Evertz Technologies (TSX:ET) held its first-quarter earnings conference call on Wednesday. Below is the complete transcript from the call.
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Summary
Evertz Technologies reported Q1 fiscal 2027 sales of $118.3 million, a 5.5% increase from the previous year, with software and services revenue contributing $58.9 million.
International revenue grew by 17.5% to $38.3 million, while the company's gross margin decreased to 58.6% from 61.4% the previous year.
The company holds a strong order backlog of over $259 million, attributed to increased demand for their IP-based solutions and global video service proliferation.
Despite challenges in the supply chain, Evertz maintains effective inventory management, particularly in memory and storage, to mitigate delays and component cost increases.
R&D investment increased to $38.5 million, reflecting ongoing commitment to innovation, particularly in IP, IT, and cloud technologies.
The company declared a quarterly dividend of 20.5 cents per share and noted no significant impact from tariffs due to strategic manufacturing and product classification.
Management emphasized the strong order intake in government and defense sectors, highlighting Evertz's competitive position in providing solutions to Canadian and U.S. governments.
Full Transcript
OPERATOR
Good morning, ladies and gentlemen, and welcome to Evertz Technologies' Q1 of fiscal 2027 investor call, this time online, journalism-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Monday, September 14, 2026. I would now like to turn the conference over to Ryan Campbell. Please go ahead.
Brian Campbell
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's 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's working capital was $131.4 million, including cash of $2.5 million as at July 31, 2026. At the end of August, Evertz's 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's IP-based software-defined video networking solutions. Evertz's IT and cloud solutions, our 4K and 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's Board of Directors declared a regular quarterly dividend of 20.5 cents per share, payable on or about October 1st. I will now hand over to Doug Moore, Evertz's Chief Financial Officer, to cover our results in greater detail.
Doug Moore, Chief Financial Officer
All right, thanks, Brian. Hey, 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 $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 total sales in the quarter.
Gross margin for the quarter was $58.6 million as compared to $61.4 million 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 administrative 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 administrative expenses as a percentage of revenue were approximately 16.8% compared to 16.9% for the same period last year. Year-over-year 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 non-recurrence 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 the prior year, and stock compensation expense, while it's up less than $100,000 sequentially to $2.4 million, is 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 of 2025 that are being recognized over the vesting period since issuance. Foreign exchange for the first quarter was a loss of $500,000.
That's 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 of 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 of July 31, 2026 compared to $200.2 million at the end of April 30, 2026.
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 non-cash working capital and current taxes. If the effects of the change in non-cash 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 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 of 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 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.
Brian Campbell
Thank you, Doug. We're now ready to open the call to questions.
OPERATOR
Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star followed by the number one on your telephone keypad. To withdraw your question, please press star followed by the number two. With that, our first question comes from the line of Tanis Mistropoulos with PMO Capital Markets. Please go ahead.
Tanis Mistropoulos, Analyst at PMO Capital Markets
Good afternoon. 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's that dynamic influencing your margins? Thanks.
Doug Moore, Chief Financial Officer
Yeah, sure. So I'll address that. So on the supply chain, that's really, you know, it's chewed up a big chunk of our cash as the lead times are being pushed out with this AI demand. During the quarter, we would have had some delays in server receipts and 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 pass on a cost is a case-by-case basis. It's not a direct line, but it's not affecting our margins at the moment. We're still within our target range, we're getting healthy margins, and we don't forecast a decrease at this time.
Tanis Mistropoulos, Analyst at PMO Capital Markets
And on tariffs, you mentioned no real impact to date, so that's remained the case. Is that a function of just being able to migrate your manufacturing to your U.S. operations, or is it that there isn't a lot within your scope that's impacted by the new U.S. tariffs?
Doug Moore, Chief Financial Officer
The scope is a big factor. So there's multiple different methods—we can build in the States, as you know, we can shift things around—but it's really not materially impacting us.
Tanis Mistropoulos, Analyst at PMO Capital Markets
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?
Doug Moore, Chief Financial Officer
On the sales side, I could say it's lumpy. In general, in the quarter it was between 5% to 6% of revenue. Probably wants to add more color, but we did have some strong order intake in August from government sales, but I can't specifically quantify. I don't know if there's additional color you want to add, Brian.
Brian Campbell
So I would reiterate the strong order intake. We've been very active 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, you know, with our campus in Burlington, our manufacturing operations, and our over 600 engineers and staff domiciled in Canada, we feel that we've got a very compelling solution to provide to the 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.
Tanis Mistropoulos, Analyst at PMO Capital Markets
All right, I'll pass. Thank you.
