Haivision Systems Inc

TSX:HAI

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Haivision Systems second quarter fiscal 2022 earnings call. [Operator Instructions] Thank you.

Mirko Wicha, Chairman, CEO and President, you may begin your conference.

[Miroslav Wicha, executive]

Thank you, Josh, and good afternoon, everyone. Thank you for joining us. I'm excited to be back today to discuss our fiscal year 2022 Q2 results. If you noticed our results we just posted a little while ago, we announced earlier today, demand for our products remain strong, and our business fundamentals have never been stronger.

Now let me just start with the amazing Q2 revenue results, $29.9 million, which exceeded all previous quarters and represents a 36.8% growth over last year's Q2. I do want to remind everyone that this time last year we had a very strong Q2 also. So to grow 36.8% over that quarter is an amazing back-to-back impressive financial results as we continue to deliver on our promise really to increase top line growth, albeit via acquisitions and build operational efficiency into our long-term business model.

Now we also delivered, you got this, our 34th consecutive quarter of positive adjusted EBITDA, a pretty rock solid performance, right, when you look around the tech world and see many companies in turmoil and ones that still haven't made any money. So that's delivering a $2.6 million of adjusted EBITDA, given all the headwinds in the industry is pretty awesome. The current market is pummeling stocks, and we're in a downturn or bear market.

I firmly believe that companies that are profitable and have fundamentally strong business models and don't spend crazy money just to get top line growth at the expense of huge losses will always prevail and come out of this stronger. And that's exactly the Haivision story and strategy. So as you can appreciate, we are very, very proud of our results.

Now let me begin actually with refreshing everyone's understanding on who is Haivision or what does Haivision do? I think this is important. Simple, we strive to be the most trusted video network supplier for everything remote, right? I mean, our customers depend on Haivision to provide them with video networks to solve their mission-critical needs. And this is what differentiates us from other companies.

And we know security, compliance, performance, quality, reliability, and we continue to invest in differentiating developments such as the FedRAMP for the government, the foci mitigation for a secure facility in Atlanta, compliance and certification testing, all of this to supply, secure, and as I like to kind of say bulletproof for trusted systems for large enterprise, government and defense deployments.

I mean this is the future of Haivision, large, programmatic multiyear, multisite opportunities that will separate Haivision from all other players. And I can't think of any competitors in our space that have a similar approach, right? The world is becoming a more dangerous place. We know that. Video plays a huge role in this. I mean, consider emergency management, ISR, security operations, public safety, cybersecurity.

I mean, everyone today needs fully secure systems to deliver, monitor mission-critical video. And our goal is to make the world a safer place. We focus on video networks, video infrastructure, security and critical collaboration for large global accounts, corporate America and governments worldwide. In fact, they used to say one day never, nobody gets fired for buying IBM. Well, I think today, we can see that nobody gets fired for buying Haivision for the video network needs.

Now let me briefly discuss a few key Q2 highlights. Number one. The Aviwest acquisition closed at the beginning of April, it's only 10 weeks ago, right? Aviwest is a phenomenal addition to the Haivision portfolio and enables us to be the only provider and vendor to deliver ultra-low latency wired and wireless streaming technology. This is huge, right, as Haivision would be looked upon to help solve the most complex and difficult contribution, screening and remote production solutions in the industry.

As I mentioned, it's only been 10 weeks since closing, and our global sales integration is complete. Customers are excited to see how our products will integrate and provide an unparallel portfolio of products under one roof. In fact, we already share many accounts where they use Haivision to land-based and wired needs and Aviwest for the remote mobile or cellular bonded systems.

So we see this as an amazing opportunity to strengthen our global customer presence. The Aviwest acquisition is extremely synergistic in all key areas of sales, geographical expansion, technology synergies and helping to solve our customers' challenges. This new combination will continue to fuel our growth well into the future. In fact, we also demonstrated our companies working together at the NAV show in April, and all customers applauded us for the synergistic acquisition. We believe it will make a huge difference in providing a single vendor solution for the broadcast market that everyone has been looking for.

