Evertz Technologies Ltd

TSX:ET

Earnings Call Analysis

Evertz Reports Solid Growth and Increased Dividend in Recent Quarter

Evertz Technologies achieved robust second-quarter sales of $125.3 million, a 12.2% increase sequentially, driven by a 28.2% hike in the U.S. and Canada. Recurring software revenue surged 23.7% year-over-year, hitting $54.8 million. The gross margin remained healthy at 59.3%. With a purchase order backlog exceeding $298 million and November shipments reaching $50 million, Evertz is well-positioned for future growth. The Board raised the quarterly dividend to $0.20 per share, reflecting confidence in the company's prospects. Overall, Evertz's strategic focus on software-defined solutions is yielding positive results, indicating a strong outlook ahead.

Evertz Technologies Achieves Strong Second Quarter Performance

In the second quarter of fiscal 2025, Evertz Technologies reported impressive sales of $125.3 million, marking a 12.2% increase sequentially from the previous quarter. The U.S. and Canada regions were particularly strong, with revenues climbing 28.2% to $94.9 million. A noteworthy highlight was the 23.7% year-over-year growth in recurring software services revenue, totaling $54.8 million. The company successfully managed its customer base with no single client exceeding 16% of total sales, reflecting a diversified revenue stream.

Solid Profit Margins and Earnings Growth

The gross margin for the quarter stabilized at 59.3%, consistent with the company's target range. This margin is crucial as it underscores Evertz’s effective cost management amidst fluctuating revenues. The net earnings for the quarter reached $15.9 million, translating to a fully diluted earnings per share of $0.21, showing a robust return for shareholders.

Operational Highlights Underpinning Growth

Evertz showcased its innovative capabilities at the National Broadcast Conference, where its RF over IP platform garnered a TVB Best of Show Award, and the DreamCatcher BRAVO Studio was recognized as a TV Technology Best of Show. The advanced features of DreamCatcher leverage AI and machine learning to enhance live production efficiency, illustrating Evertz’s commitment to innovation and market leadership.

A Growing Backlog Signals Future Revenue

As of late November 2024, Evertz boasted a purchase order backlog exceeding $298 million with shipments amounting to $50 million during that month. The management expressed that about 40-45% of this backlog is deliverable within the next year, signifying strong forward momentum. Evertz anticipates continued growth fueled by the increased demand for high-quality video solutions and the ongoing adoption of its IP-based offerings.

Strategic Investments and Dividend Increase

The company has allocated $36.3 million to research and development in the last quarter, a 12.7% rise year-over-year, reflecting its focus on innovation in software-defined networking and cloud solutions. This investment is pivotal for maintaining Evertz's competitive edge. Additionally, a quarterly dividend increase to $0.20 per share was announced, demonstrating continued confidence in the company’s prospects as this marks the fourth consecutive year of dividend hikes.

Financial Outlook and Key Challenges

While the company exhibits robust financial health, with $61.7 million in cash and a working capital of $199.8 million, it is critical to consider the dip in international revenues which fell by 46% year-over-year. Analysts suggest this may be related to project timings and a significant previous year's project that has not recurred. As Evertz enters the second half of fiscal 2025, management remains optimistic about growth prospects driven by a solid backlog and an increasing trend in software services revenue.

Earnings Call Transcript 2025-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Evertz Q2 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, John. Good afternoon, everyone, and welcome to Evertz Technologies Conference Call for our Fiscal 2025 Second Quarter Ended October 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 details. First off, sales for the second quarter totaled $125.3 million, up 12.2% sequentially from the prior quarter, and revenue in the U.S./Canada region was $94.9 million, up 28.2% sequentially. Reoccurring software services and other software revenue increased 23.7% year-over-year, totaling $54.8 million in the quarter.

Our base is well diversified with the top 10 customers accounting for approximately 45% of sales during the quarter with no single customer accounting for over 16% of sales. In fact, we had 134 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $74.3 million or 59.3%, which is within our target range.

