Evertz Technologies Limited (OTCPK:EVTZF) Q2 2023 Earnings Conference Call December 6, 2022 5:00 PM ET
Company Participants
Brian Campbell – Executive Vice President-Business Development
Doug Moore – Chief Financial Officer
Conference Call Participants
Thanos Moschopoulos – BMO Capital Markets
Rob Young – Canaccord Genuity
Operator
Good day, ladies and gentlemen, and welcome to the Evertz Q2 of Fiscal 2023 Investor 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 Tuesday, December 06, 2022.
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, Michelle. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our fiscal 2023 second quarter ended October 31, 2022, 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 will begin by providing a few highlights, and then Doug will provide additional detail. First off, sales for the second quarter totaled $113.2 million, an increase of 5.6%, compared to $107.2 million in the second quarter last year. Our base is well diversified with the top 10 customers accounting for approximately 55% of sales during the quarter with no single customer over 15%. In fact, we had 98 customer orders of over $200,000 in the quarter.
Gross margin in the quarter was $67.5 million, or 59.6%, which is within our target range. Investment in research and development during the quarter totaled $29.6 million. Earnings from operations were $28.4 million for the quarter, a 20% increase from the prior year. Net earnings for the second quarter were $20 million while fully diluted earnings per share were $0.26. Evertz’ working capital was $154.1 million with bank indebtedness of $4.2 million as at October 31, 2022.
Operational highlights for the quarter include Evertz’ stellar presence at the International Broadcast Conference where Evertz XPS compact encoding decoding platform with 5G Wireless won the TV Tech Best of Show award along with Evertz reflector cloud video platform – cloud video processing platform. And evertz.io Stream was recognized with a TVB Best of Show award. This revolutionary new cloud-based Software as a Service video platform combines the technological and feature requirements of traditional broadcast channels, conventional OTT channels and free ad supported TV fast channels into a single platform that supports file-based playout, advanced live events, and a wide range of streaming inputs and outputs, including 4K UHD with HDR.
In addition, September 15 was a historic night, which saw the NFL kickoff its first ever broadcast package carried exclusively on a streaming platform with Amazon Prime’s Thursday night football. The broadcast also marked the launch of Prime1 arguably the most state-of-the-art mobile broadcast units built around as SMPTE ST 2022-7 IP routing core. Prime1 is fully redundant, and that redundancy starts with a pair of Evertz 400 gig EXE IP routing cores managed by Evertz MAGNUM control monitoring and analytics software. In addition, all the edge routing is handled by Evertz award-winning NATX fabrics switches.
At the end of November Evertz purchase order backlog was an excessive $149 million and shipments during the month were $39 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog to HD channel proliferation, the emergence of 4K Ultra-HD, increasing live content, increasing global demand for high quality video anywhere, anytime, the ongoing technical transition to IP, IT and cloud-based architectures, and specifically to the growing adoption of Evertz IP based software defined video networking solutions, Evertz IT and cloud solutions, our immersive 4K 8K UHD solutions and our state-of-the-art DreamCatcher IP replay and live production with BRAVO Studio virtual production control suite.
Today, Evertz Board of Directors declared a regular quarterly dividend increased to $0.19 per share, payable on or about December 22.
I will now hand over to Doug Moore, Evertz’s Chief financial officer to cover the results in greater detail.
Doug Moore
Thank you, Brian. Good afternoon everyone. Looking at revenues, sales were $113.2 million in the second quarter of fiscal 2023 compared to $107.2 million in the second quarter of fiscal 2022, an increase of $6 million quarter-over-quarter. For the six months ended October 31, 2022, sales were $214.8 million compared to $204.4 million in the same period last year. That represents an increase of $10.4 million or 5.1%.
As it relates to revenues in specific regions, the U.S.-Canadian region had sales for the quarter of $88.3 million compared to $78.2 million last year. This represents an increase of $10.1 million or 13% quarter-over-quarter. Sales in the same region for U.S.-Canada were $166.5 million for the six months ended October 31, 2022, compared to $142.6 million in the same period last year, an increase of $23.9 million or 17%. The International region had sales for the quarter of $25 million compared to $29 million last year, a decrease of $4 million quarter-over-quarter.
International segment represented 22% of total sales this quarter. For the six months ended October 31, 2022, sales in the International region were $48.3 million compared to $61.7 million in the same period last year, a decrease of $13.4 million. Gross margin for the second quarter was approximately 59.6% compared with 57% in the prior quarter and within our target range. For the six months ended October 31, gross margin was approximately 58.7% and also within our target range.
