Evertz Technologies Limited (OTCPK:EVTZF) Q4 2022 Results Conference Call June 23, 2022 5:00 PM ET
Company Participants
Brian Campbell – EVP, Business and Development
Doug Moore – CFO
Conference Call Participants
Thanos Moschopoulos – BMO
Rob Young – Canaccord
Operator
Good afternoon, ladies and gentlemen, and welcome to the Evertz Q4 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] Today’s call is being recorded, June the 23rd, 2022. And I would now like to turn the call over to Mr. Brian Campbell, Executive Vice President of Business and Development. Please go ahead, sir.
Brian Campbell
Thank you, Michelle. Good afternoon, everyone and welcome to the Evertz Technologies conference call for fourth quarter ended April 30, 2022, with Doug Moore, Evertz’s Chief Financial Officer and myself, Brian Campbell. Please note that our financial press release and MD&A are now available on SEDAR. Doug and I will comment on the financial results and then open the call to your questions.
Turning now to Evertz results, I’ll begin with a few annual and fourth quarter highlights following which Doug will provide more details. First off, I’m pleased to report sales for the fiscal quarter totaled $441 million, driven in part by the adoption of Evertz’s new technologies. Annual net earnings were $72.7 million, resulting in fully diluted earnings per share of $0.94 for fiscal 2022. Investments in research and development totaled $102.4 million for fiscal ‘22, further reinforcing Evertz’s commitment to R&D.
Moving on to the fourth quarter financials. Sales in the quarter were $116.1 million, up 24% year-over-year. Gross margin for the fourth quarter was $68.3 million, or 58.9% of sales. And foreign exchange for the quarter was a gain of $1.1 million. Net earnings for the fourth quarter were $19.2 million with fully diluted earnings per share of $0.25.
At April 30, 2022, Evertz’s working capital was $158.9 million with $33.9 million in cash. The purchase order backlog at the end of May was in excess of $148 million and shipments during the month of May were $26 million. We attribute our solid annual and quarterly performance to the ongoing technical transition in the industry. Channel and video services proliferation and the increasing global demand for high quality video anywhere anytime, and specifically to the growing adoption of Evertz’s IP based software defined video networking solutions, Evertz’s IT and cloud solutions, our immersive 4K, Ultra HD solutions and state of the art DreamCatcher IP replay and BRAVO live production suite.
Our sales base is well diversified with the top 10 customers accounting for approximately 40% of sales during the year with no single customer over 6%. In fact, we had 475 customer orders of over $200,000, a 35% increase from the 353 customer orders of over $200,000 received last year. Today Evertz’s Board of Directors declared a quarterly dividend of $0.18 per share, which will be paid on or about July 7th.
I will now hand over the call to Doug Moore, Evertz’s Chief Financial Officer, to cover our results in greater detail.
Doug Moore
Thank you, Brian. Good afternoon, everyone. Starting with revenues, sales were $116.1 million in the fourth quarter of fiscal 2022 compared to $93.3 million in the fourth quarter of fiscal 2021, which represents an increase of $22.8 million or 24%. Sales for the fiscal year ended April 30, 2022 were $441 million compared to $342.9 million in the same period last year. That represents an increase of approximately $98.1 million or 29%.
Regarding regional revenues, the U.S./Canada region had sales for the fourth quarter of $77.8 million compared to $63.6 million in Q4 last year. That’s an increase of $14.2 million or 22%. International region had sales for the quarter of $38.2 million compared to $29.7 million last year, an increase of $8.5 million or 29%.
Back to fiscal results. Sales in the U.S./Canadian region were $299.4 million for the year ended Apr 30th compared to $222.7 million in the same period last year. This represents an increase of $76.7 million or 34%. Sales in the International region were $141.7 million for the year ended April 30, 2022, compared to $120.2 million in the same period last year, representing an increase of $21.5 million or 18%. Fortunately, International segment represented 33% of total sales in the quarter and 32% of total sales in the year compared to 32% and 35% in the respective periods last year.
Turning to gross margins, the gross margin for the quarter was approximately 58.9%, compared to 59.6% in the fourth quarter of fiscal 2021. Gross margin for the year was 57.9%, compared to 58.2% in fiscal 2021. Both the Q4 and fiscal 2022 gross margin rates were within the Company’s target range.
For operating costs, selling and administrative expenses were $16.1 million for the fourth quarter, an increase of $3.1 million from the same period last year. The increase is inclusive of a $2.1 million increase in travel, promotion and tradeshow costs when compared to Q4 of 2021.
As a percentage of revenue, selling and admin expenses were approximately 13.9%. Selling and administrative expenses were $60.9 million for the year ended April 30, 2022, an increase of $11.5 million from the same period in fiscal 2021. For the year, selling and administrative expenses as a percentage of revenue were approximately 13.8%, compared to 14.4% last year.
Turning to R&D, research and development expenses were $27.3 million for the fourth quarter, which represents a $4.8 million increase from the fourth quarter last year. The increase in R&D expenses is driven by an increase in net salary costs. Unlike Q4 last year and Q4 of 2022, there was no reduction in costs associated with government assistance.
