Evertz Technologies Limited

Thank you, Greg. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our third quarter ended January 31, 2019, with Doug Moore, Evertz Director of Finance and myself Brian Campbell.

Please note that our financial press release and MD&A will be available on SEDAR. Doug and I will comment on the financial results and then open the call to your questions.

I'd like to start with a few highlights and then Doug will go into more detail. First off, we're pleased to report sales for the third quarter were up 21% year-over-year to a quarterly record high of $120.9 million.

The increase was driven by a 17% sales growth in the United States, Canada region, and 32% year-over-year growth in international sales. Our sales base is well diversified, with the top 10 customers accounting for approximately 43% of sales during the quarter and with no single customer over 10%.

In fact, we had 87 customer orders of over $200,000. Gross margin was 56% for the quarter.

Net earnings for the third quarter were $21.9 million, and fully diluted earnings per share was $0.28, inclusive of a foreign exchange loss of $400,000. Evertz working capital was $278.6 million with $104.2 million in cash and marketable securities as at January 31st.

The purchase order backlog at the end of February was in excess of $77 million, and shipments during the months were $24 million. We attribute the robust quarterly performance and solid shipments in purchase order backlog to the ongoing technical transition, channel and video services proliferation, and the increasing global demand for high-quality video anywhere, anytime, and specifically to the growing adoption and ongoing success of Evertz IP-based software defined networking solutions, our state-of-the-art DreamCatcher IP replay and production suite, and Evertz's IT and virtualized cloud solutions.

Today, Evertz Board of Directors declared a dividend of $0.18 per share payable on March 29, 2019. I will now hand over to Doug Moore, Evertz Director of Finance, to cover our results in great detail.

Thank you, Brian, and good afternoon everyone. Sales were under $120.9 million in the third quarter of fiscal 2019 compared to $99.6 million in the third quarter of fiscal 2018, represents an increase of $21.3 million.

Sales for the nine months ended January 31, 2019 were $336.6 million compared to $309.8 million in the same period last year, this represents an increase of approximately 9%. The U.S./Canada region had sales for the quarter of $81.5 million, an increase of $11.8 million or 17% compared to $69.7 million in the same period last year.

Sales in the U.S./Canada region were $234.2 million for the nine months ended January 31, 2019, compared to $200.6 million in the same period last year. This represents an increase of $33.6 million or 17%.

International region had sales for the quarter of $39.5 million compared to $29.8 million last year. This represented an increase of $9.7 million.

International segment represented 33% of total sales this quarter as compared to 30% in the same period last year. Sales in international regional were $102.1 million for the nine months ended January 31, 2019, compared to $109.2 million in the same period last year.

This represents a decrease of $7.1 million. Gross margins for the third quarter was approximately 56% as compared to 56.2% for the prior year third quarter.

Gross margin for the nine months ended January 31, 2019, was approximately 56.7% and within the Company's historical range. Now, selling and administrative expenses were $17.6 million for the third quarter, that's an increase of $1.8 million for the same period last year.

Selling and admin expenses as a percentage of revenue were approximately 14.5% as compared to 15.9% for the same period last year. Selling and admin expenses were $49.9 million for the nine months ended January 31, 2019, it's an increase of $2.2 million from the same period last year.

For the first three quarters, selling and administrative expenses as a percentage of revenue were approximately 14.8% as compared to 15.4% in the same period last year. Research and development expenses were $21.6 million for the third quarter, that represents a $1.3 million increase from the third quarter last year, or for the year, research and development expenses were $64.0 million, which represents an increase of $4.2 million over the same period last year.

Foreign exchange for the third quarter, there was a loss of $400,000 compared to a loss of $3.8 million in the same period last year. Foreign exchange for the nine months ended January 31st, was a gain of $1.5 million as compared to a loss of $9.2 million in the same period last year.

Now, turning to a discussion of liquidity quality of the Company, cash and marketable securities as of January 31, 2019, was $104.2 million as compared to $98.2 million as at April 30, 2018. Working capital was $278.6 million as at January 31, 2019 compared to $264.5 million at the end of April 30, 2018.

Now, looking specifically at the cash flows for the quarter ended January 31, 2019, the Company generated cash from operations of $48.1 million, which includes a $25.2 million change in noncash working capital and current taxes. If the effects of the change of noncash working capital and current taxes are excluded, the Company generated $22.9 million cash from operations for the quarter.

The Company also used $9.5 million from investing activities, which was principally driven by the business acquisition of Quintech for $6.6 million, as well as capital assets of $2.9 million. Company used cash from financing activities of $13.9 million, which was principally driven by the dividends paid of $13.8 million.

Finally, I will review our sales share capital position as at January 31, 2019. Shares outstanding were approximately $76.5 million and options outstanding were approximately $2.7 million.

The weighted average shares outstanding was $76.5 million, while the weighted average of fully diluted shares outstanding was also $76.5 million. This brings to 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 with the Canadian Securities Commission. Brian, back to you.

Thank you, Doug. Greg, we're now ready to open the call to questions.

Brian, you obviously had a nice uptake in your international business, which was encouraging given that business has been slower over the last few quarters. It didn't seem like you had any inordinately large deals this quarter; so that uptake in international, is that being - is that sort of reflective of broad based strength or if it's the timing of a relatively small number of projects?

So, it would be a combination of projects and uptick. We actually had solid international quarter in Q2.

So we're just shy of $35 million in revenue, so we're up significantly year-over-year but also sequentially, internationally. So, good, solid work by our channel partner and sales teams.

Can you recall, I mean is that primarily Europe or would you call a specific region as far as the uptick?

Yes, I can't provide greater resolution as to whether it's predominantly in Europe, Asia, Latin America, it's fairly broad based.

