Evertz Technologies Limited

Thank you, Constantine. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2026 first quarter ended July 31, 2025, 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's 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'll begin by providing a few highlights, and then Doug will provide additional detail.

First off, sales for the first quarter totaled $112.1 million, including $51.6 million in software and services revenue, representing 46% of total revenue. Our sales base is well diversified with the top 10 customers accounting for approximately 50% of sales during the quarter with no one customer accounting for more than 9% of sales.

In fact, we had 114 customer orders of over $200,000. Gross margin in the quarter was $68.8 million or 61.4% up from 59.4% in the prior year.

Net earnings were $11.9 million, up 22% from the prior year, while fully diluted earnings per share were $0.15 for the quarter. Investment in research and development totaled $37 million in the quarter.

Evertz' working capital was $202.6 million, including cash of $124.3 million as at July 31, 2025. At the end of August, Evertz' purchase order backlog was more than $252 million and shipments during the month of August were $41 million.

We attribute the strong financial performance and robust combined shipments and purchase order backlog to channel and video service proliferation, increasing global demand for high-quality video anywhere, anytime, the ongoing technical transition to IP, IT and cloud-based architectures in the industry and specifically to the growing adoption of Evertz' IP-based software-defined video networking solutions, Evertz IT and cloud solutions, our immersive 4K, 8K ultra-high definition solutions and Evertz' state-of-the-art DreamCatcher IP replay and live production suite with BRAVO Studio featuring the iconic Studer audio. Today, Evertz' Board of Directors declared a regular quarterly dividend of $0.20 per share payable on or about September 25.

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

All right. Thank you, Brian.

Starting with revenue. After a slow start in May of 2025, sales were $112.1 million in the first quarter of fiscal 2026, a slight increase compared to $111.6 million in the first quarter of fiscal 2025.

Hardware revenue increased quarter-over-quarter from $55.7 million to $60.5 million, while software services revenue decreased from $55.9 million to $51.6 million in the current quarter. Revenue from the Software Services segment there represented approximately 46% of the total revenue in the quarter.

Looking at regional revenue. Quarterly revenues in the U.S./Canadian region were $79.5 million compared to $73.9 million in the prior year, while quarterly revenues in the international region were $32.7 million compared to $37.7 million in the prior year.

The International segment represented 29% of total sales in the quarter as compared to 34% last -- the same period last year. Gross margin for the quarter was 61.4% as compared to 59.4% in the prior year and slightly above our target range.

While the gross margin was above our target range for the second quarter in a row, that's largely being driven by product mix, including a relatively high proportion of higher-margin software service revenue in the quarter. Turning to selling and admin expenses.

S&A was $18.6 million in the first quarter, an increase of $1 million from the same period last year. And selling and admin expenses as a percentage of revenue were approximately 16.6% as compared to 15.8% for the same period last year.

Sequentially, S&A is down approximately $2 million from Q4. That's largely driven by the non-reoccurrence of NAV, which we attended in April of this year.

R&D expenses were $37 million for the first quarter. That represents a $0.3 million decrease over the same period last year.

As a percentage of revenue, R&D expenses were 33% compared to 33.5% in the prior year. The higher percentage is largely being driven by softer revenue in Q1 this year and last.

Investment tax credits for the quarter were $3.3 million. Foreign exchange for the first quarter was a gain of $0.7 million as compared to a foreign exchange gain of less than $1 million in the first quarter last year.

U.S. dollar closed at approximately $1.38 on July 31, not significantly different from its closing rate as at April 30.

Turning to a discussion of liquidity of the company. Cash as at July 31 was $124.3 million, increasing compared to cash of $111.7 million as at April 30.

Working capital was $202.6 million as at July 31 compared to $206.9 million at the end of April 30. The company generated cash from operations of $33.5 million.

That includes $18 million change in noncash working capital and current taxes. The effects in the change in noncash working capital and current taxes were excluded from the calculation, the company would have generated $15.5 million in cash from operations during the quarter.

The company used $0.5 million for investing activities, which was principally driven by the acquisition of capital assets of $1.4 million and partially offset by proceeds of disposals of $900,000. The company used cash and financing activities of $20.2 million, which was principally driven by dividends paid of $15.1 million and the repurchase of capital stock under our NCIB plan of $3.8 million, which translated to approximately 317,000 shares purchased and canceled in the quarter.

Finally, looking at our share capital position as of July 31. Shares outstanding were approximately 75.5 million and options and share-based RSUs outstanding were approximately 2.1 million at the end of the quarter.

During the quarter, approximately 2.7 million options expired. Weighted average shares outstanding were 75.5 million and weighted average fully diluted shares were 76.6 million for the year -- or the period ended July 31, 2025.

That concludes the review of our financial results and position for the first 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 our annual information form and the official reports filed with the Canadian Securities Commission.

Brian, back to yourself.

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

First place I'd like to start is the gross margins, strong. Can you remind us what your target is and whether there's any intent to adjust that?

And then I think you said that software was down in the mix year-over-year in the quarter, but you also said that the gross margins were driven by high-margin software. So if you could just maybe provide a little more color around, you may bridge between those 2 things so I can understand what's going on there.

So first of all, note that there's a lot of volatility in our margin. It's driven by product mix.

So we haven't -- we're not changing our target at this point. It's 56% to 60%.

We have had 2 quarters now that have exceeded that. But of course, just 3 quarters ago, we were at 57% before we adjust our target range, we had a greater track record of variance there.

Yes so the comments on the -- driven by the software and service revenue. So first of all, that includes software and services.

And year-over-year, you're correct, it's down the software and services year-over-year, even as a proportion. But as a proportion over the past 3 quarters, it's increased.

So our software revenue is generally higher margin than, of course, services or hardware. And being at 46% is part of the reason why that product mix pushed it up.

