Evertz Technologies Ltd

TSX:ET

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Evertz's First Quarter Investor Call. [Operator Instructions] I would now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development.

[Brian Campbell, executive]

Thank you, Constantine. Good afternoon, everyone, and welcome to Evertz's Technologies conference call for fiscal 2025 first quarter ended July 31, 2024, with Doug Moore, Evertz's Chief Financial Officer; and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on SEDAR and on the company's investor website. Doug and I will comment on the financial results and then open the call to your questions.

Turning now to Evertz's results. I'll begin by providing a few highlights, and then Doug will provide additional detail. First off, sales for the first quarter totaled $111.6 million, including $55.9 million in software and services revenue. Our sales base is well diversified with the top 10 customers accounting for approximately 50% of sales during the quarter with 1 customer accounting for approximately 14% of sales and a second customer at 11%. In fact, we had 94 customer orders of over $200,000. Gross margin in the quarter was $45.4 million or 59.4%, up from 57.3% in the prior year.

Net earnings were $9.7 million, resulting in fully diluted earnings per share of $0.13 for the quarter. Investments in research and development totaled $37.3 million, Year-over-year, our cash position strengthened closing Q1 2025 with $91 million in cash and cash equivalents compared to $48.9 million a year ago and up $4.7 million in the quarter. Evertz's working capital was $197.7 million, as at July 31, 2024, down $3.7 million from July 2023. At the end of August, Evertz's purchase order backlog was more than $302 million and shipments during the month of August were $33 million.

The solid financial performance, including the robust purchase order backlog in shipments continues to be driven by channel and video services proliferation, the ongoing technical transition in the industry, increasing global demand for high-quality video anywhere, anytime and specifically by the adoption of Evertz solutions, such as Evertz IP-based software-defined video networking solutions, Evertz IT and cloud native solutions, our immersive, 4K ultra high-definition solutions and our state-of-the-art DreamCatcher IP replay and live production with BRAVO Studio featuring the iconic Studer audio. Today, Evertz Board of Directors declared a quarterly dividend of $0.195 per share payable on or about September 17.

I will now hand over to Doug Moore, Evertz's Chief Financial Officer, to cover the results in greater detail.

[Doug Moore, executive]

Thanks, Brian. Good afternoon. Starting with revenues. Sales were $111.6 million in the first quarter of fiscal 2025 compared to $125.8 million in the first quarter of fiscal 2024. Hardware revenue declined quarter-over-quarter from $81.4 million to $55.7 million, while software services revenue increased 26% to $55.9 million. Revenue from the software services portion represented approximately half of the total revenue in the quarter.

Looking at regional revenue. Quarterly revenues in the U.S., Canadian region were $73.9 million compared to $87 million in the prior year. While quarterly revenues in the International region were $37.7 million compared to $38.8 million in the prior year. International segment represented approximately 34% of total sales in the quarter compared to 31% in the prior year. Gross margin for the quarter was 59.4% as compared to 57.3% in the prior year and within our target range.

Looking at selling and administrative expenses. S&A was $17.6 million in the first quarter. That's an increase of $1.2 million from the same period last year and represented approximately 15.8% of revenues as compared to 13% last year. Research and development expenses were $37.3 million for the first quarter, which represents a $5.4 million increase over the same period last year and $600,000 sequentially, approximately $600,000. Year-over-year, the increase includes $3.2 million in increased salary costs within North America and $800,000 increased salary costs internationally. ITCs for the quarter were $3.8 million compared to credits of $3.4 million in the prior year first quarter last year. Foreign exchange for the first quarter was a gain of less than $100,000 compared to a foreign exchange loss of $2.1 million in the first quarter last year.

Looking at liquidity of the company. Cash as at July 31, 2024, was $91 million as compared to cash of $86.4 million as of April 30, 2024. And working capital was $197.7 million as at July 31, 2024, compared to $201.4 million at the end of April 30, 2024.

Looking at cash flows for the quarter ended July 31. The company generated cash from operations of $22.5 million, and that is net of $8.9 million change in nonworking capital and current taxes. Though the effects of the change in nonworking capital and current taxes are excluded, the company generated $13.6 million in cash from operations during the quarter. The company used cash of $2.3 million for investing activities, which was principally driven by the acquisition of capital assets, and the company used cash and financing activities of $16.8 million, which was principally driven by dividends paid of $14.9 million.

