Evertz Technologies Q1 2025 Earnings Call Transcript

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September 11, 2024

Key Takeaways

  • Q1 sales totaled $111.6 million, including $55.9 million in software and services, with gross margin of 59.4% up from 57.3% a year ago.
  • Hardware revenue declined to $55.7 million, while software and services revenue rose 26%, representing half of total revenue and reflecting project timing and milestone recognition.
  • Cash and cash equivalents increased to $91 million (up from $48.9 million a year ago), supported by a purchase order backlog of $302 million and August shipments of $33 million.
  • R&D expenses rose to $37.3 million and selling & administrative costs increased to 15.8% of revenue, driven by higher salary costs and added staffing.
  • The board declared a quarterly dividend of $0.195 per share and continues to pursue share buybacks and potential acquisitions amid strong cash generation.
AI Generated. May Contain Errors.
Earnings Conference Call
Evertz Technologies Q1 2025
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to Evertz's First Quarter Investor Call. At this time, all lines are in 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 Campbell, Executive Vice President of Business Development. Please go ahead.

Speaker 1

Thank you, Constantine. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2025 Q1 ended July 31, 2024 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's results, I'll begin by providing a few highlights and then Doug will provide additional detail.

Speaker 1

First off, sales for the Q1 totaled $111,600,000 including $55,900,000 in software and services revenue. Our sales base is well diversified with the top 10 customers accounting for approximately percent of sales during the quarter with 1 customer accounting for approximately 14% of sales and a second customer at 11%. In fact, we had 94 customer orders of over $200,000 Gross margin in the quarter was $45,400,000 or 59.4 percent, up from 57.3 percent in the prior year. Net earnings were $9,700,000 resulting in fully diluted earnings per share of $0.13 for the quarter. Investments in research and development totaled $37,300,000 Year over year our cash position strengthened closing Q1 2025 with $91,000,000 in cash and in cash equivalents compared to $48,900,000 a year ago and up $4,700,000 in the quarter.

Speaker 1

Evertz's working capital was $197,700,000 as at July 31, 2024 down $3,700,000 from July 2023. At the end of August, Evertz purchase order backlog was more than $302,000,000 and shipments during the month of August were $33,000,000 The solid financial performance including the robust purchase order backlog and shipments continues to be driven by channel and video services proliferation, the ongoing technical transition in the industry, 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 4 ks ultra high definition solutions, and our state of the art DreamCatcher IP replay and live production with Bravo Studio featuring the iconic studio audio. Today, Evertz Board of Directors declared a quarterly dividend of $0.195 per share payable on or about September 17. I will now hand over to Doug Moore, Evertz's Chief Financial Officer to cover the results in greater detail.

Speaker 2

Thanks, Brian. Good afternoon. Starting with revenues, sales were $111,600,000 in the Q1 of fiscal 2025 compared to $125,800,000 in the Q1 of fiscal 20 20 Hardware revenue declined quarter over quarter from $81,400,000 to $55,700,000 while software services revenue increased 26% to $55,900,000 Revenue from the software services portion represented approximately half of the total revenue in the quarter. Looking at regional revenue. Quarterly revenues in the U.

Speaker 2

S./Canadian region were $73,900,000 compared to $87,000,000 in the prior year, while quarterly revenues in the international region were $37,700,000 compared to $38,800,000 in the prior year. International segments represented approximately 34% of total sales in the quarter compared to 31% in the prior year. Gross margin for the quarter was 59.4% as compared to 57.3% in the prior year and within our target range. Looking at selling and administrative expenses, S and A was $17,600,000 in the Q1. That's an increase of $1,200,000 from the same period last year and represented approximately 15.8% of revenues as compared to 13% last year.

Speaker 2

Research and development expenses were $37,300,000 for the Q1, which represents a $5,400,000 increase over the same period last year and $600,000 sequentially, approximately $600,000 Year over year, the increase includes $3,200,000 in increased salary costs within North America and $800,000 increased salary costs internationally. ITCs for the quarter were $3,800,000 compared to credits of $3,400,000 in the prior year Q1 last year. Foreign exchange for the Q1 was a gain of less than $100,000 compared to a foreign exchange loss of $2,100,000 in the Q1 last year. Looking at liquidity of the company, cash as at July 31, 2024 was $91,000,000 as compared to cash of $86,400,000 as of April 30, 2024. Working capital was $197,700,000 as of July 31, 2024 compared to $201,400,000 at the end of April 30, 2024.

