Evertz Technologies Ltd

TSX:ET

Earnings Call Transcript 2024-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Evertz Q4 Investor Call. [Operator Instructions] I would now like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Thank you, please go ahead.

[Brian Campbell, executive]

Thank you, Ena. Good afternoon, everyone, and welcome to Evertz Technologies' conference call for our fiscal 2024 fourth quarter ended April 30, 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'll begin by providing a few highlights, and then Doug will provide additional details. First off, I'm pleased to report sales for the fiscal year totaled $514.6 million, an increase of 13% or $60 million from the prior year. Revenue from the recurring software services and other software segment was $188.9 million, representing 37% of total revenue in the year. International revenue increased 50% in 2024, reaching $176.6 million. Earnings from operations totaled over $100 million.

Net earnings increased 10% to $71 million, resulting in fully diluted earnings per share of $0.91 for the year versus $0.84 for the prior year. Investments in research and development totaled $134.8 million, up from $117.1 million in the prior year. Year-over-year, our cash position strengthened, closing 2024 with $86.3 million in cash and cash equivalents compared to $6.6 million in 2023 net of bank indebtedness.

Turning to the fourth quarter results. Sales for the fourth quarter totaled $122.8 million. Gross margin in the quarter was $72.7 million or 59.2%, up from 58.9% in the third quarter. Investments in research and development during the quarter totaled $36.7 million. And net earnings for the fourth quarter were $13.9 million, while fully diluted earnings per share were $0.18. Evertz' working capital was $201.7 million (sic) [ $201.4 million ] as at April 30, 2024, up $30.2 million from April 2023.

At the end of May, Evertz' purchase order backlog was more than $295 million, and shipments during the month of May were $32 million. The strong financial performance, including shipments and robust purchase order backlog continues to be driven by the ongoing technical transition in the industry, channel and video services proliferation, increasing global demand for high-quality video anywhere, anytime, and specifically by the adoption of Evertz solutions such as Evertz' IP-based, software-defined video networking solutions, Evertz' IT and cloud native solutions, our immersive 4K ultra high-definition solutions, our state-of-the-art DreamCatcher IP replay and live production with BRAVO Studio featuring the iconic Studer audio solutions.

Our sales are well diversified with the top 10 customers in the fourth quarter accounting for approximately 37% of sales, with no single customer over 6%. In fact, we had 113 customer orders over $200,000 in the quarter. Today, Evertz' Board of Directors declared a regular quarterly dividend of $0.195 per share payable on or about July 10.

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

[Doug Moore, executive]

Thank you, Brian, and good afternoon, everyone. Looking at our revenues. Sales in the quarter were $122.8 million in fiscal 2024 Q4 as compared to $128.9 million in the fourth quarter of fiscal 2023.

For the year ended April 30, 2024, sales were $514.6 million compared to $454.6 million in the same period last year. This represents an increase of $60 million or 13%. In the current -- for our year-end results, we've also split out our revenue of hardware from combined software and service revenue. So hardware revenue in the year was $325.7 million and combined software service revenue was $188.9 million. This compares to $281.2 million in hardware revenue and $173.4 million in combined software and service revenue in the prior year-end April 30, 2023.

Looking at regional revenue. Quarterly revenues in the U.S. Canadian region were $96.5 million compared to $98.9 million in the prior year while quarterly revenues in the International region were $26.2 million compared to $30 million in the prior year. The International segment represented 21% of total sales in the quarter compared to 23% in the same period last year.

For the year ended April 30, 2024, sales in the U.S. Canadian region were $338 million, a slight increase compared to $337.1 million in the prior 12-month period. For the year-ended, sales in the International region were $176.6 million as compared to $117.5 million in the same period last year and represents an increase of $59.1 million or 50%. Gross margin for the fourth quarter was approximately 59.2% compared to 59.4% in the prior year and within our target range. For the year, gross margin was approximately 58.8% and also within our target range.

