Haivision Systems Inc.

Ladies and gentlemen, thank you for standing by 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 second quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise after the speakers remarks, there will be a question and answer session. If you would like to ask a question during that time simply press star 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 would now like to turn the conference over to Mirko Wicca, President and CEO. You may begin.

Thank you, Abby. And thank you everyone on the call for joining us today to discuss our second quarter of our fiscal year 2025, which ended on April 30th. As mentioned in our last earnings call back in January, We are now well into our two-year strategic plan. We shall complete our overall business transformation and return high vision to the double-digit revenue growth we have seen in the past. We'll also return us to our long-term CAGR growth rate of between 15% and 20% per year. Now, we have completed our operational efficiency model. I have a solid handle on the cost structure, gross margins, EBITDA, and cash generation. Now, the focus now is all about building high revenue growth. As mentioned back in January as well, we have seen the bottom of the revenue curve back in Q1. Our key fundamental business model for the controller market, which was the move away from being an integrator to manufacturer, is complete. We are seeing a solid increase in our long-term sales pipeline. Our business forecast is compelling. And we are seeing strong orders and revenue increase in the overall global controller market, not just in the US. This is what we've been working hard on for the past 18 to 24 months, and it's really great to see. Let me share a few thoughts on what to expect from us during the remainder of this fiscal year to prepare for this higher revenue growth in 26 and 27. We've been investing in many new product development initiatives and introductions throughout this year, some of which we discussed earlier, but here are some of the highlights for both the mission and broadcast parts of our business. Remember that six months ago, we structured the company into two focus business areas, mission and broadcast. We are already seeing the results of our actions, and our goal of focus is really paying off. Now, within our mission business, we focus on strategic developments in AI. Last year, we announced that Hivision is partnering with Shield AI, which is a leading defense technology company whose mission is to protect service members and civilians with intelligent systems. With this partnership, Shield AI Kestrel is now fully integrated with Hivision's real-time transcoding Kraken software system and can be easily deployed across a wide range of air, land, and sea-based platforms. Designed for intelligence, surveillance, and reconnaissance, and situational awareness applications, and Kraken encodes, transcodes, and transports high-quality video metadata in real time, even in environments where network bandwidth is unpredictable or limited. The latest update to Kraken features the availability of a new option, Shield AI's Tracker, the AI-powered software for superior object detection, and Tracker uses AI and two decades of computer vision research and development to detect moving objects in full motion video, turning raw data into actionable intelligence with speed and efficiency. It can detect moving and stationary objects on land such as vehicles and people and in maritime settings such as boats, vessels, individuals, and life jackets. Very, very cool stuff. Now in May, As promised, during the defense military short soft week in Tampa, we launched an exciting next generation AI-based hardware, what we're calling tactical edge processor for the defense and ISR markets called the Kraken X1, which is also called the KX1. It was extremely well received as it delivers incredible performance of AI-enabled encoding in real time. The KX1 is a ruggedized and AI-capable video processing appliance engineered for demanding ISR deployments. Combining real-time encoding, transcoding, metadata processing, and NVIDIA-powered AI capabilities in a fabulous and compact design, the KX1 brings battle-tested high-vision technology to remote and tactical edge environments. High vision is absolutely the standard low latency edge transcoding delivery platform in the defense market and a market leader in providing a unified approach to tactical edge computing. And we expect our Kraken AI technology to drive many long-term defense projects and increase our footprint within the global defense market. This is an area that is expected to have great growth potential for the next five to 10 years. And we expect to be the leader. Equally as exciting, within our broadcast business, we launched our next generation 5G transmitter platform. We successfully showcased this new generation of transmitter platform called the Falcon X2 in Vegas at the NAB show in April. This will be the basis for the next two years of transitioning our entire line of transmitters to advanced 5G private networking. We've incorporated some revolutionary technologies and created a lower cost structure that which will result in better price performance and competitive product offerings for the future. This is very exciting as we also venture into an adjacent lower-cost market with a small, lightweight, two-antenna private 5G solution that we can now go more aggressively after our key competitors, LiveView and TVU. Thus, a new revenue stream for HiVision. We will be announcing more systems within this platform throughout the next several quarters. In addition, we will launch our next generation Makito later this fall, internally dubbed as the NGX, targeted specifically for the broadcast sports market that will open additional revenue streams for HiVision. We will deliver full Genlock synchronization capability, including high bandwidth 2110 JPEG access technologies. And our Makito clients have been asking for these for a long time, and we will deliver with our signature capabilities of high quality, reliability, low latency, and security. This will enable all of our largest broadcast clients to now use HiVision for their full end-to-end workflow for both wired and wireless transmission, something no other vendor can do. All of these developments and strategic investments are key during 2025 and will affect revenue starting in our second half of fiscal 2026, and really kick in during 2027 and beyond. Another reason why we are so excited about the future of high vision. Our last piece is pretty huge. I would like to end by sharing with you one specific and extremely exciting transformational competitive win we closed at the end of Q2. that establishes high vision as industry leader in cellular, bonded, and wireless 5G private networking. We have won several large and important deals in the 5G wireless space recently and took customers away from TVU, LiveView, and Digero. They're really three competitors in this market. To the names like the PGA, Eurosport, BigFish, just to name a few. But now we flipped a huge tier one customer that has been using LiveView for over 18 years for all their wireless needs. Warner Brothers Discovery has chosen HiVision to replace their entire CNN fleet of live view equipment for their electronic news gathering, ENG, and multi-camera coverage of live events across all their offices and bureaus worldwide. This is a massive win for HiVision in many respects. It was also a very nice $5.5 million order. for over 300 units comprising of our Pro Series 300 and 400 transmitters, Air 300 units, Rack 400 systems, many Makitos, many Mojo Pro mobile player licenses, and many live guest licenses, and of course, many of our StreamHab control system licenses. In addition, the entire ecosystem will be connected with our Hub 360 cloud-based platform. The global rollout has already begun and is being installed during the next several months. All I can say is that CNN has decided to go with HiVision for our flexibility, our quality, our performance, our support, and most of all, trust as a vendor to deliver the best technology for their needs. As you can imagine, this is a huge win for the company, and it's only the beginning as we embark on our success in the wireless market. The next generation Falcon series of transmitters will make our solution even a stronger proposition for other customers. So in summary, couldn't be happier with our performance as we maintain a strong focus and attention on the revenue growth. So I will now pass it to Dan to continue with the detailed financials.