Fair enough. And I guess just maybe the broader environment, I guess if we focus on North America, you've had several quarters now of strength there, maybe any change over the past quarter or similar trends as you were seeing three or six months ago in North America?

In terms of revenues, we had very strong delivery and execution in the U.S./Canada region. And so once again, we're kind of like on back-to-back record quarters.

So, our Q2 was a record high quarterly revenue and Q3 now you should see with the $120 million of revenue sequential, very strong performances and so we had very good broad based success as the - Evertz Technology Solutions.

Last quarter you called it the dynamic of how the growth is being driven by both modern IP solutions as well as some of your baseband solutions, is that the same dynamic, are both of those areas showing strength?

So we do continue to see the based bands pulled along with the IP and virtualized solutions. But again, the strength and growth of Evertz business has been predominantly driven by the new technologies.

Any updates that you may be able to provide us with respect to your investments in EVS?

So there, what you have is what's been publicly disclosed through the transparency notifications of Evertz ownership position. And there are - no, I can't provide any additional color other than what's been publicly disclosed through those transparency notification.

One last one from me, any commentary in terms of cloud and how that's developing over the past quarter. So you clearly have had some high profile wins you announced such as with Discovery, anything more recent in terms of what you're seeing in the pipeline over the last few months that you can provide some color on as far as customer adoption?

In terms of our press releases, we have not, we don't have any new press releases that I can currently speak to, but as you the 120 million record revenue in the prior quarter does speak to the strength of our cloud ritualized solutions and our software defined networking IP-based solutions. So there we had very good strong uptake not all of the customers have chosen to press release those and we will work cooperatively with our customers to try provide timely disclosure.

I guess what’s going with that is whether - sort of the recurring revenue kind of service based model whether that's trying to become like a part of that business or whether it's relatively smaller minority of customers opting for that route?

So the recurring revenue is a separate question and pretty distinct, but that is and increasing trend but it's not reported as yet separately.

Brian given your comments it seems that the velocity of shipment you saw this quarter should be sustainability, is that fair to say and should we expect that much in Q4?

Steven, could you repeat the question for me please.

Yes. So your shipment velocity you saw in December and January and November and based on your comments seems like it should be sustainable, is that fair to say?

So we had two record quarters back to back and again with even we do tend to have a lumpy business it's one of the things that we caution people or I should say - just people look at trailing 12 months basis for the business. So we had very good quarterly revenue and we continue to expect solid results but I would caution you against extrapolating the trajectory which you are talking about.

Is there any particular season RAP that work in Q4 Brian we should be aware of?

Not necessarily seasonality in Q4 we have just - we have good solid backlog at first month shipments leading into Q4 and so we’re anticipating solid results.

The gross margins, I guess the bottom of your range although in range could you talk about the gross margins this quarter despite the high level of revenue at the bottom end of that range and would that have driven by regional mix or product mix can you give us some color there?

So Rob, Doug will fill that question for you.

Sure. When it comes to gross margin there is a lot of moving parts in the gross margin including as you noted the geographic mix and product mix within sales.

While there is as you noticed some - there is going to be movements within each quarter but as you noticed within our range and there is not really one item that we have to provide additional color on.

So you feel confident with that range right at the bottom end there?

Yes.

And maybe one piece, you haven’t updated us on for a while would be the Pro AV component of the business. Maybe you could talk about the trends there and how that business is developing for you?

The Pro AV business is been developing very well. As you recall we had the NIAP certification that came through roughly a year ago that's open the door to new customers.

That security qualification that we received definitely helps drive business and facilitates business. However, we don't necessarily have press releases associated with all the customer wins in that sector.

So the AV business has been doing very well for us.

Is that a business that eventually you may breakout as a separate line item? Is it different enough from the broader business and what would the target size maybe as a percentage of the total revenue the business be, before you break it out?

Yes, Pro AV business is a very large addressable market. Many of the underlying technologies are the software defined networking, the compression, solutions and replay and production suite.

So the technologies underlying AV product solutions are fundamentally the same with a different adaptations to suit the customer needs. So we do not break it out currently.

Maybe last question from me, just very simple terms the backlog dropped at 26 million quarter-to-quarter and presumably a lot of that was in this quarter you just reported because the strong results there. So the drop is there any seasonality in the way that you're able to kind bring larger deals is there something ahead of anything that we should be thinking about or some seasonality here and the year that would be an impact and then I think that’s all the question I have?

Yes, that’s a good question. The shipments and backlog are up 5% year-over-year, they are sequentially down and again too I would note that our prior quarter was a record high backlog in shipments number.

So as I said we do have lumpy deliveries and some large project base so we’re - it's rather than seasonality, its more project delivery based. So again - moving forward that's all momentum heading into Q4 with the backlog and shipments that are up 5% year-over-year.

Thank you, Greg. And I'd like to thank our participants for the questions and to add that we're very pleased with the Company's strong performance during the third quarter which saw sales rise 21% year-over-year to a record quarterly high of 120.9 million including a 17% increase in U.S.

Canada region and a 32% international increase, solid gross margins of 56% in the quarter yielding net earnings of $0.28 per share. We’re entering the fourth quarter of fiscal 2019 with significant momentum fueled by a growing adoption and successful large-scale deployments of Evertz IP-based software defined networking and virtualized cloud solutions deployed by some of the largest broadcast, new media, service provider and enterprise companies in the industry.

By the continuing success of DreamCatcher, our state-of-the-art IP-based replay production suite and combined purchase order backlog plus February shipments in excess of $101 million, a 5% increase year-over-year. So there is significant investment in software defined IT and virtualized cloud technologies industry leading deployments numbering well over 404 IP solutions and the capabilities of our staff.

Evertz remain focused upon building upon our position as one of the largest pure players and leading innovators in the video technology sector. Thank you everyone and good night.