Evertz Technologies Limited

Thank you, Cody. Good afternoon everyone and welcome to the Evertz Technologies conference call for our fiscal 2020 first quarter ended July 31, 2019, with Anthony Gridley, Evertz's Chief Financial Officer and myself, Brian Campbell.

Please note that our financial press release and MD&A will be 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 by providing a few highlights and then Anthony will go into greater detail. First off, I am very pleased to report sales for the first quarter fiscal 2020 of $103.4 million, an increase – modest increase compared to the first quarter of last year.

Our sales base is well diversified with the top ten customers accounting for approximately 43% of sales during the quarter and with no single customer over 6%. In fact, we had 142 customer orders of over $200,000.

Gross margin in the quarter was $59.2 million or 57.2%. Investment in research and development totaled $22.7 million, reinforcing Evertz commitment to R&D.

Net earnings for the first quarter were $13.2 million and fully diluted earnings per share were $0.17 in the quarter. Evertz working capital as approximately $280.1 million with 100.4 million in cash and marketable securities as at July 31, 2019.

The purchase order backlog was an excessive $103 million at the end of August and shipments during the month were $50 million totaling a record high $153 million combined backlog and shipments. We attribute this solid quarterly performance to the ongoing technical transition in the industry, channel NVO services proliferation, increasing global demand for high quality video, anywhere any time, and specifically to the growing adoption of Evertz IT based software defined video networking solutions, Evertz’ IT and virtualized cloud solutions, our immersive 4K Ultra HD solutions and our state-of-the-art DreamCatcher IP replay and production suite.

Today, Evertz Board of Directors has declared a quarterly dividend of $0.18 per share payable on or about September 20, 2019. Furthermore, Evertz Board also declared a special dividend of $0.90 per share, also payable on September 20.

Special dividend reflects both the strong long-term operating performance of the company and its solid balance sheet thereby enabling a distribution of cash over and above what is considered necessary to meet known commitments and maintain adequate reserves. I’ll now hand over to Anthony Gridley, Evertz’ Chief Financial Officer to cover our results in greater detail.

Thank you, Brian. Good afternoon.

Sales were a $103.4 million in the first quarter of fiscal 2020, compared to 103.1 million the first quarter of fiscal 2019, an increase of 0.3 million. To worth noting, we also had approximately 10 million in orders that shipped in August that would have been expected to ship in July normally.

This contributes to the $50 million shipment number in August, which is an all-time reportable high shipment level. US/Canada region had sales for the quarter of quarter of 74 million, compared to 75.2 million last year.

The International region had sales for the quarter of 29.4 million, compared to 27.9 million last year, an increase of 5%. Gross margin for the first quarter was approximately 57.2%, compared to 57% in the prior year.

Gross margin was within what the company considers to be in acceptable range. Selling and admin expenses were $16.3 million for the first quarter, as compared to 15.9 million in the same period last year.

Selling and admin [expenses to] revenue were 15.8% as compared to 15.4% in the same period last year. R&D expenses were 22.7 million for the first quarter, it represents a 1.4 million or 6% increase from the first quarter last year.

Foreign exchange loss was 1.8 million, as compared to foreign exchange gain in the prior year of 1.1 million. The loss was predominantly a result of the decrease in the value of the U.S.

dollar as at July 31, 2019, compared to April 30, 2019. Turning to a discussion on liquidity of the company.

Cash and marketable securities at July 31, 2019 were 100.4 million, as compared to 108.6 million at April 30, 2019. Working capital was 280.1 million at July 31, compared to 282.5 million at the end of 2019.

The company generates cash in operations of 7.9 million, which is gross of 10.6 million change in non-cash working capital and current taxes. Effects of the change in non-cash working capital and taxes are excluded, the company generated $18.5 million in cash from operations.

Company acquired 1.7 million of capital assets, company used cash from finance activities of 14.3 million, which predominantly consisted of the payment of the regular dividend of 13.8 million offset by the issuance of capital stock pursuant to stock option program of 0.9 million. Shares outstanding were approximately 76.6 million and options outstanding were 1.4 million as of July 31, 2019.

Weighted average shares outstanding were 76.6 million and weighted average fully diluted shares outstanding were 76.7 million for the quarter ended July 31, 2019. This brings to a conclusion the review of our financial results and position for the first quarter.

Finally, I like to remind you that some of the statements presented today are forward-looking subject to a number of risks and uncertainties and we’re afraid of 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, Anthony. Cody, we are now ready to open the call to questions.

Hi, good evening. First question for me would be around the special dividend, maybe if you could just talk about the decision to make the special dividend and what the other choices for the uses of that cash might have been, particularly M&A and there is a further well-known that you had a minority position in one of your competitors, and so interesting that you would make the special dividend here?

Thank you, Robert. So, the dividend is a distribution of excess cash to our shareholders.