OPERATOR
And your next question comes from the line of Paul Shriver with RBC Capital Markets. Please go ahead.
Paul Shriver, Analyst at RBC Capital Markets
Well, thanks, and good afternoon. Just a question on the backlog. Sequentially there's 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 regards to backlog?
Doug Moore, Chief Financial Officer
I can comment on the backlog composition. So it's a relatively broad-based increase. There's no specific contracts material or press-releasing on their own, but there are some contracts in the $5 to $10 million size, but that's not totally atypical. So it's relatively broad-based. And—sorry, there was a second part there.
Paul Shriver, Analyst at RBC Capital Markets
No, no—just on the breadth, which you discussed. The shifting of revenue with international being much stronger than U.S.—what was driving international in the quarter? And then conversely, in terms of the U.S. or North America, were there any factors that were potentially weighing on demand that you haven't seen in previous quarters?
Doug Moore, Chief Financial Officer
No, I mean, so we are very project-centric. So there were a few projects that were completed internationally. In particular, we had a few in Europe. That's just the lumpiness of the nature. As it relates to Canadian/U.S. demand, there's no specific factors to drive an offsetting decrease or anything like that. It's just really more the lumpiness of where the projects occurred.
Paul Shriver, Analyst at RBC Capital Markets
Okay, and then just lastly, with more and more of your software incorporating some AI features, how are you looking to manage AI-related costs that get embedded into software? Do you anticipate lower margins on products with AI, or is it relatively negligible?
Doug Moore, Chief Financial Officer
Yeah, I think it's the latter—so negligible. We don't change, I guess, the margin profile whether they're AI-embedded or not. Yeah, that's probably the best way to answer that.
Paul Shriver, Analyst at RBC Capital Markets
Okay, thank you. I'll be fine.
OPERATOR
All right, thank you. And your next question comes from the line of Robert Young with Canaccord Genuity.
Robert Young, Analyst at 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? I understand it's up year over year, but what would be the driver of the quarterly, the sequential drop?
Doug Moore, Chief Financial Officer
The only real 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 yeah, there's no real—other than, like I said, the annual renewals of licenses—there's nothing specific to point to for seasonality.
Robert Young, Analyst at Canaccord Genuity
Okay, and then what was the driver of the year-over-year growth then in software and services?
Doug Moore, Chief Financial Officer
Sure, so it's project-based. There are a few projects that would have been completed. There's a general baseline—if you look at our MD&A in the last eight quarters—where there's 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 into revenue—international revenue.
Robert Young, Analyst at Canaccord Genuity
Right. And then so over the last eight quarters, as you know, the data in the MD&A shows that you have a steadily increasing mix of software. Maybe if you just talk at a high level about the growth in the percentage of revenue coming from software as a service, what's the driver of that?
Doug Moore, Chief Financial Officer
That 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 are 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.
Robert Young, Analyst at Canaccord Genuity
And then the previous question about the growth in the backlog—first time we've seen that. Is the software and services line the driver behind that? Is it long—
Doug Moore, Chief Financial Officer
—duration programs, or it's actually the current increase. The 9% is actually more hardware-driven than it is software. So part of our contracts came in—everything's got a mix—but they're hardware-centric is what I would say. Some of those contracts that we brought in were also government-related, which generally are more hardware-centric.
Robert Young, Analyst at Canaccord Genuity
Okay, and then last question for me, just to push you a little harder on this mitigation of tariffs. In the past you 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 could 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 early buying to avoid it.
Doug Moore, Chief Financial Officer
So we're not—you know, the U.S. office is largely—you know, not everything's being produced out of there. But 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— 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. At the moment it's not.
Robert Young, Analyst at Canaccord Genuity
So is that your assessment, or is that an assessment of the—like, you've not been assessed tariffs to date, and it's because the codes related to the way you file don't line up with the codes provided in the—
Doug Moore, Chief Financial Officer
Sorry, it's not that there's no impact of tariffs. We've had—you know, there's been some marginal cost over the past year or so. But the majority of our stuff is not assessed with tariffs.
Robert Young, Analyst at Canaccord Genuity
—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?
Doug Moore, Chief Financial Officer
Not materially, no.
Robert Young, Analyst at Canaccord Genuity
Okay, thank you. I'll pass the line.
OPERATOR
Thank you. And I'm showing no further questions at this time. I would like to turn it back to Brian Campbell for closing remarks.
Brian Campbell
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 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 investment in R&D, which totaled $38.5 million in the quarter. We closed the first quarter of Evertz's 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's 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's 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, 7th October, at our annual general meeting. Good night.
OPERATOR
And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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