Haivision Systems Q2 2023 Earnings Call Transcript

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June 15, 2023

There are 4 speakers on the call.

Operator

And gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hyfission Systems Incorporated Second Quarter 2023 Earnings Conference Call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Telephone keypad. Thank you. And I will now turn the conference over to Mirko Vija, Chairman and CEO. You may begin.

Speaker 1

Thank you, Abby, and good afternoon, everyone. Thank you for joining us today to discuss our second quarter results and the 1st 6 months of our fiscal year 2023. I'm actually joining you from Bangkok, Thailand this evening as I'm attending our PAC Summit. And that's really the reason why this call is early in the morning Eastern Time as compared to our normal schedule after the market closes. So I apologize to everyone for the early start.

Speaker 1

The good news is that we're actually having an amazing event over here this week with over 100 people attending, which includes 36 of our strategic channel partners throughout the entire APAC region. So, a very successful event so far with another day to go. It's also the 1st summit together with all the HiVision and Abi West partners in the region and all sharing our combined sales successes. I mean everybody is excited As you're representing the combined company technologies to tackle the broadcast contribution market as leaders in both the fixed and wireless encoding space. So very, very cool event all week and glad to see so many new partners as well.

Speaker 1

Now, as demonstrated by the results we announced earlier today, Demand for our products remains strong and our business fundamentals have never been better. As you've seen in the press release that went out yesterday, the company achieved a record revenue of $35,100,000 which represents a 17.5% growth over Q2 of last year as we continue to deliver top line growth. This is inclusive of the much reduced revenue from the House of Worship vertical we have exited, from as of April 30. The company also achieved a record for 6 month revenue of $69,200,000 which represents 18.8% growth of the last year's 1st 6 months. And we delivered an adjusted EBITDA of $2,600,000 for Q2, which represents 7.5 percent operating margin.

Speaker 1

And for the 1st 6 months of the year, our adjusted EBITDA was 4,700,000 representing an overall 6.9 percent operating margin. It's difficult for our OpEx to be front loaded and we expect a much stronger EBITDA and operating margin performance in the second half of the year, especially with our reduced COGS. Our transition away from the household worship market, managed services market has actually been very successfully completed. As mentioned in our previous earnings call, we will begin to see the results of this initiative mainly in our reduced COGS and to a lesser extent our OpEx during the second half of the fiscal year. And the overall reduction should amount to approximately $500,000 per quarter.

Speaker 1

This will set up a stronger operational performance, as I mentioned, in the second half of the year and really prepare us for a very exciting fiscal 2024. We believe that our company has a bright future ahead and we are committed to maximizing long term value for all our shareholders. We are confident in our ability to execute on our strategic plan and deliver continued growth and success. The company remains focused on executing its growth strategy, expanding its market presence and delivering innovative solutions to its customers. In closing, before I hand it to Dan, despite the economic headwinds and continued supply chain challenges, We expect our Q3 to actually be strong and consistent with our strategic plan and feel very comfortable with our 2023 direction, delivering between $134,000,000 to $135,000,000 in revenue with a very good visibility to double digit adjusted EBITDA performance for the full year.

Speaker 1

We are very confident in our strategic plan and expect to show growth in both our revenue and profitability in 2023 and are preparing for an even more exciting 2024. And our Q3 results will be the first indication of the reduced cost of OpEx with the synergies derived as a result of our operational realignment we implemented during the past 6 to 9 months. As discussed previously, we are moving quickly toward achieving our longer term goal of delivering 20% EBITDA performance. So I'll pass it on to Dan. Please Continue with all the detailed financials and then we'll be back to me to close it up after the questions.

Speaker 2

Thank you, Mirko. Some of this will be repetitive, but let's get into it. Revenue for the Q2 of fiscal 2023 was indeed $35,100,000 an increase of $5,200,000 or 17.5 percent from the prior year comparative period. As a reminder, We closed the Abi West transaction in April 2022. So, Q2 2023 results include Abi West performance for the entire quarter, whereas in the prior year comparative period results included a single month of Abi West performance.