Number 2, in May, we actually also acquired the assets of DAZN, largely a pre-revenue SaaS platform company for cloud production. Cloud production allows event producers really to mix multiple remote video sources and apply graphics, right, to create a rich, compelling broadcast for streaming.

And we were fortunate to acquire this technology, including 6 great software engineers based in [ Lorient ] France, which is actually close to our new Aviwest office, which is also based in Lorient. The DAZN team will join that of Aviwest as we repurpose this technology to really support the Connect platform in the enterprise market going forward.

Our advanced cloud and SaaS video distribution platform, Haivision Connect, continues to receive very positive feedback from house of worship and faith clients. We have now reached 100 clients using Haivision Connect as part of our transition to this new SaaS platform, including some of the largest multi-campus ministries in the United States.

We've also secured new victories against the competition. A couple of them are New Life Spokane and Hope Channel International. I mean this network actually operates globally with 67 Hope channels worldwide, each providing programs contextualized to the language and culture of their audience.

I mean, as we continue transitioning all our paid clients to this new innovative platform, we have also recently released the advanced VOD features that everyone has been anticipating. It's been a major development effort and represents the last step to enable all the key accounts to transition the entire workflows to connect. We expect this to continue until the end of the calendar year.

Now our cloud-based video stream routing technology, the Haivision hub now has 45 active clients as we introduced our new appliance attachment features. These new features enable full management and device control of Haivision endpoints such as the Makito Encoders, the Haivision Gateway, giving users powerful control of ultra-latency cloud routing or video securely from anywhere to anywhere globally.

We have signed a Fortune 500 enterprise software company, and they use Haivision for distributing video feeds for corporate events, training and town halls. One of the largest European sports broadcasters is using hub to manage Makito X4 encoders, which are sent to stadiums or racetracks for contributing streams to the main facility for remote workflows.

Haivision Hub cloud routing is also being used to distribute feeds from stadiums to broadcast rights holders for European soccer league. Now we've also announced a strategic partnership with Grass Valley, if you haven't seen the announcement earlier. The Grass Valley media universe is intended to bring existing and new technologies together in ways that generate new opportunities for Grass Valley customers.

Haivision video and coding technology offers the ultimate combination, right, of low latency and stream synchronization required for high-quality live cloud production. Haivision as a member of the Grass Valley Media Universe Alliance helps create a digitally connected community that combines the on-premise, hybrid and public cloud technologies. This also allows new options for producing content and live production environments from wherever Grass Valley customers are working.

And finally, our percentage of international revenue has increased in Q2 to represent about 22.6 of our global revenue, mainly due to the addition of the international weighted Aviwest revenue. Now this will increase going forward as we only recorded 1 month of Aviwest revenue during Q2.

Now I'd like to maybe discuss some additional selective Q2 sales highlights. Let's talk about broadcast. PGA Golf is using our X4 decoders to receive multi viewer feeds from NEP trucks equipped with our Makito X4 encoders at the remote location and feeding back to the production crew located at PGA centralized broadcast facility, allowing for the production of live events without the PGA tour people having to travel. They have also used the Makito X4 decoders in the field to receive a large number of feeds from their AWS cloud production infrastructure for use in the local production compound or throughout the venue for hospitality needs.

In Thailand, the Southeast Asian games are using Makito X4s for contribution and remote production. In Japan, we got Hulu TV now using MX4's Makito for transporting and streaming video content within Japan. Really cool on the Olympic broadcast service or known as OBS, has seen a spectacular pickup of SRT use by major Tokyo broadcast rights holder and 20 broadcast rights holders in Beijing.

OBS has set up a thorough test program and investing in equipment and technology to address the fast growth of receiving SRT streams by broadcast rights holders all over the world. In fact, even here closer to home, MediaPro Canada are using us for the Canadian Premier League soccer, using our Makito to remote productions using our multi-camera synchronization. They are feeding from the trucks at the venue and then backhauling to the master control and where they are producing the feed for distribution.

A&E, another big client are using our equipment for remote over-the-shoulder workflows, streams coming out of the Avid players are being sent to remote editors for postproduction and live studio production review. And then finally, I'd like to say the Philadelphia Eagles are using us for remote multi-camera sync for their away game production. They're actually beating multiple cameras back from away games to the Philadelphia Eagle's control room, and they are then switching and producing all of the content of their pre and post-game shows that are being sent to YouTube and Facebook and the Eagle's website and mobile apps. So very, very -- pretty robust broadcast business there.