Turning to selling and administrative expenses. S&A was $20.1 million in the fourth quarter, an increase of $2.6 million from the same period last year. Selling and admin expenses as a percentage of revenue was approximately 16.3% in the quarter as compared to 13.6% for the same period last year. Selling and admin expenses were $72.3 million for the 12 months ending April 30, 2024, an increase of $10.7 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 14.1% for the 12-month period as compared to 13.5% for the same period last year.

Research and development expenses were $36.7 million for the fourth quarter, which represents a $6.8 million increase over the same period last year and includes $4.1 million in increased salary costs. Further, there were $1.4 million in temporary elevated R&D resource costs in the quarter, specifically relating to a specific project this quarter that was not in the prior year.

Investment tax credits for the quarter were $4.1 million compared to credits of $3.5 million in the prior year fourth quarter. And for the year ended April 30, R&D expenses were $134.8 million which represents an increase of $17.7 million over the prior year and includes $14.4 million in increased salary costs. R&D expenses were approximately 26.2% of revenue over the year compared to 25.7% in 2023.

Foreign exchange for the fourth quarter was a gain of $2.1 million. Quarterly gain was predominantly a result of the increase in value of the U.S. dollar against the Canadian dollar between January 31, 2024, and April 30, 2024. Foreign exchange for the 12 months, year ended April 30, was a gain of $0.2 million as compared to a gain of $2 million in the same period last year.

Turning to a discussion of liquidity of the company. Cash as at April 30, 2024 was $86.3 million as compared to cash of $12.5 million as at April 30, 2023. Working capital was $201.4 million as at April 3, 2020, compared to $171.4 million at the end of April 30, 2023.

Looking at cash flows for the quarter ended April 30. The company generated cash from operations of $34.2 million, which is net of a $14.6 million change in noncash working capital and current taxes. If the effects of the change in noncash working capital and current taxes are excluded from the calculation, the company generated $19.6 million in cash from operations during the quarter.

The company used cash of $3.4 million for investing activities in the quarter, which was principally driven by the acquisition of capital assets. The company used cash and financing activities of $15 million which was principally driven by dividends paid of $14.8 million (sic) [ $14.9 million ].

I'm now looking at cash flows for the 12-month period ended April 30. The company generated cash from operations of $144.7 million, which is net of a $49.3 million change in noncash working capital and current taxes. If those effects were excluded from the calculation, company generated $95.4 million in cash from operations during the year.

The company used $2.3 million of cash for investing activities, which was principally driven by the acquisition of capital assets of $9.6 million and partially offset by the disposal investments during the year. The company used cash and financing activities of $70.2 million, which was principally driven by dividends paid of $58.6 million.

Finally, reviewing our share capital position as at April 30, 2024. Shares outstanding were approximately 76.1 million and options and share-based RSUs outstanding were approximately 5.4 million. Weighted average shares outstanding were 76.1 million and weighted average fully diluted shares were 77 million for the year ended April 30, 2024.

That concludes 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 with the Canadian Securities Commission.

Now Brian, back to you so.

[Brian Campbell, executive]

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

[Operator]

[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

[Thanos Moschopoulos, analyst]

Revenue was a bit lighter this quarter than we've seen in recent quarters. So just curious to get your thoughts on that. Is that a function of project timing, like that could be reflective of any other factors such as macro weakness? Or just any color you can provide would be helpful.

[Brian Campbell, executive]

So Thanos, I would say it's primarily because of project timing.

[Thanos Moschopoulos, analyst]

Okay. So maybe...

[Brian Campbell, executive]

Our order backlog is very strong. You've seen that it's modestly up at $295 million at the end of May, and it remains very robust.

[Thanos Moschopoulos, analyst]

Okay. So from your perspective, I mean, we've heard a lot of other companies talk about tougher spending environments. But from your perspective, you're not seeing that more reflective of the quarterly volatility in order flow, which is -- I mean you see that on your business before an implementation cycle and so forth, right?