Turning to selling and admin expenses. S&A was $14.7 million in the second quarter, a decrease of $0.1 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 13% as compared to 13.8% for the same period last year. Selling and admin expenses were $27.7 million for the six months ended October 31, 2022, a decrease of $1 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 12.9% over the period as compared to 14.1% for the same period last year.
Research and development expenses were $29.6 million for the second quarter, which represents a $5.2 million increase from $24.4 million in the second quarter last year. Investment tax credits related to R&D expenses were $3.2 million in the quarter compared to credits of $2.9 million in the second quarter last year. For the six months ending October 31, research and development expenses were $57 million, which represents an increase of $7.9 million over the same period last year. R&D expenses as a percentage of revenue were approximately 26.6% over the period as compared to 24% for the same period last year.
Foreign exchange for the second quarter resulted in a gain of $3 million when compared to a gain also in $2.2 million in the same period last year. The quarterly gain was predominantly resulted the increase in the value of the U.S. dollar against the Canadian dollar between July 31 and October 31 of 2022. Foreign exchange for the six months ended October 31, 2022, were the gain of $4 million, that’s compared to a gain of $3.6 million same period last year.
Turning to a discussion liquidity of the company. Bank indebtedness as of October 31, 2022 was $4.2 million that’s compared to cash of $33.9 million as at April 30, 2022. Working capital was $154.1 million as at October 31, 2022, compared to $158.9 million at the end of April 30 2022.
Looking now specifically at cash flows, the company used cash and operations of $7.7 million, which is net of $33.1 million change in non-cash working capital and current taxes, a change including a quarterly increase of inventory of $7 million and the combined decrease in accounts payable and deferred revenue of $25 million.
If the effects of the change in non-cash working capital and current taxes are excluded from the calculation, the company generated $27.5 million in cash from operations during the quarter. The company used cash of $5.6 million for investing activities in the quarter, which was principally driven by $2.4 million in acquisition of capital assets and $3.2 million in purchase of investments. The company used cash in financing activities of $16 million, which was principally driven by dividends paid to $13.7 million.
Finally, I’ll review our share position as at April 31, 2022. Shares outstanding were approximately $76.2 million, and options outstanding were approximately $4.9 million. Weighted average shares outstanding were $76.2 million and weighted average fully diluted shares outstanding were $76.4 million for the quarter ended October 31.
That brings to a conclusion of the review of financial results and position for the second 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 with the Canadian Securities Commission. Brian, back to you.
Brian Campbell
Thank you, Doug. Michelle, we’re now ready to open the call to questions.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.
Thanos Moschopoulos
Hi, good afternoon. Brian, could you comment on the spending environments? I mean, obviously you had a nice uptake in revenues this quarter versus the prior quarter, backlog and November shipment seemed healthy, but more broadly, I mean, given that there’s a lot of macro uncertainty out there how are your customers responding? Have you seen any change in customer behavior in recent weeks or has it been kind of status quo in that regard?
Brian Campbell
Yes. Overall, our demand environment continues to be very robust. You can see that we have a solid back over – backlog – order backlog of $149 million along with our $39 million shipments in the first month. So we’re cognizant of the macro environment as our customers. However, we’re very well positioned within an extremely robust business model and a large backlog to be able to handle macro uncertainty. With respect to the international, it’s down correlate year-over-year, but strong trailing 12 months and up sequentially. So that’s a good solid indication for us as well too.
Thanos Moschopoulos
But on that point, I mean, clearly international has been significantly lagging to growth you’ve seen in North America. Would that be a function of maybe a different macro dynamic? Is that just lumpiness in the projects that they kind of come? Is it deployment issues still with lingering COVID restrictions? What would you attribute that to?
Brian Campbell
It’s actually all of the above factors that you’ve noted have contributed to. We’ve got a solid international business in certain regions, specifically there is definitely lumpiness to the delivery. We’ve done very well with some large customer orders that you’ve seen, play out Mediaset being one of them over multiple years and that’s, quite a high profile delivery that we’ve had ongoing. And yes, there are continue to be challenges delivering in certain regions, whether it’s due to macro uncertainty or COVID restrictions as well too. So all those things, play into it. However, we have had a good solid trailing 12-months. If you look at an average, it’s can be lumpy quarter-to-quarter, but it’s just under 30% of the revenue in total.
Thanos Moschopoulos
Okay. Has supply chain been getting any better or would you describe the status being consistent as far as component availability relative to last quarter?