Now within our enterprise government defense verticals, Haivision or as we say Haivision MCS that we renamed CineMassive, if you recall, has been at the heart of organizations addressing a growing threats related to cybersecurity and security in general. There are many systems involved in a comprehensive cybersecurity plan, all that must meet an organization's strict system security governance. I mean, these systems span monitoring and alerts-related networks of firewalls, databases, communications and even extend to simple physical security.

The Haivision MCS solution manages the aggregation and presentation of any source so that decision-makers can make complex environments and react to unforeseen events that may shake the foundation of the organization. This quarter we have established or extended multisite deployments of our mission-critical solutions at some of the world's most important organizations, including additional global operation centers for Facebook or Meta and adding the Sydney Security Operations Center for Salesforce. I mean these are significant multinational accounts for Haivision.

We continue to install our Haivision media platform and Makito Edge devices into new sites and expanding sites in the U.S. State Department embassies in Manila, London, Southern Salvador and Nairobi. We installed a very large emergency operations center for the Department of Energy Los Alamos National Laboratory. Actually a pretty exciting win was a significant multiyear, multisite programmatic opportunity with the alert wildlife emergency operations center in Sacramento.

They actually provide Firewatch cameras and tools and information coordination between many states like Colorado, Utah, Nevada, Idaho, Oregon, Washington and in California for wildlife response. And Haivision MCS has been selected as the operation center platform and will be rolling out new regional op centers about 14 regions over the next several years. I mean this really shows the strategic importance of the acquisition of CineMassive and the programmatic nature of the business to fuel a much higher growth. In fact we also installed a major operation center at the Philadelphia Office of Emergency Management.

I mean this continues our strength in Philadelphia Public safety, right? They actually coordinate the emergency response across multiple agencies in Philadelphia and surrounding counties. And this adds to our success with multiple op centers for the Philadelphia Police Department and the Delaware Valley Intelligence Center. And we also expanded actually our installations within our key customers, SpaceX, Blue Origin, I mean they both depend on performance, quality and reliability of our Makito X4 edge devices to do their work, pretty cool accounts.

Now just before I pass it to Dan, our CFO, for a more detailed analysis on our second quarter results, I would like to reiterate that significant headwinds still exists, which do affect business and growth. And the world continues to deal with an unprecedented supply chain and component shortage. And now the added cost of labor is making it difficult to hire or retain people. And we also see a return to travel and trade shows and increasing costs as our vendors increase their cost to us.

And this is expected to continue well into 2023, and we are building contingencies into our business model going forward, the understanding that these are significant pressures to profitability levels. Our teams are working hard to mitigate these, but these issues are not without a cost to the business. Dan will speak to this in more detail.

In summary, we have delivered as promised 2 strategic acquisitions in the first 17 months since going public with another small technology pickup for remote cloud production. We'll continue to focus on the integration of these acquisitions and prioritize a plan for operational efficiencies. We have increased our headcount significantly and need to absorb all the people, the products and synergies before embarking on any new acquisitions in the near term. We will reevaluate additional opportunities sometime in fiscal 2023.

But right now, it's all about integration, execution, to deliver a platform for growth and prepare for our very strong fiscal 2023. I could not be prouder of the Haivision team and what we have accomplished since the IPO has truly been an amazing ride since becoming a public company, which has exceeded our expectations thus far.

Finally, I just want to thank all of our investors and analysts and shareholders on the line today for their continued support of Haivision and look forward to speaking with many of you shortly. Dan, I'll pass it to you.

[Dan Rabinowitz, executive]

Thank you, Mirko. So let's get into the numbers. Revenue for the second quarter of fiscal 2022 was $29.9 million, representing an increase of $8 million or 36.8% from the same period in the prior year. Revenue for the 6 months ended April 30 was $58.2 million, representing an increase of $13.4 million or 29.8% from the same period last year.

