Evertz Technologies Limited

Thank you, Brandon. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2021 second quarter ended October 31, 2020, with Doug Moore, Evertz's Chief Financial Officer; and myself, Brian Campbell.

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

Before delving into our recent business results and outlook, I'd like to briefly address the extraordinary COVID pandemic. The pandemic has created headwinds and challenges, delaying customer deliveries, installations, and impacting customer operations around the globe.

That said, our customers are fundamentally healthy and Evertz has a unique and powerful technology position. Evertz is a technical innovator and fundamentally strong business, committed to supporting our customers and protecting our people.

We're proud of the role we play as an essential service provider and critical supplier, enabling vital telecommunications, broadcast and new media services worldwide. We are appreciative of the continuing strong partnerships with our customers and for the extraordinary efforts being made by our employees in these challenging times.

Turning now to Evertz results, I'll begin by providing few highlights and then Doug will provide additional detail. First off, sales for the second quarter totaled $100.5 million, an increase of 78% compared to $56.3 million in the first quarter of this year.

The strong sequential rebound from our first quarter fiscal 2021 was experienced across all geographic regions and was driven predominantly by the adoption of Evertz new technologies and products. Our base is well diversified with the top 10 customers accounting for approximately 55% of sales during the quarter and with no single customer over 25%.

In fact, we had 70 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $59.7 million, or 59.4%, which is within our target range.

Investments in research and development during the quarter totaled $19.7 million. Net earnings for the second quarter were $21.2 million, while fully diluted earnings per share were $0.28.

Evertz working capital was $231.2 million with cash of $110 million as at October 31. Operational highlights for the second quarter include the addition of Ease Live, OTT interactive graphics software-as-a-service technology platform and their talented engineering team.

At the end of November, Evertz’s purchase order backlog was in excess of $106 million, and shipments during the month were $23 million. We attribute the strong financial performance and robust combined shipments and purchase order backlog to the ongoing technical transition in our industry; channel and video services proliferation; increasing global demand for high-quality video anywhere, anytime; and specifically to the growing adoption of Evertz’s IP-based software-defined video networking solutions, Evertz’s IT and virtualized cloud solutions, our immersive 4K Ultra HD solutions and our state-of-the-art DreamCatcher IP replay and BRAVO live production suite.

Today, Evertz’s Board of Directors declared a regular quarterly dividend of $0.18 per share payable on or about December 23. I'll now hand over to Doug Moore, Evertz's Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. Good afternoon, everyone.

Sales were $100.5 million in the second quarter of fiscal 2020 when compared to $119.8 million in the second quarter of fiscal 2020, that represents a decrease of $19.3 million quarter-over-quarter. Sales were $156.8 million for the six months ended October 31, 2020 compared to the $223.2 million in the same period last year, represents a decrease of approximately 30%.

Decrease in revenues has been driven by travel restrictions and projects on hold as a result of the pandemic. As it relates to revenue specific regions, the U.S./Canada region had sales for the quarter of $66.9 million compared to $88.6 million last year, represented a decrease of $21.7 million, or 24% quarter-over-quarter.

Sales in the U.S./Canadian region were $102.8 million for the six months period ended October 31, compared to $160.8 million in the same period last year, decrease of $58 million, or 36%. The International region had sales for the quarter of $33.6 million, compared to $31.2 million last year, an increase of $2.4 million quarter-over-quarter.

The International segment represented 33% of total sales this quarter as compared to 26% in the same period last year. Sales in International region were $54 million for the six months ended October 31, compared to $62.4 million in the same period last year, representing a decrease of $8.4 million.

Gross margins for the second quarter, which inclusive of $2.2 million in wage subsidies, was approximately 59.4% and within the company's historic range. Our gross margin for the six months ended October 31 was approximately 58.6%.

Turning to selling and administrative expenses, S&A was $12.8 million in the second quarter, a decrease of $5.2 million from the same period last year. Selling and administrative expenses as a percentage of revenue was approximately 12.7% as compared to 15% for the same period last year.

Decrease in expenses was driven by a $3.2 million reduction in travel and promotion costs associated with reduced selling activities and travel restrictions. Selling and administrative expenses were $24.7 million for the six months ended October 31, 2020, a decrease of $9.6 million from the same period last year.

For the first two quarters, selling and administrative expenses as a percentage of revenue was approximately 15.8% as compared to 15.4% in the same period last year. Research and development expenses, which net of $3.2 million in wage subsidies, was $19.7 million for the second quarter, represented a $3.2 million decrease from the second quarter last year.

