Evertz Technologies Q3 2024 Earnings Call Transcript

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Provided by Quartr
March 14, 2024

There are 6 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Evertz Q3 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, Eric. Good afternoon, everyone, and welcome to Evertz's conference call for our fiscal 2024 Q3 ended January 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 will begin by providing a few highlights and then Doug will provide additional detail.

Speaker 1

First off, sales for the Q3 totaled $135,300,000 an increase of 22% compared to $110,900,000 in the Q3 last year. Our base is well diversified with the top 10 customers accounting for approximately 35% of sales during the quarter and with the single largest customer totaling approximately 5%. In fact, we had 110 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $79,700,000 or 58.9 percent which is within our target range. Investment in research and development during the quarter totaled $34,000,000 Net earnings for the Q3 were $19,000,000 while fully diluted earnings per share were 0 point 24 dollars Evertz's working capital was $199,600,000 as at January 31.

Speaker 1

And at the end of February, Evertz purchased back order was in excess of $292,000,000 and shipments during the month were $40,000,000 We attribute the 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 in the industry and specifically to the growing adoption of Evertz IP based software defined video networking solutions, Evertz IT Cloud Solutions, our immersive 4 ks Ultra High Definition solutions and Evertz's state of the art DreamCatcher IP replay and live production Bravo Studio featuring the iconic Studer Audio. Today, Everest Board of Directors declared a quarterly dividend of $0.195 per share payable on or about March 29. I'll now hand over to Doug Moore, Evertz's Chief Financial Officer to cover our results in greater detail.

Speaker 2

All right. Thanks, Brian. Good afternoon, everyone. I'll start by looking at revenues. Sales were $135,300,000 in the Q3 of fiscal 2024 compared to $110,900,000 for the Q3 of fiscal 20 2023.

Speaker 2

That's an increase of 22 percent or $24,400,000 quarter over quarter. For the 9 months ended January 31, 2024, sales were $391,900,000 compared to $325,700,000 in the same period last year. That represents an increase of $66,200,000 or 20%. Now looking at specific regional revenue, the U. S.

Speaker 2

Canadian region had sales for the quarter of $80,500,000 compared to $71,200,000 last year, represents an increase of $9,300,000 or 13 percent quarter over quarter. Sales in the U. S. And Canadian region were 200 and $41,500,000 for the 9 months period ended January 31, 2024, compared to $238,200,000 in the same period last year, an increase of $3,300,000 or 1%. In the international region, revenues for the quarter were $54,800,000 compared to $39,600,000 last year, an increase of $15,200,000 quarter over quarter.

Speaker 2

The international segments represented 40% of total sales this quarter as compared to 36% in the same period last year. For the 9 months ended January 31, 2024, sales in international region were 150,300,000 dollars compared to $87,500,000 in the same period last year. That's an increase of 72% or $62,800,000 Gross margins for the Q3 were approximately 58.9% compared with 59.2% prior year and within our target range. For the 9 months period ended January 31, gross margin was approximately 58.6 percent and that's also within our target range. Turning to selling and admin expenses.

Speaker 2

S and A was $18,300,000 in the 3rd quarter. That's an increase of $2,000,000 from the same period last year. Selling and event expenses as a percentage of revenue were approximately 13.5% as compared to 14.7% in the same period last year. Selling and administrative expenses were $52,200,000 for the 9 months ended January 31, 2024, an increase of $8,200,000 from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 13.3% over the period compared to 13.5% for the same period last year.

Speaker 2

Research and development expenses were $34,000,000 for the 3rd quarter. That represents an increase of $3,800,000 from $30,200,000 in the 3rd quarter last year. Investment tax credits relating to R and D expenses were $4,000,000 in the quarter compared to credits of $3,600,000 in the Q3 last year. For the 9 months ending January 31, research and development expenses were $98,100,000 that represents an increase of 10 $900,000 over the same period last year and includes an increase of $7,800,000 associated with salary Research development expenses as a percentage of revenue were approximately 25.1% over the period compared to 26.8 percent for the same period last year. Foreign exchange for the 3rd quarter was a loss of 2,800,000.

Speaker 2

Dollars The quarterly loss was predominantly driven by the decrease in value of the U. S. Dollar against the Canadian dollar from October 31, 2020 3 to January 31, 2024. Foreign exchange for the 9 months period ended January 31 was a loss of 2,000,000 compared to a gain of 1,700,000 in the same period last year. Turning to a discussion of liquidity of the company, cash as at January 31, 2024 was 69,700,000 as compared to cash of 12,500,000 at April 30, 2023.

Speaker 2

Working capital was $199,600,000 as at January 31, 2024, compared to $171,400,000 at the end of April 30, 2023. Now look at the cash flows. The cash generated cash in operations from $30,200,000 which is net of $5,200,000 change in non working non cash working capital and current taxes. If the effects of the change in non cash working capital and current taxes were excluded from the calculation, the company generated $25,000,000 in cash from operations during the quarter. The company used cash of $600,000 from a bit for investing activities, which was principally driven by the acquisition of capital assets.

