Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2021-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Evertz Q1 2021 Conference Call. As a reminder, today's conference is being recorded. It is Wednesday, September 9, 2020. At this time, I would 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, Jonathan. Good afternoon, everyone, and welcome to the Evertz Technologies Limited conference call for our fiscal 2021 first quarter ended July 31, 2020, with Doug Moore, Evertz' Chief Financial Officer; and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on SEDAR. Doug and I will comment on the financial results and then open the call to your questions. Before delving into our recent business results and outlook, I'd like to briefly address the extraordinary COVID pandemic. The pandemic has created headwinds and significant challenges, delaying customer deliveries, installations and impacting customer operations around the globe. That said, our customers are fundamentally healthy, and Evertz has a unique and powerful technology position. Evertz is a technical innovator and fundamentally sound business committed to protecting our people and supporting our customers. We're proud of the role we play as an essential service provider and critical supplier, enabling vital communications, telecommunications, broadcast and new media services worldwide. We are appreciative of the continuing strong partnerships with our customers and for the extraordinary efforts made by our employees in these challenging times. Turning now to Evertz results. I'd like to begin by providing a few notes, and then Doug will go into greater detail. First off, sales for the first quarter fiscal 2021 were $56.3 million, down as compared to $103.4 million for the first quarter last year. Our sales base remains well diversified with the top 10 customers accounting for approximately 44% of sales during the quarter and with no single customer over 9%. In fact, we had 91 customer orders of over $200,000. Gross margin in the quarter was $32.2 million or 57.2%. Investments in research and development totaled $16.6 million, net of $6.7 million in wage subsidies, further reinforcing Evertz' commitment to R&D despite these challenging times. Net earnings for the first quarter were $0.6 million, and fully diluted earnings per share were $0.01 in the quarter. Evertz' working capital was approximately $218.8 million with $102 million in cash as at July 31, 2020. The purchase order backlog at the end of August was in excess of $118 million, a record high. And shipments during the month were $36 million. Today, Evertz' Board of Directors has declared a quarterly dividend of $0.09 per share payable on September 18, 2020. I will now hand over to Doug Moore, Evertz' Chief Financial Officer, to cover our results in greater detail.

[Douglas Moore, CFO & Secretary]

Thank you, Brian. Good afternoon, everyone. Sales were $56.3 million in the first quarter of fiscal 2021 compared to $103.4 million in the first quarter of fiscal 2020, a decrease of $47.1 million. The U.S. Canadian region had sales for the quarter of $35.9 million compared to $74 million last year, a decrease of 51%. International region had sales for the quarter of $20.4 million compared to $29.4 million last year, a decrease of 31%. The decrease of revenues was due to widespread customer shutdowns, travel restrictions and projects on hold as a result of the COVID-19 pandemic. Gross margin for the first quarter was approximately 57.2%, consistent with 57.2% in the prior year. While the gross margin was adversely impacted by lower manufacturing volumes, offsetting the negative impact was $3.6 million of wage-related government assistance, which is recorded as a reduction of salary costs within cost of sales. Selling and administrative expenses were $11.9 million for the first quarter as compared to $16.3 million in the same period last year. Selling and administrative expenses as a percentage of revenue was 21.2% compared to 15.8% in the same period last year. The decrease in expenses was driven by a $1.9 million reduction in travel and promotion costs associated with reduced selling activities and travel restrictions associated with COVID-19 pandemic. Selling and administrative expenses also included $1.3 million in wage subsidies that was recorded as a reduction in the costs -- in costs in the quarter. Research and development expenses were $16.6 million for the first quarter, which represents a $6.1 million or 27% decrease from the first quarter last year. The decrease is predominantly a result of $6.7 million of wage subsidies recorded as a reduction in costs in the quarter. Foreign exchange loss was $3.1 million as compared to a foreign exchange loss in the prior year of $1.8 million. The loss was predominantly a result of the decrease in the value of the U.S. dollar as at July 31, 2020, when compared to April 30, 2020. Turning to a discussion of the liquidity of the company. Cash as at July 31, 2020, was $102 million as compared to $75 million as at April 30, 2020. Working capital was $218.8 million as at July 31, 2020, compared to $223 million as at July -- or April 30, 2020. The company generated cash in operations of $36.3 million, which is gross of a $32.2 million change in noncash working capital and current taxes in the first quarter. If the effects of the change in noncash working capital and taxes were excluded from the calculation, the company generated $4.1 million in cash from operations. The company acquired $1.8 million of capital assets. The company used cash from financing activities of $8.3 million, which predominantly consisted of the payment of dividends of $6.9 million. Shares outstanding were approximately 76.4 million, and options outstanding were approximately 5.6 million as at July 31, 2020. Weighted average shares outstanding and weighted average fully diluted shares outstanding were both 76.4 million for the quarter ended July 31, 2020. This brings to a conclusion the review of our financial results and position for the first quarter. Finally, I would 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 our annual information form and the official reports filed with the Canadian Securities Commission. Brian, back to you.

