Good afternoon, ladies and gentlemen, and welcome to Evertz Q1 Investor Call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question and answer session. If at any time during this call you require any assistance, please press star zero for the operator. I will now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Please go ahead.
Thank you, Sergio. Good afternoon, everyone, and welcome to the Evertz Technologies Limited Conference Call for our Fiscal 2024 First Quarter Ending July 31st, 2023, 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. Doug and I will comment on the financial results and then open the call to your questions. Turning now to Evertz results, I would like to begin by providing a few highlights and then Doug will go into greater detail. First off, I'm pleased to report sales for the first quarter totaled CAD 125.8 million, up 23.9% from the first quarter of last year.
Our sales base is well diversified, with the top 10 customers accounting for approximately 54% of the sales during the quarter, with one customer accounting for approximately 14% of sales and a second customer at 11%. In fact, we had 112 orders of over CAD 200,000. Gross margin in the quarter was CAD 72 million, or 57.3%, which is within our target range. Investment in research and development during the quarter totaled CAD 31.9 million. Net earnings for the first quarter were CAD 15.9 million, while fully diluted earnings per share were CAD 0.20 in the quarter. Evertz working capital was CAD 173.4 million, with CAD 48.9 million in cash as at July 31st, 2023.
The purchase order backlog was over $343 million at the end of August, and shipments during the month were CAD 49 million. We attribute the solid financial performance and robust combined shipments 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, and specifically to the growing adoption of Evertz IP-based software-defined video networking solutions, Evertz IT and cloud solutions, our immersive Ultra HD solutions, our state-of-the-art DreamCatcher IP replay and live production suite, and BRAVO Studio, featuring the iconic Studer audio. Today, Evertz Board of Directors has declared a quarterly dividend of CAD 0.19 per share, payable on or about September 29th, 2023. I will now hand over to Doug Moore, Evertz Chief Financial Officer, to cover our results in greater detail.
All right, thank you, Brian, and good afternoon, everyone. Sales were CAD 125.8 million in the first quarter of fiscal 2024. That's compared to CAD 101.5 million in the first quarter of fiscal 2023, an increase of CAD 24.3 million or 23.9%. The U.S.-Canadian region had sales for the quarter of CAD 87 million, compared to CAD 78.2 m`illion last year. That's an increase of 11.3%. The international region had sales for the quarter of CAD 38.8 million. That's an increase of CAD 15.5 million compared to CAD 23.3 million last year. Gross margin for the quarter was approximately 57.3%, compared with 57.6% in the prior year, and within our target range.
Selling and administrative expenses were CAD 16.4 million for the first quarter. That's compared to CAD 12.9 million in the same period last year. Selling and admin expenses as a percentage of revenue were 13%, compared to 12.7% in the same period last year. It's worth noting that prior year expenses included a CAD 3.8 million recovery that did not reoccur in the current year. Research and development expenses were CAD 31.9 million for the first quarter. That's compared to CAD 28.3 million in the same period last year. Research and development expenses as a percentage of revenue were 25.4%, compared to 27.9% in the same period last year. We had a foreign exchange loss of CAD 2 million.
That's compared to a foreign exchange gain in the prior year of CAD 1 million. The loss being predominantly a result of a 3% decrease in the value of the U.S. dollar as at July 31st, 2023, when comparing it to April 30th, 2023. Turning to discussion of liquidity of the company. Cash as at July 31st, 2023, was CAD 48.9 million. That's compared to CAD 12.5 million as at April 30th, 2023. Working capital was CAD 173.4 million as at July 31st, compared to CAD 171.4 million at the end of April, 2023. The company generated cash and operations of CAD 60 million, which is gross of CAD 40.1 million change in non-cash working capital and current taxes in the first quarter.
If the effects of the change in non-cash working capital and taxes were excluded from the calculation, the company generated CAD 19.9 million in cash from operations. During the first quarter of this year, deferred revenue increased by approximately CAD 23 million, and accounts receivables decreased by CAD 23 million as well. That results in a combined CAD 46 million in increased cash from working capital in the quarter. During the quarter, the company acquired CAD 3.2 million of capital assets, and the company used cash, for, sorry, from financing activities of CAD 17.2 million, net of CAD 5.9 million that was previously presented of the bank indebtedness. That predominantly consisted of the payment of dividends of CAD 14.5 million dollars.
Shares outstanding were approximately 76.1 million, and options and equity-based restricted share units outstanding were approximately 6.2 million, as at July 31st, 2023. Weighted average shares outstanding were 76.1 million, and weighted average fully diluted were 76.5 million for the quarter ended July 31st, 2023. That brings to conclusion 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 our annual information form and the official reports filed with the Canadian Securities Commission. Brian, back to yourself.