[Brian Campbell, executive]

Those are 2 different questions. So the revenue is...

[Thanos Moschopoulos, analyst]

Fair enough, yes.

[Brian Campbell, executive]

Primarily because of project timing and deliveries. And that said, your commentary about the overall macro-economic situation, Evertz is not immune to that. So we do recognize it, so -- but our order book does continue to build. So we have an extremely robust rich order of backlog of $295 million plus then a $32 million of shipments in this quarter is very strong.

[Thanos Moschopoulos, analyst]

Okay. You're providing the disclosure on the software and services revenue. So that's very helpful. Is that a metric you'll be providing on a quarterly basis? Or is that -- will that be an annual metric?

[Doug Moore, executive]

We will provide this on a quarterly basis going forward.

[Thanos Moschopoulos, analyst]

Okay. And over the last year, hardware growth actually was higher than software growth. So just interested in the dynamic there. Might that just be a function of as activity picked up over the past year, some new projects were implemented, which have a big upfront hardware component, but then a recurring software component? I mean, just curious if you have any thoughts in terms of the relative growth over the past year?

[Brian Campbell, executive]

You're correct, right? So we've done very well with the hardware -- with our hardware sales and also with recurring software, and that is totaling 37%. That's a very significant percentage of our revenue base, and we're quite proud of that, and it is building. But again, to the -- and we're also very proud of the hardware sales as well, too.

[Thanos Moschopoulos, analyst]

Okay. And on the R&D spend, just to clarify, the $1.4 million in temporary costs, does that go away in Q1? Or will there be some other elevated costs in Q1?

[Doug Moore, executive]

So some of those costs will continue through to Q1. Expectation is that it would trail off after -- into the summer. So the Q2 will be trailing off. So -- and then the other -- there is an uptick in Q4. If you're looking sequentially, in Q4, our materials and supplies went up $800,000 too, and that can be -- have a bit of volatility to it. But the temporary costs should start going up, but they will have some components in Q1.

[Thanos Moschopoulos, analyst]

Okay. The $800,000 increase in materials and supplies, is that sort of typical -- we often see that in your Q4, is there some of that?

[Doug Moore, executive]

Yes. I mean there's some volatility there and Q4 often has a bit of an uptick in materials and supply. So the $800,000 is the potential increase.

[Thanos Moschopoulos, analyst]

Okay. Last one for me. Anything think you also would call out from an OpEx perspective, aside from the R&D [ mix ] we should think about heading into Q1?

[Doug Moore, executive]

Yes. I mean the other big one is in S&A. Sequentially, again, travel and trade show costs went up $1.7 million. The biggest driver being NAB in Q4, that would be the thing to call out.

[Operator]

And your next question comes from the line of Robert Young from Canaccord Genuity.

[Robert Young, analyst]

You might have defined this somewhere in your disclosures, but can you give us maybe a broader description of what exactly this recurring software, services and other software representing 37% of total revenue in the fiscal year. Can you just maybe break out what that includes maybe a little more granularly and maybe how much of that is software that's embedded in the hardware? How much of that would be software that's sold separately, how much software in the cloud. Any broader description what exactly that is would be helpful.

[Doug Moore, executive]

What the software and services include, so it include, starting with the service component, which is more straightforward. The warranty commissioning, what else, SLAs, like that. On the software side, it would be a mix of stand-alone software, it could be channel keys, license keys, it could get -- increased functionality of hardware, but issue the software but with a license key. Provide some clarity?

[Robert Young, analyst]

Okay. Would it be fair to say that, that's revenue that's not tied directly to hardware?

[Doug Moore, executive]

License -- like certain components of it could be used on hardware, but not necessary. So you could buy the hardware without it, I guess, the way to describe it.

[Robert Young, analyst]

So maybe the broader question is what's the new information you're trying to provide investors with this disclosure?

