Evertz Technologies Ltd

TSX:ET

Earnings Call Analysis

Evertz Reports Robust Q2 2024 Performance

Evertz Technologies reported a record high Q2 revenue of $130.7 million, up 15% YoY, with a large and diversified customer base. Gross margin was solid at 59.7%, and net earnings were $22.3 million, translating to $0.29 EPS. The company's working capital stood strong at $191.3 million. A significant backlog exceeding $324 million and international sales boosting by 128% underpin the firm's momentum, while the quarterly dividend increased to $0.195 per share.

Robust Revenue Growth and Profitability

The company celebrated a record-breaking quarter, with sales soaring to $130.7 million, a 15% increase from the previous year's $113.2 million. This growth signifies the success of the company's diversified customer base and its ability to secure significant orders, as evidenced by 100 customer orders exceeding $200,000. Net earnings also reflected this prosperity, reaching $22.3 million for the quarter.

Operational Success and Future Potential

The operational achievements of the company were prominently displayed at the International Broadcast Conference, earning recognition for their innovative virtualized media processing platform and cloud-based video processing services. These advancements play a crucial role in the substantial purchase order backlog of over $324 million at the end of November 2023, augmented by the shipments of $48 million over the month. The high demand for quality video services globally is a driving force behind the company's positive financial outlook.

International Expansion and Strategic Moves

The company has experienced exponential international growth, with international sales catapulting by 128% to $56.8 million for the quarter. This impressive uptrend, which includes the delivery of approximately $15 million of a $25 million international order, has contributed to the rise of international segment sales to 43% of total sales for the current quarter. Additionally, the company's strategic decisions, such as the disposal of investments yielding $6.3 million, underscore its ability to manage assets effectively for financial optimization.

Gross Margin Stability Amidst Growth

The company posted an exceptional gross margin of 59.7%, attributing it to project delivery expansion rather than any single unusual item. This gross margin represents the higher end of the target range and reflects the company's efficiency and robust product mix.

Dividend Growth Reflecting Strong Balance Sheet

The company has delighted shareholders with the announcement of a quarterly dividend increase to $0.195, a testament to its strong cash flow and pristine balance sheet. This decision, rooted in the board's strategic discussions, indicates confidence in the company's cash generation capabilities and its commitment to delivering shareholder value.

Backlog and Revenue Recognition

Although the backlog has seen a decline of $70 million in the last two quarters from its peak, an impressive 53% is expected to convert into recognized revenue over the next 12 months. This underscores the company's capacity for sustained revenue streams and offers a glimpse into its future earning potential.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Evertz Second Quarter Investor Call. [Operator Instructions] 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, Jenny. Good afternoon, everyone, and welcome to Evertz Technologies' conference call for our fiscal 2024 second quarter ended October 31, 2023, 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 details. First off, sales for the second quarter totaled a record high $30.7 million (sic) [ $130.7 million ], up 15% compared to $113.2 million in the second quarter of last year. Our base is well diversified with the top 10 customers accounting for approximately 48% of sales during the quarter with 1 customer accounting for approximately 11.4%. In fact, we had 100 customer orders of over $200,000 in the quarter.

Gross margin in the quarter was $78 million or 59.7%, which is at the upper end of our target range. Investments in research and development during the quarter totaled $33.2 million. Net earnings for the second quarter were $22.3 million, while fully diluted earnings per share were $0.29. Evertz working capital was $191.3 million with cash of $55.9 million as at October 31.

Operational highlights for the quarter include Evertz' stellar presence at the International Broadcast Conference where Evertz ev670 virtualized media processing platform won a TV Tech Best of Show and the Evertz Reflektor cloud video processing platform was recognized with a TVB Best of Show Award. This Software-as-a-Service SaaS platform for media transcoding is helping customers optimize their operations by leveraging adaptable cloud-based workflows.

At the end of November 2023, Evertz purchase order backlog was in excess of $324 million and shipments during the month were $48 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation, increasing global demand for high-quality video anywhere, anytime. The ongoing technical transition to IP, IT and cloud-based architectures in the industry and specifically to the growing adoption of Evertz' IP-based software-defined video networking solutions, Evertz' IT and cloud solutions, our immersive 4K, 8K ultra-high definition solutions, 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 regular quarterly dividend increased to $0.195 per share payable on or about December 21.

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

[Doug Moore, executive]

Thank you, Brian, and good afternoon. Starting at -- looking at revenues. Sales were $130.7 million in the second quarter of fiscal 2024 compared to $113.2 million in the second quarter of fiscal 2023. That's an increase of $17.5 million or 15% quarter-over-quarter. For the 6 months ended October 31, 2023, sales were $256.6 million compared to $214.8 million in the same period last year. That represents an increase of $41.8 million or 19%.

As it relates to revenues in specific regions in Canada and the U.S. combined, we had sales for the quarter of $74 million compared to $88.3 million last year. That represents a decrease of $14.3 million or 16% quarter-over-quarter. Sales in the U.S. and Canadian region were $161 million for the 6 months ended October 31, 2023, compared to $166.5 million in the same period last year, a decrease of about 3%.

