Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and welcome to the Evertz Q1 2022 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, sir.

[Brian Scott Campbell, Executive Vice]

Thank you, Bobby. Good afternoon, everyone. And welcome to the Evertz Technologies Limited conference call for our fiscal 2022 first quarter ended July 31, 2021, 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.Turning now to Evertz results. I'd like to begin by providing a few highlights, and then Doug will go into greater detail. First off, I'm pleased to report sales for the first quarter totaled $97.2 million, up 72% from the first quarter last year. The strong rebound from our first fiscal quarter of 2021 was experienced across all geographic regions and was driven predominantly by the adoption of Evertz' new technologies and products. Our sales base is well diversified with the top 10 customers accounting for approximately 42% of sales during the quarter and with no single customer over 9%. In fact, we had 134 customer orders of over $200,000.Gross margin in the quarter was $56.7 million or 58.3% of sales, which is in the upper half of our target range. Investment in research and development during the quarter totaled $24.7 million. Net earnings for the first quarter were $14.7 million, while fully diluted earnings per share were $0.19 in the quarter. Evertz working capital was $217 million with $131.6 million in cash as at July 31, 2021. The purchase order backlog was a record high, $151 million at the end of August, and shipments during the month were $40 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog 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 cloud solutions, our immersive 4K/8K/UHD solutions, our state-of-the-art DreamCatcher IP replay and live production suite and BRAVO Studio.Today, Evertz Board of Directors has declared a quarterly dividend of $0.18 per share payable on or about October 5, 2021. Furthermore, Evertz Board of Directors also declared a special dividend of $1.00 per share, also payable on October 5. 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 to maintain adequate reserves.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, and good afternoon, everyone. Sales were $97.2 million in the first quarter of fiscal 2022 compared to $56.3 million in the first quarter of fiscal 2021, an increase of $40.9 million or 72%. The U.S./Canada region had sales for the quarter of $64.4 million compared to $35.9 million last year, an increase of 79%. The international region had sales for the quarter of $32.8 million compared to $20.4 million last year, an increase of 60%.Gross margin for the first quarter was approximately 58.3% compared to 57.2% in the prior year. Gross margin was within the company's target range. Selling and administrative expenses were $14 million for the first quarter as compared to $11.9 million in the same period last year. Selling and admin expenses as a percentage of revenue was 14.4% compared to 21.2% in the same period last year. Research and development expenses were $24.7 million for the first quarter as compared to $16.6 million in the same period last year. Research and development expenses as a percentage of revenue was 25.4% compared to 29.4% in the same period last year. Foreign exchange gain was $1.4 million as compared to a foreign exchange loss in the prior year of $3.1 million. The gain in the quarter was predominantly a result of the increase in the value of the U.S. dollar as at July 31 when compared to April 30.Turning to a discussion of liquidity of the company. Cash as at July 31, 2021, was $131.6 million compared to $108.8 million as at April 30, 2021. Working capital was $217 million as at July 31 compared to $214.5 million at the end of April. The company generated cash in operations of $38 million, which is gross of a $20.7 million change in non-cash working capital and current taxes in the quarter. If the effects of the change in non-cash working capital and taxes were excluded from the calculation, the company generated $17.3 million in cash from operations. The company acquired $1.1 million of capital assets, and the company used cash from financing activities of $15.1 million, which predominantly consisted of a payment of dividends of $13.7 million.Shares outstanding were approximately 76.3 million and options outstanding were approximately 5.7 million as at July 31. Our weighted average shares outstanding were 76.3 million and weighted average fully diluted shares outstanding were 76.8 million for the quarter ended July 31. That brings to a conclusion and review of our financial results and the position for the first quarter ended July 31, 2021.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 will 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 yourself.

[Brian Scott Campbell, Executive Vice]

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

[Operator]

[Operator Instructions] Our first question comes from Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

Brian, can you provide some color in terms of how the demand environment has shaped up over the last 3 months. So as things are reopening, restrictions may be using more live events. I mean -- I guess, we're seeing an uptick in your revenue and your backlog. But just generally speaking, how happy your conversations with clients in your pipeline [indiscernible] over the last 3 months?

[Brian Scott Campbell, Executive Vice]

So the conversations with clients have been very productive as you can tell with our very solid revenues in the quarter and also the significant increase in our backlog. So we're now up to a record high backlog. And so, the order intake has been going very well. Our sales team has done a phenomenal job of getting out to customers virtually and beginning to meet with folks on-site as well too. So we're seeing a good solid demand environment for Evertz products.

[Thanos Moschopoulos, VP & Analyst]

And then, with respect to deployments, I mean, I guess, it would seem that you're having more success getting on-site and deploying [indiscernible] projects. But again, how has that been evolving in recent weeks? Presumably, that's becoming easier, but [indiscernible]?

[Brian Scott Campbell, Executive Vice]

So the ability to get on-site has been reasonably consistent over the last couple of quarters. So it is still a logistical challenge to get onto into certain geographies and on to sites. We attempt to remotely commission to the greatest extent possible, but the reality is with the complexity and scale of some of the projects and the scope of the rollouts, we do need to get access into customer sites and facilities. So that still is a challenging environment that we've been working through, doing our utmost to keep our customers on the schedules for the rollouts of their business plans and projects.

