Evertz Technologies Q2 2024 Earnings Call Transcript

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December 6, 2023

Key Takeaways

  • Record quarterly sales of $130.7 M, up 15% year-over-year with over 100 customer orders exceeding $200 K.
  • Gross margin at 59.7%, hitting the upper end of the company’s target range and supporting strong profitability.
  • International revenues surged 128% year-over-year to $56.8 M, accounting for 43% of total sales in the quarter.
  • Purchase order backlog topped $324 M at the end of November, with November shipments of $48 M, underscoring robust demand and momentum.
  • Quarterly dividend increased to $0.195 per share, reflecting strong cash flow generation and a healthy balance sheet.
AI Generated. May Contain Errors.
Earnings Conference Call
Evertz Technologies Q2 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Evertz Second Quarter Investor Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. I would now like to turn the conference over to Brian Kappel, Executive Vice President of Business Development. Please go ahead.

Speaker 1

Thank you, Jenny. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2024 Second Quarter ended October 31, 2023 with Doug Moore, Evertz's Chief Financial Officer and myself, Brian Campbell. Please note that our financial press release and MD and 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.

Speaker 1

First off, sales for the 2nd quarter totaled a record high $30,700,000 up 15% compared 4%. In fact, we had 100 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $78,000,000 or 59.7 percent, which is at the upper end of our target range. Investment in research and development during the quarter totaled $33,200,000 Net earnings for the 2nd quarter were $22,300,000 while fully diluted earnings per share were $0.29 Evertz's working capital was $191,300,000 with cash of $55,900,000 as October 31st. Operational highlights for the quarter include Evertz stellar presence at the International Broadcast Conference Evertz EV670 virtualized media processing platform 1a TV Tech Best of Show And the Evertz Reflector Cloud Video Processing platform was recognized with a TVB Best of Show award.

Speaker 1

This software as a service SaaS platform for media transcoding is helping customers optimize their operations by leveraging adaptable cloud based workflows. At the end of November 2023, Evertz's purchase order backlog was in excess of $324,000,000 and shipments during the month were $48,000,000 We attribute this strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation, increasing global demand for high quality video anywhere, anytime the ongoing technical transition to IP, IT and cloud based architectures And specifically to the growing adoption of Evertz's IP based software defined video networking solutions, Evertz's IT and cloud solutions, our immersive 4 ks, 8 ks ultra high definition solutions, our state of the art DreamCatcher IP replay and live production with Bravo Studio featuring the iconic Studer audio. Today, Evertz Board of Directors declared a regular quarterly dividend increased to $0.195 we will now hand the conference over to Doug Moore, Evertz's Chief Financial Officer we will cover our results in greater detail.

Speaker 2

Thank you, Brian, and good afternoon. Starting at looking at revenues, Sales were $130,700,000 in the Q2 of fiscal 2024 compared to $113,200,000 in the Q2 of fiscal 20 that's an increase of $17,500,000 or 15 percent quarter over quarter. For the 6 months ended October 31, 2020 3 sales were $256,600,000 compared to $214,800,000 in the same period last year. That represents an increase $41,800,000 or 19 percent. As it relates to revenues in specific regions, in Canada and U.

Speaker 2

S. Combined, we had sales for the quarter of $74,000,000 compared to $88,300,000 last year. That represents a decrease of $14,300,000 or we will be conducting a few key factors to the Evertz 2nd quarter over quarter. Sales in the U. S.

Speaker 2

And Canadian region were $161,000,000 for the 6 months ended October 31, 2023, Compared to $166,500,000 in the same period last year, a decrease of about 3%. International regions had sales for the quarter of $56,800,000 as compared to $24,900,000 last year. It represents an increase of $31,900,000 quarter over quarter or 128%. International represented 43% of total sales in the current quarter. For the 6 months ended October 31, international sales were 95,500,000 Compared to $48,300,000 in the same period last year, an increase of $47,200,000 or $47,200,000 sorry, or 98%.

Speaker 2

Gross margin for the 2nd quarter was approximately 59.7% compared with we are now at 59.6% in the prior year quarter and within our target range. For the 6 months ended October 31, gross margin was approximately 58.5%, also within our target range. Turning to selling and admin expenses. Selling and admin was $17,500,000 in 2nd quarter, that's an increase of $2,800,000 from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 13.4% as compared to 13% for the same period last year.

Speaker 2

Selling and admin expenses were $33,900,000 for the 6 months ended October 31, 2023, an increase of $6,200,000 for the same period last year. As a reminder, the prior year expenses in Q1, so Q1 prior year included a $3,800,000 recovery that didn't reoccur in the current year and that partially explains the large increase over 6 months. Selling and admin expenses as a percentage of revenue were approximately 13.2% over the period as compared to 12.7% for the same period last year. Research and development expenses were $32,200,000 for the 2nd quarter. That represents a $3,500,000 increase from $28,700,000 in the Q2 last year.