Thank you, Mirko. Good evening, everyone, and thank you for joining us. I'm pleased to walk you through our performance this quarter. which I'm classifying as the end of a transition and the beginning of strategic momentum. Let's start with the top line. Q2 fiscal 2025 revenue came in at $34.3 million, up modestly by $100,000 year-over-year. Year-to-date revenue for the first six months was $62.5 million, down $6.3 million or 9.2 percent from the prior year. Importantly, though, Q2 revenue grew 22% over Q1, showing sequential strength and renewed sales energy. Some of this quarter's revenue growth, about $2.1 million, came from favorable FX tailwinds due to Canadian dollar volatility, but there's more to the story. We have been navigating a shift in U.S. government buying behavior and a move away from the integrator model in the control room space towards being a manufacturer and supplier of proprietary products. This transition is now largely complete, and the results are beginning to show. Our sales have overtaken past sales levels that included those third-party lower margin components. Our pipeline of opportunities is stronger than ever, and we have seen a notable rise in large scale opportunities. We believe we have reached an inflection point and it bodes well for the second half of this year. Our recurring revenue from maintenance support and cloud services continues to show sound growth. Occurring revenue was 7.2 million this quarter, up 11% year over year, and it was $14.2 million year to date, a 10% increase. Recurring revenue now makes up 21.2% of Q2 total revenue, and that's up two points from last year. This marks our second consecutive quarter of double-digit recurring revenue growth, a strong indicator of customer loyalty and a key contributor to future stability. Gross margins have stabilized after a softer Q1. Gross margins improved to 73 percent, up from 71.7 percent a year ago. That's a 130 basis point improvement. On a year-to-date basis, margins are steady at 72.5%, near our long-term expected average. With that said, we may continue to see quarterly variations of gross margins related to the timing of U.S. Navy deliveries, which is more closely aligned with MCS's legacy integrator model. The seasonality of certain product families may impact quarterly margins, although recently announced product introductions have dissipated margin differences between product families, and the increase in sales of software-only options or virtual machine deployments, which have a higher gross margin than our typical software sales when pre-installed on servers and sold as a complete appliance. Now, total Q2 expenses rose to $28.2 million, That's up 5.5 million year over year, but context really matters here. 1.5 million relates to settlement and legal fees that were incurred. 1.8 million stems from currency-related impacts, largely from the weaker Canadian dollar compared to the Euro or U.S. dollar. And we also made strategic investments in R&D and incurred higher sales and marketing expenses related to higher levels of revenue. So let's dive into each one of these three factors that impacted quarterly expenses. A non-recurring expense of 1.5 million was recorded regarding a dispute filed back in 2017. The judge largely ruled in our favor, but the plaintiff has since appealed the decision. A final decision won't be known for 12 to 18 months. A second major factor affecting total expenses was recent trade actions between the U.S. and other countries, which created uncertainties in the market and ultimately cost HiVision $1.8 million in additional expenses. Approximately 80% of our total expenses are denominated in the Euro or U.S. dollar. And we've witnessed the Canadian dollar slump, when tariffs were imminent and then rally when the US administration announced a reprieve. The weak of Canadian dollar impacted its total expenses by as much as $1 million in the quarter. And additionally, the weak of Canadian dollar had an impact of an additional 800,000 related to the value of assets and liabilities on the balance sheet, which was recorded as a foreign exchange loss within total expenses. And specifically, within general and administrative expenses. Lastly, some expense growth had always been planned, and some was circumstantial, but all of it ties to long-term positioning and second-half revenue growth. We had always planned on incremental investments in research and development, and for that matter, operations and support, to support the large number of new product introductions and growing business initiatives. We also incurred some incremental selling expenses like commissions and bonuses that were paid on buoyant sales that were incurred in the second quarter. Our sales teams are compensated on sales rather than on revenue. In terms of some seasonal spending, one of our largest trade shows is the National Association of Broadcasters, commonly referred to as an NAB. It is the first of our two largest trade shows that we exhibit at. Thus, total expenses will tend to be higher in the second quarter, and we should see a similar result in our fourth quarter when we will be exhibiting at the International Broadcaster Convention, commonly referred to as IBC, in Amsterdam. At April 30th, we did end the quarter with 380 employees compared to 365 employees last year to illustrate the incremental investments we've made. The result of the flattest year-over-year revenues, albeit with slightly enhanced margins, and the $5.5 million increase in total expenses is that we did have an operating loss for the quarter of $3.2 million compared to