As a percentage of revenue, R&D was approximately 23.5% in the quarter as compared to 24% for the same period last year. For the year, research and development expenses were $102.4 million, which represents an increase of $22.2 million over the same period last year. R&D expenses as a percentage of revenue were approximately 23.2% for the year, compared to 23.4% last year.
Foreign exchange for the fourth quarter resulted in a gain of $1.1 million, compared to a loss of $5.1 million in the same period last year. The gain of $1.1 million was driven by the increase in the value of the U.S. dollar against the Canadian dollar between January 31st and April 30, 2022. The foreign exchange for the year ended April 30, 2022 resulted in a gain of $6.5 million, compared to a loss of $14.9 million in the prior year. The gain was driven by an increase in the value of U.S. dollar compared to Canadian dollar over that period.
Turning to a discussion liquidity of the Company. Cash as at April 30, 2022 was $33.9 million, compared to $108.8 million as at April 30, 2021. Working capital was $158.9 million as at April 30, 2022, compared to $214.5 million at the end of April 30, 2021.
Regarding quarterly cash flows, the Company generated cash from operations of $21.5 million, which includes a $2.4 million net change in non-cash working capital and current taxes. If the effects of the change of non-cash working capital and current taxes are excluded from that calculation, the Company generated $23.9 million cash from operations in the quarter. In the quarter, the Company used $1.3 million from investing activities, which was principally driven by capital asset purchases, and the Company used cash from financing activities of $15 million, which was principally driven by the dividends paid of $13.7 million.
Regarding fiscal cash flows, for the year, the Company generated from operations cash of $68.7 million, which is net of a $24.3 million change in non-cash working capital and current taxes. The change in non-cash working capital was driven by $26 million increase in accounts receivable over the year at $25 million increase in inventory, partially offset by a $16 million increase in deferred revenue, over the year. If the effects of the change of non-cash working capital and current taxes are excluded, the Company generated $93 million cash from operations.
Regarding financing activities, during the year, the Company paid approximately $131.4 million in dividends, which includes a special dividend of $76.3 million.
Finally, looking at our share capital position, as at April 30, 2022, shares outstanding were approximately 76.2 million and options outstanding were approximately 5.1 million. Weighted average shares were 76.3 million and weighted average fully diluted shares outstanding were approximately 76.6 million for the year ended.
That brings to a conclusion of the review of our financial results and position for the fourth quarter and fiscal year end. And finally, I would like to remind you that some of the statements presented here in today are forward-looking, subject to a number of risks and uncertainties, and we refer you to the risk factors described in the annual information form and the official reports filed with the Canadian Securities Commission. Brian, back to yourself.
Brian Campbell
Thank you, Doug. Michelle, we are now ready to open the call to questions.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] Your first question comes from Thanos Moschopoulos of BMO. Please go ahead.
Thanos Moschopoulos
Hi. Good afternoon. Brian, there has clearly been a lot happening from a macro perspective, obviously, given rising rates and inflation and war in Ukraine and all that. So, from your perspective, as you look at your business and as you speak to your customers, how would you say the demand environment has evolved over the last few weeks?
Brian Campbell
Our demand environment still continues to be very robust. We’ve got a very strong backlog heading into fiscal 2023. So, we are quite optimistic about the outlook going forward. We are very cognizant of the macro economics as our customers, but we are well-positioned with an extremely robust business model and a very large backlog for the next while.
Thanos Moschopoulos
So overall, it sounds like you haven’t really seen much change in customer behavior over the past quarter. Is that fair?
Brian Campbell
Yes. That’s correct.
Thanos Moschopoulos
Now, in terms of supply chain, any incremental updates there? Has the situation gotten any better or any worse? Obviously, you had some advantage with your in-house manufacturing, but how would you characterize the supply chain dynamic over the last — versus what it was previously?
Doug Moore
I’ll comment on that. So, yes, sourcing part continues to be a challenge, right? So, a significant challenge. It’s one that we are doing our best to mitigate and can have effects on timing of certain shipments. And there is — quite frankly, I don’t know that it’s going away anytime soon, but we’re doing our best to mitigate, and we just had a pretty strong quarter of $116 million. So, I think that’s — while there is certainly challenges and I can’t say there’s been a significant change in the last two months. It’s been going on for the past many months. But, it doesn’t seem like it’s necessarily improving as of yet. But, I think we are doing our best to mitigate it.
Thanos Moschopoulos
Okay. The gross margin was obviously strong, within your targeted range, but higher than in some of the prior quarters. Anything to call out there?
Doug Moore
It’s really just driven by a product mix. I mean, we are seeing some part cost increases, of course, just given the supply chain issues. But we’ve been able to mitigate those. And so, really it’s just really been driven by the product mix itself.
Thanos Moschopoulos
Okay. And maybe just the last one for me, I mean, probably safe to assume that inventories will remain elevated for the next while, because clearly that’s one of the ways in which you are addressing the supply chain constraints, right? So, we shouldn’t expect the inventory to improve any time for the next while?