Finally, looking at our share cash -- our share capital position as at July 31, 2024. Shares outstanding were approximately 76.1 million in options and share-based restricted [ share units ] outstanding were approximately 5.6 million. Weighted average shares outstanding were 76.1 million, and weighted average fully diluted shares was 77.3 million for the period ended July 31. That concludes a 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 the annual information form and the official reports filed with the Canadian Securities Commission.

Brian, back to yourself.

[Brian Campbell, executive]

Thank you, Doug. Constantine. We're now ready to open the call to questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

[Thanos Moschopoulos, analyst]

Brian, I guess we recognize that you've got some quarterly volatility in your business, just given the project nature of some of the work. But that said, the second consecutive quarter of revenues being down year-over-year. And I think looking at the shipments number that might be the case for the upcoming quarter as well. So can you clarify for us whether you're seeing some industry dynamics here? Is there a macro issue? Is there customer caution with respect to spending or from your perspective, maybe you have more to do with just the timing of projects.

[Brian Campbell, executive]

From our perspective, it does have more to do with project timing. As you'll note, our -- we still -- we have a very robust order backlog and a solid shipments number. So totaling $335 million, which is up roughly $8 million from the prior quarter. So we're sequentially up. There is a bit of timing in this quarter. But that said, we're looking forward to going to IBC in Amsterdam over the weekend to see many of our customers and channel partners and are looking for good things in our fiscal 2025.

[Thanos Moschopoulos, analyst]

Okay. From an OpEx perspective, anything to call out this quarter? Or anything we should note as we think about the upcoming quarter other than [indiscernible]?

[Doug Moore, executive]

I guess that's one thing. So if you're doing -- if you're looking at it sequentially, of course, we didn't have NAV, right? So [ NAV ] traveling and entertainment costs went down in the quarter. We did do some trade shows like from road shows, but we do have IBC in Q2. That's obviously not in Q1.

From an R&D perspective, there's a couple of things I'll call out. One, in the prior quarter, I mentioned that we did some temporary elevated resource costs. We incurred in Q4. There's another $400,000 that's in Q1. Additionally, we do take on quite a few co-ops actually in the summer from May through to the end of August. I mean in that, plus it's actually 2 or 3 more business days in the quarter this quarter versus last, that equates to almost $1 million. So there's a couple of different items to touch on that are a bit abnormal.

[Thanos Moschopoulos, analyst]

Okay. Software and services revenue, I appreciate the fact that we're getting the quarterly disclosure now. One question on that is, does there tend to be a lot of seasonality in that revenue line?

[Doug Moore, executive]

So there can be a bit of seasonality depending on when license renewals happen. So if there's a fair amount that might go in December and January, but I don't know that's an extremely significant thing to call out. I mean there is some milestones that did occur. So in this quarter, in particular, there was -- I know a project that had -- so commissioning completed at $6 million of released deferred revenue in one project alone. So there could still be some milestones that have -- that aren't seasonal, but are just a bit fluid depending on timing.

[Brian Campbell, executive]

You will see in the MD&A 2 years of quarterly segmentation of hardware and services. So that will give you an idea of the volatility. But on a trailing 12-month basis, it's averaged roughly 40%.

[Thanos Moschopoulos, analyst]

Okay, that's very helpful. I look forward to saying that. Maybe finally, with respect to your markets outside of broadcast, anything to comment there with respect to the growth opportunities in pipeline you're seeing?

[Brian Campbell, executive]

So we continue to do very well in adjacent markets. However, the press releases are somewhat sparse there as you'll note, but that continues to be a significant part of our revenue base and backlog.

[Operator]

Question comes from the line of Rob Young from Canaccord.

[Robert Young, analyst]

I'll continue an some questions on the software and services it's what, about 50% this quarter. You said it was 40% on average. And so is that weakness in hardware? Or is it strength in software. Software? I'm assuming it's strength in software. Can give us some color on what's going on there? Why is it a high percentage?

[Brian Campbell, executive]

Rob, it's a bit of both. So we have lighter hardware revenues in this quarter. But there is a nice upward trend with the software and services. However, it is volatile quarter-to-quarter. As Doug noted, sometimes it has to do with the timing of milestones and licensing contracts.

[Robert Young, analyst]

Great. And I guess part of it is about $6 million deferred. Is that what drives the motility there? Yes, without that, it would still be about 40%.

