Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2021-Q4

[Operator]

Good day, and welcome to the Evertz Fourth Quarter 2021 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Campbell, Executive Vice President of Business and Development. Please go ahead, sir.

[Brian Scott Campbell, Executive Vice]

Thank you, Todd. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our fourth quarter ended April 30, 2021, with Doug Moore, Evertz's Chief Financial Officer; and myself, Brian Campbell. Please note that our financial press release and MD&A are now available on SEDAR. 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 with a few annual and fourth quarter highlights, following which Doug will provide greater detail. First off, I'm pleased to report sales for the fiscal year totaled $342.9 million, driven in part by the adoption of Evertz's new technologies. Annual net earnings were $42 million, resulting in fully diluted earnings per share of $0.55 for fiscal 2021. Liquidity and capital resources remained robust with cash of $108.8 million as at April 30 after the return of $41.2 million quarterly dividends to shareholders and special dividends. Investments in research and development totaled $80.2 million for fiscal 2021, further reinforcing Evertz's commitment to R&D. Operational highlights for 2021 include, first, the acquisition of Ease Live, a direct-to-consumer interactive graphics company; second, securing the ShotTracker USD 11 million financing led by Evertz and Verizon Ventures. The funding will support accelerated deployment across the NCAA basketball conferences, expand remote live sports production in the cloud with 5G-enabled technology; and third, a strategic asset acquisition of the iconic Studer audio brand technology and related assets from HARMAN International, a Samsung Company. Moving on now to the fourth quarter. Sales were $93.3 million. Gross margin for the quarter was $55.6 million or 59.6% of sales. And foreign exchange for the fourth quarter was a loss of $5.1 million. Net earnings were $9.8 million with fully diluted earnings per share of $0.13 in the quarter. As at April 30, 2021, Evertz working capital was $214 million with $108.8 million in cash. Purchase order backlog at the end of May was a record high of $139 million, and shipments during the month of May were $27 million. We attribute Evertz's resilient quarterly performance and solid annual performance despite this unprecedented pandemic 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's IP-based software-defined video networking solutions, Evertz's IT and virtualized cloud solutions, our immersive 4K Ultra HD solutions and state-of-the-art DreamCatcher IP replay and BRAVO live production suite. Our sales base is well diversified with the top 10 customers accounting for approximately 40% of sales during the year with no single customer over 10%. In fact, we had 353 customer orders of over $200,000 during the year. Today, Evertz's Board of Directors declared a quarterly dividend of $0.18 per share, which will be paid on or about July 2, 2021. I'll now hand the call over 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. Starting with revenues. Sales were $93.3 million in the fourth quarter of fiscal 2021 compared to $92.2 million in the fourth quarter of fiscal 2020. That represents an increase of [ $1.1 million ] [indiscernible]. Sales for the 12 months ended April 30, 2021, were $342.9 million compared to $436.6 million in the same period last year. This represents a decrease of approximately $93.7 million or 21%. A decrease of sales during the year was already driven by projects put on hold or interrupted as a result of the COVID-19 pandemic. For regional revenues, the U.S. Canadian region had sales for the fourth quarter of $63.6 million compared to $58.7 million last year, an increase of 8%. International region had sales for the quarter of $29.7 million compared to $33.5 million last year, a decrease of $3.8 million or 11%. Back to the fiscal results for sales. Sales in the U.S. Canadian region were $222.7 million for the year ended April 30, 2021, compared to $289 million in the same period last year. That represents a decrease of $66.3 million. Sales in the international region during the year were $120.2 million compared to $147.6 million in the same period last year, which represents a decrease of $27.4 million. The International segment represented 32% of total sales in the quarter and 35% of total sales in the year as compared to 36% and 34% in the same respective periods last year. Turning to margins. Gross margin for the fourth quarter was approximately 59.6% compared to 56.5% in the fourth quarter of fiscal 2020. Gross margin for the year was 58.2% compared to 56.9% in fiscal 2020. Both the Q4 and fiscal 2020 gross margin rates were within the company's target range for operating costs. Selling and administrative expenses were $13 million for the fourth quarter, a decrease of $2.4 million from the same period last year. As a percentage of revenue, S&A expenses were approximately 13.9%. Selling and administrative expenses were $49.4 million for the year ended April 30, 2021, a decrease of $18.2 million from fiscal 2020. For the year, selling and administrative expenses as a percentage of revenue were approximately 14.4% compared to 15.5% last year. Research and development expenses were $22.5 million for the fourth quarter, which represents a $1.3 million increase from the fourth quarter last year. For the year, research and development expenses were $80.2 million, which represents a decrease of $10.6 million compared to the same period last year. The decrease being driven by assistance recorded as a reduction in costs. Foreign exchange for the fourth quarter was a loss of $5.1 million compared to a gain of $6.1 million in the same period last year. The loss of $5.1 million was driven by a significant decrease in the value of the U.S. dollar against the Canadian dollar from January 31 to April 30, 2021. Now foreign exchange for the year ended April 30, 2021, was a loss of $14.9 million compared to a gain of $3.5 million in the prior year. The loss again was driven by a significant decrease in the value of the U.S. dollar compared to the Canadian dollar over that period. Turning to a discussion of liquidity of the company. Cash as at April 30, 2021 was $108.8 million as compared to $75 million as at April 30, 2020. Working capital was $214.5 million as at April 30, 2021, compared to $223.7 million at the end of April 30, 2020. Regarding quarterly cash flows, the company generated cash from operations of $33.6 million, which includes a $21.2 million change in noncash working capital and taxes. If the effects of the change in noncash working capital and current taxes are excluded, the company generated $12.4 million in cash from operations during the quarter. Now the company used $4.1 million from investing activities -- for investing activities, sorry, which was principally driven by capital asset purchases. And the company used cash for financing activities of $15.2 million, which was principally driven by dividends paid of $13.8 million in the quarter. Regarding fiscal cash flows. For the year, the company generated cash from operations of $101.0 million, which includes $42 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 $59.0 million in cash from operations. Now during the year, the company paid approximately $41.6 million in total dividends, acquired $9.6 million in capital assets and completed investments for $9.1 million, which includes an investment in DDSports or otherwise as ShotTracker for $7.8 million. Finally, I'll review our share capital position as at April 30, 2021. Shares outstanding were approximately 76.3 million and options outstanding were approximately 5.9 million. Weighted average shares and weighted average fully diluted shares were both 76.4 million outstanding for the year-end. This brings to a conclusion the review of our fiscal results or financial results and position for the fourth 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, yourself?

