Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2018-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Evertz' Third Quarter 2018 Conference Call. As a reminder, today's conference is being recorded. It is Thursday, March 1, 2018. At this time, I would 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, Vicky. Good afternoon, everyone, and welcome to the Evertz' Technologies conference call for third quarter ended January 31, 2018, with Anthony Gridley, Evertz' Chief Financial Officer; and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on SEDAR. Anthony and I will comment on the financial results, and then open the call to your questions.I'd like to start with a few highlights, and then Anthony and I will go into greater detail. First off, sales for the third quarter were up 9% year-over-year to $99.6 million, driven by 23% sales growth in the United States/Canada region. Our sales base is well diversified, the top 10 customers accounting for approximately 43% of sales during the quarter, with no single customer over 7%. In fact, we had 73 customer orders of over $200,000. Gross margin was 56.2% for the quarter. Net earnings for the quarter were $14.7 million, and fully diluted earnings per share was $0.19, inclusive of a foreign exchange loss of $3.8 million in the quarter.Evertz' working capital was $277.6 million, with $98.2 million in cash as at January 31, 2018. The purchase order backlog at the end of February was in excess of $76 million, and shipments during the month of February were $20 million. We attribute this robust quarterly performance and solid shipments and purchase order backlog to the ongoing technical transition in the industry, channel and video services proliferation, the increasing global demand for high-quality video anywhere, anytime and specifically to the growing adoption of Evertz' IP-based Software-Defined Networking solutions, our state-of-the-art DreamCatcher IP replay and production suite and Evertz' IT and virtualized cloud solutions.Today, Evertz' Board of Directors declared a dividend of $0.18 per share payable on March 16, 2018.I'll now hand over to Anthony to cover our results in greater detail.

[Anthony Ronald Gridley, CFO & Corporate Secretary]

Thank you, Brian. Good afternoon, everyone. Sales were $99.6 million for the third quarter of fiscal 2018 compared to $91.1 million in the third quarter of fiscal 2017, an increase of $8.5 million or approximately 9%. Sales were $309.8 million for the 9 months ended January 31, 2018, compared to $277.7 million in the same period last year. This represents an increase of approximately 12%. U.S./Canada region had sales for the quarter of $69.7 million, an increase of $12.9 million or 23% compared to $56.8 million in the same period last year.Sales in the U.S./Canada region were $200.6 million for the 9 months ended January 31, 2018, compared to $171.2 million in the same period last year, which represents an increase of $29.4 million or 17%. International region had sales for the quarter of $29.8 million compared to $34.3 million last year, represents a decrease of $4.5 million. International segment represents 30% of total sales this quarter as compared to 38% in the same period last year. Sales in the International region were $109.2 million for the 9 months ended January 31, 2018, compared to $106.5 million in the same period last year. This represents an increase of $2.7 million. Gross margin for the third quarter was approximately 56.2% as compared to 56.1% for the third quarter ended January 31, 2017. Gross margin for the 9 months ended January 31 was approximately 56.1% and within the company's historical range. Selling and admin expenses were $15.8 million for the third quarter, an increase of $0.3 million from the same period last year. Selling and admin expenses as a percentage of revenue are approximately 15.9% as compared to 17% for the same period last year. Selling and admin expenses were $47.7 million for the 9 months ended January 31, 2018, an increase of $2 million from the same period last year. For the first 3 quarters, selling and admin expenses as a percentage of revenue were approximately 15.4% as compared to 16.5% for the same period last year. R&D expenses were $20.3 million for the third quarter, which represents a $1.8 million increase from the third quarter last year. For the year, R&D expenses were $59.8 million, which represents an increase of $6 million over the same period last year.Foreign exchange for the third quarter was a loss of $3.8 million compared to a loss of $4.3 million over the same period last year. Foreign exchange for the 9 months ended January 31, was a loss of $9.2 million as compared to a gain of $5.8 million in the same period last year.Turning to a discussion of the liquidity in the company. Cash at January 31, 2018, was $98.2 million as compared to $54.3 million as of April 30, 2017. Working capital was $277.6 million at January 31, 2018, compared to $264.6 million at the end of April 30, 2017. Now looking specifically at the January 31 quarter. The company generated cash from operations of $50.7 million, which included a $37.8 million change in noncash working capital and current taxes. The effects of the change in noncash working capital and current taxes are excluded, the company generated $12.9 million cash from operations for the quarter. The company generated $2.6 million cash from investing activities, which is principally driven by the proceeds from the disposal of property plants and equipment of $6.1 million, offset by the purchase of capital assets of $3.6 million. The company used cash from finance activities of $8.9 million, which was principally driven by dividends paid of $13.8 million, offset by $4.9 million from the exercised employee stock options. Finally, I will review our share capital position at January 31, 2018. Shares outstanding were approximately 76.5 million and options outstanding were approximately 2.1 million. Weighted average shares outstanding were 76.3 million and weighted average fully diluted shares outstanding were 76.5 million.This brings to conclusion the review of our financial results and position for the third quarter. Finally, I'd 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. Now Brian, back to you.

[Brian Scott Campbell, Executive Vice]

Thank you, Anthony. Vicky, we're now ready to open the call to questions.

[Operator]

[Operator Instructions] And we'll go first to Anshu Deora with Raymond James.

[Anshu Deora, Associate]

In terms of the International revenues, why was it down year-over-year, and when can we expect a rebound? And is that in fiscal 2019?

