Evertz Technologies Ltd

TSX:ET

Earnings Call Analysis

Evertz Reports Strong Q3 with 22% Revenue Growth

Evertz Technologies announced a notable quarter, boasting a 22% increase in sales to $135.3 million over the previous year. The company credited this growth to demand for high-quality video and their innovative products like IP-based solutions and immersive 4K UHD solutions. Gross margin remained stable at 58.9%, and net earnings hit $19 million, leading to a $0.24 EPS. Research and development investments have supported these advances, amounting to $34 million this quarter. The solid financial achievements led to a purchase back order surpassing $292 million, providing a substantial future revenue stream. Evertz also declared a dividend of $0.195 per share, underpinning its commitment to shareholder returns.

Robust Third-Quarter Growth and Customer Diversification

Evertz Technologies has reported a strong fiscal third-quarter with sales soaring to $135.3 million, marking a 22% increase from the previous year's $110.9 million. This growth is supported by a well-diversified customer base, where the top ten customers represent only 35% of sales, ensuring reduced dependency on any single client.

Solid Gross Margin Performance

The company has maintained a healthy gross margin of 58.9% for the quarter, remaining consistent with its target range and previous year's performance.

Steady Net Earnings and Earnings Per Share

Net earnings have been posted at $19 million for the quarter, translating to fully diluted earnings per share of $0.24.

Strong Financial Position and Backlog

Evertz's financial stability is exemplified by its working capital which stood at $199.6 million as of January 31, 2024. Moreover, the purchase order backlog is robust, exceeding $292 million, a promising indicator of future revenue.

Consistent Dividend Payout

Reflecting confidence in its financial health, the Evertz Board of Directors declared a quarterly dividend of $0.195 per share, payable on or about March 29.

Geographical Revenue Insights

The U.S.-Canadian region showcased a 13% rise in quarterly sales reaching $80.5 million, while the International segment significantly spiked by 72% to $54.8 million, indicating broadening market influence globally.

Investments in Innovation

Investments in research and development increased to $34 million for the quarter, up by $3.8 million from the last year, signifying Evertz's commitment to innovation and technology leadership.

Currency Fluctuations Impact

Foreign exchange has resulted in a loss of $2.8 million for the quarter, primarily due to a weaker U.S. dollar against the Canadian dollar, underscoring the influence of currency volatility on financial results.

Healthy Liquidity and Cash Flow

Cash reserves swelled to $69.7 million, increasing substantially from $12.5 million at the end of the previous fiscal year. Cash from operations contributed $25 million to this boost, highlighting the firm's operational efficiency.

Capital Structure

Evertz's share capital as at January 31, 2024, included approximately 76.1 million shares outstanding, with options and share-based RSUs at about 5.7 million, indicating investor opportunities for share-based investment growth.

Near to Mid-Term Revenue Expectations

The current backlog, standing at $292 million, suggests a strong pipeline, with nearly half expected to be realized in revenue within the next 12 months, and the remainder thereafter, ensuring a consistent revenue stream into the future.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Evertz Q3 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, Eric. Good afternoon, everyone, and welcome to Evertz Technologies Conference Call for our Fiscal 2024 Third Quarter ended January 31, 2024, with Doug Moore, Evertz' 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' results. I will begin by providing a few highlights, and then Doug will provide additional detail. First off, sales for the third quarter totaled $135.3 million, an increase of 22% compared to $110.9 million in the third quarter last year. Our base is well diversified, with the top 10 customers accounting for approximately 35% of sales during the quarter, and with the single largest customer totaling approximately 5%. In fact, we had 110 customer orders of over $200,000 in the quarter.

Gross margin in the quarter was $79.7 million or 58.9%, which is within our target range. Investment in research and development during the quarter totaled $34 million. Net earnings for the third quarter were $19 million, while fully diluted earnings per share were $0.24. Evertz working capital was $199.6 million as at January 31. And at the end of February, Evertz' purchase back order was in excess of $292 million and shipments during the month were $40 million.

We attribute the strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation; increasing global demand for high-quality video anywhere, anytime; the ongoing technical transition in the industry; and specifically, to the growing adoption of Evertz IP-based software-defined video networking solutions, Evertz' IT cloud solutions, our immersive 4K ultra high-definition solutions and Evertz' state-of-the-art DreamCatcher IP replay and live production BRAVO Studio featuring the iconic Studer audio.