[Brian Scott Campbell, Executive Vice]

Thank you, Doug. Jonathan, we're now ready to open the call to questions.

[Operator]

[Operator Instructions] We'll take our first question from Thanos Moschopoulos of BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

Brian, can you provide some more color in terms of the current environment and what you're seeing? I mean obviously, the quarter was quite weak, although your August shipments showed a nice rebound, I guess, almost at pre-COVID levels. How did the environment progress throughout the course of the quarter? What are you seeing currently? And to what extent are you still being hampered by maybe challenges in deploying orders that you might have in hand but that you can't actually fulfill because customer sites are shut down?

[Brian Scott Campbell, Executive Vice]

So Thanos, yes, we're definitely still encountering challenges getting access on site to customer premises and deploying new solutions. So we are -- as an essential service provider, we're crossing borders and delivering to customers, but that is definitely hampered by the various jurisdictions, whatever state they are in and their rules regarding shelter in place, quarantines and such. We do continue to ramp up. As you can see, shipments were quite strong in August compared to prior months. So that's very encouraging.So yes, the Q1 results were definitely impacted by our ability to get on site and deliver. You can see that also has resulted in a record-high order backlog as well, too. So solid shipments in September is encouraging, and the record-high backlog does speak for itself in terms of orders but also is impacted by our delay and postponement in delivery, whether that's our ability to get access on site or the customers delaying those projects themselves.

[Thanos Moschopoulos, VP & Analyst]

So if we look at the August shipments number, might you be able to repeat that performance in September, October, November? Was there anything unique about August that you'd highlight that might make that more challenging to repeat that performance?

[Brian Scott Campbell, Executive Vice]

So we're continuing to get greater access to customer premises as the COVID restrictions relax in regions. But again, too, we're very dependent on what those restrictions are in the various geographies. Our sales team is continuing to do a great job of fulfilling customers' needs in terms of selling solutions to them. And some of those include our view anywhere in conjunction with our MAGNUM solution, which enables our customers to be able to have operational control from anywhere. So whether that's workers at home or it can be in other rooms in their own -- in their facility. But we're really trying to enable our customers build these to operate in a very flexible manner in today's environment and going forward.

[Thanos Moschopoulos, VP & Analyst]

Okay. Has there been any supply chain issues? Or is that pretty much under control as far as things like component availability?

[Brian Scott Campbell, Executive Vice]

Our Purchasing Department has done an excellent job in stocking -- keeping stock and dealing with any kind of supply chain vulnerabilities. There's nothing material to comment in that regard.

[Thanos Moschopoulos, VP & Analyst]

Okay. And then from an OpEx perspective, should we expect a similar amount of government stimulus to reoccur in the upcoming quarter? Or how should we think about that dynamic?

[Brian Scott Campbell, Executive Vice]

No. You should not forecast straight across like that. So the majority of the government system is indeed the CEWS, the Canadian wage subsidy plan. That is -- the government is scaling that back through the coming months through now. I think -- we -- I can't -- it's not a linear calculation, but I would expect it to be substantially decreased. I can't give an exact percentage, but half as much should be reasonable as opposed to the current amount.

