Good afternoon, ladies and gentlemen, and welcome to the Evertz Q3 2025 Conference 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, Andrew. Good afternoon, everyone, and welcome to Evertz Technologies' Conference Call for our Fiscal 2025 Q3 ended January 31st, 2025, 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 CR 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 details.
First off, sales for the Q3 totaled CAD 136.9 million, up 9% sequentially from the prior quarter and 1% year-over-year. Revenue included CAD 99.1 million in the US-Canada region, up 23% sequentially. Recurring software services and other software revenues increased 6.3% year-over-year, totaling CAD 55 million in the quarter. Our base is well diversified, with the top 10 customers accounting for approximately 48% of sales during the quarter, with no single customer accounting for over 10% of sales. In fact, we had 115 customer orders of over CAD 200,000 in the quarter. Gross margin in the quarter was CAD 79.1 million, or 57.8%, which is within our target range.
Investment in research and development during the quarter totaled CAD 36.6 million. Net earnings for the Q3 were CAD 21.1 million, while fully diluted earnings per share were CAD 0.27. Evertz working capital was CAD 207.9 million, with cash of CAD 96.3 million as of January 31st, 2025. At the end of February 2025, Evertz purchase order backlog was in excess of CAD 269 million, and shipments during the month were CAD 39 million.
We attribute the strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation, increased global demand for high-quality video anywhere, anytime, the ongoing technical transition to IP IT 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 CAD 0.20 per share payable on or about March 20th. I will now hand it over to Doug Moore, Evertz Chief Financial Officer, to cover our results in greater detail.
All right. Thanks, Brian. Good afternoon. Starting with sales, revenue was a record CAD 136.9 million in the Q3 of fiscal 2025, as compared to CAD 135.3 million in the Q3 of fiscal 2024, an increase of CAD 1.6 million, or just over 1%. For the nine months ended January 31st, revenue was CAD 373.8 million, compared to CAD 391.8 million the same period last year, a decline of CAD 18 million, or approximately 4.5%. Looking at revenues in specific regions, the U.S. and Canadian region had revenue for the quarter of CAD 99.1 million, compared to CAD 80.5 million last year. That represents an increase of CAD 18.6 million, or 23% quarter over quarter.
Revenue in the U.S. and Canadian region was CAD 267.9 million for the nine months ended January 31st, 2025, compared to CAD 241.5 million in the same period last year, an increase of CAD 26.4 million, or 11%. The international region had revenue for the quarter of CAD 37.8 million, compared to CAD 54.8 million last year, decreased to CAD 16.9 million, or 31% quarter over quarter. The international segment represented 28% of total sales in the quarter. For the nine months ended January 31, 2025, international revenue was CAD 105.9 million, compared to CAD 150.3 million in the same period last year, a decline of CAD 44.4 million, or around 29.5%.
Looking at the, let's call it, class of revenue, hardware revenue in the three-month period ended January 31st, 2025, was CAD 81.2 million, as compared to CAD 82.8 million in the same period last year, while software and services revenue was CAD 55.7 million in the quarter ended January 31st, 2025, compared to CAD 52.4 million in the same period last year. For the nine months, hardware revenue was CAD 207.4 million, while software and services revenue were CAD 166.4 million. Now, looking at gross margins, gross margin for the Q3 was approximately 57.8%, compared with 58.9% in the same prior year quarter.
The gross margin was within our target range, albeit slightly lower than the past few quarters. The comparative decrease was largely driven by the product mix we delivered in the quarter. For the nine months ended January 31st, gross margin was approximately 58.8%. As noted, both quarterly and year-end to date margins were within our target range. Turning to selling and admin expenses, S&A was CAD 19.2 million in the Q3. that is an increase of CAD 0.9 million from the same period last year. S&A represented approximately 14% of revenue, compared to 13.5% in the same period last year.
For the nine months, period ended January 31st, selling and admin expenses were CAD 55.2 million, an increase of CAD 3 million from the same period last year. Selling and admin expenses as a percentage of revenue were approximately 14.8% over the period. Now, research and development expenses, they were CAD 36.6 million for the Q3. That represents a CAD 2.6 million increase from CAD 34 million in the Q3 last year. The increase includes CAD 1.7 million in increased salary costs and CAD 0.9 million increase in a combination of higher software, prototypes, and material costs.
As a percentage of revenue, R&D expenses were 26.7%, compared to 25.1% last year. For the nine months, research and development expenses were CAD 110.2 million. That represented an increase of CAD 12.1 million over the same period last year. The increase included an increase of CAD 5.7 million in North American salaries and another CAD 1 million in overseas salaries. Research and development expenses as a percentage of revenue were approximately 29.5% year to date.