Today, Evertz Board of Directors declared a quarterly dividend of $0.195 per share payable on or about March 29.

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

[Doug Moore, executive]

All right. Thanks, Brian. Good afternoon, everyone. I'll start by looking at revenue. Sales were $135.3 million in the third quarter of fiscal 2024 compared to $110.9 million for the third quarter of fiscal 2023. That's an increase of 22% or $24.4 million quarter-over-quarter. For the 9 months ended January 31, 2024, sales were $391.9 million compared to $325.7 million in the same period last year. That represents an increase of $66.2 million or 20%.

Now looking at specific regional revenue. The U.S.-Canadian region had sales for the quarter of $80.5 million compared to $71.2 million last year. It represents an increase of $9.3 million or 13% quarter-over-quarter. Sales in the U.S. and Canadian region were $241.5 million for the 9 months period ended January 31, 2024, compared to $238.2 million in the same period last year, an increase of $3.3 million or 1%.

In the International region, revenues for the quarter were $54.8 million compared to $39.6 million last year, an increase of $15.2 million quarter-over-quarter. The International segment represented 40% of total sales this quarter as compared to 36% in the same period last year. For the 9 months ended January 31, 2024, sales in International region were $150.3 million compared to $87.5 million in the same period last year. That's an increase of 72% or $62.8 million.

Gross margins for the third quarter were approximately 58.9% compared with 59.2% prior, and within our target range. For the 9 months period ended January 31, gross margin was approximately 58.6%, and that's also within our target range.

Turning to selling and admin expenses. S&A was $18.3 million in the third quarter. That's an increase of $2 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 13.5% as compared to 14.7% in the same period last year. Selling and administrative expenses were $52.2 million for the 9 months ended January 31, 2024, an increase of $8.2 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 13.3% over the period compared to 13.5% for the same period last year.

Research and development expenses were $34 million for the third quarter. That represents an increase of $3.8 million from $30.2 million in the third quarter last year. Investment tax credits relating to R&D expenses were $4 million in the quarter compared to credits of $3.6 million in the third quarter last year. For the 9 months ending January 31, research and development expenses were $98.1 million. That represents an increase of $10.9 million over the same period last year and includes an increase of $7.8 million associated with salary costs. Research and development expenses as a percentage of revenue were approximately 25.1% over the period compared to 26.8% for the same period last year.

Foreign exchange for the third quarter was a loss of $2.8 million. The quarterly loss was predominantly driven by the decrease in value of the U.S. dollar against the Canadian dollar from October 31, 2023 to January 31, 2024. Foreign exchange for the 9 months period ended January 31 was a loss of $2 million compared to a gain of $1.7 million in the same period last year.

Turning to a discussion of liquidity of the company. Cash as at January 31, 2024, was $69.7 million as compared to cash of $12.5 million at April 30, 2023. Working capital was $199.6 million as at January 31, 2024, compared to $171.4 million at the end of April 30, 2023.

Now we look at the cash flows. The cash -- generated cash in operations from -- sorry, $30.2 million, which is net of $5.2 million change in nonworking -- noncash working capital and current taxes. If the effects of the change in noncash working capital and current taxes were excluded from the calculation, the company generated $25 million in cash from operations during the quarter. The company used cash of $0.6 million for investing activities, which was principally driven by the acquisition of capital assets. And the company used cash and financing activities of $16.1 million, which was principally driven by dividends paid of $14.8 million.

Finally, our share capital position as at January 31, 2024. Shares outstanding were approximately 76.1 million and options and share-based RSUs outstanding were approximately 5.7 million. Weighted average shares outstanding were 76 million and weighted average fully diluted shares was 77 million for the quarter ended January 31, 2024.

That concludes the review of our financial results and position for the third quarter. 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 Campbell, executive]

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

[Operator]

[Operator Instructions] Your first question comes from the line of Andy Nguyen with Raymond James.

[Andy Nguyen, analyst]

Going forward, looking forward to 2025, what would you say would you be your biggest opportunity?

[Brian Campbell, executive]

Andy, we're going to continue to grow the -- our share with our existing customers and add new customers. As you know, our backlog is extremely strong at $292 million. I believe 48% of it is deliverable within the next 12 months and 52% outside of that. So we're going to be both addressing the backlog, delivering to the customers within that and continuing to grow the market.

