Evertz Technologies Limited (OTCPK:EVTZF) Q1 2025 Earnings Conference Call September 11, 2024 5:00 PM ET
Company Participants
Brian Campbell – EVP of Business Development
Doug Moore – CFO
Conference Call Participants
Thanos Moschopoulos – BMO Capital Markets
Robert Young – Canaccord Genuity
Operator
Good afternoon, ladies and gentlemen, and welcome to Evertz First Quarter Investor Call. [Operator Instructions] I would now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Please go ahead.
Brian Campbell
Thank you, Konstantin. Good afternoon, everyone, and welcome to Evertz Technologies’ conference call for our fiscal 2025 first quarter ended July 31, 2024, with Doug Moore, Evertz’ Chief Financial Officer; and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on SEDAR and on the company’s investor website. 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 provide additional details. First off, sales for the first quarter totaled $111.6 million, including $55.9 million in software and services revenue. Our sales base is well diversified, with the top 10 customers accounting for approximately 50% of sales during the quarter, with one customer accounting for approximately 14% of sales, and a second customer at 11%. In fact, we had 94 customer orders of over $200,000.
Gross margin in the quarter was $45.4 million or 59.4%, up from 57.3% in the prior year. Net earnings were $9.7 million resulting in fully diluted earnings per share of $0.13 for the quarter. Investment in research and development totaled $37.3 million. Year-over-year, our cash position strengthened, closing Q1 2025 with $91 million in the quarter.
Evertz working capital was $197.7 million as at July 31, 2024, down $3.7 million from July 2023. At the end of August, Evertz purchase order backlog was more than $302 million in shipments during the month of August were $33 million. The solid financial performance, including the robust purchase order backlog in shipments, continues to be driven by channel and video services proliferation, the ongoing technical transition in the industry, increasing global demand for high-quality video anywhere, anytime, and specifically by the adoption of Everetz solutions such as Everett’s IP-based software-defined video networking solutions, Evertz IT and cloud native solutions, our immersive 4K ultra-high definition solutions, our state-of-the-art DreamCatcher IP replay and live production with BRAVO Studio featuring the iconic Studer audio.
Today, Evertz Board of Directors declared a quarterly dividend of $0.195 per share payable on or about September 17th. I will now hand over to Doug Moore, Evertz Chief Financial Officer, to cover the results in greater detail.
Doug Moore
Okay. Thanks, Brian. Good afternoon. Starting with revenues. Sales were $111.6 million in the first quarter of fiscal 2025 compared to $125.8 million in the first quarter of fiscal 2024. Hardware revenue declined quarter-over-quarter from $81.4 million to $55.7 million, while software services revenue increased 26% to $55.9 million.
Revenue from the software services portion represented approximately half the total revenue in the quarter. Looking at regional revenue, quarterly revenues in the U.S Canadian region were $73.9 million compared to $87 million in the prior year. While quarterly revenues in the international region were $37.7 million compared to $38.8 million in the prior year.
International segments represented approximately 34% of total sales in the quarter compared to 31% in the prior year. Gross margin for the quarter was 59.4% as compared to 57.3% in the prior year and within our target range.
Looking at selling administrative expenses, S&A was $17.6 million in the first quarter. That’s an increase of $1.2 million from the same period last year and represented approximately 15.8% of revenues as compared to 13% last year. Research and development expenses were $37.3 million for the first quarter, which represents a $5.4 million increase over the same period last year at $600,000 sequentially — approximately $600,000.
Year-over-year, the increase includes $3.2 million in increased salary costs within North America and $800,000 increased salary costs internationally. ITCs for the quarter were $3.8 million compared to credits of $3.4 million in the prior year, first quarter of last year. Foreign exchange for the first quarter was again less than $1000 compared to foreign exchange loss of $2.1 million in the first quarter of last year.
Looking at liquidity of the company. Cash as of July 31, 2024 was $91 million. That’s compared to cash of $86.4 million as of April 30, 2024. And working capital was $197.7 million as of July 31, 2024, compared to $201.4 million at the end of April 30, 2024.
Looking at cash flows for the quarter ended July 31. The company generated cash from operations of $22.5 million, and that is net of $8.9 million change in non-working capital and current taxes. Though the effects of the change in non-working capital and current taxes are excluded, the company generated $13.6 million in cash from operations during the quarter.
