Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2023-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Evertz Q2 of Fiscal 2023 Investor Call. [Operator Instructions].

This call is being recorded on Tuesday, December 6, 2022. I would now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Please go ahead.

[Brian Campbell, executive]

Thank you, Michelle. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2023 second quarter ended October 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 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' results. I'll begin by providing a few highlights and then Doug will provide additional detail. First off, sales for the second quarter totaled $113.2 million, an increase of 5.6% compared to $107.2 million in the second quarter last year. Our base is well diversified with the top 10 customers accounting for approximately 55% of sales during the quarter with no single customer over 15%. In fact, we had 98 customer orders of over $200,000 in the quarter.

Gross margin in the quarter was $67.5 million or 59.6%, which is within our target range. Investment in research and development during the quarter totaled $29.6 million. Earnings from operations were $28.4 million for the quarter, a 20% increase from the prior year. Net earnings for the second quarter were $20 million, while fully diluted earnings per share were $0.26.

Evertz working capital was $154.1 million with bank indebtedness of $4.2 million as at October 31, 2022. Operational highlights for the quarter include Evertz stellar presence at the International Broadcast Conference where Evertz XPS compact encoding, decoding platform with 5G wireless on a TV, Tech, Best of Show award along with Evertz reflector, cloud video platform -- cloud video processing platform, and Evertz IO stream was recognized with a TVB Best of Show Award.

This revolutionary new cloud-based Software-as-a-Service video platform combines the technological and future requirements of traditional broadcast channels, conventional OTT channels and free ad-supported TV fast channels into a single platform that supports follow-based player, advanced live events and a wide range of streaming inputs and outputs, including 4K UHD with HDR.

In addition, September 15 was a historic night, which saw the NFL kick off its first-ever broadcast package, carried exclusively on a streaming platform with Amazon Prime's Thursday Night Football. The broadcast also marked the launch of Prime One, arguably the most state-of-the-art mobile broadcast units built around SMT SD2022-7IP routing core. Prime One is fully redundant and that redundancy starts with a pair of Evertz 400-gig EXE IP routing cores, managed by Evertz MAGNUM, control monitoring and analytics software.

In addition, all the edge routing is handled by Evertz award-winning Nadex fabric switches. At the end of November, Evertz' purchase order backlog was in excess of $149 million in shipments during the month were $39 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog to HD channel proliferation, the emergence of 4K Ultra HD and increasing live content, increasing global demand for high-quality video anywhere, anytime, the ongoing technical transition to IP/IT and cloud-based architectures and specifically to the growing adoption of Evertz' IP-based software-defined video networking solutions, Evertz IT and cloud solutions, our immersive 4K 8-K UHD solutions and our state-of-the-art DreamCatcher IP replay and live production with Bravo Studio virtual production control suite. Today, Evertz' Board of Directors declared a regular quarterly dividend increased to $0.19 per share payable on or about December 22.

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

[Doug Moore, executive]

Thank you, Brian. Good afternoon, everyone. Looking at revenues. Sales were $113.2 million in the second quarter of fiscal 2023 compared to $107.2 million in the second quarter of fiscal 2022, an increase of $6 million quarter-over-quarter. For the 6 months ended October 31, 2022, sales were $214.8 million compared to $204.4 million in the same period last year. That represents an increase of $10.4 million or 5.1%.

As it relates to revenues in specific regions, the US/Canadian region had sales for the quarter of $88.3 million compared to $78.2 million last year.

This represents an increase of $10.1 million or 13% quarter-over-quarter. Sales in the same region for US/Canada were $166.5 million for the 6 months ended October 31, 2022, compared to $142.6 million in the same period last year, an increase of $23.9 million or 17%. The International region had sales for the quarter of $25 million compared to $29 million last year, a decrease of $4 million quarter-over-quarter.

International segment represented 22% of total sales this quarter. For the 6 months ended October 31, 2022, sales in the International region were $48.3 million compared to $61.7 million in the same period last year, a decrease of $13.4 million. Gross margin for the second quarter was approximately 59.6% compared with 57% in the prior quarter and within our target range. For the 6 months ended October 31, gross margin was approximately 58.7% and also within our target range.

Turning to selling and admin expenses. S&A was $14.7 million in the second quarter, a decrease of $0.1 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 13% as compared to 13.8% for the same period last year. Selling and admin expenses were $27.7 million for the 6 months ended October 31, 2022, a decrease of $1 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 12.9% over the period as compared to 14.1% for the same period last year.

