Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Evertz Q4 Investor Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, June 21, 2023.

I would now like to turn the conference over to Brian Campbell, Executive Vice President, Business Development. Please go ahead.

[Brian Campbell, Executive Vice President, Business Development]

Thank you, Julia. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our fourth quarter and year ended April 30, 2023, 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 with a few annual and fourth quarter highlights, following which Doug will provide more detail.

First off, I'm pleased to report sales for the fiscal year totaled a record $454.6 million. Annual net earnings were $64.6 million, resulting in fully diluted earnings per share of $0.84 for fiscal 2023. Investments in research and development totaled $117.1 million for fiscal 2023.

Now moving on to the fourth quarter financials. Sales in the fourth quarter were a record high $128.9 million, up 11% year-over-year. Gross margin for the fourth quarter was $76.7 million or 59.5% of sales. And foreign exchange for the fourth quarter was a gain of $252,000. Net earnings for the fourth quarter were $18.6 million, with fully diluted earnings per share of $0.24 in the quarter.

At April 30, 2023, Evertz's working capital was $171.4 million, with $12.5 million cash. Purchase order backlog at the end of May was a record high $392 million and shipments during the month of May were $40 million.

We attribute our strong annual and quarterly performance 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 continued adoption of Evertz's IP-based software-defined video networking solutions, Evertz's IT and cloud solutions, our immersive 4K Ultra HD solutions and the state-of-the-art DreamCatcher IP replay and BRAVO live production suite.

Our sales is well diversified with the top 10 customers in the fourth quarter accounting for approximately 43% of sales with no single customer over 6%. In fact, we had 133 customer orders of over $200,000 in the quarter.

Today, Evertz Board of Directors declared a dividend of $0.19 per share, which will be paid on or about July 6.

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

[Doug Moore, Chief Financial Officer]

Okay. Thank you, Brian. Good afternoon, everyone.

Starting with revenues. Sales were $128.9 million in the fourth quarter of fiscal 2023 compared to $116.1 million in the fourth quarter of fiscal '22, which represents an increase of $12.8 million or 11%. Sales for the fiscal year ended April 30, 2023 were $454.6 million compared $441 million in the same period last year, that represents an increase of approximately $13.6 million.

Regarding regional revenues, the U.S./Canadian region had sales for the fourth quarter of $98 million compared to $77.8 million last year, an increase of $20.2 million or 26%. International region had sales for the quarter of $30.9 million compared to $38.2 million last year, a decrease of $7.3 million.

Now, fiscal results again. Sales in the U.S./Canadian region were $337.1 million in 2023, compared to $299.4 million in fiscal 2022, that represents an increase of $37.7 million or 13%. Sales in the International region were $117.5 million for the year ended April 30, 2023, as compared to $141.7 million in fiscal 2022, representing a decrease of $24.2 million. Proportionately, the International segment represented 24% of total sales in the quarter and 26% of the total sales in the year compared to 33% and 32% in the respective periods last year.

Looking at gross margins. The gross margin for the fourth quarter was approximately 59.5% compared to 58.9% in the fourth quarter of fiscal 2022. Gross margins for the year were approximately 59% compared to 57.9% in fiscal 2022. Both the fourth quarter and fiscal 2023 gross margins were within the company's target range.

Looking at operating costs. Selling and administrative expenses were $17.5 million for the fourth quarter, that's an increase of $1.4 million in the same period last year. Selling and admin expenses were $61.5 million for the year ended April 2023, that's an increase of $0.6 million from fiscal 2022. Selling and admin expenses as a percentage of revenue were approximately 13.5% compared to 13.8% last year.

Looking at R&D. Research and development expenses were $29.9 million for the fourth quarter, which represents a $2.6 million from the fourth quarter last year. For the year, research and development expenses were $117.1 million, which represents an increase of $14.7 million compared to fiscal 2022. The key drivers to the increase being approximately $6 million in additional costs from increased headcount to address key R&D initiatives and approximately $8 million associated with salary increases. R&D expenses as a percentage of revenue were approximately 25.8% for the year compared to 23.2% last year.

