Evertz Technologies Limited

Thank you, Justin. Good afternoon, everyone.

And welcome to Evertz Technologies conference call for our fiscal 2022 third quarter ended January 31st, 2022, 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 go into more detail.

First off, I'm very pleased to report that sales for the third quarter totaled $120.6 million, an increase of $27.8 million up 30% compared to $92.8 million for the third quarter last year. Our base is well diversified with the top 10 customers accounting for approximately 43% of sales during the quarter and with no single customer over 10%.

In fact we had 113 customer orders of over $200,000. Gross margin in the quarter was $69.2 million or 57.4% for the quarter, which is within our gross margin target range.

Net earnings for the third quarter were $21.6 million up 108% from last year and fully diluted earnings per share was $0.28. Evertz working capital was $157.3 million with $29.8 million in cash as at January 31, 2022.

The purchase order backlog at the end of February was a record high of $176 million in shipments during the month of February were $25 million. We attribute this very strong financial performance and robust combined shipments and 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, Ultra HD solutions, our state-of-the-art DreamCatcher IP replay and live production suite and BRAVO Studio. Today Evertz Board of Directors declared a dividend of $0.18 per share payable on or about March 24, 2022.

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

Thank you, Brian. Good afternoon everyone.

Looking at revenues, sales were $120.6 million in the third quarter of fiscal 2022 an increase of $27.8 million or 30% compared to $92.8 million in the third quarter of fiscal 2021. For the nine months ended January 31, 2022 sales were $324.9 million compared to $249.6 million in the same period last year.

That represents an increase of approximately 30%. Looking at specific regions, the U.S.

Canadian region has sales for the quarter of $78.9 million, an increase of $22.6 million or 40% compared to $56.3 million in the same period last year. Sales in the U.S.

Canadian region were $221.5 million for the nine months period ended January 31, 2022 compared to $159.1 million in the same period last year. That's an increase of $62.4 million or 39%.

International region had sales for the quarter of $41.7 million compared to $36.5 million last year an increase of $5.2 million or 14%. The International segment represented 35% of total sales this quarter, compared to 39% in the same period last year.

Sales in the International region were $103.4 million for the nine months ended January 31, 2022 compared to $90.5 million in the same period last year. This represents an increase of $12.9 million or 14%.

Gross margin for the third quarter was approximately 57.4% compared to 56.0% in the third quarter last year, and within our target range. Gross margin for the nine months ended January 31, was approximately 57.5% and also within the company's target range.

For operating expenses, selling and administrative expenses were $16.0 million for third quarter, an increase of $4.3 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 13.3% as compared to 12.6% for the same period last year.

For the nine months ended January 31, 2022 selling and administrative expenses were $44.7 million, an increase of $8.3 million compared to $36.4 million from the same period last year. For the nine months period, selling and administrative expenses as a percentage of revenue were approximately 13.8% compared to 14.6% for the same period last year.

Turning to R&D, research and development expenses were $26.0 million for the third quarter, which represents a $4.6 million increase from the third quarter last year. R&D expenses as a percentage of revenue were approximately 21.5% over the period as compared to 23.1% for the same period last year.

For the year, research and development expenses were $75.1 million, which represents an increase of $17.4 million over the same period last year. R&D expenses as a percentage of revenue were approximately 23.1% over the period and that's consistent with the same period last year.

Foreign exchange for the third quarter resulted in a gain of $1.7 million, compared to a loss of $5.3 million in the same period last year. The current quarter gain was driven by an increase in the value of the U.S.

dollar compared to Canadian between October 31, and January 31. Foreign exchange for the nine months period ended January 31 resulted in a gain of 5.4 million as compared to a loss of $9.8 million in the same period last year.

The nine month gain is also driven by the increase in value of the U.S. dollar, but - since April 30, 2021.

Turning to a discussion liquidity of the company, cash as at January 31, 2022 was $29.8 million as compared to $108.8 million as at April 30, 2021. Working capital was $157.3 million as at January 31 compared to $214.5 million as at the end of April 30, 2021.