Investments in research and development during the quarter totaled $36.3 million. Net earnings for the second quarter were $15.9 million, while fully diluted earnings per share were $0.21. Evertz's working capital was $199.8 million with cash of $61.7 million as at October 31, 2024.

Operational highlights for the quarter include: Evertz's stellar presence at the National Broadcast Conference, where Evertz's RF over IP platform was recognized with a TVB Best of Show Award and Evertz's DreamCatcher BRAVO Studio won a TV Technology Best of Show Award. DreamCatcher's advanced data-driven copilots provide the ability to automatically create clips, playlists and stories using AI with large language models and deep machine learning technology, making live productions even more creative and efficient.

At the end of November 2024, Evertz purchase backorder -- purchase order backlog was in excess of $298 million and shipments during the month were $50 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation; increased 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's IP-based software-defined video network solutions, Evertz's 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's Board of Directors declared a regular quarterly dividend increase to $0.20 per share payable on or about December 24th.

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

[Doug Moore, executive]

Thank you, Brian, and good afternoon. Looking at sales, revenues were $125.3 million in the second quarter of fiscal 2025 compared to $130.7 million in the second quarter of fiscal 2024. That's a decline of $5.4 million or 4% quarter-over-quarter. For the 6 months ended October 31, revenue was $236.9 million compared to $256.6 million in the same period last year. That represents a decline of $19.7 million or 7.7%.

As it relates to revenues in specific regions, the U.S. and Canadian region had revenue for the quarter of $94.8 million compared to $74 million last year. That represents an increase of $20.8 million or 28% quarter-over-quarter. Revenues in the U.S. and Canadian region were $168.8 million for the 6 months ended October 31, 2024, compared to $161 million in the same period last year, an increase of $7.8 million or 5%.

International region had revenues for the quarter of $30.4 million compared to $56.7 million last year. That's a decrease of $26.3 million quarter-over-quarter or 46%. International region represented 24% of total sales this quarter. For the 6 months ended October 31, International revenue was $68.1 million compared to $95.5 million in the same period last year, a decline of $27.4 million or 29%.

Gross margin for the second quarter was approximately 59.3% compared to 59.7% in the prior year quarter. And for the 6 months ended October 31, gross margin was approximately 59.3%. Both the quarterly and year-to-date margins are within our target range.

Looking at selling and administrative expenses, S&A was $18.4 million in the second quarter, an increase of $0.9 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 14.7% as compared to 13.4% for the same period last year. For the 6 months ended October 31, selling and administrative expenses were $36 million, an increase of $2.1 million from the same period last year. And selling and admin expenses as a percentage of revenue were approximately 15.2% over the period.

Research and development expenses were $36.3 million for the second quarter, which represents a $4.1 million increase from $32.2 million in the second quarter last year. The increase includes $1.9 million in increased salary and benefit costs and $0.6 million in specialized service costs. Just to provide a bit more color on the specialized service costs. That relates to the modernization of certain IP and code that we purchased from HARMAN a couple of years ago. That project is now substantially completed from an external cost perspective.

As a percentage of revenue, R&D expenses were 29% as compared to 24.6% in the prior year. For the 6 months ended October 31, research and development expenses were $73.7 million, represents an increase of $9.5 million of the same last year, and research and development expenses as a percentage of revenue were approximately 31.1% over the period compared to 25% for the same period last year.

Foreign exchange for the second quarter was a gain of $0.8 million as compared to a $2.9 million gain in the same period last year. So a relatively nominal gain this quarter. It's driven by a slightly stronger U.S./Canadian dollar between July 31, which we closed at approximately [ $1.381 and ] October 31, which we closed at approximately [ $1.3 ] million to -- Canadian dollars to U.S. dollars.

Foreign exchange for the 6 months ended October 31 was a gain of $0.8 million as compared to a gain of $0.9 million in the same period last year. Looking at the liquidity of the company. Cash as at October 31 was $61.7 million. That's compared to net cash of $86.3 million as at April 30, 2024. And working capital was $199.8 million as at October 31 compared to $201.4 million at the end of April 30, 2024.

