Evertz Technologies Limited

Thank you Melinda. Good afternoon, everyone.

And welcome to Evertz Technologies Conference Call for our Fiscal 2022 Second Quarter ended October 31st, 2021, with Doug Moore, Evertz Chief Financial Officer and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on SEDAR and on the Company Investor website.

Doug and I will comment on the financial results and then open the call to your questions. Turning now to Evertz results, I will begin by providing a few highlights and then Doug will provide additional detail.

First off, sales for the second quarter totaled $107.2 million, an increase of 7% compared to the $100.5 million in the second quarter last year. This solid increase from our second fiscal quarter of 2021 was experienced primarily in the U.S.

Canada region and was driven predominantly by the adoption of Evertz new technologies and products. Our base is well diversified.

The top 10 customers accounting for approximately 44% of sales during the quarter, with no single customer over 8%. In fact, we had 122 customer orders of over $200,000 in the quarter.

Gross margin in the quarter was $61.1 million or 57%, which is within our target range. Investments in Research and Development during the quarter totaled $24.4 million.

Net earnings for the second quarter were $17.2 million, while fully diluted earnings per share were $0.22. Evertz's working capital was $144.9 million with cash of $37.7 million as at October 31st, 2021.

At the end of November, Evertz’ purchase order backlog was a record high, $162 million and shipments during the month were $39 million. We attribute this strong financial performance and robust combined shipments in backlog and purchase order backlog to 1.

the ongoing technical transition in the industry, 2. channel and Video Services proliferation, 3.

increasing global demand for high-quality video anywhere, anytime, and 4. specifically to the growing adoption of Evertz’ IP based, software-defined video networking solutions.

Evertz's IT, and cloud solutions, our immersive 4K Ultra HD solutions, our state-of-the-art Dreamcatcher, IP replay live production suite, and BRAVO studio. Today, Evertz's Board of Directors declared a regular quarterly dividend of $0.18 per share payable on or about December 23rd.

I will now hand over to Doug Moore, Evertz’ Chief Financial Officer, to cover our results in greater detail.

Thank you, Brian. And good afternoon, everyone.

Looking at revenues. Sales were a $107.2 million in the second quarter of fiscal 2022, compared to a $105 million in the second quarter of fiscal 2020, an increase of $6.7 million quarter-over-quarter.

For the 6 months ended October 31st, 2021, sales were $204.4 million compared to $156.8 million in the same period last year. This represents an increase of $47.6 million or 30%.

As it relates to revenues in specific regions, the U.S., Canada region had sales for the quarter of $78.2 million compared to $66.9 million last year. This represents an increase of $11.3 million or 17% quarter-over-quarter.

Sales in the U.S. Canadian region were $142.6 million for the six months ended October 31, 2021, compared to a $102.8 million in the same period last year, an increase of $39.8 million or 39%.

The International region had sales for the quarter of $29 million compared to $33.6 million last year. A decrease of $4.6 million quarter-over-quarter.

The International segment represented 27% of total sales this quarter, as compared to 32% in the same period last year. For the 6 months ended October 31, 2021, sales International region were $61.7 million compared to $54 million in the same period last year, an increase of $7.7 million.

Gross margin for the second quarter was approximately 57% compared to 59.4% in the prior year, and within our target range. For the 6 months ended October 31st, gross margin was approximately 57.6%, also within our target range.

Turning to selling and administrative expenses, S&A was $14.8 million in the second quarter, an increase of $2 million for the same period last year. Selling and admin expenses as a percentage of revenue was approximately 13.8% as compared to 12.7% for the same period last year.

The increases inclusive of $1.1 million increase in travel and promotion costs associated with increased selling activities. Selling and admin expenses were $28.7 million for the 6 months ending October 31, 2021, an increase of $4 million from the same period last year.

[Indiscernible] administrative expenses as a percentage of revenue for the 6 months were approximately 14.1% as compared to 15.8% for the same period last year. Research and Development expenses were $24.4 million for the second quarter, which represents a $4.7 million increase from $19.7 million in the second quarter last year.

Investment tax credits which relates to R&D expenses were $2.9 million in the quarter, compared to credits of $4.7 million in second quarter last year. The decrease in investment tax credits is driven by a favorable audit ruling relating to prior years that was recognized last year, and did not reoccur in the current year.

For the 6 months ending October 31, research and development expenses were $49.1 million, which represents an increase of $12.9 million over the same period last year. Research and development expenses as a percentage of revenue were approximately 24% over the period as compared to 23.1% for the same period last year.