Foreign exchange for the Q3 was a gain of CAD 3.9 million, as compared to a loss of CAD 2.9 million the same period last year. The gain in the quarter was largely driven by the US and Canadian exchange rate. We closed January 31 at approximately CAD 1.45 to CAD 1, so CAD 1.45 Canadian to $2 , as compared to CAD 1.39 on October 31. Foreign exchange for the nine months ended January 31 was a gain of CAD 4.7 million, as compared to a loss of CAD 2 million the same period last year. Looking at liquidity of the company, cash as at January 31st, 2025, was CAD 96.3 million, as compared to net cash of CAD 86.3 million as at April 30th.
Working capital was CAD 207.9 million as at January 31st, compared to CAD 201.4 million at the end of April 30th. Now, for cash flows, the company generated cash from operations of CAD 53 million, which includes a CAD 24.8 million change in non-cash working capital and current taxes. That change includes a quarterly decrease of inventory of approximately CAD 11 million, which was split relatively evenly between finished goods and raw materials, as well as an increase in accounts payable of CAD 7.4 million. If the effects of the change in non-cash working capital and current taxes are excluded, the company generated CAD 26.8 million in cash from operations during the quarter.
The company used cash of CAD 1.1 million from investing activities. That is principally driven by the acquisition of capital assets. The company used cash in financing activities of CAD 17.2 million, which was principally driven by dividends paid of CAD 15.1 million. Finally, looking at our share capital position as of January 31st, shares outstanding were approximately 75.9 million, and options and equity-based restricted share units outstanding were approximately 5.1 million. The weighted average shares outstanding were 76 million, and the weighted average of fully diluted shares were 77 million for the quarter ended January 31st.
That brings to a conclusion the review of our financial results and position for the Q3. 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 Commission. Brian, back to yourself.
Thank you, Doug. Andrew, we're now ready to open the call to questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number 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 is from Robert Young from Canaccord Genuity. Please go ahead.
Good evening. I think probably the most relevant question is to dig into the impact or the potential impact from tariffs on your business. I know that may be difficult to answer, but if you just give us a summary of how the manufacturing footprint is split and what you think the exposure is and what you're doing to mitigate it, whether that might be through pricing or whether you believe pricing can be passed through to your customers. Just a general overview of how you think you might deal with tariffs.
Sure. It's a question I'm obviously expecting, of course. In regards to U.S. tariffs, I mean, this is obviously a fluid situation. We've been actively monitoring it, frankly hoping they wouldn't transpire, but planning for their implementation nonetheless. As you know, we have significant sales in the U.S., both domestically therein and the ones domestically therein, obviously not impacted, but we also have manufacturing facilities in Canada that we sell to the U.S.
I will highlight, however, that we currently have multiple development and manufacturing facilities in the U.S. Prior to the recent announcements on the U.S.-Canadian tariffs, we have been actively adding to our manufacturing capabilities within the U.S. The rationale then was primarily focused on addressing U.S. government opportunities, but that process has been accelerated to try and lessen the potential exposure to the new tariffs on our U.S. customers.
We have completed the initial stages of our expansion, largely focused in our Indiana, Pennsylvania facility. Our intention is to continue to expand our manufacturing capabilities there and processes within the U.S. They're targeting specific products and customers to start, lessen that tariff exposure. I will, obviously, as we add capabilities in the U.S., I will highlight that we remain committed to maintaining our significant Canadian manufacturing. I mean, whether it's tariff-related or as we increase capabilities in the U.S., there will be some operational redundancies, we'll call them, between, say, Burlington and Pennsylvania.
I can't really give you a specifically quantify the impact, whether it's either as a margin percentage or a monetary amount, because obviously it's going to be specific impacts, will be dependent on a number of factors, obviously the speed at which we continue to ramp up our manufacturing in the states, the product mix, specific customers we end up selling to, and of course, if there's any changes to the tariffs or duties that are put into place. It's a long-winded answer.
No, thanks for the color. I think you had a strong quarter for revenue, and the backlog dropped quarter to quarter. Should we think of that as front-loading in front of the application of tariffs? Is that a one-time benefit that might not repeat going forward?
[crosstalk] No, I don't think we've seen a lot.
Do you see any front-loading?
No, I don't think we've seen a material amount of front-loading from customer orders, to be fair. I think it's not at any material level, no.