Thank you. Sergio , 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 star one. If you want to withdraw your question, please press star two. Your questions will be pulled in the order they are received. 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 Thanos Moschopoulos from BMO Capital Markets. Please go ahead.
Hi, good afternoon. Brian, clearly it was a strong quarter and seems like you know shipments for progress were also very strong. Can you just comment on maybe the spending environment? Is some of that strength you know supply chain easing? Is some of that you know some pent-up demands or you know more specific project-based? I mean, what are you seeing as far as the environment?
So from the Evertz's perspective, you know, yes, it's been a very good solid quarter in terms of delivering to our customers and securing new orders. So specifically, you know, we do continue to win very good profitable business and, you know, larger contracts. So whether that's a broader spending implications or whether it's specifically with the customer sets that Evertz is addressing, you'd have to look at the rest of the industry to see what their order intake looks like.
Okay. But I guess from an Evertz's perspective, directionally, does it feel sort of status quo or, are things, you know, feeling a bit better versus a few months ago, within your own business direction, what do you think?
Well, definitely we're continuing to address, you know, a very significant, you know, order backlog multiyear, and we are well positioned to deliver that to our customers. So, you know, we're continuing to, you know, work through, you know, very, you know, substantive backlog that we have, and to bring in new business as well too. And so from our perspective, it's a very good solid environment. And, you know, that's going to continue, you know, for the next foreseeable quarters, as we're, you know, working through this very large backlog.
Great. The writer and actor strike, if it drags on, is that likely to have any impact? I mean, on the one hand, maybe that might cause more investment in less production. On the other hand, does it cause, you know, some of the customers to be more mindful about their CapEx spending? Any thoughts in that regard?
That's definitely a factor in the industry, but we are continuing to secure significant orders. There's been crystal ball as to how long this will play out, but currently, our order backlog is very strong and our order book has been continuing to build.
Okay. The gross margin was within your targeted range, double a bit larger than in the recent quarters. Was that just reflective of, maybe having a couple of larger deals in there or any other dynamics you point to?
I'll address that. So it really is just a, it's a product mix. I would say, I would highlight that we do have a bit of a larger international segment in revenue in the quarter, but it really is a, a general product mix and not really necessarily a specific contract to point to.
All right, I'll pass the line. Thank you.
Thank you. Your next question comes from Robert Young, from Canaccord Genuity. Please go ahead.
Hi, good evening. You announced a couple of larger deals, going back, I think, in April, and so I was curious. I think you said the largest customer is 11%, if I heard that right. Maybe just talk about whether either of those deals fell into the quarter?
So the largest press release we did with the approximately $150 million order, in the quarter, there's about $6 million of revenue recognized therein. Looking at the next 12 months, it is, you know, we're estimating, you know, it's a big range, it's $22 million-$35 million. It's, you know, dependent on certain cloud deliverables and milestones, relatively linear after the next 12 months. But yeah, in the current quarter, there's about $6 million in Q1. On the approximately $25 million international order we previously press released, there would be very limited, if any, revenue in this quarter.
Okay, that's helpful. The change in the cash, I think you highlighted working capital, if I heard right.
Yeah.
Deferred revenue was a big increase. Maybe just talk about the drivers there. What's behind that? Or maybe you can just go through the different pieces of working capital that caused that, and then-
Yeah, sure. So-
Detailing that.
I mean, the simplest half of it is just AR is down. So, I mean, we've been running the last few quarters at a relatively high AR level of over CAD 100 million. It's not totally abnormal to have closer to 80s, in the 80s, kind of a accounts receivable, so we've collected, you know, an additional CAD 20 million there. On the deferred revenue side, there's about CAD 20 million in cash we've received upfront ahead of revenue. So if you're looking at a specific contract, the large one referenced, there's about CAD 15 million of that that we would have received cash but not recognized. That's sitting in deferred revenue. That's the biggest piece to the increase there. While the collections in there are more broad-based across multiple customers.
That explains the AR question there.
Great. And is that just typical, like a large project, you collect a certain amount up front, or is that because I think you said it was driven by cloud and services? Is there just a change in the composition?
Yeah.
So, yeah, it's really the, well, components to it, but it's the nature of the project, I would say. So the order as a whole, where there's unlike a typical just shipping of hardware, where sometimes you receive funds upfront, many large customers get some terms. When it's more the service or cloud-centric projects, there will be an upfront cash outlay towards us that will often result in deferred revenue.
