Evertz Technologies Limited (OTCPK:EVTZF) Q1 2023 Earnings Conference Call September 13, 2022 5:00 PM ET
Company Participants
Brian Campbell – Executive Vice President-Business and Development
Doug Moore – Chief Financial Officer
Conference Call Participants
Thanos Moschopoulos – BMO Capital Markets
Rob Young – Canaccord Genuity
Operator
Good afternoon ladies and gentlemen. And welcome to the Evertz Q1 Investor Call. At this time, all participant lines are in a listen only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Also note that the call is being recorded on Tuesday, September 13, 2022.
I would now like to turn the call over to Brian Campbell, Executive Vice President of Business and Development. Please go ahead, sir.
Brian Campbell
Thank you, Silvy. Good afternoon, everyone and welcome to the Evertz Technologies Limited conference call for fiscal 2023 first quarter ended July 31, 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’s results, I would like to begin by providing a few highlights and then Doug will go into greater detail. First off, I’m pleased to report sales for the first quarter, totaled $101.5 million up 5% year-over-year with strong performance in the U.S. Canada region where sales increased 21% year-over-year to $78.2 million driven to a large extent by the adoption of Evertz’s new technologies and products.
Our sales is well diversified with the top 10 customers accounting for approximately 45% of sales during the quarter with no single customer over 8%. In fact, we had 103 customer orders of over $200,000.
Gross margin in the quarter was $58.5 million or 57.6%, which is within our target 56% to 60% range. Investments in research and development during the quarter totaled $28.3 million. Net earnings for the first quarter were $13.9 million, while fully diluted earnings per share were $0.18 in the quarter.
Evertz’s working capital was $159.3 million with $25.6 million in cash as at July 31, 2022. Purchase order backlog was $140 million at the end of August, and shipments during the month were $33 million. We attribute the solid quarterly 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 are immersive for an 8K Ultra HD solutions and our state-of-the-art DreamCatcher IP replay and BRAVO studio live production suite. Today, Evertz’s Board of Directors has declared a quarterly dividend of $0.18 per share payable on/or about September 29, 2022.
I’ll now hand the call over to Doug Moore, Evertz’ Chief Financial Officer, to cover the results in greater detail.
Doug Moore
Thank you, Brian, and good afternoon, everyone. Sales were $101.5 million for the first quarter of fiscal 2022 compared to $97.2 million in the first quarter of fiscal 2022, an increase of $4.3 million or 5%.
The U.S./Canada region had sales for the quarter of $78.2 million, compared to $64.4 million last year, an increase of 21%. International region sales for the quarter of $23.3 million, compared to $32.8 million last year.
Gross margin for the first quarter was approximately 57.6%, compared with 58.3% in the prior year and within our target range. Selling and administrative expenses were $12.9 million for the first quarter, compared to $14 million in the same period last year. Selling and administrative expenses as a percentage of revenue 12.7%, compared to 14.4% in the same period last year.
Research and development expenses were $28.3 million for the first quarter this year as compared to $24.7 million in the same period last year. $2.8 million of the increase is attributable to increased salary costs from increased head count as well as wage increases.
Research and development expenses as a percentage of revenue was 27.9%, compared to 25.4% in the same period last year. Foreign exchange gain was $1 million, compared to a foreign exchange gain in the prior year of $1.4 million. The gain in the current period was predominantly a result of the increase in the value of the U.S. dollar as at July 31, 2022, when compared to April 30, 2022, as well as the translation of U.S. assets into Canadian dollars at favorable exchange rates during the quarter.
Turning to a discussion liquidity of the company. Cash as at July 31, 2022 was $25.6 million as compared to $33.9 million as at April 30, 2022. Working capital was $159.3 million as at July 31, 2022, compared to $158.9 million at the end of April 2022.
The company generated cash from operations of $19.3 million, which is gross of a $1.6 million change in non-cash working capital and current taxes in the first quarter. If the effects for the change in non-cash working capital and taxes were excluded from the calculation, the company generated $17.7 million in cash from operations.
During the quarter, the company acquired marketable securities of $11 million and $1.9 million of capital assets. The company used cash from financing activities $15.1 million, which predominantly consisted of the payment of dividends of $13.7 million. Shares outstanding were approximately 76.2 million and options outstanding were approximately 5 million as at July 31, 2022.
Weighted average shares outstanding were 76.2 million and weighted average fully diluted shares outstanding were 76.4 million for the quarter ended. This brings to a conclusion, the review of our 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 our annual information form and the official reports filed for Canadian Securities Commission. Brian, back to yourself.
Brian Campbell
Thank you, Doug. Silvy, we’re now ready to open the call to questions from the analyst.
Question-and-Answer Session
Operator
Thank you, sir. [Operator Instructions] And your first question will be from Thanos Moschopoulos at BMO Capital Markets. Please go ahead.
Thanos Moschopoulos
Hi. Good afternoon. Brian, can you give us some more color in terms of just the current marketing conditions you’re seeing? I mean, obviously there’s some macro things going on, some global uncertainty. I know you’ve had to deal with supply constraints recent quarters as well. So for example, when we see the softer revenue internationally this quarter, is that just lumpiness is indicative of a softer environments. Just any color you can provide in terms of current business conditions would be helpful.
Brian Campbell
Thanks, Thanos. Overall the demand environment continues to be very robust. We’ve got strong backlog heading into the first quarter fiscal 2023, and we’re quite optimistic about the outlook going forward. We are cognizant of the macroeconomic environment as our customers. However, we’re well positioned with an extremely robust business model and a large backlog. So with respect to the international, it is down this quarter on a trailing 12 month basis. It’s in the range that it’s been over the last couple of years so there is definitely some of the macro environment impacting international sales, but we continue to have good strong international sales and its part of the backlog as well, too.
