Haivision Systems Inc. (HAI) Earnings Call Transcript & Summary

Thank you, everyone, for joining our webinar today with Haivision Systems. The purpose of today's presentation is to give our audience a better understanding of the business through a presentation and then questions with management. The presentation today will be led by Mirko Wicha, CEO, who is also joined by Dan Rabinowitz, Chief Financial Officer. If you'd like a copy of today's presentation, simply e-mail me at [email protected], and I'll be happy to send you a copy. We're going to break for questions at the end of the formal presentation. When we do break, we encourage questions. And as a reminder, we're only taking questions through the web portal. If you're listening over the telephone, please access the web link sent earlier today to ask a question. You can submit a question using the text box within the portal at any time. I'll ask the questions on the air for everyone to hear and then Mirko or Dan will answer. I'm not going to reference any names, but simply read the questions asked. As we have a fairly large audience today, if I can't get to your question online and has not yet been addressed during the call and can be, I'll come back to you by e-mail. I'm not going to read the forward-looking statements, but I do state that they do apply, and I reference them on Page 2 of this PowerPoint. With that said, once again, thank you for joining us. Remember, this is fairly informal, and we do encourage those questions to help you better understand the business and its growth path. And now I'll turn the call over to Mirko to start his part of the discussion and presentation.

Super. Thanks, Glen, and welcome, everybody. Let's go to Slide 3, and I'll just begin. The power of real-time live video has struck the world about 50 years ago when America actually landed on the moon. Now since then, the technological progress of network connectivity from the first TV broadcast to the Internet and more recently, mobile have transformed the world for consumers, enterprises and governments beyond the ability to instantaneously share text, e-mails, documents, pictures and data of all types, everyone now relies on real-time live video to ingest information, process it to drive decisions and then share the outcome. This is the ultimate power made possible by 50 years of network video and data processing innovations. And we are now at a tipping point with the prevalence of cloud computing, the emergence of 5G, advancements in AI, ubiquitous bandwidth and unlimited data processing is now a reality. And combine that with the complexity of real-time video what was once considered a novelty has now become a necessity. Now we call this transformational wave, the real-time video revolution and Haivision aims to lead it in the enterprise, the government and the defense markets. Now Haivision's mission is to drive awareness, better decisions and faster responses by leveraging real-time video across fixed and mobile networks through performance, quality, reliability and security. That's the DNA of all our solutions. The use cases we serve are varied, yet our solutions are all based around the same 3 steps. We first ingest the video and data source generated from cameras or sensors to carry it across the network. We then process it to match market-specific needs and create value, and then we share it to downstream users or exploitation systems. Now whether it's a director in a bustling environment of a live NFL game, Commander stationed in the strategic confines of war room or CIO orchestrating response to a cybersecurity attack, I mean, Haivision empowers them to observe and engage with the world in real time with unparalleled clarity and precision, or as we like to call it the mission-critical video networking. And our ability to serve truly diverse customers needs with the same set of solutions, the unique differentiator, allowing Haivision to create value from a truly global market opportunity. And let me be a little more specific with a few customer examples. Now within the context of controlling, optimizing and protecting the global enterprise, Haivision leads the market in providing real-time video visualization solutions. We cater to professionals within organizations that require real-time video and information to effectively do their jobs. From delivering live video to financial traders like we do for RBC, Citibank, New York Stock Exchange to network operation centers, such as Akamai, Salesforce, Meta, our solutions play a pivotal role in decision-making, resource allocation and strategic planning, particularly in emergency or complex operations. And installations such as these demand the highest level of system security and 24/7 resilient operational capability, together with high-end performance, responsiveness and connectivity. Now cyber crime has also become a serious concern and enterprises are increasingly adopting military command center style approaches to their cybersecurity strategies. And this involves establishing centralized, highly sophisticated video operation centers that are designed to monitor, assess and respond in real time to global cyber threats across the entire enterprise. Now for example, Meta has turned to Haivision to help them visualizing virtually every aspect of their business, including cybersecurity, network operations, fraud, physical security and critical data center systems. In fact, they have commissioned over 60 operational centers globally, all connected back to their 3 major GSOCs, which is global security operation centers. Haivision has also invested significantly in security, certifications and network threat compliances, thus creating a huge barrier to entry. In government and defense where security performance, reliability and low latency are paramount, we specifically focus on several things: mission-critical video distribution across government campuses and offices, within space centers and onboard military or defense platforms; global ISR deployments, ISR stands for intelligent surveillance reconnaissance. This includes the critical video from sensors and cameras and drones, the pilots on the other side of the world rely on. And command centers from real-time crime centers for police departments to joint operation centers that enable coordinated military action. In fact, NASA, one of our strategic accounts, relies on Haivision to capture video from all their cameras all over their launch sites, deliver those critical feeds throughout their campuses and display the video along with other mission-critical data within all their mission control centers. Haivision has been a game changer in the media and entertainment industry, pushing the boundaries with innovative ultra-low latency video network technology for almost 20 years. I mean, back in 2010, we first teamed up with the NFL to transform live remote interviews. Then in 2014, we invented and introduced our groundbreaking streaming protocol for secure reliable transport, now known as SRT, offering a cost-effective alternative to expensive satellite or expensive MPLS fees, spreading our technology to every cloud video broadcast and stream professional. And then in 2017, we took the bold step to open source SRT, transforming the entire industry. A private 5G networks and advanced application of 5G network slicing is unleashing vast new broadcast production opportunities. We invested in this wireless sector by bringing the latest 5G bonded cellular technology to our premier customer list. We demonstrated a part of this technology through the coverage of the King's Coronation last summer and at the Winter Olympics of last year. Another one of our large clients, ESPN, is leveraging our technology in a massive way for NCAA sports over 600 college venues are wired up to stream live events straight back to ESPN's control center in Bristol, Connecticut. Our Makitos and SRT technology power through a staggering 2,500 events each year for their OTT platforms. And this Haivision-powered network contributes to more than 10% of ESPN's 23,000 live events annually. From CNN's newsrooms to the Olympics, Haivision's presence and broadcast is undeniable and everywhere. We're not just part of the scene, we're at very, very core. And as our customers example demonstrate Haivision's focus on live video use cases applied to market segments, where our DNA of performance, quality, reliability and security are most important. We don't play in the consumer market or the low-cost prosumer video market segment, which investors rightfully perceived as low value nor do we play in the video conferencing market, competing with Zoom, Skype or free offerings like Teams. Our mission-critical video networking represents the highest value segment of the global video streaming infrastructure market estimated to be about $23 billion back in 2022 and to grow at a compound annual growth rate of about 16% over the next 10 years. Now