Evertz Technologies Ltd
TSX:ET

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Earnings Call Transcript

Earnings Call Transcript
2022-Q3

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Operator

Good day and welcome to the Evertz Q3 Investor Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Please go ahead, sir.

B
Brian Campbell
executive

Thank you, Justin. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our fiscal 2022 third quarter ended January 31, 2022, 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 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 go into more detail.

First off, I'm very pleased to report that sales for the third quarter totaled $120.6 million, an increase of $27.8 million, up 30%, compared to $92.8 million for the third quarter last year. Our 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 113 customer orders of over $200,000.

Gross margin in the quarter was $69.2 million or 57.4% for the quarter, which is within our gross margin target range. Net earnings for the third quarter were $21.6 million, up 108% from last year. And fully diluted earnings per share was $0.28.

Evertz's working capital was $157.3 million, with $29.8 million in cash as at January 31, 2022. The purchase order backlog at the end of February was a record high of $176 million, and shipments during the month of February were $25 million. We attribute this very strong 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 cloud solutions, our immersive 4K Ultra-HD solutions, our state-of-the-art DreamCatcher IP replay and live production suite and BRAVO Studio.

Today, Evertz Board of Directors declared a dividend of $0.18 per share payable on or about March 24, 2022.

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

D
Doug Moore
executive

Thank you, Brian. Good afternoon, everyone. Looking at revenues. Sales were $120.6 million in the third quarter of fiscal 2022, an increase of $27.8 million or 30% compared to $92.8 million in the third quarter of fiscal 2021. For the 9 months ended January 31, 2022, sales were $324.9 million compared to $249.6 million in the same period last year. That represents an increase of approximately 30%.

Looking at specific regions. The U.S./Canadian region had sales for the quarter of $78.9 million, an increase of $22.6 million or 40% compared to $56.3 million in the same period last year. Sales in the U.S./Canadian region were $221.5 million for the 9 months period ended January 31, 2022, compared to $159.1 million in the same period last year. That's an increase of $62.4 million or 39%.

The international region had sales for the quarter of $41.7 million compared to $36.5 million last year, an increase of $5.2 million or 14%. The international segment represented 35% of total sales this quarter compared to 39% in the same period last year. Sales in international region were $103.4 million for the 9 months ended January 31, 2022, compared to $90.5 million in the same period last year. This represents an increase of $12.9 million or 14%.

Gross margin for the third quarter was approximately 57.4% compared to 56.0% in the third quarter last year and within our target range. Gross margin for the 9 months ended January 31 was approximately 57.5% and also within the company's target range.

For operating expenses, selling and administrative expenses were $16.0 million for the third quarter, an increase of $4.3 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 13.3% as compared to 12.6% for the same period last year. For the 9 months ended January 31, 2022, selling and administrative expenses were $44.7 million, an increase of $8.3 million compared to $36.4 million from the same period last year. For the 9 months period, selling and administrative expenses as a percentage of revenue were approximately 13.8% compared to 14.6% for the same period last year.

Turning to R&D. Research and development expenses were $26.0 million for the third quarter, which represents a $4.6 million increase from the third quarter last year. R&D expenses as a percentage of revenue were approximately 21.5% over the period as compared to 23.1% for the same period last year. For the year, research and development expenses were $75.1 million, which represents an increase of $17.4 million over the same period last year. R&D expenses as a percentage of revenue were approximately 23.1% over the period, and that's consistent with the same period last year.

Foreign exchange for the third quarter resulted in a gain of $1.7 million compared to a loss of $5.3 million in the same period last year. The current quarter gain was driven by an increase in the value of the U.S. dollar compared to Canadian between October 31 and January 31. Foreign exchange for the 9 months period ended January 31 resulted in a gain of $5.4 million as compared to a loss of $9.8 million in the same period last year. The 9-month gain is also driven by the increase in value of the U.S. dollar since April 30, 2021.

Turning to the discussion of liquidity of the company. Cash as at January 31, 2022, was $29.8 million as compared to $108.8 million as at April 30, 2021. Working capital was $157.3 million as at January 31 compared to $214.5 million as of the end of April 30, 2021.

Looking now specifically at the cash flows for the quarter ended January 31. The company generated cash from operations of $8.3 million, which is net of a $20.3 million change in noncash working capital and current taxes. If the effects of the change in noncash working capital and current taxes are excluded, the company generated $28.6 million cash from operations for the quarter.