[Doug Moore, executive]

Sure. That's just kind of an example of -- so that did happen in the quarter, but as an example. I mean if you look at the MD&A, I think it highlights so well. It is -- there is some weakness in the quarter on the hardware front. So I think that is a fair observation that would obviously push the percentage up -- upward.

[Robert Young, analyst]

And is it 1 strong program? Or is it just a general broad set of programs you're doing on software?

[Doug Moore, executive]

That's been a broad trend.

[Robert Young, analyst]

[indiscernible] reason that's driving it?

[Doug Moore, executive]

No, that's been a broad trend.

[Robert Young, analyst]

Keep going.

[Brian Campbell, executive]

So Rob, to put it in perspective, the 40% on a trailing 12-month basis, that's over $200 million revenue in recurring software services and other software. So that's very broad based.

[Robert Young, analyst]

Yes. Okay. And so -- but this quarter, specifically, is it driven by one reach or one customer or one program. I'm just trying to get a sense of price [indiscernible].

[Doug Moore, executive]

Sure. If I just give you figures even in the past 3 quarters. So software service revenue in Q1 was $55.9 million, in Q4 was $47.7 million and then in Q3 was $52.4 million. So there's -- and then Q2 last year was $44.3 million. So there's -- there's not a huge swing from Q4 to Q1. That helps?

[Robert Young, analyst]

Yes. And then the deferred, the $6 million, I guess, I'm assuming that's pure profit. So if I were to exclude that, that probably would have driven your gross margins down towards maybe below the bottom end of your range. And so curious about the margin structure, particularly given there's a lot of the quarter. Is that deferred? First question was deferred? Is that a pure margin? And then what would the margin -- gross margins look like without it?

[Doug Moore, executive]

So sure. So let me start with saying that deferred revenue does not inherently have a 100% margin.

[Robert Young, analyst]

And without that $6 million, you would still have been in your gross margin range?

[Doug Moore, executive]

To be blunt, I have not done that calculation.

[Brian Campbell, executive]

The revenue milestones are part of our ongoing business. That's the nature of our financial model, delivering on software and services milestones and then recognizing the revenue. Again, too helpful toward the business and analyze it on a failing 12-month basis, some of the fluctuation.

[Robert Young, analyst]

Yes. That's fair. And then as you noted, the cash balance has grown. And I'm curious what your plans are completely raised the dividend this quarter, but what do you expect to do with that growing cash balance?

[Brian Campbell, executive]

So we're very cognizant and the Board is aware of the growing cash balance, and we continue to have tremendous confidence in Evertz's robust business model and ability to generate cash as we have over the years. So that is a Board's decision to determine what is done with the cash. And we regularly attribute by quarterly dividends. We also have a normal course issuer bid in place. And we're in tune with acquisition opportunities as well.

[Robert Young, analyst]

Okay. Last question for me would be on the backlog. Sometimes you give us the -- now the percentage that's going to convert in the next to year or next 12 months, you could [indiscernible] that.

[Doug Moore, executive]

Between -- it's approximately 45%, that's more than a year.

[Robert Young, analyst]

Okay. So 55% within the next 12 months?

[Doug Moore, executive]

Right Correct.

[Operator]

There are no further questions at this time. I would like to turn the call over back to Brian Campbell for closing remarks. Sir, please go ahead.

[Brian Campbell, executive]

I'd like to thank the questions or the participants for their questions and to add that we are pleased with the company's performance during the quarter, which saw sales of $111.6 million, including $55.9 million in software and services revenue, strong gross margins of 59.4% for the year, up 57.3% in the prior along with continued investment in R&D totaling $37 million.

We closed the first quarter -- 2025 with significant momentum fueled by a combined purchase order backlog plus August shipments totaling in excess of $335 million by the growing adoption and successful large-scale deployments of Evertz's IP-based software-defined video networking and cloud native solutions by some of the largest broadcast, new media service provider and enterprises in the industry. And by the continuing success of Evertz's DreamCatcher, BRAVO, our state-of-the-art IP-based replay and production suite. With Evertz's significant investments in software-defined IP, IT and cloud native technologies, the over 600 industry-leading IP SDN 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. We look forward to having many of you join us on Wednesday, the second of October at our Annual General Meeting. Good night.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you very much for your participation. You may now disconnect.