[Doug Moore, executive]

That's fair. So before, hardware and software, so whether it was stand-alone, whether it was license keys, whether it was options, it was all grouped in with hardware. Now hardware shows physical hardware, so a physical kit. So there's a serial number on it. How else to describe it, but...

[Brian Campbell, executive]

So it's primarily to address our analyst and investor requests for breaking out the software revenues to ascertain what percentage of our overall business is related to software.

[Robert Young, analyst]

Okay. I guess maybe if I just put a finer point on that. Is there any hardware embedded into that 37% or can I assume that, that's all software, all recurring software?

[Doug Moore, executive]

No hardware embedded in the software and services.

[Robert Young, analyst]

Okay. Second question for me just on the cash balance growing, continues to grow despite the higher level of OpEx this quarter, strong cash from operations. Can you maybe give us a sense of what you have planned for that cash?

[Doug Moore, executive]

Well, the driver on the cash increase. I mean there's a couple of things there. There is the increase in deferred revenue. So that has brought up cash substantially in the year. Further [ areas or the area ], which has a positive effect on cash well. As for the use, we have announced another regular quarterly dividend. And beyond that, we have significant flexibility.

[Robert Young, analyst]

Okay. Do you have a dividend policy around, I think, the last couple of years, you've increased the dividend on an annual basis. How would that happen in the future, if you're going to increase the dividend?

[Brian Campbell, executive]

It's a good question. The dividend policy is handled by the Board. It's a Board decision, and the Board is very cognizant of Evertz' very strong operational cash flow generation capabilities over the long term and they are confident in it. And that has been reflected in increasing quarterly dividends over the last years. Again, too, that is a Board decision, but they're well aware of the significant cash buildup.

[Robert Young, analyst]

Okay. Last question for me. I think we're past the anniversary of that large $152 million cloud software deal, but there was some -- some words in press release suggested significant orders. And as you noted earlier, the backlog did go up despite the fact that revenue was down quarter-over-quarter by a pretty significant amount. And so I was just curious, can you maybe expand on that significant order comment, and then I'll pass the line.

[Brian Campbell, executive]

So with respect to the $152 million cloud software and services order over 5 years, so that is exactly what it says. There is a potential and our other revenues and -- of the side of that purchase order, hardware-related specifically with that customer. So I'm not sure what else...

[Robert Young, analyst]

Yes. So the increase in the backlog, was that driven by larger deals? Maybe you can just talk about are there other large deals of that sort of size, $152 million multiyear deal. Maybe just talk about the pipeline, maybe there are large deals this quarter.

[Brian Campbell, executive]

There have been significant purchase orders and deals to occur. Nothing that we've press released outside of the $25 million international purchase order, which you saw last year, again, too, and we spoke about it being delivered in the later quarters of 2024. And that was, again, to just -- you'll recall that it was for Evertz' IP-based solutions, so EXEs and EQXs, gateways and other solutions. So a very high-end solution for an international customer.

[Operator]

There are no further questions at this time. I will now hand the call back to Mr. Brian Campbell for closing remarks.

[Brian Campbell, executive]

Thank you, Ena. I'd like to thank our participants for their questions and to add that we are very pleased with the company's strong performance during fiscal 2024, which saw sales increased 13% year-over-year, crossing the $0.5 billion threshold to reach a record high of $514.6 million. Strong gross margins of 58.8% for the year, delivering over $100 million of earnings from operations, all while investing $139 million in R&D to build and sustain future growth.

We closed the fourth quarter of Evertz' fiscal 2024 with significant momentum fueled by combined purchase order backlog plus May shipments totaling in excess of $327 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 and service provider and enterprises in the industry. And by the continuing success of Evertz' DreamCatcher BRAVO, our state-of-the-art IP-based replay and production suite.

With Evertz' significant investments in software-defined IP, IT and cloud-native technologies, the over 600 industry-leading IP 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]

Thank you. This concludes today's call. Thank you for participating. You may all disconnect.