Evertz Technologies Limited (ET) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Evertz Q4 Investor Conference Call. [Operator Instructions] Today's call is being recorded, June 23, 2022. And I would now like to turn the call over to Mr. Brian Campbell, Executive Vice President of Business and Development. Please go ahead, sir.

Thank you, Michelle. Good afternoon, everyone, and welcome to the Evertz Technologies Conference Call for our Fourth Quarter ended April 30, 2022 with Doug Moore, Evertz' Chief Financial Officer; and myself, Brian Campbell. Please note that our financial press release and MD&A are now available on SEDAR. Doug and I will comment on the financial results and then open the call to your questions. Turning now to Evertz' results. I'll begin with a few annual and fourth quarter highlights, following which Doug will provide more details. First off, I'm pleased to report sales for the fiscal quarter totaled $441 million, driven in part by the adoption of Evertz' new technologies. Annual net earnings were $72.7 million, resulting in fully diluted earnings per share of $0.94 for fiscal 2022. Investment in research and development totaled $102.4 million for fiscal 2022, further reinforcing Evertz' commitment to R&D. Moving on to the fourth quarter financials. Sales in the quarter were $116.1 million, up 24% year-over-year. Gross margin for the fourth quarter was $68.3 million or 58.9% of sales. And foreign exchange for the quarter was a gain of $1.1 million. Net earnings for the fourth quarter were $19.2 million with fully diluted earnings per share of $0.25. At April 30, 2022, Evertz' working capital was $158.9 million with $33.9 million in cash. The purchase order backlog at the end of May was in excess of $148 million, and shipments during the month of May were $6 million. We attribute our solid annual and quarterly performance to the ongoing technical transition in the industry, channel and video services proliferation and the increasing global demand for high-quality video anywhere, anytime, and specifically to the growing adoption of Evertz' IP-based software-defined video networking solutions, IT and cloud solutions, our immersive 4K Ultra-HD solutions and state-of-the-art DreamCatcher IP replay and BRAVO live production suite. Our sales base is well diversified with the top 10 customers accounting for approximately 40% of sales during the year with no single customer over 6%. In fact, we had 475 customer orders of over $200,000, a 35% increase from the 353 customer orders of over $200,000 received last year. Today, Evertz' Board of Directors declared a quarterly dividend of $0.18 per share, which will be paid on or about July 7. I will now hand over the call to Doug Moore, Evertz' Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. Good afternoon, everyone. Starting with revenues. Sales were $116.1 million in the fourth quarter of fiscal 2022 compared to $93.3 million in the fourth quarter of fiscal 2021, which represents an increase of $22.8 million or 24%. Sales for the fiscal year ended April 30, 2022, were $441 million compared to $342.9 million in the same period last year. That represents an increase of approximately $98.1 million or 29%. Regarding regional revenues. The U.S./Canada region had sales for the fourth quarter of $77.8 million compared to $63.6 million in Q4 last year. That's an increase of $14.2 million or 22%. International region had sales for the quarter of $38.2 million compared to $29.7 million last year, an increase of $8.5 million or 29%. Back to fiscal results. Sales in the U.S./Canadian region were $299.4 million for the year ended April 30 compared to $222.7 million in the same period last year. This represents an increase of $76.7 million or 34%. Sales in the International region were $141.7 million for the year ended April 30, 2022, compared to $120.2 million in the same period last year, representing an increase of $21.5 million or 18%. Fortunately, International segment represented 33% of total sales in the quarter and 32% total sales in the year compared to 32% and 35% in the respective period last year. Turning to gross margins. The gross margin for the quarter was approximately 58.9% compared to 59.6% in the fourth quarter of fiscal 2021. Gross margin for the year was 57.9% compared to 58.2% in fiscal 2021. Both the Q4 and fiscal 2022 gross margin rates were within the company's target range. For operating costs, selling and administrative expenses were $16.1 million for the fourth quarter, an increase of $3.1 million from the same period last year. The increase is inclusive of a $2.1 million increase in travel promotion and trade show costs when compared to Q4 of 2021. As a percentage of revenue, selling and admin expenses were approximately 13.9%. Selling and administrative expenses were $60.9 million for the year ended April 30, 2022, an increase of $11.5 million from the same period in fiscal 2021. For the year, selling and administrative expenses as a percentage of revenue were approximately 13.8% compared to 14.4% last year. Turning to R&D. Research and development expenses were $27.3 million for the fourth quarter, which represents a $4.8 million increase from the fourth quarter last year. The increases in R&D expenses is driven by an increase in net salary costs. I think unlike Q4 last year, in Q4 of 2022, there was no reduction in costs associated with government assistance. As a percentage of revenue, R&D was approximately 23.5% in the quarter as compared to 24% for the same period last year. For the year, research and development expenses were $102.4 million, which represents an increase of $22.2 million over the same period last year. R&D expenses as a percentage of revenue were approximately 23.2% for the year compared to 23.4% last year. Foreign exchange for the fourth quarter resulted in a gain of $1.1 million compared to a loss of $5.1 million in the same period last year. The gain of $1.1 million was driven by the increase in the value of the U.S. dollar against the Canadian dollar between January 31 and April 30, 2022. Foreign exchange for the year ended April 30, 2022, resulted in a gain of $6.5 million compared to a loss of $14.9 million in the prior year. The gain was driven by an increase in the value of the U.S. dollar compared to Canadian dollar over that period. Turning to a discussion of liquidity of the company. Cash as at April 30, 2022, was $33.9 million compared to $108.8 million as at April 30, 2021. Working capital was $158.9 million as at April 30, 2022, compared to $214.5 million at the end of April 30, 2021. Regarding quarterly cash flows. The company generated cash from operations of $21.5 million, which includes a $2.4 million net change in noncash working capital and current taxes. If the effects of the change in noncash working capital and current taxes are excluded from that calculation, the company generated $23.9 million of cash from operations in the quarter. In the quarter, the company used $1.3 million from investing activities, which was principally driven by capital asset purchases. And the company used cash from financing activities of $15 million, which was principally driven by the dividends paid of $13.7 million. Regarding fiscal cash flows. For the year, the company generated from operations cash of $68.7 million, which is net of a $24.3 million change in noncash working capital and current taxes. The change in noncash working capital was driven by a $26 million increase in accounts receivable over the year, a $25 million increase in inventory, partially offset by a $16 million increase in deferred revenue over the year. If the effects of the change in noncash working capital and current taxes are excluded, the company generated $93 million cash from operations. Regarding financing activities. During the year, the company paid approximately $131.4 million in dividends, which included a special dividend of $76.3 million. Finally, looking at our share capital position as at April 30, 2022. Shares outstanding were approximately 76.2 million, and options outstanding were approximately 5.1 million. Weighted average shares were 76.3 million and weighted average fully diluted shares outstanding were approximately 76.6 million for the year ended. That brings to a conclusion the review of our financial results and position for the fourth quarter and fiscal year-end. And finally, I would like to remind you that some of the statements presented herein 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. Brian, back to yourself.