Obviously much of the year-over-year growth can be attributed to the acquisitions of Haivision MCS, formerly known as CineMassive Displays, which was completed in August of 2021, and more recently, Aviwest in April of 2022. Historically, our traditional business had an interesting seasonal pattern to it. Our first quarter was traditionally our smallest quarter, representing about 20% of our overall revenue.

Our fourth quarter, which was commensurate with the U.S. government year-end, was traditionally our largest quarter, representing about 30% of our overall quarter. With the onset of COVID, we did begin to see client purchases become more ratable throughout the year, and we began to see significant purchases in our first quarter.

As an example, revenue for first quarter 2021 grew 18.4% when compared to the prior year period. With COVID seemingly behind us, we seem to be reverting back to our historical seasonal patterns. Complicating matters, the seasonal patterns for both Haivision MCS and Aviwest tend to be disproportionately slanted towards the end of the calendar year. As an example, nearly 40% of Aviwest revenue was realized in the calendar fourth quarter of last year. Thus I would caution investors from coming to conclusions based on current performance. Our business remains healthy and is expected to continue to grow from these levels.

Recurring revenue, which we define as our cloud solutions and maintenance and support, continues to be robust. Recurring revenue was $6.6 million and represented just under 22% of this quarter's total revenue. This compares to our recurring revenue in the same period last year, which was about $5.2 million. But then it represented just over 24% of second quarter fiscal 2021 total revenues. Obviously we are disappointed that our recurring revenue isn't growing in concert with our overall revenues. But it speaks to the opportunities before us as we conform our maintenance and support options and offer our cloud solutions to Haivision MCS and Aviwest customers.

For this quarter, gross margins were 71.4%, which were an improvement from the 69.4% realized last quarter. Margins are very much in line with expectations given our recent acquisitions. Our supply chain experts have done a phenomenal job ensuring that we can continue to supply our customers with their mission-critical needs, but it hasn't been without some additional costs in terms of higher component costs and in some cases, expediting costs.

To give you a sense for the second quarter of fiscal 2022, we incurred approximately $450,000 in additional componentry costs and on a year-to-date basis approximately $900,000 in additional componentry costs. Had these incremental component costs not have been incurred, we would likely have been seen total gross margin to be 1% to 2% higher than where they are today.

As presented, total expenses for the second quarter were about $21.2 million, an increase of $6.6 million when compared to the same period in the prior year. And on a year-to-date basis, total expenses were $41 million, an actual decrease of $2.5 million when compared to the same period in the prior year. As we've discussed on previous calls, in the first half of last year, total expenses included $14.1 million of a nonrecurring share-based expense resulting from the exercise of options related to our legacy employee stock option plan. When we normalize for share-based payments, total expenses on a year-to-date basis were $39.5 million, an increase of $11.2 million when compared to the same period last year.

As we've said in the past, our cost structure is largely made up of people costs. In fact, approximately 70% of our total expense consists of labor and related benefits. Thus it shouldn't be a surprise that much of the increase in total expenses is directly related to headcount. At April 30, 2022, our total headcount was 417 people. That's up 70% from the 245 on staff as of April 30, 2021. Much of the year-over-year headcount increase is directly the result of recent acquisitions.

Haivision MCS added 64 people while Aviwest added another 81 people. Further, the acquisitions resulted in us acquiring assets and intangibles that impacted financial performance. Amortization and depreciation expenses this fiscal year were $2.4 million higher than the same period in the prior year, and we also incurred $700,000 in transactional expenses during the period related to our acquisitions.

Further, we are seeing headwinds that are impacting our labor costs, our travel and marketing expenditures and the cost of just about everything else. I'll touch on that, the impact of these headwinds in just a few moments.

Adjusted EBITDA for the quarter was $2.6 million. Now that's a decrease of $1 million compared to the same period in the prior year. And adjusted EBITDA for the 6 months was $4.7 million, a decrease of $2.4 million from the prior year. With the Haivision MCS acquisition and the more recent Aviwest acquisition, we have a lot of initiatives underway, and I will touch on where we stand in regards to integrations a bit later. But EBITDA margins have compressed a bit in recent periods due to a number of factors.