Speaker 2

And the company used cash and financing activities of $16,100,000 which was principally driven by dividends paid of $14,800,000 Finally, our share capital position as at January 31, 2024, shares outstanding were approximately 76,100,000 and options and share based RSUs outstanding were approximately 5,700,000. Weighted average shares outstanding were 76,000,000 and weighted average fully diluted shares was 77,000,000 for the quarter ended January 31, 20 24. That concludes the review of our financial results and position for the Q3. I would like to remind you that some of the statements presented today are forward looking, subject to a number of risks and uncertainties, and we refer you to the risk factors described in the annual information form and the official reports filed with the Canadian Securities Commission. Now Brian, back to

Speaker 1

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

Operator

Your first question comes from the line of Andy Nguyen with Raymond James. Please go ahead.

Speaker 3

Thank you for taking my questions. Going forward looking forward to 2025, what would you say would be your biggest opportunity?

Speaker 1

Andy, we're going to continue to grow the our share with our existing customers and add new customers. As you know, our backlog is extremely strong at $292,000,000 I believe 48% of it is deliverable within the next 12 months and 52% outside of that. So we are going to be both addressing the backlog, delivering to the customers within that and continuing to grow the market.

Speaker 3

Got you. And I noticed the backlog up quite a bit this quarter. Could you share any more color with us on that?

Speaker 1

So we had approximately a year ago, we did press release the $152,000,000 5 year cloud software and services agreement with a global media giant. So we're that did step up our backlog very significantly along with other large orders that were in and around that time. So approximately a year ago, we did have effectively a step function increase in our backlog. So we're very pleased to have that type of support, long term demand from our customers and we're going to continue to grow the business.

Speaker 3

Got you. Thank you. I'll pass it back.

Operator

Your next question comes from the line of Thomas Michopoulos with BMO. Please go ahead.

Speaker 4

Hi, good afternoon. Brian, this is, I think, the 4th consecutive quarter you've had a double digit year over year growth and good to see that the growth this quarter was with a very low level of customer concentration. Just wondering if you have anything specific that you point to as far as the growth acceleration over the past year. I mean, I'm sure your strong market position and competitive product offering is a key part of it. But beyond that, is there some dynamic in terms of the types of initiatives your customers are undertaking or the spending environments, better component availability.

Speaker 4

I mean, are there other factors you would point to in terms of what's been driving the acceleration in recent months?

Speaker 1

So you got a multifaceted question there. I think I'll address the continued growth that we've seen in the U. S. Canada market. So that has been underpinning our growth historically and very strong.

Speaker 1

So it's up 12% year over year or 13% year over year I believe. And then internationally, we have been delivering larger projects of recently. So you do see that internationally, our revenues are up very significantly this quarter. But again to you should watch on a trailing 12 month basis our revenue in those sectors as well too because it tends to you'll see some spikes in quarters, but on average we're seeing good solid growth there. But yes, overall, it's Evertz market share.

Speaker 1

Our products are leading on multiple fronts. We're having very good success with our cloud based solutions and candidly the SD WAN cloud based and also on our traditional baseband SDI products are doing very well.

Speaker 4

Okay. That's helpful. And just from a qualitative perspective, I mean, I presume cloud is becoming a growing part of the business. And I appreciate that you can't quantify it for us specifically, but just qualitatively, is it fair to assume that interest and adoption of cloud continues to grow rapidly? Is it a situation where most of the large broadcasters you talk to want the Cloud Element to move deals?

Speaker 4

Or how would you characterize where the industry is in adoption and how much of a driver it is in contributing to your recent growth?

Speaker 1

It's a very significant driver and it is part of cloud discussions and the plans of our customers pertaining to their cloud infrastructure is a big part of many of the conversations with most of our customers. So it's top of mind and that also is across the industry as well too. However, we have been deploying very large SD WAN solutions and very large cloud based solutions as well too.

Speaker 4

And I know that you've been maintaining your gross margin target range, but as Cloud PCs become a part of the mix, should we think about just a fundamental gross margin profile, operating margin profile of the business changing appreciably? Or do you think that over, call it, the next 2, 3 years, it should remain in kind of a similar range even as cloud continues to grow?

Speaker 2

I can comment on that. So while we have seen some tick ups on the higher side of the range, The range is currently as it is, so the 56% to 60%. I mean, if you look at Q1, they're around 57%. So there's some fluidity to it. So I think at this time, we'll maintain the range between that 56% 60% as being a reasonable target.

Speaker 4

Okay. All right. I will leave it there. Thanks.

Operator

Your next question comes from the line of Robert Young with Canaccord. Please go ahead.

Speaker 5

Hi, good evening. You noted earlier that we're coming up on the anniversary of a couple of large deals. I think one was $25,000,000 the other one $152,000,000 Both of them happened in April as I recall. Maybe you talk about is there some seasonality around April? Should we be thinking of April as a period where you might see large deals?