International region had sales for the quarter of $56.8 million as compared to $24.9 million last year. It represents an increase of $31.9 million quarter-over-quarter or 128%. International segment represented 43% of total sales in the current quarter. For the 6 months ended October 31, International sales were $95.5 million compared to $48.3 million in the same period last year, an increase of $47.2 million or 98%.

Gross margin for the second quarter was approximately 59.7% compared with 59.6% in the prior year quarter and within our target range. For the 6 months ended October 31, gross margin was approximately 58.5%, also within our target range.

Turning to selling, admin expenses. Selling, admin was $17.5 million in the second quarter, which is an increase of $2.8 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 13.4% as compared to 13% for the same period last year. Selling and admin expenses were $33.9 million for the 6 months ended October 31, 2023, an increase of $6.2 million for the same period last year. As a reminder, the prior year expenses in Q1, so Q1 prior year, included a $3.8 million recovery that didn't reoccur in the current year, and that partially explains the large increase 6 months over 6 months. Selling and admin expenses as a percentage of revenue were approximately 13.2% over the period as compared to 12.7% through the same period last year.

Research and development expenses were $32.2 million for the second quarter. That represents a $3.5 million increase from $28.7 million in the second quarter last year. As a percentage of revenue, R&D expenses was 24.6% compared to 25.3% in the prior year. For the 6 months ended October 31, Research and development expenses were $64.2 million. That represents an increase of $7.1 million over the same period last year, and the increase includes approximately $5.5 million in increased salary cost. Research and development expenses as a percentage of revenue were approximately 25% over the 6-month period as compared to 26.6% for the same period last year.

Foreign exchange for the second quarter was a gain of $2.9 million when compared -- and that's compared to $3 million in the same period last year. The current period gain was predominantly driven by approximately 4% increase in the value of the U.S. dollar as at October 31, 2023, compared to July 31, 2023. Foreign exchange for the 6 months period ended October 31, 2023, was a gain of $0.9 million. That's compared to a gain of $4 million in the same period last year.

Turning to a discussion of liquidity of the company. Cash as at October 31, 2023, was $55.9 million as compared to net cash of $6.5 million as at April 30, 2023. Working capital was $191.3 million as at October 31, 2023, compared to $171.4 million as at the end of April 30, 2023.

Looking now at cash flows. The company generated cash in operations of $20.3 million, which is net of $10.6 million change in nonworking capital and current taxes. That includes a quarterly decrease in accounts payable of $28.8 million. If the effects of the change in nonworking capital -- noncash working capital, sorry, and current taxes are excluded from the calculation, the company would have generated $30.9 million in cash from operations during the quarter.

Net investing activities, the company generated cash of $4.1 million, which was predominantly driven by proceeds from disposal of investments of $6.3 million. This was partially offset by cash used for the acquisition of capital assets of $2.3 million. The company used cash and financing activities of $17 million, which was principally driven by dividends paid of $14.5 million.

Finally, I'll look at our share capital position as at October 31, 2023. Shares outstanding were approximately 76 million, and options in equity-based restricted share units outstanding were approximately 6 million. The weighted average shares outstanding were 76.1 million, and the weighted average fully diluted shares was 76.7 million for the quarter ended October 31.

That brings to conclusion the review of our financial results and position for the second quarter. And 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. Jenny, we're now ready to open the call to questions.

[Operator]

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

[Thanos Moschopoulos, analyst]

The gross margin was obviously very strong. I think it might be our best ever, and that's despite a higher international mix. And I know that margins can fluctuate based on the mix in any given quarter. But anything that you would call out as part of that dynamic?

[Doug Moore, executive]

No, I mean, you're right in looking at the history. You see a correlation between international revenue and lower margins. I mean that's just -- depending on the projects we delivered in the quarter, it just pushed up the margin. There's not really any onetime or unusual items to point out. It's really just the mix driving it. So I mean we are still within our range, I mean, higher end of it, of course, but I mean that's just the fluidity to it. Not really anything to point to you specifically.

[Thanos Moschopoulos, analyst]

Would it be the case still that perhaps is like a higher software and/or cloud mix in there, which is contributing to the margins?

[Doug Moore, executive]

Again, I'm just going to point to the mix. So I guess what I would say is if you look at Q1, it's 57.5%, so I think we're sitting in our target the last couple of quarters. We were at 59.5% in Q4 last year. So it's been a positive trend there, but it's not really a product mix driven and not really a specific item to point to.

[Thanos Moschopoulos, analyst]

Okay. Brian, any comments in terms of the spending environment? And I know that the dynamics and the demand that you see for your products is always somewhat different than what the market as a whole may be doing. But certainly, it seems like there's been an uptick in growth if we look at the strong growth rate you've had the last couple of quarters and the strong shipments reported for November. So might some of this be kind of pent-up demands coming out of -- with component shortages residing during the pandemic or anything else that you would more specific as far as market share gains? And any commentary would be helpful.

[Brian Campbell, executive]

So yes, Thanos, from Evertz' perspective, it's been a very good quarter both in terms of delivery of projects and revenue and also securing new orders for good profitable business and large contracts as well, too. So Evertz does see a very good, strong environment for our products whether that's specific to our customers or an underlying trend for the industry. The industry trend, I'll have to leave that to you, but definitely, we're seeing a very productive environment for ourselves.