Speaker 2

This recent quarter was the 2nd best quarter in the history company only surpassed by our Q4 last fiscal year. Revenue for the 6 months ended April 30 was $69,200,000 an increase of $11,000,000 or 18.8 percent from the prior year comparative period. Again, year to date results include AviWest performance for the entire 6 months, whereas in the prior year comparative period, its performance only included AbbVie West for a single month. Nevertheless, this year over year performance is even more impressive when you take into consideration our exit from the house of worship market. Recurring revenue, which we define as our cloud solutions and maintenance and support, was about $7,100,000 for about 20% of total revenue.

Speaker 2

We anticipated that our recurring revenue would decrease as a percentage of our total revenue once we exited the House of Worship Business. The House of Worship Managed Service Business represented about a third of our recurring revenue. On a positive note, the House of Worship revenue was heavily dependent on the price of bandwidth. And because of the nature of the business, There was a number of more cost effective solutions to serve that church market, including free offerings. The business had always been putting downward pressure on the growth in cloud revenues and resulting gross margins.

Speaker 2

On another positive note, we have seen our maintenance and support revenue grow even faster than our overall revenue. Maintenance and support revenue grew 33% quarter over quarter and grew 28% on a year to date basis. As launching due to the fact that we've conformed our support offerings across our new properties and we've increased our attention on these renewals. For this quarter, gross margins were 68.9%, down from the 69.4% realized in the same period last year. We anticipated margins to slip from historical experience as margins for the Abbey West offering and for that matter the High Vision MCS offerings tended to be operate below our historical margins.

Speaker 2

However, this quarter's gross margin was an improvement from the 66.6% realized

Speaker 1

last quarter

Speaker 2

and it surpassed what we did for the full year last year as well. Part of the explanation for the improvement in margins is related to overall product mix. The recently acquired businesses lines have different seasonality heavily weighted to the end of the calendar year, in November December timeframe or what is consistent with our Q1. Again, discontinuation of the House of Worship business should improve gross margins going forward as that managed services offering tended to be a below the average performer in terms of gross margins. Even in this quarter, where we shut down the business, we incurred about $700,000 in fixed COGS related to that business.

Speaker 2

We should see the full benefit of this incremental savings in the beginning of our Q3 and beyond. Further, although supply chains appear to be reverting to more normal delivery schedules, we did incur between $300,000 $400,000 in additional costs related to hard to procure componentry consumed in this quarter. We expect that these types of extra expenses will continue to dissipate as we go forward. Total expenses for this quarter were $25,100,000 That represents an increase of $3,900,000 when compared to the same period in the prior year. Now, as we've said in previous calls, our cost structure is heavily weighted towards overall compensation related expenses.

Speaker 2

We ended the quarter with 389 employees compared to about 417 employees a year ago. The Abby West transaction consummated in April is in fact impacting year over year comparisons. After all, Adi West added 81 people, 77 of whom are still with us today. Thus, the $3,900,000 in year over year increases is largely explained by compensation related expenses, adding an incremental 1,700,000 Increases in depreciation and amortization expenses related to the acquired assets and intangibles added an incremental $1,000,000 to total expenses. The Canadian dollar exchange rate impacts on U.

Speaker 2

S. Dollar denominated assets and liabilities added an incremental $600,000 and then increased travel expense added an incremental $500,000 to total expenses. With that said, there are opportunities for additional expense savings that we should realize in the Q3 and beyond. For instance, our largest trade show NAB is a 2nd quarter event and we wouldn't expect to incur similar marketing expenses in the Q3. And our expenses for professional services are disproportionately focused on the first half of the year.