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

[Operator Instructions] Your first question comes from Thanos Moschopoulos of BMO.

Brian, there's really been a lot happening from a macro perspective, obviously, given like rates and inflation and more, Ukraine, all that. So from your perspective, as you look at your business and you speak to your customers, how would you say the demand environment has evolved over the last few weeks?

Our demand environment still continues to be very robust. We've got a very strong backlog heading into fiscal 2023. So we're quite optimistic about the outlook going forward. We're very cognizant of the macroeconomics as our customers, but we're well positioned with an extremely robust business model and a very large backlog for the next while.

So overall, it sounds like you haven't really seen much same investment behavior over the past quarter. Is that fair?

Yes, that's correct.

Okay. In terms of supply chain, any incremental updates there and the situation gotten any better or any worse? Obviously, you had some advantage with greenhouse manufacturing, but how would you characterize the pricing dynamic versus what it was previously?

Yes. I'll comment on that. So yes, I mean, sourcing parts continues to be a challenge rate. So a significant challenge. It's one that we're doing our best to mitigate and can have effects on timing of certain shipments. And there's -- quite frankly, I don't know that it's going away anytime soon, but we're doing our best to mitigate and we just had a pretty strong quarter around $116 million. So I think that's -- while there's certainly challenges and I can't say there's been a significant change in the last 2 months. It's been going on for the past many months, but it doesn't seem like it's necessarily improving as of yet. But I think we're doing our best to mitigate it.

Okay. The gross margin was obviously strongly, within your targeted range but higher than in some of the prior quarters. Anything you can call out there?

It's really just driven by product mix. I mean we are seeing some part cost increases, of course, just given the supply chain issues, but we've been able to mitigate those. And so really, it's just really been driven by the product mix itself.

Okay. And maybe just a last one for me. I mean probably safe to assume that inventories will remain elevated for the next while because, clearly, that's one of the ways in which you're investing in the supply chain components, right? So we shouldn't get to see inventory going to conclude any time in the next while?