When I look at the cash flows. The company used cash from operations of $9.6 million. That is net of a $31.5 million change in noncash working capital incurring taxes. And that includes a quarterly decrease in accounts payable of $21.8 million and a decrease in deferred revenue of $7.4 million. If the effects of the change in noncash working capital and current taxes were excluded from the calculation, the company generated $21.8 million in cash from operations during the quarter.

Looking at investing activities. The cash used -- the company used cash of $1.4 million, which was predominantly driven by the acquisition of capital assets. And the company used cash and financing activities of $18.7 million, just principally driven by dividends paid of $14.8 million and the purchase of capital stock under our NCIB for $1.8 million. Subsequent to the quarter, that NCIB has since expired, but we did renew for a new NCIB effective November 27.

Finally, looking at our share capital position as at October 31, 2024. Shares outstanding were approximately 76 million and options in equity-based restricted units outstanding were approximately 5.5 million. The weighted average of shares outstanding were 76 million and weighted average fully diluted shares was 76.8 million for the quarter ended October 31.

That brings to 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 statements printed 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 yourself.

[Brian Campbell, executive]

Thank you, Doug. John, 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]

A significant discrepancy in the growth rate between the North American region and international. I'm fully aware that you have a project-based business and you can have some quarterly lumpiness, but just is there anything else to call out in terms of the difference in growth rates between the regions?

[Doug Moore, executive]

One thing I could note is in Q2, we did have last year, I should note in Q2, we did have a large project for approximately $15 million in revenue that related to something we had press released about 1.5 years ago, there was a bit of a large spike in Q2, Q3. Some of that related to that project. That's one thing to call out when looking at year-over-year comparables.

[Thanos Moschopoulos, analyst]

That's helpful. Brian, anything that you would say more generally in terms of spending environment is status quo? Or are you seeing any significant difference versus, say, the prior quarter in that regard?

[Brian Campbell, executive]

So internationally, as Doug said, it's more project related. However, we are seeing very robust quotations and purchase orders in our North American region.

[Thanos Moschopoulos, analyst]

Okay. And if we look at the November shipments, and I mean just kind of comparing it to last year, is the implication that revenue for the upcoming quarters should be likely be up sequentially from what we saw in Q2?

[Brian Campbell, executive]

We are starting with a very strong first month shipments -- the November shipments that equals the highest that we've had in a disclosure period for monthly shipments. So we've got a very good Q3 start. And we're sitting on a very solid backlog at $298 million. That's again to so the combination of backlog and shipments is very solid.

[Thanos Moschopoulos, analyst]

Okay. From an OpEx perspective, anything you'd call out as we think about the near-term trajectory, I mean, aside for the $0.6 million related to the HARMAN costs you called out?

[Doug Moore, executive]

Yes. So I mean, just looking sequentially, I mean, this quarter, we did have IBC, as Brian mentioned, we attended there. So if comparing Q1 and Q2, we're up around $0.8 million. I mean the largest increase being $700,000 to $800,000 in trade show and promotion costs, which is largely attributed to IBC, frankly. So that's one thing to call out. Obviously, we still have trade shows in that in Q3, but that is a bit of a spike on the side.

On the R&D side, we're actually down a bit sequentially. So we're down just around like $1.1 million. About $500,000 of that relates to in Q1, we have a lot of summer co-ops that joined that didn't occur in Q2. And that wouldn't increase in Q3, but would reoccur in a future year. That -- yes, so other than that kind of special projects, we're working on some modernization of IP being done that -- yes, that's all I have the call over there.

[Thanos Moschopoulos, analyst]

Okay. And finally, the software and services revenue obviously had some very good growth year-over-year. Should -- I mean, I guess, longer term, you should expect that trajectory, I think, to continue as far as becoming a bigger part of the mix. But just as we think about sort of the next couple of quarters, would you also expect a similar dynamic with software and services becoming a higher component? Or as you look at your backlog, is there also a strong hardware opportunity that you're seeing as well in the backlog of the pipeline?