Speaker 2

They tend to be aligned with our year end statutory reporting, our annual shareholder meetings, expenses, accounting services and so on and so forth. So we should not see the same level of professional services in the Q3 or the Q4. On a year to date basis, total expenses were $48,800,000 an increase of $7,800,000 when compared to the prior year comparative period. The reasons for the increases are similar to those that we discussed about the 2nd quarter. Increases in compensation related expenses, again mostly attributed to Abi West, added about $4,000,000 in total expenses, Increases in depreciation and amortization expenses related to these acquired assets and tangible added an incremental 2,100,000 Increased travel expenses added an incremental $1,500,000 and the Canadian dollar exchange rate impact on U.

Speaker 2

S. Dollar denominated assets and liabilities added an incremental 600,000. When normalized for share based payments, depreciation of fixed assets and amortization of intangibles, Total expenses were only $21,700,000 That's an increase from the $2,900,000 last year That's an increase of $2,900,000 from the prior year, which is only an increase of about 15%, less than what our revenue growth was. The result is that adjusted EBITDA for the quarter was 2,600,000 That's flat compared to the $2,600,000 in adjusted EBITDA for the same period in the prior year. However, That adjusted EBITDA margin for this quarter was 7.5%.

Speaker 2

Albeit lower than our annual expectation, It does represent an improvement from last year's overall performance of 6.4% and an improvement from the 6.2% realized last quarter. We are really just beginning to see the benefits of our restructuring plan. And as I touched on before, there's certainly additional opportunities going forward. Net loss for this quarter was $1,500,000 compared to a net loss of $400,000 for the same period in the prior year. As was the case with EBITDA, this quarter's net income was impacted by increased headcounts, depreciation and amortization, increases in travel and the exchange rate impact on U.

Speaker 2

S. Dollar denominated assets and liabilities. On a year to date basis, the net loss was $2,900,000 compared to a net loss of $300,000 for the prior year comparative period. With respect to the balance sheet, we ended the quarter with cash balances of $7,300,000 that does represent a decrease of $5,400,000 from prior quarter end. However, we also ended the quarter with $10,000,000 outstanding on the credit facility, which is a reduction of $5,200,000 from the prior quarter end.

Speaker 2

Total assets quarter end were $141,700,000 That is a decrease of $6,900,000 from the end of fiscal year 2022. The decrease in assets in the 6 month period include a $7,500,000 reduction in trade and other receivables, a $2,000,000 reduction in net intangible assets that represents $4,000,000 in amortization offset by the increase in balance sheet items related exchange rates. These decreases were offset by the $1,500,000 increase in cash and the $2,000,000 increase in receivables related to tax credits. Total liabilities at quarter end were $50,800,000 That's a decrease of $7,200,000 from the end of fiscal 2022. This decrease in total liabilities includes a $5,000,000 decrease in trade and other payables.

Speaker 2

These trade payables include compensation related accruals like vacation accruals and commission accruals and so on and so forth. We also had a $1,200,000 decrease in the line of credit in that 6 month period. We reduced our term loans by about 600,000 And we decreased our lease liabilities by another $600,000 With respect to integration plans, For Avi West, we have completed the move of Avi West to a common accounting system and our focus in the near term is Again, increasing the flexibility of Avi West supply chain, porting Avi West to a common ERP system and bringing Abi West products to North America. For High Vision MCS, although a bit slower than when we had hoped, Progress is accelerating. Our current focus has been on fully integrating development teams And most of the heavy lifting was completed as of this last quarter.

Speaker 2

Our next major focus is integrating production capabilities And we have additional opportunities beyond that. And as I mentioned before, the pace of integration should increase over the remainder of the year. In terms of expectations for the remainder of the year, we have completely transitioned out of the hospital worship managed services market And even after losing that revenue, our overall revenues continue to show growth. Thus, our revenue guidance for the full year, which Factors in the reduction in the House of Worship revenue is still expected to be between $130,000,000 $135,000,000 although the top end of the range Is increasingly in reach. We also expect to see expansion of our adjusted EBITDA margins as we continue to So that concludes my prepared remarks.

