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Edited Transcript of ET.TO earnings conference call or presentation 11-Mar-20 9:00pm GMT

Q3 2020 Evertz Technologies Ltd Earnings Call

Burlington Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Evertz Technologies Ltd earnings conference call or presentation Wednesday, March 11, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Scott Campbell

Evertz Technologies Limited - Executive Vice-President of Business Development

* Doug Moore

Evertz Technologies Limited - CFO

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Conference Call Participants

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* Paul Michael Treiber

RBC Capital Markets, Research Division - Director of Canadian Technology & Analyst

* Robert Young

Canaccord Genuity Corp., Research Division - Director

* Thanos Moschopoulos

BMO Capital Markets Equity Research - VP & Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Evertz Q3 2020 Conference Call. As a reminder, today's conference is being recorded. It is Wednesday, March 11, 2020.

At this time, I'd like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, Mr. Campbell.

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [2]

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Thank you, Louis. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our third quarter ended January 31, 2020, with Doug Moore, Evertz' Chief Financial Officer; and myself, Brian Campbell.

Please note that our financial press release and MD&A will be available on SEDAR. Doug and I will comment on the financial results and then open the call to your questions.

I'd like to start with a few highlights, and then Doug will go into greater detail. First off, we are pleased to report sales for the third quarter were up $0.3 million year-over-year to a quarterly record high of $121.2 million. The increase was driven by a 31% year-over-year growth in the International sales region. Our base is well diversified. The top 10 customers accounting for approximately 44% of sales during the quarter, with no single customer over 10%. In fact, we had 100 customer orders of over $200,000.

Gross margin was 56% for the quarter. Net earnings for the third quarter were $19.4 million and fully diluted earnings per share was $0.25. Evertz' working capital was $225 million, with $51.7 million in cash as at January 31. The purchase order backlog at the end of February was in excess of $93 million and shipments during the month were $39 million. We attribute this robust quarterly performance and solid shipments and purchase backlog to the ongoing technical transition, channel and video services proliferation, the increasing global demand for high-quality video anywhere and anytime, and specifically to the growing adoption of Evertz' IP-based software-defined video networking solutions, Evertz' IT and virtualized cloud solutions, our immersive 4K Ultra HD solutions and our state-of-the-art DreamCatcher IP and live production suite.

Today, Evertz' Board of Directors declared a dividend of $0.18 per share payable on or about March 27.

I will now hand over to Doug Moore, Evertz' Chief Financial Officer, to cover our results in greater detail.

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Doug Moore, Evertz Technologies Limited - CFO [3]

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Thank you, Brian. Good afternoon. Sales were $121.2 million in the third quarter of fiscal 2020 compared to $120.9 million in the third quarter of fiscal 2019. That represents an increase of $0.3 million. Sales for the 9 months period ended January 31, 2020, were $344.4 million compared to $336.3 million in the same period last year. That represents an increase of approximately 2%.

The US/Canada region had sales for the quarter of $69.5 million, a decrease of $12 million or 15% compared to $81.5 million in the same period last year. Sales in the US/Canada region were $230.3 million for the 9 months ended January 31, 2020, compared to $234.2 million in the same period last year. That represents a decrease of $3.9 million or 2%.

While the International region had sales for the quarter of $51.7 million compared to $39.5 million last year, that represents an increase of $12.2 million or 31%. The International segment represented 43% of total sales this quarter as compared to 33% in the same period last year. Sales in International region were $114.1 million for the 9 months ended January 31 compared to $102.1 million in the same period last year. That represents an increase of $12 million or 12%.

Gross margin for the third quarter was approximately 56%, consistent with the third quarter ended January 31, 2019. Gross margin for the 9 months ending January 31 was approximately 57% and within the company's historical ranges.

Selling and admin expenses were $17.9 million for the third quarter. That's an increase of $0.3 million in the same period last year. Selling and admin expenses as a percentage of revenue were approximately 14.7% compared to 14.5% for the same period last year. Selling and admin expenses were $52.2 million for the 9 months ended January 31, 2020, an increase of $2.3 million for the same period last year. For the first 3 quarters, selling and administrative expenses as a percentage of revenue were approximately 15.1% compared to 14.8% for the same period last year.

Research and development expenses were $24 million for the third quarter. That represents a $2.4 million increase from the third quarter last year. For the year, research and development expenses were $69.6 million, which represents an increase of $5.6 million over the same period last year. Foreign exchange for the third quarter was a gain of $0.3 million compared to a loss of $0.4 million in the same period last year. Foreign exchange for the 9 months ending January 31 was a loss of $2.6 million as compared to a gain of $1.5 million in the same period last year.

Now turning to a discussion of liquidity of the company. Cash as at January 31, 2020, was $51.7 million as compared to $104.6 million as at April 30, 2019. Working capital was $225 million as at January 31, 2020, compared to $282.5 million at the end of April 30, 2019.