out of the $23 billion TAM, we estimate our targeted high-value segments were about $5 billion in 2022. The live video represents the lion's share of this market, and it always starts at the back of a camera or sensor. Our strategy is focused on 3 high-value segments: enterprise, government and defense, media and entertainment. Leveraging our end-to-end solutions across market segments is foundational to our business as we maximize technical synergies and credibility while differentiating against pure-play players. Now we serve a broad set of customers and markets, and it all starts with the ingest stage where the video output of the camera or sensor needs to be included and sent over a network. And we addressed this challenge with 2 award-winning families of high-value hardware solutions, our Makito, designed for fixed networks and our Pro Series transmitters designed for mobile wireless networks. The barrier to entry for solutions matching our DNA is high, and we demonstrate the significant value we bring to these solutions with gross margins in excess of 70%. We also offer pure software solutions tailored to the needs of each market and representing the majority of our R&D investments. Note that systems and government, defense and enterprise are often on-premise solutions due to their mission-critical nature and security requirements. And our software solutions are also available within public clouds, and our growth strategy includes continued development of SaaS solutions with recurring revenue streams. In addition, we support all of our hardware and software solutions with recurring maintenance and support revenue. Finally, artificial intelligence and machine learning are also used across our product portfolio at the time of the ingest to enhance the incoming video with real-time intelligence and at the process stage to optimize the efficiency of our solutions, and at the share stage to optimize the quality of the video output. Now when it comes to transporting live video over any network, Haivision is absolutely the world leader in innovation and technology. 20 years ago, Haivision brought to the market the world's first ultra-low latency codecs that were the foundation of the telepresence, distance education and telemedicine markets. Like the SRT protocol, we invested 10 years ago, continues to be Haivision's strategic cornerstone within the global video market. SRT actually has established Haivision as a true pioneer that created a revolution, opened the doors to the highest level of leadership within our clients and forged the path to many strategic partnerships and M&A opportunities. We have also established Haivision as being on the cutting edge of ultra-low latency 5G innovation. Anchored by client, equipment vendor and telco partnerships, we have pushed the envelope of live video over cellular networks. Haivision continues to outpace the competition in innovation. Finally, for our collaboration with the major players in public cloud and AI, we are looking to make high-performance live video, not only simple and ubiquitous, but intelligent in what specific video needs to be delivered, what information is captured and created to accompany that video and how efficiently that video gets delivered from source to destination. So about the DNA. Like when I founded Haivision almost 20 years ago, we defined our market focus back then as live video for applications that require ultra-low latency encoding under low bandwidth conditions. The past 5 to 7 years has seen an explosion in demand for live low latency HD video using the public Internet. And interesting enough, the overall video market has now moved into our domain of expertise. We have also steered away from applications that don't require our core values, and we definitely do not play in the consumer space, right? We focus on clients that align with our fundamentals where we can provide the highest differentiated value. Clients come to Haivision because of our core DNA fundamentals and technological leadership. We solve the fundamental needs of our clients through a consultative approach. We do this through a global sales organization equipped with top field engineers in the business. And many of our clients continue to buy from us for years. In fact, about 75% of sales last year came from the clients that purchased from us the previous year. This really shows predictability and a sense of recurring revenue we enjoy. In fact, we also continue to build multiyear deployments for large programmatic business with clients that deploy our solutions over multiple years. A few great examples are the U.S. State Department, upgrading all their 183-plus embassies worldwide over 5-plus years or the U.S. Navy, where we continue to upgrade their video systems for the past 7 years or the U.S. Department of Defense, the Predator program that we retrofitted 3x over a 10-year period. Now with that overview, let's look at the Haivision numbers. Now today, we have approximately 350 employees throughout the world and $140 million in revenue in our fiscal year 2023. Since our incorporation in 2004, we have delivered 17 years of positive adjusted EBITDA, which we see as a proof point of the value of our vision. Our strong 70%-plus gross margin profile is another testament to our innovative technology and to the solutions we provide to these mission-critical and high demanding use cases. And as mentioned earlier, we target the $5 billion high-value segment of the broad video infrastructure market, which is a total TAM of about $23 billion. We believe this is the right segment with significant growth perspective to deliver long-term shareholder value. Also, over our history, we've done 8 acquisitions to serve our growth objectives, and we will continue doing M&A as opportunities arise. I would say that today, Haivision is seen as an innovator, disruptor, prime influencer and technology leader in the real-time video industry. Now profitable growth has been a guiding principle since I founded Haivision. In our 16-plus years as a private company, we grew organically at 22.7% CAGR and have been excellent stewards of capital. As from an initial investment of only $8.25 million in capital, we delivered over $80 million in revenue at the time of our IPO in 2020. Not sure many companies can actually say that. Usually, it's the reverse, right? They raise $80 million, maybe they have sales of $8 million. More importantly, the current market conditions show us how critical it is to keep profitable growth as a core objective of the business to drive long-term shareholder value. Now our acquisition history also included 2 strategic post-IPO acquisitions to position us as leaders in the command centers and 5G wireless development, an essential part of our vision for the real-time video revolution. Now considering that 80% of acquisitions fail, we have an impressive record of accomplishment, and we will keep leveraging our team's expertise in strategic M&A to expand product offering and grow revenue. Our growth will be driven by the demand for increasingly complex command centers across all market segments, expanding the reach of those command centers to the rest of the world, introducing AI to our products to make them more intelligent and by new possibilities offered by 5G connectivity in the media and entertainment domain. We have built a sizable business, and the investments we have already made in product development and in our sales organization are enabling us to drive operational efficiencies and accelerate profitability faster than revenue growth. And this is just the beginning. Haivision has the potential to serve a platform for growth and reap the benefits of the real-time video revolution. Talk about people. Our management team has an average of 30-plus years in the video industry, and most of us have worked together for the last 15 years. In fact, I've worked with Peter, our Chief Strategy Officer, in my previous life at Discreet and Autodesk, since the very beginning of Haivision. Dan, our CFO, joined us in the early, early days of Haivision as well. In addition to that, a year ago, we successfully strengthened our product activities with the arrival of Jean-Marc as our Chief Product Officer, who ran all product strategy at Synamedia. And this team is tight and works extremely well together and with all the other senior management of Haivision. And our ability to deliver also relies on the engagement and quality of our employees. We are proud to have assembled diverse workforce spread across 24 countries, 17 time zones and speaking 27-plus languages. And we're also proud to say that 50% of our employees have been with us for more than 5 years, the right balance to retain expertise while allowing ongoing acquisition of new talents. It's all about people and our culture is dear to my heart, is what built Haivision and makes us special. So thank you for listening. And Glen, we're ready for questions.