Speaker 2

Looking at cash flows for the quarter ended July 31. The company generated cash from operations of $22,500,000 and that is net of $8,900,000 change in non working capital and current taxes. If those effects of the change in non working capital and current taxes are excluded, the company generated CAD13.6 million in cash from operations during the quarter. The company used cash CAD2.3 million for investing activities, which was principally driven by the acquisition of capital assets. And the company used cash in financing activities of $16,800,000 which was principally driven by dividends paid of $14,900,000 Finally, looking at our share cash our share capital position as at July 31, 2024.

Speaker 2

Shares outstanding were approximately $76,100,000 and options and share based restricted share units outstanding were approximately 5,600,000 Weighted average shares outstanding were 76,100,000 and weighted average fully diluted shares was 77,300,000 for the period ended July 31. That concludes a review of our financial results and position for the Q1. 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 within the Canadian Securities Commission. Brian, back to yourself.

Speaker 1

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

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Please go

Speaker 3

ahead. Hi, good afternoon. Brian, I guess we recognize that you've got some quarterly volatility in your business just given the project nature of some of the work. But that said, the 2nd consecutive quarter of revenues being down year over year and I think looking at the shipments number that might be the case for the upcoming quarter as well. So can you clarify for us whether you're seeing some industry dynamics here?

Speaker 3

Is there a macro issue? Is there customer caution with respect to spending? Or from your perspective, may it have more to do with just the timing of projects?

Speaker 1

From our perspective, it does have more to do with project timing. As you'll note, we still we have a very robust order backlog and a solid shipments number, so totaling $335,000,000 which is up roughly $8,000,000 from the prior quarter. So we're sequentially up. There is a bit of timing in this quarter. But that said, we're looking forward to going to IBC in Amsterdam over the weekend to see many of our customers and channel partners and are looking for good things in our fiscal 2025.

Speaker 3

Okay. From an OpEx perspective, anything to call out this quarter or anything we should note as we think about the upcoming quarter?

Speaker 2

Sure. So, I guess that's one thing. So if you're doing if you're looking at it sequentially, of course, we didn't have NAV, right? So NAV traveling and entertainment costs went down in the quarter. We did do some trade shows like some road shows, but we do have IBC in Q2.

Speaker 2

That's obviously not in Q1. From an R and D perspective, there's a couple of things I'll call out. 1, in the prior quarter, I mentioned that we did some temporary elevated resource costs we incurred in Q4. There's another $400,000 that's in Q1. Additionally, we do take on quite a few co ops actually in the summer from May through to the end of August.

Speaker 2

I mean, in that plus, it's actually 2 or

Speaker 1

3 more business days in

Speaker 2

the quarter, this quarter versus last that equates to almost $1,000,000 So there's a couple of different items to touch on that are a bit abnormal. Software

Speaker 3

and services revenue, I appreciate the fact that we're getting the quarterly disclosure now. One question on that is, does there tend to be a lot of seasonality in that revenue line?

Speaker 2

So there can be a bit of seasonality depending on when license renewals happen. So if there's a fair amount that might go in December January, but I don't know that's extremely significant in call out. I mean there is some milestones that still occur. So in this quarter in particular, there was I know a project that had some commissioning completed that had $6,000,000 of release deferred revenue in one project alone. So there could still be some milestones that have that aren't seasonal, but are just a bit fluid depending on timing.

Speaker 2

And

Speaker 1

you will see in the MD and A 2 years of quarterly segmentation of hardware and services. So that will give you an idea of the volatility, but on a trailing 12 month basis, it's averaged roughly 40%.

Speaker 3

Okay. That's very helpful. I look forward to seeing that. Maybe finally, with respect to your markets outside of broadcast, anything to comment there with respect to the growth and opportunities in pipeline you're seeing?

Speaker 1

So we continue to do very well in adjacent markets. However, the press releases are somewhat sparse there. I shall note, but that continues to be a significant part of our revenue base and backlog.

Operator

Question comes from the line of Rob Yang from Canaccord. Please go ahead.

Speaker 4

Hi, good evening. I'll continue on Thanos' questions on the software and services. I think it's about 50% this quarter. You said it was 40% on average. And so is that weakness in hardware or is it strength in software?

Speaker 4

Software is up from 6%. So I'm assuming it's strength in software. Can you give us some color on what's going on there by such a high percentage?