Looking now specifically at the cash flows for the quarter ending January 31, 2020. The company generated cash from operations of $67.3 million, which included a $43.6 million change in noncash working capital and current taxes. If the effects of the change in noncash working capital and current taxes are excluded, the company generated $23.7 million in cash from operations for the quarter. Note, the change in noncash working capital included $29.6 million collected from receivables in the quarter. The company used $2.8 million from investing activities, which was principally driven by capital asset purchases of $3 million. The company used cash for financing activity of $18.8 million, which was principally driven by dividends paid of $13.8 million and capital stock repurchased under the NCIB for $3.6 million.

Finally, I will review our share capital position as at January 31, 2020. Shares outstanding were approximately 76.6 million and options outstanding were approximately 1.6 million. Lastly, the weighted average shares outstanding and weighted average of fully diluted shares were both 76.7 million.

This brings to conclusion the review of our financial results and position for the third quarter.

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 with the Canadian Securities Commission.

Thanks. And Brian, back to you.

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [4]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Thanos Moschopoulos from BMO Capital Markets.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [2]

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Brian, maybe just given current events, can you provide some commentary in terms of what you're seeing from a demand perspective? Whether there's been any impact in terms of the customer conversations you're having on sales cycles at this point? And also from a supply perspective, I know you do manufacturing in Canada, but any component shortages that might affect production or not at this point?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [3]

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So Thanos, on the supply side, I'll let Doug Moore address that question with our robust inventory.

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Doug Moore, Evertz Technologies Limited - CFO [4]

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Yes. So on the supply side, there's no -- I mean purchasing is constantly analyzing risks when it comes to supply chain management. I mean we don't know for sure how the future will come about. But at this moment, they've been able to handle any kind of supply chain difficulties. And we're not short -- we had no shortage of components to meet current needs.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [5]

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Great. And from demand perspective?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [6]

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On the demand side, as you can see from our very robust February shipments and backlog. So we're moving ahead with a very solid order book and continue to see solid demand.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [7]

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Okay. And then in terms of the geographic breakdown this quarter, the decline that we saw in the North American business, is that just lumpiness? Or is there anything else to call out there?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [8]

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So with respect to the North American business, again to -- that's still quite a solid quarter. If you look at our historical, in 2019 fiscal, we had $280 million in the U.S. region. So this quarter, that's $68.4 million, so very close to the average there, and down a little bit from the prior year, which was a very strong U.S. component. But again to -- we're seeing very good solid results in the U.S., but it's overshadowed by the strength this quarter internationally.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [9]

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And on that front, internationally, it's -- imagine that's just, again, maybe just some large projects coming through. Or is there anything else you'd call out internationally that drove that strength?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [10]

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There's -- it's really -- it is not specific projects that are driving more than 10% or more than that. It's a multiple different product -- projects within the International region, just strength across the board more than highlighting any kind of projects more than 10% or 20% of that amount.

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Doug Moore, Evertz Technologies Limited - CFO [11]

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Thanos, as you recall, last quarter, we've spoken about that we were looking to stronger International revenues on the strength of some of the large deployments that we've had internationally. Those being a couple that have been in the press over the last year have been M6 in France, which is a very influential reference sites, Channel 1 Russia as well as the over 300 channels of cloud playouts -- European cloud playout that we have. So we have some very positive, strong, large deployments internationally. And we intend to continue to build on that momentum.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [12]

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The gross margin dipped a little this quarter. Is that just strictly because of the International mix?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [13]

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Yes. So I mean -- correct. So just beyond the fluctuations of product mix and whatnot, it really is driven, as you'll see, there's a correlation between a higher portion of International revenue and bit softer margins. But being 43% of our revenue, that's a lot higher than in the past few quarters. And while it's strong margin, it's definitely worth noting that the International mix has some effect there.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [14]

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And then last one for me. Just given that number of events are being delayed or canceled, the Olympics, for example, just talk of that being delayed. Is there a possibility that some of your current backlog could end up being debooked as a result?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [15]

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We're not anticipating that. That can happen from time to time. We're intending to -- we're open for business, continuing to build our order book and to deliver to customers as well.

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Operator [16]

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We will now take our next question from Robert Young with Canaccord Genuity.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [17]

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So we just learned that NAB is going to be canceled. If you could maybe talk about the impact on Evertz from that. Is that a marketing opportunity lost? Or is it something that you would say that is a marketing opportunity that would have been a bigger loss to your competitors? Is there any cost recovery you think you can pull out of that? Any other positive or negative impacts?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [18]

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Well, in terms of the marketing impact, we have very good, strong relationships with key influential industry players. We continue to have those -- they've got direct access to us. NAB is always very helpful and influential venue for us to meet face-to-face with them to hear their business plans and to show them product. We have that capability to do so being one of the leaders in the industry with our own manufacturing and our campus here in Burlington. So we're well positioned to continue to provide innovative products and solutions to our customers, to give them access to Evertz' technologies to come and view it here. So we're well positioned to weather any lack of trade shows. And with our extremely solid balance sheet, long history, we're well positioned for the future.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [19]

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And can you remind us of -- I mean how much NAB costs you where it falls in your financials? And if there's any that cost that won't happen because NAB is canceled?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [20]

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Well, I think it's worth noting, it's still a very fluid situation that's -- we're learning this that is fully canceled or postponed. We actually don't know for sure if there's a postponement or how it's going to react. So to quantify anything like that, it would be difficult at this time.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [21]

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Okay. So the IP transition, I think most would agree that it's maturing, and I was wondering if you could talk about the demand environment that you see. You've mentioned a lot of really good programs that you've been on recently. If you could talk about the environment and Evertz' competitive position inside that environment, maybe an update on the number of installations that you have out there, that would be helpful.

