EVTZF (EVTZF) Q1 2027 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Evertz Q1 and Fiscal 2027 Investor Call. [Operator Instructions] This call is being recorded on Monday, September 14, 2026. I would now like to turn the conference over to Brian Campbell. Please go ahead.

Good afternoon, everyone, and welcome to Evertz Technologies conference call for our Fiscal 2027 First Quarter ended July 31, 2026, 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 $118.3 million, up 5.5%, including $58.9 million in software and services revenue, which represents 49.8% of the total revenue. International revenue in the quarter was $38.3 million, up $4.6 million or 17.5% from the prior year. Our sales base is well diversified with the top 10 customers accounting for approximately 49% of sales during the quarter with no one customer accounting for more than 10% of sales. In fact, we had 87 customer orders of over $200,000. Gross margin in the quarter was $69.3 million or 58.6%, down from 61.4% in the prior year. Net earnings were $8 million, resulting in fully diluted earnings per share of $0.10 for the quarter. Investment in research and development totaled $38.5 million. Evertz' working capital was $131.4 million, including cash of $2.5 million as at July 31, 2026. At the end of August, Evertz' purchase order backlog was more than $259 million and shipments during the month of August were $30 million. We attribute this strong financial performance and robust combined shipments and purchase order backlog to channel and video services 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, our state-of-the-art DreamCatcher IP replay and live production with Bravo Studio featuring the iconic Studer audio. Today, Evertz' Board of Directors declared a regular quarterly dividend of $0.205 per share payable on or about October 1. I'll now hand over to Doug Moore, Evertz' Chief Financial Officer, to cover our results in greater detail.

All right. Thanks, Brian. Good afternoon, everyone. Starting with revenue. After a slower start in May of 2026, sales were up just over 5% to $118.3 million in the first quarter of fiscal 2027 compared to the $112 million in the first quarter of fiscal 2026. Hardware revenue declined slightly quarter-over-quarter from $60.5 million to $59.3 million, while software and services revenue increased 14% from $51.6 million to $58.9 million in the current quarter. Revenue from software and services represented approximately 50% of the total revenue in the quarter. Looking regionally, quarterly revenues in the U.S./Canadian region were $79.9 million compared to $79.5 million in the prior year. While quarterly revenues in the international region were $38.3 million, an increase of $4.6 million or 17% compared to $32.7 million in the prior year. The International segment represented 32% of the total sales in the quarter. Gross margin for the quarter was $58.6 million as compared to $61.4 million (sic) [ 61.4% ] in the prior year, and this quarter was within our target range. While down year-over-year, the gross margin, as I said, was within our target range, while our software and services revenue represented almost 50% of revenue, I'll note there was an increase in international revenue that counterbalanced that a bit. It's also worth noting that at this time, we aren't being materially impacted by additional tariff costs. Turning to selling and admin expenses. S&A was $19.9 million in the first quarter. That's an increase of $0.9 million from the same period last year. And selling and admin expenses as a percentage of revenue were approximately 16.8% compared to 16.9% for the same period last year. Year-over-year, the increase in S&A expenses included around $300,000 in additional trade show and travel costs as we've attended more trade shows in the quarter year-over-year, particularly within the government and military sector. Sequentially, S&A is down about $0.8 million from Q4. That's just as a reminder, the largest driver there is the nonreoccurrence of NAB that happened in April of the prior year. Research and development expenses were $38.5 million in the first quarter, that represented a $1.5 million increase over the same period last year. As a percentage of revenue, R&D expenses were 32.5% compared to 33% in the prior year. The increase in R&D expenses was driven by salaries of around $700,000 and also some patent-related professional fees for around $300,000. Investment tax credits for the quarter were $3.7 million as compared to credits of $3.3 million in the prior year. And stock compensation expense, while it's up less than $100,000 sequentially to $2.4 million, but it's up $1.3 million year-over-year. That increase year-over-year is driven by the equity-based RSU and share options we issued in December 2025 that are being recognized over the vesting period since issuance. Foreign exchange for the first quarter was a loss of $500,000 as compared to a foreign exchange gain of $0.7 million in the first quarter last year. Now turning to liquidity of the company. Cash net of bank indebtedness as at July 31, 2026, was $2.5 million. That's a large decline compared to cash of $19.1 million as at April 30, 2026. And that decrease is mostly driven by a sharp increase in raw materials inventory that we ended up bringing in during the quarter. Working capital was $215.1 million as at July 31, 2026, compared to $200.2 million at the end of April 30, 2026. Now looking at cash flows for the quarter. The company generated cash from operations of $0.8 million, which is net of a $16 million negative change in noncash working capital [ and ] current taxes. If the effects of the change in noncash working capital and current taxes were excluded from the calculation, the company generated $16.8 million in cash from operations during the quarter compared to $16.8 million in the first quarter of fiscal 2026. As noted, the use of cash was driven by a large increase in raw materials inventory. We brought in approximately $20 million of raw materials in the quarter, largely consisting of memory, storage and servers driven by the some of the supply chain increased lead times. The company used cash of $2.1 million for investing activities. That was principally driven by the acquisition of capital assets of $1.8 million and business acquisitions of $0.3 million. During the quarter, we acquired a small AV integrator in the Ottawa region for $300,000. The company used cash in financing activities of $16.8 million, which was principally driven by dividends paid of $15.5 million. Finally, looking at our share capital position as at July 31. Shares outstanding were approximately 75.7 million and options and share-based RSUs outstanding were approximately 4 million. Weighted-average shares outstanding were 75.6 million and weighted-average fully diluted shares were 77.6 million for the period ending July 31. That concludes the review of our financial results and position for the first quarter. 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 you.

