration plans, for AviWest, we have completed the move of AviWest to a common accounting system. We completed AviWest's move to a common ERP system. And with this enhanced visibility of AWS inventory, we hope to increase the flexibility of the AWS supply chain and reduce product costs to increase gross margins. Our focus in the near term is to sell more AWS products in North America, and we're well on our way. At HiVision MCS, progress has accelerated. We have fully integrated development teams. We have fully integrated production capabilities. and we have migrated MCS ERP system and accounting system to common platforms. Our focus in the near term is to sell more MCS product internationally. In terms of expectations for fiscal 2024, first of all, our revenue guidance for the full year factors in our exit from the House of Worship vertical in April 2023. We are projecting revenues for this fiscal year to be between $145 and $150 million. We also expect to see continued expansion of our adjusted EBITDA margin as we take advantage of the recent restructuring and the synergistic opportunities. Thus, we anticipate adjusted EBITDA margins in the mid-teens, and we still anticipate seeing one quarter in this fiscal year knocking on the door of our long-term adjusted EBITDA margin of 20%. Since we believe this fourth quarter just completed represents a bit of a watershed event, we wanted to manage first quarter fiscal 2024 expectations as well. Typically, we see first quarter revenues being down from the prior fourth quarter, which was the case in this most recent first quarter. first quarter 2023. We will likely see something similar this year, again mitigated for the seasonality that we expect to see from MCS and Abby West. The revenue mix will likely be more slanted towards our MCS and Abby West products, as MCSs and Abby West revenue tend to be strongest at calendar year end. The result is that we will likely see lower gross margins due to mix. However, the revenue difference and the gross margin difference will likely be overcome by additional reductions in total expenses. So that really concludes my prepared remarks. I'm going to pass the microphone back to Mirko, and then we will open the floor to questions.

Thanks, Dan. Actually, I think we'll just open up for questions, and then I'll close up after that. So who's going to ask the questions?

Thank you. If you have a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, simply press star 1 again. One moment, please, for your first question. Your first question comes from the line of Nick Corcoran of Acumen Capital Partners. Your line is open.