Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2022-Q2

[Operator]

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

[Brian Scott Campbell, Executive Vice]

Thank you, Melinda. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2022 second quarter ended October 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 and on the company investor website. Doug and I will comment on the financial results and then open the call to your questions. Turning now to Evertz results. I'll begin by providing a few highlights and then Doug will provide additional detail. First off, sales for the second quarter totaled $107.2 million, an increase of 7% compared to the $100.5 million in the second quarter last year. This solid increase from our second fiscal quarter of 2021 was experienced primarily in the US/Canada region and was driven predominantly by the adoption of Evertz' new technologies and products. Our base is well diversified. The top 10 customers accounting for approximately 44% of sales during the quarter with no single customer over 8%. In fact, we had 122 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $61.1 million or 57%, which is within our target range. Investments in research and development during the quarter totaled $24.4 million. Net earnings for the second quarter were $17.2 million while fully diluted earnings per share were $0.22. Evertz' working capital was $144.9 million, with cash of $37.7 million as at October 31, 2021. At the end of November, Evertz' purchase order backlog was a record high $162 million, and shipments during the month were $39 million. We attribute this strong financial performance and robust combined shipments and backlog -- 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 Ultra-HD solutions, our state-of-the-art DreamCatcher IP Replay Live Production Suite and BRAVO Studio. Today, Evertz' Board of Directors declared a regular quarterly dividend of $0.18 per share payable on or about December 23. I'll 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. Looking at revenues, sales were $107.2 million in the second quarter of fiscal 2022 compared to $105 million in the second quarter of fiscal 2020, an increase of $6.7 million quarter-over-quarter. For the 6 months ended October 31, 2021, sales were $204.4 million compared to $156.8 million in the same period last year. This represents an increase of $47.6 million or 30%. As it relates to revenues in specific regions, the US/Canada region had sales for the quarter of $78.2 million compared to $66.9 million last year. This represents an increase of $11.3 million or 17% quarter-over-quarter. Sales in the US/Canadian region were $142.6 million for the 6 months ended October 31, 2021, compared to $102.8 million in the same period last year, an increase of $39.8 million or 39%. The International region had sales for the quarter of $29 million compared to $33.6 million last year, a decrease of $4.6 million quarter-over-quarter. The International segment represented 27% of total sales this quarter as compared to 32% in the same period last year. For the 6 months ended October 31, 2021, sales in the International region were $61.7 million compared to $54 million in the same period last year, an increase of $7.7 million. Now margins. Gross margin for the second quarter was approximately 57% compared to 59.4% in the prior year and within our target range. For the 6 months ended October 31, gross margin was approximately 57.6%, also within our target range. Turning to selling and administrative expenses. S&A was $14.8 million in the second quarter, an increase of $2 million for the same period last year. Selling and administrative expenses as a percentage of revenue was approximately 13.8% as compared to 27 -- sorry, as compared to 12.7% for the same period last year. The increase is inclusive of $1 million increase in travel and promotion costs associated with increased selling activities. Selling and admin expenses were $28.7 million for the 6 months ending October 31, 2021, an increase of $4 million from the same period last year. Selling and administrative expenses as a percentage of revenue for the 6 months were approximately 14.1% as compared to 15.8% for the same period last year. Research and development expenses were $24.4 million for the second quarter, which represents a $4.7 million increase from $19.7 million in the second quarter last year. Investment tax credits, which relating to R&D expenses, were $2.9 million in the quarter compared to credits of $4.7 million in the second quarter last year. The decrease in investment tax credits is driven by a favorable auto ruling relating to prior years that was recognized last year and did not reoccur in the current year. For the 6 months ending October 31, research and development expenses were $49.1 million, which represents an increase of $12.9 million over the same period last year. Research and development expenses as a percentage of revenue were approximately 24% over the period as compared to 23.1% for the same period last year. Turning to FX. Foreign exchange for the second quarter was a gain of $2.2 million when compared to a loss of $1.3 million in the same period last year. The quarterly gain was predominantly a result of the translation of U.S. assets and to Canadian dollars at a favorable exchange rate during the quarter. Foreign exchange for the second -- sorry, foreign exchange for the 6 months ended October 31, 2021, was a gain of $3.6 million compared to a loss of $4.4 million in the same period last year. Turning to a discussion of liquidity of the company. Cash as at October 31, 2021, was $37.7 million as compared to $108.8 million at April 30, 2021. Working capital was $144.9 million at October 31 compared to $214.5 million at the end of April 2021. Looking now specifically to cash flows. The company generated cash in operations of $0.9 million, which is net of the $22.2 million change in noncash working capital and current taxes. If the effects of the change in noncash working capital and current taxes are excluded from the calculation, the company generated $23.1 million in cash from operations during the quarter. The company also used cash of $1.9 million for investing activities, which was predominantly driven by the acquisition of capital assets. The company used cash and financing activities of $91.7 million, which was principally driven by dividends paid of $90.3 million, including a special dividend of $76.3 million. Finally, I will review our share capital position as of October 31, 2021. Shares outstanding were approximately 76.3 million and options outstanding were approximately 5.5 million. Weighted average shares outstanding were 76.3 million and weighted average fully diluted shares were 76.6 million for the quarter ended October 31. This brings to a 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 the official reports filed with the Canadian Securities Commission. Brian, back to you.

