Evertz Technologies Limited

Thank you Dory. Good afternoon everyone and welcome to the Evertz Technologies conference call for our fourth quarter ended April 30, 2019, with Anthony Gridley, Evertz's Chief Financial Officer and myself, Brian Campbell.

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

I would like to begin with a few annual and fourth quarter highlights, following which Anthony will provide more detail. First off, I am very pleased to report sales for the fiscal year totaled a record high, $443.6 million, driven by the adoption of Evertz's new technologies and an 18% increase in the U.S./Canada region.

Annual net earnings were $78.5 million resulting in fully diluted earnings per share of a $1.02. Liquidity and capital resources remain robust with cash and marketable securities of $108.6 million as at April 30 after the return of $55.1 million in annual dividends to shareholders.

Investment in research and development totaled $85.8 million for fiscal 2019 further reinforcing Evertz's commitment to R&D. Moving on to the fourth quarter.

Operational highlights include Evertz's entry into the cloud-based Software-as-a-Service market with the official launch of EVERTZ.iO and Evertz's strong presence at the NAB Show in Las Vegas with Evertz receiving TV Technology Best of Show Award for evEDGE, our virtualized IP media services over agile hardware platforms and Evertz's MediaFlow solution, which enables a single integrated IP workflow for all incoming transport streams in the cloud, on premises and in hybrid. Turning to the financials.

Sales in the fourth quarter were $107.2 million. Gross margin in the quarter was $62.7 million or 58.5% of sales.

And foreign exchange for the fourth quarter was a gain of $1.9 million. Net earnings for the quarter were $18.6 million with fully diluted earnings per share of $0.24.

At April 30, 2019, Evertz's working capital was $282.5 million. Purchase order backlog was in excess of $90 million at the end of May and shipments during the month were $33 million.

We attribute our strong annual and solid quarterly performance to the ongoing technical transition in the industry, channel and video services proliferation, the increasing global demand for high-quality video anywhere, anytime and specifically to the growing adoption of Evertz IP-based software defined video networking solutions, our state-of-the-art DreamCatcher IP replay and production suite and Evertz's IP and virtualized cloud solutions. Our sales base is well diversified with top 10 customers accounting for approximately 40% of sales during the year with no single customer over 13%.

In fact, we had 425 customer orders of over $200,000. Today, the Board has declared a dividend of $0.18 per share.

I will now hand the call over to Anthony Gridley, Evertz's Chief Financial Officer, to cover our results in greater detail.

Thank you Brian. Good afternoon everyone.

Sales were $107.2 million in the fourth quarter of fiscal 2019 compared to $93 million in the fourth quarter of fiscal 2018, an increase of $14.2 million or 15%. Sales were $443.6 million for the 12 months ended April 30, 2019 compared to $402.8 million in the same period last year, representing an increase of $40.8 million or 10%.

U.S./Canada region had sales for the fourth quarter of $63.6 million compared to $52.1 million last year, an increase of 22%. Sales in the U.S./Canada region were $297.8 million for the 12 months ended April 30 219 compared to $252.8 million in the same period last year.

This represents an increase of $45 million or 18%. International region had sales for the quarter of $43.7 million compared to $40.9 million last year, an increase of 7%.

The international segment represents 41% of total sales this quarter as compared to 44% in the same period last year. Sales in international region were $145.8 million for the 12 months ended April 30, 2019 compared to $150.1 million in the same period last year.

Gross margin for the fourth quarter was approximately 58.5% and gross margin for the 12 months ended April 30, 2019, was 57.1%, both within the company's targeted range. Fourth quarter gross margin included between $3 million and $4 million of revenue from Q2 and Q3 that was picked up as a result of the detailed contract reviews that supported recognizing revenue over time as opposed to a point in time.

Selling and admin expenses were $18 million for the fourth quarter, an increase of $0.2 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 16.8% compared to 19.2% in the same period last year.

Selling and admin expenses were $67.8 million for the 12 months ended April 30, 2019, an increase of $2.3 million from the same period last year. For the year, selling and admin expenses as a percentage of revenue were approximately 15.3% compared to 16.3% last year.

R&D expenses were $21.8 million for the fourth quarter which represents a $0.8 million increase from the fourth quarter last year. For the year, R&D expenses were $85.8 million, which represents an increase of $5 million over the same period last year.

R&D expenses were up for the year predominantly as a result of increases in R&D salary cost and the inclusion $1 million in R&D costs associated with the recently acquired Quintech. Foreign exchange for the fourth quarter was a gain of $1.9 million compared to a gain of $4.5 million in the same period last year.

Foreign exchange for the 12 months ended April 30, 2019 was a gain of $3.4 million compared to a loss of $4.7 million in the prior year. Turning to a discussion of liquidity.

The company's cash and marketable securities as of April 30, 2019, was $108.6 million compared to $94.2 million at April 30, 2018. Working capital was $282.5 million as at April 30, 2019 compared to $264.5 million at the end of April 30, 2018.

For the year, the company generated cash from operations of $88.5 million. For the year, the company paid approximately $55 million in dividends and acquired $11.6 million in capital assets, completed total business acquisitions of $9.2 million.

Looking now specifically at the fourth quarter ending April 30, 2019. For the quarter, the company generated cash from operations of $23.7 million.

For the quarter, the company paid approximately $13.8 million in dividends and acquired $3.4 million in capital assets. Finally, I will review our share capital position at April 30, 2019.

Shares outstanding were approximately 76.5 million and options outstanding were approximately 1.4 million. Weighted average shares outstanding were 76.5 million.

Weighted average fully diluted shares were also 76.5 million. This brings to conclusion the review of our financial results and position for the fourth quarter.

