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Evertz Technologies Ltd
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Good day, ladies and gentlemen, and welcome to the Evertz First Quarter 2019 Conference Call. As a reminder, today's call is being recorded, today, Tuesday, September 11, 2018.At this time, it's my pleasure to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, sir.
Thank you, Lori. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our fiscal 2019 first quarter ended July 31, 2018, with Anthony Gridley, Evertz's Chief Financial Officer; and myself, Brian Campbell.Please note that our financial press release and MD&A will be available on SEDAR.Anthony and I will comment on the financial results and then open the call to your questions.I'd like to begin by providing a few highlights, and then we will go into greater detail. First off, I'm pleased to report sales for the first quarter fiscal 2019 of $103.1 million, up 11% sequentially from the fourth quarter, driven primarily by strength in the US/Canada region, which saw an increase of 15% compared to the prior year. Our sales base is well diversified with the top 10 customers accounting for approximately 51% of sales during the quarter and with no single customer over 17%. In fact, we had 114 customer orders of over $200,000. Gross margins in the quarter were $58.8 million or 50%, 7% of sales. Investment in research and development totaled $21.3 million, reinforcing Evertz's commitment to R&D. Net earnings for the first quarter were $17.4 million, up 32% from the prior year. And fully diluted earnings per share were $0.23 in the quarter.Evertz's working capital was approximately $268.4 million with $91.7 million in cash as at July 31, 2018. The purchase order backlog was in excess of $81 million at the end of August, and shipments during the month were $41 million. We attribute this strong quarterly performance to the ongoing technical transition in the industry, channel and video services proliferation, increasing global demand for high-quality video anywhere, anytime, and specifically to the growing adoption of Evertz's IP-based Software Defined Video Networking solutions, Evertz's IT virtualized cloud solutions and our state-of-the-art DreamCatcher IP replay and production suite.Today, Evertz Board of Directors has declared a dividend of $0.18 per share.I will now hand over -- hand the call over to Anthony Gridley, Evertz's Chief Financial Officer, to cover our results in greater detail.
Thank you, Brian. Good afternoon, everyone. Sales were $103.1 million the first quarter of fiscal 2019 compared to $109 million in the first quarter of fiscal 2018, a decrease of 5%. The US/Canada region had sales for the quarter of $75.2 million, compared to $65.4 million last year, an increase of 15%. The International region had sales for the quarter of $27.9 million compared to $43.6 million last year. Gross margin for the first quarter was approximately 57% compared to 56.1% in the prior year. Gross margin was within what the company considers to be an acceptable range. Selling and admin expenses were $15.9 million for the first quarter as compared to $15.8 million in the same period last year. Selling and admin expenses as a percentage of revenue were 15.4% compared to 14.5% in the same period last year. R&D expenses are $21.3 million for the first quarter, which represents a $2 million or 11% increase from the first quarter last year. Foreign exchange gain was $1.1 million as compared to foreign exchange loss in the prior year of $8.2 million. The gain was predominantly a result of the increase in the value of the U.S. dollar at July 31, 2018, when compared to April 30.Turning to a discussion of liquidity of the company. Cash at July 31, 2018, was $91.7 million as compared to $94.2 million at April 30, 2018. Working capital was $268.4 million as of July 31, 2018, compared to $264.5 million at the end of April 2018. Coming to generated cash in our operations of $24.2 million, which is growth of a $3.9 million change in noncash working capital and current taxes in the first quarter of fiscal 2019. If the effects of the change in noncash working capital and taxes are excluded, the company generated $20.3 million from operations.Company acquired $2.3 million of capital assets and $10.8 million of marketable securities. The company's cash from financing activities of $13.5 million, which is predominantly the payment of the dividend of $13.8 million, offset by the issuance of capital stock pursuant to the stock option program of $0.3 million. Shares outstanding were approximately 76.5 million and options outstanding approximately 2.2 million at July 31, 2018. Weighted average shares outstanding were 76.5 million. And weighted average fully diluted outstanding were also 76.5 million for the quarter ended July 31, 2018. This brings to conclusion the review of our financial results and position for the first quarter. And I'd now like to remind you that some of the statements presented today are forward looking, subject to number of risks and uncertainties. We refer you to the risk factors described in the annual information form and other official reports filed with the Canadian Securities Commission.Brian, back to you.
Thank you Anthony. Lori, we're now ready to open the call to questions.