Foreign exchange for the fourth quarter was a gain of $0.3 million as compared to a gain of $1.1 million in the same period last year. Foreign exchange for the 12 months ended April 30, was a gain of $2 million compared to a loss of $6.5 million in the prior year. In both cases, the gains were driven by change in value of the U.S. to Canadian dollar.

Turning to a discussion of liquidity of the company. Cash and bank indebtedness as at April 30, 2023 netted to a total of $6.5 million in cash, that's compared to $33.9 million as at April 30, 2022. Working capital was $171.4 million as at April 30, 2023 compared to $158.9 million at the end of April 2022.

Now, quarterly cash flows. The company generated cash from operations of $25.9 million, and that includes a $0.8 million change in non-cash working capital and current taxes. If the effects of those changes in non-cash working capital and current taxes were excluded, the company generated $26.7 million in cash from operations in the quarter. The company generated -- sorry, generated $3 million in cash from investing activities, and the company used $16.5 million in financing activities, which is gross of the $5.9 million presented as bank indebtedness on the balance sheet, and that was driven by dividends paid of $14.5 million.

Now, fiscal cash flows. For the year, the company generated cash from operations of $53.8 million, and that's net of $37.7 million change in non-cash working capital and current taxes. If the effects of the changes in non-cash working capital and current taxes were excluded, the company generated $91.5 million in cash from operations. As we've discussed in prior calls, the main use of cash and working capital relates to increase of inventory. Regarding financing activities, during the year, the company paid approximately $56.4 million in dividends.

Finally, I'll review our share capital position as at April 30, 2023. Shares were approximately 76.1 million, and options and equity-based restricted share unit outstanding combined to approximately 6.3 million. Weighted average shares were 76.2 million and weighted fully average share -- diluted shares outstanding were also 76.2 million for the year ended.

That brings to conclusion the review of our 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 on the Canadian Securities Commission.

Brian, back to yourself.

[Brian Campbell, Executive Vice President, Business Development]

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

[Operator]

Thank you. [Operator Instructions] Your first question comes from Thanos Moschopoulos from BMO Capital. Please go ahead.

[Unidentified Analyst]

Hi, this is Steven on for BMO -- sorry for Thanos. Yes, I was hoping to get a bit more color on the large $152 million contract you announced earlier this quarter. More specifically, is it an existing customer? And how is it going to ramp?

[Doug Moore, Chief Financial Officer]

Sure, I'll address that. It is an existing customer, that is the first point. The large order is driven by our cloud native technology and services business. The thing I would highlight is how it will flow out and ramp will be dependent on certain -- how we meet our deliverables, but I would note that no revenue was taken in fiscal 2023. We estimate it's going to be dependent on our cloud-based deliverables there, but between $25 million and $35 million in fiscal 2024 and then kind of carry on throughout the rest of five years.

[Unidentified Analyst]

Okay, that's helpful. Is there any upfront hardware component related to it?

[Doug Moore, Chief Financial Officer]

No.

[Unidentified Analyst]

No. Perfect. Okay. And I guess there was a -- you had a record revenue quarter. With some of your larger customers [indiscernible] this quarter, like what proportion are opting for [indiscernible]? Can you give a little context on maybe how the mix has shifted over the last few quarters?

[Doug Moore, Chief Financial Officer]

Yes, I cannot provide specifics on -- as it relates to how much is on the cloud model. I can see that a lot of the large -- significant portion is associated with our cloud native technology business -- service business. I can't particularly quantify that. I think if you look at our record backlog, I've noted the large order with $150 million order. There's also approximately $45 million related to a long-term service contract, which is a licensing and support a contract over multiple years, 10 years in fact. I think without diving into specific numbers, so that provides some color.

[Unidentified Analyst]

Okay. And my last question, shipments were quite strong in the first month of this quarter and also you apparently finished out Q4 pretty strongly. Do you see that pace continuing throughout the rest of this quarter?

[Doug Moore, Chief Financial Officer]

We do have -- we anticipate solid deliveries in the rest of the quarter and again to that depends on the customers' ability for us to deliver in the summer months.