Super. Thank you for that, Mirko. Great presentation. To our audience, remember, if you've got a question, please use the Q&A tab down at the bottom of the webinar portal. We've got quite a few questions in the queue already. So we'll get going. So first question for you, Mirko. Do all of your contracts include hardware, software and services? Or do some organizations only use you for Makitos, some for commercial 360, for example -- sorry, Command 360, for example?

That's a great question. A bit of a mixture depending on what market. If you go -- a lot of the defense area, they tend to get the best of the breed of all different parts of their solutions. So I would say in some areas, people just buy for the specific needs like our Kraken real-time transcoding system over the Makito low latency encoder or in other areas, just our SRT Gateway. If you go more into the command center area, interestingly enough, we kind of play now in the ingest of all the video from our encoders, which we've been doing for years. And now we actually own the delivery of all of that and visualize it with the C360. So we're taking a full end-to-end approach. And if you look at the broadcast, sometimes it becomes more of an end-to-end solution where we do ingest, right? We do the contribution, we do the delivery through maybe even HMP or the SRT Gateway, and we actually deliver it to our mobile devices. So they'll take a more of a holistic approach. So it's depending on what market you are, whether it's the enterprise, government, defense or broadcast.

Super. Can you discuss your contract with the New York Stock Exchange for delivering low-latency video to the New York Stock Exchange trading floor? Is that a multiyear contract? And can you discuss specifics such as dollar figures? How many screens do you power? Any additional services, such as maintenance and support, cloud business that goes into a contract like this?

Yes. And I would say we are kind of -- a lot of times we are bound by confidentiality. So I would say, no, we can't. Definitely can't mention numbers, can't mention the amounts. That's been an account of ours for many, many years. And what we've actually done, and it's not like it's a contracted multiyear revenue stream. This will be an example -- the NYSE is a client that we first deployed, believe it or not, digital signage technology for the whole floor. In fact, I remember visiting them 9 years ago, and they actually had our CoolSign technology even in the elevators going up and down the building. From there, we actually grew into HMP, which is our Haivision Media Platform for IPTV to all of the -- not only the traders, but all their IPTV needs. And actually, now we're actually talking to them about expanding that to our Command 360. So it goes from year to year, and it's very similar to NFL. We've been with NFL for, I think, 12, 13 years at least. And we've started, again, with the remote interviews. We've done so many projects with them, and every year they come up with something new and they buy new technology, different technologies. So that's not an example of a contracted multiyear revenue stream because we tend to just kind of increase our footprint within these customers, right? The more they buy, the more they like, the more they buy after.

Okay. Super. And understand the confidentiality. Outside of the core sectors that Haivision focuses on, are there others that you're currently looking at getting into?

Sorry, I missed that part. Sorry.

Outside of the core sectors that you're currently focused on, are there other sectors that you're currently looking to get into?

