Good afternoon, ladies and gentlemen, and welcome to the Evertz Q3 Investor Call. At this time, all lines are in listen-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. I would now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Please go ahead.
Thank you, Eric. Good afternoon, everyone, and welcome to Evertz Technologies' Conference Call for Fiscal 2024 Third Quarter and January 31st, 2024, with Doug Moore, Evertz's 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 will begin by providing a few highlights, and then Doug will provide additional detail. First off, sales for the third quarter totaled CAD 135.3 million, an increase of 22% compared to CAD 110.9 million in the third quarter last year. Our base is well diversified, with the top 10 customers accounting for approximately 35% of sales during the quarter and with the single largest customer totaling approximately 5%.
In fact, we had 110 customer orders of over CAD 200,000 in the quarter. Gross margin in the quarter was CAD 79.7 million, or 58.9%, which is within our target range. Investment in research and development during the quarter totaled CAD 34 million. Net earnings for the third quarter were CAD 19 million, while fully diluted earnings per share were CAD 0.24. Evertz's working capital was CAD 199.6 million as of January 31st, and at the end of February, Evertz's purchase backlog was in excess of CAD 292 million, and shipments during the month were CAD 40 million.
We attribute the 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 in the industry, and specifically to the growing adoption of Evertz's IP-based software-defined video networking solutions, Evertz IT Cloud Solutions, our immersive 4K ultra-high-definition solutions, and Evertz's state-of-the-art DreamCatcher IP replay and live production BRAVO Studio featuring the iconic Studer audio. Today, Evertz's board of directors declared a quarterly dividend of CAD 0.19 per share payable on or about March 29th. I'll now hand over to Doug Moore, Evertz's Chief Financial Officer, to cover results in greater detail.
All right. Thanks, Brian. Good afternoon, everyone. I'll start by looking at revenue. Sales were CAD 135.3 million in the third quarter of fiscal 2024 compared to CAD 110.9 million for the third quarter of fiscal 2023. That's an increase of 22%, or CAD 24.4 million, quarter-over-quarter. For the nine months ended January 31st, 2024, sales were CAD 391.9 million compared to CAD 325.7 million in the same period last year. That represents an increase of CAD 66.2 million, or 20%. Looking at specific regional revenue, the U.S.-Canadian region had sales for the quarter of CAD 80.5 million compared to CAD 71.2 million last year. That represents an increase of CAD 9.3 million, or 13%, quarter-over-quarter. Sales in the U.S. and Canadian region were CAD 241.5 million for the nine months period ended January 31st, 2024, compared to CAD 238.2 million in the same period last year, an increase of CAD 3.3 million, or 1%.
In the international region, revenues for the quarter were CAD 54.8 million compared to CAD 39.6 million last year, an increase of CAD 15.2 million quarter-over-quarter. The international segment represented 40% of total sales this quarter as compared to 36% in the same period last year. For the nine months ended January 31st, 2024, sales in the international region were CAD 150.3 million compared to CAD 87.5 million in the same period last year. That's an increase of 72%, or CAD 62.8 million. Gross margins for the third quarter were approximately 58.9% compared with 59.2% prior and within our target range. For the nine months period ended January 31st, gross margin was approximately 58.6%, and that's also within our target range. Turning to selling and admin expenses, S&A was CAD 18.3 million in the third quarter. That's an increase of CAD 2 million from the same period last year.
Selling and administrative expenses as a percentage of revenue were approximately 13.5% as compared to 14.7% in the same period last year. Selling and administrative expenses were CAD 52.2 million for the nine months ended January 31st, 2024, an increase of CAD 8.2 million from the same period last year. Selling and administrative expenses as a percentage of revenue were approximately 13.3% over the period compared to 13.5% for the same period last year. Research and development expenses were CAD 34 million for the third quarter. That represents an increase of CAD 3.8 million from CAD 30.2 million in the third quarter last year. Investment tax credits relating to R&D expenses were CAD 4 million in the quarter compared to credits of CAD 3.6 million in the third quarter last year. For the nine months ending January 31st, research and development expenses were CAD 98.1 million.
That represents an increase of CAD 10.9 million over the same period last year and includes an increase of CAD 7.8 million associated with salary costs. Research and development expenses as a percentage of revenue were approximately 25.1% over the period compared to 26.8% for the same period last year. Foreign exchange for the third quarter was a loss of CAD 2.8 million. The quarterly loss was predominantly driven by the decrease in value of the U.S. dollar against the Canadian dollar from October 31st, 2023, to January 31st, 2024. Foreign exchange for the nine months period ended January 31st was a loss of CAD 2 million compared to a gain of CAD 1.7 million in the same period last year. Turning to a discussion of liquidity of the company, cash as of January 31st, 2024, was CAD 69.7 million as compared to cash of CAD 12.5 million at April 30th, 2023.
