Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and welcome to the Q3 2021 conference call. Today's conference is being recorded.At this time, I'd like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, sir.

[Brian Scott Campbell, Executive Vice]

Thank you, Cody. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our fiscal 2021 third quarter ended January 31, 2021, 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.I will begin by providing a few highlights, and then Doug will go into greater detail. First off, sales for the third quarter totaled $92.8 million. Our base is well diversified for the top 10 customers accounting for approximately 34% of sales during the quarter, with no single customer over 6%. In fact, we had 89 customer orders of over $200,000.Gross margin was 56% for the quarter. Net earnings for the third quarter were $10.4 million and fully diluted earnings per share was $0.13. Evertz's working capital was $221.6 million with $94.1 million in cash as at January 31, 2021.Operational highlights for the third quarter included, first, securing the ShotTracker USD 11 million financing led by Evertz and Verizon Ventures. This funding will support accelerated deployment across NCAA basketball conferences, expand remote live sports production in the cloud with 5G-enabled technology. And second, the announcement of a strategic asset acquisition of the iconic Studer audio brand technology and related assets from HARMAN International, a Samsung company. The acquisition was successfully closed on February 9, at which time, members of Studer's talented staff joined Evertz.Moving on. The purchase order backlog at the end of February was a record high $125 million, and shipments during the month were $25 million. We attribute this solid financial performance and robust combined shipments and purchase order backlog to the ongoing technical transition in the industry, channel and video services proliferation, increasing global demand for high-quality video anywhere, anytime and specifically to the growing adoption of Evertz IP-based software-defined video networking solutions, Evertz IT and virtualized cloud solutions, our immersive 4K Ultra-HD Solutions and our state of the art DreamCatcher IP replay and BRAVO live production suite.Today, Evertz's Board of Directors declared a dividend of $0.18 per share payable on March 25, 2021. I will now hand over the call to Doug Moore, Evertz's Chief Financial Officer, to cover our results in greater detail.

[Douglas Moore, CFO & Secretary]

Thank you, Brian. Good afternoon, everyone. Sales were $92.8 million in the third quarter of fiscal 2021, a decrease of $28.4 million compared to $121.2 million in the third quarter of fiscal 2020. Sales for the 9 months ended January 31, 2021, were $249.6 million compared to $344.4 million in the same period last year that represents a decrease of approximately 28%. The decrease in revenues during the 9-month period were due to travel restrictions and projects on hold as a result of the pandemic.Looking at specific regions. The U.S. Canadian region had sales for the quarter of $56.3 million, a decrease of $13.2 million or 19% compared to $69.5 million in the same period last year. Sales in the U.S. Canadian region were $159.1 million for the 9 months ended January 31, 2021, compared to $230.3 million in the same period last year, a decrease of $71.2 million or 31%.The international region had sales for the quarter of $36.5 million compared to $51.7 million last year, a decrease of $15.2 million or 29%. International segments represented 39% of total sales this quarter as compared to 43% in the same period last year. Sales in the international region were $90.5 million for the 9 months ended January 31, 2021, compared to $114.1 million in the same period last year that represents a decrease of $23.6 million or 21%.Gross margin for the third quarter was approximately 56%, consistent with the third quarter ended January 31, 2020. Gross margin for the 9 months ended January 31 was approximately 57.6% and within company store ranges. For operating expenses, selling and administrative expenses were $11.7 million for the third quarter, a decrease of $6.2 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 12.6% as compared to 14.7% for the same period last year. The decrease in S&A expenses in the quarter was driven by $2.7 million decrease in net salary expenses and $2.0 million decrease in travel and promotion costs, both due to the pandemic.Selling and admin expenses were $36.4 million for the 9 months ended January 31, 2021, a decrease of $15.8 million for the same period last year. For the 9-month period ended -- or sorry, 9-month period, selling and admin expenses as a percentage of revenue was approximately 14.6% as compared to 15.1% in the same period last year.Turning to R&D. Research and development expenses were $21.4 million for the third quarter, which represents a $2.6 million decrease from the third quarter last year. For the year, research and development expenses were $57.7 million, which represents a decrease of $11.9 million over the same period last year and driven by government assistance recorded as a reduction in costs. Foreign exchange for the third quarter was a loss of $5.3 million compared to a gain of $0.3 million in the same period last year. The loss was driven by a substantial decrease in the value of the U.S. dollar to Canadian dollar between October 31 and January 31.Foreign exchange for the 9 months ended January 31 was a loss of $9.8 million compared to a loss of $2.6 million in the same period last year. That 9-month losses was driven by the decrease in value of the U.S. dollar since April 30, 2020.Turning to a discussion of liquidity of the company. Cash, as of January 31, 2021, was $94.1 million compared to $75 million as of April 30, 2020. Working capital was $221.6 million as of January 31, 2021, compared to $223.7 million at the end of April 30, 2020.Now looking specifically at cash flows for the quarter, in the quarter ended January 31. The company generated cash from operations of $10.3 million, which is net of a $6.1 million change in noncash working capital and current taxes. If the effects of those changes in noncash working capital and current taxes are excluded, the company generated $16.4 million cash from operations for the quarter. The company used cash for investing activities of $10 million in the third quarter ended January 31, which was principally driven by the acquisition of capital assets of $2 million and an CAD 8 million investment in Ddsports or otherwise known as ShotTracker.The company used cash for financing activities of $15.5 million, which was principally driven by dividends paid of $13.7 million and $1.1 million in principal payments on capitalized leases.Finally, I will review our share position as at January 31, 2021. Shares outstanding were approximately 76.3 million and options outstanding were approximately 5.9 million. The weighted average shares outstanding were 76.3 million and weighted average or fully diluted shares were to 76.4 million. That brings us to the conclusion, the review of our financial results and the position -- and positions right, 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. Brian, over to you.