Okay. And then the last question for me, just around the shipment figure, like Doug highlighted, very strong. I think it's the second highest going back, so it's very, very strong. And so is that sustainable? I mean, when we think about how that cadence through the quarter, and just maybe give us some context around that large figure and whether it's sustainable, then I'll pass it on.
So I'll start, Brian. You want to go on. But so I mean, CAD 49 is certainly a strong month of shipments. I think we've certainly never had CAD 150 million, so that you know that's not fair to prorate that across the board. What I would say is if you look at our total backlog, approximately 45% is beyond a year. I already kind of mentioned the WBD, you know, the 45%, and then that which is lost my train of thought there.
So, Rob, very strong shipment is actually, you know, solid overall results for the year. It's a timing of deliverables as well, that contributed to very significant month of shipments.
Okay, but we shouldn't just multiply that by three?
Yeah, I don't think that would be a realistic to prorate across. Yeah.
You can like-
Yeah, as you know, we deliver when the customers are ready at times, so that can have shipments delayed in a month and then you know pile up in a second month. So, our you know August shipments at CAD 49 is an inordinately high number. We can do it, but it's high.
Is that driven by one order or one customer? I mean, this quarter, I think you said top customer is 11%.
Multiple.
We expect that to be quite a bit higher next quarter? Okay.
Could you repeat that for me, please?
Sorry, I was just... That you said that the top customer is 11%. Should we expect that to be quite a bit higher next quarter, just given the size of that shipment figure, if it's driven by a small number of customers?
We actually had a 14% annual and a 11% as part of the large customers.
Okay. I was more thinking about in the 49 million shipments figure. Like, is that driven by a small number of customers, or is it broad? And then, should we be expecting that top customer figure to be a lot higher in the fiscal Q2?
The 14% of the single customer in the quarter is unusual, and that would be unusual for it to persist for the full year. So the answer is no to that.
Thanks, appreciate it.
T hank you. Your next question comes from Steven Lee from Raymond James. Please go ahead.
Hey, guys. Given what you just said on the August shipment, that momentum is continuing. I mean, we're not going to multiply by three, but Q2 should be sequentially up from Q1, correct?
That's hard to assert. Yeah, so.
Say that again? I didn't catch that.
I mean, to say it sequentially, Q2 will be higher than Q1 is hard to assert. So it's a strong start at CAD 49 million. If you look past, we've had CAD 50 million in 2019, I believe, and then the final quarter was about CAD 120 million. So it's... I cannot give a specific forecast beyond what the first month.
Right. Overall, your backlog is much bigger, so it should give you a bit more visibility, isn't it?
The backlog is certainly larger.
Yes, but once again, once again, Steven, the deliverables are customer based as well, too. So, we do delivery, you know, products, services, you know, as the customers are ready for them, so, it's not prudent to extrapolate that number.
Okay. That's fair. Okay. And the R&D, Brian, CAD 32 million, I mean, the sequential increase, is there any one-time there, or is that kind of a good level going forward? Thanks.
Thank you. I can comment on R&D. If you're looking at sequentially, we did bring a fair amount of co-ops on in the summer, so additional co-ops, I would say. There's always some co-ops in that. That actually equates to approximately, you know, a little bit over CAD 500,000. If you're looking at sequentially to, it's actually additional business days in, in Q1 versus Q4, which equates to approximately CAD 500,000 as well. So, yeah, if you use that as kind of a guide, I mean, it, it's, I don't expect any kind of major decreases going forward.
All right. Got it. Thanks, guys.
Thank you. There are no further questions at this time. I'll turn the call back to Brian Campbell for closing remarks.
Thank you, Sergio. I'd also like to thank the participants for the questions and to add that we're very pleased with the company's performance during the first quarter of fiscal 2024, which saw strong quarterly sales of CAD 125.8 million, an increase of 24% from the prior year. Solid gross margins of 57.3%, which together with disciplined expense management, yielded earnings of CAD 0.20 per share.
We're entering the second quarter of fiscal 2024 with significant momentum, fueled by a combined purchase order backlog, plus August shipments totaling in excess of CAD 392 million by the growing adoption and successful wide-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 enterprise companies in the sector, and by the continuing success of Evertz DreamCatcher, BRAVO, our state-of-the-art IP replay and production suite. With Evertz's significant investments in software-defined IP, IT, and cloud technologies, over 600 industry-leading SDVN 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. We look forward to having many of you join us on Wednesday, the 4th of October, at our annual general meeting. 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. Thank you.