Speaker 2

I'm going to pass the microphone back to Mirko and then we will open the floor to questions.

Speaker 1

Thank you, Beth. I think we'll probably take the questions. Abby?

Operator

Thank you. And we will pause for just a moment to compile the Q and A roster. And we'll take our first question from Robert Young with Canaccord Genuity. Your line is open.

Speaker 3

Good morning. Maybe just a high level question to kick it off. You gave

Speaker 2

us some context in the prepared remarks that if

Speaker 3

you could just go through some of the Maybe just the demand across your most important end markets, I mean, government, ICER, commercial and broadcast. Just maybe in relative terms to last quarter, maybe you can give us some sense of the trend in demand that you're seeing.

Speaker 1

Sure. Well, thanks, Robert. Good to hear from you. Interestingly enough, I mean, from last again from Q2 and we're seeing that continue into Q3 And we believe for the rest of the year, we're actually seeing a very strong traction in our government, Defense, ISR and Enterprise markets, which is nice. And when I say enterprise, I'm talking about our video collaboration, mission critical type of stuff.

Speaker 1

So that's actually is very favorable at the moment. And we're actually seeing a very interesting combination right now of our combined AviWest and HyVision wireless and wired solution in the contribution space for broadcast. So that's actually pretty robust, Not at the levels that we saw during the pandemic, of course, because that was pretty dramatic growth that we had, but we're still seeing some pretty good traction. So interestingly enough, We're seeing pretty good feedback from all of our key markets. I was a bit concerned, obviously, as we were all a bit concerned with the debt ceiling nonsense going on in the U.

Speaker 1

S. That was averted, thank goodness. But as a result, we are seeing a very robust government business as well.

Speaker 3

Okay. That's great. Maybe second question for me would be around the gross margins outlook, Again, something you talked about in the monologue, but the I'm just trying to get a sense of where that's going to go over the next couple of years. There are some one time items from housewarship And also supply chain, but that seems to be moderating. And then the impact of the recent acquisitions, do you see a path to get back to the historical margin profile or should we be looking for something different?

Speaker 2

Sure. Okay. So, I'm not exactly sure I would refer to the House of Worship anticipated improvements to be a one time event, But it does represent sort of

Speaker 1

a forklift lift in what

Speaker 2

we can expect in the COGS in the near term, mid term. As I kind of alluded to before, We spend about $500,000 to $600,000 in fixed expenses related to that House of Worship business that should be completely dissipated by the Q3 and beyond. Quick math, assuming around the same kind of revenue levels that we're at right now, that could Represent about 200 basis points improvement in our overall gross margin from where we have historically been. Recent historical event, right. And we do have opportunities as it relates to supply chain improvements.

Speaker 2

During the supply chain challenges, we did make significant investments in componentry that we that was hard to obtain. And as we consume that inventory, we have been spending perhaps around 300,000 to 500,000 per quarter incremental costs that are going to be dissipated over some period of time. Now I'd like to say that that would be an immediate forklift lift on our gross profit or gross margins, but really that's getting eased in. So to give you a sense, in this Q3, we're expecting those kind of costs to be about half what they may have been in the second quarter. And hopefully will be fully through the entire inventory of componentry mid year next year.

Speaker 2

Now that's those are the sort of immediate things that are done deal, so to speak. On top of that, We are putting both Avi West and MCS on a common ERP system that will give us more visibility to the componentry, to the timing, To levels of inventory and what have you, and that will enable our supply chain experts to exploit the opportunities that will be presented to us.

Speaker 1

Yes. And I guess I would add to that Robert is, you mentioned our previous Historical gross margins, which obviously before these acquisitions were pretty significant. I mean, we're not going to obviously be at those levels Because when we acquired MCS, as you know, that business has a very different profile, right? And that's about 30% to 40% and growing of our business, which is more of an integration model. So we've already been planning for a lower overall gross margin profile.