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [22]

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So Rob, we continue to grow those installations. We haven't had a press release on the exact number since the last update, which would have been approximately 450 IP installations. Some of those include the largest installations in the industry. So we're very much at the forefront leadership of deployments of IP-based solutions and virtualized cloud solutions, and that continues to progress.

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Robert Young, Canaccord Genuity Corp., Research Division - Director [23]

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All right. And maybe last question would be around the sale process around Grass Valley group. I mean that looks like that's coming to a conclusion. I was wondering if you could talk about how you think that might change the environment around you. Is there anything that you're seeing thus far? What do you expect approximately?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [24]

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Thanks, Rob. So Grass Valley have been a long time competitor. They continue to do so. The ownership has changed. But again, to the backdrop of the -- a very significant number of deployments that we've had over the last 4 years. And again, to industry-leading 2110 deployments, that continues to grow. And we're seeing very strong interest from customers in the US/Canada region and internationally as well, too.

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Operator [25]

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Final question comes today from Paul Treiber from RBC Capital Markets.

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Paul Michael Treiber, RBC Capital Markets, Research Division - Director of Canadian Technology & Analyst [26]

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Just in regards to backlog and then also the shipments in February, does the mix by geography aligned with the revenue mix in the quarter? Or is it -- reflects more typical mix that you've seen internationally over the last several quarters?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [27]

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Paul, it's a very good question. We don't actually break out the specifics. But by inspection, it appears to be in line with historical composition.

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Paul Michael Treiber, RBC Capital Markets, Research Division - Director of Canadian Technology & Analyst [28]

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So maybe another way to ask the same question is, like, International revenue in the $50 million range this past quarter. Is that -- should we think about that as a new run rate? Or is it a bit of an outlier to the upside? And maybe it's more reasonable to expect revenue in the $30 million to $40 million range in International going forward.

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [29]

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So Paul, what we tend to advice folks is to look at Evertz on a 12-month rolling basis. So if you look at the International revenue over the trailing 12 months, I think we're at $156 million. We definitely have aspirations of growing our International revenue significantly. But I would look at the very strong quarter that we had is more of a lumpy. So we do end up with lumpy results quarter-to-quarter geographically. That's nothing new for us. So I would tend to look at the trailing 12 months when you're modeling the revenue mix.

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Paul Michael Treiber, RBC Capital Markets, Research Division - Director of Canadian Technology & Analyst [30]

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That's helpful. Just one more for me. Just looking at shipments in February, just going back over the last number of years. It looks like the shipments this past February is at a multiyear high or even record high. Was there anything unusual with the shipments this past February? Or is it just reflective of the deployments we have ongoing and that the demand that you have in the market?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [31]

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Yes, it's as much just timing of demand. We've had monthly revenue at that level, sure shipments at that level and beyond, and it depends on the deployments that we have underway.

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Paul Michael Treiber, RBC Capital Markets, Research Division - Director of Canadian Technology & Analyst [32]

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And just a brief follow-up on that. Is there any seasonality we should be aware of? Or is it more dependent on the timing of deployments?

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [33]

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It's more dependent on the timing of deployments and project rollouts rather than seasonality for us. February is a shorter month of the year and a leap year, but that said, that's -- the monthly fluctuations in shipments has much more to do with our deployments and the customers' flat schedules of when they want products rolled out.

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Operator [34]

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At this time, there's been no further questions. I would like to turn the conference back to you, Mr. Campbell, for any additional or closing remarks.

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Brian Scott Campbell, Evertz Technologies Limited - Executive Vice-President of Business Development [35]

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Thank you, Louis. I'd like to thank our participants for their questions and to add that we are very pleased with the company's strong performance during the third quarter, which saw sales rise to a record quarterly high of $121.2 million, including a 31% increase year-over-year in the International region and solid gross margins of 56% in the quarter, yielding net earnings of $0.25 per share.

We're entering the fourth quarter of fiscal 2020 with significant momentum, fueled by the growing adoption and successful large-scale deployments of Evertz' IP-based software-defined video networking and our Emmy award-winning virtualized cloud solutions by some of the largest broadcast, new-media service providers and enterprise companies in the industry, and by the continuing success of our DreamCatcher, Evertz' state-of-the-art IP-based replay and live production suite and the combined purchase order backlog plus February shipments in excess of $132 million. With Evertz' significant investments in software-defined IP -- IT virtualized and cloud technologies, over 450 leading installs of IP software-defined networking deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position.

Thank you, everyone, and good night.

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Operator [36]

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This concludes today's call. Thank you for your participation. You may now disconnect.