Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2020-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Evertz Second Quarter 2020 Conference Call. As a reminder, today's conference is being recorded. It is Thursday, December 12, 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, Chantelle. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2020 second quarter ended October 31, 2019, 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 on the company's -- and on the company's investor website. Doug and I will comment on the financial results and then open the call to your questions. I would like to start with a few highlights, and then Doug will provide additional details. First off, I'm pleased to report sales for the second quarter totaled $120 million, up 7% from the prior year. This increase was driven predominantly by the adoption of Evertz' new technologies and products and by the strength in the US/Canada region, which had sales for the quarter of $88.6 million, an increase of 14% from the prior year. Our base is well diversified, with the top 10 customers accounting for approximately 49% of sales during the quarter and with no single customer over 12%. In fact, we had 124 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $69.3 million, up for 57.9%, which is within our target range. Investments in research and development during the quarter totaled $22.9 million. Net earnings for the second quarter were $20.5 million, while fully diluted earnings per share were $0.27. Evertz working capital was $222 million, with cash of $5.4 million as at October 31, 2019. Operational highlights for the second quarter include Evertz strong presence at the International Broadcast conference, where Group M6 Paris headquarters modernization to IP with Evertz was featured in the IBC IP showcase theater. This master control and playout IP migration is a leading deployment of SMPTE ST 2110, leveraging Evertz pioneering software-defined video networking technologies. In addition, during the quarter, it was announced that CBS partnered with -- with Evertz to launch DABL, CBS's new lifestyle channel hosted completely in the public cloud using Evertz Mediator-X and Overture playout solutions deployed within Amazon Web Services public cloud. At the end of November, Evertz' purchase order backlog was in excess of $97 million, and shipments during the month were in excess of $39 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 virtualized cloud solutions; our immersive 4K Ultra-HD solutions; and our state-of-the-art DreamCatcher IP replay and live production suite. Today, Evertz Board of Directors declared a regular quarterly dividend of $0.18 per share payable on or about December 20. I will now hand over to Doug Moore, Evertz Chief Financial Officer, to cover our results in greater detail.

[Doug Moore, Chief Financial Officer]

All right. Thank you, Brian. Good afternoon, everyone. Sales were $119.8 million in the second quarter of fiscal 2020 compared to $112.3 million in the second quarter of fiscal 2019. This represents an increase of $7.5 million or 7% over the -- quarter-over-quarter. Sales were at $223.2 million for the 6 months ended October 31, 2019, compared to $215.4 million in the same period last year. This represents an increase of approximately 4%. The US/Canada region had sales for the quarter of $88.6 million compared to $77.5 million last year. This represents an increase of $11.1 million or 14% quarter-over-quarter. Sales in the US/Canada region were $160.8 million for the 6 months ended October 31, 2019, compared to $152.7 million in the same period last year. This represents an increase of $8.1 million or 5%. International region had sales for the quarter of $31.2 million compared to $34.8 million last year. International segment represented 26% of total sales this quarter as compared to 31% in the same period last year. Sales in the International region were $62.4 million for the 6 months ended October 31, 2019, compared to $62.6 million in the same period last year. This represents a small decrease of $0.2 million. Gross margin for the second quarter was approximately 57.9% and within the company's historical range. Gross margin for the 6 months ended October 31 was approximately 57.6%, also within historical range. Selling and admin expenses were $18 million for the second quarter. That's an increase of $1.6 million for the same period last year. Selling and admin expenses as a percentage of revenue were approximately 15% compared to 14.6% for the same period last year. Selling and admin expenses were $34.3 million for the 6 months ended October 31, an increase of $2 million from the same period last year. For the first 2 quarters, selling and admin expenses as a percentage of revenue were approximately 15.4% compared to 15% for the same period last year. Research and development expenses were $22.9 million for the second quarter, which represented a $1.8 million increase from the second quarter last year. For the 6 months ending October 31, research and development costs were $45.6 million, which represented an increase of $3.2 million over the same period last year. Foreign exchange for the second quarter was a loss of $1.1 million compared to a gain of $0.8 million in the same period last year. Foreign exchange for the 6 months ended October 31 was a loss of $2.9 million compared to a gain of $1.9 million in the same period last year. The 6-month loss was predominantly a result of the decrease in the value of the U.S. dollar since April 30. Turning to a discussion of liquidity of the company. Cash as at October 31, 2019, was $5.4 million as compared to $104.6 million on April 30, 2019. Working capital was $222 million at October 31, 2019, compared to $282.5 million at the end of April 2019.Looking now specifically to cash flows for the quarter. The company used cash in operations of $12.9 million, which is net of $36.8 million change in nonworking capital and current taxes. If the effects of the change in noncash working capital and current taxes were excluded, the company generated $23.9 million cash from operations in the quarter. The change in noncash working capital is largely driven by an increase in accounts receivable of approximately $39 million between July 31 and October 31. It's worth noting that collections of AR subsequent to quarter end have driven an increase of cash to $5.4 million as of October 31 to approximately $29 million at the end of November. Back to the cash flow in the quarter. The company generated cash from investment activities of $1.8 million as marketable securities were disposed for proceeds of $4.1 million, partially offset by the acquisition of capital assets of $2.2 million. The company used cash and financing activities of $81.9 million, which was principally driven by dividends paid of $83.4 million, including a special dividend of $69.1 million. That was all partially offset by the issuance of capital stock pursuant to the company's stock option plan of $3.4 million. Finally, I'll review our share capital position at October 31, 2019. Shares outstanding were approximately $76.8 million and options outstanding were approximately $1.1 million. Weighted average shares outstanding were $76.7 million and weighted average fully diluted shares were $76.8 million for the quarter ended October 31, 2019. This brings to conclusion the review of our financial results and position for the second 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 official reports filed with the Canadian Securities Commission. Brian, back to you.