Well, one of -- I think one of our strengths as a company has been that we're very focused like a laser beam on what we're really good at, right? And we have 3 core markets that actually share common technologies, but it's all based what I called our core DNA, which is really the quality, performance, right, low latency and security. So at the moment, we're not really looking to expand to other core markets. It's more if they're adjunct, if they're synergistic, if they play in already those 3 areas, we will expand our footprint. I mean a great example -- 2 great examples is our last 2 acquisitions, right? We were always in defense, government, right, market, and we're always in broadcast, right, what we call media and entertainment. Well, what do we do? We expanded. We got into 5G cellular bonded because we've never played in that space. We were the kings of fixed networks encoding. Now we are actually the only player that has both fixed and wireless. So that expanded our footprint and now we're actually increasing our footprint within that market, still the same segment, but synergistic. Defense, we've always fueled exploitation systems, command centers. Well, you know what? We bought a company. How about we are actually going to deliver that whole visualization experience and make it better from one vendor. So that's again, expanding our footprint. So yes, there are opportunities, but I would say they have to be very, very synergistic in those government, defense, enterprise and what we call live video, right, and media and entertainment.

Super. Thank you. Next question. Between your core market which is $5 billion and total addressable market of $23 billion, are you selling into the global market as well? Does the core value segment grow organically? Or does demand shift from total global TAM into the core market? And how did that play into your sales growth?

Dan, do you want to take that one?

Yes. Well, I'll give it a go. That's a difficult one. If you're trying to bridge the gap between the $5 billion and the $25 billion, you have to understand that the $25 billion number is going to include cloud computing companies that are focused on video and so on and so forth, like an Azure or a AWS or what have you. We're focused on the the video infrastructure market, which is hardware, software and services that enable our customers to be able to distribute video the way they need to distribute it. So I don't know if we're talking about moving from one place to another. We're just trying to find that segment within this $25 billion market that is applicable to what we do and where our DNA is actually the strongest. So I think people play between these spaces. I don't think there's a hard line. I don't think you can look for a bright line between the $5 billion and the $25 billion. We're just trying to give an approximation as to where our focus is within this overall market.

Sorry. And just to add to that, Glen, let's not forget, I mean, that whole $23 billion thing, I mean that's -- we're talking DoD, which we don't get -- we don't deal with, right? I mean that's a lot of that stuff. Think of OTT, will people do monetization, DIARMF type of stuff in video, you don't want to play in that. So the market is huge, but it's also extremely complicated, right? And there's so many bloody players in there, it's crazy. It's so fragmented. There is no one company that can do -- that can say they do everything because it's impossible. So as a result, there is no big large company that can -- everybody says end-to-end, but it's only with what they actually do. So we really focus on heavily contribution. That's our big thing. Contribution, ingest behind a camera sensor up into the network. And we deliver through our type of solutions and then we get it to a mobile device or something like a set-top box or whatever a screen. But that's -- it's just the delivery of our secure and reliable video and we focus on markets where most people don't realize is we specialize. We started this company. Remember when I said originally low bandwidth, people don't realize what that means sometimes. That means our use cases don't have the benefit of unlimited bandwidth, right? So we have to have high-performance systems that can deliver high-quality video over a very limited bandwidth like the military, medical, telemedicine, Well, guess what? Today, with public Internet, everybody knows public Internet is crap, right? And yet everybody is using it, which means you're limited in bandwidth. But everyone is going to use it. They don't want to pay for any MPLS private fiber networks. So guess what? Here we are. The kings of live, low bandwidth video, it's kind of becoming kind of our expertise area. So as a result, we're drawn into some of these applications where, oh, Haivision has the best technology because that's all we've always been doing. That's not the case for a tremendous amount of other vendors who have built systems for unlimited bandwidth, just give me whatever you have, I'll give you good quality. That's not the case anymore.

Super. Thank you. I appreciate the answer from both of you. Next question, and you sort of touched on this point, so I'll just go to this question. Can you elaborate on the security features and protocols embedded within Haivision's platforms to address mission-critical needs across these diverse industries?

Well, I mean, there's a tremendous amount of certifications. I mean we could list them all. We got them on the website, but you look at like from JITC certifications. I mean we spend a lot of money, common criteria for the military, certificate network worthiness, can't even say it. But it's every one of our key clients that if we want to put any of our products onto the government networks, you have to go through a tremendous amount of work and compliancy testing. So we've been doing that since the beginning, 20 years. So with that come very different levels of secure networks. And we have done an incredible job. I mean we are the go-to video people for the U.S. Military. I mean every branch, right? I mean some of the -- even programs we can't even talk about, right? So when you go through all of that -- all of those certifications -- by the way, including our company went through ISO certification as a company, which many of our competitors could never do. So we took that. Even we went into medical, we did the medical certification. Our systems are installed with medical suppliers OEM-ing our products. So we have to pass medical certifications. So we've taken this very, very seriously. It cost a lot of money, but it's made us better. And as a result, they can pluck -- put the Makito on a government DoD network and has passed every bloody certification. So yes, there's a whole list of stuff that we can -- well, I think most of it we have on our website, but we'll be happy to provide all the certifications.

Super. Thank you. Next question. Can you discuss the most -- the 2 most recent acquisitions, the value to your business suite of products and cross-selling opportunities from these businesses, if geographically or by business group? Have these already integrated into the business in terms of the past drag compression on margins and have analysts baked into -- baked this into their -- into your valuation?

That's -- well, a lot of questions. I maybe cover off some of the...

I'm just reading, Mirko.