The company used cash of $2.3 million for investing activities, which was principally driven by the acquisition of capital assets. And the company used cash in financing activities of $16.8 million, which was principally driven by dividends paid of $14.9 million.
Finally, looking at our share capital position as of July 31, 2024. Shares outstanding were approximately 76.1 million and options and share based restricted share units outstanding were approximately 5.6 million. Weighted average shares outstanding were 76.1 million and the weighted average fully diluted shares was 77.3 million at the period end of July 31.
That concludes the review of financial results and position for the first 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 in the official reports filed within the Canadian Securities Commission.
Brian, back to you.
Brian Campbell
Thank you, Doug. Konstantin, we are now ready to open the call to questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Please go ahead.
Thanos Moschopoulos
Hi, good afternoon. Brian, I guess we recognize that you’ve got some quarterly volatility in your business just given the project nature of some of the work. But that said, the second consecutive quarter of revenues being down year-over-year, and I think looking at the shipments number, that might be the case for the upcoming quarter as well. So can you clarify for us whether you’re seeing some industry dynamics here? Is there a macro issue? Is there customer caution with respect to spending? Or from your perspective, would you have more to do with just the timing of projects?
Brian Campbell
From our perspective, it does have more to do with project timing. As you’ll note, we still have a very robust order backlog and a solid shipments number, so totaling $335 million, which is up roughly $8 million from the prior quarter. So we’re sequentially up. There is a bit of timing in this quarter, but that said, we’re looking forward to good things in our fiscal 2025.
Thanos Moschopoulos
Okay. From an OpEx perspective, anything to call out this quarter or anything we should note as we think about the upcoming quarter?
Brian Campbell
Sure. So, I guess that’s one thing. So, if you’re doing — if you’re looking at it sequentially, of course, we didn’t have NAB, right? So, NAB, traveling and entertainment costs went down in the quarter. We did do some trade shows, like some road shows, but we do have IBC in Q2. That’s obviously not in Q1. From an R&D perspective, there’s a couple things I’ll call out. One, in the prior quarter, I mentioned that we did some temporary elevated resource costs we incurred in Q4. There’s another $400,000 that’s in Q1. Additionally, we do take on quite a few co-ops actually in the summer from May through to the end of August. I mean, that plus, there’s actually 2 or 3 more business days in the quarter, this quarter versus last, that equates to almost a $1 million. So there’s a couple of different items to touch on that are a bit abnormal.
Thanos Moschopoulos
Okay. Software and services revenue, I appreciate the fact that we’re getting the quarterly disclosure now. One question on that is, does there tend to be a lot of seasonality in that revenue line?
Doug Moore
Not necessarily.
Brian Campbell
So there can be a bit of seasonality depending on when license renewals happen. So if there’s a fair amount that might go in December and January, but I don’t know that’s an extremely significant thing to call out. I mean, there is some milestones that still occur. So in this quarter, in particular, there was, I know, a project that had, so commissioning completed that had $6 million of released deferred revenue in one project alone. So there could still be some milestones that have, that aren’t seasonal, but are just a bit fluid, depending on timing. And you will see in the MD&A, 2 years of quarterly segmentation of hardware and services. So that will give you an idea of the volatility, but on a trailing 12-month basis, it’s averaged roughly 40%.
Thanos Moschopoulos
Okay. That’s very helpful. I look forward to seeing that. Maybe finally, with respect to your markets outside of broadcast, and anything to comment there with respect to the growth and opportunities in pipeline, you’re saying?
Doug Moore
So, we continue to do very well in adjacent markets. However, the press releases are somewhat sparse there, I shall note, but that continues to be a significant part of our revenue base and backlog. [Indiscernible].
Unidentified Analyst
The question comes from the line of Robert Young from Canaccord. Please go ahead.
Robert Young
Hi, good evening. I’ll continue. I want to ask some questions on the software and services. We did what, about 50% this quarter? You said it was 40% on average. And so, is that weakness in hardware or is it strength in software? Software is up 26%. So I’m assuming it’s strength in software. Will you give us some color on what’s going on there by such a high percentage?
Doug Moore
Rob, it’s a bit of both. So we have lighter hardware revenues in this quarter, but there is a nice upward trend with the software and services. However, it is volatile quarter-to-quarter, as Doug noted. Sometimes it has to do with the timing of milestones and licensing contracts.