[Thanos Moschopoulos, VP & Analyst]

So -- then the uptick we saw as far as the very strong August shipments that has less to do with getting on the deployments getting easier, maybe has more to do with just the timing of projects and the demand environment for anything? Or how would you characterize that?

[Brian Scott Campbell, Executive Vice]

So I would characterize it as it's a combination of both. So we are getting greater numbers of people on-site. So it's still a logistical challenge, but we do have a significant number of our field service and deployment teams out, internationally, the U.S. and abroad and deploying. So we're doing quite well on that front. But by no stretch to the imagination, our borders open globally at this time. We're still [ relying ] on our position as essential service providers to get on-site and drive business forward.

[Thanos Moschopoulos, VP & Analyst]

And then on the OpEx side, were there any level of wage subsidies this quarter? Or should we think of this being sort of a good run rate for what OpEx will look like in the near term as we're going to Q2?

[Douglas Moore, CFO & Secretary]

I think the assistance programs have significantly decreased this quarter. The -- there are some amounts in there as they clear through the income statement. But going forward, they are expected to be minimal or not material at all in Q2 and onwards.

[Thanos Moschopoulos, VP & Analyst]

And then finally, on the special dividend, you kind of alluded to the rationale. I guess, it's a function of cash, that one is building. Obviously, your cash flow generation is strong. Anything else to highlight in terms of the motivation and the timing for doing this now record than in the future?

[Douglas Moore, CFO & Secretary]

The special dividend, it's a Board decision. It does reflect the strength and stability of our business. It also reflects our outlook as well too for future business and our cash flow generation capabilities. So we, as you know, have a pristine balance sheet and very strong cash-generating capabilities from our business model.

[Operator]

Our next question comes from Robert Young with Canaccord Genuity.

[Robert Young, Director]

If I continue on that last line of questions, it seemed as though you had put a little more emphasis on M&A recently. And so, should we be thinking of the special dividend as a sign that you don't see a lot of opportunities along acquisitions right now?

[Brian Scott Campbell, Executive Vice]

So with respect to acquisitions, we're still seeing multiple opportunities. We've got to address those in the context of value -- creating value for shareholders. So we have the capability to execute on acquisitions as they arise. So I wouldn't say that we're deemphasizing M&A. We had a very active second half of 2021 in terms of our investment in Shot Tracker, the acquisition of Ease Live and the acquisition of the Studer assets as well too. So that was a very busy second half, which we're still working through the smooth integration of some of those technologies, but we have the capability and capacity to execute more acquisitions, if they arise.

[Robert Young, Director]

And then the -- maybe continuing on the question on the backlog, like you noted, it's a record -- I think it's a third consecutive record. And so, is that a sign of recovery out of COVID? Is it a sign that the backlog is lengthening? Are you seeing longer-term deployments in the backlog? And is there anything you can give investors in terms of duration or how much might convert over the next year? Just to get a sense of how much of that backlog is multi-year and how much is short term?

[Douglas Moore, CFO & Secretary]

A significant portion of the backlog is shorter term and -- in terms of rollouts for ongoing projects. And some of that is geared towards the ability to get on-site and customers on timing of the roles that they fit their business. But again, to -- our business model is definitely changing where we have some long-term service level agreements or other projects. So the duration has increased over the years. And that is accurate.

[Robert Young, Director]

And then, I know the deferred revenue went up quarter-over-quarter. So that would be an impact on the backlog. Is there -- maybe you can talk about what's driving the deferred revenue increase?

[Douglas Moore, CFO & Secretary]

Yes. So I think that's more the nature of some of our larger projects, where, quite frankly, larger projects along roll times have -- we take in deposits. So that would be the large increase there. It's really driven by a change in -- I shouldn't say change, but just in a certain -- taking larger deposits from customers, not so much anything beyond that.

[Robert Young, Director]

And the last question for me is on gross margin just around a little higher than it has been in the past. And so, is there any government assistance in there? Or is there some FX impact? Is there any unusual factors in the gross margin to call out?

[Douglas Moore, CFO & Secretary]

Yes. There's about 0.5 percentage point associated with government assistance. So what happens is, some of it gets capitalized into inventory and cleared throughout. So that is in there. So it's 0.6% associated with that. But beyond that, it's largely driven by product mix.

[Operator]

That concludes today's question-and-answer session. Mr. Campbell, at this time, I will turn the conference back to you for any additional or closing remarks.

[Brian Scott Campbell, Executive Vice]

Thank you, Bobby. 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 2022, which saw strong quarterly sales of $97.2 million, with strength in the U.S./Canada region, where sales rose 79% from the prior year and internationally, where sales rose 60%, and by solid gross margins of 58.3%, which, together with Evertz' disciplined expense management, yielded earnings of $0.19 per share. We're entering the second quarter of fiscal 2022, with significant momentum fueled by a record high combined purchase order backlog plus August shipments totaling in excess of $191 million, up 24% year-over-year and 16% sequentially from our last quarter.By the growing adoption and successful large-scale deployments of Evertz IP-based software-defined video networking solutions, cloud solutions and by some of the largest broadcast, new media service provider and enterprise companies in the industry and by the continuing success of DreamCatcher BRAVO, our state-of-the-art IP-based replay and production suite. With Evertz significant investments in software-defined IP, IT and cloud technologies, the over 500 industry-leading SDVN 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 6th of October for our virtual Annual General Meeting. Thank you, and good night.

[Operator]

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