Okay. So let me just start about the first part of it, and then maybe Dan can kind of finish up on some of the margin stuff. But as far as integration, I mean, it's done, and we've integrated and we've gone through the process. Now one thing that leads us to be successful in acquisitions is the fact that we take time and effort when we do acquisitions, to learn the business, to know the people because honestly, most of the acquisition is people, right? You're acquiring know-how and technology and people. So we've taken that time on both of these acquisitions. The beauty of it is that not only are they already integrated, but they're very different from each other, right? One is on one side of the ocean, the other one is on the other side, right? So the U.S. company, CineMassive that we acquired for the control rooms, predominantly only sold in the U.S., right? Very little, if anything, almost nothing international. And then the French company, Aviwest, was 75% of the business is EMEA, very little in the U.S. and some in Asia Pacific. So the interesting thing is what we are experiencing now is that we have the synergy from Aviwest products to take that into the U.S. where we're very big. And we have the ability to take the CineMassive technology internationally where we're also very large. So we have cross-selling geographics on both acquisitions, and we have the sales infrastructure to actually make that happen. So right now, we're building a lot of our channel strategy for the control rooms internationally because that's a long lead time, long-term sales cycle, but the growth to us is very, very strong in the next 3 to 5 years, both cross-selling both technologies. Again, Dan, you might want to address maybe some of the margin implications.

Right. As we've sort of communicated before, both of these 2 entities historically had operated at margins -- gross margins that were lower than our legacy business. We were generally in the mid-70s, and they were generally in the mid-60s. And so we saw our overall gross margins go down. In fact, a year ago, the quarter -- we were talking about margins around 66% thereabouts. But over the last year, we've been spending a tremendous amount of time integrating these 2 companies. We typically start with the sales because that's where we get the greatest synergies, and that's relatively easy for us to do because our salespeople like to cross-sell products. And then we've moved into engineering. We moved into production. We moved into accounting and so on and so forth. All of that was completed by our third quarter of last year and was demonstrated by our fourth quarter performance of last year. So those things are done, were behind us, and our analysts have recognized that our operational efficiency, our performance in that fourth quarter is likely going to be the basis for our performance in 2024 and beyond.

Okay. Super. And I guess sticking on this topic then and given that you've got a history of M&A, can you just talk about what you tend to look for in an M&A target? And how investors should think about future prospects for continued M&A activity?

Sure. First of all, we're looking for sizable investments. We have done a number of investments that have been about technology, acquiring technology that's certainly true our 2 Spanish entities. But we're looking for something that creates scale, right? We're a fairly big company these days at $140 million. And so we're not looking for another tuck-in, so to speak. We want to look for something that can propel our growth. We're also looking for geographic breadth. We are highly concentrated -- I should say, concentrated in the U.S., and we'd like to expand that breadth to cover Europe and South America and so on and so forth. We're looking for products that are tangential to what we're offering today. We spoke a little bit about expanding our footprint within our existing customers. Both the Aviwest and the MCS CineMassive transactions are a means for us to sell to our existing customers and expanded breadth of product set. And obviously, we're looking for something that's going to be accretive or at least has visibility to accretive earnings in the short run. Recurring revenue is a bonus. We -- everyone wants recurring revenue, and we spend a lot of time focusing on our maintenance and support contracts and other recurring methodologies, recurring offerings, and we'd like to expand that offering as well.

Okay. Super. Thank you, Dan. I've got a bunch of questions here, sort of on competition and the environment. So I'll try to combine them into just a couple of questions. So first off, can you just list some of your bigger competitors that investors may have heard of? And as part of that, how do you stay ahead of companies or like these competitors like AWS, assuming they're a competitor?

Well, competition is a tough one because -- number one, AWS is not a competitor, let's be clear. But we've got 3 key market segments, right? And so what we actually see is we see different competitors in each of those markets. Some of them kind of go in and out because they might have a point product that they can play in this one. But there is no company that has the breadth of technology that we have that are serving in these 3 markets. So it's impossible to give you here's our #1 competitor, because they're not. So let me give you an example. In our -- in the 5G cellular bonded technology, I mean, there's probably 5 players, right? So the guys like LiveU, TVU and Dejero, another Canadian company, we would compete with, right, in the 5G cellular. We don't see those guys anywhere in our enterprise or defense -- for as an example, right? We've got encoder companies, which there's less and less these days, we would see in some areas. We've got VITEC. We've got the Matroxs. We've got the Teradeks. But again, they're very pinpoint products. They don't have the breadth of technology that would serve an end-to-end solution in our spaces. But we would see them here and there. But then again, we've got the whole video wall right, a command center area. And there, you've got another slew of competitors, Barco, right, a multibillion dollar a Belgian company. We compete with them. We would never see them in the other markets. We've got Cyviz out of Norway, a small company, but they compete more in the enterprise, Microsoft kind of rooms, but it's a video wall, right? So it's difficult to pigeonhole us in one competitor or here is our key competitor. And then let's not forget, we've got the typical broadcast companies we -- yes, we compete a little bit with, I mean, the famous Evertz, yes, well, they make encoder, we make an encoder. That's it. We don't compete with them in their infrastructure side. Harmonics, same thing, attempt. So we see all these players, but we're not direct competitors. In fact, some of our -- what people think are competitive, we actually provide ingest and contribution of video into their enterprise systems, could be like Kaltura or Brightcove, right? These guys we used to compete with these people, but we got rid of our house of worship business because that was streaming, but we will partner with them for -- they need encoders. I don't know if that helps, but it's a very difficult discussion...

It helps, and we'll get some follow-up if it doesn't. You touched on this name, and I've got a couple of questions on it, so I'll just bring it up. Can you just elaborate on your current relationship with Evertz?

Dan, do you want to take that?

Yes, sure. For sure. We certainly understand the value that Haivision brings to a company like Evertz. Our vertical focuses, especially in the areas like government, public safety and defense, and defense would be very interesting to a company like Evertz. And Evertz right now is tightly controlled, and we would be -- we would represent an opportunity to diversify their shareholder base and perhaps even improve liquidity for that company. There is a lot of synergies that could be derived between us and a company like Evertz. We certainly understand their interest in acquiring revenues, products and employees, but they wanted to do it on the cheap. I think they may have miscalculated our blocking position that was largely held by insiders and the loyalty of our investor base. Many of our investors that invested in us have been part of our solutions since the early 2000s and are still with us today. So I think as their interest seemed to dissipate, they began to realize that they would not be able to acquire the company on the cheaps, and they were not willing to pay a strategic value for the business. The good news is that we believe they have liquidated their entire ownership. And the overhang that, that ownership brought is no longer keeping the share price down. We've not had any discussions with them since those days back in April, May of last year.

Okay. Super. Very helpful for that. Thanks, Dan. Next question. Thank you for the helpful insights today. What do you attribute the 25% churn and which competitors do you think you're losing these customers to? And I think that relates to your 75%...

Yes. I think people are misunderstanding the business. We -- it is not a churn number that we're trying to give you. What we're saying is that 75% of our revenue this year are from customers who have purchased from us before. That's not about a churn or recurring revenue. It's not about a contract. Remember, we are a provider of infrastructure products, end-to-end solutions that we sell either as a total solution or point solutions, not like the Makitos or our gateways or what have you. We sell products, we sell software licenses and we provide maintenance and support contracts on top of that. So you should not interpret that conversation that 75% number as a churn number, rather it demonstrates that most of our customers who have purchased us in the past will continue to purchase to expand their use cases or expand the size of the use case that we've already sold to them in the past. It's really more of a positive and should be looked at as a negative.

Well, it's more of a predictability, I would say. If you look at it is we know, like I know going into next year, for example, where pretty much 70-plus percent of our business is going to come from already. That's really what that means. This is not a SaaS recurring revenue thing. This is just knowing with all the programmatic deals, all of the projects we work on, some that are multi, multiyear projects. Some of them we already know people are going to need to upgrade. So a lot of that people just keep buying from us and expanding their systems. And then you look at new accounts and new deals. So yes, so we got to look for about 20% to 25% for new opportunities, but that's actually a pretty good position. That's actually a very positive position in our type of business to be and most people only have maintenance support, and that's it, and everything is new. That's not our case.

Super. Thank you. Next question. Could you please elaborate on the potential AI integration opportunities with some practical examples?

Yes. It's -- well, look, we've been doing -- it's funny because when you look at what our Makito encoders have been doing from the beginning, 90% of it is software intelligence, right? It's -- I mean, look, when I started the company, we had 7 engineers total. They are hardware -- FPGA hardware developers. Today, guess what, we still have -- well, actually, with Aviswest, we got about 12, right, hardware engineers. But we've got 100 software embedded systems firmware engineers, right? That's all software, people programming these technology or how things move around the board or chips from chip to chip and FPGA. So we've been incorporating what people can call AI. We're not an AI platform, but we have intelligence built into a lot of our systems that we've been deploying. Recently, we've taken it to the next level where we're actually working with AI companies that have models for some of our markets. And one of the main developments we're working right now is in the ISR defense military side where we're working with our Kraken. For example, our Kraken real-time transcoder that's becoming a standard in the military, where we're actually merging with AI engines in the field that can actually solve multiple things all at once in one box. So there's -- I can't get into too many specifics, but you will see some of the new developments. We're going to try to show a little bit of a hush-hush stuff at NAB, but you'll see more and more AI developments over the next couple of years, predominantly starting in that space. And then that will then feed into some of our broadcast areas as well.

Okay. Thank you. Next question. Are you seeing government agencies that you noted shifting away from on-premises solutions? Or are you seeing more cloud adoption in these customers? How does that impact -- how does that impact your outlook within these customer segments?

Well, it's a good question. I mean we're -- it's funny when you go into the different markets, like we're getting a lot of traction from government, federal government, specifically, not just defense, obviously, a lot of those people, I mean, have their private clouds, right? So that's a whole different FedRAMP, private clouds for government. But there's a lot of demand on prem because people need security, and you're not seeing cloud-only solutions. We see a lot of our solutions and our clients going hybrid models. So we don't see that going out anytime soon. So we're really focused on hybrid, both cloud and prem are a necessity from our security posture, and we're seeing that in enterprises. We're definitely seeing in the government and defense. And I think we're going to be seeing it more and more in the broadcast because they kind of went all cloud, but I think you're going to see some try to go a little bit on-prem as well.

Okay. Thank you. Next question. What was the rationale for exiting the Haivision Video Cloud, the managed services business a while back?

Yes. A good question. Remember, when we talked about our DNA and we looked at what our business was, and we looked at that house of worship, the faith market was a great market for us, by the way. When we started that, we went from 0 to like $8 million in a matter of 4 years. It was a pretty compelling story. But what happened during the last few years of that is that bandwidth became basically free, right? So we were reselling a lot of our stuff, we were reselling Akamai bandwidth, which kind of didn't make sense because we were delivering kind of the video to all of the faith markets and all of a sudden, they're saying, wait a minute, we don't need security. We don't need necessarily the low latency that you guys need for your mission-critical stuff. We can go to Facebook. We can go to Microsoft. We can go to Google. So all of a sudden, we saw a lot of our contracts being cut in half because they took a lot of their bandwidth and they moved it to a free service. So we're battling the bandwidth streaming nonsense, and it was just a race to the bottom, in my opinion, and we said, look, we don't add value here. So we start thinking early on thinking, guys, this doesn't make sense. So you know what we did? We actually did the right thing. We got out of that streaming market. It doesn't require any of our core DNA values, and we actually transitioned all of our 180-plus key clients to one of our partners seamlessly over a 9-month period and exited the market. And then as a result, well, it also one of our lowest gross margin verticals as well. So that was not only a very hands-on market, kind of white glove services market, costly, low margin. And we just couldn't see the future growth there when you're competing with free services. So it was the right thing to do. We did it. And that was kind of really -- actually, I think next quarter is going to be our first quarter where we're finally going to be able to compare revenue without any house of worship the previous year. So it's taken that long to flush through the system.