[Brian Scott Campbell, Executive Vice]

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

[Operator]

[Operator Instructions] We'll take our first question from Bill Zhang with Raymond James.

[Bill Zhang, Associate]

Just a couple of questions for me. Starting with the cash on hand. You talked about the liquidity of a little over $100 million at the end of this quarter. Any uses there or plans to increase the dividend?

[Brian Scott Campbell, Executive Vice]

Bill, in terms of the dividend policy, that's set by the Board, there's been no changes. So it's stated currently that we're paying an $0.18 quarterly dividend. And as you can tell, we have more than sufficient capacity to sustain that. We are looking at opportunities assessing the market for M&A transactions as well, too, as you saw through the year. And we had been busy in the second half of 2021 with closing of investments and acquisitions, and the deal flow opportunity does continue to present itself to us.

[Bill Zhang, Associate]

Okay. Great. And a follow-up to that. So on the acquisition side, could you just give us an update on Studer now that you have like a full quarter results, how has the integration been? What are some of your expectations there?

[Brian Scott Campbell, Executive Vice]

So with respect to the investment in ShotTracker, that's an ongoing relationship that is working out very nicely for us. And Studer, we closed the acquisition of those assets in February, and we are still in transition. The transition agreement included manufacturing continuing at HARMAN's facility in Pécs. So that will ultimately transition to Evertz, and we're still in that process. But things are moving ahead smoothly for us.