Looking now specifically at the cash flows for the quarter ended January 31. The company generated cash from operations of $8.3 million, which is net of a $20.3 million change in non-cash working capital and current taxes.

If the effects of the change in non-cash working capital and current taxes are excluded, the company generated $28.6 million cash from operations for the quarter. The company use cash from investing activities of $0.7 million for the third quarter ended January 31, 2022, which was principally driven by the acquisition of capital assets of $1.2 million.

The company used cash from financing activities of $15.7 million, which was principally driven by dividends paid of $13.7 million. Finally reviewing our share capital position as at January 31, 2022 shares outstanding were approximately 76.2 million and options outstanding were approximately 5.4 million.

Lastly, the weighted average shares outstanding were 76.3 million and weighted average fully diluted shares were 76.5 million. That brings to a conclusion the review or financial results and the position for the third 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 factors described in the Annual Information Form and the official reports filed with the Canadian Securities Commission, Brian back to yourself.

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

Hi, good afternoon. Brian, can you provide some color on the spending environment?

I mean, obviously, you had strong quarter the backlog keeps increasing. Now as we're kind of maybe exiting definite lockdowns from pandemic, are you seeing an uptick in demand just from live events starting to pick up again or from you know, previously shelved spending priorities kind of coming back?

What do you see in that regard? Thanks.

So thank you, Thanos - we are seeing very good solid demand from our existing customer base and some new, but very good demand for Evertz's next generation IP solutions or cloud-based solutions, especially within the North American U.S. environment.

Okay, and in terms of the logistical constraints that you've had, you know, over the last, I guess, since throughout the pandemic, I mean to what extent is that improving? I know that Canada, U.S.

travel is now getting easier. But as far as deploying internationally, what's that situation looking like?

So yes, with Canada, U.S., the logistics are getting easier, we have done very well over the past two years working through the pandemic that quarantine. So, we have a significant number of our people on staff available to travel to the U.S.

to customer sites to help them with their installations and commissioning of solutions as well so, we continue to execute to the best of our ability remotely. But again, to it's very helpful for many of these installs to and have folks available for on-site commissioning.

That does extend internationally as well to and we have teams in geographic regions, both in Asia Pacific and in Europe, delivering major installs as well to. So it is more challenging and dealing with the logistics of quarantining and testing of our people abroad.

But that has been continuing. So we haven't seen a significant change internationally in those constraints.

Okay. I guess up until this point, it seems like you've been doing well, dealing with essential component shortages, supply chain issues.

Does that remain the case or to what extent is that impeding some of the growth, you might have once had?

I'll comment to that. So the challenges associated with obtaining components an increased costs is consistent with the past many months now, I don't think that environment is expected to end in the immediate term.

It is a bit of a fluid situation, but we are doing our best to mitigate the challenges associated with that - our inventory our raw materials and our - inventory as a whole has increased about $12 million just since the last quarter. So we continue to stockpile inventory as much as possible.

But there are certainly challenges in the environment remaining.

But it's fair to say that it's not to be having all that material of a revenue impact at this point based on the mitigating actions you've taken?

So we're been - have been able to and continue to ship and deliver at a near record quarterly revenue level.

Okay, great. Maybe one last one from me is how do we think about the OpEx trajectory as travel and trade shows start to pick up again?

So one thing I'll note is that the quarter is no - there's no government assistant programs that are included at this point anymore. So the quarter is no cost reductions associated with that.

We did have a peak Q3 versus Q3, there's a $1.5 million increase in travel costs associated with increased selling. So I think that many of those components are starting to rebound to consistent levels.

So are we certainly back on the road more often, and those costs are going to go up in hand.

Right thanks I'll past it on.

Thanks.

Good evening, the $10 million contract you announced, I think it was March 1, and I think you said that it was received the day before. So is that in the backlog bigger that you published today or is that would that be an additional $10 million on top?

That is included, so it's with the backlog includes that order.

Okay.

So we received the order on actually February 28. So that is before the close of our month end.

Okay. And the increase in inventory you just mentioned is that entirely due to supply chain and components stockpiling or is there some staging or work in process for the future opportunities, is that - a factor as well or is it just bugging?