[Brian Scott Campbell, Executive Vice]

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

[Operator]

[Operator Instructions] We will take our first question from Robert Young with Canaccord Genuity.

[Robert Young, Director]

Maybe I'll start, logistical issues around site access, commissioning, integration, all of that. Is that improving? Or is it stable? Is there any kind of an update you can provide there, more as it relates to going forward?

[Brian Scott Campbell, Executive Vice]

So it's relatively stable. It's been a little bit more difficult to be in access into certain jurisdictions in Q3 as compared to Q2. But that said, we're still pushing ahead and executing very effectively on our customers' key projects that they want to deliver on. And a solid revenue numbers, but our backlog is at a record high, currently.

[Robert Young, Director]

Great. And is it fair to say that remote commissioning is offsetting some of the impact that you might otherwise have seen?

[Brian Scott Campbell, Executive Vice]

Yes, that's absolutely a fair statement. And we do our utmost to pre-configure systems before shipping and also implement remote commissioning as well, too. But numerous of the major installations do require on-site attention from Evertz, not just from the systems integrators who rack and install equipments and string fiber and other.

[Robert Young, Director]

Okay. Is that -- are those delays like driving the backlog up higher? Or would you say that the backlog is being driven by larger deals, demand strength, I think, you had a large deal that you announced at the end of January and last quarter, there was one customer who's 25% of revenue. Well, I guess, this quarter, I think you said 6%, so that didn't happen this quarter. But maybe we could talk about the components inside the backlog, is that just delays, or is it good quality projects, large projects?

[Brian Scott Campbell, Executive Vice]

It's primarily the timing of large quality projects coming in and also being multisite deployments. And also adding to the challenges, not just on our side, but also customer readiness as well, too. And the logistics of multisite deployments is challenged, not only for Evertz executing, but also for our customers as well.

[Robert Young, Director]

Okay. And the Studer acquisition, you said it closed. Is there anything that you can -- any guidance or indication you can give us on the potential contribution in the current quarter?

[Brian Scott Campbell, Executive Vice]

Not at this time. We're very excited to have -- to have closed the transaction that has an iconic brand as part of the Evertz portfolio and also to have the [ type of ] staff from the team join us as well, too. But you'll definitely see more of that in the future. But at this point, there's no financial disclosure on the transaction.