Research and development expenses were $29.6 million for the second quarter, which represents a $5.2 million increase from $24.4 million in the second quarter last year. Investment tax credits related to R&D expenses were $3.2 million in the quarter compared to credits of $2.9 million in the second quarter last year. For the 6 months ending October 31, research and development expenses were $57 million, which represents an increase of $7.9 million over the same period last year.

R&D expenses as a percentage of revenue were approximately 26.6% over the period as compared to 24% for the same period last year. Foreign exchange for the second quarter resulted in a gain of $3 million compared to a gain also a $2.2 million in the same period last year. The quarterly gain was presumably a result of the increase in the value of the U.S. dollar against the Canadian dollar between July 31 and October 31, 2022. Foreign exchange for the 6 months ended October 31, 2022, was a gain of $4 million, that's compared to a gain of $3.6 million in the same period last year.

Turning to a discussion of liquidity of the company. Bank indebtedness as at October 31, 2022, was $4.2 million, that's compared to cash of $33.9 million as at April 30, 2022. Working capital was $154.1 million as at October 31, 2022, compared to $158.9 million at the end of April 30, 2022.

Looking now specifically at cash flows. The company used cash in operations of $7.7 million, which is net of $33.1 million change in noncash working capital and current taxes, a change, including the quarterly increase of inventory of $7 million and the combined decrease in accounts payable and deferred revenue of $25 million. If the effects of the change in noncash working capital and current taxes are excluded from the calculation, the company generated $27.5 million in cash from operations during the quarter.

The company used cash of $5.6 million for investing activities in the quarter, which was principally driven by $2.4 million in acquisition of capital assets and $3.2 million in purchase of investments. The company used cash and financing activities of $16 million, which was principally driven by dividends paid of $13.7 million.

Finally, I will review our share position as at April 31, 2022. Shares outstanding were approximately 76.2 million and option outstanding were approximately 4.9 million. Weighted average shares outstanding were $76.2 million and weighted average fully diluted shares of standing were $76.4 million for the quarter ended October 31.

That brings to a conclusion of the review of our financial results and position for the second quarter. Finally, I would like to remind you that some of the statement s 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 Campbell, executive]

Thank you, Doug. Michelle, we are now ready to open the call to questions.

[Operator]

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

[Thanos Moschopoulos, analyst]

Brian, could you comment on the spending environment? I mean, obviously, you had a nice uptick in revenues this quarter versus the prior quarter, backlog and November shipments seem healthy. But more broadly, I mean, given that there's a lot of macro uncertainty out there. How are your customers responding initially and any customer behavior in recent weeks? Or has it been kind of status quo in that regard?

[Brian Campbell, executive]

Yes. Overall, our demand environment continues to be very robust. You can see that we have a solid backlog order backlog of $149 million, along with our $39 million shipments in the first month. So we're cognizant of the macro environment as our customers. However, we're very well positioned within an extremely robust business model and a large backlog to be able to handle macro uncertainty. And with respect to the International, it's down quarterly year-over-year but strong trailing 12 months and up sequentially. So -- and that's a good solid indication for us as well, too.

[Thanos Moschopoulos, analyst]

But on that point, I mean, clearly, International has been significantly lagging, growth you've seen in North America, would that be a function of maybe a different macro dynamic? Is that just lumpiness in the projects kind of come? Is it deployment issues still with lingering the COVID restrictions? What would you attribute that to?

[Brian Campbell, executive]

It's actually all of the above factors that you've noted, have contributed to. And we've got a solid International business in the certain regions. And specifically, there is definitely lumpiness to the deliveries. We've done very well with some large customer orders that you've seen play out. Mediaset being one of them over in multiple years. And that's quite a high profile, delivery that we've had ongoing.

And yes, there are continue to be challenges delivering in certain regions, whether it's due to macro uncertainty or COVID restrictions as well, too. So all those things play into it. However, we have had a good solid trailing 12 months. If you look at it on average, it's can be lumpy quarter-to-quarter, but it's just under 30% of the revenue in total.

[Thanos Moschopoulos, analyst]

Okay. Has supply chain been getting any better? Or would you describe that as being consistent as far as the component capability relative to last quarter?

[Doug Moore, executive]

Yes. I mean from a quarter-over-quarter basis, it still represents a significant challenge, to be honest. But we are seeing some vendors with lead time improvements in -- improvements on deliveries. But at the same sense, other ones, it's -- we're seeing no improvements at all. So that's really has why we're sitting with $23 million more in raw materials this year-end and $40 million since the last of October. So we've continued to stockpile raw materials as it continues to be a challenge.