[Thanos Moschopoulos, VP & Analyst]

Okay. And finally, would you say that headcount -- was headcount relatively stable in the quarter versus the prior quarter? Or has there been any significant change there?

[Brian Scott Campbell, Executive Vice]

No. I think the Canadian wage subsidy plan really did what it was supposed to do, and the headcount remains relatively consistent.

[Operator]

We'll take our next question from Robert Young of Canaccord Genuity.

[Robert Young, Director]

Have you seen any order cancellations? I think you've talked about order maybe delays. Or have you seen anything canceled? Have you been unbooking any backlog?

[Brian Scott Campbell, Executive Vice]

So Robert, order cancellation is a fact of life. So in every quarter, we will have a few -- not many order cancellations. But no, there's nothing significant as you can tell from -- candidly, it's a record-high backlog and that with our shipments at 154 million total, it's as high as it's been. So we're seeing good, solid customer demand and no exceptional cancellation.

[Robert Young, Director]

Okay. And then if you were to look at the challenges in the quarter, logistics and site access versus demand dynamics, I mean, which one would have been the bigger challenge?

[Brian Scott Campbell, Executive Vice]

It's -- site access would be the biggest challenge that we've had. And it's ourselves, our customers, their ability to go on site with us when we're deploying and commissioning systems. And candidly, on the logistics, too, depending on the activity, we've got folks quarantining upon return. Some areas, people have to test in advance of going on site. Or in the extreme case, they quarantine on the way in and out as they return. So we definitely have logistic challenges that we're working through.

[Robert Young, Director]

So from where you stand, it sounds as though the orders -- there's not any -- out of the normal cancellation than what you're seeing is demand -- or you're just seeing orders pushed out, but you don't have a good sense of visibility into when some of the pushouts might start to move again. It's all dependent on regional rules. Is that a good way to summarize it?

[Brian Scott Campbell, Executive Vice]

Yes. Yes. It depends on the jurisdiction of where we are delivering. That can be country, state or cities as well, too. They have different rules. We have significant and major deployments underway, and they're continuing, and we're staffing them up to the best of our abilities and ensuring the safety of our staff and customers.

[Robert Young, Director]

Okay. And then the metrics that you shared at the beginning of the call around the composition of the sales, the percentage related to top 10, the largest customer, and then the customer orders over 200,000, those all seem to be relatively strong metrics. And so I'm trying to understand how to put that into context with the weak top line. The 91 customer orders over 200,000 is particularly strong. And so is there a group of larger customers that's doing relatively better and then there's a long tail of smaller customers that you're having more of an issue with? Is there anything that you could call out related to those metrics that would be a good insight?

[Brian Scott Campbell, Executive Vice]

So what you would look at is with the border restrictions and access to premises during the front end of the first quarter, that definitely impacted the revenue numbers. You saw last quarter, the first month shipment was very low, and that increased but not dramatically during the next 2 months. We are sitting here with a record backlog. So some of that is reflected in our -- the inability to be able to get on-premise or to deploy, whether it's the customer's ability to commission or our ability to execute in that -- those jurisdictions. But those 2 things go hand in glove. So we are currently sitting today with a record backlog and a very solid August shipment. Now the environment from August to September has been pretty consistent. So we're in an improved situation, but is -- that's dependent upon the restrictions. The more they relax, the better our ability is to execute on all fronts.

[Robert Young, Director]

Right. And so if the environment gets a little more easier -- if logistics are easier and freedom to operate is better than you'd expect that maybe there's a little bit of pent-up demand that you would have not been able to take advantage of this quarter that might catch up in the next several months, but there's no way to tell that that's -- you don't have a lot of visibility though?

[Brian Scott Campbell, Executive Vice]

That's correct. Yes. We're -- your utmost to deliver in the jurisdictions where we have the capability to do so. And that does involve cross-border travel in some instances. We're definitely doing our utmost again to deliver and commission solutions remotely. So extensive activity back at headquarters to precommission solutions so that they're more easily deployed on-site by the system integrators or the customers. But oftentimes, we have to send our own staff in as well, too, to do on-site commissioning for larger systems.