Turning to FX, foreign exchange for the second quarter was a gain of $2.2 million and compared to a loss of $1.3 million in the same period last year. The quarterly gain was predominantly a result of the translation of U.S.

assets into Canadian dollars at a favorable exchange rate during the quarter. Foreign exchange for the 6 months ended October 31st, 2021, was a gain of $3.6 million compared to a loss of $4.4 million in the same period last year.

Turning to a discussion of liquidity of the Company. Cash as at October 31, 2021 was $37.7 million as compared to a $108.20 million at April 30, 2021.

Working capital was a $144.9 million of October 31 compared to $214.5 million at the end of April 2021. Looking now specifically at cash flows, the Company generated cash and operations of $0.9 million, which is net of the $22.2 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 $23.1 million in cash from operations during the quarter.

The Company also used cash of $1.9 million for investing activities, which was predominantly driven by the acquisition of capital assets. Company used cash and financing activities of $91.7 million, which was principally driven by dividends paid of $90.3 million, including a special dividend of $76.3 million.

Finally, I will review our share capital position as of October 31st, 2021. Shares outstanding were approximately $76.3 million and options outstanding were approximately $5.5 million.

Weighted average shares outstanding were $76.3 million and weighted average fully diluted shares were $76.6 million for the quarter ended 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 to the risk factors described in the annual information form, and the official reports filed with the Canadian Securities Commission. Brian, it's back to you.

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

Hi, good afternoon. Brian, if I look at your North American revenue, it was up over 20% relative to Q1.

So would the main driver of that be that perhaps the deployments environment than just the logistics around getting your people onsite to deploy. Did that dynamic improve?

And is that what drove the strong uptick or was it something else in play there?

Definitely, a big part of it. So the U.S.

region is the single largest market for us. We've done extremely well with the customer base that we have there.

And yes, we're -- the logistics for us delivering our products are well underway. So we still incur problems crossing the border, quarantining, and with this [Indiscernible] -continued next wave of the COVID variants.

So we still have challenges, but we're doing very well, delivering to our key customers. And that is helping to drive revenue in the U.S.

region.

And a related question, if we look at your international revenue, its been kind of range down for -- in the past 5 quarters now. So is the takeaway there, that situation there hasn't really improved from deployment.

And that you're kind of [Indiscernible] to your deployment capacity there?

It's stable, it's good, but it's stable. And yes, this -- we've been averaging just over $30 million a quarter for the last five quarters or so, internationally.

Okay. At the -- I know we've talked about the supply chain in the past.

It hasn't been an issue today, so any developments on that front? Are you still able to procure all the components that you need or anything challenges in that regard, or just logistics in terms of being able to ship your equipment where needs to go?

So could you -- I guess your question is multipart with the components and constraints. I'll let Doug Moore jump in there.

Sure, so for the components constraints, I would say this is exceedingly challenging. So it is getting more difficult to -- even as time passes on regarding procurement lead times, and in some case it's [Indiscernible] costs.

We have a stockpile quite a bit. If you look at our inventory our raw materials is up quite substantially as we mitigate those risks associated with the challenges presented before us.

And we do continue to deliver as you can tell from the very good solid revenue performance on. So we are delivering to our customers.

We're meeting their needs in terms of their roll-outs that they are planning.

So just a question then, if I'm looking at your shipments for November, the backlog, all else equal, to me that would suggest that you should be able to have some level of sequential growth in Q3 over Q2. Would that be a fair conclusion or might there be issues such as the component constraints that might prevent that from happening?

We're entering into Q3 with a very solid shipments number of $39 million and a record high backlog. So we're in very good shape.

We are heading into the holiday season. So that always poses challenges in terms of logistics of delivery, whether it's on the customer's side or travel as well too.

So you will have to continue to factor that into your estimates. But we are sitting here today with exceptional backlog and shipments number.

Okay. And finally, deferred revenue was up 27% year-over-year.

And I think you've talked about it in the past. Is that from everything driven by more cloud type revenue.

And the dynamic there or is something else driving that?

I'll let Doug Moore -- I'm give you the --

Yeah, I think you're onto it there. So it's really more -- it's a general trend as we have the type of projects we do with [Indiscernible] the nature of our business.

So whether we're receiving more funds upfront, longer-term recognition, or waiting for certain milestones to recognize revenue. It's a trend that we've seen over the past that continued.

I mean, our deferred revenue, I think is relatively stable compared to Q1, but when even when you compare it to April, you'll see an increase there.

All right. Thanks for [Indiscernible].