[Operator Instructions] And we'll go first to Thanos Moschopoulos of BMO Capital Markets.
Brian, the August shipments number was obviously very strong. Can you update us on the spending environment, was that shipments number reflective of a stronger environment or perhaps maybe it's reflective of a large project that's underway?
I would say it's representative of the demand for Evertz's IP-based and cloud-based products. Our next generation of products are helping many of the industry leaders' transition to IP-based solutions, virtualized cloud solutions and file-based solutions.
But generally speaking have you seen any discernable change in the expanding environment now versus 3 or 6 months ago, or you would say it's been pretty consistent?
It's reasonably consistent. As you know, we have volatility quarter-to-quarter. But generally, we've seen good solid uptake in the Canada/US region, specifically for the last few quarters. And the European market has been more volatile for us, up and down.
That was going to be my next question. International revenues obviously weak this quarter, so would you just attribute that to volatility or is there something else going on in that region?
Yes, I would say it's primarily volatility. What we have done recently, and I'll draw your attention to a couple of our press releases, so at the tail end of August, we had press released that Russia's Channel One had deployed first-of-its-kind UHD and IP-based solutions to cover the FIFA World Cup. This is a very big project, involving 2 hyper-scale Evertz's IP-based switches and a whole complement of our products right through the mediator, media asset management workflow solutions and transcoding. So that's a very big project that was well received, again, too in the international market. And then just today, again, another press release talking about the European cloud playout transition at a massive scale with over 300 European channels. And again to that in both the cloud-based playouts. So Evertz' software solutions on a public provider, Amazon Web Services, and also our software defined networking solutions deployed in conjunction with the 2 on-ramp and off-ramp signals.
Regarding that press release, Discovery has previously talked publicly about the work they did with you in the cloud. Could you clarify whether that's representative -- is that the customer in question or is that another customer that you're now in deployment with?
The press release does not detail the customer. And that's by agreement with the customer, so I don't want to go any further than what's in the press release. But, yes, we've had a very successful deployment. And in the U.S. with Discovery, where they migrated their entire U.S. channel playout to Amazon Web Services. The press release here also talks about supporting cloud-based live event management. Again to -- this is a massive deployment and you have not seen anyone other than Evertz come out with press releases such as this.
And we'll go next to Steve Arthur at RBC Capital Markets.
Just a couple of things to follow up on the last comment. This cloud migration project in Europe sounds obviously very interesting. And any color you can add just in terms of the sales cycle and then the projected implementation there? How long are those things taking? Was there anything else comparatively that they looked at in the sales cycle? And then just the nature regarding the products and services that you delivered, I mean what kind of content?
So projects of this scope and magnitude develop over many quarters, if not years. And the deployment cycle is fairly lengthy as well too.
The revenue model on [indiscernible] is -- oh, sorry, go ahead.
Go ahead, Steve.
Yes, no, I just -- the revenue model of it is just mostly upfront revenues, so as you deliver the services and products it gets booked? Or is there a meaningful ongoing deployment as well?
It's a combination of all the above, partially because we do have a software to find networking IP gateways transcoding infrastructure solutions, provided along with the cloud-based virtualized solutions, which include the workflow media asset management, can include transcoding as well too. So it's a mixture of both upfront and ongoing.
It's probably tough to measure pipeline, but just anecdotally, is the pipeline building? And is it getting -- is interest building because of these kind of releases and just general industry awareness that these projects are going on?
The pipeline and our -- so what we do disclose is the backlog rather than the pipeline. So the backlog most definitely has significant components of our new products of the IP-based Software Defined Networking solutions, the cloud playout, whether it's on-premise, hybrid or public cloud, and our IP-based DreamCatcher replay and live production. So those new solutions have been driving our sales very significantly for quite a while, and they do represent a significant component of our backlog.
Okay. Just one final one. I think you mentioned earlier the top customer at 17% or not over 17%. That's still a big number. Any color around that program or the nature of that project or if it's been fully recognized now as it's flowing into Q2 as well?
Yes, I couldn't add much additional color to it other than give you examples. So it is 17% in the quarter. And we've had that happened in the past, several times as well. Often times there is preceding quarterly revenue as well too and follow on. But when it averages out over a 12-month period or a year, we don't typically see customers quite that high. In addition, the 51% for the top 10 is still -- that's a little higher than we would normally average. We typically range from the 30% to 50% range of top 10.