[Robert Young, Director]

Okay. Maybe last question for me is just your cash balances building, and you've been more active on M&A, at least in the recent. Maybe talk about how you think about that cash balance? Is it -- are you going to be more aggressive on M&A, or would you tend to think of it as returning to shareholders through dividends or otherwise? And then if you could just maybe comment a little bit on the environment that you're seeing out there for M&A. Is it a -- are lots of businesses for sale? Or are valuation's good? Maybe any color you can provide there would be helpful.

[Brian Scott Campbell, Executive Vice]

Thanks, Rob. So I'll start with -- so we're proud to have the very solid balance sheet and cash position that gives us the financial flexibility to entertained acquisitions or investments. You also see the ShotTracker was an investment, along with Verizon Ventures, to fund that very exciting business. So we're looking at multiple fronts on acquisitions and also strategic investments if it aligns very directly with Evertz. So the environment for investing, is fairly right. In terms of acquisitions, we are seeing opportunities. We're looking at them, and we are -- and continue to be a very discerning purchaser. But we're obviously open for business on that front.

[Robert Young, Director]

Are you seeing valuations higher than in the past, or is it a stable environment?

[Brian Scott Campbell, Executive Vice]

It's still a relatively stable environment. The valuations have been relatively high on private companies. It all depends on the state and timing of what the owners of the company want to do or whether they're a public entity as well too. Valuations depends on the sector and -- are in the context of the public market. So we do absolutely see opportunities that we're investigating.

[Robert Young, Director]

Okay. Maybe a last question, and I'll leave it. I think you talked about government assistance recorded as a reduction of cost. Is there any -- I haven't seen a number in any of the disclosure there. Is there a number that you could share government assistance, maybe by R&D and maybe by segment or whatever you can share? That would be helpful, and then I'll pass the line.

[Brian Scott Campbell, Executive Vice]

Yes. I mean, it's not as quite as simple as it's kind of baked into some inventory as well. But it's come down a lot since the first quarter. It's about -- it's less than half of what it was in the first quarter. So -- and it will continue to drop, I think, in the next -- going forward, it's going to really start to dwindle down as you may or may not know, but the Canadian program has, I think, goes through June, if I'm not mistaken, just 3 or 4 months left, but the amounts continue to dwindle away.

[Operator]

We will now take our next question from Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

Brian, can you comment on, I guess, your expectations with respect to the logistical constraints in the current quarter? Do you think it will be similar? Or are there any signs of an improvement at this point?

[Brian Scott Campbell, Executive Vice]

The current quarter, Q3, is very similar to Q2 in terms of the logistical constraints that we're seeing. But we are -- we have people deployed rolling out projects domestically in Canada, U.S. and also internationally as well, too.

[Thanos Moschopoulos, VP & Analyst]

I'm sorry, I was referring to Q4 versus Q3. But you commented...

[Brian Scott Campbell, Executive Vice]

Yes. So Q3 and Q4 are similar logistic constraints.

[Thanos Moschopoulos, VP & Analyst]

Okay. Okay. And then as far as the demand environment, did -- yes, are you seeing any sort of change there? Clients, maybe, gearing up for new projects and expectation as things reopen? Or has that been pretty consistent? Obviously, your backlog is very strong because you've had good demand throughout. But are you seeing any collaboration in that regard?

[Brian Scott Campbell, Executive Vice]

So throughout the pandemic, as you can tell from some of the order concentration that you would have seen over prior quarters, we continue to have deployments of very significant projects for large customers. And you would have seen the press release in January as well to -- of the $21 million purchase order. So we're definitely seeing a continuation of our -- of traction, adoption of Evertz products within our customer base. So that has been continuing. And we're fortunate to be in that position where we have very strong relationships with our customer base and also very innovative leading technology portfolios that help them with -- execute their business strategies for the future. So we're continuing to see very good demand.Our sales team have done an excellent job of capturing those opportunities. And we're doing our utmost to execute and deploy, but living within the constraints of the current pandemic-induced restrictions on site access and border crossings and quarantines that happen as a result of crossing international borders.