As I mentioned before, supply chain issues cost us about $900,000 on a year-to-date basis. Transaction costs related to recent acquisitions costs us about $700,000 on a year-to-date basis. We've had increasing labor costs, which are almost impossible to calculate and we've had increases in travel and marketing spend, which exceeded last year's spend by $800,000 and $500,000 respectively.

Nevertheless, this quarter now represents our 34th consecutive quarter of positive adjusted EBITDA. With that said, net loss for the quarter was $400,000 compared to a net income of $1.2 million for the same period last year. In addition to the headwinds, I should just discuss this quarter's net income was impacted by the additional amortization and depreciation expenses that I spoke of is kind of a bit earlier. Obviously, these are noncash expense, but nevertheless, they have a profound impact on net income.

On the other hand, our net loss for the 6 months was only $800,000, and that's a $10 million improvement from the same period last year. Again, a significant component of the variance is related to that share-based payment. And as I mentioned before, we incurred a share-based payment of about $14.1 million related to the legacy employee stock option plan, but that represented the culmination of a 14-year program.

Normalized for these share-based payments, we did see an increase in overall labor costs related to recent acquisitions and increases in what I'm calling headwind expenses that impacted gross margin and overall costs. And as I mentioned before, net income was also impacted by the additional amortization and depreciation expenses related to the acquisitions.

Looking at the balance sheet. We ended the quarter with a cash balance of $12.8 million, but much of that was funded through our credit facility, which had $13 million outstanding at the end of the quarter. Obviously, the big news for the quarter was the consummation of the Aviwest transaction in early April. Haivision acquired 100% of the shares of Aviwest West on a cash-free and debt-free basis for cash consideration of EUR 20.5 million. That's approximately CAD 29.6 million, but it was subject to customary adjustments. So the transaction actually consumed $21.9 million in cash and we assumed $5.5 million in their term debt.

In terms of the term debt, the terms of the term debt vary and it includes noninterest-bearing debt and interest-bearing debt up to an interest rate of about 2.71%. Now in addition, we do have an obligation to pay an additional $2.7 million in 2 future payments that assumes Aviwest has no obligations under any indemnities.

Total assets at quarter end were $146.1 million, an increase of $23.7 million from fiscal 2021 year-end. The increase in assets is largely the result of the Aviwest transaction. We assumed assets of $11.7 million, including inventories, receivables, property equipment and right-of-use assets. And we also acquired intangibles of $13.3 million and goodwill of $9.7 million. These working capital increases were offset by a $2.8 million decrease in cash in the quarter.

Total liabilities at quarter end were $56 million, an increase of $22.4 million from fiscal 2021 year-end. And again, the increases in liability is largely the result of the Aviwest transaction. We assumed $5.8 million in liabilities related to trade payables, deferred revenue, deferred taxes and the like. We assumed $5.5 million in term debt, and we assume $1.4 million in lease liabilities.

So let's talk about where we are on integration plans. As we have discussed, one of Haivision MCS's key assets, albeit a nonfinancial asset is their facility security clearance. Our commitment at the time of the acquisition was that we wouldn't make any structural changes to the business until such time that we have mitigated all foreign influence. Some of you may be familiar with the term FOCI mitigation. And once we execute a special security agreement or SSA A, along with several other documents, then we will be in a position to implement more integration changes. All of our documentations have been provided to DCSA and we await their response.

Now although we are -- our commitment was to maintain the status quo until we receive formal approval, we have had constant dialogue with DCSA and they have provided us advanced approval of several of our planned initiatives. Said another way, we have not been sitting still. Nevertheless, we are disappointed that we have yet to exploit all of the synergistic opportunities in front of us, for sure.

However, we have focused on key elements of the integration plan like integrating the sales teams, upgrading the payroll function, migrating Haivision MCS to a common accounting system and implementing procurement best practices to reduce the order to cash cycle time. The good news is that we still have vast opportunities still in front of us.

Fortunately, the Aviwest acquisition hasn't had the same government encumbrance. The integration has been less complicated and progress has been swift. Now after all, we just closed on the transaction about 10 weeks ago, but our sales team have been fully integrated, and Aviwest is operating under a common sales management system. Technologies are already being integrated.

