Evertz Technologies Limited

Thank you, Bobby. Good afternoon, everyone.

And welcome to the Evertz Technologies Limited conference call for our fiscal 2022 first quarter ended July 30, 2021, 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.

Doug and I will comment on the financial results and then open the call to your questions. Turning now to Evertz 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 $97.2 million up 72% from the first quarter last year. This strong rebound from our first fiscal quarter of 2021 was experienced across all geographic regions and was driven predominantly by the adoption of Evertz's new technologies and products.

Our sales base is well diversified with the top 10 customers accounting for approximately 42% of sales during the quarter and with no single customer over 9%. In fact, we had 134 customer orders of over $200,000.

Gross margin in the quarter was $56.7 million or 58.3% of sales, which is in the upper half of our target range. Investment in research and development during the quarter totaled $24.7 million.

Net earnings for the first quarter were $14.7 million, while fully diluted earnings per share were $0.19 in the quarter. Evertz's working capital was $217 million with $131.6 million in cash as at July 31, 2021.

The purchase order backlog was a record high $151 million at the end of August, and shipments during the month were $40 million. We attribute this strong financial performance and robust combined shipments in 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's IT and cloud solutions, our immersive 4K, 8K UHD solutions, our state-of-the-art Dreamcatcher IP replay and live production suite and BRAVO studio.

Today Evertz's Board of Directors has declared a quarterly dividend of $0.18 per share payable on or about October 5, 2021. Furthermore, Evertz's Board of Directors also declared a special dividend of $1 per share, also payable on October 5th.

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 to maintain adequate reserves. I will now hand over to Doug Moore, Evertz's Chief Financial Officer to cover our results in greater detail.

Thank you, Brian and good afternoon everyone. Sales were $97.2 million in the first quarter of fiscal 2022 compared to $56.3 million in the first quarter of fiscal 2021, an increase of $40.9 million or 72%.

The U.S./Canada region had sales for the quarter of $64.4 million compared to $35.9 million last year, an increase of 79%. The International region had sales for the quarter $32.8 million compared to $20.4 million last year, an increase the 60%.

Gross margin for the first quarter was approximately 58.3% compared to 57.2% in the prior year. Gross margin was within the company's target range.

Selling and administrative expenses were $14 million for the first quarter as compared to $11.9 million in the same period last year. Selling and administrative expenses as a percentage of revenue was 14.4% compared to 21.2% in the same period last year.

Research and development expenses were $24.7 million for the first quarter as compared to $16.6 million in the same period last year. Research and development expenses as a percentage of revenue was 25.4% compared to 29.4% in the same period last year.

Foreign exchange gain was $1.4 million as compared to a foreign exchange loss in the prior year of $3.1 million. The gain in the quarter was predominantly a result of the increase in the value of the U.S.

dollar as at July 31st when compared to April 30th. Turning to a discussion of liquidity of the company, cash as at July 31, 2021 was $131.6 million compared to $108.8 million as of April 30, 2021.

Working capital was $217 million as at July 31st, compared to $214.5 million at the end of April. The company generated cash and operations of $38 million, which is gross of a $20.7 million change in non-cash working capital and current taxes in the quarter.

If the effects of the change in non-cash working capital and taxes were excluded from the calculation, the company generated $17.3 million in cash from operations. The company acquired 1.1 million of capital assets and the company used cash from financing activities of $15.1 million, which predominantly consisted of a payment of dividends of 13.7 million.

Shares outstanding were approximately 76.3 million and options outstanding were approximately 5.7 million as at July 31st. Our weighted average shares outstanding were 76.3 million and weighted average fully diluted shares outstanding were 76.8 million for the quarter ended July 31st.

That brings to the conclusion of the review of our financial results in the position for the first quarter ended July 31, 2021. 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 with the Canadian Securities Commission. Brian, back to yourself.

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

Brian, can you provide some color in terms of how the demand environment has shaped up over the last three months. So as things are reopening, restrictions maybe easing, more live events, I mean, I guess we're seeing an uptick in your revenue and your backlog.

But just generally speaking, how have your conversations with clients and your pipeline evolve over the last three months?

So the conversations with clients have been very productive, as you can tell with our very solid revenues in the quarter. And also the significant increase in our backlog.

So we're now up to a record high backlog. And so the order intake has been going very well.

Our sales team has done a phenomenal job of getting out to customers virtually and beginning to meet with folks on site as well, too. So we're seeing a good solid demand environment for Evertz products.

And then with respect to deployments, I mean, I guess it seems that, you're having more success getting on site and deploying some of these project. But again, how has that been evolving in recent weeks?

Presumably that's becoming easier, as some restrictions ease here.

So the ability to get on site has been reasonably consistent over the last couple of quarters. So it is still a logistical challenge to get on to certain industries and geographies and on to sites.

