Start Time: 17:00 January 1, 0000 5:24 PM ET
Evertz Technologies Limited (OTCPK:EVTZF)
Q3 2023 Earnings Conference Call
March 02, 2023, 17:00 PM ET
Doug Moore – CFO
Brian Campbell – EVP, Business Development
Conference Call Participants
Thanos Moschopoulos – BMO Capital Markets
Rob Young – Canaccord Genuity
Good afternoon, ladies and gentlemen, and welcome to the Evertz Q3 Investor Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Thursday, March 02, 2023.
I would now like to turn the conference over to Brian Campbell, Executive Vice President, Business Development. Please go ahead, Mr. Campbell.
Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2023 third quarter ended January 31, 2023, with Doug Moore, Evertz’s Chief Financial Officer; and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on SEDAR and on the company’s Investor Web site. 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 by providing a few highlights and then Doug will go into greater detail. First off, sales for the third quarter totaled $110.9 million. Our sales base is well diversified, the top 10 customers accounting for approximately 32% of sales during the quarter with no single customer over 7%. In fact, we had 113 customer orders of over $200,000 during the quarter.
Gross margin in the quarter was 65.6 million or 59.2% for the quarter, which is within our target range. Net earnings before foreign exchange for the third quarter were 19.8 million and fully diluted earnings per share was $0.16. Evertz working capital was 157.5 million, with 5.3 million in bank indebtedness, as at January 31, 2023.
The purchase order backlog at the end of February was in excess of $140 million and shipments during the month of February were $31 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog to the ongoing technical transition in the industry, channel and video services proliferation, increasing global demand for high quality video anywhere anytime, and specifically to the growing adoption of Evertz IP-based software-defined video networking solutions, Evertz IT and cloud solutions, our immersive 4K Ultra HD solutions and our state-of-the-art DreamCatcher IP replay and BRAVO live production suite.
Today, Evertz’s Board of Directors declared a dividend of $0.19 per share, payable on or about March 23.
I will now hand over to Doug Moore, Evertz’s Chief Financial Officer to cover our results in greater detail.
Thank you, Brian, and good afternoon, everyone. Starting at revenues, sales were $110.9 million for the third quarter of fiscal 2023. That’s a decrease of 9.7 million or 8% compared to 120.6 million in third quarter of fiscal 2022. For the nine months ended January 31, 2023, sales were 325.7 million compared to 324.9 million in the same period last year. That represents an increase of approximately 0.8 million.
Looking at specific regions, the U.S./Canadian region had sales for the quarter of 71.2 million, a decrease of 7.7 million or 10% compared to 78.9 million in the same period last year. Sales in the U.S./Canadian region were 238.2 million for the nine months period ending January 31, 2023 compared to 221.5 million in the same period last year, which represents an increase of 16.7 million or 8%.
The international region had sales for the quarter of $39.6 million compared to $41.7 million last year, a decrease of 2.1 million or 5%. International segment represented 36% of total sales this quarter compared to 35% in the same period last year. Sales in the international region were 87.5 million for nine months period ended January 31, 2023 compared to 103.4 million in the same period last year. That represents a decrease of 15.9 million or 15%.
Gross margin for the third quarter was approximately 59.2% compared with 57.4% in the third quarter ended January 31 last year and was within our target range. Gross margin for the nine months ending January 31 was approximately 58.8% and also within the company’s target range.
For operational expenses, selling and admin expenses were $16.3 million for the third quarter. That’s an increase of 0.3 million from the same period last year. Selling and administrative expenses as a percentage of revenue were approximately 14.7% as compared to 13.3% for the same period last year.
For the nine months period ending January 31, selling and admin expenses were $44 million. That’s a decrease of 0.7 million compared to 44.7 million from the same period last year. For the nine-month period, selling and admin expenses as a percentage of revenue were approximately 13.5% as compared to 13.8% for the same period last year.
Turning to R&D. Research and development expenses were 30.2 million for the third quarter, which represents a $4.2 million increase from third quarter last year. R&D expenses as a percentage of revenues were approximately 27.3% over the period as compared to 21.5% for the same period last year. For the year, research and development expenses were 87.3 million, which represents an increase of 12.1 million over the same period last year.
R&D expenses as a percentage of revenue were approximately 26.8% over the period compared to 23.1% in the same period last year. The increase in the nine-month period includes 11.6 million increase in net salary expenses, that’s driven by increased headcount and salary increases to current staff as well.