As announced yesterday, Aviwest IP video contribution solution supports the SRT protocol, allowing interoperability with the Haivision product portfolio and other SRT-enabled solutions. Our next areas of focus are improving the flexibility of Aviwest supply chain, porting Aviwest to a common accounting system and bringing Aviwest product to North America.

Now Mirko mentioned significant headwinds, so I want to touch on that just a bit. Our supply chain specialists have addressed all issues for the current quarter and the number of issues for fourth quarter are very limited. However, our successes are not without some real cost to the company.

In the past quarter, as mentioned already, we incurred approximately $0.5 million in additional direct product costs directly related to the worldwide shortage in components. And on a year-to-date basis, we incurred approximately $900,000 in those additional component costs. To secure our 6-month needs for parts and components, we have increased our deposits with our contract manufacturers by approximately $1.5 million. We have also made $2.4 million in component purchases to secure the high-value long lead time components necessary to keep the revenue line moving.

We have also reduced cost of goods sold with the in-sourcing of mechanical assemblies. We have redesigned certain of our boards to accommodate more available componentry. We have invested in new systems to provide real-time assessment of our supply chain resiliency, and we are constantly qualifying alternate manufacturers for difficult to procure electronic components.

Like I mentioned, there is little risk in the third and fourth quarter. However, despite all of these initiatives, we recognize that we still have additional work, particularly in securing an acceptable level of safety stock necessary to grow revenues for Aviwest products. We still don't know when we might see our supply chains reverting back to historical levels.

Nevertheless, we are beginning to see a degree of stabilization, albeit at a level with unacceptable long lead times and unacceptable high component costs, nevertheless, the worst appears to be behind us. Those were a lot of words to say that our supply chain experts seem to be well on top of this issue. The people side of the equation continues to be a challenge. Labor costs are continuing to increase. We are in a difficult hiring environment and retention continues to be a challenge.

To give you a sense of the challenge at the beginning of this fiscal year, Haivision reevaluates compensation and overall increases at that time averaged over 6%. To further frame the impact for fiscal 2021, labor was about $40 million. So a 6% increase amounts to an additional $2.5 million in added OpEx. Adding to the challenge, the cost of fringe benefits are increasing at an average weight of over 10%.

Despite attempts to sweeten our compensation packages, including company incentives to participate in our employee share purchase plan, the overall environment to attract and retain employees remains challenging. Adding to that challenge, we have always believed that our culture was a key contributor to our ability to attract and retain employees.

Obviously, the work from home environment has complicated matters and our established culture is being diluted. We have since encouraged our staff to return to the office 2 to 3 days a week. We have not mandated it. But candidly, the idea of returning the office has made Haivision less compelling in the eyes of some, particularly those people who have been hired in the last 2 years who never were the beneficiary of seeing our culture in action. It's definitely a confusing time for employers and employees.

However, labor and supply chains are just part of the overall equation. We are yet again seeing an overall change in our business since the pandemic and things have taken a new form. Our vendors are beginning to pass their higher cost structures on to us, their customers. We have anticipated that travel would be coming back. We knew that nothing really can substitute for face-to-face interaction with our customers or between our colleagues.

Further, with 2 companies to integrate the need to interact in person has never been more important. But we also believe that our experiences with Teams, Zoom, Slack, et cetera, would mitigate some of the need to travel. Well, we couldn't have been more mistaken. And for anyone who has booked a trip in the last month or 2, the cost of air fares have more than doubled and is getting more difficult to find a reasonably priced hotel room.

In the 6 months that just passed, as an example, our travel expenses amounted to $900,000, of which $700,000 was unrelated to our professional services practice, which has continued to travel during the pandemic, albeit at reduced levels. This compares to just $100,000 in travel spend in the same period last year. What's more is that we are seeing a real return to trade show at levels that we had not anticipated.

To illustrate, on a year-to-date basis, we have spent $600,000 in trade shows and advertising compared to just $100,000 in the prior year period, and we don't see this being mitigated any time in the future. Quick note about currency. In the instance when we provide guidance, we really do not consider the potential impact of foreign exchange gains or losses as we do not attempt to estimate future movements in foreign currency rates.