Working capital was CAD 199.6 million as of January 31st, 2024, compared to CAD 171.4 million at the end of April 30th, 2023. Now, look at the cash flows. The cash generated from operations of CAD 30.2 million, which is net of CAD 5.2 million 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 CAD 25 million in cash from operations during the quarter. The company used cash of CAD 0.6 million for investing activities, which was principally driven by the acquisition of capital assets, and the company used cash in financing activities of CAD 16.1 million, which was principally driven by dividends paid of CAD 14.8 million. Finally, our share capital position as of January 31st, 2024. Shares outstanding were approximately 76.1 million, and options and share-based RSUs outstanding were approximately 5.7 million.
Weighted average shares outstanding were CAD 76 million, and weighted average fully diluted shares was CAD 77 million for the quarter ended January 31st, 2024. That concludes the review of our financial results and position for the third 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. Eric, we're now ready to open the call to questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt acknowledging your request. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Andy Nguyen with Raymond James. Please go ahead.
Thank you for taking my questions. Going forward, looking forward to 2025, what would you say would be your biggest opportunity?
Andy, we're going to continue to grow our share with our existing customers and add new customers. As you know, our backlog is extremely strong at CAD 292 million. I believe 48% of it is deliverable within the next 12 months and 52% outside of that. So we're going to be both addressing the backlog, delivering to the customers within that, and continuing to grow the market.
Gotcha. I noticed the backlog up quite a bit this quarter. Could you share any more color with us on that?
Approximately a year ago, we did press release the CAD 152 million 5-year cloud software and services agreement with a global media giant. So that did step up our backlog very significantly, along with other large orders that were in and around that time. So approximately a year ago, we did have effectively a step function increase in our backlog. So we're very pleased to have that type of support, long-term demand from our customers, and we're going to continue to grow the business.
Gotcha. Thank you. I'll pass it along.
Your next question comes from the line of Thanos Moschopoulos with BMO. Please go ahead.
Hi. Good afternoon. Brian, this is, I think, the fourth consecutive quarter you've had of double-digit year-over-year growth, and good to see that the growth this quarter was with a very low level of customer concentration. Just wondering if you have anything specific that you'd point to as far as the growth acceleration over the past year? I mean, I'm sure your strong market position and competitive product offering is a key part of it, but beyond that, is there some dynamic in terms of the types of initiatives your customers are undertaking or the spending environments, better component availability? I mean, are there other factors you would point to in terms of what's been driving the acceleration in recent months?
So you've got a multifaceted question there. I think I'll address the continued growth that we've seen in the U.S.-Canada market. So that has been underpinning our growth historically and very strong. So that's up 12% year-over-year or 13% year-over-year, I believe. And then internationally, we have been delivering larger projects recently. So you do see that internationally, our revenues are up very significantly this quarter. But again, too, you should watch on a trailing 12-month basis our revenue in those sectors as well too because it tends to you'll see some spikes in quarters, but on average, we're seeing good, solid growth there. But yes, overall, it's that Evertz market share, our products are leading on multiple fronts. We're having very good success with our cloud-based solutions. And candidly, the SDVN cloud-based and also on our traditional baseband SDI products are doing very well.
Okay. That's helpful. And just from a qualitative perspective, I mean, I presume cloud's becoming a growing part of the business. And I appreciate that you can't quantify it for us specifically, but just qualitatively, is it fair to assume that interest in adoption of cloud continues to grow rapidly? Is it the situation where most of the large broadcasters you talk to want the cloud element in the deals, or how would you characterize where the industry is in adoption and how much of a driver it is in contributing to your recent growth?
It's a very significant driver, and it is part of the cloud discussions and the plans of our customers pertaining to their cloud infrastructure, is a big part of many of the conversations with most of our customers. So it's top of mind. And that also is across the industry as well too. However, we have been deploying very large SDVN solutions and very large cloud-based solutions as well too.
I know that you've been maintaining your gross margin target range, but as cloud continues to become a bigger part of the mix, should we think about just the fundamental gross margin profile, operating margin profile of the business changing appreciably, or do you think that over, call it, the next two-three years, it should remain in kind of a similar range even as cloud continues to grow?
I can comment on that. So while we have seen some tickups on the higher side of the range, the range is currently as is, so the 56%-60%. I mean, if you look at Q1, we're around 57%. So there's some fluidity to it. So I think at this time, we'll maintain the range between that 56%-60% as being a reasonable target.
Okay. All right. I'll leave it there. Thanks.
Your next question comes from the line of Robert Young with Canaccord. Please go ahead.
