Good day, and welcome to the Evertz Technologies Quarter 2022 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Please go ahead, sir.
Thank you, Melinda. Good afternoon, everyone, and welcome to Evertz Technologies Conference Call for our Fiscal 2022 Second Quarter, ended October 31st, 2021. 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 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 second quarter totaled CAD 107.2 million, an increase of 7% compared to CAD 100.5 million in the second quarter last year.
This solid increase from our second fiscal quarter of 2021 was experienced primarily in the U.S./Canada region and was driven predominantly by the adoption of Evertz Technologies and products. Our base is well diversified, the top 10 customers accounting for approximately 44% of sales during the quarter, with no single customer over 8%. In fact, we had 122 customer orders of over CAD 200,000 in the quarter. Gross margin in the quarter was CAD 61.1 million or 57%, which is within our target range. Investments in research and development during the quarter totaled CAD 24.4 million. Net earnings for the second quarter were CAD 17.2 million, while fully diluted earnings per share were CAD 0.22. Evertz's working capital was CAD 144.9 million, with cash of CAD 37.7 million as at October 31st, 2021.
At the end of November, Evertz purchase order backlog was a record high CAD 162 million, and shipments during the month were CAD 39 million. We attribute this strong financial performance and robust combined shipments and backlog and purchase order backlog to the ongoing technical transition in the industry, channel and video services proliferation, increasing global demand for high quality video anywhere, anytime. Specifically to the growing adoption of Evertz IP-based software-defined video networking solutions, Evertz IP and cloud solutions, our immersive 4K Ultra HD solutions, our Stax Edit, DreamCatcher, IP replay, live production suites, and BRAVO Studio. Today, Evertz Board of Directors declared a regular quarterly dividend of CAD 0.18 per share, payable on or about December 23rd. I will now hand over to Doug Moore, Evertz Chief Financial Officer, to cover our results in greater detail.
Thank you, Brian, and good afternoon, everyone. Looking at revenues, sales were CAD 107.2 million in the second quarter of fiscal 2022, compared to CAD 105 million in the second quarter of fiscal 2020, an increase of CAD 6.7 million quarter over quarter. For the six months ended October 31st, 2021, sales were CAD 204.4 million, compared to CAD 156.8 million in the same period last year. This represents an increase of CAD 47.6 million or 30%. As it relates to revenues in specific regions, the U.S./Canada region had sales for the quarter of CAD 78.2 million, compared to CAD 66.9 million last year. This represents an increase of CAD 11.3 million or 17% quarter over quarter.
Sales in the U.S./Canadian region were CAD 142.6 million for the six months ended October 31st, 2021, compared to CAD 102.8 million in the same period last year, an increase of CAD 39.8 million or 39%. The International region had sales for the quarter of CAD 29 million compared to CAD 23.6 million last year, a decrease of CAD 4.6 million quarter-over-quarter. The International segment represented 27% of total sales this quarter as compared to 32% in the same period last year. For the six months ended October 31st, 2021, sales in the International region were CAD 61.7 million compared to CAD 54 million in the same period last year, an increase of CAD 7.7 million. Net margins.
Gross margin for the second quarter was approximately 57% compared to 59.4% in the prior year and within our target range. For the six months ended October 31st, gross margin was approximately 57.6%, also within our target range. Turning to selling and administrative expenses, S&A was CAD 14.8 million in the second quarter, an increase of CAD 2 million for the same period last year. Selling and admin expenses as a percentage of revenue was approximately 16.8% as compared to 12.7% for the same period last year. The increase is inclusive of CAD 1.1 million increase in travel and promotion costs associated with increased selling activities.
Selling and admin expenses were CAD 28.7 million for the six months ending October 31st, 2021, an increase of CAD 4 million from the same period last year. Selling and administrative expenses as a percentage of revenue for the six months were approximately 14.1% as compared to 16.8% for the same period last year. Research and development expenses were CAD 24.4 million for the second quarter, which represents a CAD 4.7 million increase from CAD 19.7 million in the second quarter last year. Investment tax credits, which relate to R&D expenses, were CAD 2.9 million in the quarter compared to credits of CAD 4.7 million in the second quarter last year.
The decrease in investment tax credits is driven by a favorable audit ruling relating to prior years that was recognized last year and did not reoccur this current year. For the six months ending October 31st, research and development expenses were CAD 49.1 million, which represents an increase of CAD 12.9 million over the same period last year. Research and development expenses as a percentage of revenue were approximately 24% over the period as compared to 23.1% for the same period last year. Turning to FX, foreign exchange for the second quarter was a gain of CAD 2.2 million when compared to a loss of CAD 1.3 million in the same period last year. The quarterly gain was primarily a result of the translation of US assets to Canadian dollars at a favorable exchange rate during the quarter.