[Robert Young, Director]

Okay. And then last question for me. I mean last year, you had 20% operating margins despite the more challenged finish. So I mean looking forward into fiscal '21 here, are there any margin targets that you have for the year? I mean would you be -- in the event that there's a wage subsidy slowdown, would you look at headcount? Like what -- is there a target margin? And how would you maintain that if you have one? Then I'll pass the line.

[Brian Scott Campbell, Executive Vice]

So in terms of target margin, that's more along the lines of our gross margin, and we're well within our 56% to 60% target gross margin range. You can see with the foreign exchange loss rather than gain and the subsidies that we were a little over $4 million operating profit. And that's at a reduced -- significantly reduced revenue rate. So that's $56 million revenue for the quarter. And as you're aware, our first month shipment in August is $36 million. So we're -- we've got a good start to Q2.

[Operator]

We'll take our next question from Boyang Li with RBC Capital Markets.

[Boyang Li, Associate]

So in terms of your conversations with clients, has demand across different products changed from pre-COVID, particularly longer-term deployment projects? So has there been a shift in terms of what clients are asking for in terms of kind of longer-term strategic deployments?

[Brian Scott Campbell, Executive Vice]

The long-term strategic deployments have not changed to any large extent. We're doing very well with our Software Defined Networking IP-based solutions and virtualization, our DreamCatcher IP-based instant replay and the BRAVO live production suite. So those are all big, long-term drivers to the market. In the short term, what we definitely saw were folks looking to access our view anywhere capability to enable their staff to work very effectively from home. So that was more of a short-term shift.

[Boyang Li, Associate]

It sounds like the long-term competitive dynamics or the competitive environment like it hasn't changed too much, right?

[Brian Scott Campbell, Executive Vice]

Our long-term competitive position is very strong technologically.

[Boyang Li, Associate]

Okay. Great. And then I guess the last question from me is in terms of -- how do we think in terms of M&A? I recall last call you guys mentioned you're seeing some inbound calls. Has that increased, decreased or changed at all?

[Brian Scott Campbell, Executive Vice]

There's still a significant flow of inbound calls, and we are looking at opportunities. We have a very strong balance sheet cash position that gives us the flexibility to entertain opportunities.

[Operator]

Thank you. At this time, there are no further questions in the queue. I would like to turn the floor back over to Mr. Brian Campbell for closing remarks.

[Brian Scott Campbell, Executive Vice]

Thank you, Jonathan. I'd like to thank the participants for their questions and briefly recap the company's performance during the first quarter of fiscal 2021, which saw total sales of $56 million and gross margins of 57.2% in the quarter, which, together with Evertz' disciplined expense management, yielded earnings of $0.01 per share, inclusive of a $3 million foreign exchange loss in the quarter. At Evertz, we're an essential service provider, and we've met or exceeded all government health and safety protocols to ensure continued operations, including manufacturing, research and development activities and the provision of technical services and support to our customers. While widespread temporary customer shutdowns, travel restrictions and the postponement or cancellation of live events and projects present short-term challenges, we believe Evertz will emerge through the pandemic very well positioned with our technological leadership and fundamental operational strength. We are entering the second quarter of fiscal 2021 with significant momentum fueled by a record-high combined purchase order backlog plus latest month shipment totaling in excess of $154 million, up 40% sequentially from our prior quarter, the financial strength and flexibility of a pristine debt-free balance sheet with over $102 million in cash and by the growing adoption and successful large-scale deployments of Evertz' IP-based Software Defined Video Networking virtualized cloud solutions, DreamCatcher IP-based instant replay and BRAVO live production suite, all by some of the largest broadcast, new media and service provider companies in the industry. With Evertz' significant long-term investments in these software-defined IP, IT, virtualized cloud technologies and our leading deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position in the broadcast and media technology sector. Thank you and we look forward to having many of you join us on the 7th of October at our Annual General Meeting. Please note, any changes to the meeting will be announced by way of the press release. Good night.

[Operator]

Thank you. That concludes today's conference call. Thank you for your participation. You may now disconnect.