For the six months ended October 31, research and development expenses were $36.2 million, which represents a decrease of $9.4 million over the same period last year. Foreign exchange for the second quarter was a loss of $1.3 million, compared to a loss of $1.1 million in the same period last year.

Foreign exchange for the six-month period ended October 31, was a loss of $4.4 million, compared to a loss of $2.9 million in the same period last year. The six-month loss was predominantly a result of the decrease in the value of U.S.

dollars since April 30, 2020. Turning to a discussion of the liquidity of the company, cash as at October 31, 2020 was $110 million as compared to $75 million at April 30, 2020.

Working capital was $231.2 million at October 31, 2020, compared to $223.7 million at the end of April 2020. Looking now specifically at cash flows in the quarter, company generated cash and operations of $20.8 million, which is net of $5.3 million change in non-cash working capital and current taxes.

The effects of the change in non-cash working capital and current taxes are excluded from the calculation the company generated $26.1 million in cash from operations during the quarter. During the current quarter, the company used cash of $2.9 million for investing activities, which was principally driven by the acquisition of capital assets of $2.1 million and $0.8 million in the investment in Ease Live AS.

The company used cash in financing activities of $10.4 million, which is principally driven by dividends paid of $6.9 million, $1.1 million in principal payments on capitalized leases and 1.7 million in the purchase of capital stock. Finally I will review our share capital position as at October 31, 2020.

Shares outstanding were approximately 76.3 million and options outstanding were approximately $5.5 million. Weighted average shares outstanding were $76.4 million and weighted average fully diluted shares were also $76.4 million end of October 31.

This brings to a conclusion, the review of our 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 factor described in the Annual Information Form, and the official reports filed with the Canadian Securities Commission.

Brian, back to you.

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

Hi, good afternoon. I realize you don't provide guidance, but what would be your thoughts, I guess, qualitatively in terms of how we should think about the near-term revenue trajectory?

Is it a situation where things are improving as far as customer spending behavior and your ability to implement or whether maybe some one-time factors that benefited Q2, which might make Q3 comparatively a little bit more challenging?

So I'll break it down into points. I guess, the - we did see good, strong revenue increases in all geographies during Q2 and we also had numerous projects pushed ahead in the quarter.

So we had very strong delivery results as well, too. So, they're - definitely we're continuing to experience challenges getting onsite with customers and COVID shutdowns and lockdowns in various geographies.

We are working through it fairly well, as you can tell by the strong financial results. Q3, again, to – I can't forecast what the global environment is going to look like in terms of our access to be able to get into multiple geographies.

That said, we continue to do our utmost to provide remote delivery, commissioning of the services and the solutions that our customers need for their business models to continue to grow and prosper. So, we're looking at a very good solid shipments and backlog.

You can see that the shipments are a little lower than the prior entry into Q2, but our backlog is solid.

So, Brian, I mean, the main variable we should think about maybe is just how this new wave of lockdowns may or may not affect implementation. Is that maybe more likely to have an impact on the upcoming quarter relative to - rather than the demand picture?

That's not something I can forecast.

Yes.

We’ll do our utmost to deliver throughout the quarter. So, what you have is a good solid shipments and backlog number that's right in line with our two-year averages, even excluding prior to COVID.

So we're sitting, well positioned entering into Q3 and - but we're still subject to the global environment for getting access to customer sites. And again, we're doing our utmost to be able to deliver products and solutions remotely.

But there's definitely a component of onsite commissioning and other activities that's required for our business.

Okay. Can you speak to how the pandemic might be altering customer spending priorities?

One of the things we've heard is the - some customers are looking to accelerate their plans for cloud adoption. So just curious as to whether you're seeing that dynamic as well.

And if that's the case, how might we think about sort of the impact over the coming quarters in terms of, how that could influence revenue and margins if your cloud mix does shift considerably versus your hardware mix?

Doug, I’ll let you address the margin shift.

Yes. So I guess, - you do kind of divert from the spending environment.

But some of the cloud-based solutions are behind on the higher-margin side. I mean, there is hardware components on the less.

But a shift in such a nature will lead inherently to a slight uptick in margins.

And on the demand side, as we've noted, much of our sales are driven by our new technology. So our SDVN solutions, our DreamCatcher and BRAVO replay and live production and our cloud-based solutions.

