Evertz Technologies Limited (ET) Earnings Call Transcript & Summary

Good morning, everybody. Different times these days, I guess. Okay. My name is Doug DeBruin. It's my pleasure as Chairman of the Board to welcome you to Evertz' 14th Annual Shareholders Meeting as a public company, and thank you all for being here today, whether virtually or in person. We'll conduct official business and procedures of our annual meeting today, and I'm pleased to call this meeting to order. With me today is -- via Teams meeting is Romo Magarelli, President and Chief Financial Officer of Evertz; also, Doug Moore, Chief Financial Officer and Corporate Secretary, who will assist with the procedural matters and act as Secretary of the Meeting. On the screen behind me, you'll find the agenda outlining the procedures of today's meeting. Following the completion of the formal business of the meeting, Doug Moore will report on Evertz' financial performance for fiscal year 2020. And then Romo will take you through an overview of the industry as well as an outlook at Evertz for the future. First item on the agenda will be the appointment of scrutineers to report on the shareholders present in person and the number of shares represented by proxy at this meeting to compute the votes on any poll taken at this meeting or adjournment thereof and to report hereon to the Chairman. With the consent of the meeting, I shall now appoint Amy Kam and [ Jamie Basik ] of Compushare Investor Services Inc. (sic) [ Computershare Investor Services Inc. ] to act as scrutineers and then ask them to prepare the attendance report. Notice calling this meeting of shareholders was mailed on September 14, 2020, to all shareholders of record as at September 2, 2020, along with all applicable proxy-related materials. The scrutineer -- the secretary has an affidavit attesting to the mailing of this notice of meeting, which is available for inspection by shareholders. I direct that a copy of the Notice of the Meeting together with the affidavit attesting to the mailing be kept by the secretary with the records of the meeting. In view of the fact that these documents have been tabled and have been delivered to all shareholders of record, I will now ask for a motion that the reading of this notice of this meeting be dispensed with.

Mr. Chairman, I'm a shareholder and I so move.

Thank you, Brian. Can someone second the motion?

Mr. Chairman, I'm a shareholder, and I second the motion.

Thank you. All those in favor of the motion, please signify by raising your hand. [Voting]

Anyone opposed? [Voting]

No? I declare the motion carried. I'm advised by the scrutineer that the scrutineer's report on share representation is ready. I will now ask the Secretary, Doug Moore, to read the scrutineer's report.

All right. I'll read that from here. According to the scrutineer's report, there are no registered shareholders presented in person and 40 shareholders represented by proxy at the meeting, representing a total of 59,135,562 shares or 77.35% of all outstanding shares.

Based on the scrutineer's report, I conclude that the required quorum of 2 persons, each being a shareholder or duly appointed proxyholder and together holding or representing by proxy not less than 51% of the outstanding common shares, is present and declare that the meeting to be duly called and properly constituted for transaction of such business as may properly come before it. Before commencing to the business of this meeting, I would like to comment on voting procedures. It's going to be a little different this year, but -- well, each shareholder of a common share is entitled to 1 vote for each share held in respect of each matter to be dealt with at this meeting. The scrutineer has advised that 59,135,562 votes are represented by proxy at today's meeting. Unless a shareholder or proxyholder demands a ballot to vote on the election of the directors and appointment of auditors and any other matter that may properly come before this meeting will be conducted by a show of hands. Please note that the bylaws of the company allow every shareholder who has not submitted a proxy and every proxyholder present at the meeting to have 1 vote on a show of hands and that each shareholder or proxyholder present in person at this meeting has a right to demand that a ballot be conducted on any resolution either before the show of hands vote or following that vote. Where ballot is conducted on any resolution, I will vote my -- by ballot all proxies submitted to me as proxyholder or required by law. The first item of business for this meeting is to receive the audited consolidated financial statements of Evertz for the year ended April 30, 2020, along with the auditor's report on these statements. The 2020 annual report, which contains the consolidated financial statements and the auditor's report was mailed to all registered shareholders together with a notice of this meeting as well as to nonregistered shareholders who requested a copy. The Board has approved these financial statements and has directed that they be placed before the shareholders. The next item of business is the election of directors. The Board has determined by resolution that there will be 7 directors. Of the 7 nominees proposed for election, all currently serve as directors of the company and are eligible for reelection. The management proxy circular sent to you provides the names and background information of each of these nominees. Each director elected to the Board will hold office until the next annual meeting of shareholders or until the director's successor is elected or appointed. Before we proceed with the nominations, I'll read out the names of the directors: Chris Colclough, Dr. Ian McWalter, Dr. Thomas Pistor, Brian Piccioni, Rakesh Patel, Romolo Magarelli, and myself, Douglas DeBruin. I will now entertain nominations for the directors of Evertz. I declare the meeting open for nomination for the election of 7 directors to hold office for the term expiring at the close of the next annual meeting of shareholders. May I have the motions -- the nominations, sorry?