In terms of expectations for the remainder of the year, we are a B2B provider to enterprises around the world. And certainly, our customers have been facing the same headwinds that we have been experiencing. The stock market is in their territory and our customers are definitely feeling some pain. Although we've not lost any business to date, we are beginning to hear of projects moving to the right, and there has been some reservation for purchases pending more clarity on the economy.

Thus, in the interest of conservatism, we are revising our revenue target for the full year to between $123 million and $127 million and are expecting our adjusted EBITDA margin to be between 8% and 11% of revenue. There is upside in both the revenue and EBIT side of the equation, and although still a bit early, we have already begun to work on our plans for 2023 and are quite buoyant on the industry and our position within this industry. Thus we are still forecasting EBITDA in the mid-teens for next year.

With that said, we are now ready to take questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Robert Young with Canaccord.

[Robert Young, analyst]

Maybe first place, I'll start with gross margin. You already gave us a lot there. But I think you suggested that the supply chain or component cost was relatively stable in Q1 and Q2, and you don't see a lot of risk in Q3 and Q4. Is that to say that you think it will be $450,000 impact each quarter going forward or should we expect gross margins around this level? Gross margins are a little stronger than we expected. So should we expect it to improve from here with the integration activities or maybe is this a good level?

[Dan Rabinowitz, executive]

I would not make the assumption that we're going to be seeing gross margins improve from here. In fact, I would say that as Aviwest comes in to bear, we may actually see it come down a little bit because their gross margins are a little bit below what our legacy business has been. But I want to make sure I am specific about your -- sort of your preamble here. We incurred additional costs related to componentry in the first quarter and the second quarter. We don't expect that those costs are going to disappear in the third or fourth quarter.

In fact, we don't see those costs disappearing until mid-2023, earliest, right? So what I was trying to suggest is that whereas every week, we were coming across components that were becoming more unavailable. We're not seeing that kind of sentiment. And every week where we used to see lead times increasing, we're not seeing that happen anymore either. So things have sort of stabilized, albeit at a long lead time construct and with high additional costs, but we're not seeing it get worse from here.

[Robert Young, analyst]

The second question would be around just at the end of your prepared remarks, highlighted, said that there were some indications you might see some programs delaying. I know last quarter you had said that you expected a little weaker government spend from some lumpiness in some of the programmatic revenue, maybe slower ISR spend. And so is that the source of these project delays that you're getting a suggestion of? Or maybe if you could expand on that if that's the case.

[Miroslav Wicha, executive]

Yes, I can expand on that, Robert. It's actually -- and that what Dan was referring to was actually not the defense or government space is more on the commercial enterprise space, addressing the enterprise B2B type of a mode. And we're seeing that some of these enterprise clients are starting to feel the pain of the market. And that's what we're referring to. In fact, from the ISR government, defense, sector, we actually feel -- we actually feel pretty bullish for Q3 and Q4 because as we said earlier, remember, we did have some stuff push from Q1 to Q2, but we also -- given the recent developments, right, in Ukraine and the NATO expansion has buoyed some of our programs and actually brought some stuff forward as well. So we actually feel pretty good about Q3 and Q4, and it is the government year-end on top of that. So we're pretty bullish on that. It's really more the commercial enterprise sector that we're a bit concerned right now.

[Robert Young, analyst]

So relative to last quarter, I guess, the government spend, you're a little more confident on. I think you also said some -- had some concerns about Russia, Ukraine, Saudi, Turkey, a couple of -- a group of companies you thought might be a headwind? Like is that a little better now or is that kind of tracking the way you thought?

[Miroslav Wicha, executive]

No, pretty much shut down. It's pretty difficult to sell anything to Russia, Turkey or Saudi is getting difficult getting permits. And unfortunately we've had business development going on. And we've had -- we've got customers obviously in some of these regions. I'm talking about Turkey, I'm talking about Saudi specifically. So that's been frustrating. I don't see that ending anytime soon just because of what's going on in the world right now. But we're hopeful that if the Ukraine thing does settle. I know we've got Biden going over to Saudi and trying to restart the relations. We're hoping that, that might help. But from a Canadian, being a Canadian company, we seem to still be stuck in the mud with our Canadian government and some of these other governments. So it's not just the U.S. issue for us. It's actually a Canadian issue.

