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Evertz Technologies Limited (EVTZF) Management on Q4 2020 Results – Earnings Call Transcript

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Evertz Technologies Limited (OTCPK:EVTZF) Q4 2020 Earnings Conference Call June 30, 2020 5:00 PM ET

Company Participants

Brian Campbell – EVP of Business Development

Doug Moore – CFO

Conference Call Participants

Thanos Moschopoulos – BMO Capital Markets

Robert Young – Canaccord Genuity

Paul Treiber – RBC Capital Markets

Bill Zhang – Raymond James

Steven Li – Raymond James

Operator

Good day, ladies and gentlemen, and welcome to the Evertz Q4 2020 Conference Call. As a reminder, today’s conference is being recorded. It is Tuesday, June 30, 2020.

At this time, I’d like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, Mr. Campbell.

Brian Campbell

Thank you, Brett. Good afternoon, everyone, and welcome to the Evertz Technologies conference call for our fourth quarter ended April 30, 2020, with Doug Moore, Evertz’ Chief Financial Officer; and myself, Brian Campbell.

Please note that our financial press release and MD&A are now available on SEDAR. Doug and I will comment on the financial results and then open the call to your questions.

Before delving into our recent business results and outlook, I’d like to briefly address the extraordinary COVID situation. Evertz is a technical innovator delivering operational excellence a fundamentally sound business committed to protecting our people, our partners and supporting our customers. We’re proud of the role we play as an essential service provider and critical supplier, enabling vital telecommunications, broadcast and new-media services worldwide.

We’re appreciative of continuing strong partnerships with our customers and for the extraordinary efforts made by our employees to continue to support our customers and drive our business forward.

Turning now to Evertz’s results I’ll begin with select annual and fourth quarter highlights following which Doug will provide more digital. First off I am pleased to report sales for the fiscal year totaled $436.6 million, driven by the adoption of Evertz’s new technologies.

Annual net earnings were $69.2 million resulting in fully diluted earnings per share of $0.90 for fiscal 2020. Liquidity and capital resources remained robust with cash at $75 million at April 30, after the return of $124.3 million by a special and quarterly dividends to shareholders.

Investment in research and development totaled $90.8 million for fiscal 2020 further reinforcing Evertz’s commitment to R&D. Moving on to the fourth quarter, operations were impacted by the global COVID-19 pandemic. We moved quickly to implement a number of actions including work place best practices from national and local authorities, implemented the avoidance of essential travel, we scaled work from home protocols and worked closely with our customers to provide service and support via online tools to the maximum extent possible, all while maintaining our manufacturing capabilities across multiple sites.

Turning to the financials, sales in the fourth quarter were at $92.2 million. Gross margin for the fourth quarter was $52.1 million or 56.5% of sales and foreign exchange for the fourth quarter was a gain of $6.1 million. Net earnings for the fourth quarter were at $16 million while earnings per share were $0.21.

At April 30, 2020, Evertz’s working capital was $223.7 million. We attribute our solid annual and resilient quarterly performance despite the onset of this unprecedented pandemic to Evertz’s fundamentally sound industry and financial position, the ongoing technical transition in the industry, channel and video services proliferation, the increasing global demand for high quality video anywhere, anytime and specifically to the growing adoption of Evertz’s IP-based software defined video networking solutions, Evertz’s IT and virtualized cloud solutions, our immersive 4K ultra HD solutions and our state of the art to our IP replay and live production suite.

Our sales base is well diversified with the top 10 customers accounting for approximately 42% of sales during the year with no single customer over 7%. In fact we had 443 customer orders of over $200,000 a modest increase over the $425 customer orders received last year.

In addition at the end of May the purchase order backlog was in excess of $94 million and shipments during the month were at $16 million. In response to the current uncertainty in an environment dominated by COVID-19 and by the desire to maintain the financial flexibility of the company the Board has declared a dividend of $0.09 per share, which is reduction in the regular quarterly dividend.