We have taken profits and exited the Evertz position. Evertz does remain disciplined a value investor when we are considering M&A transactions and with the pristine balance sheet and strong operating performance of the company, it does provide us significant financial capacity and flexible.

Okay, great. Maybe some color on the slipped orders.

Are there any description, you know what type of order it is, particularly interested in the gross margin profile of this order is, it is, you had strong gross margins despite the lower level of top line in that slipped order, and so maybe you could talk about that a bit?

So not original misconception, it's not an order, it's numerous orders. And the gross margin profile would have been a strong gross margin.

So, if we hadn't been able to ship the 10 million of multitude of orders it would have helped our gross margin, it would have improved where we are at.

And since the close of the quarter, those slipped orders are now in the -- at the close doors in August?

Yes. So, they are in the August, obviously not financial number, but they are in the August press release, first month of the shipment number.

So, if you, the way I look at it, if you sort of think of those as being more in July, then that normalizes July, probably, you know adds $0.05 or $0.06 of EPS in July and then it takes the August number down to a 40 level, which I think is pretty similar to where we were at this time last year, but we have a bigger backlog this year I think for similar backlog as well.

Yes, well the backlog I think is record – tide for record highs, very high. So, maybe you just talk about the composition of the backlog, what’s driving the strength there?

Does it build into 2020 events or is it IP, what – where is the strength of the backlog coming from?

Robert, our business continues to be driven primarily by our Software Defined Video Networking solutions, our cloud-based solutions whether they are on premise or in the public cloud and it is our DreamCatcher IP replay and production suite. Those new technologies are driving the predominance of our backlog and also our revenue.

Okay. And last question from me as you head into the IBC conference.

Maybe you could talk about what you're seeing out there on IP transition and how Evertz is sparing competitively there and then also on the cloud transition separately that would be great? And I’ll pass the line.

Thank you, Robert. We’re very excited to be heading into IBC with a very strong portfolio of leading-edge products.

We continue to see very good uptake in customer receptivity to our software defined via networking solutions that are deployed at scale in hundreds of installations and we’ve also have been very successful with the large-scale deployments on premise and cloud and in the public cloud, some – the last IBC, we press released over 300 channels migrating to the public cloud and we continue to have a very strong uptake of those products.

Would you feel comfortable giving an updated number of IP installations? I think you’ve given that [indiscernible]?

Rob, could you repeat that, we couldn't hear it on our end.

Sorry, would you feel comfortable giving an update on the number of IP inflations that you’ve deployed, I think you’ve given out in the past?

It generally comes as told in the press release and we do continue to add to that number, but I don't have the total at this time.

Okay, thanks guys. I’ll pass on.

Hi, guys. Thanks for taking my questions.

Just a quick one here. I noticed the international revenue came up, upward trends in recent quarters, any color around changes on the International fund or something you would point out?

Bill, thanks for the question. On both internationally and in the Canada/U.S.

region, we do have volatility quarter-to-quarter in terms of revenue. Internationally, we are up year-over-year in the quarter, but down sequentially.

So, in general, so on a trailing 12-month basis we would be up on an upward take. So, we continue to have good customer base internationally and of course we would like to see stronger sustained growth internationally.

Got you. And what about at the product portfolio level, are you seeing any stronger demand for certain types of products on the international scale, may be relative to North America?

As you can tell, in North American market we have more large-scale deployments of our Software Defined Video Networking technology and we do have large-scale deployments in your internationally as well too, but the shared number is greater in the U.S. So, we have had good success, but it isn't at the same level as it is in the U.S.

And with the cloud-based deployments type of course discoveries, U.S. – other U.S.

operations and migration to Amazon Web Services with Evertz is one of the very high-profile deployments. Internationally, we do have those 300 channels, all so that have migrated to the public cloud on Amazon Web Services within Evertz be either Overture software side and also our SDVN solutions supporting that.

Okay, cool. I'll pass the line.

Thank you, Cody. I’d like to thank the participants for the questions and add that we are very pleased with the company's performance during the first quarter of fiscal 2020, which saw sales in the international region increase 5% over the prior year supported by sequential quarterly sales growth in the U.S., delivering total sales of 103.1 million in the quarter and solid gross margins at 57.2%, which together with Evertz's disciplined expense management yielded earnings of $0.17 per share inclusive of 1.8 million foreign exchange loss in the quarter.

We’re entering the second quarter of fiscal 2020 with significant momentum fueled by a record high combined purchase order backlog plus August shipments totaling in excess of 153 million, up 26% year-over-year. And by the growing adoption of Evertz successful large-scale deployments of Evertz IP-based software defined video networking and virtualized cloud solutions by some of the largest broadcast new media service provider and enterprise companies in the industry and by the continuing success of DreamCatcher, our state-of-the-art IP-based replay and production suite.

With Evertz significant investments in software defined IP, IT, and virtualized cloud technologies, Evertz leading deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position. Thank you.

We look forward to having many of you join us on 9 October at our Annual General Meeting. Good night.