Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2019-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to today's Evertz Third Quarter 2019 Conference Call. As a reminder, this call is being recorded. It is Wednesday, March 13, 2019. 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, Greg. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for third quarter ended January 31, 2019, with Doug Moore, Evertz' Director of Finance and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on SEDAR. Doug 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 Doug will go into more detail. First off, we're pleased to report sales for the third quarter were up 21% year-over-year to a quarterly record high of $120.9 million. The increase was driven by a 17% sales growth in the United States/Canada region and 32% year-over-year growth in international sales.Our sales base is well diversified with the top 10 customers accounting for approximately 43% of sales during the quarter and with no single customer over 10%. In fact, we had 87 customer orders of over $200,000.Gross margin was 56% for the quarter. Net earnings for the third quarter were $21.9 million and fully diluted earnings per share was $0.28, inclusive of a foreign exchange loss of $400,000. Evertz's working capital was 27 point -- $278.6 million with $104.2 million in cash and marketable securities as at January 31. The purchase order backlog at the end of February was in excess of $77 million and shipments during the month were $24 million. We attribute the robust quarterly performance and solid shipments and purchase order backlog to the ongoing technical transition, channel and video services proliferation and the increasing global demand for high-quality video anywhere, anytime and specifically, to the growing adoption and ongoing success of Evertz's IT-based software defined networking solutions, our state-of-the-art DreamCatcher IP replay and production suite and Evertz's IT and virtualized cloud solutions. Today, Evertz's Board of Directors declared a dividend of $0.18 per share payable on March 29, 2019. I will now hand over to Doug Moore, Evertz's Director of Finance, to cover our results in greater detail.

[Doug Moore, Director of Finance]

Thank you, Brian, and good afternoon, everyone. Sales were $120.9 million in the third quarter of fiscal 2019 compared to $99.6 million in the third quarter of fiscal 2018, represents an increase of $21.3 million. Sales for the 9 months ended January 31, 2019, were $336.6 million compared to $309.8 million in the same period last year. This represents an increase of approximately 9%.The US/Canada region had sales for the quarter of $81.5 million, an increase of $11.8 million or 17% compared to $69.7 million in the same period last year. Sales in the US/Canada region were $234.2 million for the 9 months ended January 31, 2019, compared to $200.6 million in the same period last year. This represents an increase of $33.6 million or 17%.The International region had sales for the quarter of $39.5 million compared to $29.8 million last year. This represented an increase of $9.7 million. International segment represented 33% of total sales this quarter as compared to 30% in the same period last year. Sales in the International region were $102.1 million for the 9 months ended January 31, 2019, compared to $109.2 million in the same period last year. This represents a decrease of $7.1 million. Gross margin for the third quarter was approximately 56% as compared to 56.2% for the prior year third quarter. Gross margin for the 9 months ended January 31, 2019, was approximately 56.7% and within the company's historical range.Now selling and administrative expenses were $17.6 million for the third quarter, that's an increase of $1.8 million for the same period last year. Selling and admin expenses as a percentage of revenue were approximately 14.5% as compared to 15.9% for the same period last year. Selling and admin expenses were $49.9 million for the 9 months ended January 31, 2019, an increase of $2.2 million from the same period last year. For the first 3 quarters, selling and administrative expenses as a percentage of revenue were approximately 14.8% as compared to 15.4% in the same period last year.Research and development expenses were $21.6 million for the third quarter. That represents a $1.3 million increase from the third quarter last year. For the year, research and development expenses were $64.0 million, which represents an increase of $4.2 million over the same period last year. Foreign exchange for the third quarter, that was a loss of $400,000 compared to a loss of $3.8 million in the same period last year. Foreign exchange for the 9 months ended January 31 was a gain of $1.5 million as compared to a loss of $9.2 million in the same period last year. Now turning to a discussion of the liquidity of the company. Cash and marketable securities as at January 31, 2019, was $104.2 million as compared to $98.2 million as at April 30, 2018. Working capital was $278.6 million as at January 31, 2019, compared to $264.5 million at the end of April 30, 2018. Now looking specifically at the cash flows for the quarter ended January 31, 2019. The company generated cash from operations of $48.1 million, which includes a $25.2 million change in noncash working capital and current taxes. If the effects of the change of noncash working capital and current taxes are excluded, the company generated $22.9 million cash from operations for the quarter. The company also used $9.5 million from investing activities, which was principally driven by the business acquisition of Quintech for $6.6 million as well as capital assets of $2.9 million. The company used cash from financing activities of $13.9 million, which was principally driven by the dividends paid of $13.8 million. Finally, I'll review our share capital position as at January 31, 2019. Shares outstanding were approximately 76.5 million and options outstanding were approximately 2.7 million. The weighted average shares outstanding was 76.5 million, while the weighted average of fully diluted shares outstanding was also 76.5 million. This brings to a conclusion, the review of our financial results and position for the third 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. Now Brian, back to you.