[Brian Scott Campbell, Executive Vice]

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

[Operator]

[Operator Instructions] And we go to the line of Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

Brian, if I look at your North American revenue, it was up over 20% relative to Q1. So would the main driver of that be that perhaps the deployment environment and just the logistics around getting your people on site to deploy? Did that dynamic improve? And is that what drove the strong uptick or was there something else at play there?

[Brian Scott Campbell, Executive Vice]

a big part of it. So the U.S. region is the single largest market for us. We've done extremely well with the customer base that we have there. And yes, we're -- the logistics for us delivering our products are well underway. So we still incur problems crossing the border, quarantining and with this continued next wave of the COVID variants. So we still have challenges, but we're doing very well delivering to our key customers, and that is helping to drive revenue in the U.S. region.

[Thanos Moschopoulos, VP & Analyst]

And sort of a related question. If we look at your International revenue, it's been kind of range-bound for the past 5 quarters now. So is the takeaway there that the situation there hasn't really improved from a deployment perspective and that you're kind of add on to your deployment capacity there?

[Brian Scott Campbell, Executive Vice]

It's stable. It's good but it's stable. And yes, it is -- we've been averaging just over $30 million a quarter for the last 5 quarters or so internationally.

[Thanos Moschopoulos, VP & Analyst]

Okay. The -- I know we've talked about the supply chain in the past. It hasn't been issued to date, so any developments on that front? Are you still able to procure all the components that you need or any challenges in that regard? Or just logistics in terms of being able to ship your equipment where it needs to go?

[Brian Scott Campbell, Executive Vice]

So could you -- I guess your question is multipart with the components and constraints. I'll let Doug Moore jump in there.

[Douglas Moore, CFO & Secretary]

Sure. So for the components constraints, I would say it is exceedingly challenging, so it is getting more difficult to even as time passes on. Regarding procurement lead times and, in some case, component costs, we have actually stockpiled quite a bit. If you look at our inventory, our raw materials is up quite substantially as we mitigate those risks associated with the challenges presented before us.

[Brian Scott Campbell, Executive Vice]

And we do continue to deliver, as you can tell from the very good solid revenue performance. So we are delivering to our customers. We're meeting their needs in terms of their rollouts that they are planning.

[Thanos Moschopoulos, VP & Analyst]

So I guess the question then is if I look at your shipments for November, the backlog, I mean all else equal, to me, that would suggest that you should be to have some level of sequential growth in Q3 over Q2. Would that be a fair conclusion? Or might there be issues such as the component constraints that might prevent that from happening?

[Brian Scott Campbell, Executive Vice]

So we're entering into Q3 with a very solid shipments number of $39 million and a record backlog so we're in very good shape. We are heading into the holiday season, so that always poses challenges in terms of logistics of delivery, whether it's on the customer side or travel as well, too. So you will have to continue to factor that into your estimates. But we are sitting here today with exceptional backlog and shipments number.

[Thanos Moschopoulos, VP & Analyst]

Okay. And finally, deferred revenue was up 27% year-over-year, and I think you've talked about in the past. Is that primarily being driven by more cloud-type revenue? Any dynamic there or something else riding that?

[Brian Scott Campbell, Executive Vice]

I'll let Doug Moore give you the...

[Douglas Moore, CFO & Secretary]

Yes. I think you're on to it there. So it's really more -- it's a general trend as we've -- the type of projects we do with the nature of our business. So whether we're receiving more funds upfront, longer-term recognition or waiting for certain milestones to recognize revenue, it's a trend that we've seen over the past that's continued. I mean, our deferred revenue, I think, is relatively stable compared to Q1, but even when you compare it to April, we'll see an increase.

[Operator]

Next, we go to the line of Rob Young with Canaccord.

[Robert Young, Director]

The gross margins are a bit lower and U.S. mix is really strong, so those don't really don't happen at the same time. So is that the component lead times and pricing that you highlighted? or maybe is it the government assistance? Or is there something that you can point us to why the gross margins were a little bit lower?