[Thanos Moschopoulos, analyst]

Okay. North America was obviously down year-over-year, presumably more to do with project timing and maybe tough year-over-year comps rather than being indicative of any softness in that market.

[Doug Moore, executive]

Yes. I mean there's just some natural lumpiness to it, right? So you're on the right path there. It's not really which you could point to. It's just the timing of certain deliveries and milestones that went out. So...

[Thanos Moschopoulos, analyst]

Okay. Finally, with respect to cloud, any particular update you can offer? I mean, clearly, there's been a trend of customers, larger customers adopting cloud. Is that something that you're seeing continue? Any update in terms of what you're seeing as far as be it pipeline customer discussions and so forth would be helpful.

[Brian Campbell, executive]

So our cloud discussions with customers and our deliveries continue to roll out and be very encouraging, very strong. And of course, that's anchored by the $152 million 5-year purchase order that we received and disclosed. So that is a very significant cloud deployment, multiyear deployment both in terms of products and services, and that does underpin that sector for us.

[Operator]

Your next question is from Robert Young from Canaccord Genuity.

[Robert Young, analyst]

Nice to see the dividend increase. I was wondering if you could share if there's any policy around that or any way that you're organizing the timing and the quantum of that increase? It looks like you're doing it once a year. Maybe just give me any kind of color you can around that.

[Brian Campbell, executive]

So Rob, we are pleased to announce the $0.195 quarterly dividend. The Board is cognizant of our cash flow and cash buildup, and that increase to $0.195 reflects very strong, pristine balance sheet and our cash flow generation capabilities as well, too. So it is a Board-based discussion.

[Robert Young, analyst]

All right. The -- maybe a little more on the international growth. You had that $25 million international order in April. And I believe the last couple of quarters, you said that you hadn't seen that pass-through revenue. So is that the $25 million deal? Or is there some part conversion of that here?

[Doug Moore, executive]

Yes. So I mean you're correct in your assertion of the prior quarter. There wasn't any. I mean there's quite a variety of different projects that happen to get delivered in Q2 here in the International region. I would say that approximately $15 million of that $25 million went out in the quarter in Q2. So I mean there's certainly a portion of that associated with that project.

[Robert Young, analyst]

Okay. And that's the large customer, the 11.4%. That's about $15 million. So that's what you're saying.

[Doug Moore, executive]

Yes, that's from approximately $25 million, press release. Yes.

[Robert Young, analyst]

Okay. And then if you can give any other color around this $4.1 million generated in the investment activities. You gave a little bit of color in the prepared remarks, but I missed it. Maybe if you can just expand on that.

[Doug Moore, executive]

Yes, sure. So it's I mean -- so $6.3 million is disposal of investments. So on the balance sheet, we no longer have investments, so they're now disposed of. There's $6.3 million that came from there and then partially offset just by a little over $2 million in capital asset purchases.

[Robert Young, analyst]

Right. Okay. Last question for me is just around the backlog trend. It peaked at, I guess, just under $400 million, $394 million. It's down $70 million in the last 2 quarters, still at a very high level obviously, highest ever. But if you could give maybe just a little bit of context around the trend in the backlog. Maybe you can give us maybe the moving parts there. That would be helpful. And then I'll pass the line.

[Doug Moore, executive]

I guess I could say a couple of different things. So I would say that approximately 45% of that or a little above it is just -- 47%, I think, is about expected to be more than 12 months out, just to provide a little color in that sense. On the big -- I'm taking things off on the big $150 million purchase order to date. The first 2 quarters, we've recognized about $11 million. And then like I mentioned, the other large order that we press released is another $15 million that comes off if you normalize that a bit, I guess, but [indiscernible] to provide color on.

[Robert Young, analyst]

Okay. And you said roughly -- 47% -- sorry, I missed the context there. Half of it is within the next 12 months. Is that what you'd said, that -- of the current backlog.

[Doug Moore, executive]

So 47% is greater than -- it is expected to get delivered in more than 12 months from now.

[Robert Young, analyst]

Got it. So that means obviously the other 53% is going to flow through the income statement in the next 12 months.

[Doug Moore, executive]

That's correct.

[Operator]

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

[Brian Campbell, executive]

Okay. Thanks, Jenny. I'd like to thank the participants for their questions and to add that we are very pleased with the company's performance during the second quarter of fiscal 2024, which saw record quarterly sales of $130.7 million, an increase of 15% year-over-year; strong gross margins of 59.7% in the quarter, which, together with Evertz' disciplined expense management, yielded quarterly earnings per share of $0.29.

We're entering into the second half of fiscal 2024 with significant momentum fueled by a combined purchase order backlog plus November shipments totaling in excess of $372 million by the growing adoption and successful large-scale deployments of Evertz' IP-based software-defined video networking and cloud solutions by some of the largest broadcast, new media service provider and enterprises 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 600 industry leading IP SDN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position to provide innovative solutions to customers and deliver to shareholders.

Thank you, everyone, and good night.

[Operator]

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.