Robert Young
Right. I guess part of it is that $6 million deferred. That’s what drives the volatility there. I guess without that, it would still be about 40%.
Doug Moore
Sure. That’s just an example of – that did happen in the quarter, but as an example. I mean, if you look at the MD&A, I think it highlights it well. There is some weakness in the quarter on the hardware front. So I think that is a fair observation that would, obviously, push the percentage up.
Robert Young
Is it one strong program, or is it just a general broad set of programs that are doing well in software.
Brian Campbell
That’s been a broad trend.
Robert Young
Okay. Then, two point.
Brian Campbell
So, Rob, they put in perspective the 40% and the [indiscernible] that’s over $200 million revenue in recurring software and services, another software. So that’s clearly broad based.
Robert Young
Yes, okay. So but this quarter specifically is it driven by one region or one customer or one program. I was just trying to get a sense of — [indiscernible].
Doug Moore
Sure. If I just give you figures even up to the past three quarters. So, software service revenue in Q1 was $55.9 million, in Q4 it was $47.7 million, and in Q3 it was $52.4 million. So, there’s — and then Q2 last year was $44.3 million, so there’s not a huge swing from Q4 to Q1.
Doug Moore
Okay. If that helps.
Robert Young
Yes, and then the deferred, the $6 million, I’m assuming that’s pure profit. So if I were to exclude that, that probably would have driven your gross margins down towards maybe below the bottom end of your range. So, curious about the margin structures, particularly given there’s a lot of software in the quarter,. Is that deferred? First question was deferred, does that appear margin? And then what would the margin look like without it?
Doug Moore
So sure. So let me start with saying that deferred revenue does not inherently have 100% margin.
Robert Young
And without that $6 million, you would still have been in your gross margin range?
Doug Moore
To be blunt, I have not done that calculation.
Robert Young
Okay. I see.
Brian Campbell
The revenue milestones are part of our ongoing business, that’s the [indiscernible] financial model, delivering on software and services milestones and then recognizing the revenue. So, again, it’s helpful to observe the business and analyze it on a trailing 12-month basis to figure out some of the fluctuations.
Robert Young
Yes, that’s fair. And then, as you noted, the cash balance is growing, and I’m curious what your plans are. I believe you raised the dividend this quarter, but what do you expect to do with that growing cash balance?
Doug Moore
So, we’re very cognizant, and the Board is aware of the growing cash balance, and balance and we continue to have tremendous confidence in Evertz robust business model and ability to generate cash as we have over the years. That is a Board decision to determine what is done with the cash. We regularly attribute by quarterly dividends. We also have a normal course issuer bid in place, and we’re in tune with acquisition opportunities as well.
Robert Young
Okay, last question for me would be on the backlog. Sometimes you give us the percentage that’s going to convert in the next, so a year or the next 12 months?
Doug Moore
It’s approximately 45%. That’s more than a year.
Robert Young
Okay, so 55% within the next 12 months.
Doug Moore
Right.
Brian Campbell
Okay, thank you. I’ll pass the line.
Operator
There are no further questions at this time. I would like to turn the call over back to Brian Campbell for closing remarks. Sir, please go ahead.
Brian Campbell
I’d like to thank the questions — the participants for their questions and to add that we are pleased with the company’s performance during the quarter, which saw sales of $111.6 million, including $55.9 million in software and services revenue, strong gross margins of 59.4% for the year, up 57.3% in the prior year, along with continued investment in R&D totaling $37 million.
We close the first quarter of Evertz fiscal 2025 with significant momentum fueled by a combined purchase order backlog plus August shipments totaling in excess of $335 million, by the growing adoption and successful large scale deployments of Evertz IP-based software-defined video networking and cloud-native solutions by some of the largest broadcast, new media service provider, and enterprises in the industry, and by the continuing success of Evertz DreamCatcher BRAVO, our state-of-the-art IP-based replay and production suite.
With Evertz’s significant investments in software-defined IT and cloud-native technologies, the over 600 industry-leading IP SDN [ph] 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. We look forward to having many of you join us on Wednesday, the 2nd of October at our Annual General Meeting. Good night.
Operator
Ladies and gentlemen, this concludes today’s conference. Thank you very much for your participation. You may now disconnect.
Read the full article here