[Thanos Moschopoulos, VP & Analyst]

Okay. And then, finally, on the ITCs. Just remind us, I know that you've had a dispute, and now you're in the higher level of ITC. So just on a go-forward basis, how should we think about ITCs as a percentage of gross R&D expense? Should it be similar to this quarter? Or will it be coming down?

[Brian Scott Campbell, Executive Vice]

No. So it's actually 2 separate things. So last quarter, you're right, it was an effect of an audit. This is actually -- we received additional guidance on how the wage subsidy impacts the actual ITC, where it's more favorable than originally believed. But if you look at whether it's going forward, it should be more consistent. Maybe we do adjust our assumptions as it relates to audits. We do have accruals we bake in there for audit accruals, that those assumptions may be impacted favorably a bit. But I would say it will be -- if you use the before Q2 as a guide, it's maybe a little bit better than that, but it's -- that's a more comparable than what we are at either this quarter or last quarter.

[Operator]

And we'll now take our final question from Boyang Li with RBC Capital Markets.

[Boyang Li, Associate]

Can you talk through the investment in ShotTracker a bit more? Like, what's the business opportunity here in terms of product co-development or even cross-selling?

[Brian Scott Campbell, Executive Vice]

So the investment is actually a financial investment along with Verizon Ventures and other parties. So we are helping to fund the business opportunity of ShotTracker. There absolutely is the opportunity for business partnership as well, too, with our DreamCatcher and BRAVO live production in sports replay. So there's the opportunity for increasing automation and saving cost and also in the COVID pandemic environment being safer, having fewer people there as part of the production crew. So it aligns very nicely. And Verizon is a valued customer of Evertz, so they are -- we're very happy to partner with them as lead investors on this transaction. So it fits very nicely aligning with our sports portfolio and also the customer base.

[Boyang Li, Associate]

And I guess, how do you see the opportunity in live sports? Do you expect to invest more in sporing related products?

[Brian Scott Campbell, Executive Vice]

Could you repeat that for me? You broke up.

[Boyang Li, Associate]

Sorry. I was wondering what your view on live sporting is, and you're planning to make further investments in sporting-related products.

[Brian Scott Campbell, Executive Vice]

Well, we're a huge supporter of technologies for live sports, and we did see this as a really exciting and growing opportunity. So we're thrilled to be an investor and a participant in that ShotTracker opportunity, and we're going to continue to -- and develop products and look for opportunities and be a big part of the infrastructure solutions of many sports leagues around the world, who are pushing the envelope for higher resolution content and delivery to multiple parties. So it's front and center in -- around strategy.

[Operator]

That does conclude today's question-and-answer session. I would now like to turn the conference back over to Mr. Campbell for any additional or closing remarks.

[Brian Scott Campbell, Executive Vice]

Thank you, Cody. I'd like to thank our participants for the questions and that we are pleased with the company's strong performance during the third quarter, which saw quarterly sales of $92.8 million, solid gross margins of 56% in the quarter, delivering pretax earnings of $14 million despite a $5.3 million foreign exchange loss, all while investing $21 million in R&D to build future growth. We're entering the fourth quarter of fiscal 2021 with significant momentum fueled by a record high $125 million purchase order backlog plus $25 million February shipments totaling in excess of $150 million, by the growing adoption and successful large-scale deployments of Evertz's IP-based software-defined video networking and virtualized cloud solutions, by some of the largest broadcast new media service provider and enterprise companies in the industry and by government, by the financial strength and flexibility of a pristine debt-free balance sheet with over $94 million cash and by the growing adoption and successful large-scale deployments of Evertz IP-based software-defined video networks. With Evertz investments in software-defined IP, IT, virtualized and cloud technologies, the over 500 industry-leading IP SDVN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership. Thank you, everyone, and good night.

[Operator]

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.