Hi. Good evening. You noted earlier that we're coming up on the anniversary of a couple of large deals. I think one was $25 million, the other one $152 million. Both of them happened in April, as I recall. Maybe you can talk about, is there some seasonality around April? Should we be thinking of April as a period where you might see large deals? And then maybe a second part to that question is that $152 million deal, is that just a one-time, best-ever single point in time type of a deal, or are there others that are out there in your pipeline that you're looking at that might have that type of scale?
So April does coincide as well too with NAB. So we're pleased to go and meet and host numerous of our customers at our booth at NAB. Meetings are being set now, so that'll be a very active time for us. And that is the National Association of Broadcasters Convention, and historically, it's April. So yes, April is a significant time period for us. The second part of your question, could you repeat that again for me?
Yeah. I'm just trying to get a sense of how unusual that deal is. It's been a year now. Are there other opportunities in your pipeline that have that type of scale, or was that a one-time event?
It was a very significant event, most definitely, and it is a five-year transaction. So on an annual basis, you have seen other purchase orders or contracts of that magnitude. And we do have other very significant cloud-based projects underway that not necessarily have been press-released either, either due to the number of years of the term or how the customer has decided to provide those purchase orders.
Okay. So I guess what I'd take from that is that that isn't that unusual of a deal. If you look at it on a one-year basis, there are other deals of that scale in the cloud, or are you just talking about deals in general?
Deals in general, there have been other deals of that size for a given year. But make no mistake, signing a five-year long-term contract of that magnitude is a significant milestone.
Okay. As you're going into NAB this year, are there opportunities of that size and scale that you're looking at, hoping to sign?
That scale, definitely. The duration comes into play as well too. But yes, we are continuing to look at very large, significant deals, contracts, and we are also deploying significant contracts.
Okay. And then also this year, I mean, in the past, you've been not dismissive, but you suggested that Olympic year dynamics don't have that much of an impact on your business. So I was curious about this year as we go into an Olympic year after a hiatus from COVID and combined with what's expected to be a pretty active U.S. election year. Are those drivers of the business? Maybe if you could just give us a summary of how those events manifest in Evertz's business.
So again, too, we're very excited to have the Olympics, and they do absolutely have an impact, and we have revenues associated with it. However, Evertz's underlying growth is not as impacted by the major events as other companies who have very significant rental portions of their business.
Right. Right. And so the high level of organic growth we've seen this year, that wouldn't be associated with the Olympic year?
It's associated more with Evertz's underlying position with large global broadcast and media players.
Okay. Okay. I think you said that 48% of the backlog is expected to convert in the next 12 months. I think I heard that, if that's correct. And then maybe last question would just be, I mean, on that large annual deal, the CAD 152 million deal, should we just think of that as a CAD 30 million contribution per year, or would there have been an upfront component to that? When I'm looking forward to modeling this year, how much of that contract should I expect in this fiscal year? And then I'll pass the line.
I'll answer that. What I could say is through the first nine months, there's CAD 17 million of revenue from that contract and earnings. Averaging it out would be dependent on certain milestones that are reached that aren't specifically defined to a specific date. Forecasting out, it's a logical way to do it, to average it out, but it will ultimately be dependent on certain milestones that are met.
Okay. Maybe digging that just a little bit deeper. I guess if it's a cloud deal, I would assume a significant portion would be some subscription or a lease on the software. When you say milestones, is it still being deployed, or is it dependent on a volume of transactions or something like that? Maybe just give me a little sense, maybe at a high level because you don't want to get into details, just what are those milestones in as much detail as you're willing to share?
Sure. So if there's a component of it's going to be dependent on revenue recognition. So if there is a licensing component, it could be when annual licenses are provided. If it's milestones, there could be certain deployments associated with it. But the idea of having a linear modeling is a reasonable approximation.
Okay. Thank you.
I'll now turn the conference back over to Brian Campbell for closing remarks. Please go ahead.
Thank you, Eric. I'd like to thank the participants for their questions and to add that we're very pleased with the company's performance during the third quarter of fiscal 2024, which saw quarterly sales increase 22% year-over-year to a record high of CAD 135.3 million. Strong gross margins of 58.9% in the quarter, which together with Evertz's disciplined expense management yielded fully diluted quarterly earnings per share of CAD 0.24 despite a loss on foreign exchange of CAD 2.8 million in the quarter. We're entering into the fourth quarter of fiscal 2024 with significant momentum fueled by a combined purchase order backlog plus February shipments totaling in excess of CAD 332 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 broadcast, new media service providers, 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's significant investments in software-defined IP, IT, and cloud technologies, the over 600 industry-leading SDN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position in the broadcast and media technology sector. Thank you, everyone, and good night.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.