[Brian Scott Campbell, Executive Vice]

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

[Operator]

[Operator Instructions] And first, from BMO Capital Markets, we have Thanos Moschopoulos.

[Thanos Moschopoulos, VP & Analyst]

Brian, you obviously had a nice uptick in your international business, which was encouraging given that business had been slower over the last few quarters. It doesn't seem like you had any inordinately large deals this quarter. So that uptick in international, is that being -- is that sort of broad-based strength? Or maybe just the timing of a relatively small number of projects?

[Brian Scott Campbell, Executive Vice]

So it would be a combination of projects and uptick. We actually had a solid international quarter in Q2. So we're just shy of $35 million of revenue. So we're up significantly year-over-year, but also sequentially internationally. So good, solid work by our channel partner and sales teams.

[Thanos Moschopoulos, VP & Analyst]

Can you call -- I mean, is that primarily Europe, or would you call it a specific region as far as the uptick?

[Brian Scott Campbell, Executive Vice]

I can't provide greater resolution as to whether it's predominantly in Europe, Asia, Latin America. It's fairly broad-based.

[Thanos Moschopoulos, VP & Analyst]

Fair enough. And I guess, just maybe the broader environment thing. I guess, if we focus on North America, you've had several quarters now of strength there. Any change over the past quarter or similar trends as you were seeing 3 or 6 months ago, in North America?

[Brian Scott Campbell, Executive Vice]

In terms of the revenues, we had very strong delivery and execution in the US/Canada region. And -- so once again to -- kind of like we're on back-to-back record quarters. So our Q2 was a record-high quarterly revenue and Q3 now as you see with the $120 million revenue sequential, very strong performances. And so we had very good broad-based success of the Evertz Technology Solutions.

[Thanos Moschopoulos, VP & Analyst]

Last quarter, you called this the dynamic of healthy growth being driven by both modern IP solutions as well as some of your baseband solutions, is that the same dynamic? Are both those areas showing strength?

[Brian Scott Campbell, Executive Vice]

So we do continue to see the baseband pulled along with the IP and virtualized solutions. But again, the strength and growth of Evertz business has been predominantly driven by the new technologies.

[Thanos Moschopoulos, VP & Analyst]

Okay. Any updates that you may be able to provide us with respect to your investments in EVS?

[Brian Scott Campbell, Executive Vice]

So there -- what you have is what's been publicly disclosed through the transparency notifications of Evertz ownership position. And there -- no. I can't provide any additional color other than what's been publicly disclosed through those transparency notification.

[Thanos Moschopoulos, VP & Analyst]

Okay, fair enough. One last one for me. Any commentary in terms of cloud and how that's developing over the past quarters? So you clearly have had some high-profile wins you've announced such as with Discovery, anything more recent in terms of what you're seeing in the pipeline over the last few months that you can provide some color on as far as customer adoption?

[Brian Scott Campbell, Executive Vice]

In terms of press releases, we have not -- we don't have any new press releases that I can currently speak to. But as you -- the $120 million revenue, record revenue in the prior quarter does speak to the strength of our cloud virtualized solutions and our software defined networking IP-based solution. So there we've had very good strong uptick. Not all of the customers have chosen to press release those, and we will work cooperatively with our customers to try and provide timely disclosure.

[Thanos Moschopoulos, VP & Analyst]

I guess, where I was going with that is whether sort of the recurring revenue kind of service-based model, whether that's starting to become a larger part of the business or whether it's still relatively smaller minority of customers opting for that route.

[Brian Scott Campbell, Executive Vice]

So the recurring revenue is a separate question and pretty distinct but -- and that is an increasing trend, but it's not reported as yet, separately.

[Operator]

Moving on, we have Steven Li with Raymond James.

[Steven Li, Senior Vice President]

Brian, given your comments, it seems that the velocity of shipment you saw this quarter should be sustainable, is that fair to say? And should we expect that much in Q4?

[Brian Scott Campbell, Executive Vice]

Steven, could you repeat the question for me, please?

[Steven Li, Senior Vice President]

Yes. So the shipment velocity you saw in December and January and November and then based on your comments seems like it should be sustainable, is that fair to say?

[Brian Scott Campbell, Executive Vice]

So we've had 2 record quarters back to back. And again, with Evertz, we do intend to have a lumpy business. It's one of the things that we caution people or I should say we suggest people look at a trailing 12-month basis for the business. So we've had very good quarterly revenue, and we continue to expect solid results, but I would caution you against extrapolating the trajectory, which you were talking about.