Finally, I would like to remind you that some of the statements presented today are forward-looking and subject to a number of risks and uncertainties and I refer you to the risk factors described in the annual information form and official reports filed with the Canadian Securities Commission. Brian, back to you.

Thank you Anthony. Dory, we are now ready to open the call to questions.

Hi. Good afternoon.

Anthony, you made a comment about $3 million to $4 million of gross margin that was shifted. I think I missed that.

Could you repeat that, please?

I will explain it. So as we went through our year-end procedures and through our audit, as we looked at how we applied IFRS 15 and we got into the contract level, we discovered that one of our contracts that we were completing should have been recognized as revenue under IFRS 15 as a percentage of revenue or over time revenue stream as opposed to a point in time.

So we had taken the more conservative approach over the years of waiting till the final piece of the contract is completed and under IFRS 15, that was not correct. So we ended up recognizing over time and that $3 million to $4 million would have been revenue that we would have picked up in Q2 and Q3 that ended up in Q4.

So from the year, everything is correct, but some of it should have been picked up in Q1.

Okay. So that's the revenue line and then I guess some associated margin pickup as well?

Correct. It's all a revenue adjustment.

So it has no prior [indiscernible] element.

Okay. That makes sense.

And I think for the year, Brian, you said no customer over 13%. What the largest customer for Q4 would have been?

It is over 10%. In Q4, 14.6%.

Okay. Thanks.

And then Brian, it might be early days, but can you talk about what you are seeing as far as EVERTZ.iO and your pipeline of discussions with customers on that front?

It is very early days. So as you know, we just launched EVERTZ.iO officially in advance of NAB in April.

So we are getting a very good reception to this Software-as-a-Service platform. But at this stage, I can't elaborate on the customer adoption as yet.

Fair enough. With respect to large purchase order that you recently announced, would that likely be shipping in the current quarter?

We haven't announced a delivery schedule, but it is a product that is released and you can anticipate seeing in the upcoming quarters.

Okay. And then finally more broadly in terms of the environment.

It clearly seems like we have been seen, your North American business has been consistently strong. It seems like international is trying to grow a little bit better.

Coming out of NAB, can you comment more broadly in terms of what you are seeing in terms of spending environment? Any changes in that respect over last quarter or two?

And what are you hearing from your customers?

So Thanos, we continue to see very good demand for Evertz's software defined video networking solutions and virtualized solutions has very significant interest, as you can tell from our backlog and shipments number and then of course the $13 million that you mentioned that we received subsequent to May. So that's in addition to the backlog numbers that we announced.

So we have seen very strong customer demand, which is in line with what we have seen in the prior year. So we have been experiencing very good customer uptake in demand for our IP-based software defined video networking solutions, our DreamCatcher IP-based replay and production and also our cloud-based solutions.

All right. I will pass the line.

Thank you.

Hi. Thank you.

Brian and Anthony, this is your third quarter of revenue upside. What has changed in the last 12 months?

Is it conversion rates? Is it shorter duration projects?

Any color there, Brian?

If you could repeat the question for me, that would be appreciated as we have had a very significant and solid revenue over last 12 months and we are our 58th quarter of consecutive profitability. So I didn't quite follow your question.

If you could repeat that, please?

Yes. So what I was asking was, what has changed in the last 12 months?

Is it higher conversion rates in your pipeline? Or is it maybe the projects are shorter duration so you are shipping more?

So we are continuing to ship very good solid quarters. I think the question you are asking is, is backlog being converted more rapidly to revenue?

Is it correct?

Yes.

And there, we do have a very significant or a significant component in the backlog that our revenue that will be delivered in subsequent quarters, again to our mediator, so the cloud-based solutions, the file-based solutions, those do take longer to deliver. There is more upfront work associated with those products.

So seeing a slightly more rapid conversion of backlog to revenue and that's going to go up and down depending on the product mix that we are delivering in the quarter. And so I wouldn't say that there is a trend to faster conversion of backlog.

We are delivering large projects. Our file-based solutions and virtualized solutions are absolutely a significant component of that and they do have somewhat longer conversion.

Okay. That's helpful.

And Anthony, just on the IFRS 15, the $3 million to $4 million, that was the revenue impact or the impact on the gross margin?

Both. So it was revenue but there is no cost of sales affiliated to it.

There is no cost of sales. Okay.

Thank you. Go ahead, Anthony.

It was $3 million to $4 million that we would have recognized in Q4 where the cost would have been in Q2 and Q3.

Q2 and Q3, perfect. Got it.

And then just on the Lawo litigation, is there any update there? And is it a significant expense in terms of legal costs?

Well, during Q4, it was fair, it was not a material expense but it tickles up and down as we fight different battles, but certainly not material.

Okay. Thank you.

Thank you Dory. I would like to thank our participants for the questions.

We are pleased with the company's strong performance in fiscal 2019 with record sales of $436 million, driven by 18% increase in sales in U.S./Canada region, delivering pretax earnings of 23.7% of sales and net earnings of $78.5 million, up 47% year-over-year, all while investing $85.8 million in R&D to sustain future growth. We are enthused by the significant momentum that we carry into fiscal 2020 fueled by record high annual revenues, which are up 10% year-over-year, a combined purchase order backlog plus May shipments totaling $123 million, up 22% sequentially from the third quarter and further enhanced by the $13 million purchase order received and press released on June 10 and by the growing adoption and successful large-scale deployments of Evertz's IP-based software defined video networking and virtualized cloud-based solutions by some of the largest broadcast, new media and service provider and enterprise companies in the industry and also by the continuing success of DreamCatcher, our state-of-the-art IP-based replay and production suite.

With our significant investments in software defined IP, IT and virtualized cloud technologies, industry-leading deployments and the capabilities of our staff, Evertz is poised to build upon our position as one of the largest pure players and leading innovators in the broadcast and media technology sector. Thank you and good night, all.