[Bill Zhang, Associate]

Okay. Great. And just last one for me. Will this be the last quarter for government assistance programs? I know you mentioned on the last call and this might be the last month [ lower ] within the quarter?

[Douglas Moore, CFO & Secretary]

I'll comment to that. So the -- I mean, we can't assert anything in the sense of the -- it's based on monthly revenues, of course, in Canada. There's global policies, but just focusing on the Canadian one. Now it's winding down through over the next, I guess, over the summer, really, I mean, that's subject to change by government policy and the rules they make. But -- so it's -- we would be open to receiving more through the first quarter depending on our revenues in each individual month. So there's a possibility we'll get some more assistance in the first quarter, but it's dependent on revenues.

[Operator]

We'll take our next question from Thanos Moschopoulos with BMO Capital Markets.

[Thanos Moschopoulos, VP & Analyst]

Just on that last point, did you actually break out the level of government assistance you received this quarter?

[Douglas Moore, CFO & Secretary]

No, our financial statements disclosed the amount of government assistance received globally during the fiscal year. In this past quarter, we would have again, through various global programs received around $4 million to $5 million.

[Thanos Moschopoulos, VP & Analyst]

Okay. And then gross margins were strong. I know that it's within your targeted range but higher than we've seen in many recent quarters. Is that a function of mix? Or is there another dynamic you can call out there?

[Douglas Moore, CFO & Secretary]

Yes, I think it's fair to say there's definitely a mixed component to that. There's also inherently so with the government assistance, some of that goes through to inventory, all that inventory is sold inherently relates to slightly larger margin, but that would be -- it could impact it by a percent or so. I don't have the exact figure in front of me, but there would be associated benefit with the assistance as well. But the product mix is definitely has an impact there.

[Thanos Moschopoulos, VP & Analyst]

And Brian, can you comment on the environment and how that's been evolving? I guess, both on the demand side and also in terms of your ability to implement projects. I mean, revenue was sort of flattish sequentially from last quarter. So is the implication that the implementation constraints were still very much in effect during Q4. And if that's the case, how are things shaping up on that front now?

[Brian Scott Campbell, Executive Vice]

The situation is continuing to improve with the roll out of vaccines across the world that is potentially going to open up orders for us. We are definitely still in a constrained access environment in terms of our ability to get on-site with customers. That said, we have on-site teams internationally in the U.S. and domestically in Canada as well, too. So we do continue to cross borders as essential service providers to the telecom and broadcast industry. And to the extent possible, we're remotely commissioning new systems. But again, too, it is a logistics challenge for those enterprise and broadcast customers as well to deploy some of their solutions. But our team has done extremely well throughout the period, getting on site since the onset of the pandemic where we saw the biggest impact in Q1.

[Thanos Moschopoulos, VP & Analyst]

Okay. And then from a demand perspective, I mean, how are things have been evolving just the last, call it, 3 or 4 months as the vaccine situations are improving?

[Brian Scott Campbell, Executive Vice]

The demand situation continues to be very robust. We are at our $139 million backlog. So that is a record high for us. Customers continue to adopt our solutions. It's incumbent on us to deliver them -- to them to help them with their business models moving forward. We're an integral part of many of the largest broadcast and new media companies, plans for the future. So there, the demand has been quite robust. You can see, as I said, with the $139 million backlog, plus we -- this first month shipment of May of $27 million. So that total is very strong.

[Operator]

The final question goes to Robert Young with Canaccord Genuity.

[Robert Young, Director]

Maybe I'll push you a little further on that gross margin question, particularly strong, and I understand there's some benefit maybe some from assistance in there. But are you seeing any benefit from shift to cloud or some of the newer products? Is there anything in there that's more sustainable? And what is the target range, if you can remind me again?

[Brian Scott Campbell, Executive Vice]

So the target range, Rob, is 56% to 60%. And yes, the cloud-based solutions, Software as a Service solutions are higher margin and candidly as our the -- most of the newer Evertz products. So the -- that mix does tend to increase our gross margin.