[Anthony Ronald Gridley, CFO & Corporate Secretary]

So specifically, the International revenues are down this quarter, but we wouldn't anticipate that there's -- that they are going to be down year-over-year for any extended period. So we traditionally had, if you look at trailing 12 months or on an average 12-month period, growth on both our domestic and International sectors.

[Anshu Deora, Associate]

Is there a reason for that decline this quarter?

[Anthony Ronald Gridley, CFO & Corporate Secretary]

No. It's primarily -- I'd attribute it to quarterly fluctuations and the timing of projects.

[Anshu Deora, Associate]

Okay, makes sense. And I just wanted to get a sense of the timeline for the SDVN opportunity. How long should we see SDVN presenting a growth opportunity for Evertz?

[Anthony Ronald Gridley, CFO & Corporate Secretary]

The Software-Defined Networking and the virtualization of our solutions is very early and in the curve in terms of overall industry adoption, and we've been very fortunate to have over 100 large-scale deployments with industry leaders and -- around the globe. And -- but, again, too, this is -- it's very early days for the transition to IP Software-Defined Networking. While we're very established and well-known and successful, it's early in the adoption phase.

[Anshu Deora, Associate]

Okay. And lastly, your purchase backlog was down quite a bit year-over-year. Are you expecting the strong contract towards in March or April to catch up?

[Anthony Ronald Gridley, CFO & Corporate Secretary]

Well, we were coming into NAB, which will be early in April. So that's in Las Vegas and the largest broadcast trade show in the industry. So -- and oftentimes, we do see a significant uptick. If you'd look at our backlog, although it's down this quarter, it is basically on pace with the 2-year average of their backlog.

[Operator]

And we'll go next to Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

Brian, maybe to ask the International question a bit differently. If you looked at recent quarters, it seems like your growth in North America has consistently outpaced your International growth. Would -- do you say that's reflective of a macro dynamic? Or might that be more reflective of where North America is in terms of the IP adoption and the fact that's a key driver of spending?

[Brian Scott Campbell, Executive Vice]

It's probably a bit of both. When we look at, say, the trailing 12 months for International, and I'm looking at my numbers here, and we've put $158 million. And -- so a very good, solid International sales on a 12-month period. And we have been seeing more large-scale Software-Defined Networking and virtualization activities in our North American customer base. And as you're aware, we've focused much of our resources in delivering those innovative solutions to folks who were moving ahead with their IP adoption or their move to the private or public cloud.

[Thanos Moschopoulos, VP & Analyst]

You do have some International customers who've deployed your IP solutions. Would you say that the pipeline there is progressing in terms of what adoptions are looking like in internationally?

[Brian Scott Campbell, Executive Vice]

Yes, absolutely. We've got some marquee customers internationally, and we did a press release. The greater number is still in North America for us. And -- but definitely, we're seeing a very good traction internationally.

[Thanos Moschopoulos, VP & Analyst]

Now in terms of the recent ratification of the final SNMP standard. Has that had any kind of discernible impact as far as customer behavior with respect to moving forward on IP? Or was that sort of a nonevent in your perspective?

[Brian Scott Campbell, Executive Vice]

No, it's actually a very helpful industry event. So it's SNMP and 2110 is ongoing, and -- but it absolutely is helpful to move the industry forward. We have been leading the charge with our customers who are adopting an IP-based infrastructure solutions, and this will definitely help going forward.

[Thanos Moschopoulos, VP & Analyst]

Okay. And then maybe one for Anthony. Any expected impacts from the recent U.S. tax reform?

[Anthony Ronald Gridley, CFO & Corporate Secretary]

I'm sorry, from the...

[Thanos Moschopoulos, VP & Analyst]

From the tax reform in the U.S. Will you guys see much of an impact there or cost pressure?

[Anthony Ronald Gridley, CFO & Corporate Secretary]

Yes. So the lower rates will help us. Like in the current quarter, we had a little bit of a tax gain from reevaluating our liabilities in the U.S. -- our long-term tax liability. So mostly, timing differences with equipment and things. But it's a -- but a vast majority of our profits are in Canada. So I don't really see a substantial move percentage-wise off our about 25% to 26% range we're in, effective tax rate.

[Operator]

At this time, I will turn the call back to Brian Campbell for any additional or closing comments.

[Brian Scott Campbell, Executive Vice]

Thank you, Vicky. I'd like to thank our participants for their questions and then add that we are pleased with the company's performance during the third quarter, which saw sales rise 9% year-over-year to $99.6 million, including a 23% increase in the U.S./Canada region, solid gross margins of 56% yielding net earnings of $0.19, despite a $3 million foreign exchange loss. We're entering the fourth quarter of fiscal 2018 with significant momentum fueled by growing adoption of, and successful large-scale deployments of Evertz' IP-based Software-Defined Video Networking and our virtualized cloud solutions deployed by some of the largest broadcasts, new media, service provider and enterprise companies in the industry, and by the continuing success of DreamCatcher, our state-of-the-art IP-based and replay suite. With our significant investments in software-defined IP, IT and virtualized cloud technologies, industry-leading deployments and the capabilities of our staff, Evertz is poised to build upon our position as one of the largest pure players and leading innovators in the broadcast and- the media technology sector. Thank you, and good night.

[Operator]

That does conclude today's conference. We thank you for your participation.