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

Doug Moore

Thank you, Brian. Good afternoon, everyone. Sales were at $92.2 million in the fourth quarter of fiscal 2020 compared to $107.2 million in the fourth quarter of fiscal 2019 which represent a decrease of $50 million and 14%. Sales for the 12 months ended April 30, 2020 were at $436.6 million compared to $443.6 million in the same period last year. This represents a decrease of approximately $7 million or 2%.

The decrease in sales was largely attributable to projects put on hold or cancelled in the fourth quarter as a result of the COVID-19 pandemic. US Canada region had sales for the fourth quarter of $58.7 million compared to $63.6 million last year, a decrease of 8%. Sales in the US Canada region were $289 million for the 12 months ended April 30, 2020 compared to $297.8 million in the same period last year. This represents a decrease of $8.8 million or 3%.

International region had sales for the quarter of $33.5 million compared to $43.7 million last year, a decrease of $10.2 million or 23%. Sales in international region were $147.6 million for the 12 months ended April 30, 2020, compared $145.8 million in the same period last year representing an increase of $1.8 million. International segment represented 36% of total sales in the quarter and 34% of total sales in the year as compared to 41% and 33% in the same respective periods last year.

Gross margin for the fourth quarter was approximately 56.5% and gross margin for the 12 months ending April 30 2020 was 56.9%, both of which were with the company’s target range. Selling and administrative expenses were $15.4 million for the fourth quarter, a decrease of $2.6 million from the same period last year. As a percentage of revenue, expenses were approximately 16.7% consistent with the same period last year.

A decrease in selling and administrative expenses was driven by the cancellation of trade shows and reduced trial and selling cost as a result of the pandemic. Selling and administrative expenses were $67.6 million for the 12 months period ending April 30, 2020, a decrease of $0.2 million from the same period last year. For the year, selling and admin expenses as a percentage of revenue were approximately 15.5% compared to 15.3% last year.

Research and development expenses were at $21.2 million for the fourth quarter which represents a $0.6 million decrease from the fourth quarter last year. For the year, research and development expenses were $90.8, which represents an increase of $5 million for over the same period last year. Research and development expenses were up for the year which is predominantly a result of an increase in R&D, salary and broadcast and headcount.

During the year $4.2 million in government assistance related to COVID-19 programs was deducted from expenses. Up to that $3 million was deducted from the fourth quarter R&D costs. Foreign exchange for the fourth quarter was a gain of $6.1 million compared to a gain of $1.9 million in the same period last year.

A gain $6.1 million was driven by the increase in the value of the US dollar against the Canadian dollar between January 31 and April 30, 2020. Foreign exchange for the 12 months ended April 2020 was a gain of $3.5 million or a gain of $3.4 million in the prior year.

Turning to a discussion of the liquidity of the company, cash as at April 30, 2020 was $75 million as compared to $104.6 million at April 30, 2019. Working capital was $223.7 million at April 30, 2020 compared to $282.5 million at the end of April 30, 2019. For the year, the company generated cash from operations of $109.3 million which includes $21.6 million change in noncash working capital and current taxes.

The effects of the change in non-cash working capital and current taxes are excluded from the company’s operating cash flows, the company would have generated $87.7 million in cash from operations. For the year, the company paid approximately $124.8 in dividends and acquired $10.1 million in capital assets.

Now looking specifically at cash flows for the quarter ended April 30, the company generated cash from operations of $47.1 million which includes at $25.5 million in noncash working capital and current taxes. The effects of the change in non-cash working capital and current taxes are excluded, the company would have generated $21.6 million cash from operations for the quarter.

The company used $3.1 million for investing activities which was principally driven by capital asset purposes. The company used cash from financing activities of $17.7 million which was principally driven by dividends paid of $13.8 million and capital stock repurchased under NCIB for $2.4 million.

Finally I’ll review our share capital position as of April 30, 2020. Shares outstanding were approximately $76.4 million and options outstanding were approximately $1.6 million. Weighted average shares outstanding were $76.6 million and weighted average fully diluted shares were also $76 million for the year ended. This brings to a conclusion of the review of our financial results and position for the fourth quarter.