Mr. Chairman, I'm a shareholder, and I nominate each of -- Chris Colclough; Dr. Ian McWalter, Dr. Thomas Pistor, Brian Piccioni, Rakesh Patel, Romolo Magarelli, and Doug DeBruin to serve as directors of the company until the next annual meeting of shareholders or until their successors are elected or appointed.

Thank you, Brian. Are there any further nominations? Shareholders are entitled to vote for the directors on an individual basis. Consequently, shareholders can vote for all of the proposed directors nominated, vote for some of them and withhold for others or withhold for all of them. However, in order to expedite the process of meeting, we suggest electing all 7 individuals nominated with 1 resolution. Would anyone object to such resolution? [Voting]

Would someone move a resolution for election of 7 -- of the 7 individuals nominated as directors?

Mr. Chairman, I'm a shareholder, and I move the election of each of Chris Colclough, Dr. Ian McWalter, Dr. Thomas Pistor, Brian Piccioni, Rakesh Patel, Romolo Magarelli and Doug DeBruin to serve as directors of the company until the next annual meeting of shareholders or until their successors are elected or appointed.

Thank you, Brian. Can someone second the motion?

Mr. Chairman, I'm a shareholder, and I second the motion.

Thank you. All those in favor of the motion, please signify by raising your hand. [Voting]

No? Those opposed? [Voting]

I declare that Chris Colclough, Dr. Ian McWalter, Dr. Thomas Pistor, Rakesh Patel, Brian Piccioni, Romo Magarelli and Douglas DeBruin have been duly elected as directors of the company to hold office until the close of the next annual meeting of shareholders. The next item of business is appointment of auditors. In the management proxy circular, it is recommended that BDO Canada LLP be reappointed as auditors of the company and the directors be authorized to fix the auditor's remuneration. May I have a motion reappointing BDO Canada LLP as auditors?

Mr. Chairman, I'm a shareholder, and I move that BDO Canada LLP be reappointed as auditors of the company until the next annual meeting of shareholders and that the Board of Directors of the company be authorized to fix the auditor's remuneration.

Thank you, Brian. Can someone second the motion?

Mr. Chairman, I'm a shareholder, and I second the motion.

Thank you. All those in favor of the motion, please signify by raising your hand. [Voting]

Those opposed? [Voting]

I declare the motion carried and BDO Canada LLP be duly appointed as auditors of the company until the next annual meeting of shareholders and that the Board of Directors of the company is authorized to fix their remuneration. That concludes the formal requirements of today's meeting. But before I officially close the meeting, does anyone have any questions regarding the items discussed so far? Okay. May I now have a motion that this meeting is terminated?

Mr. Chairman, I'm a shareholder, and I move that this meeting be terminated.

Thank you, Brian. Can someone second the motion?

Mr. Chairman, I'm a shareholder, and I second the motion.

You've heard the motion as moved and seconded. All in favor? [Voting]

Okay. Contrary, if any? [Voting]

I now declare this meeting terminated. It's now my pleasure to update you on the company's business, operations and financial affairs. Before I pass it over to Doug Moore, our CFO, I'll take you through our financial results for fiscal year ended April 30, 2020. I would like to point out that certain information within today's presentation may contain forward-looking statements, and the actual results may vary from those that are forecast or projected based on material factors and assumptions that are sometimes beyond the company's control. Evertz continues to be a world leader in the video technology sector. Through market-leading product innovation and state-of-the-art successful project completions, Evertz is able to provide solutions to its customers to navigate challenges and benefit from technology transitions within the market. Specifically, Evertz has developed and deployed software-defined IP, IT and virtualized public, private, hybrid cloud-based solutions, which continue to lead the industry. Evertz is built upon a long-term vision of generating value and sustainable success through investment in our technology portfolio while continuing to maintain a strict operating discipline. This vision and discipline has allowed Evertz to build a strong balance sheet and secure financial position while returning excess capital and cash flow to shareholders. During the year, Evertz distributed quarterly dividends of $0.72 per share as well as a special dividend of $0.90 per share, which combined to provide $125 million or $1.62 per share dividend this year. Fiscal 2020 included significant challenges associated with the pandemic crisis, which created uncertainty in the global economy, delayed customer deliveries and installations and impacted operation of Evertz -- impacted operation as Evertz prioritized health and safety of our employees, customers and partners. Despite these challenges, Evertz generated industry-leading earnings and cash flow from operations while delivering significant value to shareholders. Throughout the 14 years since our IPO in 2006, we have achieved a 9% compound annual revenue growth rate. Through the first 9 months of fiscal 2020, revenue had grown from $336 million to $344 million. Momentum was steady for a strong fourth quarter until the close of the borders due to government regulations. During this period, Evertz forged ahead with our commitment to the development of new innovative solutions. These investments fueled development activities within our core product portfolio and funded longer-term R&D initiatives, such as high-performance, low-latency IP networking technologies; our IT-based and virtualized cloud architectures; playout and content management; DreamCatcher IP-based replay live production suites, including BRAVO; compression and media transport solutions; and professional AV solutions. These initiatives are enabling our customers to transition to IP, IT and public, private and hybrid cloud-based solutions. Our 2021 plan is to continue our focus on investing into these new technologies, which is even more important in these changing times; leverage and expand upon virtualized cloud solutions that Evertz has successfully deployed with key customers to help them adapt to the new work environment. These technologies provide superior solutions, enabling our customers to address and implement complex multi-platform solutions and to efficiently transition to evolving IP and IT-based solutions, including virtualized cloud services. We enter fiscal 2021 with significant momentum of IP, IT and cloud-based solutions, designed, delivered, deployed and extended with influential industry leaders across the world. As a leading innovator and one of the largest pure players in our technology sector, we believe Evertz is again in a position of strength to deliver to customers and shareholders. Now prior to passing it over to Romolo, who will elaborate on the new product introductions and touch upon a few key successes, I'd like to first pass it over to Doug Moore, our CFO, to take you through our financial results for fiscal year 2020 in more detail. Thanks very much.