Speaker 5

And then maybe a second part to that question is that $152,000,000 deal, is that just a one time best ever single point in time type of a deal? Or are there others that are out there in your pipeline that you're looking at that might have that type of scale?

Speaker 1

So Rob, so April does coincide as well too with NAB. So we're pleased to go and meet and host numerous of our customers at our booth at NAB meetings are being set now. So that will be a very active time for us. And that is the National Association of Broadcasters Convention historically is April. So, yes, April is a significant time period for us.

Speaker 1

The second part of your question, could you repeat that again for me?

Speaker 4

Yes. I'm just trying to

Speaker 5

get a sense of how unusual that deal is. It's been a year now. Are there other opportunities in your pipeline that have that type of scale? Or was that a one time event?

Speaker 1

It was a very significant event, most definitely, and it is a 5 year transaction. So on an annual basis, you have seen other purchase orders or contracts of that magnitude. And we do have other very significant cloud based projects underway that not necessarily have been press released either, not either due to the number of years of the term or how the customer has decided to provide those purchase orders.

Speaker 5

Okay. So I guess what I take from that is that, that isn't that unusual of a deal. If you look at it on a 1 year basis, there are other deals of that scale in the cloud? Or are you just talking about deals in general?

Speaker 1

But there are deals in general, there have been other deals of that size for a given year. But make no mistake, signing a 5 year long term contract of that magnitude is a significant milestone.

Speaker 5

Okay. As you're going into NAB this year, like are there opportunities of that size and scale that you're looking at hoping to sign?

Speaker 1

That scale definitely the duration comes into play as well too. But yes, we are continuing to look at very large significant deals, contracts and we are also deploying significant contracts.

Speaker 5

Okay. And then also this year, I mean, in the past, you've been not dismissive, but you suggested that Olympic year dynamics don't have that much of an impact on your business. So I was just curious about this year as we go into an Olympic year after, a hiatus from COVID and combined with the what's expected to be a pretty active U. S. Election year.

Speaker 5

Is this are those drivers of the business? Maybe if you could just give us a summary of how those events manifest in Evertz's business?

Speaker 1

So again, we're very excited to have the Olympics and they do absolutely have an impact and we have revenues associated with it. However, Evertz's underlying growth not as impacted by the major events as other companies who have very significant rental portions of their business.

Speaker 5

Right. And so the high level of organic growth we've seen this year, that wouldn't be associated with the Olympic year?

Speaker 1

It's associated more with Evertz underlying position with large global broadcast and media players.

Speaker 5

Okay. Okay. I think you said that 48% of the backlog is expected to convert in the next 12 months, I think

Speaker 4

I heard that, if that's correct?

Speaker 1

And then

Speaker 5

maybe last question would just be, I mean, on that large annual deal, the $152,000,000 deal, should we just think of that as a $30,000,000 contribution per year or would there have been an upfront con point into that? When I'm looking forward to modeling this year, how much of that contract should I expect in this fiscal year? And then I'll pass the line.

Speaker 2

I'll answer that. What I could say is through the 1st 9 months, there's $17,000,000 of revenue from that contract and earnings. The averaging it out would be dependent on certain milestones that are reached that aren't specifically defined to a specific date. Forecasting out, it's a logical way to do it, to average it out, but it will ultimately be dependent on certain milestones that are met.

Speaker 5

Okay. So maybe we can dig into that just a little bit deeper. I guess if it's a cloud deal, I would assume a significant portion of it would be some subscription or like a lease on the software. When you say milestones, is it still being deployed or is it dependent on like a volume of transactions or something like that? Maybe just give me a little sense, maybe at a high level because you want to get into details, just what are those milestones in as much detail as you're willing to share?

Speaker 2

Sure. So if there is a component of it's going to be kind of revenue recognition. So if there is a licensing component, it could be when annual licenses are provided. If it's milestones, there could be certain deployments associated with it. But the idea of having a linear modeling is a reasonable approximation.

Operator

Please go ahead.

Speaker 1

Thank you, Eric. I'd like to thank the participants for their questions and to add that we're very pleased with the company's performance during the Q3 of fiscal 2024, which saw quarterly sales increase 22% year over year to a record high of $135,300,000 Strong gross margins of 58.9% in the quarter which together with Evertz disciplined expense management yielded fully diluted quarterly earnings per share of $0.24 despite a loss on foreign exchange of $2,800,000 in the quarter. We're entering into the Q4 of fiscal 2024 with significant momentum fueled by a combined purchase order backlog plus February shipments totaling in excess of $332,000,000 By the growing adoption and successful large scale deployments of Evertz, IP based software defined video networking and cloud solutions by some of the largest broadcast new media service providers 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 SDN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position in the broadcast and media technology sector.

Speaker 1

Thank you everyone and good night.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Earnings Conference Call
Evertz Technologies Q3 2024
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