Finally, I would like to remind you that some of the statements presented are forward-looking subject to a number of risks and uncertainties and we refer you to the risk factor described in the Annual Information form, official reports filed with the Canadian Securities Commission. Brian back to you?

Brian Campbell

Thank you, Doug. We’re now ready to open the call to questions.

Question-and-Answer Session

Operator

[Operator instructions] Our first question comes from Thanos Moschopoulos with BMO Capital Markets.

Thanos Moschopoulos

Hi. Good afternoon. Brian, can you give us a little bit more color in terms of the current demand environment. Clearly, shipments were weak for May. Can you comment on whether there has been an improvement in June and on what you’re hearing from your customers as some economies, globally, are starting to reopen?

Brian Campbell

So the way it looks currently May was a low points and we’re seeing solid quotation activities, quarter intake and yes customers are trying to move back. You see sports leagues starting to restart. That activity does involve oftentimes Evertz’s sales and solutions. So we’re seeing an uptake in activity.

Thanos Moschopoulos

And generally speaking, can you comments in terms of the weakness you’ve been seeing whether has had more to do with logistical issues be it customers having their facility shutdown or not being able to get it in the cross boarders or supply chain issues or live events not happening versus lower macro activity I guess weaker macro spending environment, I guess where we’re going with this is as we think about the recovery you know is it more a function of just you having some of the logistical things being addressed or we also have to see a stronger macro backdrop especially from the spending coming back?

Brian Campbell

I’ll address the first part of it. So yes our delivering inflations were definitely impacted by the boarder closures, shelter in place restrictions in geographies, state of emergencies in various states and countries. So as we said, we’ve worked to the extent possible remotely for both providing service and deployment of new installations and that involves trying to ensure that solutions can be very efficiently installed.

But again if the customers facility is closed, that’s closed the systems integrators and their staff as well too who are involved in deployments and you still need to have your systems integrators or others rack equipment, fun fiber and cables and the customer engineering staff available as well too. So the revenue is against that backdrop.

Thanos Moschopoulos

Okay. And from an OpEx perspectives, should we think about OpEx being similar to Q4 levels in the short-term? Have you done the headcount reduction at this point, are you contemplating any headcount reductions?

Brian Campbell

What I can speak is we’ve applied for different COVID related government assistance programs. During the quarter, we would have had $4.2 million a reduction in costs associated with those programs including the Canadian wage subsided as well as others. The month to month it’s conditional application but that has allowed us to maintain the vast majority of our headcount.

Thanos Moschopoulos

Okay. And then it might be hard to pin this down, I guess given where revenue might land, but how should we think about gross margins in the near term? I mean even on a much reduced revenue base, should we still expect margins stay above 50%? Or is that really give you comfortable revenue lens?

Brian Campbell

Our gross margin stated range is 56% to 60%. In the quarter, we’re at 56.5% which is well within the range then we haven’t announced any changes to that range.

Thanos Moschopoulos

Okay. I’ll pass the line. Thank you.

Brian Campbell

Thanks, Thanos.

Operator

Thank you. And we’ll take our next question from Robert Young with Canaccord Genuity.

Robert Young

Hi, good evening. You haven’t had any interruption in manufacturing. I don’t think I might have missed that in the prepared remarks.

Brian Campbell

Robert, that’s correct. We’re an essential service provider, our manufacturing operations have remained open, working, we’re delivering to customers on a daily basis around the globe.

Robert Young

Great and then I don’t want to read too much into the wording of that press release, but the dividend reduction, the way you described, it appears to be a temporary measure you’re going to revisit the decision in September maybe if you could talk about the process around the decision to reduce it. And then what decision points might be in the future?

Brian Campbell

So the decision process culminates with the board meeting and it’s a board decision. And as stated in the press release, it was a dividend reduction to maintain financial flexibility. Clearly, we don’t know the duration of the pandemic, we’re well positioned to work through it. The financial flexibility also enables us to keep our powder dry to look at opportunities for business developments and then in fact, we’re quite active on that front, currently.

Robert Young

Okay, so do you expected valuations in the sector will be attractive in the near-term? I guess the inference there might be that there’s a lot of businesses that you compete against that are on less stable financial terms than yourself?

