Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2020-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Evertz First Quarter 2020 Conference Call. As a reminder, today's conference is being recorded. It is Thursday, September 5, 2019.At this time, I'd like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, Mr. Campbell.

[Brian Scott Campbell, Executive Vice]

Thank you, Cody. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our fiscal 2020 first quarter ended July 31, 2019, with Anthony Gridley, Evertz' 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 would like to begin by providing a few highlights and then Anthony will go into greater detail. First off, I'm very pleased to report sales for the first quarter fiscal 2020 of $103.4 million, an increase -- modest increase compared to the first quarter of last year. Our sales base is well diversified with the top 10 customers accounting for approximately 43% of sales during the quarter and with no single customer over 6%. In fact, we had 142 customer orders of over $200,000.Gross margin in the quarter was $59.2 million, or 52 -- 57.2%. Investment in research and development totaled $22.7 million, reinforcing Evertz' commitment to R&D.Net earnings for the first quarter were $13.2 million, and fully diluted earnings per share were $0.17 in the quarter.Evertz' working capital was approximately $280.1 million, with $100.4 million in cash and marketable securities as at July 31, 2019. The purchase order backlog was in excess of $103 million at the end of August and shipments during the month were $50 million, totaling a record high $153 million combined backlog and shipments.We attribute this solid 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' IP-based Software Defined Video Networking solutions, Evertz' IT and virtualized cloud solutions, our immersive 4K Ultra-HD solutions and our state-of-the-art DreamCatcher IP replay and production suite.Today, Evertz' Board of Directors has declared a quarterly dividend of $0.18 per share payable on or about September 20, 2019. Furthermore, Evertz' Board also declared a special dividend of $0.90 per share, also payable on September 20. Special dividend reflects both the strong long-term operating performance of the company and its solid balance sheet, thereby enabling a distribution of cash over and above what is considered necessary to meet known commitments and maintain adequate reserves.I will now hand over to Anthony Gridley, Evertz' Chief Financial Officer to cover our results in greater detail.

[Anthony Ronald Gridley, CFO & Corporate Secretary]

Thank you, Brian. Good afternoon. Sales were $103.4 million in the first quarter of fiscal 2020 compared to $103.1 million in the first quarter of fiscal 2019, an increase of $0.3 million. It's worth noting, we also had approximately $10 million in orders that shipped in August that would have been expected to ship in July, normally. This contributed to the $50 million shipment number in August, which is an all-time reportable high shipment level.US/Canada region had sales for the quarter of $74 million compared to $75.2 million last year. International region had sales for the quarter of $29.4 million compared to $27.9 million last year, an increase of 5%.Gross margin for the first quarter was approximately 57.2% compared to 57% in the prior year. Gross margin was within what the company considers to be an acceptable range.Selling and admin expenses were $16.3 million for the first quarter as compared to $15.9 million in the same period last year. Selling and admin expenses to revenue were 15.8% as compared to 15.4% in the same period last year.R&D expenses were $22.7 million for the first quarter. It represents a $1.4 million or 6% increase from the first quarter of last year. Foreign exchange loss was $1.8 million as compared to foreign exchange gain in the prior year of $1.1 million. The loss was predominantly a result of the decrease in the value of the U.S. dollar as at July 31, 2019, compared to April 30, 2019.Turning to a discussion on liquidity of the company, cash and marketable securities at July 31, 2019, were $100.4 million as compared to $108.6 million, at April 30, 2019. Working capital was $280.1 million at July 31 compared to $282.5 million at the end of 2019. The company generated cash in operations of $7.9 million, which is gross of a $10.6 million change in noncash working capital and current taxes. Effects of the change in noncash working capital and taxes are excluded, the company generated $18.5 million in cash from operations. Company acquired $1.7 million of capital assets. Company used cash from finance activities of $14.3 million, which predominantly consisted of the payment of the regular dividend of $13.8 million offset by the issuance of capital stock pursuant to a stock option program of $0.9 million.Shares outstanding were approximately 76.6 million and options outstanding were 1.4 million as of July 31, 2019. Weighted average shares outstanding were 76.6 million and weighted average fully diluted shares outstanding were 76.7 million for the quarter ended July 31, 2019.This brings to a conclusion the review of our financial results and position for the first quarter. Finally, I'd like to remind you that some of the statements presented today are forward-looking subject to a number of risks and uncertainties and we refer you to the risk factors described in the annual information form and the official reports filed with the Canadian Securities Commission.Brian, back to you.

[Brian Scott Campbell, Executive Vice]

Thank you, Anthony. Cody, we're now ready to open the call to questions.

[Operator]

[Operator Instructions] And we'll take our first question from Robert Young with Canaccord Genuity.

[Robert Young, Director]

First question for me will be around the special dividend. Maybe if you could just talk about the decision to make the special dividend? And what the other choices for the uses of that cash might have been, particularly, M&A? I know there's a fairly well known that you had a minority position in one of your competitors, and so interesting that you would make the special dividend here.

[Brian Scott Campbell, Executive Vice]

Thank you, Robert. And so the dividend is a distribution of excess cash to our shareholders. We have taken profits and exited the Evertz' EVS position. Evertz does remain a disciplined value investor when we're considering M&A transactions. And with the pristine balance sheet and strong operating performance of the company, it does provide us significant financial capacity and flexibility.

[Robert Young, Director]

Okay. Great. Maybe some color on the slipped order. Is there any description on what type of order it is? Particularly interested in the gross margin profile of this order. You've had strong gross margins despite the lower level of top line in that slipped order, and so maybe you could talk about that a bit.