So we're already experiencing a strong component of the delivery of the type of products that our customers are increasingly adopting. So any changes in our customer spending behavior that you may see in reports align very well with our product suite that we've invested very heavily over the last years and have been deploying in numerous locations.

Okay. And certainly, you have some good case studies, such as - the work you've done with Discovery and Warner, among others?

I guess, ultimately, would you agree with the notion, though, that the pandemic specifically is accelerating cloud adoption? Does that make sense to you from what you're seeing?

Yes, it is and it's also accelerating IP infrastructure adoption well, too.

Okay. And then finally from me, from an OpEx perspective, I guess, the variable there might be whether and to what extent the stimulus repeats next quarter.

But aside for that, should we expect OpEx to remain fairly consistent heading into Q3?

Yes. So I think, first of all, you're correct, and there is the variable there that you mentioned in the sense of the wage subsidies.

Beyond that, there was also – in the OpEx, you'll see a one-time item associated with ITCs that we had a successful audit appeal associated with our shared claims that resulted in a bit of an uptick in about $2 million, $2.5 million is kind of a one-time item that was helped out the overall OpEx, But – and you'll see that and through the ITC component.

Hey, guys, thanks for taking my questions. Congrats on a solid quarter.

Just kind of curious on the shipment numbers for November, it is down compared to last quarter. I was wondering if you could kind of talk through why that is and maybe how it compared to what your expectations were for the month of November?

So, shipments are in line with the variability that we'll have on any months in a given period, so it's reasonably solid shipment level. And that together with our backlog, as I said, were right on the two-year average for total of shipments and backlog.

Okay, great. And then maybe switching gears here, can you maybe speak to your mix of revenue or orders by customer type, like either traditional broadcasters, production companies, OTT vendors?

As a result of the pandemic, have you seen a shift in customer demand across these different customers?

Our customer base has been fairly consistent. And so, we have the largest global broadcast media companies, new media companies as customers, the complexion of them changes at any given quarter.

But we consistently have our top 10 saw the largest broadcast and new media companies in the world. So, we haven't seen any significant shifts - and that just normal changes in spending patterns.

I'm going to try the same question a third time, if you'll forgive me just on that shipment number for November at $23 million, that's down a lot year-over-year, as you noted. And so I just try to, square up the progression of the quarter, if it started at $36 million in August, and then to get to the quarter, you'd have to do 30 average both of the other two months.

And then you drop to 23 which doesn't, as far as I remember just, it doesn't match normal seasonality? And then in this year, you would have seen a resumption of sports, and you would have seen U.S.

election activity. And so I guess the worry is, is that you would have seen some one-time items from those things that might have drawn - driven a higher than normal level of revenue, in the last quarter.

And so, as we look forward into Q3, should we be thinking of that, as a quarter that down quarter-over-quarter or can we kind of think of $100 million, type of quarterly pace, as back to pre COVID levels back to normal?

So Rob again, to the shipments and backlog level, we are very good, solid robust numbers, our average. One of the things with a big election period like that as you've noted, what happens as well to - when you've got critical news.

Customers networks enter into a lockdown phase where they're not deploying or altering their networks to ensure that there's no outages. So you do have to bear in mind that is a consequence of a new cycle as well to.

And so that, there are any benefit from that wouldn't have fallen in Q2 and would have fallen in Q1, perhaps because your customers would have lockdown is that what you're saying?

During the election period leading up to it and of course - as the new cycles progress through, there are periods of lockdown, yes.

Okay. And then the second sorry keep going, sorry Brian and that means kind of yes?

So that does have an impact on the ability to deliver.

Yes, okay.

For those prime customer.

That make sense, okay. I'm not sure if I caught it in the monologue right or not.

But I think you said that the top customers 25%, I don't think I've seen a number that high. And as long as I remember and so any color you can provide around that that would be $25 million from one customer and in the quarter or something around that number.

And so, is there any color you can provide there with the pent up demand on a delayed project that freed up or something like that, or did I just hear that number wrong?

No, you heard the number correctly. And that does happen from time-to-time where - a customer’s business plan and projects drop into one quarter more so.

Oftentimes, it's spread out over several quarters, timing wise, that is a significant percentage of the quarter. It does tend to even out over or the year over multiple quarters.

But again, we're thrilled to have significant customers, have the confidence to deploy that level of infrastructure solutions with us in a challenging time like this in a quarter. So that bodes well for us.

