Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Evertz Q1 Investor Call. [Operator Instructions] Also note that the call is being recorded on Tuesday, September 13, 2022. I now would like to turn the conference over to Brian Campbell, Executive Vice President of Business and Development. Please go ahead, sir.

[Brian Campbell, executive]

Thank you, [indiscernible]. Good afternoon, everyone, and welcome to the Evertz Technologies Limited Conference Call for fiscal 2022 First Quarter ended July 31, 2022, 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 for your questions.

Turning now to Evertz' results. I would 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 $101.5 million, up 5% year-over-year with strong performance in the U.S./Canada region, where sales increased 21% year-over-year to $78.2 million driven to a large extent by the adoption of Evertz' new technologies and products.

Our sales is well diversified with the top 10 customers accounting for approximately 45% of sales during the quarter with no single customer over 8%. In fact, we had 103 customer orders of over $200,000. Gross margin in the quarter was $58.5 million or 57.6%, which is within our target 56% to 60% range. Investments in research and development during the quarter totaled $28.3 million. Net earnings for the first quarter were $13.9 million, while fully diluted earnings per share were $0.18 in the quarter.

Evertz's working capital was $159.3 million with $25.6 million in cash as at July 31, 2022. Purchase order backlog was $140 million at the end of August, and shipments during the month were $33 million. We attribute the solid quarterly 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 are immersive for an 8-K Ultra HD solutions and our state-of-the-art DreamCatcher IP replay and BRAVO studio live production suite.

Today, Evertz's Board of Directors has declared a quarterly dividend of $0.18 per share payable on/or about September 29, 2022. I'll now hand the call over to Doug Moore, Evertz' Chief Financial Officer, to cover the results in greater detail.

[Doug Moore, executive]

Thank you, Brian, and good afternoon, everyone. Sales were $101.5 million for the first quarter of fiscal 2022 compared to $97.2 million in the first quarter of fiscal 2022, an increase of $4.3 million or 5%. The U.S./Canada region had sales for the quarter of $78.2 million compared to $64.4 million last year, an increase of 21%. International region of sales for the quarter of $23.3 million compared to $32.8 million last year.

Gross margin for the first quarter was approximately 57.6% compared with 58.3% in the prior year and within our target range. Selling and administrative expenses were $12.9 million for the first quarter compared to $14 million in the same period last year. Selling and admin expenses as a percentage of revenue 12.7% compared to 14.4% in the same period last year.

Research and development expenses were $28.3 million for the first quarter this year as compared to $24.7 million in the same period last year. $2.8 million of the increase is attributable to increased salary costs from increased headcount as well as wage increases. Research and development expenses as a percentage of revenue was 27.9% compared to 25.4% in the same period last year.

Foreign exchange gain was $1 million compared to a foreign exchange gain in the prior year of $1.4 million. The gain in the current period was predominantly a result of the increase in the value of the U.S. dollar as at July 31, 2022, when compared to April 30, 2022 as well as the translation of U.S. assets into Canadian dollars at favorable exchange rates during the quarter.

Turning to a discussion of liquidity of the company. Cash as at July 31, 2022, was $25.6 million as compared to $33.9 million as at April 30, 2022. Working capital was $159.3 million as at July 31, 2022, compared to $158.9 million at the end of April 2022. The company generated cash in operations of $19.3 million, which is gross of a $1.6 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 $17.7 million in cash from operations. During the quarter, the company acquired marketable securities of $11 million and $1.9 million of capital assets. The company used cash from financing activities of $15.1 million, which predominantly consisted of the payment of dividends of $13.7 million.

Shares outstanding were approximately $76.2 million, and options outstanding were approximately $5 million as at July 31, 2022. Weighted average shares outstanding were $76.2 million and weighted average fully diluted shares outstanding were $76.4 million for the quarter ended.

This brings to a conclusion of 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 yourself.

[Romolo Magarelli, executive]

Thank you, Doug. [indiscernible], we're now ready to open the call to questions from the analysts.

[Operator]

[Operator Instructions] And your first question will be from Thanos Moschopoulos at BMO Capital Markets.

[Doug Moore, executive]

Brian, can you give us some more color in terms of the current market conditions you're seeing? I mean, obviously, there's some macro things going on, some global uncertainty. I know you've had a deal with supply constraints in recent quarters as well. So for example, when we see the softer revenue you had internationally this quarter, is that just lumpiness? Is it indicative of the softer environment? Just any color you could provide in terms of current business conditions would be helpful.

[Brian Campbell, executive]

Thanks, Thanos. Overall, even demand environment continues to be very robust. We've got strong backlog heading into the first quarter fiscal 2023, and we're quite optimistic about the outlook going forward. We are cognizant of the macroeconomic environment as our customers. However, we're well positioned with an extremely robust business model and a large backlog. So with respect to the international, it is down this quarter on a trailing 12-month basis, it's in the range that it's been over the last couple of years. So there is definitely some of the macro environment impacting international sales, but we continue to have good, strong international sales. And it's part of the backlog as well, too.

[Doug Moore, executive]

Okay. As far as supply chain, any color in terms of whether the situation is getting better, worse or stable?

I can address that. So Sorry, you mean from a component perspective or from a sales perspective?