Yes. So that's exactly part of our strategy to mitigate as we increased raw materials quite substantially. So I think we're up over $20 million compared to last year. So I would not expect to decrease. We've taken an approach where we're quite frankly stocking more than we did a year ago because we have to given the constraints on lead times. They've gone a lot longer by suppliers. So we are forced to hold more inventory at the time.

[Operator Instructions] The next question comes from Rob Young of Canaccord.

Maybe first question for me around the backlog, down quarter-over-quarter, still up year-over-year. It seems as though it hasn't continued the recent trend or just been inching up. Is there something that is different this quarter? Or is there some kind of a seasonal factor in the quarter-to-quarter?

So Rob, we're coming off of 2 record high quarterly backlog numbers. That said, we've -- this is at $148 million. It's a very significant backlog for us. Much of it deliverable within the next 12 months predominantly. So we don't see any real trends there in terms of the order intake, but we have, again, [ 2 ] -- had good deliveries in this past quarter, which impacts the backlog.

Okay. So nothing out of the ordinary. And maybe second question, the deferred revenue group in the quarter. Is there anything to call out there and driver behind that?

So I mean, the increase in deferred revenue is very much a trend in the past, right? So there is a couple of customers that we have taken deposits from that are pretty large, but it's spread across a little bit broader than that. There's nothing really industry-specific -- sorry, industry is a wrong word, but specific to highlight there other than it's somewhat of a trend given our business model where we're taking more money upfront and paying on milestone payments. And I think it's not really one item to highlight.

Okay. Nothing to highlight around recurring revenue growth or anything like that or anything on subscription or software-related?

No, I don't think it's -- in this case, it's not quarter-over-quarter. There's no substantial association with that. There is -- quite frankly, again, there's a couple of customers that put deposits on with the larger projects.

Okay. And then in the last, I guess, even 2 years now, you've highlighted some difficulties getting access to sites and getting into even the geographies that you needed to do the work required. And I just wonder if you could just update us on how that's developing now. There's -- everything is opening up a little more. Is that becoming easier?

It is becoming easier. We still do have those challenges in place. But again, we've been working through them for 2 years and things are getting better. We do have significant teams deployed in North America and some internationally as well, too. And that's part of the course. So yes, things are gradually getting better.

Okay. Maybe last question for me is just around -- are you seeing any pressure on wage inflation or return to travel? I know the NAB conference is maybe a little bigger than people thought it would be. And so are you seeing a return to trade show expenses or anything to call out for the coming year?

Yes. I think even in Q4, we had -- comparing year-over-year, for example, attending NAB is there's a cost associated with that. Our staff are traveling a lot more. There is some -- within R&D either, especially there's some salary costs associated with market adjustments or -- but yes, for the -- associated with SMA, for example, there is -- certainly, the return to trade shows and attending more trade shows is a cost. I think we hope to continue to attend them. So I don't expect it to go away.

We -- candidly, we're thrilled to be able to attend and see in-person customers again, although we have been visiting them on site where possible. But the opening up of trade shows is definitely a positive for us and the industry.

Should we think of maybe expenses going up as a percentage of revenue in 2020 operating expenses? Or do you think you can hold them relatively flat despite those extra costs?

So there will be some -- they wouldn't be linear, right, so -- if your increasing revenue wouldn't nearly proportionately go up. But we would expect that, with increased selling activity, some of the costs would indeed go up -- increase.

There are no further questions from the phone lines. I would like to turn the conference back to Mr. Brian Campbell for closing remarks.

Thank you, Michelle. I'd like to thank our participants for their questions and add that we're encouraged by the company's strong performance in fiscal 2022, achieving sales of $441 million and, in particular, by strength in the important U.S./Canada region where sales rose 34%, delivering pretax earnings of $97.9 million, 22.2% of sales. All while investing $102.4 million in R&D to build for future growth. We optimistically enter the first half of fiscal 2023, fueled by a purchase order backlog in excess of $148 million, plus $26 million shipments in May totaling in excess of $174 million, up 5.5% year-over-year, and fueled by the financial strength and flexibility of our pristine balance sheet and by the continued adoption and successful large-scale deployments, software-defined IP, IT and cloud-based video solutions, DreamCatcher, BRAVO, IP-based, instant replay and live production suite. With our significant investments in software-defined IP, IT and cloud technologies, industry-leading 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, and good night.

Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank you all for participating and ask that you please disconnect your lines.