And can we expect that one customer to continue spending that bad level, if we were to take that customer out obviously, it would be a $75 million quarters out of a $100 million quarter which jives a little closer with the $23 million first month shipment. And so, could that be a reason for the lower shipment number?

We have very good Tier 1 customers who require delivery over multiple quarters. So, I do not expect, anticipate to see levels persist at the 25% rate.

What if - this is again to a significant customer of ours, a long-term customer.

Okay, great, that's really good color. Thank you.

And then maybe one last question, just on the other questions on the trend towards cloud and maybe you touch a little bit on remote production. I know you've hit on this BRAVO product a few times.

Maybe you talk about centralized production and remote production. And how Evertz has seen any benefit there, are you seen a big is that a driver in the market today and yes?

Yes, absolutely, the move to remote production is certainly a driver, our DreamCatcher IP-based replay and the BRAVO live production suite. So together, those are very innovative groundbreaking products.

And you're going to see, more of them in the future. And some of the press releases, whether it's the previously [CBS DABL] or Discovery and their ability to be able to more easily spin up channels and do production, innovative productions.

And that is a wave of the future. And most definitely our DreamCatcher and BRAVO live production suite fit squarely in there.

Okay, maybe this last question from me just on I mean, you're probably saving a lot of money right now not going to trade shows, which normally would be a normal course of your business. And so, I see you're doing a lot of virtual trade shows and marketing events.

And so, maybe if you could just talk about, how that is changing the way you're thinking about your sales and marketing expense going forward? Will you be leaning more on that less on trade shows?

Are you seeing a, good competitive advantage relative to others, given that these big trade shows are shutdown, and then I'll pass the line?

So very good question. So - our sales team has done an outstanding job of maintaining communications with our customer base and with these interactive programs, we're able to let them help introduce new products show the use cases, and to continue to drive purchase orders and delivery of those innovative solutions to our customers.

So it's absolutely been very beneficial to us. But candidly, we all love to meet our customers face-to-face to show the products.

And that's just not possible in today's environment. As the environment changes, we anticipate resuming face-to-face communications, but the lessons that we've learned during these challenging times won't be lost.

And so, numerous folks appreciate the ability to be able to see our products and can communicate in a virtual environment, as well to supplement - our sales and marketing experiences.

My question is on the gross margin during the pandemic. So the first two quarters this fiscal year is even stronger than last year, despite the lower revenues.

How do you explain that?

I think to properly explain it, you have to include the notification that there is certain costs that have been subsidized so where as the wage subsidies - is designed to highlight there. I mean the biggest component where cost of sales includes during the year, a little over $5 million and wage subsidies that have been taken as a straight reduction to cost of sales.

So, I think to properly analyze it you would have that back in a sense. In the first quarter in fact, actually was with a decrease selling activity and efficiencies, I guess with the shutdowns the margins without that was actually quite weak.

It's definitely in Q2, things have rebounded very strongly. But I do analyze it property, you need to look at both components.

And so that's 5 million in the first half is it a similar amount in the second half for subsidies or is it going to be a much lower number?

No, no, no it will be much lower. So we - there is a variety of different global programs, but yes, the expectation is, it's really even from Q1 to Q2, it's been cut in half really.

And then it's going to be further, maybe a third next time. It's really - the actual amount difficult to forecast as its dependent on actual sales and other such calculations, but no, it will be dropping significantly.

Thank you, Brandon. I'd like to thank the participants for the questions and add that we're very pleased with the company's performance during the second quarter of fiscal 2021, which is our quarterly sales rebound to $100.5 million.

Solid gross margins of 59.4% in the quarter, delivering pretax earnings of $28.1 million, all while investing nearly $20 million in R&D to build future growth. We're entering the second half of fiscal 2021 with significant momentum, fueled by a combined purchase order backlog plus November shipments totaling in excess of $136 million.

By the growing adoption and successful large scale deployments of Evertz’s 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. By the financial strength and flexibility for pristine debt free balance sheet with over $110 million of cash and by the growing adoption and successful large scale deployments of Evertz’s IP-based software defined video networking cloud solutions, DreamCatcher IP-based instant replay and BRAVO live production suite.

With Evertz’s significant investments in software defined IP, IT virtualized cloud technologies. Over 500-industry leading IP SDVN deployments, and the capabilities of our staff Evertz is poised to build upon our leadership position in the broadcast and media technology sector.

Thank you everyone and good night.