So a component perspective, yes.

So that still represents a significant challenge, quite frankly. So anecdotally, sometimes feel like it's getting better, but it's still -- it's an ongoing challenge where certain vendors are difficult to source components from.

So we're doing our best to mitigate by sourcing parts -- additional parts to deal with long lead times. I mean even the -- this quarter alone, we raised our raw materials by another $15 million as we continue to stockpile inventory.

But we -- while it's a challenge, we were able to deliver $100 million of revenue in the quarter and $33 million in August. So we are doing our best to mitigate it, but it's definitely a significant ongoing challenge that has not gone away.

[Thanos Moschopoulos, analyst]

I know you don't disclose your cloud or recurring revenue separately. But just any commentary there in terms of how that's progressing? I think in recent years, we've seen more of a customer appetite towards cloud. Is any of that perhaps accelerating given the current backdrop? Or what's the dynamic you're seeing on that front?

[Brian Campbell, executive]

So we continue to see very strong cloud deployments, not all of them hitting the press, but we're very actively engaged on that front. That said, we are delivering traditional on-premise solutions to numerous customers as well, too. So there's a very good solid mix of our new technologies, both cloud and on-premise based.

[Operator]

[Operator Instructions] And your next question will be from Rob Young at Canaccord Genuity.

[Robert Young, analyst]

Maybe just I'll continue this last question there on the cloud. Maybe just -- I understand you can't name -- a lot of customers have described some unannounced activities. But maybe if you could just in a generic way, give maybe a cross-section of where the most demand you're seeing in your cloud-related product. That could be helpful.

[Brian Campbell, executive]

And do you mean with respect to geographic or...

[Robert Young, analyst]

Whatever you'd like to share?

[Brian Campbell, executive]

So as you can tell, the North American market has been the strongest for us, right? It's near 70% on a trailing 12-month basis. So that is the strongest geographic market for us. With respect to cloud, we've had successes with Evertz IO as well to our new SaaS-based platform. So the mediator award-winning product family plus the new Evertz IO are both doing very well. So that's a bit of an update on the cloud dynamics.

[Robert Young, analyst]

All right. Maybe if you could talk a little bit about the backlog. In the past, you've given us a sense of how much of the current backlog might be deliverable in the next 12 months? Maybe just talk about the relative duration of what's in there?

[Brian Campbell, executive]

That's a good question, Rob. So of the $141 million, Over 90% of it is deliverable in the next 12 months. So it's a very robust backlog number.

[Robert Young, analyst]

Okay. And the $33 million for an August period, just looking back, is it a pretty high level for the summer, especially given the weakness in international. And so can you just talk about what's going on there, that would be helpful.

[Brian Campbell, executive]

We have our teams out helping our customers to deploy solutions. We have a tremendous amount of customer demand right now for Evertz next-generation solutions, and we are helping to deploy those with customers to meet their time lines for whether it's sporting events or other milestones that they want to hit. So that does represent a very good solid shipment number for August.

[Robert Young, analyst]

I mean is there somewhat of -- could we think of that as an inflection or strengthening the demand? It just seems like a very strong shipment number for an August period.

[Brian Campbell, executive]

It is a very good shipment number. We're proud of the teams who have helped deploy during the month, and sales have done an outstanding job of continuing to provide the orders with key customers. So I would necessarily say it's an inflection. It is a continuation of very robust demand from our key customers.

[Robert Young, analyst]

Okay. And then maybe last question for me would just be around the ability to access customer sites. I know that's been an ongoing [indiscernible]. Is that something that is continuing to improve? Or has it improved a lot this quarter? Maybe if you could just talk about that and then I'll pass the line.

[Romolo Magarelli, executive]

Yes. So it is getting better. Candidly, it hasn't improved a lot this quarter over the prior quarters. North America, we have good access. We still have challenges internationally. We are getting on site and deploying as well, too. But again, that's against the macro backdrop internationally that we're well aware of. So it's modestly better than it was in the prior quarter but again, to still a challenging environment to get folks on site in some locations.

[Operator]

Thank you. And at this time, Mr. Campbell, we have no further questions. Please proceed with your closing.

[Brian Campbell, executive]

Thank you, [indiscernible]. I'd like to thank the participants for their questions and to add that we're very pleased with the company's performance during the first quarter of fiscal 2023, which saw strong quarterly sales of $101.5 million with strength in the U.S./Canada region, where sales rose 21% from the prior year. Solid gross margins of 57.6%, which together with Evertz' disciplined expense management, yielded earnings of $0.18 per share, all while investing over $28 million in R&D to sustain future growth.

We're entering the second quarter of fiscal 2023 with significant momentum fueled by $33 million of shipments in August plus $141 million purchase order backlog totaling in excess of $174 million and fueled by the continued adoption and successful large-scale deployments of Evertz software-defined IP, IT and cloud-based video networking solutions by some of the largest broadcast, new media service providers and enterprise companies in the industry.

With Evert's 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 in the broadcast and the technology sector.

Thank you. We look forward to having many of you join us on the 5th of October at our Annual General Meeting. Please note any changes to the meeting will be announced by way of press release.

Goodnight.

[Operator]

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good evening.