[Unidentified Analyst]

Okay. And would you say that -- was it easier to deliver to the customer this most Q1 and Q4 compared to the past? Like, are a lot of the constraints gone by now, or are you still experiencing some restrictions there?

[Doug Moore, Chief Financial Officer]

I think from a purchasing perspective -- like, from a manufacturing perspective, there's definitely improvements overall in the past three to six months. There's still challenges we deal with, in particular, with certain vendors. But we have done our best to mitigate those issues, right? We've stockpiled a lot of raw materials components. I mean, year-over-year, our raw materials are up $23 million. If you look back two years, from April '21, it's up $47 million. I think that helped us mitigate some of those challenges, but it would be -- I could not say they're overly gone.

[Unidentified Analyst]

All right.

[Doug Moore, Chief Financial Officer]

In terms of on-site access, we're doing very well.

[Unidentified Analyst]

Okay, fantastic. All right. Thanks for taking my questions. I'll pass the line.

[Operator]

Your next question comes from Robert Young from Canaccord. Please go ahead.

[Unidentified Analyst]

[Parth] (ph) on for Rob. I'm just following on that cloud question there. I'm guessing you're not providing more color on the mix, but as I go back to the AGM last year, I believe a 20% number was mentioned. So, assuming the big cloud order, should we expect cloud as a percentage to grow over time or kind of stay steady?

[Brian Campbell, Executive Vice President, Business Development]

The cloud part of the business is definitely a key focus when we're investing very heavily in terms of R&D and resources, dollars and people. So that definitely is the strategy to ramp up that part of the business. So what you're seeing is evidence with the long-term very large purchase order success in those areas. So we've been delivering cloud services to our key customers now since 2016, '17, and that business is definitely ramping up and continues to.

[Unidentified Analyst]

Got it. And then, it appears that competition is steadily growing. Grass Valley and Ross put out a couple of announcements. How do you see yourself positioned versus competition?

[Brian Campbell, Executive Vice President, Business Development]

We're definitely the leader -- the global leader. So -- and the announcements, you'd have to read through them. Candidly, we're focused on our own business and delivering to customers, and we're delivering and have been delivering at scale to the largest broadcast media players in the industry in North America and Internationally.

[Unidentified Analyst]

That's helpful. And then, just following up on gross margins, really strong in the quarter. I'm guessing cloud has a pretty big role to play there. So should we expect you to increase your target gross margins going ahead, maybe beyond 60%?

[Doug Moore, Chief Financial Officer]

I think, at this time, our target maintains, I would think. And it wouldn't necessarily just be cloud. So, I mean, there are other high margin components, whether it's warranty, licensing, maintenance, other services that are generally higher margin, too. I wouldn't just say it could be isolated to cloud based, but our target remains the same, 56% to 60%.

[Unidentified Analyst]

Got it. Thank you. And one last one. Any update on the Haivision expression of interest? And any update there?

[Brian Campbell, Executive Vice President, Business Development]

Nothing that isn't in the public domain.

[Unidentified Analyst]

All right. Thank you so much, and I'll pass the line.

[Brian Campbell, Executive Vice President, Business Development]

Thank you.

[Operator]

Brian, there are no further questions at this time. Please proceed with your closing remarks.

[Brian Campbell, Executive Vice President, Business Development]

Thank you, Julia.

I'd like to thank our participants for their questions. We're very pleased by the company's strong performance in fiscal 2023, achieving record sales of $454.6 million, delivering pre-tax earnings of $87.8 million, 19.3% of sales, all while investing $117 million in R&D to build future growth.

We're entering the first half of fiscal 2024 with significant momentum, fueled by a record purchase order backlog in excess of $392 million, plus $40 million shipments in May, totaling in excess of $342 million. And fueled by the growing adoption in successful large-scale deployments of Evertz's IP-based software-defined video networking solutions, cloud solutions, and our cloud solutions by some of the largest broadcast new media service provider and enterprise companies in the industry.

With our significant investments in software-defined IP, IT and cloud native technologies, industry-leading 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, and good night.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.