[Andy Nguyen, analyst]

Got you. And I noticed the backlog is up quite a bit this quarter. Could you share any more color with us on that?

[Brian Campbell, executive]

So we had a -- approximately a year ago, we did press release the $152 million, 5-year cloud software and services agreement with a global media giant. So we're -- that did step up our backlog very significantly, along with other large orders that we're in and around that time. So approximately a year ago, we did have effectively a step function increase in our backlog. So we're very pleased to have that type of support, long-term demand from our customers, and we're going to continue to grow the business.

[Operator]

The next question comes from the line of Thanos Moschopoulos with BMO.

[Thanos Moschopoulos, analyst]

Brian, this is the fourth consecutive quarter you've had a double-digit year-over-year growth, and good to see that the growth this quarter was with a very low level of customer concentration. Just wondering if you have anything specific that you point to as far as the growth acceleration over the past year. I mean I'm sure your strong market position and competitive product offering is a key part of it. But beyond that, is there some dynamic in terms of the types of initiatives your customers are undertaking or the spending environment, better component availability? I mean are there other factors you could point to in terms of what's been driving the acceleration in recent months?

[Brian Campbell, executive]

So you've got a multifaceted question there. I think I'll address the continued growth that we've seen in the U.S.-Canada market. So that has been underpinning our growth historically, hence, very strong, so it's up 12% year-over-year or 13% year-over-year, I believe. And then internationally, we have been delivering larger projects of recent -- recently. So you do see that internationally, our revenues are up very significantly this quarter. But again, to -- you should watch on a trailing 12-month basis our revenue in those sectors as well, too, because it tends to -- you'll see some spikes in quarters, but on average, we're seeing good solid growth there. But yes, overall, it's Evertz' market share. Our products are leading on multiple fronts. We're having very good success with our cloud-based solutions and candidly, the SDVN cloud base and also on our traditional baseband SDI products are doing very well.

[Thanos Moschopoulos, analyst]

Okay, that's helpful. And just from a qualitative perspective, I mean, I presume cloud is becoming a growing part of the business. I appreciate that you can't quantify it for us specifically, but just qualitatively, is it fair to assume that interest and adoption of cloud continues to grow rapidly? Is it a situation where most of the large broadcasters you talk to want the cloud element of new deals? Or how would you characterize where the industry is in adoption and how much of a driver it is contributing to your recent growth?

[Brian Campbell, executive]

It's a very significant driver, and it is part of the cloud discussions. And the plans of our customers pertaining to their cloud infrastructure is a big part of many of the conversations with most of our customers. So it's top of mind. And that also is across the industry as well, too. However, we have been deploying very large SDVN solutions and very large cloud-based solutions as well, too.

[Thanos Moschopoulos, analyst]

And I know that you've been maintaining your gross margins and target range. But as cloud continues to become bigger part of the mix, should we think about just the fundamental gross margin profile, operating margin profile of the business changing appreciably? Or do you think that over, call it, the next 2, 3 years, it should remain in kind of a similar range even if cloud continues to grow?

[Doug Moore, executive]

I can comment on that. So while we have seen some pickups on the higher side of the range, the range is currently as is, so 56% to 60%. I mean if you look at Q1, we're around 57%. So there's some fluidity to it. So I think at this time, we'll maintain the range between that 56% and 60% as being a reasonable target.

[Operator]

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

[Robert Young, analyst]

You noted earlier that we're coming up on the anniversary of a couple of large deals. I think one was $25 million, the other one $152 million. Both of them happened in April, as I recall. Maybe you can talk about, is there some seasonality around April? Should we be thinking of April as a period where you might see large deals? And then maybe a second part to that question is, that $152 million deal, is that just a onetime, best-ever single point in time type of a deal? Or are there others that are out there in your pipeline that you're looking at that might have that type of scale?

[Brian Campbell, executive]

So Rob, so April does coincide as well too with NAB. So we're pleased to go and meet and host numerous of our customers at our booth at NAB. Meetings are being set now, so that will be a very active time for us. And that is the National Association of Broadcasters Convention, historically, is April. So yes, April is a significant time period for us. Yes.

The second part of your question, could you repeat that again for me?

[Robert Young, analyst]

Yes. I'm just trying to get a sense of how unusual that deal is. It's been a year now. Are there other opportunities in your pipeline that have that type of scale? Or was that a onetime event?