operating income of $1.8 million in the same period last year. The $500,000 in additional gross margin was only partially able to offset the $5.5 million increase in total expenses. And then again, as a reminder, Total expenses were impacted by $1.5 million in non-recurring expenses and $1.8 million in additional expenses related to the weaker Canadian dollar. Turning to adjusted EBITDA, adjusted EBITDA for the quarter was $1.7 million compared to $5.1 million in the same period last year, a decline of $3.4 million. As I mentioned, improving gross margins resulted in half a million in incremental gross profit. However, if we normalize total expenses for share-based payments, depreciation and amortization, the non-recurring impact of legal, and then operating expenses were 23.3 million, or 3.9 million higher than the same period last year. The adjusted EBITDA comparison for the six-month period isn't dramatically different than what we experienced in the second quarter, but was further encumbered by the year-over-year revenue decline in our first quarter. For the six months, adjusted EBITDA is $2.2 million compared to $10.2 million in the prior year. That's a decrease of $8 million. So, in addition to the $3.9 million increase in operating expenses cited earlier, year-to-date revenues fell short of prior year by 6.3 million, resulting in a 4.4 million shortfall in gross profit when compared to that prior year. With respect to the balance sheet, we ended the quarter with cash balances of 11.8 million. That represents a decrease of 4.8 million from the end of last quarter. A primary driver to the decline in cash is the 2.3 million decline in deferred revenues related to maintenance or contracts, which have been invoiced for which revenue has yet to be realized. But also, in January, we announced TSX's approval of our normal course issuer bid renewal, our NCIB. In this second quarter, we purchased over 400,000 shares for cancellation through the NCIB, totaling $1.9 million. and that is $2.8 million on a year-to-date basis. We've had some payments on term loans and lease liabilities, which amounted to another $600,000 during the quarter, and we also had capital expenditures during the quarter amounting to another $400,000. As a point of information to the group, between last year's NCIB and this year's renewal, HiVision has purchased over 1.4 million shares for approximately $6 million. And we still believe that the stock is undervalued at today's prices. We still maintain the $35 million credit facility with the opportunities to expand the size of the line of credit if strategic opportunities arise. And there's only about 7.3 million outstanding on that line of credit. So let's turn our attention towards tariffs. Last earnings call, we suggested that things are fluid. Unfortunately, not sure we are seeing much more clarity today, but as things stand today, we are a Canadian company, and the majority of our production of proprietary technology is done in Canada. Fortunately, our proprietary products are governed by the United States-Mexico-Canada Agreement, USMCA, which replaced NAFTA back in 2020. Thus, there are no tariffs for our proprietary products manufactured in Canada, when sold into the United States. In fact, we may be in an advantageous position. Many of our competitors are overseas and may not have the benefit of the USMCA with respect to tariffs. And Canada isn't currently imposing tariffs on countries that provide critical technology components, whereas the US might take a different position. Now, the same isn't true of our products that are currently manufactured in France, namely our transmitter products. In April, the US administration announced broad tariffs on imports, which includes a 10% base tariff on all imports into the United States. However, the impact of these tariffs haven't been significant. Yes, Mirko did allude to the significant success we are having with the transmitters in the United States, However, it's still a relatively early initiative for us. We also have means to lower the overall impact of tariffs. Tariffs are paid on the value of goods when they cross the border, and our corporate structure and transfer pricing methodologies enable us to mitigate some of the impact. Mirko also mentioned recent product introductions like the Falcon X2. A new product introduction is a great time to re-look at our manufacturing strategy and where best to manufacture such products. Of course, any tariff impact is really predicated on whether we can transfer the tariff burden to our customers, and we've had conversations with customers, and thus far they've been largely receptive. I should also mention that we have a handful of tactics that are being considered for each of those for each of these tariff areas that we can accelerate or delay depending on the day-to-day actions of the U.S. administration. With that said, we believe our current course of action should provide us a cost-effective solution with little risk. So for the time being, we intend to stay the course at least until there is some future clarity. And hopefully individuals with deep expertise on tariff macroeconomics are addressing the various issues, and that thoughtful, level-headed decisions will be made. So to summarize, this quarter was a mix of transition, stabilization, and building momentum. We've crossed key milestones in our business and in model shifts, and our recurring revenue is growing steadily. And the pipeline has never looked more promising. So with that said, I'm going to hand the mic back to Mirko for Q&A. Thanks for everyone for attending.