And we'll go next to Raymond James and Anshu Deora.
Are there any changes to the duration of deliveries or managed services in your backlog?
Yes, definitely. Since our initial public offering, the backlog was primarily delivered in a 4-to-6 week period. As we've -- the business has evolved and we've incorporated workflow, media asset management, other bigger projects, like the software defined networking, the deployment has lengthened out, so we do have some managed services as well too, that are not just big projects deployed over multiple quarters, but those can be contracts that are delivered over 1, 2, 3 years and sometimes longer. So yes, that has changed somewhat the nature of our backlog duration.
Makes sense. I guess what I'm trying to get a sense of is, like I understand the backlog's up quite significantly, and that's definitely what we like to see. But like does revenue increase in tandem with that? Or is increasing the backlog...
It's information and an indicator. How it's correlated, I would leave up to you. However, what I would say is that the shipments in the first month are actual shipments. So that's a direct correlation to the next quarter's revenue.
Yes, I would also -- and I would also add that going back 6 or 7 -- 5, 6, 7 years ago, the correlation between the backlog and the conversion of the backlog was much, much more linear and easier to predict, but we are definitely more lumpy and we do have a mixture of -- we still have products that are delivered in that 4 to 6 week. And we have, like Brian said, products scalable to multiple years, multiple quarters. And the waiting will change quarter-to-quarter, of how that backlog gets converted. It's a little harder to predict.
Yes, I guess -- and that definitely helps. I was just trying to get a sense of that correlation whether the increase in backlog versus the increase in duration sort of offsets, so revenue recognized actually increases year-over-year, or whether...
We're still -- it's still going to be a function of deliverability and project milestones. And like I was saying, there's -- in today's environment, there's a lot more VAT and a lot more variability of revenue than we had 5 years ago when we were -- majority of our revenue was just recognize and shipping. So now it's much more project-driven than it was 5 years ago. But I think in terms of has it changed drastically in the last 6 or 9 months? No, I mean it's got more similarities, but it has changed over the last 4, 5 years.
And moving next to Robert Young at Canaccord Genuity.
A few questions for me. I guess -- maybe I'll start off with the -- a couple of your competitors suggested that they see a pickup in the second half of the calendar 2018. Are you seeing the same trend? I guess you can say that the August shipment number might be a sign of that, but are you seeing a stronger environment in the second half?
I would say fairly consistent to what Evertz has experienced in the past. So we've seen good uptake and traction for an adoption of our Software Defined Video Networking, our cloud-virtualized solutions and our IP-based replay. I can't speak for the industry in terms of how our competitors are seeing it, but we have got a very good, solid backlog again too, and when you look at the very strong first month shipments plus the backlog, that would be right up there, what, I guess top 3 total that we've had historically. So well above our 2-year average. So that is a good, strong indicator.
Okay. And I think Steve asked this question. I just want to make sure I understood the answer correctly. But was there any push or pull of revenue into -- pulled forward or delayed into August that made August such a big revenue number?
I can answer. Well, I guess there is every quarter and every month. So a lot of the projects, especially there are, as you probably know, new revenue recognition standards. So there is going to be -- this continuously pulling in and out of quarters. I think it's more -- going back to my answer on how to convert backlog to revenue, it's a much tougher proposition. And the revenue flows are less linear than they were 5 years ago.
Okay. And if I look back historically, it seems as though Q3 is the quarter where you have outsized large shipment number. And so this seems a bit earlier. And so was there -- that's where I'm getting at, is this happening earlier in year or are you seeing a stronger trend? That's, I guess, the basic thing I'm trying to get at.?
I wouldn't extrapolate it to trends. It just happens from time to time where we have lumpier quarters and revenue occurs when we have either delivery of products and that can be dependent upon customers' readiness for deployments, either their facilities or just timing of other things that they want to cycle in. So we're -- we really do recommend that you look at us on a trailing 12-month basis rather than simply quarter-to-quarter.
And internally we -- like we're even seeing monthly revenues fluctuating quite a bit more than they ever did. So even month-to-month we can have really, really strong months and then more average months, and it really does fluctuate on deliveries, so...
Right, okay. And then the -- so -- the press release that you are talking about with the shipment migration into the cloud with the European customer. Is there a European customer, like should we expect to see it in the Europe numbers or would that be a U.S. customer expanding in Europe?