The company used cash from investing activities of $0.7 million for the third quarter ended January 31, 2022, which was principally driven by the acquisition of capital assets of $1.2 million. The company used cash from financing activities of $15.7 million, which was principally driven by dividends paid of $13.7 million.

Finally, reviewing our share capital position as at January 31, 2022. Shares outstanding were approximately 76.2 million, and options outstanding were approximately 5.4 million. Lastly, the weighted average shares outstanding were 76.3 million, and weighted average fully diluted shares were 76.5 million.

That brings us to a conclusion of review of our financial results and the 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. Brian, back to you.

B
Brian Campbell
executive

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

Operator

[Operator Instructions] And our first question comes from Thanos Moschopoulos with BMO Capital Markets.

T
Thanos Moschopoulos
analyst

Brian, can you provide some color on the spending environment? I mean, obviously, you had a strong quarter. The backlog keeps increasing. Now as we're kind of maybe exiting some of the lockdowns in the pandemic, are you seeing an uptick in demand just from live events starting to pick up again or from previously shelved spending priorities coming back? What are you seeing in that regard?

B
Brian Campbell
executive

So thank you, Thanos. We are seeing very good solid demand from our existing customer base and some new but very good demand for Evertz next-generation IP solutions or cloud-based solutions, especially within the North American U.S. environment.

T
Thanos Moschopoulos
analyst

Okay. And in terms of the logistical constraints that you've had over the last -- I guess, throughout the pandemic, I mean, to what extent is that improving? I know that Canada/U.S. travel now is getting easier. But as far as deploying internationally, what's that situation looking like?

B
Brian Campbell
executive

So yes, with Canada/U.S., the logistics are getting easier. We have done very well over the past 2 years working through the pandemic, the quarantine. So we have a significant number of our people on staff available to travel to the U.S. to customer sites to help them with their installations and commissioning of solutions as well, too. We continue to execute to the best of our ability remotely.

But again, too, it's very helpful for many of these installs to have folks available for on-site commissioning. That does extend internationally as well, too. We have teams in geographic regions, both in Asia Pacific and in Europe, delivering major installs as well, too. So it is more challenging dealing with the logistics of quarantining and testing of our people abroad, but that has been continuing. So we haven't seen a significant change internationally in those constraints.

T
Thanos Moschopoulos
analyst

Okay. I guess up until this point, it seems like you've been doing well dealing with a potential component charges, supply chain issues. Does that remain the case? Or to what extent is that impeding some of the growth you may have otherwise had?

D
Doug Moore
executive

I'll comment to that. So the challenges associated with obtaining components and increased cost is consistent with the past many months now. I don't think that environment is expected to end in the immediate term. It is a bit of a fluid situation, but we are doing our best to mitigate the challenges associated with that.

Our inventory -- our raw materials and our inventory -- our inventory as a whole has increased about $12 million just since the last quarter. So we continue to stockpile inventory as much as possible, but there are certainly challenges in the environment remaining.

T
Thanos Moschopoulos
analyst

But it's fair to say that it's not been having all that material of a revenue impact at this point based on the mitigating actions you've taken?

D
Doug Moore
executive

So we have been able to and continue to ship. So...

B
Brian Campbell
executive

And delivered it at a near-record quarterly revenue level.

T
Thanos Moschopoulos
analyst

Okay. Great. Maybe one last one for me is, how do we think about the OpEx trajectory as travel and trade shows start to pick up again?

D
Doug Moore
executive

So one thing I'll note is that the quarter has no -- there's no government assistant programs that are included at this point anymore. So the quarter has no cost reductions associated with that. We did have a Q3 versus Q3, there is a $1.5 million increase in travel costs associated with increased selling. So I think that many of those components are starting to rebound to consistent levels. So we're certainly back on the road more often, and those costs are going to go up again.

Operator

[Operator Instructions] And our next question come from Robert Young with Canaccord Genuity.

R
Robert Young
analyst

The $10 million contract you announced, I think it was March 1, and I think you said that it was received the day before. So is that in the backlog figure that you've published today? Or is that -- would that be an additional $10 million on top?

B
Brian Campbell
executive

That is included. So it's with -- the backlog includes that order. So we received the order on actually February 28. So that is before the close of the month end.

R
Robert Young
analyst

Okay. And the increase in inventory you just mentioned, is that entirely due to supply chain and component stockpiling? Or is there some staging or work in process for future opportunities? Is that a factor as well? Or is it just supply chain?

B
Brian Campbell
executive

Well, the most significant component is associated with raw materials. So we do have a record backlog that we need to purchase for. But we are doing our best to mitigate these challenges associated with the supply chain. So we are stockpiling -- planning out further than we did, and quite frankly, just buying more inventory than we used to.