[Robert Young, Director]

And then the backlog increase that you noted it's a record. It has been inching up. And so maybe talk about the drivers of that larger backlog? Is it just longer duration? Is it these cloud products that are maybe sold on a recurring agreement? Or is there some deferred revenue associated with that that's growing in the backlog? Maybe if you could just help us understand why the backlog has been growing substantially in the last couple of quarters?

[Brian Scott Campbell, Executive Vice]

That is a part of it, but we do have very significant infrastructure rollouts as well, too, of some of the newer products that are being delivered in this quarter, the next to then through till -- through the fall, just in terms of the access to customer sites -- multiple sites and rolling out in numerous locations. So there is a significant component to it of large infrastructure build-outs there, SDVN related or compression solutions as well, too. But yes, there also are cloud-related deferred revenue components to it, and Doug can speak to that.

[Douglas Moore, CFO & Secretary]

Yes. So there is -- some of those cloud-based -- depending on the nature of the, I guess, the contracts, some of those contracts get deferred until their acceptance is achieved or certain milestones are met. So that can -- they can take a lot longer to roll out than the simple equipment that [ ship and bill ] kind of thing. That can drag on a bit longer, just given the nature of them.

[Robert Young, Director]

Right. Okay. And so larger projects, you have to get some sort of acceptance and then you're able to bill it. Are there any large projects that are coming close to a milestone that might drive revenue in [ Studer ]?

[Brian Scott Campbell, Executive Vice]

Sure. So I mean there's a lot of different projects ongoing at once, right? So there's some that inherently some get close each quarter. But -- and sorry, in your comment regarding the billings, sometimes the billing could even be a portion upfront and some -- we make bills based on milestones, just to clarify your point there. But that's been ongoing for quite a while in the sense that those projects acceptance happens on various ones through each quarter.

[Robert Young, Director]

Okay. So nothing that is the ordinary?

[Brian Scott Campbell, Executive Vice]

Fair.

[Robert Young, Director]

And then maybe just a broader question on the resumption of live sports. You talk about whether there's broadening opportunities to support some of these events that are starting to come online. I guess we don't know what's going to happen with the Olympics. But maybe just -- maybe you talk about that environment, that would be helpful. And I'll pass the line.

[Brian Scott Campbell, Executive Vice]

So Rob, yes, there are improving opportunities there. Evertz has been an integral supplier to major North American sports leagues that you see that have been providing entertainment throughout the pandemic. So we continue to deliver infrastructure to many of the leagues and to many of the stadiums and locations. So our people have been traveling, and we have been delivering solutions throughout. So that is important and valued customer set for Evertz.

[Robert Young, Director]

Is there any commentary that you can provide around kind of an improvement or a lack of improvement in the short run going forward? Are you seeing anything that's manifesting in better bookings for you or better conversion of shorter-term revenue opportunities?

[Brian Scott Campbell, Executive Vice]

We're seeing significant revenue opportunities, and that is reflected in the -- both the $139 million backlog and also future opportunities. So as I said, we're optimistic that as the orders free up in multiple locations and we get greater access and we're looking at a positive environment going forward for ourselves.

[Operator]

Thank you. That concludes our questions. I'll turn it back to Brian Campbell for closing remarks.

[Brian Scott Campbell, Executive Vice]

Thank you, Todd. And I'd like to thank our participants for their questions. As I said, we're encouraged by the company's solid performance in fiscal 2021, achieving sales of $342.9 million, delivering pretax earnings of 16.3%, all while investing $80 million in R&D to build future growth. We're optimistic as we enter the first half of fiscal 2022, fueled by a record high purchase order backlog plus $27 million May shipments totaling in excess of $166 million. That's a 48% sequential increase year-over-year and 18.3% sequential increase from the prior quarter. 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 enterprise companies in the industry and government and by the financial strength and flexibility of a pristine debt-free balance sheet with over $108 million of cash and by the growing adoption and successful deployments. With our significant investments in software-defined IP, IT, virtualized and cloud-based technologies, Evertz's industry-leading deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position in the broadcast and new media sector. Thank you, and good night.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.