[Douglas Moore, CFO & Secretary]

Yes. I mean it's -- quite frankly, it's a mix of those things. So the government assistance continues. We had some in the quarter but dwindling away. That's definitely an impact when comparing quarter-over-quarter, significantly dropped there. The component costs, it's a harder thing to quantify. But there is not a material impact in the sense of a disclosure. But yes, it's really -- you're right in the sense that the government assistance has dwindled away, and that's had a significant impact comparing Q2 to Q2. However, [ 55% ] is solidly within our gross margin target range of 50%.

[Robert Young, Director]

Normally, I think when you see the International drop and U.S. up normally, I'd expect to see margins at the higher end of your range. And so it leads me to think that the pricing environment for raw materials is having a pretty significant impact on your gross margin. Is that a reasonable assumption? Or is most of that going to be government assistance? I mean, just trying to pushing a little harder on that.

[Douglas Moore, CFO & Secretary]

And there's product mix in there.

[Brian Scott Campbell, Executive Vice]

There's an impact of the product mix. There's an impact the -- so -- but I guess our range remains at 50% and sitting there.

[Robert Young, Director]

And then I saw your release around the Studer manufacturing moving to Burlington. Like is there an impact there? Maybe you just talk about that. Is that meaningful enough to have an impact on the financials at all?

[Brian Scott Campbell, Executive Vice]

It's strategically meaningful for us. It was part of the acquisition of the -- those iconic assets to repatriate manufacturing from HARMAN's facilities in Hungary and that's an ongoing process. We're well along the way with it and I'm very proud of the progress that we're making on that front.

[Robert Young, Director]

Okay, okay. But no gross margin impact from having that in your own manufacturing or there's nothing to think about there, I guess?

[Brian Scott Campbell, Executive Vice]

There's not a material impact.

[Robert Young, Director]

Okay. Okay, fine. And then maybe I'll just ask a thing -- is there anything that you can give us around update on the recent acquisition like Studer, the ShotTracker, Ease Live. Anything there that you could update us on?

[Douglas Moore, CFO & Secretary]

So with respect to Studer, the intellectual property continues to be integrated within our product portfolio and specifically within the DreamCatcher BRAVO portfolio, manufacturing is underway here and we're continuing to service and support customer base and look forward to the upcoming year as we really get our feet under us with the Studer acquisition. So that's moving ahead nicely, as is the Ease Live and Ease Live acquisition and ShotTracker investment. Those are both very strategic investments that you'll see more of in the coming quarters.

[Robert Young, Director]

Okay, okay. Maybe I'll just ask a little bit along the lines of Thanos' question on the backlog. It continues to grow quarter-over-quarter. You keep hitting record levels or maintain record levels at least. And so is most of that growth driven by the dynamics of longer contracts? Or is it just pent-up demand that you're not able to get to? Is there anything that you can give us around reasons for that backlog build, the continued backlog? And then I'll...

[Douglas Moore, CFO & Secretary]

That's a very good question. Thanks, Rob. The backlog does continue to build partially because of the very strong demand we have for Evertz product portfolios. But as we've said in the past, the nature of the business is changing, right? So with our cloud-based solutions, the playout mediator has a component to it of maintenance and long-term revenues. So in general, if you look at that backlog, whereas in prior years, if you went back to our initial public offering, the delivery of it would have been over the course of 4 to 8 weeks, whereas now 15% to 20% extends beyond a 12-month period. So whether that's warranties, extended warranties, service level agreements or other solutions that are being delivered in the future, 15% to 20% is currently delivered over -- outside of the 12-month period.

[Robert Young, Director]

Okay. And so then the 80% is going to be delivered within the 12-month period, I guess, is actually the assumption there?

[Douglas Moore, CFO & Secretary]

Yes, yes. And some of it -- a significant fund of it in the subsequent quarter, so we're still delivering very quickly where we have the opportunity to.

[Operator]

This concludes our question-and-answer session. We return to Brian Campbell for closing remarks.

[Brian Scott Campbell, Executive Vice]

I'd like to thank the participants for their questions. And to that, that we are very pleased with the company's performance during the second quarter of fiscal 2022, which saw strong quarterly sales of $107.2 million with strength in the US/Canada region, where sales rose 17% from the prior year and with solid gross margins of 57% in the quarter, which together with Evertz' disciplined expense management, yielded earnings of $0.22 per share. We're entering into the second half of fiscal 2022 with significant momentum, fueled by our record high combined purchase order backlog plus November shipments totaling in excess of $201 million, up 56% year-over-year, and by the growing adoption of successful large-scale deployments of Evertz' IP-based Software Defined Video Networking solutions, cloud solutions and by some large 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 IP/SDVN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position. Thank you, everyone, and good night.

[Operator]

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines.