Evertz Technologies Limited

Thank you, Andrew. Good afternoon, everyone, and welcome to Evertz Technologies’ conference call for our fiscal 2025 third quarter ended January 31, 2025.

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 on the company's investor website.

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

First off, sales for the first quarter -- for the third quarter totaled $136.9 million up 9% sequentially from the prior quarter and 1% year-over-year. Revenue included $99.1 million in the U.S.

Canada region, up 23% sequentially. Recurring software services and other software revenues increased 6.3% year-over-year totaling $55 million in the quarter.

Our base is well diversified with the top 10 customers accounting for approximately 48% of sales during the quarter with no single customer accounting for over 10% of sales. In fact, we had 115 customer orders of over $200,000 in the quarter.

Gross margin in the quarter was $79.1 million or 57.8% which is within our target range. Investment in research and development during the quarter totaled $36.6 million.

Net earnings for the third quarter were $21.1 million while fully diluted earnings per share were $0.27. Evertz working capital was $207.9 million with cash of $96.3 million as of January 31, 2025.

At the February 2025, Evertz's purchase order backlog was in excess of $269 million and shipments during the month were $39 million. We attribute the strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation, increased global demand for high-quality video anywhere, anytime, the ongoing technical transition to IP, IT cloud-based architectures in the industry and specifically to the growing adoption of Evertz's IP based software defined video networking solutions, Evertz's IT and cloud solutions, our immersive 4K, 8K Ultra High Definition solutions, our state of the art DreamCatcher IP replay and live production with Bravo Studio featuring the iconic studio audio.

Today, Evertz's board of directors declared a regular quarterly dividend of $0.20 per share payable on or about March 20. I'll now hand it over to Doug Moore, Evertz’s Chief Financial Officer to cover our results in greater detail.

All right. Thanks, Brian.

Good afternoon. Starting with sales, revenue was a record $136.9 million in the third quarter of fiscal 2025 as compared to $135.3 million in the third quarter of fiscal 2024, an increase of $1.6 million or just over 1%.

For the nine months ended January 31, revenue was $373.8 million compared to $391.8 million in the same period last year, that's a decline of $18 million or approximately 4.5%. Looking at revenues in specific regions, U.S.

and Canadian region had revenue for the quarter of $99.1 million compared to $80.5 million last year. That represents an increase of $18.6 million or 23% quarter-over-quarter.

Revenue in the U.S. and Canadian region were $267.9 million for the nine months ended January 31, 2025, compared to $241.5 million in the same period last year, an increase of $26.4 million or 11%.

The international region had revenue for the quarter of $37.8 million compared to $54.8 million last year, decrease of $16.9 million or 31% quarter-over-quarter. International segment represented 28% of total sales in the quarter.

For the nine months ended January 31, 2025, international revenue was $105.9 million, $150.3 million in the same period last year, a decline of $44.4 million or around 29.5%. Looking at the, let's call it, class of revenue.

Hardware revenue in the three-months period ended January 31, 2025 was $81.2 million as compared to $82.8 million in the same period last year, while software and services revenue was $55.7 million in the quarter ended January 31, 2025 compared to $52.4 million in the same period last year. For the nine months, hardware revenue was $207.4 million while software and services revenue were $166.4 million.

Now looking at gross margins. Our gross margin for the third quarter was approximately 57.8% compared with 58.9% in the same prior year quarter.

The gross margin was within our target range albeit slightly lower than the past few quarters. Comparative decrease was largely driven by the product mix we delivered in the quarter.

For the nine months ended January 31, gross margin was approximately 58.8%. As noted, both quarterly and year-end-to-date margins were within our target range.

Turning to selling and admin expenses, S&A was $19.2 million in the third quarter. That's an increase of $900,000 from the same period last year and S&A represented approximately 14% of revenue compared to 13.5% in the same period last year.

For the nine-month period ended January 31, selling and amen expenses were $55.2 million increase of $3 million from the same period last year. And selling and amendment expenses as a percentage of revenue were approximately 14.8% over the period.

Now research and development expenses, they were $36.6 million for the third quarter. That represents a $2.6 million increase from $34 million in the third quarter last year.

The increase includes $1.7 million in increased salary costs and $900,000 increase in the combination of higher software, prototypes and material costs. As a percentage of revenue, R&D expenses were 26.7% compared to 25.1% last year.