Foreign exchange for the third quarter was a loss of 2.3 million. That’s compared to a gain of 1.7 million in the same period last year. The loss was driven by a decrease in the value of the U.S. dollar compared to the Canadian dollar between October 31 and January 31. Foreign exchange for the nine-month ended January 31 was a gain of 1.7 million. That’s compared to a gain of 5.4 million in the same period last year, and the nine-month gain was driven by an increase in the value of the U.S. dollar since April 30, 2022.
Turning to a discussion of liquidity of the company, bank indebtedness as at January 31, 2023 was $5.3 million as compared to cash of 33.9 million as of April 30, 2022. Working capital was 157.5 million as at January 31, 2023 as compared to 158.9 million at the end of April 30, 2022.
Now looking specifically at cash flows for the quarter ended January 31, 2023. The company generated cash from operations of 16.2 million, which is net of a 3.4 million change in non-cash working capital and current taxes. If the effects of the change in non-cash working capital and current taxes are excluded, the company generated 19.6 million cash from operations for the quarter.
The company used cash from investing activities of 1.6 million for the third quarter ended January 31, 2023, which was principally driven by the acquisition of capital assets in the quarter. The company used cash from financing activities of 16.3 million, which was principally driven by dividends paid of 14.5 million.
Finally, I’ll review our share capital position as at January 31, 2023. Shares outstanding were approximately 76.2 million and options outstanding and share-based RSUs were approximately 4.9 million and 1.1 million, respectively. Lastly, the weighted average shares outstanding were 76.2 million and the weighted average of fully diluted shares were 76.3 million.
That brings to a conclusion the review of our financial results and position for the third quarter. Finally, I would like to remind you that some of the statements presented today are forward-looking, subject to a number of risks and uncertainties. And we refer you to the risk factors described in the Annual Information Form and the official reports filed within the Canadian Securities Commission.
Brian, back to yourself.
Thank you, Doug. JP, we’re ready to open the call to questions.
Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions]. Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Your line is now open.
Hi. Good afternoon. Brian, can you provide some color in terms of how the business environment has evolved over the last few weeks, both from a demand perspective but also from a supply perspective? As I know, you’ve had to contend with supply constraints over the last while.
Thanks, Thanos. I’ll touch on the demand side and then allow Doug to handle the supply constraints. So yes, overall, our demand environment continues to be robust. You can see that we have a solid order backlog of 140 million, along with our 131 million of shipments in the first month. So we are cognizant of the macro environment. However, we’re very well positioned with a very extremely robust business model and a large backlog to handle macro uncertainty. With respect to the various segments, if you look at revenues over the trailing 12 months, we’re pretty much in line with Canada, North America and international. So at that point, I’ll turn it over to Doug to handle the constraint side.
Yes. So on the supply side we are seeing incremental improvements, definitely on a macro level. We still do run into some issues with specific parts. So therefore, while we’re definitely — things have improved over the past six months, there’s just still challenges we’re working through. So it’s not a perfect world by any means. We are holding a lot of inventory, as you know. So that helps. But there’s still occasions where specific parts causes some problems. But yes, so it’s definitely getting better. But it’s not perfect is the short summary of it.
Should that perhaps provide some opportunity for releasing some inventory and working capital over the next year?
Yes, I think — so I actually expect our inventory to — it’s definitely peaking a bit, but I expect it to go up a little bit more in the next quarter, but not to the same level obviously as the past nine months. Now lead times from vendors are still quite significant. So the need to hold a lot of inventory still is maintained. In the long run, of course you would have an ability to decrease that raw material holdings. But in the near term, I think quite frankly, we need to hold that amount just to deal with vendor lead times.
If I look at your R&D spend on a year-to-date basis, the percentage of revenue I think is about the highest it’s ever been in your history as a public company. And I understand that there’s maybe some cyclical things going on, like you have to wage pressures on one end, maybe revenue being a bit depressed because of ongoing supply constraints. But is there some other dynamic we should be aware of, have you had to step up your level of investments due to some technological change happening in your industry, if you could probably any color on that or context, that would be great?
So from a straight OpEx perspective on the R&D front, so if you look at year-over-year, there’s two things. So we have increased headcount. There’s also been inflationary salary cost increases even to current staff, so just being able to maintain those that we have. There’s both pieces to that, as it directly relates to specific projects I can’t specifically comment on. But yes, so I don’t know if that provides guidance you’re looking for.
Brian, do you have any comments in terms of just more strategically the level of R&D investment? Obviously, Evertz has certainly differentiated itself through heavy R&D investments and that’s been a key to your success. But again, just thinking about the historical context, we’re now at a record multiyear high, any additional context in terms of that dynamic?
We definitely recognize that it is at a high. And we do hire the best people that we can for our long-term needs and want to retain the folks that we have in-house as well too. So that speaks to some of the inflationary aspects of it. But we will be cognizant of this level and going forward with our revenue to see what we can do.