Speaker 1

But the good news is that we will be returning with This quarter, we're already in Q3 and of course for Q4 of next year, you can definitely see us that we'll be in the low 70s For sure, right. I mean, we're going to get down to those levels very, very quickly.

Speaker 3

Okay, great. That's all great color. Thanks for that. And maybe last question, if I hand it off would just be, I appreciate that this isn't something you want to talk about too much, but I was curious if you could give us an update from your perspective on the unsolicited bidder that you had over the last couple of quarters. If you just talk about any update from your perspective on what's going on with EVERTs and then I'll pass the line.

Speaker 3

Thanks.

Speaker 1

Yes. Well, I can answer that very quickly. There's 0 update. So I haven't heard anything.

Speaker 2

No change.

Speaker 1

Yes, no. Dan's favorite word, I would say, crooked. So, no, we haven't really heard anything at all, right, since the last interaction, Which has been quite a while ago. So, nothing to report. Okay.

Speaker 1

Thank you. I'll pass the line.

Speaker 2

I did receive questions by email. Apparently, they're having difficult time asking questions on the webinar. So the first question that's being asked is seasonality that we can expect in sales in Q3 and Q4. I think in our last earnings call. We kind of mentioned that we were seeing our seasonality revert back to our historical averages, which means that our Q4, which is commensurate with the U.

Speaker 2

S. Government year end, will likely be our largest quarter again this year, just as it was last year. In fact, if you were to look at the seasonality patterns of last year, you would see that our second and third quarter tend to be about equal, but we tend to think of our 3rd quarter as our weakest quarter and our weaker than our second quarter and our 4th quarter will be stronger Than it had been before. I would think that if you looked at our historical for last year and look at that seasonality, you can expect something similar this year.

Speaker 1

Yes. I'm going to talk to the So, Dan, let me just add to that a bit, because let's not lose the fact that Q1 and Q2 have been exceptionally strong, right, this year. I mean, dollars 35,000,000 in Q1, 1,000,000 in Q2 is significantly strong. So Q3 for sure will be Typically low because it is a summer quarter, obviously in Europe, but it's traditionally lower. So yes, there is There's going to be some seasonality there and Q4 is going to be very, very strong, but we have to again understand that Q1 and Q2 were pretty So overall, I think we're very confident that we're going to have a very strong year, as we mentioned, closer to the $134,000,000 $135,000,000 mark for the rest of the year.

Speaker 2

And I will point out that the hospitalization business, which Had some revenue in the 2nd quarter will not be part of the 3rd quarter equation. I thought I had touched on this in our prepared remarks about OpEx being front loaded, but and I gave you two examples of front loaded expenses. 1 was our marketing expense related to NAV. It was a heavy the first half of the year has been heavy in terms of marketing. We've reverted back to our Let's go to the trade shows and do it big.

Speaker 2

We also spend a disproportionate amount of our professional services fees in the first half of the year compared to the second half of the year. But there are other opportunities for us to reduce OpEx in the second half of the year. As an example, our House of Worship business does have an OpEx component that's going to disappear in the 3rd Q4. And as we continue to sort of refine our business models Going forward, we'll be seeing additional reductions in the Q3 and Q4. Any other questions out there?

Operator

And with no further questions at this time, I will now turn the call back to Mirko for closing remarks.

Speaker 1

Yes. Thank you, Abby. I just want to thank all of our shareholders and analysts on the call today and for the continued support of HiVision. I really look forward to speaking with you in September when we discuss our Q3 results. I truly believe Q3 results will be the beginning of the picture of everything that we've been working on for the last 6 to 9 months.

Speaker 1

So these are the results I think that we're all going to be waiting for to be able to give us a really solid guidance, not just for the rest of the year, but more to 2024. So, very excited for what's happening in 2024 and look forward to speaking with all of you in September. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call and we thank you for your participation. You may now disconnect.

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Haivision Systems Q2 2023
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