To address it, I mean, do you think that you have the ability to absorb it? I mean, we see gross margins down a little bit quarter to quarter. I guess it would not be from this impact, but would you?
No, this quarter is not to do with that at all. What we're going to focus on, if we can make something and ship it from the states to our customers in the states, we will where we can.
If you can't, will you absorb it in pricing, or do you think you can pass the pricing through to your customer?
That is going to be very dependent on the arrangement we have with that customer.
Last question then on this would be the backlog where you have deals in play. Would those be impacted? Would the pricing on those be impacted, or should we think of any change related to tariffs on past deals?
On things in our backlog, again, if we're able to manufacture in the U.S. and ship to a customer in the U.S., we will do so. As to whether or not the additional tariffs apply to the U.S. entity that receives the goods, the customers, whether it's absorbed or not, that's going to depend on the arrangement we have with that customer. That's why it's very difficult to specifically quantify an impact. I do think.
Give me another way to ask it.
The goal, I would say, is clear.
Are you the importer? Are you paying the tariffs on a deal that's in your backlog, or is your customer going to pay for that tariff as an importer?
Doug has answered that it depends on the customer arrangement. Our goal here is to, again, if we can manufacture in the states and ship to a customer in the states to lessen the impact of tariffs, we will. In the long term, we expect this to level out, quite frankly.
Great. Okay. In the short run, you're shifting manufacturing to the US as much as you can, but you're at the early stages of that shift. Is that a good way to think of that?
Yeah, we had started this before. Again, the intention was not before we heard of anything about tariffs or whatnot, there was a focus on government opportunities that would be manufactured in the states. This has escalated that ramp-up. It is not the first step, but earlier days, but we did not just start this a month ago.
Okay. Great. Okay. Thanks. Thanks for all the color. I appreciate it. It's hard questions to answer. I'll pass the line.
Sure. Next question is from Thanos Moschopoulos from BMO Capital Markets. Please go ahead.
Hi, good afternoon. It might be too early to say, but should we anticipate a meaningful uptick in CapEx associated with building out more capacity in the U.S.? If so, any way to think about that quantitatively?
Yeah. I mean, we've been planning this for quite some time. From a materiality perspective, we could have CapEx of CAD 2 million-CAD 5 million type of a thing, the cost, over the next 6-12 months, but we're not going to double our capital assets or anything like that. That's kind of how we quantify that, CAD 2 million-CAD 5 million of extra CapEx across multiple quarters.
Is this already a topic that's coming up in customer discussions, or is it just so early days that your customers are also scratching their heads trying to make sense of it?
This has been a topic with customers, I would say, since the initial discussions of this well over a month ago.
All right. Moving on a different topic, the international business, obviously, your data has been down significantly. I realize that that could be dependent on maybe some projects in the year or quarter that did not repeat. Just in general, is there anything else to point to in terms of the growth challenges international has had, not only over recent quarters, but also kind of more broadly in recent years relative to North America? Anything you would call out?
I mean, international revenue. year-over-year, we did have a large project we press released that went out in the prior year. That was around CAD 25 million, approximately, at a macro level, to call out. I don't have a specific item to call at a macro level.
Okay. Generally speaking, anything of note that you'd call out as far as the overall spending environments, be it across either of the key geographic regions?
Sure. Thanos, could you repeat that question? You broke up at the end.
Yeah. Yeah. Just asking whether there's anything you'd call out as far as the spending environments. Would you characterize it as status quo or any changes you've seen, be it in Europe or North America, as far as overall demand?
Overall demand for US products remains very robust. That said, there is uncertainty around the current tariff situation. We are very much looking forward to having close contact in April at NAB, our largest annual trade show. That will definitely help us continue those relationships and continue to build our strong backlog and order book.
All right. I'll pass the line. Thank you.
There are no further questions at this time. Mr. Campbell, please proceed with closing remarks.
Thank you, Andrew. I'd like to thank the participants for their questions and to add that we are very pleased with the company's performance during the Q3 of Fiscal 2025, which saw record-high quarterly sales of CAD 136.9 million, solid gross margins of 57.8% in the quarter, which together with Evertz's disciplined expense management yielded basic quarterly earnings of CAD 0.28 per share.
We're entering into the last quarter of fiscal 2025 with significant momentum fueled by the combined purchase order backlog plus February shipments totaling in excess of CAD 308 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 provider 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 IP SDN deployments, and the capabilities of our staff, Evertz is poised to build upon our leadership position to provide innovative solutions to customers and deliver to shareholders. 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.