[Brian Campbell, executive]

It was a very significant event most definitely, and it is a 5-year transaction. So on an annual basis, you have seen other purchase orders or contracts of that magnitude. And we do have other very significant cloud-based projects underway that not necessarily have been press released either, not -- either due to the number of years of the term or how the customer has decided to provide those purchase orders.

[Robert Young, analyst]

Okay. So I guess what I take from that is that isn't that unusual of a deal. If you look at it on a 1-year basis, there are other deals of that scale in the cloud. Or are you just talking about deals in general?

[Brian Campbell, executive]

There are -- deals in general. There have been other deals of that size for a given year. But make no mistake, signing a 5-year, long-term contract of that magnitude is a significant milestone.

[Robert Young, analyst]

Okay. As you're going into NAB this year, like are there opportunities of that size and scale that you're looking at hoping to sign?

[Brian Campbell, executive]

That scale, definitely. The duration comes into play as well, too. But yes, we are continuing to look at very large significant deals and contracts, and we are also deploying significant contracts.

[Robert Young, analyst]

Okay. And then also this year, I mean, in the past, you've been not dismissive, but you suggested that Olympic year dynamics don't have that much of an impact on your business. So I was just curious about this year as we go into an Olympic year after a hiatus from COVID and combined with the -- what's expected to be a pretty active U.S. election year. Is this -- are those drivers of the business? Maybe if you could just give us a summary of how those events manifest in Evertz business.

[Brian Campbell, executive]

So again, too, we're very excited to have the Olympics. And they do absolutely have an impact and we have revenues associated with it. However, Evertz' underlying growth is not as impacted by the major events as other companies who have very significant rental portions of their business.

[Robert Young, analyst]

Right. Right. And so the high level of organic growth we've seen this year, that wouldn't be associated with the Olympic year.

[Brian Campbell, executive]

It's associated more with Evertz' underlying position with large global broadcast and media players.

[Robert Young, analyst]

Okay. Okay. I think you said that 48% of the backlog is expected to convert in the next 12 months. I think I heard that -- if that's correct.

[Brian Campbell, executive]

That's correct.

[Robert Young, analyst]

And then maybe last question would just be, I mean, on that large annual deal, the $152 million deal. Should we just think of that as a $30 million contribution per year? Or would there have been an upfront component to that? When I'm looking forward to modeling this year, how much of that contract should I expect in this fiscal year? Then I'll pass the line.

[Doug Moore, executive]

I'll answer that. What I could say is through the first 9 months, there's $17 million of revenue from that contract in earnings. Averaging it out will be dependent on certain milestones that are reached that aren't specifically defined to a specific date. Forecasting out, it's a logical way to do it to average it out, but it will ultimately be dependent on certain milestones that are met.

[Robert Young, analyst]

Okay. Maybe to dig into that just a little bit deeper. But I guess if it's a cloud deal, I would assume a significant portion of it would be some subscription or like a lease on the software. When you say milestones, is it still being deployed? Or is it dependent on like a volume of transactions or something like that? Maybe just give me a little sense maybe at a high level because you don't want to get into details. Just what are those milestones? And as much detail as you're willing to share.

[Doug Moore, executive]

Sure. So if there is a component of -- it's going to depend on revenue recognition. So if there is a licensing component, it could be when licenses annualize, licenses are provided. If it's milestones, there could be certain deployments associated with it. But the idea of having a linear modeling is a reasonable approximation.

[Operator]

I'll now turn the conference back over to Brian Campbell for closing remarks. Please go ahead.

[Brian Campbell, executive]

Thank you, Eric. 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 third quarter of fiscal 2024, which saw quarterly sales increased 22% year-over-year to a record high of $135.3 million. Strong gross margins of 58.9% in the quarter, which, together with Evertz's disciplined expense management, yielded fully diluted quarterly earnings per share of $0.24, despite a loss on foreign exchange of $2.8 million in the quarter.

We're entering into the fourth quarter of fiscal 2024 with significant momentum, fueled by a combined purchase order backlog, plus February shipments totaling in excess of $332 million; by the growing adoption and successful large-scale deployments of Evertz' IP-based software-defined video networking and cloud solutions by some of the largest broadcast, new media service providers 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' significant investments in software-defined IP, IT and cloud technologies, the over 600 industry-leading 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 your conference call for today. We thank you for participating and ask that you please disconnect your lines.