Speaker 1

Rob, it's a bit of both. So we have lighter hardware revenues in this quarter. But there is a nice upward trend with the software and services. However, it is volatile quarter to quarter, as Doug noted. Sometimes it has to do with the timing of milestones and licensing contracts.

Speaker 4

Great. And I guess part of it is that $6,000,000 deferred, is that what drives the volatility there? I guess without that

Speaker 3

it would still be about 40%.

Speaker 2

Sure. That's just an kind of an example of so that did happen in the quarter, but as an example. I mean, if you look at the MD and A, I think it highlights it well. It is there is some weakness in the quarter on the hardware side. So I think that is a fair observation that would obviously push the percentage off.

Speaker 4

And is it one strong program or is it just a general broad set of programs that are doing well in software?

Speaker 1

That's been a broad trend.

Speaker 4

Is that one reason that's driving it?

Speaker 2

No, that's been a broad trend.

Speaker 4

Okay. And then sorry, two points.

Speaker 1

So Rob, to put it in perspective, the 40% on a trailing 12 month basis, that's over 200,000,000 dollars revenue in recurring software services and other software. So that's very broad based.

Speaker 4

Yes, okay. And so but this quarter specifically, is it driven by 1 reach or 1 customer or 1 program? I'm just trying to get a sense of

Speaker 2

No, no. Causing volatility to say. Sure. If I just give you figures even after the past three quarters. So software service revenue in Q1 was $55,900,000 and Q4 was $47,700,000 and in Q3 was 52.4 So there's and then Q2 last year was 44.3.

Speaker 2

So there's not a huge swing from Q4 to Q1.

Speaker 3

Okay.

Speaker 1

If that helps.

Speaker 4

Yes. And then the deferred, the $6,000,000 I guess I'm assuming that's pure profit. So if I were to exclude that, that probably would have driven your gross margins down towards maybe below the bottom end of your range. And so curious about the margin structures, particularly given there's a lot of software in the quarter. Is that deferred?

Speaker 4

First question was deferred, was that a pure margin? And then what would the margin look like without it?

Speaker 2

So let me start with saying that deferred revenue does not inherently have 100% margin.

Speaker 4

And without that $6,000,000 you would still have been in your gross margin range?

Speaker 2

To be blunt, I have not done that calculation.

Speaker 4

Okay.

Speaker 1

The revenue milestones are part of our ongoing business. That's the nature of our financial model, delivering on software and services milestones and then recognizing the revenue. So again, it's helpful

Speaker 2

to curve

Speaker 1

the business and analyze it on a trailing 12 month basis, takes some of the fluctuations.

Operator

Yes, that's fair.

Speaker 4

And then as you noted, the cash balance is growing and I'm curious what your plans are. I believe you raised the dividend this quarter, but what do you expect to do with that growing cash balance?

Speaker 1

So we're very cognizant and the Board is aware of the growing cash balance and we continue to have tremendous confidence in Evertz's robust business model and ability to generate cash as we have over the years. So that is a Board decision to determine what is done with the cash. We regularly attribute via quarterly dividends. We also have a normal course issuer bid in place and we're in tune with acquisition opportunities as well.

Speaker 4

Okay. Last question for me would be on the backlog. Sometimes you give us the percentage that's going to convert in the next fiscal year or next 12 months?

Speaker 2

It's approximately 45%, that's more than a year.

Speaker 4

Okay. So 55% within the next 12 months? Right. Okay. Thank you.

Speaker 4

I'll pass the line.

Operator

There are no further questions at this time. I would like to turn the call over back to Brian Campbell for closing remarks. Sir, please go ahead.

Speaker 1

I'd like to thank the questions the participants for their questions and to add that we are pleased with the company's performance during the quarter, which saw sales of $111,600,000 including 55 point $9,000,000 in software and services revenue. Strong gross margins of 59.4 percent for the year, up 57.3% in the prior year along with continued investment in R and D totaling $37,000,000 We closed the Q1 of Evertz fiscal 2025 with significant momentum fueled by a combined purchase order backlog plus August shipments totaling in excess of $335,000,000 by the growing adoption and successful large scale deployments of Evertz IP based software defined video networking and cloud native solutions by some of the largest broadcast, new media 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 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. We look forward to having many of you join us on Wednesday, 2nd October at our Annual General Meeting.

Speaker 1

Good night.

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