Speaker 2

As a percentage of revenue, R and D expenses was 24.6% we expect to be in the range of 25.3 percent in the prior year. For the 6 months ended October 31, research and development expenses were 64 point $2,000,000 represents an increase of $7,100,000 of the same period last year and the increase includes approximately $5,500,000 in increased salary costs. Research and development expenses as a percentage of revenue were approximately 25% over the 6 month period as compared to 26.6% for the same period last year. Foreign exchange for the 2nd quarter was a gain of 2,900,000 and compared to $3,000,000 the same period last year. The current period gain was predominantly driven by approximately 4% increase in the value of the U.

Speaker 2

S. Dollar as of October 31, 2023, compared to July 31, 2023. Foreign exchange for the 6 months period ended October 1, 2023 was a gain of $900,000 that's compared to a gain of $4,000,000 in the same period last year. Turning to a discussion of liquidity of the company, cash as at October 31, 2023 was $55,900,000 as compared to net cash of 6,500,000 as at April 30, 2023. Working capital was 191,300,000 as of October 31, 2023 compared to 171,400,000 as at the end of April 30, 2020 Looking now at cash flows, the company generated cash and operations of $20,300,000 which is net of 10.6 If the effects of the change in non working capital non cash working capital, sorry, and current taxes are excluded from the calculation, the company generated $30,900,000 in cash from operations during the quarter.

Speaker 2

In our investing activities, the company generated cash of $4,100,000 which was predominantly driven by proceeds from disposal of investments of $6,300,000 This was partially offset by cash used for the acquisition of capital assets of $2,300,000 The company used cash and financing activities of $17,000,000 which was principally driven by dividends paid of 14,500,000. Finally, I'll look at our share capital position as at October 31, 2023. Shares outstanding were approximately 76,000,000 and options and equity based restricted share units outstanding were approximately 6,000,000. The weighted average shares outstanding were 76,100,000 and the weighted average fully diluted shares was we have $76,700,000 for the quarter ended October 31. That brings to conclusion the review of our financial results and position for the 2nd quarter.

Speaker 2

And 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, we refer you to the risk factors described in the annual information form and the official reports filed with the Canadian Securities Commission. Brian, back to yourself.

Speaker 1

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

Operator

Yes. Thank you. Ladies and gentlemen, we will now begin the question and answer questions will be taken in the order your first question is from Thanos Moschopoulos from BMO Capital Markets. Please ask your question.

Speaker 3

Hi, good afternoon. The gross margin was obviously very strong. I think it might be your best ever. And that's despite a higher international mix. And I know that margins can fluctuate based on the mix in any given quarter, but anything that you would call out as far as the dynamic?

Speaker 2

So I mean you're right in looking at the history you see a correlation between international revenue and lower margins. I mean that's just Depending on the projects we delivered in the quarter, it just pushed up the margin. There's not really any one time or unusual items to point out. It's really just the mix driving it. So I mean, we are still within our range.

Speaker 2

I mean, higher end of it, of course, but I mean, that's just the fluidity to it, Not really anything to point to specifically.

Speaker 3

Would it be the case though that perhaps it's like a higher software and or Cloud mix in there which is contributing to the margins.

Speaker 2

Again, I'm just going to point to the mix. I guess what I would say is if you look at Q1, it's 57.5 percent, so I think we're sitting in our target the last couple of quarters. We were at 59.5 percent in Q4 last year. So It's been a positive trend there, but it's not really a product mix driven and not really a specific item to point to.

Speaker 3

Okay. Brian, any comments in terms of the spending environment? And I know that the dynamic And the demand that you see for your products is always somewhat different than what the market is all might be doing. But certainly, it seems like there's been an uptick in growth if we look at You know the strong growth rate you've had the last couple of quarters and the strong shipments reported for November. So, might some of this be kind of pent up demand coming out of with the component shortages deciding coming out of the pandemic or anything else If you would more Evertz specific as far as market share gains and any commentary would be helpful.

Speaker 1

So, yes, Thanos, from Evertz's perspective, it's been a very good quarter, both in terms of delivery of projects and revenue and also securing new orders for good profitable business and Large contracts as well too. So Evertz does see Very good strong environment for our products, whether that's specific to our customers or An underlying trend for the industry and the industry trend, I'll have to leave that to you. But definitely we're Seeing a very productive environment for ourselves.

Speaker 3

Okay. North America was obviously down year over year, presumably more to do with project timing and maybe it's up year over year comps Rather than being indicative of any softness in that market?

Speaker 2

Yes, I mean, there's just some natural lumpiness to it, right? So You're on the right path there. That's not really a serviced you to point to. It's just the timing of certain deliveries and milestones that went out.