[Brian Scott Campbell, Executive Vice]

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

[Operator]

[Operator Instructions] We will now take our first question from Thanos Moschopoulos.

[Thanos Moschopoulos, VP & Analyst]

The gross margin was quite strong this quarter. Can you provide some color on that dynamic?

[Doug Moore, Chief Financial Officer]

Yes. So it's a function of our product mix, but it's also assisted by the increased revenues that's driving down the impact of fixed costs. And also, a really strong revenue in North America, which there's a strong correlation there.

[Thanos Moschopoulos, VP & Analyst]

And would some of it also be due maybe to higher software mix versus prior quarters or not necessarily?

[Brian Scott Campbell, Executive Vice]

So, Thanos, our software and next-generation products are definitely a very significant component of the product mix and that does aid our gross margin.

[Thanos Moschopoulos, VP & Analyst]

Okay. And then looking at the regions, your North American growth, obviously, has consistently outpaced your international growth over the last couple of years. Can you provide your thoughts on that dynamic? I presume that's because North America is further ahead of the curve in IP adoption. And if that's the case, as you speak to your international customers and look at the pipeline, when do you think we might start to see international growth catch up and accelerate the kind of growth we're seeing in North America?

[Brian Scott Campbell, Executive Vice]

So, Thanos, yes, the North America and specifically the U.S. environment has been very robust and healthy for us. As you can tell, from our 2019 fiscal year, where we had very significant large U.S. network uptake, and we're continuing in fiscal 2020 to see a very strong uptake of our SDVN and IP and virtualized products. And again, to -- and strength has been with some of our larger customers. The second part of your question was within the international markets. And there, on a 6-month basis, we're basically flat year-over-year in terms of revenue. We are absolutely seeing good, strong uptake of our software-defined video networking solutions and our cloud-based virtualized solutions. That said, we absolutely would like to see more growth internationally. So, yes, we are seeing marquee installs. And some of those, hopefully, we'll be able to press release in near future. But the growth has been flat year-over-year.

[Thanos Moschopoulos, VP & Analyst]

Well, I guess, maybe just to expand, would you say that -- is it more a function of the macro environment being softer internationally than the U.S.? Or is it more of a function of where customers are on the technology adoption curve?

[Brian Scott Campbell, Executive Vice]

It may be a bit of both and maybe partially our own execution sales-wise as well, too. It's all of that. We have aspirations to do much better internationally.