Brian Campbell

Correct. Yes, there are and we remain very disciplined acquirers and we’re recipients of numerous phone calls from folks who are considering their strategic options. And our phone is open.

Robert Young

Okay. It might be helpful to, you haven’t done this in the past, but if there was any information you could give us into the composition of the backlog which remain relatively strong. But is there any way to understand how much of that backlog would convert in the near-term versus longer-term contracts or anything around the probability or lack of probability that backlog could be unbooked? The example I might think of there was the Olympics, would there be work related to the Olympics which might be unbooked for the backlog? Could you give any information on the backlog competition, that’d be very helpful.

Brian Campbell

So the backlog is composed of purchase orders and signed contracts. So there’s no pipeline at all in it. The composition does include some longer-term contracts not all that will be delivered in Q1 and Q2, but the majority would be.

Robert Young

Okay, if just to push a little harder on that, is there would it be I mean 50% of the backlog would convert inside of 12 months or is there any help you can provide along that line of question?

Brian Campbell

Not this time, Rob.

Robert Young

Okay. And then maybe last question for me will be you mean all the cultural changes we’re seeing, are you seeing any increase demand around IP infrastructure, cloud? Maybe just talk about any changes in the way that your customers are thinking about those new technologies. And I’ll pass on?

Brian Campbell

So Rob, definitely our customers are thinking about IP and cloud based solutions. That’s been the driving force for either it’s sales and sales growth in previous years. With respect to IP and our software defined networking solutions, we’ve had tremendous up tick globally, that continues to progress. And similarly with cloud based virtualized solutions, again we continue to have very strong position and innovative products for public cloud, private cloud and hybrid cloud solutions. Those do continue to deploy.

If anything, I think you’re going to see the mindset change of customers to be more proactive or continue to push their initiatives in that front into migration to the newer technologies, IP based infrastructure and cloud-based solutions. That said, we’re currently seeing strong up tick of our baseband solutions as well to some of which address UHD Immersive Solutions.

Robert Young

Okay, thanks a lot.

Operator

Thank you. We’ll take our next question from Paul Treiber with RBC Capital Markets.

Paul Treiber

Thanks very much. Good afternoon. Just in regards to what you saw in terms of demand in the quarter, was it fairly evenly spread across your customer base? Or was it weighted to any particular group or region, particular group customer group in terms of like live sports or broadcasters versus others. And also could you speak to just a regional mix and the demand trends there?

Brian Campbell

So with respect to the regional trends, the U.S. continues to be a very strong base for us, not only in sales, but also in quotation activity as well too. Similarly, you saw the international results were up this quarter marginally.

So we’re having strong International quotation activity as well too with respect to live sports where we have very strong customer base in basketball, baseball, football, soccer, in European football. And there we continue to deploy, those deployments are slowed down by COVID and the travel restrictions and the onsite customer access availability as well too. So we’re working through that, we actually have deployment teams and service people deployed, continuing to implement infrastructure solutions in North America less so internationally, but that is we’re continuing to work through and push deployments and help our customers deliver on their business plans.

Paul Treiber

Okay. And in the prepared remarks, you mentioned order cancellations. Could you speak to the terms in your contracts, if you typically receive any penalties, if there are cancellations or what’s sort of the business negotiations that you see when order cancellations come up?

Doug Moore

It’s not a heavily prominent thing, but it’s really dependent on the arrangement. So the broader discussion, I mean we’ve had cancellations with understanding that replacements will come in the future We’ve had cancellations that are associated returns or restocking fees and things like that, but of the postponements and cancellations with it, it’s more heavily weighted towards the postponements or the delays as opposed to actually receiving cancellations which is a rare event. It’s a rare event.

Paul Treiber

Okay. And last one for me. During typical seasonality heading into Q1 and then do you think at this point like ultimately, any seasonality will be overshadowed by the macro-economic environment where like the reopening of the economy and obviously live sporting events and other events?