[Robert Young, analyst]

So it sounds like the government pieces, like I said, a little better than you thought, commercial a little bit worse. And some of this exposure you're just talking about just now, is that more in the broadcast space? Would that be a good way to summarize it?

[Miroslav Wicha, executive]

Exposure, meaning -- sorry, these other countries?

[Robert Young, analyst]

Yes.

[Miroslav Wicha, executive]

Well, no, I think it's in those countries specifically, we've actually done business in all the verticals, right? So it's not just the broadcast, right? I think what we're finding in the broadcast is that I think the COVID bubble has finally slowed down in the market across the board. We've had tremendous pickup in 2020 and '21. We're starting to see that slow down to a more normal level. So I would not be expecting massive growth, but the good news is that with Aviwest on top of our solution all of a sudden, that's going to mitigate all of that. What we saw in our traditional business, if you know what I mean, where I see our broadcast revenue actually overall increasing well into next year.

[Operator]

[Operator Instructions] Your next question comes from the line of Nick Corcoran with Acumen Capital.

[Nick Corcoran, analyst]

Just a couple of questions from me. Just the first is the revised guidance for revenue. It sounds like that's being driven by projects maybe being delayed. Can you give a little bit more color on why your adjusted EBITDA guidance is lower than what you've given in the past?

[Dan Rabinowitz, executive]

Well, I think the easy answer is headwinds, right? We're seeing cost increase. We're seeing a return to travel. We're seeing a return to trade shows. And we're still in the process of integrating 2 companies. And so we're a little bit disappointed that we haven't been able to get DCSA’s approval of our operating plan, and that has sort of delayed some of the big moves that we intended to make. But it's going to take us some time to both integrate CineMassive, Haivision MCS and Haivision and Aviwest to derive the operational efficiencies that we spoke of in the last call.

[Nick Corcoran, analyst]

And a related question, I understand you're seeing price increases through your supply chain. Are you having any challenges passing those prices on to your customers?

[Dan Rabinowitz, executive]

Mirko?

[Miroslav Wicha, executive]

Yes. It's something -- we -- let's, we haven't done it yet. We are talking about it. We're discussing it. We have rumors that there are some vendors that are looking at it as well. So no, we haven't been able to. It's one of those very unpopular things, but the good news is that we are getting feedback now that customers would be accepting and understand that the supply chain issues are severe and a company we absolutely plan to seriously consider. But we have not yet today changed any of our pricing based on that. We're basically absorbing it.

[Nick Corcoran, analyst]

Good. And then just a last question for me. You did a small tuck-in acquisition of a few software engineers in the quarter. How many more acquisitions like that do you see?

[Miroslav Wicha, executive]

At the moment we have no plans, honestly. That was actually very opportunistic. We were very lucky and fortunate to pull that one together with minimal effort and cost, and it was just a perfect time at -- we were at the right place at the right time and it happened to also be based in rent, so it makes it really easy. So we can absorb those engineers in the same office with Aviwest. In fact, they're already there and integrated. I do not expect, honestly, to look at any other acquisitions in the near-term future. The priority #1 right now is we need to absorb, we need to integrate. We need to right size properly, both from a product offering and people of the company, and we absolutely are planning to make sure that we are back in the mid-teens of EBITDA for next year. And that's probably #1. We will start looking at, I mean, we're talking to people, obviously, but I have no intention of doing any acquisitions for the foreseeable future, right? It's really a 2023 kind of a thought.

[Operator]

There are no further questions at this time. I'll turn the call back to Mirko Wicha for closing remarks.

[Miroslav Wicha, executive]

Great. Thank you, Josh. Well, thanks, everybody. I hope you enjoy the update of Q2, and we look forward to the second half, which I believe is going to be a very strong half for Haivision, and I look forward to talking to you in the next earnings update. Thank you, everybody. Bye.

[Operator]

This concludes today's conference call. Thank you for joining. You may now disconnect.