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

[Operator Instructions] With that, our first question comes from the line of Thanos Moschopoulos with BMO Capital Markets.

From a supply chain perspective, you mentioned greater investment in inventory for some of the components. To date, are you able to manage supply constraints? Or is it having any impact in terms of delayed orders or shipments or anything like that? And also have you been able to pass through the pricing increases on the component costs? Or how is that dynamic influencing your margins?

Yes, sure. So I'll address that. So on the supply chain, that's really -- it's chewed up a big chunk of our cash as the lead times are being pushed out largely with this AI demand. During the quarter, we would have had some delays in server receipts in that. But as of today, we're not impacted by -- like we're not having part shortages or any kind of constraints in that regard. It's just really it's taken -- like I said, we've built up a lot of stock in memory and storage servers just to make sure we can deliver when we need to. And that's taken a lot of our cash out. On the cost side, so that's not a straightforward answer, I guess, I would say, whether or not you can -- it's a case-by-case basis on how you pass on costs. It's not a direct line, but it's not affecting our margins at the moment. Like we're still within our target range. We're getting healthy margins, and we don't forecast a decrease at this time.

And on tariffs, you mentioned no real impact to date. Do you expect that to remain the case? Is that a function of just being able to migrate your manufacturing to U.S. operations? Or is it that there isn't a lot within your scope that's impacted by the U.S. tariffs?

The scope is a big factor. So there's multiple different methods we can build in the States, as you know, we can ship things around. But it's really -- it's not materially impacting us.

Okay. And then finally, any update in terms of your opportunity within government and defense and how the pipeline there has been progressing over the past quarter?

On the sales side, I could say it's lumpy in general. In the quarter, it was between 5% to 6% of revenue. I don't know if Brian wants to add more color. But we are -- we did have some strong order intake in August from government sales, but I can't specifically quantify it, but I don't know if there's additional color you want to add, Brian?

So I would reiterate the strong order intake. We've been very active on -- both domestically in Canada, trying to increase our presence and position being a Made in Canada solution, not just a Canadian goods for classification purposes, but we're -- with our campus in Burlington, our manufacturing operations and our 600 engineers and staff domiciled in Canada, we feel that we've got a very compelling solution to provide to Canadian government. And historically, we have had a very good position within the U.S. government and defense community and at times, NATO as well.

And your next question comes from the line of Paul Treiber with RBC Capital Markets.

Just a question just on the backlog. Sequentially, there was quite a large rise there. Was that concentrated in a few large contracts? Or is it fairly broad-based? And what's the underlying demand trend that you're seeing in the backlog?

I can comment on the backlog composition. So it's a pretty relatively broad-based increase. There's no specific contracts material of press releasing on their own. But there is some contracts in the $5 million to $10 million size, but that's not totally atypical. So it's a bit relatively broad-based. And then sorry, there was a second part there.

No, no. Just on the breadth, which you've discussed. The -- shifting to revenue with international being much stronger than U.S. The -- is there -- what was driving international in the quarter? And then conversely, like in terms of the U.S. or North America, was there -- were there any factors that were potentially weighing on demand that you haven't seen in previous quarters?

No. I mean, so the -- we are very project-centric. So there was a few projects that were completed internationally. So in particular, we had a few in Europe. That's just the lumpiness of the nature. As it relates to Canadian and U.S. demand, there's no specific factors to drive an offsetting decrease or like that. It's just really more the lumpiness of where the projects [ occur ].