R
Robert Young
analyst

Okay, okay. The Studer manufacturing transition, I see that's complete. Does that have any impact on the financials? Does that have an impact on gross margins? Or is there anything positive or negative you had called out from that completion?

B
Brian Campbell
executive

So it's still in process. So we are -- the transition and our ramping up of Studer manufacturing is a work in process. We're doing very well, and we don't expect it to alter our gross margins.

R
Robert Young
analyst

Okay. Last question. I know you've had business in Russia in the past and Eastern Europe. And so is there any material exposure to that to call out?

B
Brian Campbell
executive

In regards to sanctions, so we will most certainly comply with all government rules and requirements. Our revenues over the past 3 years have been, on average, less than 2%. So there's some fluidity to that, but has not exceeded that amount.

R
Robert Young
analyst

Okay. And is that Russia and Ukraine together? Or is that just Russia?

B
Brian Campbell
executive

That would be a combination.

R
Robert Young
analyst

Okay. And maybe last question for me, just the -- on the OpEx. Maybe to continue Thanos' question. So there's increased sales and marketing, but there was also a pretty strong jump in R&D. And so as we look forward, should we be thinking of Q3 as a baseline for going forward? Just in absolute terms, like should we be thinking of a $22 million type of net R&D number and $17 million sort of a range of selling and admin? Or will it come down? There's been a lot of changes over the last year, 2 years, and so it'd be helpful to understand how that might trend.

D
Doug Moore
executive

Sure. So as noted, there's no more assistance programs reducing any costs. So those costs are reasonable to project forward with inflationary-type increases, of course. And depending on -- I know we are planning to attend further trade shows such as NAB that may have small spikes in costs, but not too -- as much a significant amount. No.

B
Brian Campbell
executive

The trade shows, Rob, is in a smaller capacity than pre-COVID.

R
Robert Young
analyst

Okay. So we shouldn't expect a bump in April from NAB this year or IDC, I guess, later in the year?

B
Brian Campbell
executive

We will have a presence there, a strong presence, but it won't be to the same extent in terms of the number of staff that we have on site and nor will there be as many international travelers coming in as well, too.

Operator

[Operator Instructions] Our next question will come from Steven Li with Raymond James.

S
Steven Li
analyst

I may have missed this, but you averaged about $40 million in revenues a month in the quarter. And February was $25 million. Any dynamic to call out there?

B
Brian Campbell
executive

Steven, we routinely have ups and downs -- bumpiness in terms of the revenues and deliveries. So there is nothing unusual about a $25 million shipments in February. And yes, we did have very strong monthly shipments in the prior quarter. But we're sitting on, again, to our record high backlog of $176 million. So we will be delivering that over the next quarters. Of that $176 million, there is a component that is delivered outside of 12 months. And going forward, that number is in around the 10% range of the backlog.

S
Steven Li
analyst

Got it. And Brian, so given the backlog, so would you expect to get back to $40 million in March and April?

B
Brian Campbell
executive

The -- our deliveries -- the revenue in deliveries are very dependent on our site access and our customers' readiness to be able to take shipments of the orders that they've taken. So there -- we're not in a position to give you a forecast for Q4. We do have a very significant backlog, and we'll do our utmost to deliver as much as of it. But it is sequenced by the customers' availability -- their readiness to take those Evertz solutions as well, too. So some of it is scheduled in the subsequent quarter and others in fiscal 2023 as well, too, but only about 10% of it would be delivered or scheduled for delivery outside 12 months.

Operator

And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.

B
Brian Campbell
executive

Thank you, Justin. I'd also like to thank our participants for their time and their questions and reiterate that we're very pleased with the company's strong performance during the third quarter which saw quarterly sales of $120.6 million, solid gross margins of $57.4 million in the quarter, yielding net earnings of 28% -- $0.28 per share.

We're entering the fourth quarter of fiscal 2022 with significant momentum fueled by a record-high purchase order backlog, which, combined with February shipments, totals in excess of $201 million, also fueled by the growing adoption and successful large-scale deployments of Evertz IP-based software-defined video networking solutions, our cloud solutions by some of the largest broadcast, new media and service providers in the industry and also fueled by the growing adoption and successful large sale deployments.

With Evertz's significant investment in our software-defined IP, IT and cloud technologies, the over 500 industry-leading IP SDN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position.

Thank you, everyone, and good night.

Operator

Thank you. And that does conclude today's call.