Doug Moore

Evertz financial results have not shown a great degree of seasonality. So if there were any, it would be dramatically overshadowed by the COVID pandemic. But currently, we’re making very good strides. We’re pushing ahead with our business. And the main focus is delivering to our customers in support of their business plans in light of the restrictions and constraints that we’re dealing with.

Paul Treiber

Okay, thanks for taking my questions.

Operator

Thank you. We’ll take our next question from Bill Zhang with Raymond James.

Bill Zhang

Hi, guys. So I have a question related to operating margin trends. Should we expect some pressure during this pandemic period?

Doug Moore

Could you repeat that question for me, please?

Bill Zhang

So it’s related to operating margin trends. Should we expect some pressure during this pandemic period?

Doug Moore

Sorry, are you referring to gross margins at a cost — sales perspective or operating expense?

Bill Zhang

Operating.

Doug Moore

So, what I would reiterate is two components here. One that we did have government assistance or assistance programs that we would have recorded offset to operating expenses in the fourth quarter. We expect that to continue to occur in the first quarter of the next fiscal year, unable to quantify as a whole because it’s a month-to-month calculation, but then the impact of our inability to travel to certain regions would inherently reduce the associated costs of travel expenses.

Bill Zhang

Okay, thanks.

Doug Moore

So we remain solidly above a 20% operating margin, in fact for the year was 21.5%.

Operator

Thank you. And we will now take our final question. Our final question comes from Steven Li with Raymond James.

Steven Li

Hey thanks. Hey Brian, I joined a little late but I did say you speak of May as a low month with quotation activity having picked up. How about actual deployments access to customer premises, has that eased up May to June?

Brian Campbell

Yes, so with border restrictions open, Evertz is an essential service provider, so we can across the border for those customers where we have designation, that activity has been occurring and you’re seeing geographies, states and other locations try to open up and either resume their seasons or other activities. So that is reflected in our deployment activities as well too.

Steven Li

But compared to your normal state, I mean are there still restrictions impeding deployments at this stage?

Brian Campbell

Yes, absolutely. Yes, so it’s better than it was. But we continue to deal with local jurisdictions where various states have in the United States have different regulations. Some are more open, others have restrictions and we work within the regulatory environment for those locations. And so yes, we are deploying. And yes, we have to plan around those deployments. And we’re constrained by onsite access as well to in certain areas.

Steven Li

Okay, got it. Thanks.

Operator

Thank you. That concludes today’s question-and-answer session. I would now like to turn the conference back to Mr. Brian Campbell for any closing or additional remarks.

Brian Campbell

Thank you, Brett. I’d like to thank our participants for their questions. We reiterate that we’re encouraged by the company’s solid performance in fiscal 2020, achieving sales of $436 million delivering pre-tax earnings of 21.1% through disciplined cost control, all while investing $90.8 million in R&D to build future growth. While the company believes the COVID pandemic to be temporary, the situation is fluid and the impact of the pandemic on operations and results, including the impact on overall customer demand is uncertain at this time.

While the company is an essential service provider, widespread customer shutdowns and travel restrictions and the postponement or cancellation of sporting events as well as other live events and various other related projects will have an adverse effect on the company’s revenue and financial results in the first quarter and potentially the second quarter of 2021. Notwithstanding the uncertainty, the company believes the situation is temporary, and we’re well positioned to benefit from an economic revival and the industry transition to IP and Cloud based solutions. We’re cautiously optimistic as we enter the first half of 2021 with a combined purchase order backlog plus May shipments totaling $110 million and a pristine debt free balance sheet with over $75 million cash and equivalents, providing the financial flexibility needed to fund working capital and investment opportunities.

With our significant investments in software defined IP, IT virtualized and cloud technologies, industry leading deployments and the capabilities of our staff, Evertz is well poised to build upon our position as one of the largest pure players and leading innovators in the broadcast and new-media technology sector.

We’re confident that we will get through this together, emerge stronger, and we wish everyone the best during this difficult time. Thank you and good night.

Operator

Thank you. Ladies and gentlemen, this concludes today’s call. We thank you for your participation. You may now disconnect.

Source: Seeking Alpha

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