Okay. And then just lastly, just with more and more of your software incorporating some AI features, how do you -- how are you looking to manage AI-related costs that get embedded into software? Like do you anticipate lower margins on products with AI? Or is it relatively negligible?

Yes, I think it's the latter, so relatively negligible. We don't change, I guess, the margin profile, whether they're AI embedded or not. It's -- yes, that's probably the best way to answer that.

And your next question comes from the line of Robert Young with Canaccord Genuity.

First question for me would be on the quarter-over-quarter dip in the software and services line. I think last year, it was the same type of dip quarter-over-quarter. So is there some seasonality there to understand? Or I understand it's up year-over-year, but what would be the driver of the quarterly -- the sequential drop?

It's not so -- the only really seasonality we would have in the sense of software and services is more towards Q3 when there's a lot of annual license renewals for calendar year ends. But even then certain customers are over various periods. Some of that's just driven by volumes. So it's not so much a seasonality as it is volume driven, I guess. But yes, there's no real -- other than -- like I said, other than the annual renewals of licenses, and there's nothing specific to point to for seasonality.

Okay. And then what was the driver of the year-over-year growth then in software and services?

Sure. So it's project-based. So there's a few projects that would have been completed. So there's a general baseline, if you look at our MD&A in the last 8 quarters where there's a, I guess, a general baseline, I'll call it. But there is -- as projects get completed, sign-offs like SAT sign-offs, acceptances, then basically they get recognized into revenue. So if -- for example, there's a project in Europe that got signed off, it would go to revenue, then international revenue.

Right. And then -- so over the last 8 quarters, as you know, the data in the MD&A shows that you have a steadily increasing mix of software. And maybe you could just talk at a high level what the growth in that -- the percentage of revenue coming from Software-as-a-Service, what's the driver of that?

That is -- this is the long-term trend of our business model having more -- we're still very hardware-centric, of course. But having software solutions that used to be solely hardware. Now there's software solutions. We have more service level agreements than we had in the past. It's just the long-term trend we've had in our business model.

And then the previous question about the growth in the backlog, first time we've seen that. Is that -- is the software and services line the driver behind that? Is it long duration programs or...

It's actually -- the current increase, the 9% is actually hardware. It's more hardware driven than it is actually software. So there's -- a big part of our contracts came in. Everything has got a mix, but they're hardware-centric is what I would say. So there are some of those contracts that we brought in were also government related, so -- which generally are more hardware-centric.

Okay. And then last question for me, just to push you a little harder on this mitigation of tariffs. In the past, you've said that you were protected under the NAFTA or CUSMA, and it seems as though that's no longer a protection. And so I'm curious if you just get into maybe a little more detail around how you're mitigating? Are you able to service all of your U.S. demand out of your U.S. manufacturing? And I guess I was kind of anticipating a higher level of U.S. revenue crowding in, in front of this increase in tariffs, which we didn't see. And so I'm just trying to get a better understanding of how you're mitigating and why there wasn't any, in fact early buying to avoid it.

So we're not -- the U.S. office is largely -- not everything is being produced [indiscernible] there. So it's more government-related projects, we'll say, is the focus. The majority of our products are currently being protected by the USMCA. The tariff -- there's the various codes that have been applied to products and the majority of our stuff is not being impacted at the moment. But it's a volatile situation, but at the moment, it's not.

Okay. So is that your assessment? Or is that an assessment of the -- like you've not been assessed tariffs to date on -- and it's because the codes related to the way you file don't line up with the codes provided in the...

It's not that we're done. Yes. Sorry, it's not that there's no impact of tariffs. Like we've had -- there's been some marginal costs over the past year or so, right? But I mean, the majority of our stuff is not being -- is not assessed with tariffs.

And that's having no real expected impact on your margin structure or it's not a headwind to growth in the U.S. market?

Not materially, no.

And I'm showing no further questions at this time. I would like to turn it back to Brian Campbell for closing remarks.

Thank you. 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 2027, which saw sales rise of 5.5% to $118.3 million, including $58.9 million in software and services revenue, solid gross margins of 58.6% for the quarter, along with continued investments in R&D, which totaled $38.5 million in the quarter. We closed the first quarter of Evertz fiscal 2027 with significant momentum fueled by a combined purchase order backlog plus August shipments totaling in excess of $289 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 new media and broadcast players in the industry and with government, defense and enterprise. And by the continuing success of our DreamCatcher Bravo 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. Thank you, and we look forward to having many of you join us on Wednesday, the 7th of October at our Annual General Meeting. Good night.

And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.