Speaker 3

Okay. Finally, with respect to cloud, any particular update you can offer? I Clearly, there's been a trend of customers larger customers adopting cloud. Is that something that you're seeing continue any update in terms of what you're seeing as far as be it pipeline, customer discussions and so forth would be helpful?

Speaker 2

So

Speaker 1

our cloud discussions with customers And our deliveries continue to roll out and be very encouraging, very strong. And of course, that's anchored by the 1 $152,000,000 5 year purchase order that we received and disclosed. So that is A very significant cloud deployment, multi year deployment both in terms of products and Services and that does underpin that sector for us.

Speaker 3

All right. I'll pass the call. Thanks.

Operator

Thank you. Your next question is from Robert Young from Canaccord Genuity. Please ask your question.

Speaker 4

Hi, good evening. Nice to see the dividend increase. I was wondering if you could share if there's any policy around that or any Wait that you're organizing the timing and the quantum of that increase. It looks like you're doing it once a year. Maybe just give me any kind of color you can around that.

Speaker 1

So Rob, we are Pleased to announce the $0.195 quarterly dividend. The Board is cognizant Our cash flow and cash build up and that increase to 0.195 SENSE reflects very strong pristine balance sheet and our cash flow generation capabilities as well too. So It is a board based discussion.

Speaker 2

All right.

Speaker 4

Maybe a little more on the international Growth, you had that $25,000,000 international order in April. I believe last couple of quarters you said that you hadn't seen that Pass through revenue, sir. Is that the $25,000,000 deal or is there some part conversion of that here?

Speaker 2

Yes. So I mean, you're correct in your assertion of the prior quarter. There wasn't any. I mean, there's quite a variety of different projects that happen to get delivered In Q2 here in the international region, I would say that approximately $15,000,000 of that $25,000,000 went out in the quarter Q2. So I mean there's certainly a portion of that associated with that project.

Speaker 4

Okay. And that's the large customer, the 11 4%, that's about $15,000,000 so that's the thing. Yes, it looks

Speaker 2

from approximately $25,000,000 press release, yes.

Speaker 4

Okay. And then If you can give any other color around this $4,100,000 generated in the investment activities. You gave a little bit of color in the prepared remarks, but I missed it. Maybe we could just expand on that.

Speaker 2

Yes, sure. So it's I mean, it's it's So $6,300,000 is disposal of investments. So on the balance sheet, we no longer have investments. So they are now disposed of $6,300,000 that came from there, then partially offset just by a little over $2,000,000 in capital asset purchases.

Speaker 4

All right. Okay. Last question for me is just around the backlog trend. It peaked at, guess just under $400,000,000 $394,000,000 it's down $70,000,000 in the last two quarters, still at a very high level obviously, highest ever. If you could give maybe just a little bit of context around the trend in the backlog, maybe give us maybe the moving parts there, That would be helpful and then I'll pass the line.

Speaker 2

I guess I could say a couple of different things. So I would say that approximately 45% of that or a little above it is just 47%. I think it's about expected to be more than 12 months out, Just to provide a little color in that sense. On the big I'm taking things off on the big $150,000,000 purchase order. To date in the 1st two quarters, we've recognized about $11,000,000 and then like I mentioned, the The other large order that we press released is another $50,000,000 that comes off.

Speaker 2

If you normalize that a bit, I guess, but provide color on.

Speaker 4

Okay. And you said roughly sorry, I missed the context there. Half of it is within the next 12 months. Is that what you'd said,

Speaker 2

That's greater than 12 months. So 47% is greater than is expected to get delivered in more than 12 months from now.

Speaker 4

Got it. So that means obviously the other 53% is going to flow through the income statement in the next 12 months?

Speaker 2

That's correct,

Operator

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

Speaker 1

Thank you, Jenny. I'd like to thank the participants for their questions and to add that we are very pleased with the company's performance during the Q2 of fiscal 2024, we saw record quarterly sales of $130,700,000 an increase of 15% year over year. Strong gross margins of 59.7 percent in the quarter, which together with Evertz disciplined expense management yielded quarterly earnings per share of $0.29 we're entering into the second half of fiscal twenty twenty four with significant momentum fueled by the combined purchase order backlog plus November shipments totaling in excess of $372,000,000 by the growing adoption and successful large scale deployments of Evertz IP based software defined video networking and cloud solutions

Speaker 2

by some of

Speaker 1

the largest broadcast new media service provider and enterprises in the industry and by the continuing success of DreamCatcher Bravo, our state of the art IP based replay and production suite. With Evertz significant investments in software defined IP, IT and Cloud Technologies, the over 600 industry leading IP SDN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership we are in a position to provide innovative solutions to customers and deliver to shareholders. Thank you, everyone, and good night.

Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

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