Welcome to the conference call. Please continue to stand by. Your conference will begin shortly. Good afternoon, ladies and gentlemen, and welcome to the Evertz Q2 of F iscal 2026 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. Thank you. Please go ahead.
Thank you, Ina. Good afternoon, everyone, and welcome to Evertz Technologies' conference call for our Fiscal 2026 second quarter ended October 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 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 and I will provide additional detail. First off, sales for the second quarter totaled CAD 132.7 million, up 18.4% sequentially from the prior quarter, and revenue in the U.S.-Canada region was CAD 98.5 million, up 24% sequentially. Recurring software services and other software revenue totaled CAD 60.7 million in the quarter, an increase of 17.6% sequentially from the prior quarter.
Our sales base is well-diversified, with the top 10 customers accounting for approximately 53% of sales during the quarter, with no single customer accounting for more than 16% of sales. In fact, we had 98 customer orders of over CAD 200,000 in the quarter. Gross margin in the quarter was CAD 77.8 million, or 58.6%, compared to 59.3% in the second quarter of the prior year. Net earnings were CAD 18.6 million, resulting in fully diluted earnings per share of CAD 0.24 for the quarter. Investment in research and development totaled CAD 36.6 million. Evertz working capital was CAD 205.7 million, including cash of CAD 96.7 million, as at October 31st, 2025.
Operational highlights for the quarter include Evertz's stellar presence at the International Broadcast Convention, where Evertz's innovative NEXX converged media infrastructure platform was recognized with a TV Tech Best of Show award, and Evertz's frame rate conversion platform, which is purpose-built for premium live sports and news production and global content delivery, won a TVBEurope Best of Show award. At the end of November, Evertz's purchase order backlog was more than CAD 240 million, and shipments during the month of November were CAD 46 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 to IP, IT, and cloud-based architectures, and specifically to the growing adoption of Evertz's IP-based software-defined video networking solutions, Evertz's 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. And today, Evertz's Board of Directors declared a regular quarterly dividend of CAD 0.205 per share payable on or about December 24th. Furthermore, Evertz's Board of Directors also declared a special dividend of CAD 1 per share, also payable on December 24th.
The special dividend reflects both the strong long-term operating performance of the company and its solid balance sheet, thereby enabling a distribution of cash over and above what is considered necessary to meet known commitments and maintain adequate reserves. I'll now hand over to Doug Moore, Evertz's Chief Financial Officer, to cover our results in greater detail.
Thank you, Brian. Looking at revenues, so revenue was CAD 132.7 million in the second quarter of Fiscal 2026, a 6% increase compared to CAD 125.3 million in the second quarter of Fiscal 2025. For the six months ending October 31st, 2025, revenues were CAD 244.9 million, up CAD 8 million, or 3% from the six months compared to the six months ending October 31st, 2024. Quarterly hardware revenue increased slightly year over year from CAD 70.5 million to CAD 72 million, a 2% increase, while software and services revenue also increased from CAD 54.8 million to CAD 60.7 million, or 11%. Revenue from software and services represented approximately 46% of total revenue in the quarter. Year-to-date, hardware revenues up 5% to CAD 132.5 million for the six months period ending October 31st, while revenues from software and services were up slightly to CAD 112.4 million from CAD 110.7 million.
Looking at regional revenues, quarterly revenues in the U.S.-Canadian region were CAD 98.5 million compared to CAD 94.8 million in the prior year, while quarterly revenues in the international region were CAD 34.2 million compared to CAD 30.4 million in the prior year. The international segment represented 26% of total sales in the quarter compared to 24% the same period last year. For the six months ended October 31st, international revenue was CAD 66.9 million compared to CAD 68.1 million the same period last year, a decline of 2%, and then for the six months period ending, international sales represented 27% of total sales compared to 29% in the same period last year. Gross margins for the quarter were 58.6% compared to 59.3% in the prior year.
The gross margin is down sequentially from the past two quarters, driven by varied product mix delivered in the quarter, but overall was within our 56%-60% target range. For the six months ending October 31st, the gross margin was 59.9% at the very high end of that same target range. Turning to selling and administrative expenses, S&A was CAD 19.1 million in the second quarter, an increase of CAD 0.7 million, or 4% from the same period last year. And selling and admin expenses as a percentage of revenue were approximately 14.4% compared to 14.7% for the same period last year. Sequentially, S&A is up approximately CAD 0.5 million from Q1. That includes a CAD 0.8 million increase in trade shows and travel costs quarter- over- quarter, the largest driver of which was our attendance at the IBC show.
For the six months ending October 31st, S&A expenses were CAD 37.7 million, or 15.4% of sales, compared to CAD 36 million, or 15.2% of sales for the same period last year. Research and development expenses were CAD 36.6 million for the second quarter, which represents a CAD 0.3 million increase from the same period last year. As a percentage of revenue, R&D expenses were 27.6% compared to 29% in the prior year. Sequentially, R&D expenses were declined CAD 0.4 million from the first quarter, July 31st. The decline was primarily due to lower salary and benefit costs, including the impact of less co-ops that we have in Q1 during the summer. For the six months ending October 31st, R&D expenses were CAD 73.6 million, compared to CAD 73.7 million for the same period last year. Investment tax credits for the quarter were CAD 4.4 million, compared to credits of CAD 3.6 million the prior year second quarter.