[Steven Li, Senior Vice President]

Okay. Is there any particular seasonality at work in Q4, Brian, we should be aware of?

[Brian Scott Campbell, Executive Vice]

Not necessarily seasonality in Q4. We have just -- we have good, solid backlog first month shipments leading into Q4. So we're anticipating solid results.

[Operator]

Moving on, we have Robert Young with Canaccord Genuity.

[Robert Young, Director]

The gross margins, I guess, the bottom of your range, although within range. Can you talk about the gross margins this quarter despite the high level of revenue at the bottom end of that range, will that have been driven by regional mix or product mix, can you maybe give us some color there?

[Brian Scott Campbell, Executive Vice]

Yes. So Rob, Doug Moore will field that question for you.

[Doug Moore, Director of Finance]

Sure. I think when it comes to gross margin, there's a lot of moving parts in the gross margin, including as you noted, the types of geographic mix and product mix within sales. While there is, as you notice, some -- there's going to be movements within each quarter, but as you notice, within our range and there's not really one item that we have to provide additional color on.

[Robert Young, Director]

So you're still confident with that range despite it being at the bottom end there?

[Doug Moore, Director of Finance]

Yes.

[Robert Young, Director]

Okay. Maybe one piece that you haven't updated us on for a while would be the ProAV component of the business. Maybe you could talk about the trends there and how that business is developing for you?

[Brian Scott Campbell, Executive Vice]

So Rob, it's Brian. The ProAV business has been developing very well. As you recall, we had the NIAP certification that came through roughly a year ago. That's opened the door to new customers. That security qualification that we receive definitely helps drive business and facilitates business. However, we don't necessarily have press releases associated with all the customer wins in that sector. So the AV business has been doing very well for us.

[Robert Young, Director]

Is that a business that eventually you may break out as a separate line item? Is it different enough from the broader business? And what would the target size may be as a percentage of the total revenue of the business be before you break it out?

[Brian Scott Campbell, Executive Vice]

The ProAV business is a very large addressable market. Many of the underlying technologies are the software defined networking, the compression solutions and our replay and production suite. So the technologies underlying the AV product solutions are fundamentally the same with different adaptations to suit the customer needs. So we do not break it out currently.

[Robert Young, Director]

Okay. And then maybe last question for me. Just very simple terms, backlog dropped at $26 million quarter-to-quarter and then presumably a lot of that was in this quarter that you just reported because the strong results there but still a big drop. Is there any seasonality in the way that you're able to convert larger deals? Is there something ahead of NAB that we should be thinking about or some seasonality here in the year that would be an impact? And then I think that's all the questions I have.

[Brian Scott Campbell, Executive Vice]

Yes, so that's a good question. The shipments in backlog are up 5% year-over-year. They are sequentially down and again to -- I would note that our prior quarter was a record high backlog in shipments numbers. So as I said, we do have lumpy deliveries and some large project base, so we're -- it's rather than seasonality, it's more project delivery based. So again we're -- moving forward, we've got solid momentum heading into Q4 with the backlog and shipments that are up 5% year-over-year.

[Operator]

And at this time, it looks like we have nothing further from the audience. So that will conclude our Q&A session. I'd like to turn the floor back to Mr. Brian Campbell for any additional or closing remarks.

[Brian Scott Campbell, Executive Vice]

Thank you, Greg. And I'd like to thank our participants for their questions and to add that we're very pleased with the company's strong performance during the third quarter, which saw sales rise 21% year-over-year to record quarterly high of $120.9 million, including a 17% increase in US/Canada region and a 32% international increase. Solid gross margins of 56% in the quarter, yielding net earnings of $0.28 per share. We're entering the fourth quarter of fiscal 2019 with significant momentum, fueled by a growing adoption and successful large-scale deployments of Evertz's IP-based software defined networking and virtualized cloud solutions deployed by some of the largest broadcast, new media service provider and enterprise companies in the industry. By the continuing success of DreamCatcher, our state-of-the-art IP-based replay production suite and a combined purchase order and backlog plus February shipments in excess of $101 million, a 5% increase, year-over-year. With our significant investment in software-defined IP, IT and virtualized cloud technologies, industry-leading deployments numbering well over 400 for IP solutions and the capabilities of our staff, Evertz remains focused upon building upon our position as one of the largest pure players and leading innovators in the video technology sector. Thank you, everyone, and good night.

[Operator]

Once again, ladies and gentlemen, that concludes our call for today. Thank you for joining us. You may now disconnect.