Foreign exchange for the six months ending October 31st, 2021 was a gain of CAD 3.6 million compared to a loss of CAD 4.4 million in the same period last year. Turning to a discussion of liquidity for the company, cash as at October 31st, 2021 was CAD 137.7 million as compared to CAD 108.8 million at April 30, 2021. Working capital was CAD 144.9 million at October 31st compared to CAD 214.5 million at the end of April 2021. Looking now specifically at cash flows, the company generated cash from operations of CAD 0.9 million, which is net of the CAD 22.2 million change in non-cash working capital and current taxes.
If you exclude the change in non-cash working capital and current taxes are excluded from the calculation, the company generated CAD 23.1 million in cash from operations during the quarter. The company also used cash of CAD 1.9 million from investing activities, which was primarily driven by the acquisition of capital assets. The company used cash from financing activities of CAD 91.7 million, which was principally driven by dividends paid of CAD 90.3 million, including a special dividend of CAD 76.3 million. Finally, I will review our share capital position as of October 31st, 2021. Shares outstanding were approximately CAD 76.3 million, and options outstanding were approximately CAD 5.5 million. Weighted average shares outstanding were CAD 76.3 million, and weighted average fully diluted shares were CAD 76.6 million for the quarter ending October 31st.
This brings to the conclusion the review of our financial results and position for the second 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 Administrators. Brian, back to you.
Thank you, Doug. Melinda, we're now ready to open the call to your questions.
Thank you. If you'd like to ask a question, please do so by pressing star and one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment. We go to the line of Thanos Moschopoulos with BMO Capital Markets.
Hi, good afternoon. Brian, if I look at your North American revenue, it was up over 20% relative to Q1. Would the main driver of that be that perhaps the deployments environment and just the commercial systems getting your people on site just slightly. Did that dynamic improve? Is that what drove the strong uptick, or was there something else in play there?
That's a part of it. The U.S. region is the largest project for us. We've done extremely well with the customer base that we have there. Yes, the logistics for us delivering our products you know are well underway. We still incur you know problems crossing border, quarantining, and with this continued next wave of the COVID variants. We still have challenges, but we're doing very well delivering to our key customers. That is helping to drive revenue in the U.S. region.
Sort of a related question, if we look at your international revenue, it's been kind of trending down for the past five quarters now. Is the story there that, you know, the situation there hasn't really improved from a customer perspective, and that you're kind of optimistic about the data?
It's stable. It's good, but it's stable.
Mm-hmm.
Yes, it is. We've been, you know, averaging just over CAD 30 million each quarter for the last five quarters or so internationally.
Okay. I know we've talked about this question in the past. It hasn't been an issue to date. You know. Any problems on that front? Are you still able to secure all the components that you need? Or any challenges in that regard, or just basically in terms of being able to, you know, ship your equipment where it needs to go?
I guess your question's multi-part, you know, components and constraints. I'll let Doug Moore jump in there.
Sure. For the components constraints, I would say it is exceedingly challenging. It is getting more difficult even as time passes on, regarding procurement lead times and in some cases, component cost. We have actually stockpiled quite a bit. Our inventory of raw materials is up quite substantially as we mitigate the risks associated with the challenges presented before us.
We do continue to deliver, as you can tell from the, you know, very good, solid revenue performance. We are delivering to our customers. We're meeting their, you know, needs in terms of their roles that they are playing.
I guess the question then is just by looking at your shipments for November backlog, I mean, all else equal, to me, that would suggest that you should see perhaps some level of sequential growth in Q3 over Q2. Would that be a fair conclusion or might there be issues such as the component constraints that might prevent that from happening?
We're entering into Q3 with a very solid shipment number of CAD 39 million and a recognized backlog. We're in very good shape. We are heading into the holiday season, so that always poses challenges in terms of logistics of delivery, whether it's on the customer side or travel as well too. You will have to, you know, continue to factor that into your, you know, estimates. But you know, we are sitting here today with a, you know, exceptional backlog and shipment number.
Okay. Yeah. Finally, the revenue was up 27% year-over-year. I think you've talked about it in the past. Is that primarily being driven by, you know, more, you know, cloud-based revenue in the dynamic there or something else I didn't ask?
I'll let Doug Moore comment on that.
Yeah. I think you're on track there. It's really more a general trend as we've the type of projects we do. It's inherent in the nature of our business. Whether we're receiving more funds upfront, longer-term recognition or waiting for certain milestones to recognize revenue, it's a trend that we've seen over the past continuing. I mean, our deferred revenue, I think, is relatively stable compared to Q1, but even when you're comparing data growth, you're seeing an increase.
All right. Thanks.
Next we go to the line of Rob Young with Canaccord. Please go ahead.
Hi, Doug. The gross margins are a bit lower and U.S. mix is really strong, so those don't really happen at the same time. Is that the components lead times and pricing that you highlighted? Or is it maybe the government assistance in it? Or is there something that you can point us to why the gross margins were a little bit lower?