[Anthony Ronald Gridley, CFO & Corporate Secretary]

So that's original misconception, it's not an order, it's numerous orders. And the gross margin profile would have been -- yes, would have been a strong gross margin. So if we had have been able to ship the $10 million of multitude of orders, it would have helped our gross margin, it would have improved where we were at.

[Robert Young, Director]

And since the close of the quarter, those slipped orders are now in the -- the closed doors in August?

[Anthony Ronald Gridley, CFO & Corporate Secretary]

They are in August. Yes, so they're in the August, obviously, not financial number, but they're in the August press release, first month August shipment number. So if you -- the way I look at it, if you sort of think of those as being more in July, then that normalizes July, probably adds $0.05 or $0.06 of EPS in July and then it takes the August number down to a 40 level, which I think is pretty similar to where we were at this time last year, but we have a bigger backlog this year, I think, or a similar backlog as well, so...

[Robert Young, Director]

Yes. Well, the backlog, I think is record -- tied for record high, it's very high.

[Anthony Ronald Gridley, CFO & Corporate Secretary]

Yes.

[Robert Young, Director]

So maybe you just talk about the composition of the backlog. What's driving the strength there? Is it build into 2020 events? Or is it IP? What -- where is the strength in the backlog coming from?

[Brian Scott Campbell, Executive Vice]

Robert, our business continues to be driven primarily by our Software Defined Video Networking solutions, our cloud-based solutions whether they are on-premise or in the public cloud, and it is our DreamCatcher IP replay and production suite. And those new technologies are driving the predominance of our backlog and also our revenue.

[Robert Young, Director]

Okay. And last question for me. As you head into the IBC conference, maybe if you can talk about what you are seeing out there on IP transition and how Evertz is faring competitively there? And then also on the cloud transition, separately, that would be great, and I'll pass the line.

[Brian Scott Campbell, Executive Vice]

Thank you, Rob. Yes, we're very excited to be heading into IBC with a very strong portfolio of leading edge products. We continue to see very good uptake in customer receptivity to our Software Defined Video Networking solutions that are deployed at scale in hundreds of installations. And we've also had been very successful with the large-scale deployments on on-premise and cloud and in the public cloud. And some -- in the last IBC, we press released over 300 channels for migrating to the public cloud. And we continue to have very strong uptake of those products.

[Robert Young, Director]

And did you -- would you feel comfortable giving an updated number of IP installations? I think you've given that...

[Brian Scott Campbell, Executive Vice]

Rob, could you repeat that. We couldn't hear it on our end.

[Robert Young, Director]

Sorry, can -- would you feel comfortable giving an update on the number of IP installations that you've deployed, I think, you have given that in the past?

[Brian Scott Campbell, Executive Vice]

It generally comes -- has come out in a press release, and we do continue to add to that number, but I don't have the total at this time.

[Operator]

[Operator Instructions] We'll take our next question from Bill Cocks with BMO.

[William James Cocks, Associate]

Just a quick one here. I noticed the international revenue came up, upward trends in recent quarters. Just any color around changes on the international front or something that you would point out?

[Brian Scott Campbell, Executive Vice]

So Bill, thanks for the question. And both internationally and in the Canada/U.S. region, we do have volatility quarter-to-quarter in terms of revenue. Internationally, we are up year-over-year in the quarter, but down sequentially. So in general, so on a trailing 12-month basis, we would be up on an upward tick. So we continue to have good -- a good customer base internationally, and of course, we would like to see stronger sustained growth internationally.

[William James Cocks, Associate]

Got you. And what about at the product portfolio level? Are you seeing any stronger demand for certain types of products on the international scale maybe relative to North America?

[Brian Scott Campbell, Executive Vice]

As you can tell the North American market, we have more large-scale deployments of our Software Defined Video Networking technology and we do have large-scale deployments in Europe and internationally as well too. But this year number is greater in U.S. So we have had good success, but it isn't at the same level as it is in the U.S. And with the cloud-based deployments and, of course, Discovery's U.S. -- their U.S. operation and migration to Amazon Web Services with Evertz is one of the very high profile deployments. Internationally, we do have those 300 channels and also that have migrated to the public cloud on Amazon Web Services with Evertz mediator Overture software stack and also our SDVN solutions supporting that.

[Operator]

And that does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Campbell for any additional or closing remarks.

[Brian Scott Campbell, Executive Vice]

Thank you, Cody. I'd like to thank the participants for their questions and add that we're very pleased with the company's performance during the first quarter of fiscal 2020, which saw sales in the international region increase 5% over the prior year, supported by sequential quarterly sales growth in the U.S. delivering total sales of $103.1 million in the quarter and solid gross margins of 57.2%, which together with Evertz' disciplined expense management yielded earnings of $0.17 per share inclusive of $1.8 million foreign exchange loss in the quarter. We're entering the second quarter of fiscal 2020 with significant momentum fueled by a record high combined purchase order backlog plus August shipments totaling in excess of $153 million, up 26% year-over-year. And by the growing adoption of Evertz' successful large-scale deployments of Evertz' IP-based Software Defined Video Networking and virtualized cloud solutions by some of the largest broadcast, new media service provider and enterprise companies in the industry, and by the continuing success of DreamCatcher, our state-of-the-art IP-based replay and production suite. With Evertz' significant investments in Software Defined IP, IT, and virtualized cloud technologies, Evertz' leading deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position. Thank you. We look forward to having many of you join us on the 9th of October at our Annual General Meeting. Good night.

[Operator]

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.