[Brian Campbell, executive]

We do continue to see strong hardware in the backlog and pipeline. It's a significant component. But definitely, the recurring software services component of the business, is one that we're emphasizing and have been growing pretty significantly in the last years. So that trend of us emphasizing recurring software and services and other software is an ongoing push.

[Operator]

Your next question comes from the line of Robert Young from Canaccord.

[Robert Young, analyst]

I think you said in the prepared comments that deferred revenue was down. I'm not sure if that's quarter-over-quarter or year-over-year. But if you could just dig into the drivers behind that?

[Doug Moore, executive]

Sure. So it's down quarter-over-quarter. So since July 31 and also since April 30 to year-end. If you look in the past 12 to 18 months, it has ramped up quite a bit. And now what's really, it's a timing of -- it's largely services and software solutions as the majority of it, and it's been triggered by some milestones being met. So whether it's commission -- finalization of commissioning or site acceptance or in some cases, just the amortization of cash upfront for warranties and long-term services. So that's the broad explanation.

[Robert Young, analyst]

Okay. So more related to long-term projects as opposed to something to do with reoccurring software or software contracts?

[Doug Moore, executive]

Sorry, those could be the same, right? So you could have a long-term software service contract -- clear on the question...

[Robert Young, analyst]

So maybe I'll ask it a different way. Would the deferred revenue, would it be down because of hardware-related or hybrid contracts? Or would it be related to something to do with the software growth? Because just given the software growth, seeing the 2 things at the same time, trying to understand that.

[Doug Moore, executive]

Sure. So -- what I would say again is that the majority of deferred revenue is -- not all of it, but the majority of it is software or service related. There is certain large projects in the past year including the one we press released that there was a lot of cash upfront for a longer term. And some of that is being amortized into revenue over time that is exceeding the cash received.

[Robert Young, analyst]

Okay. I see you raised the dividend. Is there any insights you can give into the policy or the thought process that the board goes through in making that decision? I guess it's the third year, I believe, it's been raised annually. So is that the driver? Maybe just give a sense of where the Board is thinking?

[Brian Campbell, executive]

Yes. So I guess, technically, it would be the fourth year -- fourth increase that we've had. But yes, the Board looks at the dividend, the business outlook going forward, the strength of our balance sheet and the increase in quarterly dividend does reflect the ongoing confidence of the Board and the business prospects for our business.

[Robert Young, analyst]

Would it be fair to say that you intend to raise that dividend annually going forward? Or is that going to be a decision you make every year?

[Brian Campbell, executive]

That's a decision that the Board makes every year, but that has been the trend.

[Robert Young, analyst]

Okay. And then the last question for me will just be around the backlog down a little bit, but just give a sense of how much do you expect that to convert over the next year, that would be helpful. And I'll pass the line.

[Brian Campbell, executive]

Yes. So the backlog is sequentially. So we're quite proud of the fact that it's up another $12 million in the quarter. And Doug, I believe it's 40% to 45% of the backlog is greater than 12 months out. So the bulk of it is due -- is deliverable in the next 12 months.

[Operator]

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

[Brian Campbell, executive]

Thank you, John. 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 continued strong quarterly sales of $125.3 million, solid gross margins of 59.3% in the quarter, which, together with Evertz's disciplined expense management yielded quarterly earnings per share of $0.21.

We're entering the second half of fiscal 2025 with significant momentum fueled by a combined purchase order backlog plus November shipments totaling in excess of $348 million, up $12 million from the prior quarter. By the continued adoption and successful large-scale deployments of Evertz's IP-based software-defined video networking and cloud solutions by the largest broadcast, new media source 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's 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 in the broadcast and media technology sector.

Thank you, everyone, and good night.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participant. You may now disconnect.