Thank you, Mirko. A follow-up question here on the comments about the broadcasters and the cloud. Why are they moving back to on-premise -- back to on-prem to some degree?

Sorry, why are people moving back on-prem?

Yes.

Well, I think people need performance and security. And I think that's one of the -- I would say, 2 of the big things that we deal with on a daily level. And they need both, right? So they'll take the flexibility of the cloud, and they'll take the secure performance posture of on-prem. And in what we do is mission-critical, you need both, like you absolutely must have both. And that's the area that we actually are playing in. So we're seeing our clients going to that model.

Super. We've got a bunch of financial questions in the queue. So I'm going to ask one more general business question, and then we're going to get into some of the financial questions that are sitting there. Do you see the nature of new contracts incorporating a higher cloud software mix? And on that point, do you see your cloud business growing? Do you see it expanding your sales pie and thus transforming your margins in the near term?

It's a bunch of questions in there, I think. But I mean, one of the things that we're working on and we've been working on is a cloud-based -- the -- what we call the Hub 360, which we've kind of soft launched already, which is a fully cloud-based service. We'll be launching it at officially, releasing it actually at NAB. So we are definitely investing in that. So we will see more cloud recurring revenue over the next few years. Is it going to be a massive revenue driver for us? I don't think so, but I think what it's going to do is it's going to help us sell more systems, more software and more hardware because it's going to be an ecosystem where you can manage and control all of our devices through this cloud-based ecosystem. So it's going to actually help us sell more revenue, but will have a nice cloud recurring component to it. But I'm not planning huge cloud SaaS recurring revenue. That's the question, where I would say for -- there are opportunities for us to move some of our other software properties over time into the cloud, like the Command 360, but that's still -- that's in the plan, but that's still several years away. We -- predominantly, we're going to see a prem-based kind of a solution for our type of systems.

Super. Thank you, Mirko. All right, Dan, I think these questions are more for you now. So first question is, do you give formal guidance? And if so, can you just restate it?

We do give annual guidance. And so last quarter at the earnings call, we released guidance for 2024. We suggested that revenue is going to be somewhere between $145 million and $150 million for the year. We have also given guidance on our adjusted EBITDA. That's been a big focus of ours as we're trying to derive our operational efficiencies. We believe that our adjusted EBITDA for 2024 will be in the mid-teens, which will be a significant increase from where we ended up 2023. And we've also suggested that there is some likelihood that at least one quarter, we'll have demonstrated adjusted EBITDA margins of 20%, which is our target for the earning potential of this business.

Okay. Why did you see such rapid increase in costs between 2021 and 2022?

Well, we had 2 acquisitions, right? So one acquisition closed in August of 2021. So we only had 4 or 5 months of that entity's expenses built into our system. And then Aviwest closed in the following April of 2022. So in the middle to end of 2022, we actually had 2 entities that we brought on board, and we had not had the chance to derive the operational efficiencies and the synergies that we expected to get out of those 2 businesses. Remember, we've done this before, and the culture of these targeted companies are important to us. And so we wanted to get them under the fold. We want to learn the people. We want to understand exactly where our opportunities work. And then we started taking decisive action in getting the synergies out of those businesses to be able to get us to the operational adjusted EBITDA margins that we wanted to get to.

Okay. I'm going to combine a couple of questions here into sort of one question/comment. So as you scale the business, have you thought about what type of capital you're going to need to get to a reasonable portion of this $5 billion market that you're going after? And realistically, how much of that do you think you could grow?

That's a tough question. We tend to be a fairly efficient cash generator in the scheme of things. If you take a look at what our EBITDA is, our adjusted EBITDA, most of that is derived in cash. We're seeing significant cash generation. On top of that, we have a line of credit with the Bank of Montreal for $35 million that can be expanded to $60 million if we choose to do so or if they choose to allow us to do so. And so we do have access to immediate capital to continue down this path going forward. As a public entity, we're hoping that we can also use our stock as a currency to be able to acquire more entities going forward. Will that get us to $5 billion? I don't think so. It's a very fragmented market. It's got a lot of different players with a lot of different niches in there. But I think we are, over the long term, ripe to grow in excess of what the overall market is growing. And I think the overall market has been growing at around 16%. We've been growing 22% compound annual growth rate from our beginning. And so we'll continue to grow that way. What -- where we get in 5 years, I'm not exactly sure. I don't know what percentage of $5 billion it will be, but it's a buoyant business.