Hi, good evening. The gross margins are a bit lower and the U.S.

mix is really strong, so those don't really don't happen at the same time. And so is that the component lead times in pricing that you highlighted or maybe, is it the government assistance in there, is there something that you can point us to why the gross margins were a little bit lower?

Yes. I mean, it's quite frankly -- it's a mix of those things.

So the government assistance continues. We had some in the quarter but dwindling away.

That's definitely an impact when you're comparing quarter-over-quarter significantly dropped there. The -- the component costs, it's a harder thing to quantify, but there is a lot of material impact in the sense of disclosure.

But yeah, it's really you're right in the sense of the Government assistance is dwindling away and that's had a significant impact comparing Q2 to Q2. Or [Indiscernible] is solidly within our gross margin target range of 50.

Right, great. Now, and then normally, I think when you see the, your international drop and U.S.

up, normally, I'd expect to see margins at the higher end of your range and, so it leads me to think that the pricing environment for raw materials is having a pretty significant impact on your gross margin. Is that a reasonable assumption?

Or is most of that going to be government assistant? Just I mean, just trying to push a little harder on that.

And there's product mix in there.

There is an impact of the product mix. There's an impact.

The third, but I guess our range remains at 56% to 50%. It's still in there.

Yes, just that to our [Indiscernible].

And then I saw your release around the Studer manufacturing moving to Burlington, I mean, is there an impact there? I mean, maybe just talk about that.

Is that meaningful enough to have an impact on the financials at all?

It's strategically meaningful for us. It was part of the acquisition of the -- those iconic assets to repatriate manufacturing from Harman's facilities in Hungry.

And that's ongoing process, we're well along the way with it and very proud of the progress that we're making on that front.

Okay. Let me -- but no gross margin impact from having that in your own manufacturing, or it's not -- there's nothing to think about there, I guess.

There's no real impact.

Okay. Fine.

And then maybe I'll just ask. Is there anything that you can give us around update on the recent acquisition like Studer, the Shottracker, or Ease Live, is anything there that you could update us on?

So with respect to Studer, the intellectual property continues to be integrated within our product portfolio and specifically within the DreamCatcher BRAVO portfolio and manufacturing is underway here. And we're continuing to service and support customer base and look forward to the upcoming year as we really get our feet under us with the Studer acquisition.

So that's moving ahead nicely. As is the Ease Live and ShotTr -- Ease Live acquisition and ShotTracker investment.

Those are both very strategic investments that you'll see more of in the coming quarters.

Okay, okay. Maybe I'll just ask a little bit along the lines of Thanos' question on the backlog.

The -- anyway it continues to grow quarter to quarter, you keep hitting record levels or maintained record levels at least. And so is most of that growth driven by the dynamics of longer contracts or is it just pent-up demand that you're not able to get to, is there anything that you can give us around reasons for that backlog build, the continued backlog build?

That's a good question. Thanks, Rob.

The backlog does continue to build. Personally because of the very strong demand we have for Evertz' product portfolios.

But as we've said in past, the nature of the business is changing. And so with our cloud-based solutions to play out mediator and has a component to it of maintenance and long-term revenues.

So in general, if you look at that backlog, whereas in prior years, if you went back to our initial public offering, the delivery of it would've been over the course of 4 to 8 weeks. Whereas now 15% to 20% on extends beyond the 12-month period.

So whether that's warranties, extended warranties, service level agreements, or other solutions that are being delivered in the future. 15% to 20% is currently delivered over outside of the 12-month period.

Okay, and so then the 80% is going to be delivered within the 12-month period? I guess.

that's naturally the assumption there?

Yes. Yes.

And some of it a significant component of it. In the subsequent quarter, as we saw, we're still delivering very quickly.

Where we have the opportunity to.

Okay. Thanks a lot.

Thanks for that extra bit of data. Thanks.

I'd like to thank the participants for their questions and add to that that we're very pleased with the Company's performance during the second quarter of fiscal 2022, which saw strong quarterly sales of a $107.2 million with strength in the U.S.- Canada region where sales rose 17% for the prior year. And with solid gross margins of 57% in the quarter, which together with Evertz’ disciplined expense management, yielded earnings of $0.22 per share.

We're entering into the second half of fiscal 2022 with significant momentum fueled by our record high combined purchase order backlog plus November shipments totaling in excess of $201 million, up to 56% year-over-year. And by the growing adoption of successful large scale deployments of Evertz's IP-based Software Defined Video Networking solutions, cloud solutions, and by some largest broadcast new 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 IP SDVN deployments, and the capabilities of our staff, Evertz is poised to build upon our leadership position.

Thank you, everyone and good night.