[Thanos Moschopoulos, VP & Analyst]

Okay. And then finally, Belden obviously announced they're looking to divest Grass Valley. I have to imagine that can only be a good thing for you competitively. Have you started to see some positive impact from the announcement in your pipeline in win rates? Or maybe done a lot incrementally given that you're already up competing them, especially in IP?

[Brian Scott Campbell, Executive Vice]

We continue to have very good success and have in the past years with our software-defined networking and our virtualized cloud-based solutions. And so our traction in those areas has been very good before and after the announcement.

[Operator]

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

[Robert Young, Director]

Another factor in the gross margin. I think last quarter, you said there was a slipped order that had a -- that you're expecting to have a positive impact on margins this quarter. Is that correct? Did I -- do I understand it correctly? Would that have been a positive effect on gross margins?

[Doug Moore, Chief Financial Officer]

It's certainly a positive effect on revenue. There's not a...

[Robert Young, Director]

Maybe more about...

[Doug Moore, Chief Financial Officer]

Not a material impact on the margins.

[Robert Young, Director]

Okay. I mean there was an interview with one of your competitors who said that they've seen a pretty significant kickup in IP. And so maybe -- I mean just explain the last question. Can just talk about where your IP deployments are? If there's any update you can give us on any numbers there? And maybe update us on the overall competitive landscape and the IP transition, that would be really helpful.

[Brian Scott Campbell, Executive Vice]

Right. Yes, Rob. So we are well over 400 IP-based SDVN installations and again, to those include the larger scale installations in the industry. So we continue to do very well with our customers deploying numerous projects. So again, we are doing very well with the SDVN deployments. What was the second part of your question?

[Robert Young, Director]

I was just looking for an update on the competitive dynamic. Like the last question -- Thanos' question about Belden. Are there any other factors that we should think about as the IP transition moves forward? How has the competitive environment changed?

[Brian Scott Campbell, Executive Vice]

We continue to lead the largest deployments in the industry of the software-defined video networking, the largest SMPTE ST 2110 deployments and also the largest cloud-based deployments as well, too. So the competitive dynamic is still very similar to what it was before with Evertz taking a leadership position on those fronts.

[Robert Young, Director]

And is there any way to frame up where you think penetration of IP in the market is now? And how that might develop over the next couple of years?

[Brian Scott Campbell, Executive Vice]

With respect to penetration, again, too, that's more of an industry research question. So I can't provide any additional color other than the large deployments that we have press released and the IP showcases that we participated in speaks to very good penetration in the early days with some significant customers. So WarnerMedia has announced several times their move to IP in multiple locations with Evertz M6 France. Another marquee customer, European 1, progressing very nicely. Channel One Russia as well, too, has been press released, very significant deployments of our software-defined networking and end-to-end solutions for an immersive 4K experience as well, too.

[Robert Young, Director]

Another announcement was FOX and AWS. Is Evertz involved in that one? Is there anything that you can talk about related to that deal announcement?

[Brian Scott Campbell, Executive Vice]

No, Evertz has not made any press release there.

[Operator]

We have no further questions at this time, I'd like to turn it back to Mr. Campbell for any additional or closing remarks.

[Brian Scott Campbell, Executive Vice]

Thank you, Chantelle. I'd also like to thank the participants for their questions and to add that we're very pleased with the company's performance during the second quarter, which saw fiscal 2020 results and strong quarterly sales of $120 million, in particular, strength in the important US/Canada region, where sales rose 7% from the prior year; earnings from operations before foreign exchange of $28.4 million, up 7% year-over-year; solid gross margins of 57.9% in the quarter. We are entering into the second half of fiscal 2020 with significant momentum, including a strong cash position of $29 million as at November 30, 2019; a combined purchase order backlog plus November shipments totaling in excess of $136 million; and by growing adoption and successful large-scale deployments of Evertz' IP-based, software-defined video solutions 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 live production suite. With Evertz' significant investments in software-defined IP, IT and virtualized cloud technologies, the over 400 industry-leading IP SDN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position. Thank Chantelle everyone, and good night.

[Operator]

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