The most significant component is associated raw materials. So we do have a record backlog that we need to purchase for.

But we are doing our best to mitigate these challenges associated with supply chain. So we are stockpiling, planning out further than we did quite frankly, just buying more material than we used to.

Okay, okay. The Studer manufacturing transition, I see that's complete, does that have any impact on the financials - like does that have an impact on gross margins or is there anything positive or negative, you'd call out from that completion?

So it's still in a process. So we are the transition and are ramping up of Studer manufacturing it's work in process, we're - doing very well.

And we don't expect it to alter our gross margins.

Okay and last question. I know you've had business in Russia in the past and you know, Eastern Europe.

And so is there any material exposure to that to call out?

In regards to sanctions, so we will most certainly comply with all government rules and requirements. Our revenues over the past three years have been average, less than 2%.

So there's some fluidity to that, but it's not exceeded - that amount.

Okay, is that Russia and Ukraine together or is that just Russia?

That would be a combination.

Okay. And maybe last question from me we'll just be on the OpEx.

Maybe continues Thanos' question. So there's increased sales and marketing, but there was also pretty strong jump in R&D.

And so as we look forward, should we be thinking of Q3 as a baseline for going forward? Just in absolute terms of like, should we be thinking of, you know $22 million type of net R&D number and $17 million sort of a range of - selling and admin will come down.

There's, been a lot of changes over the last year, two years, and so would be helpful to understand how that might trend?

Sure, so as noted, there's, no more assistance programs reducing any costs. So, those costs are reasonable to project forward with inflationary type increases of course and depending on I know, we are planning to attend you know, further trade shows such as NAB that you know, may have small spikes in costs, but not too much of significant amount.

Will NAB?

The trade shows Rob is in a smaller capacity than a pre-COVID.

Okay, so we shouldn't expect a bump in, in April from NAB this year or IBC, I guess later?

We will have a presence there a strong presence. But it won't be to the same extent in terms of the number of staff that we have on site and nor will there be as many international travelers coming in as well to.

Got it, okay. Thanks appreciate the answers.

Hey guys, I may have missed this, but you average about $40 million in revenues a month in the quarter and $25 million any dynamic to call out there?

Yes and Steven, we routinely have ups and downs, lumpiness in terms of the revenues and deliveries. So there's nothing unusual about a $25 million shipments in February.

And yes, we did have very strong monthly shipments in prior quarter. But we're sitting on, again to our record high backlog of $176 million.

So we will be delivering that over the next quarters of that $176 million, there is a component that is delivered outside of 12 months. And going forward, that number is in around the 10% range of the backlog.

Got it. And Brian, so given the backlog, so fully expect to get back to 40 in March and April?

Our deliveries, the revenue and deliveries are very dependent on our site access and our customers' readiness to be able to take shipments of the orders that they've taken. So they're you know, we're not in a position to give you a forecast for Q4, we do have a very significant backlog.

And we'll do our utmost to deliver as much as of it. But it is sequenced by the customers' availability, their readiness to take those Evertz solutions as well to.

So some of it is scheduled in the subsequent quarter and others - on fiscal 2023 as well, to, but only about 10% of it would be delivered or scheduled for delivery outside of 12 months.

Got it. Thanks for the color Brian.

You're welcome.

Thanks, Justin. I'd also like to thank our participants for their time and their questions and reiterate that we're very pleased with the company's strong performance during the third quarter, which saw quarterly sales of $120.6 million, solid gross margins of $57.4 million in the quarter yielding net earnings of - $0.28 per share.

We're entering the fourth quarter of fiscal 2022 with significant momentum, fueled by a record high purchase order backlog, which combined with February shipments, totals in excess of $201 million. Also fueled by the growing adoption and successful large scale deployments of Evertz IP-based Software Defined Video Networking, or cloud solutions by some of the largest broadcast, new media and service providers in the industry and also fueled by the growing adoption and successful large scale deployments.

With Evertz's significant investment in our software defined IP, IT, and cloud technologies, the over 500 industry leading IP SDN deployments in the capabilities of our staff Evertz is poised to build upon our leadership position. Thank you everyone, and good night.