Doug Moore
Yes. So, that’s exactly part of our strategy and mitigation as we’ve increased raw materials quite substantially. So, I think, we’re up over $20 million compared to last year. So, I would not expect to decrease if we take an approach where we’re quite frankly stocking more than we did a year ago, because we have to, given the constraints on lead times, if they’ve gone a lot longer by suppliers. So, we are forced to hold more inventory at the time.
Operator
[Operator Instructions] Your next question comes from Rob Young of Canaccord. Please go ahead.
Rob Young
Hi. Good evening. Maybe first question for me around the backlog, I mean down quarter-over-quarter, still up year-over-year. It seems as though it hasn’t continued the recent trend or just been inching up? There’s just something that is different this quarter or is there some kind of a seasonal factor in the quarter-over-quarter dip?
Brian Campbell
So, Rob, we’re coming off of two record high quarterly backlog numbers. That said, we’ve — this is at $148 million, so very significant backlog for us, much of it deliverable within the next 12 months, predominantly. So, we don’t see any real trends there in terms of the order intake, but we have again too had good deliveries in this past quarter, which impacts the backlog, so.
Rob Young
Okay. So, nothing out of the ordinary. And maybe second question, deferred revenue grew in the quarter. Is there anything to call out there and driver behind that?
Doug Moore
So, I mean, the increase in deferred revenue is very much a trend in the past, right? So, there’s a couple of customers that we have taken deposits from that are pretty large, but it’s spread across a little bit broader than that. There’s nothing really industry-specific — sorry, industry is the wrong word, but specific to highlight there, other than it’s somewhat of a trend, given our business model or taking more money up front and paying on milestone payments. And I think it’s not really one item to highlight.
Rob Young
Okay. Nothing to highlight around like recurring revenue growth or anything like that, or anything on subscription or software related?
Doug Moore
No, I don’t think, in this case, it’s not. Quarter-over-quarter, there is no substantial association with that. There is — quite frankly, again, there is a couple of customers that put deposits on with larger projects.
Rob Young
Okay. And then, over the last, I think it’s even two years now, you’ve highlighted some difficulties getting access to sites and getting into even the geographies that you needed to do the work required. And I just wonder if you could just update us on how that’s developing, now there’s — everything’s opening up a little more, is that becoming easier?
Brian Campbell
It’s becoming easier. We still do have those challenges in place. But again, we’ve been working through them for two years, and things are getting better. We do have significant teams deployed in North America and some internationally as well, too. And that’s par for the course. Yes, things are gradually getting better.
Rob Young
Maybe last question for me is just around, are you seeing any pressure on more wage inflation or return to travel? I know the NAB conference is maybe a little bigger than people thought it would be. And so, you’re seeing a return to trade show expenses or anything to call out for the coming year?
Doug Moore
Yes. I think definitely, I think even in Q4, we had a — comparing year-over-year for example, attending NAB is — there’s not a — there’s a cost associated with that. Our staffs are traveling a lot more. There is some — within R&D, especially there’s some salary costs associated with that market adjustments. But yes, for the — associated with that, for example, there is certainly the return to trade shows and attending more trade shows is a cost that I think we hope to continue to attend them. So, I don’t expect them to go away.
Brian Campbell
Yes. We candidly were thrilled to be able to attend and see in person the customers again. Although we have been visiting them on site where possible, but the opening up of trade shows is definitely a positive for us and the industry.
Rob Young
Should we think of maybe expenses going up as a percentage of revenue in 2023, like operating expenses, or do you think you can hold them relatively flat, despite those extra costs?
Doug Moore
So there would be some — they wouldn’t be linear, right? So, if you’re increasing, revenue wouldn’t — proportionately go up. But we would expect that with increased selling activity, some of the costs would indeed go up, increase.
Operator
There are no further questions from the phone lines. I would like to turn the conference back to Mr. Brian Campbell for closing remarks.
Brian Campbell
Thank you, Michelle. I’d like to thank our participants for the questions. And we’re encouraged by the Company’s strong performance in fiscal 2022, achieving sales of $441 million, and in particular, by strength in the important U.S./Canada region where sales rose 34%, delivering pre-tax earnings of $97.9 million, 22.2% of sales, all while investing $102.4 million in R&D to build for future growth.
We optimistically entered the first half of fiscal 2023, fueled by a purchase order backlog in excess of $148 million, plus $26 million shipments in May, totaling in excess of $174 million, up 5.5% year-over-year. And fueled by the financial strength and flexibility of our pristine balance sheet and by the continued adoption and successful large scale deployments of Evertz’s software defined IP, IT and cloud-based video solutions, DreamCatcher, BRAVO IP-based instant replay and live production suite, with our significant investments in software-defined IP, IT and cloud technologies, industry leading deployments and the capabilities of our staff, Evertz’s poised to build upon our leadership position in the broadcast and media technology sector. Thank you and good night.
Operator
Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank you all for participating and ask that you please disconnect your lines.
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