We attempt to remotely commission to the greatest extent possible, but the reality is, with the complexity and scale of some of the projects and the scope of the rollouts, we do need to get access into customer sites and facilities. So that still is a challenging environment that we've been working through, doing our utmost to keep our customers on the schedules for the rollouts of their business plans and projects.

So the uptick we saw as far as the very strong August shipments that has less to do with getting on the deployments getting easier. Maybe it's more to do with the timing of projects and the demand environment for anything or how would you characterize that?

So I would characterize it as it's a combination of both. So we are getting greater numbers of people on site, so it is still logistical challenge, but we do have a significant number of our field service and deployment teams out, internationally, in the U.S.

and abroad, deployment. So we're doing quite well on that front but by no stretch of the imagination, our borders open across globally at this time.

We're still relying on our position as essential service providers to get on-site and drive business forward.

Okay. And then on the OpEx side, were there any level of wage subsidies this quarter or should we think of this being sort of a good run rate for what OpEx will look like in the near-term, as we head into Q2?

I think the assistance programs have significantly decreased. This quarter, there is some amounts in there as they cleared through the income statement.

But going forward, they are expected to be minimal or nonmaterial at all in Q2 and onwards.

Okay. And then finally, on the special dividend, you kind of alluded to rationale.

I guess it's a function of cash balance building, obviously, your cash flow generation is strong. Anything else to highlight in terms of the motivation and the timing for doing this now rather than in the future?

Especially when it's a board decision, it does reflect the strength and stability of our business. It also reflects our outlook as well too for future business and our cash flow generation capabilities.

So we, as you know, have a pristine balance sheet and very strong cash generating capabilities from our business model.

If I continue on that last line of question, it seemed as though you'd put a little more emphasis on M&A recently. And so should we be thinking of the special dividend as a sign that you don't see a lot of opportunities along acquisitions right now?

So with respect to acquisitions, we're still seeing multiple opportunities, we've got to address those in the context of value, creating value for shareholders. So we have the capability to execute on acquisitions as they arise.

So I wouldn't say that we're deemphasizing M&A. We had a very active second half of 2021 in terms of our investment in ShotTracker, the acquisition of Ease Live, and the acquisition of the Studer assets as well, too.

So that was a very busy second half, which we're still working through the smooth integration of some of those technologies, but we have the capability and capacity to execute more acquisitions if they arise.

Okay, great. And then the -- maybe continuing and the question on the backlog.

Like you noted it's a record, I think it's a third consecutive record. And so is that a sign of recovery out of COVID?

Is it a sign that the backlog is lengthening? Are you seeing longer term deployments in the backlog?

And is there anything you can give investors in terms of duration or how much might convert over the next year? Just to get a sense of how much of that backlog is multi-year and how much is short-term?

A significant portion of the backlog is shorter term, in terms of rollouts for ongoing projects. And some of that is geared towards the ability to get on on-site and customers’ timing of the rollouts at their business.

But, again too, our business model is definitely changing where we have some long-term service level agreements or other projects. So the duration has increased over the years.

That is accurate.

And then I know the deferred revenue went up quarter-over-quarter. So that would be an impact on the backlog.

Is there -- maybe if you could talk about, what's driving the deferred revenue increase?

So I think that's more the nature of some of our larger projects where quite frankly, larger projects have long rollout times have, we take in deposits. So that would be the large increase there, it's really driven by a change in the -- I shouldn't say change, but just in a certain taking larger deposits from customers.

Not so much anything beyond that.

And the last question for me is on gross margin, just around a little higher than it has been in the past. And so is there any government assistance in there?

Or is there some FX impact? Is there any unusual factors in the gross margin to call out?

And I'll pass the line.

There's about a 0.5 percentage point associated with government assistance. So what happens is it gets -- some of it gets capitalized into inventory and cleared throughout.

So that is in there. So it's 0.6% associated with that.

But beyond that, it's largely driven by product mix.

Thank you, Bobby. I'd like to thank the participants for the questions.

And to add that we are very pleased with the company's performance during the first quarter of fiscal 2022, which saw strong quarterly sales of $97.2 million with strength in the U.S./Canada region where sales rose 79% from the prior year, and internationally where sales rose 60%, and by solid gross margins of 58.3%, which together with Evertz's disciplined expense management yielded earnings of $0.19 per share. We're entering the second quarter of fiscal 2022 with significant momentum fueled by record high combined purchase order backlog, plus August shipments totaling in excess of $191 million, up 24% year-over-year, and 16% sequentially from our last quarter.

By the growing adoption and successful large scale deployments of the Evertz’s IP based software defined video networking solutions, cloud solutions and by some of the largest broadcast, mew media service provider and enterprise companies in the industry, and by the continuing success of Dreamcatcher, BRAVO, our state-of-the-art IP based replay and production suite. With Evertz’s significant investments in software defined IP, IT and cloud technologies the over 500 industry leading SDVN 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 the 6th of October for our Virtual Annual General Meeting.

Thank you and good night.