Yeah, I mean, it's quite frankly, it's a mix of those things, the government assistance excuses we had some in the quarter, but it's dwindling away. That's definitely an impact when you're comparing quarter-over-quarter, significantly dropped there. The component costs, it's a harder thing to quantify, but there is, it's not a material impact in the sense of a disclosure. But yeah, it's really, you're right in the sense that the government assistance is dwindling away. That's had a significant impact comparing Q2 to Q2.
Okay.
Which is possible within our gross margin target range.
Right. Right.
Yeah.
Normally I think when you see the international drop and U.S. up, normally I'd expect to see margins at the higher end of your range. It leads me to think that the, you know, the pricing environment for raw materials is having a pretty significant impact on your gross margin. Is that a reasonable assumption or is most of that maybe government assistance? I'm just trying to push a little harder on that.
I think it's product mix.
There's an impact with product mix. I guess our range remains at the 56%-60%. Just sitting there, yeah, just toward that range.
All right. Thank you. Then, I saw your release around the Studer manufacturing moving to Burlington. I mean, is there an impact there or, I mean, maybe you just talked about that. Is that meaningful enough to have an impact on the financial level?
It's strategically meaningful for us. It was, you know, part of the acquisition of those iconic assets to retreat manufacturing from HARMAN's facilities in Hungary. That's an ongoing process. We're well along the way with it and, you know, very proud of the progress that we're making on that front.
Okay. No, no gross margin impact from, you know, having that, you know, in your own manufacturing or just not.
There's no material impact.
Maybe I'll just ask maybe on the Studer acquisition. Where are you at with the, is there anything that you can give us an update on the recent acquisitions like Studer, the ShotTracker, Ease Live? Is there anything there that you can update us on?
With respect to Studer, the intellectual property continues to be, you know, integrated within our product portfolio and specifically within the DreamCatcher BRAVO portfolio. Manufacturing is underway here. We're continuing to, you know, service and support the customer base and, you know, look forward to the upcoming year as we really get our feet under us with the Studer acquisition. That's, you know, moving ahead nicely, as is the Ease Live acquisition and ShotTracker investments. Those are both, you know, very strategic, you know, investments. We'll see more of in the coming quarters.
Maybe I'll just ask a little bit along the lines of Ken's question on the backlog. It continues to grow quarter to quarter, keeping record levels or maintaining record levels at least. Is most of that growth driven by the dynamics of longer contracts or is it just pent-up demand you're not able to get to? Is there anything that you can, you know, give us around, you know, reasons for that backlog build, CPC backlog build?
That's a great question. Thanks, Rob. The backlog does continue to build, you know, partially because of the, you know, very strong demand we have for Evertz's product portfolios. You know, as we've said in the past, the nature of the business is changing. With our cloud-based solutions like Mediator has a component to it of maintenance and long-term revenues. In general, if you look at that backlog, whereas in prior years, if you go back to our initial public offering, the delivery of it would have been over the course of 14 weeks, whereas now 15%-20% extends you know, on a 12-month period. Whether that's warranties, extended warranties, service level agreements or other solutions that are being delivered in the future.
15%-20% is currently delivered over, you know, outside of the 12-month period.
Okay. The 80% is gonna be delivered within the 12-month period, I guess, is naturally assumed in there?
Yes. Yeah. In some cases, you know, being included, you know, in the subsequent quarter. We're still delivering very, very quickly.
Okay.
where we have the opportunity to.
Okay. Thanks for that, Sir. Thank you.
Thanks.
This concludes our question and answer session. We return to Brian Campbell for closing remarks.
I want to thank participants for their questions. Add to that, we are very pleased with the company's performance during the second quarter of fiscal 2022, which saw strong quarterly sales of CAD 107.2 million. The strength in the U.S., Canada region, where sales rose 17% from the prior year. With solid gross margins of 57% in the quarter, which together with Evertz's disciplined expense management, yielded earnings of CAD 0.22 per share. We're entering into the second half of fiscal 2022 with significant momentum fueled by our record high combined purchase order backlog, plus November shipments totaling in excess of CAD 201 million, up 56% year-over-year.
By the growing adoption of successful large-scale deployments of Evertz IP-based software-defined video networking solutions, cloud solutions, and by some of the largest broadcast and media service provider and enterprise companies in the industry. By the continuing success of DreamCatcher™ BRAVO, our state-of-the-art IP-based replay and production suite. With Evertz's significant investments in software-defined IP, IT and cloud technologies to over 500 industry-leading IP, SDVN deployments and the capabilities of our staff, Evertz is poised to solidify our leadership position. Thank you everyone, and good night.
This does conclude today's teleconference. We thank you for your participation. You may disconnect your line.