Doug Moore
Yes, I mean from a quarter-to-quarter basis, it’s still a represents significant challenge to be honest. But we are seeing some vendors with lead time improvements and, improvements on deliveries, but at the same sense, other ones, it’s we’re seeing no improvements at all. So that’s really has why we’re sitting with $23 million more in raw materials this year ends and even $40 million since the last of October. So we’ve continued to stockpile raw materials as it continues to be a challenge.
Thanos Moschopoulos
And finally the gross margin was obviously very strong. Is that just reflective of the mix during the quarter? Is there anything, you’d call out that the – margin?
Doug Moore
Yes, I mean as there’s always including, anything with the mix. There is some larger projects that are higher margin that were completed during the quarter, you’ll see a corresponding decrease in deferred revenue to kind of align with that. But really its product mix and what was delivered and signed off in the quarter.
Thanos Moschopoulos
Great. I’ll pass the line. Thank you.
Operator
Thank you. [Operator Instructions] The next question comes from Rob Young of Canaccord Genuity. Please go ahead.
Rob Young
Hi, do you remind us what the target range for gross margins is? I think 56% to 60% or you just remind?
Doug Moore
Yes, 56% to 60%. You’re correct.
Rob Young
Okay. And then you just said that large project clearing drove the strength…
Brian Campbell
Yes, I mean, there’s always some fluidity to it’s been on the mix of itself, but if I – there were a couple larger projects that were signed off in the quarter that were higher margin in nature. So that would’ve been a partial reason of the uptick on the higher end of the range.
Rob Young
Right. Is that like a cost matching thing? Or is it like just a mix of the product? Is it more software related? More…
Brian Campbell
Yes, mix. So whether it’s more heavier [ph] in software would be right path to think.
Rob Young
Okay. The – on the macro, are you seeing any delays on signing deals? It sounds like you’ve got large projects that are closing. Are you seeing any delays on large projects or any reticence on the part of your larger customers that are signed larger deals to sort of get those across the line?
Brian Campbell
And that has been ongoing for the last couple of years that there have been large projects delayed. However, we do have very significant projects that continue to move forward with our customers and that’s what we’re focusing on delivering for them to keep their business plans moving ahead at the pace that they need.
Rob Young
Okay. So it’s more consistent with what you’ve seen over the last couple of years as opposed to any big change?
Brian Campbell
Correct.
Rob Young
Okay. Maybe you could talk a little bit about access to customer sites. I know that’s been an ongoing issue. Has that improved material or is there anything you call out there?
Brian Campbell
It remains consistent. So in North America, we’ve had good access; and internationally it still can be a challenge in certain areas. And we’ve been managing through it and – but there has been no significant change since last quarter.
Rob Young
Okay. Notable the cash, you have net debt this quarter, I think you have to go back to 2008 or so to see something like that in your financials and at the same time that you’re raising the dividend. So I’m curious about those two things having at the same time is right change in the way you think about your – the structure of the business? Or are you going to carry a larger amount of debt? Or is the set of that $75 million revolver, I think you have?
Doug Moore
So the $75 million revolver is able to cover the current indebtedness. And there’s definitely like we – like I said, we’ve stockpiled quite a fair amount of inventory, like we’ve increased raw materials by $40 million in the past 12 months. There’s some timing to the – if you look at our payables, deferred revenue, we used to pull those came down quite a bit, so there’s a cash flow impact there. But the expectation is with carrying on business as is, the indebtedness would go away in the next quarter or so.
Rob Young
Okay. So same as it happened in 2008. Okay. And then the $3.2 million in acquisitions, I didn’t have a chance to go through the MD&A. I don’t know if you discussed it in there. Maybe just give some color on what that is?
Doug Moore
It’s the same – the investments are the same nature as in Q1.
Rob Young
So it’s an additional, it’s or so these are marketed securities or?
Doug Moore
Yes.
Rob Young
So is it the same thing or you just building a larger position in the same security?
Doug Moore
Its $3.2 million additional investments.
Rob Young
All right. I think that’s all I’ve got. I’ll pass the line.
Operator
Thank you. There are no further questions at this time. I will now turn the call back to Brian Campbell for closing remarks.
Brian Campbell
Thank you. I’d like to thank the participants for the questions and add that we’re very pleased with the company’s performance during this second quarter of fiscal 2023, which saw strong quarterly sales of a $113.2 million, solid gross margins of 59.6% in the quarter. We are entering into the second half of fiscal 2023 with significant momentum fueled by a combined purchase order backlog plus November shipments totaling in excess of $188 million.
With Evertz significant investments in software defined IP, IT and cloud technologies, the over 500 industry-leading IP, SDVN deployments and the capabilities of our staff. Evertz is poised to build on our leadership position in the broadcast and media technology sector. Thank you everyone and good night.
Operator
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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