Okay. And maybe just to close it off before I pass the line, you obviously made investments in High Vision recently. Any additional coverage you can provide on that?
With respect to our investments in High Vision, the early warning report is quite accurate with respect to our intentions. The shares were acquired for investment purposes. Evertz doesn’t tend to review its investment in High Vision on a continuing basis depending on various factors, including High Vision’s financial position, the price levels of the common shares, conditions in the overall securities market, general, economic and industry conditions and other factors. Evertz may in the future take actions with respect to its investments in High Vision as the executive team and Board deems appropriate.
All right, fair enough. I’ll pass the line. Thanks.
Your next question comes from the line of Robert Young from Canaccord. Your line is now open.
Hi. Maybe I’ll just push you a little harder on that last question. Can you give us an indication of whether that’s just a passive investment if it purely is an investment as the description you just gave suggests that, or is there some sort of corporate action that you’re considering?
Rob, I’m going to reiterate that the shares required for investment purposes and Evertz intends to review its position on a continuing basis.
How about we talk a little bit about the demand environment, just specifically around some of the higher margin pieces of the business like IP and cloud. This is the second quarter where you’ve had very strong gross margins, so maybe two parts there. Just talk about the demand in the higher margin pieces, and then maybe you could give a broader explanation on what’s driving the gross margin strength at the high end of your range?
So definitely, we do continue to see demand for very innovative products on both cloud and on-premise equipment. A couple of examples we gave last quarter was the Prime One Truck, arguably the largest state-of-the-art IP-based mobile production facility, and Evertz is an integral part of it. You’ve probably seen more press release from Game Creek regarding its presence at Super Bowl, a very successful presence. And we are an integral part of many of the large network and new media companies infrastructures.
Yes. Just on the margin, just additional color. I know in the second quarter — I have it. I know there’s two or three larger higher margin projects that were signed off in Q2. There’s really not that in the third quarter, it’s a little broader. So it’s really a broader product mix this quarter in third that pushed up the margin. So it’s in the target obviously and to the higher end, which is good but there’s not really a specific project or two to point to.
Is there a dynamic around pricing, like there’s inflation hitting everybody? Are you raising your prices? Are you able to pass on some of your — the higher cost you described earlier in the call, are you gone to pass those through on to your customers and perhaps that’s what’s been –?
So there’s certainly — where we’re able to, we pass on obviously higher costs with price increases. There’s nothing specific in the quarter that was driving that, like we didn’t highlight. But twofold, the costs are also going up in that sense. So we passed on what we can. But there’s not really a direct — I can’t point to that and say that’s the reason for the higher margin.
The backlog has declined. I think last quarter you said there was a large program which ended, maybe that’s part of the reason when it was closed ending, if I remember correctly. If you could — is there a reason for the backlog decline quarter-over-quarter or is that just seasonality? Is there anything you call out there?
I wouldn’t call anything. As you know, we can have lumpy quarters and that also occurs with respect to orders as well too. If we look at the backlog, a little over 12% of it will be delivered outside of the 12-month period. So the bulk of it is to be delivered in the upcoming quarters.
Great. That was going to be my next question. Maybe on the dividend, you raised it last quarter. It’s same this quarter. Is there any change in the dividend policy to communicate? Is it an ad hoc process every quarter with the Board, or is there any process you can share around how you look at that?
It’s reviewed at the Board level every quarter. That said, we have been at a steady level previously for a number of quarters. So I would not go any further other than looking at our historical dividend performance. We’ve been fairly consistent quarter-to-quarter.
Maybe last question just on the environment, you’ve talked a little bit really over the last two or three years around access to sites. I think the U.S., it’s sort of normalized. But the international markets have been harder to get on site, get the work done? Is there any change there or is that still a good way to describe it?
That’s a good way to describe it. So not all of it is — the overall macro political environment rather than COVID, so we’ve worked through much of that but there are areas where we have more difficulty getting into somewhere we’re not going at all as well too. And that does impact the revenue and distribution or segmentation geographically. But we’re continuing to win the long-term business with our key customers over and over again where they care about innovative, high quality products, and that’s where we shine well.
Okay. Thank you. I think I’ll end it there.
There are no further questions at this time. I will now turn the call over to Mr. Campbell for closing remarks.
I’d like to thank the participants for their questions and add that we are very pleased with the company’s solid performance during the third quarter, which saw a strong backlog of $140 million plus shipments in the month of February of $31 million, totaling $171 million, which is in line with the historical trends over the last couple of years. So we are very well positioned with this momentum for the fourth quarter and the coming year. So thank you, and good night.
Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.