[Thanos Moschopoulos, analyst]

And finally, the gross margin was obviously very strong. Is that just reflective of the mix during the quarter? Is there anything you'd call out that margin?

[Doug Moore, executive]

Yes. I mean, as there's always a fluidity anytime with the mix. There is some larger projects that are higher margin that were completed during the quarter. You'll see a corresponding decrease in deferred revenue to kind of align with that. But really, it's product mix and what was delivered and signed off in the quarter.

[Operator]

[Operator Instructions] The next question comes from Rob Young of Canaccord Genuity.

[Robert Young, analyst]

Can you remind us what the target range for gross margins is? I think, 56% to 60% or -- just remind.

[Doug Moore, executive]

Yes. 56% to 60%, you're correct.

[Robert Young, analyst]

Okay. And then you just said that large project clearing drove the strength and...

[Doug Moore, executive]

Yes. I mean there's always some fluidity to it being on the mix of sell. But if I -- there were a couple of larger projects that were signed off in the quarter that were higher margin in nature. So that would have been a partial reason of the uptick on the higher end of the range.

[Robert Young, analyst]

Right. Is that like a cost matching thing? Or is it like just a mix of the product? Is it more software related, more...

[Doug Moore, executive]

It's from a mix. So -- but as we're happy in software would be right path to think.

[Robert Young, analyst]

Okay. On the macro, are you seeing any delays on signing deals? It sounds like you've got large projects that are closing. Are you seeing any delays on large projects or any reticence on the part of your larger customers are signing larger deals to sort of get those across the line?

[Brian Campbell, executive]

That has been ongoing for the last couple of years that there have been large projects delayed. However, we do have very significant projects that continue to move forward with our customers. And that's what we're focusing on delivering for them to keep their business plans moving ahead at the pace that they need.

[Robert Young, analyst]

Okay. So it's more consistent with what you're seen over the last couple of years as opposed any big change?

[Brian Campbell, executive]

Correct.

[Robert Young, analyst]

Maybe if you could talk a little bit about access to customer sites. I know that's been an ongoing issue. Has that improved material? Is there anything you call out there?

[Brian Campbell, executive]

It's remains consistent. So in North America, we've had good access. And internationally, it still can be a challenge in certain areas. And we've been managing through it and -- but there has been no significant change since last quarter.

[Robert Young, analyst]

Okay. Notable the cash, you have net debt this quarter, I think you have to go back to 2008 or so to see something like that in your financials at the same time that you're raising the dividend. So I'm curious about those 2 things having at the same time is right change in the way you think about your -- the structure of the business? Or are you going to carry a larger amount of debt? Or is the set of that $75 million revolver, I think you have?

[Doug Moore, executive]

So the $75 million revolver is able to cover the current indebtedness. And there's definitely like we -- like I said, we've stockpiled quite a fair amount of inventory, like we've increased raw materials by $40 million in the past 12 months. There's some timing to the -- if you look at our payables, deferred revenue, we used to pull those came down quite a bit, so there's a cash flow impact there. But the expectation is with carrying on business as is, the indebtedness would go away in the next quarter or so.

[Robert Young, analyst]

Okay. So same as it happened in 2008. Okay. And then the $3.2 million in acquisitions, I didn't have a chance to go through the MD&A. I don't know if you discussed it in there. Maybe just give some color on what that is.

[Doug Moore, executive]

It's the same -- the investments are the same nature as in Q1.

[Robert Young, analyst]

So it's an additional -- so these are marketed securities or...

[Doug Moore, executive]

Yes.

[Robert Young, analyst]

So is it the same thing or you just building a larger position in the same security?

[Doug Moore, executive]

It's $3.2 million additional investments.

[Operator]

Thank you. There are no further questions at this time. I will now turn the call back to Brian Campbell for closing remarks.

[Brian Campbell, executive]

Thank you. 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 second quarter of fiscal 2023, which saw strong quarterly sales of $113.2 million, solid gross margins of 59.6% in the quarter. We are entering into the second half of fiscal 2023, with significant momentum fueled by a combined purchase order backlog, plus November shipments, totaling in excess of $188 million.

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 on our leadership position in the broadcast and media technology sector. Thank you, everyone, and good night.

[Operator]

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.