Well, I mean, I'll just add to that, Glen. I mean it's like -- we're not even remotely worried about the size of the market, it's huge. That's a good thing, right? The question is what's our next step. And I think we can very, very quickly get to $250 million to $300 million in size. We can see that. That's not an issue. But we could also do that overnight by a very strategic merger, if we want of equals. So there's a lot of opportunities for us to become a potential $0.5 billion, sorry, company with some strategic maneuvering. And so those are all available. Now having said that, you're not going to do that with a $30 million line, right? So I think there is an opportunity for us to potentially partner with somebody with deeper pockets that want to see somebody aggregate this market or take us to be $1 billion-plus type of company to leverage the right multiples that we deserve, right? And I think we're focusing on delivering the 20% kind of area of EBITDA to get us to that level before we start having a lot of those discussions because I think what we know we've been brutally undervalued. And I know we've been taken down by the markets with all the micro-cap nonsense and technology. But I think we're finally starting to show people that it's never been us. We're profitable. We're generating cash. We're going -- and we're going to deliver what we said we're going to deliver 20% EBITDA. So once we get to that stage, which is this fiscal year, I think the discussions are very different and the opportunities to need more money, I think, will be there. And if the stock goes, I don't see us absolutely not, not raising money, we can or we could bring in partners to help us probably chew off a massive acquisition before we just -- we're really looking at what's digestible, right? So I think we've done that. I think we're open to a lot of interesting opportunities because I think the market is so fragmented. It's so opportunistic for somebody to actually become the catalyst and a platform that the opportunity is there for valuations much higher than we are today.

Okay. Super. I'm going to combine a couple of questions here. So first off, is there any seasonality or lumpiness in your business related to certain business segment? And do you see any, I guess, lumpiness as a result of upcoming Olympics or U.S. elections?

Good question, and I would address that, that you know what, if we were a one market pony and only sold in the broadcast, which we -- then yes. We don't have any of that. Because we have about 1/3, 1/3, 1/3 of our business is enterprise, government and what we call broadcast or media entertainment. Yes, we're going to have a little bump in the Olympics, wow great, but it's not going to affect our numbers in any meaningful way. It's going to be good, right? Where I see a lot of -- for us, it used to be previously was Q4 was almost big because our Q4 is October 31, and that is the U.S. government year-end September 30, right? So our Q4 and the U.S. government business has always been a large piece of our revenue, and Q4 has always traditionally been the biggest quarter, okay? So that used to be like a hockey stick. Over the last, I'd say, 6 years -- 5, 6 years, with all the different administrations, interesting enough, with the continuing resolutions and the shutdown, all that nonsense, the spending habits of the U.S. government has actually changed, which is kind of good, I think, into 2 time slots. One is the traditional September, October time frame. But the other one is also February to kind of April time frame where they want to spend the money before something else might happen. And so we've seen that kind of actually level off our business. And the enterprise market, again, it usually tends to be December, right, because a lot of corporations year end is December, which is our Q1. Our Q1 ends on January 31. So I think we just have a great balance of our year-end and our 3 markets that we don't have these, I'd say, positive or negative swings. And we -- in fact, the last, I don't know, how many quarters, it's been very, very similar revenue going like this, not like that. And which I think has kept -- well, our CFO sleeping at night nicely because we're not -- every quarter is a very profitable quarter.

And then it used to be that our -- we would have the most profitability in our fourth quarter and the least amount of profitability in our first quarter, which made financing the business a little bit more difficult. That has been mitigated over some period of time. We're seeing a lot more constant growth quarter-over-quarter and linear growth quarter from quarter.

Perfect. Thanks, Dan. Just doing a time check. We've got a few questions still in the queue to our audience. If your question has not been answered, and you still would like to get an answer, do me a favor, send an e-mail, [email protected], I'll make sure I get it answered. I'm going to ask you one more question Mirko, and then you could do some closing remarks and we'll end the presentation. So your last question is, how should investors think about your free cash flow allocation? What are you going to prioritize? Is it acquisition? Is it share buybacks? Is it dividends?

I'll pass that to my CFO.

Well, I don't think there's going to be share buybacks, and I don't think it's going to be dividends, that's not the nature of our business, but we are clearly looking for expanding the size of the company over some period of time. From an efficiency standpoint, I'd like to think that all of our adjusted EBITDA becomes cash. It's probably closer to 75% that becomes part of the cash. And right now, we are accumulating cash. As we demonstrate that 20% adjusted EBITDA, we think it's really important to be able to show that, have the investors see what the earnings potential of the business is hopefully gets reflected in the stock price before we start on our next M&A target.

I would say, yes, just to add to that, honestly, I think we prepared for 2024 to be the, I would say, a clean kind of a year, if you want to say that, to demonstrate the true potential of the company post the 2 acquisitions. And I think we're -- even though we've got a lot of potential M&A [indiscernible] I really would not expect -- unless there's a phenomenal opportunity that just pops up to pull off an M&A this fiscal year, right? I mean maybe near the end of our fiscal year, we're going to start getting more heated. But I'd like to at least just demonstrate, hey, this is a true potential. We can easily do 20% EBITDA. We're going to generate a tremendous amount of cash. I mean people can do their math. And I think once we do our Q1 announcement in 2 weeks, people will get a glimpse into the 2024. It will be our Q1. And I think that's kind of the first step to try to get a good gauge on 2024. That will be unobstructed, if you know what I mean, by acquisitions and write-offs and restructuring. So I think we're trying to keep '24 really true potential earnings of the company. And I think that will become very apparent. People, I would hope, will get excited about that, and I believe there's a lot of M&A opportunities down the road.

Super. I really appreciate it. Thank you, Mirko. Thanks to our audience. Mirko or Dan, I'll leave you with some closing remarks, and then we'll end the call.

Super. Thanks, everybody. And you know us, we're very open and available any time. So people want to have one-on-ones or whatever they want to chat. Dan is located in Chicago, I'm in Montreal. We're not there right now, but we travel around. But if you guys -- anybody wants us to talk to us, we're more than happy. Talk to Glen, they'll set it up, and we'll be happy to talk to anybody.

Super. Thank you very much, guys. Thank you to our audience. This concludes this presentation.