It's a European channel lineup.
Okay. And was that recorded in revenue already or should we expect that in the future? Or would this be part of the $41 million of shipments in the August figure?
So part of it would have been deployed, because it's already on air. And so as of the September 11 date, the transition is completed and it's on air. So even when we go to air that doesn't mean that the -- revenue recognitions stops abruptly, but is a good indicator that revenue has been accounted for in prior quarters, because something of this scale is a significant undertaking.
Okay. And so this large single customer, 17%, would that -- would it be the same customer? Or is that -- what drove the...
I'm not going to draw that linkage. So they are independent pieces of information.
Yes. Yes, I guess I'm trying to get at, so you've got a large customer in the quarter you just reported, you've got a large shipment number in the August month. And I'm trying to calibrate what drove that? Is -- should we assume that the announcement here of this 300 lineup of channels, is it -- it's already been -- well, the bulk of it has already been recognized, it's not in either one of those figures?
So, Robert, what we've said is it's deployed, so it's on air. And it would have been deployed over multiple quarters. But that's not to say that there isn't ongoing revenue associated with it.
Well, yes, absolutely. I understand that. Okay. And maybe I'll shift gears, talk about gross margins. You have to go back to 2016 to see a point where you're above 57%. And so is that a function of the product mix? Or is it North American mix that drove that or is there an FX component? And can you give a sense of why that might have been higher than in past? Even though it's inside of your guided range.
Yes, I can try. There is -- honestly, we were -- we're in the range we want to be. So there hasn't been necessarily a ton of analysis done on why we're right within our range. And -- but, yes, I mean the international was definitely lower. The North American was higher, and that generally has a somewhat positive impact. But again, that can change. There are quarters where we have international business, bucks those odds and does even better. So it's really -- it's geographic mix, product mix, it's really a bunch of functions. And really we're only -- we're talking about a change of, like, 0.5%. So it's going to change and fluctuate.
No -- okay. Okay. Last question for me...
As Anthony was saying, the geographic mix, when you look at it you'll see that the US/Canada region accounted for 66%. So that's higher than normal.
Yes. And that would, in the past, I would've attributed that to the fact that you go directly to customers in North America more often than you do internationally. And so would that be a factor? Or the thing that causes me some pause there is that you've also got this piece of growing, recurring and software revenue which might be higher margin, so I'm trying to figure those 2 pieces out.
You're correct. The growing software and recurring streams are higher margin. And that is a component of it, yes.
Okay. Okay, last question. I'll let you off the hook. In the press release you talked about, over the top for your cloud-based live event broadcast. And so maybe if you can sort of back up for a second and talk about whether that's a positive or a negative overall trend from Evertz, because live event broadcast is a big part of my understanding of your business. And I'll pass the line.
Okay. In -- so it's positive for us, with the Discovery deployment in the U.S. as well too. You'll note that Discovery had noted that it also provided live event playout, which they were quite happy with. So Evertz has been very successful deploying the playout but including cloud-based live event. So that is something that we haven't seen other significant press releases of any scale.
Right. Okay. So what you're trying to say is that you're a leader in that space or see yourself as a leader in that space?
Definitely.
And with no additional questions at this time, Mr. Campbell, I'll turn things back over to you, sir.
Thank you, Lori. I'd like to thank the participants for their questions, and to add that we are very pleased with the company's performance during the first quarter of fiscal 2019, which saw strong sales growth in the US/Canada region resulting in an 11% sequential sales increase, totaling $103.1 million in the quarter. Solid gross margins of 57%, which together with Evertz's disciplined expense management yielded a 32% increase in earnings to $0.23 per share. We're entering the second quarter of fiscal 2019 with significant momentum fueled by combined August shipments plus purchase backlog, totaling in excess of $121 million, up 10% year-over-year. By the growing adoption and successful large-scale deployments of Evertz's IP-based Software Defined Video Networking and virtualized cloud solutions by some of the largest broadcast, new media, service providers, enterprise companies in the industry and by the continuing success of DreamCatcher, our state-of-the-art, IP-based replay and production suite. With our significant investments in software-defined IP, IT, virtualized-cloud technologies, industry-leading deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position.Thank you, and we look forward to having many of you join us on the 10th of October at our Annual General Meeting. Good night.
And once again, ladies and gentlemen, that does conclude today's conference. And again I'd like to thank everyone for joining us today.