All right. Thank you, Doug. In regards to the financial results during the year, Evertz posted $437 million in sales in fiscal 2020. That represented a decrease of $7 million or 1.6% compared to the prior year. As demonstrated earlier by Doug, the decrease occurred in the fourth quarter and was driven by projects and deliveries placed on hold as a result of the pandemic. Now looking at revenue within the international region in particular, over the past 14 years, Evertz has achieved a 9% compound annual growth rate with international sales growing from $46 million in 2006 to $148 million in fiscal 2020 and now represents 34% of our total sales. As it relates to margins, the company strives to maintain a gross margin target within the 56% to 60% range. In 2020, our gross margin was indeed within that range and was at 56.9%. For the 2020 fiscal year, selling and administrative expenses were $67.6 million, which represents just under 15.5% of revenue. As it translates to earnings, stable margins and strong cost accountable management has enabled Evertz to continue our solid profitability into fiscal 2020. In particular, we achieved operating earnings of $92.6 million or over 21% of sales. Looking at results as a percentage of revenue. Net earnings as a percentage of revenue was 15.8%. As previously noted, selling and administrative expenses were 15.5% of revenue, while our commitment to innovation is clearly demonstrated here as our annual R&D investments as a percentage of revenue represented 20.8%. Now turning to cash flows. During fiscal 2020, we generated cash from operating activities of $87.7 million. After including the impacts of the change in noncash working capital and current taxes, we generated an impressive $109.3 million from operations. Cash from operations was used to invest in the acquisition of capital assets, which net of disposals resulted in the use of $10 million. And we also paid quarterly dividends totaling $0.72 during the year or $55.2 million and also returned excess capital to shareholders through a special dividend totaling $69.6 million. Now lastly, moving to the balance sheet. I am pleased to say the company finished the year in a strong financial position. As at April 30, cash was $75 million and working capital was $224 million. Total assets were $444 million, highlighting our maintenance of a strong balance sheet. And given the difficulties over the past few months and uncertainty in the global environment, we view this -- view our pristine balance sheet as a very key asset in and of itself. Now to move beyond financial discussions, I'd like to pass it over to Romolo, our President and CEO, who will give an industry and corporate overview as well as outline our growth strategy going forward. Thanks a lot.