And then FX for the second quarter resulted in a gain of CAD 0.8 million. It's pretty consistent with a foreign exchange gain of CAD 0.8 million the second quarter last year. While for the six months ending October 31st, foreign exchange resulted in a gain of CAD 1.5 million compared to a gain of CAD 0.8 million the same period last year. And that foreign exchange gain was predominantly driven by a weaker Canadian dollar compared to the U.S. dollar, which closed at approximately 1.4 as at October 31st, 2025. Now, looking at the liquidity of the company, cash as at October 31st, 2025, was CAD 96.7 million. That's a decline of cash compared to cash of CAD 111.7 million as at April 30th. And working capital was CAD 205.7 million as at October 31st, 2025, compared to CAD 206.9 million at the end of April 30th, 2025.
Now, looking at cash flows for the quarter, the company used cash from operations of CAD 5.4 million, which is net of a CAD 26.3 million change in non-cash working capital and current taxes. If the effects of the change in non-cash working capital and current taxes are excluded from the calculation, the company would have generated CAD 25.2 million in cash from operations during the quarter. The biggest use of cash and working capital during the quarter relates to a CAD 19.9 million decrease in payables that was driven by the disbursement of bonuses in the quarter and the net release of CAD 8.1 million in deferred revenue in the quarter. The company used cash of CAD 6.4 million for investing activities, which was principally driven by the acquisition of capital assets, and those acquisitions of capital assets included the acquisition of land and building that we were renting outside of Pittsburgh, Pennsylvania.
That's the facility where we're increasing our manufacturing capabilities. The company used cash in financing activities of CAD 17 million, which was principally driven by dividends paid of CAD 15.1 million and lease payments of CAD 1.1 million. Subsequent to the past quarter end, so just recently, we also renewed our NCIB, which will have an effective date of December 11th. Finally, looking at our share capital position as at October 31st, 2025, shares outstanding were approximately 75.5 million, and options and share-based RSUs outstanding were approximately 2 million. Weighted average shares outstanding were 75.5 million, and weighted average fully diluted shares was 76.6 million as at October 31st. That concludes 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, thank you.
Thank you, Doug. You know 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 star followed by the one on your telephone keypad. You will hear a prompt that your hand has been raised, and should you wish to cancel your request, please press 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. Thank you, and your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Please go ahead.
Hi, good afternoon. On the gross margin, clearly it was within your targeted range, but a little later than the last two quarters. Is that just typical volatility or product mix, or is there anything else to call out, like maybe some impact from the initial ramp of your U.S. facilities or something like that? Thanks.
No, it really is a product mix. There's not really a specific item to call out that materially impact the margin. I think that's part of the reason we have that volatility. We expect that volatility. That's part of the reasons why we're hesitant to change our target range from that 56%-60%. And we're still at the strong end of that, but yeah, it's really just the volatility driven by product mix that we happen to deliver in the quarter.
R&D spend has been relatively stable in recent quarters, which I mean, from my perspective, is a healthy dynamic. Is that reflective of maybe just greater OpEx discipline on your part? Is it reflective maybe of just how you feel about the strength of your competitive position and thus not needing to ramp up that investment relative to where you sit competitively, or what's the dynamic there?
No, I think there was a significant ramp-up a couple of years ago that were partially due to inflationary factors with, quite frankly, hiring and retaining engineers. Some of that broader inflationary drivers have subsided to some levels anyway. But no, R&D is still a major commitment of Evertz to as an investment. So it's really the inflationary factors on salaries kind of going back to more historical norms as opposed to we dealt with a couple of years ago.
Great. And then, Brian, just in terms of the overall environments, what you're hearing from your customers coming out of IBC, is it sort of status quo, or is there anything else, any changes that you'd highlight in recent weeks or months regarding customer priorities or propensity to spend?
We continue to have a very robust backlog, and you can see from the month's shipments in November, along with a very strong quarter, we're firing on most of the cylinders. You had increases in the North American and international regions in sales. We have been seeing continued adoption of Evertz products from our customers. They have projects that they want to execute on, and we have the products to be able to help them with those needs.
Great. I'll leave it there. Thanks.
Thank you. And your next question comes from the line of Robert Young from Canaccord Genuity. Please go ahead.
Hi, good evening. Maybe just a little more around the decision to issue the special dividend. I mean, you've renewed the buyback, you've increased the quarterly dividend, and you're issuing a special dividend. So I was wondering if you could give us some sense of the decision-making behind that and the timing. And maybe if you could take it one step further just to give us a sense of where you see the balance sheet in the near term after that and what it means for your confidence in the near term.
So the Board does make the decision regarding the dividends and the special dividends. The timing is consistent with prior special dividends that we've had. The balance sheet still remains pristine in a cash position and no debt. And we are confident, as you can tell, with the business prospects we've got going forward. We're continuing to invest very heavily in R&D and have a very robust product portfolio. So we're in very good shape as an organization. And with respect to M&A activities going forward, we still have full flexibility.