For the nine months, research and development expenses were $110.2 million that represented an increase of $12.1 million over the same period last year. The increase included an increase of $5.7 million in North American salaries and another $1 million in overseas salaries.

Research and development expenses as a percentage of revenue were approximately 29.5% year to date. Foreign exchange for the third quarter was a gain of $3.9 million as compared to a loss of $2.9 million same period last year.

The gain in the quarter was largely driven by the U.S. And Canadian exchange rate.

So, we closed January 31 at approximately CAD1.45 to $1 as compared to CAD1.39 in October 31. Foreign exchange for the nine months ended January 31 was a gain of $4.7 million as compared to a loss of $2 million in the same period last year.

Looking at liquidity of the company, cash as at January 31, 2025 was $96.3 million as compared to net cash of $86.3 million as of April 30. Working capital was $207.9 million as of January 31 compared to $201.4 million at the April '30.

For cash flows, the company generated cash from operations of $53 million which includes a $24.8 million change in non-cash working capital and current taxes. That change includes a quarterly decrease of inventory of approximately $11 million which was split relatively evenly between finished goods and raw materials as well as an increase in accounts payable of $7.4 million.

If the effects of the change in non-cash working capital and current taxes are excluded, the company generated $26.8 million in cash from operations during the quarter. Company used cash of $1.1 million from investing activities that's principally driven by the acquisition of capital assets and the company used cash and financing activities of $17.2 million which is principally driven by dividends paid of $15.1 million.

Finally, looking at our share capital position as of January 31, shares outstanding were approximately 75.9 million and options and equity-based restricted share units outstanding were approximately 5.1 million. The weighted average shares outstanding were 76 million and the weighted average of fully diluted shares were 77 million for the quarter ended January 31.

That brings to conclusion the review of our financial results and 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. Andrew, we're now ready to open the call to questions.

Good evening. I think the probably the most relevant question is to dig into the impact or the potential impact from tariffs on your business.

I know that may be difficult to answer. But if you can just give us a summary of how the manufacturing footprint is split and what you think the exposure is and what you're doing to mitigate it whether that might be through pricing or whether you believe pricing can be passed through to your customers?

Just general overview of how you think you might deal with tariffs?

Sure. It's a question I'm obviously expecting of course.

So in regards to U.S. tariffs, I mean this is obviously a fluid situation.

We've been actually monitoring it, frankly hoping they wouldn't transpire but planning for their implementation nonetheless. As you know we have significant sales in the U.S.

both domestically therein and the ones domestically therein obviously not impacted, but we also have manufacturing facilities in Canada that we sell to the U.S. So, I will highlight however that we currently have multiple development and manufacturing facilities in the U.S.

Prior to the recent announcements on the U.S. Canadian tariffs, we have been actively adding to our manufacturing capabilities within the U.S.

The rationale then was primarily focused on addressing U.S. government opportunities, but that process has been accelerated to try and lessen the potential exposure to the new tariffs on their U.S.

Customers. We have completed the initial stages of our expansion, largely focused in our Pennsylvania facility.

Our intention is to continue to expand our manufacturing capabilities there and processes within the U.S. They are targeting specific products and customers to start, lessen that tariff exposure.

I will obviously -- as we add capabilities in the U.S, I will highlight that. We remain committed to maintaining our significant Canadian manufacturing.

But we do expect some negative impact in the near-term margin. I mean whether it's tariff-related or as we increase capabilities in the U.S, there will be some operational redundancies we'll call them between say Burlington and Pennsylvania.

But I can't really give you specifically quantify the impact whether it's either as a margin percentage or a monetary amount, but yeah, because obviously it's going to be specific impact will be dependent on a number of factors obviously the speed at which we continue to ramp up our manufacturing in the States, the product mix, specific customers we end up selling to and of course if there's any changes to the tariffs or duties that are put into place. So, long-winded answer for you.

Thanks for the color. I think well, you had a strong quarter for revenue and the backlog dropped quarter over quarter.

So, should we think of that as front loading in front of the application of tariffs? Is that a onetime benefit that might not repeat going forward?

No, I don't think we've seen a lot ---

Any front loading?

No, I don't think we've seen a material amount of front-loading like from customer orders to be fair. I think it's not any material level, no.

And then to address it, do you think that you have the ability to absorb it? I mean we see gross margins down a little bit quarter over quarter, I guess it wouldn't be from this impact.