Thanos Moschopoulos
Okay. As far as supply chain, any color in terms of whether the situation’s getting better or worse or stable?
Doug Moore
Well, I can address that. So yes, sorry, you mean from a component perspective or from a sales perspective?
Thanos Moschopoulos
Yes, from a component perspective. Yes.
Doug Moore
So that still represents a significant challenge, quite frankly. So anecdotally, sometimes they feel like it’s getting better, but it’s still – it’s an ongoing challenge where certain vendors are difficult to source components from.
So, we’re doing our best to mitigate by sourcing parts – additional parts to deal with long-lead times. I mean, even this quarter alone, we raised our raw materials by another $15 million as we continue to stockpile inventory. But while it’s a challenge, we were able to deliver a $100 million of revenue in the quarter and $33 million in August. So, we are doing our best to mitigate it, but it’s definitely a significant ongoing challenge that has not gone away.
Thanos Moschopoulos
Okay. I know you don’t disclose your cloud or recurring revenue separately, but just in any commentary there, in terms of how that’s progressing? I think in recent years we’ve seen more of a customer appetite towards cloud it’s – is any of that perhaps accelerating keeping the current backdrop or what’s the dynamic you’re seeing on that front?
Doug Moore
So, we continue to see very strong cloud deployments, not all of them hitting the press. But we’re very actively engaged on that front. That said we are delivering traditional on-premise solutions to numerous customers as well, too. So there’s a very good solid mix of our new technologies, both cloud and on-premise based.
Thanos Moschopoulos
Okay. Right. I’ll pass the line. Thank you.
Operator
Thank you. [Operator Instructions] And your next question will be from Rob Young at Canaccord Genuity. Please go ahead.
Rob Young
Hi, good evening. Maybe just continue with last question there on the cloud. We just, I mean, understand you can’t name a lot of customers are describe some unannounced activities, but maybe if you could just in a generic way give maybe a cross section of where the most demand you’re seeing in your cloud related product? That could be helpful.
Brian Campbell
And do you mean with respect to geographic or…
Rob Young
Whatever you’d like to share?
Brian Campbell
So as you can tell, the North American market has been the strongest for us, right? It’s near 70% on the trailing 12-month basis. So that is the strongest geographic market for us. With respect to cloud, we’ve had successes with Evertz IO as well to our new SaaS-based platform. So the mediator award-winning product family plus the new Evertz IO are both doing very well. So that’s a bit of an update on the cloud dynamics.
Rob Young
All right. Maybe if you could talk a little bit about the backlog. In the past, you’ve given us a sense of how much of the current backlog might be deliverable in the next 12 months. Maybe you just talk about the relative duration of what’s in there?
Brian Campbell
That’s a good question, Rob. So of the $141 million, over 90% of it is deliverable in the next 12 months. So it’s a very robust backlog number.
Rob Young
Okay. And the 33 million for an August period, just looking back, is it a pretty high level for the summer, especially given the weakness in international. And so just you talk about what’s going on there? That’d be helpful.
Brian Campbell
We have our teams out helping our customers to deploy solutions. We have a tremendous amount of customer demand right now for Evertz next-generation solutions. And we are out helping to deploy those with customers to meet their timelines for whether its sporting events or other milestones that they want to hit. So that does represent a very good solid shipment number for August.
Rob Young
I mean, is there somewhat of it is, could we think of that as an inflection or strengthening the demand? It just seems like a very strong shipment number for an August period?
Doug Moore
Yes. It is a very good shipment number. We’re proud of it. We’re proud of the teams who have helped deploy during the month and sales have done an outstanding job of continuing to provide the orders with key customers. So I wouldn’t necessarily say it’s an inflection, it is a continuation of very robust demand from our key customers.
Rob Young
Okay. And then maybe last question from me would just be around the ability to access customer sites. I know that’s been an ongoing theme. Is that something that is continuing to improve or is it improved a lot this quarter? Maybe if you could just talk about that and then I’ll pass line?
Doug Moore
Yes. So it is getting better, candidly it hasn’t improved a lot this quarter over the prior quarters. North America, we have good access. We still have challenges, internationally. We are getting on site and deploying as well too, but again that’s against the macro backdrop internationally that we’re all well aware of. So it’s modestly better than it was in the prior quarter but again, to still a challenging environment to get folks, onsite in some locations.
Rob Young
Got it. Thanks. I’ll pass the line.
Operator
Thank you. And at this time, Mr. Campbell, we have no further questions. Please proceed with your closing.
Brian Campbell
Thank you, Silvy. I’d like to thank the participants for the questions and to add that we’re very pleased with company’s performance during the first quarter of fiscal 2023, which saw strong quarterly sales of $101.5 million with strength in the U.S., Canada region, where sales rose 21% from the prior year solid gross margins of 57.6%, which together with Evertz disciplined expense management yielded earnings of $0.18 per share all while investing over $28 million in R&D to sustain future growth.
We’re entering the second quarter of fiscal 2023 with significant momentum fueled by $33 million of shipments in August, plus $141 million purchase order backlog totaling in excess of $174 million and fueled by the continued adoption in successful large scale deployments of Evertz software defined IP, IT, and cloud-based video networking solutions by some of the largest broadcast, new media service provider and enterprise companies in the industry. With the Evertz significant investments in software defined IP, IT and cloud technologies. The over 500 industry leading SDVN deployments and the capabilities of our staff, Evertz has poised to build upon our leadership position in the broadcast in media technology sector. Thank you.
We look forward to having many of you join us on the 5th of October at our Annual General Meeting. Please note any changes to the meeting will be announced by way of press release. Good night.
Operator
Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines. Have a good evening.
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