Okay. And then just take one of Thanos's questions a little further. The gross margin, it is notable that the recurring software is up quarter- over- quarter, but the gross margins are down. And although it is at the higher end of the range, it is at the low end of where we've seen it over the last several quarters. And so I'm just trying to understand the dynamic there. Is that the international revenue taking higher? I'm just trying to understand what is it that's driving that because it doesn't make sense to me.
Well, I mean, I think there's always going to be volatility. So international revenue, you're correct, generally has a little bit lower of a margin. But it really is not as simple as saying U.S. region sales are up, therefore margin's up, or software and service is up, therefore it's up. It really is driven by a general product mix. And we've had volatility in the past through, although we've been slightly above that target range, I think there's not really one item to point to.
Okay.
I guess another point to make is in the quarter, we did have some pretty significant customer concentration. So often very significant customers may get higher discounting.
Okay. And then we're just around the corner from the renegotiation of CUSMA. And I know that you guys as a management team have been trying to prepare operations in the U.S. ahead of that. Could you maybe give us a summary of where you are on that and how comfortable you are if CUSMA ends without a replacement deal?
Yeah. I mean, so currently, from an as of today perspective, so again, the vast majority of what we're selling is USMCA compliant and therefore not being impacted by the tariffs when we sell through to the United States. We do continue to build up manufacturing capabilities outside Pittsburgh, Pennsylvania. That's the acquisition of the building and land there is to exert a bit more control as we build out that facility. It is a work in progress, but we continue to progress.
If tariffs suddenly apply to your product, if a renegotiation isn't successful, what does that look like for Evertz, I guess? And just at a high level, if you just give us a sense of what your planning looks like to deal with something like that?
There would be certain products that we would increase manufacturing out of that facility. We would not be able to push every single product there at this point in time, but certainly we would shift some builds there as opposed to here, there as in being United States as opposed to Canada, but we continue to build on the amount of products we can build there.
Okay. Would you believe that the gross margin target range would still be something you could maintain?
Yes.
Okay. And then last question from you just on the proportion of the backlog that you expect to convert in the next 12 months. That'd be helpful. I'll pass the line.
So, I guess it'd be about 40% more than 12 months out. So that's 60% in the next 12 months.
Okay.
Thank you. Once again, should you have a question, please press star followed by the one on your telephone keypad. Your next question comes from the line of Paul Treiber from RBC Capital Markets. Please go ahead.
Oh, good afternoon. Thanks for taking the question. Just a question on the recurring software revenue in the quarter. It was quite strong. You mentioned a number of different product areas that you did see strengthen, but specifically, could you speak to was there any outliers that drove the momentum in the quarter? And then do you see, looking forward, do you see it sustained, or should we expect it to be sustained in the $60 million-plus range going forward?
So there is some lumpiness to it because it's recurring software and other software and services as well. So there are times when you could have software-based projects that have acceptance met, so where you would have a bit of a spike, I guess you'd say. If you look at the past eight quarters, there's a general range that kind of has been falling through, but there's definitely some peaks, I'd say, within that quarter to quarter.
Yeah. So looking at it over the trailing 12 months, if you do that on a rolling basis, we're at 224 million of recurring software services and software, and it's now that's 44% of a trailing 12-month basis. So we're in and around that 40%-44% range, and we do suggest that you look at it on a trailing 12-month basis.
Okay. That's helpful. Secondly, just can you remind us or outline the company's traction in the defense market? And specifically, where I'm going is the Canadian federal government announced a number of initiatives to boost defense spending and make other investments. Do you see opportunities for Evertz within the Department of National Defence?
Yes, we do. And we're actively pursuing them. We have historically had good success with U.S. and at times NATO partners. So that's business that we've had over the past years. And we do have key elements of our technologies that are Common Criteria certified and NIAP listed, allowing us to sell those products into government facilities. So that is definitely a key focus of ours. And we have been spending an increasing amount of time with the Canadian government as they've increased the spending initiative and dialogue with specifically Canadian content. We fit front and square as a dual-use innovation leader and are exactly the type of company that the Canadian government and defense should support.
Great. Thanks for taking the questions.
Thank you.
Thank you. There are no further questions at this time. I will now hand the call back to Mr. Campbell for any closing remarks.
Thank you, Ina. I'd like to thank the participants for their questions and to add that we are pleased with the company's performance during Q2 of Fiscal 2026, which saw sales of CAD 132.7 million, including CAD 60.7 million in software and services revenue, solid gross margins of 58.6% in the quarter, which together with Evertz's disciplined expense management yielded quarterly earnings per share of CAD 0.24. We are entering the second half of Evertz's Fiscal 2026 with significant momentum fueled by over CAD 46 million of shipments in November, with a combined purchase order backlog plus shipments totaling in excess of CAD 286 million. By the continued adoption and successful large-scale deployments of Evertz's IP-based software-defined video networking and cloud solutions, with the largest new media and broadcast players in the industry, and with government, defense, and enterprise, 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 in the broadcast and media technology sector. Thank you and good night.
This concludes today's call. Thank you for participating. You may all disconnect.