No, this quarter has not to do with that at all. What we're going to focus on, if we can make something and ship it from The States to our customers in the States, we will, where we can.

And if you can't, will you absorb it in pricing or do you think you can pass the pricing through your customer?

That is going to be very dependent on the arrangement we have with that customer.

The last question on this would be the backlog where you have deals in play. Would those be impacted?

Would the pricing on those be impacted, or should we think of any change related to tariffs on past deals?

So, I think that our backlog again if we're able to manufacture in the States and ship to a customer in the States we will do so. And as to whether or not the additional tariffs applied to the U.S.

entity that receives the goods, the customers whether it's absorbed or not, that's going to depend on the arrangement we have with that customer. That's why it's very difficult to specifically quantify an impact.

Maybe another way to ask it. Are you the importer?

Are you paying the tariffs or on a deal that's in your backlog or is your customer going to pay for that tariff as an importer?

So, Rob, Doug has answered that it depends on the customer arrangement.

Okay.

Look, our goal here is to again if we can manufacture in the States and ship to a customer in the States to lessen the impact of tariffs we will. And in the long term we expect this to level out quite frankly.

Great. Okay.

And in the short run, you're shifting manufacturing to the U.S. as much as you can, but you're at the early stages of that shift.

Is that a good way to think of that?

Yeah, we had started this before. Again, the intention wasn't before we heard of anything about tariffs or whatnot, there was a focus on government opportunities that would be manufactured in the States.

This has escalated that ramp-up. So, it's not the first step, but earlier days, but not -- we didn't just start this a month ago.

Okay, great. Okay, thanks.

Thanks for all the color. I appreciate it.

It's hard questions to answer. I'll pass the line.

Hi, good afternoon. It might be too early to say, but should we anticipate a meaningful uptick in CapEx associated with building that more capacity in the U.S?

And if so, any way to think about that quantitatively?

Yes, I mean we do we've been planning this for quite some time. So, from a materiality perspective, they could we could have CapEx of $2 million to $5 million type of a thing, the cost over the next 6 months to 12 months, but we are not going to double our capital assets or anything like that.

That's kind of how we quantify that $2 million to $5 million of extra CapEx across multiple quarters.

Is this already a topic that's coming up in customer discussions or is it just so early days that your customers are also scratching their heads trying to make sense of it?

This has been a topic with customers from I would say since the initial discussions of this well over a month ago.

All right. Maybe on a different topic, the international business obviously year-to-date has been down significantly.

And I realize that that can be dependent on maybe some projects in the year-ago quarter that didn't repeat. But just in general, is there anything else to point to in terms of the growth challenges international has had, not only over recent quarters but also kind of more broadly in recent years relative to North America, anything you'd call out?

I mean international revenue, so year over year we did have a large project we press released that was went out in the prior year that was around $25 million approximately at a macro level to call out. I don't have a specific item to call it at a macro level.

Okay. Generally speaking, anything of note that you'd call out as far as the overall spending environments be it either across either of the key geographic regions?

Thanos, could you repeat that question you broke up at the end?

Yeah. Just asking whether there's anything you'd call out as far as the spending environment.

Would you characterize the status quo or any changes you've seen be it in Europe or North America as far as overall demand?

Overall demand for these products remains very robust. That said there is uncertainty around the current tariff situation.

We are very much looking forward to having close contact in April at NAB, our largest annual trade show. So that will definitely help us continuing those relationships and continue to build our strong backlog and order book.

All right. I'll pass the line.

Thank you.

Thank you, Andrew. 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 third quarter of fiscal 2025, which saw record-high quarterly sales of $136.9 million solid gross margins of 57.8% in the quarter, which together with Evertz disciplined expense management yielded basic quarterly earnings of $0.28 per share.

We're entering into the last quarter of fiscal 2025 with significant momentum fueled by a combined purchase order backlog plus February shipments totaling in excess of $308 million by the growing adoption and successful large-scale deployments of Evertz IP-based software-defined video networking and cloud solutions by some of the largest broadcast new media service provider and enterprises in the industry. And by the continuing success of DreamCatcher Bravo, our state-of-the-art IP-based replay and production suite.

With Evertz significant investments in software-defined IP, IT and cloud technologies, the over 600 industry-leading IP SDN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position to provide innovative solutions to customers and deliver to shareholders. Thank you, everyone and good night.