Hello, everybody. Thanks, Doug, and good morning. As you just heard, we've had a successful fiscal 2020 with a strong financial performance driven by innovation and operational excellence. I'm very proud of the commitment and accomplishments of our team, especially during this challenging time. Before I go into more detail about this year's event, let me briefly touch upon some of Evertz' highlights. Evertz is an engineering-focused innovator that designs, produces and markets Tier 1 video and audio solutions for the new media and broadcast and television service providers and enterprise AV markets. We have and continue to lead the industry's cloud transition, and we lead in cloud-based facility upgrades. Industry leaders such as Turner CNN, NBCU, Disney, CBS, Discovery, Google and Amazon and many others have benefited from our pioneering solutions. Evertz has successfully deployed more than 500 IP SDVN systems in the world, including recent developed -- deployments of the industry's largest-scale facilities in the U.S. and international, an unrivaled accomplishment. Here are some examples of some projects we provided key solutions towards. Over the past year, Evertz has been working closely with ViacomCBS to enable their migration to the public cloud. This enables -- this includes establishing a highly resistant cloud playout capability that utilizes the Evertz Mediator and Overture products in the AWS cloud. ViacomCBS also leverages our VUE platform to further facilitate an operator-friendly system. They launched numerous channels from this system, including their Digital Lifestyle Channel and Country Music Television Australia. All of these channels are completely built and operated in the cloud with core streams generating from the East Coast in the U.S. Leveraging CDN distribution, ViacomCBS is able to deliver streams from this system across the globe and deliver premium content to its customers. Evertz has recently introduced the Evertz VUE Anywhere solution, which combined with the flexibility of an Evertz IP-based network architecture provides the flexibility to create a more dynamic workflow, adjusting to changing consumer platforms and needs. This tool allows operators to remotely control the facility with low latency. VUE Anywhere combines individual control monitoring elements in a single interface, providing the ability to maintain operations from a remote location, ideal for work-from-home applications. When the pandemic hit, our customers required to incorporate remote production, DreamCatcher's BRAVO is another exemplary solution there to meet the channel -- the challenge. Initially chosen by Discovery because it allows them to deliver more live shows efficiently, BRAVO demonstrated its value with its flexibility, ease of use and scalability as it enabled Discovery to continue streaming live programming as their -- like the Food Network Kitchen app. The 2020 Irish Open was one of the many examples highlighted by our perseverance and dedication towards our customer during this -- customers during this particular difficult period. The event was successfully broadcast over 4 days in late September using their new OB12 production trucks equipped with an 80-display Evertz IP multiviewer system, all running over 100-gig network timed by an Evertz' master clock arrangement. One of the more significant sports-relating milestones during the year was the opening of the SoFi Stadium, home to both the NFL's Los Angeles Rams and Los Angeles Chargers, the heart of which is a 360-foot double-sided 4K HDR video scoreboard, simply amazing. The core of the facility is an all Evertz SDVN technology orchestration and replay system, all in Ultra-HD. They took advantage of our AV solutions also for the campus security system. That was just a cherry on top for Evertz. I'd now like to take a few minutes to discuss what our team has accomplished during the year. We've made key advancements in a number of areas. We achieved strong sales with solid profitability despite the challenges associated with COVID-19. Our key R&D efforts were further validated by our third Emmy Award, winning customer solution deployments and implementation of work-from-home solutions. We continue to lead the industry's technical transition with over 500 successful SDVN IP installations. And Evertz' AV division delivered large-scale deployments in higher education, global financial customers and government, where the common criteria certification is opening many new doors. Recapping the 2020 financial results. Operational discipline and execution have served us well in fiscal 2020. We delivered industry-leading profitability with pretax earnings of 21% on a record $437 million in sales. In fact, we've achieved 68 consecutive quarters of profitability. Turning to fiscal 2021. We are off to a slow start, heavily impacted by temporary customer shutdowns, travel restrictions and postponements of live events and projects as a result of the pandemic. During the first quarter, sales were $56 million, and pre-FX operating earnings were just over $4 million. However, we now enter the second quarter of fiscal 2021 with some restored momentum, fueled by a combined purchase order backlog totaling $154 million, up 1% from the prior year. Now moving on to talk about drivers in our industry. There are several factors converging that are helping us grow the market. First, live TV content and the emergence of Ultra-HD in high dynamic range and enhanced audio to create an immersive experience. Live TV fueled by sports, news and variety shows is increasing viewership, with live Internet video forecast to increase fifteen-fold by 2022. Second, the TV everywhere and direct-to-consumer phenomena is a necessity for our customers. The consumer groundswell is expected to escalate with global Internet traffic forecast to increase fourfold by 2022 and to reach 82% of all consumer Internet traffic. Lastly, the demand for more content, channels and services, along with higher resolutions and ability to increase remote operation capabilities, is driving the technical transition. Delivering more with less is a necessity for our customers. Evertz has solutions to meet the drivers of our market. Over the past 5 years, we've invested over $398 million in R&D and set a pace of innovation that is unmatched in the industry. Evertz' R&D has produced new solutions in every category, but most importantly, we're at the forefront of the IP and virtualized cloud transitions with our initiatives in software-defined video and IP networking platforms, media asset management and workflow solutions, advanced production technology and Evertz AV, our network-based, high-quality audio/video solutions. Evertz has earned a worldwide reputation as a solution provider for delivering IP and cloud solutions today. Our key customers recognize our commitment and leadership, and their support sustains our growth and future success. Thank you for your interest in Evertz, and thank you for taking the time to join us, virtually or not, in person today. At this point, I would like to take any questions you have. Thank you.

On the floor here, let us know if there's any questions that -- from online, please include them in the chat. We'll give you a few minutes.

There's no current questions.

Okay. There are no questions. Give it a couple more minutes. Still no one.