So even Q1 last year was high 59s, so with a high proportion. But it's not a direct mathematical calculation, but there's certainly a correlation between higher proportion of software and services and margin.

Is there anything worth calling out like product-wise, what is the -- like what is the product that is driving the high margin? Like a category you'd highlight?

No. I mean there's a significant portfolio of products that are within software and services, right?

So I will remind that there's 2 different types of software and services recognized that's some over time. So whether it's SLAs, warranties, and then there's other components that are -- could be a software site acceptance that triggers a release of revenue.

So it is -- fortunately, it's a fair mix of products that go into that category.

Okay. So what could have happened here is like a milestone in software revenue recognition at high margin or something like that?

Is that good...

That happens every quarter projects that get released in that manner.

Okay. And then the other notable thing that jumped out to me was the cash balance, quite high.

Maybe I know that you always say that it's a decision driven by the Board, but I was hoping you can give us some insight into the thought process, how you would go about deploying that capital, whether it's M&A or dividend. If you can give us a sense of the thought process, that would be helpful.

So Rob, the thought process is quite consistent. We have distributed via regular quarterly dividends, which have been increasing in each of the last 5 years.

Now cash has been building up to a very significant level. We are -- we do continue to look at acquisition opportunities.

But again, the acquisitions have to align with our growth and long-term strategic plan such that they provide very good shareholder value over the long haul. And those -- that thought process is what the Board considers each quarter.

I will also highlight that Q2 often has a large negative cash flow swing in working capital. Last year in Q2, we used cash from -- and working capital of $30 million, including $20 million payables.

That's coinciding with looking ahead to past Q2s are forward and behind. That's often we pay our incentive plans out in Q2, which is cash.

Looking ahead, we're also looking at acquiring a building that we are currently leasing for CAD 2.5 million to CAD 3 million. So there is some significant today, the cash balance, but we do expect the cash to decrease over the next quarter.

And not a normal course issuer bid is in effect.

Okay. And then the last question before I hand it off to someone else.

Just a high-level product question, 2 part. You're just fresh at IBC.

But maybe you could give us a sense of what the areas of interest in the Evertz product lineup are? And the second part would be just everyone is looking at the Oracle results this morning and there's enormous amount of infrastructure build in the data center.

And I thought maybe there's an opportunity for you to talk about potential applications for your IP switching product given the deterministic nature and if there's an application inside of that data center build or something that you're looking at, and then I'll pass the line.

So Rob, IBC does begin on Friday. So yes, we are looking forward very much to seeing our customers over the weekends and resuming the relationships.

So we're very excited by the lineup of products that we're releasing and reinforcing our long-term commitment to investment in R&D and innovation. Of course, the IP-based and cloud-based solutions are a very integral part of our product portfolio and a big driver.

So we are excited by those opportunities and not just in the data center, but in customer facilities as well to on-premise and in the cloud.

Just with respect to M&A opportunities, we've heard the comments from some other companies that there's kind of more stuff available as of late. PE has been kind of looking to monetize assets and so forth.

Are you seeing more M&A opportunities in the past or anything you see on that front?

Thanos, you were breaking up. I didn't hear all of your question, but I believe you asked, are we seeing more opportunities than in the past?

Yes.

I would say it's a fairly consistent level of acquisition opportunity. So there are targets available.

And as I said, we do investigate and analyze those opportunities, but we're very selective in terms of ensuring that we've got alignment with Evertz' portfolio of products and our growth areas that we're looking at, whether it's in our core markets or adjacent markets. And so that is an ongoing process.

Okay. Can you update us on your U.S.

expansion, how that's proceeding and whether we should be mindful of any cost or margin implications as that continues to ramp up in the near term?

So I can give you an update for sure. So our location in India, Pennsylvania, just outside Pittsburgh, we're continuing to ramp up capacity there.

It's not fully operational in the sense that we can't manufacture everything there at this point, but we're continuing to ramp that up. To date, we've -- in that part of that expansion, we've incurred about a little over $2 million in costs that we've already incurred.

And then we do -- that's a building we currently lease that we will be planning on purchasing and hopefully closing this quarter, which will cost an extra $2.5 million to $3 million. I'm sorry, I don't know if there was a second part of that question, but...

Yes, just whether we should still got any margin implications as you continue to ramp up production there and that becomes maybe a larger part of the relative mix?

There will be certainly some additional -- as there already is, some additional costs incurred by having some, say, redundant staff, you would say, having people here and there doing similar things. But at this point, it's not overly material.

So it's not -- I'm not able to specifically quantify a significant impact. I don't expect a significant impact at this time.

And any update you can provide in terms of what you're seeing from customers outside of broadcast and media, so be it in AV or in other parts of other end markets?

So we continue to have good traction and success in the adjacent markets, specifically our Evertz AV. However, the press releases are somewhat sparse from that customer set.

Oftentimes, government and military installations do not provide those press releases. So that is very much a focus of part of our business and a successful part.

However, I can't provide you additional color.

On a relative basis, can you comment on whether that's growing any faster or slower than the broadcast media market?

It has greater potential for us as it's a newer market.

I'd like to thank the participants for their questions and to add that we are pleased with the company's performance during Q1 of fiscal 2026, which saw sales of $112 million, including $51.6 million in software and services revenue. Strong gross margins of 61.4% for the year, up from 59.4% in the prior year, along with continued investments in R&D totaling $37 million in the year.

We closed the first quarter of fiscal 2026 with significant momentum fueled by combined purchase order backlog plus August shipments totaling in excess of $293 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 in the broadcast and media technology sector, providing high reliability reliable, innovative solutions to customers and delivering to shareholders.

Thank you. We look forward to having many of you join us on Wednesday, the 1st of October at our Annual General Meeting.

Good night.