Vizrt announced results for the second quarter of 2018.  For the quarter Vizrt had revenue of $34.3 million, an increase of 22.5% versus the second quarter of 2017, and an increase of 16.7% versus the preceding quarter, Q1 2018.

Together with Q1 2018 results, the first half 2018 revenue grew 14% compared to the first half of 2017.  Management attributed the strength in the first half to successful developments in the Americas region.

Vizrt’s CEO Michael Hallen participated at the Devoncroft Summit during the 2018 NAB Show (first from right in below) on a panel of technology supplier CEOs.  Responding to the question of market health, Mr. Hallen shared the following observation, “When I look at it from a Vizrt perspective. We had a pretty good year last year.  We picked up a lot of growth momentum…geography-wise we did well in Asia and we picked up a lot of growth momentum in the US in the second half of 2017.  So from our perspective it is pretty healthy.”   Those comments have been proven out by the first half results.

Devoncroft Summit 2018: Technology Supplier C-Suite Panel

(Pictured above from left to right: Joe Zaller, President Devoncroft; Patrick Harshman CEO Harmonic; Jeff Rosica CEO Avid; John Stroup CEO Belden; Michael Hallen CEO Vizrt)

Gross margins for Q2 2018 were 69.5%, which compares to 71.4% gross margins recorded during Q2 2015 and 70.7% gross margins from the preceding quarter. (Note: these gross margins add back the amortization related to Vizrt’s go-private transaction in 2014.  I carry this math through the other operational figures as well).

Operating income for the quarter was $8.2 million, a substantial increase compared to the $2.6 million recorded during the second quarter of 2017 and a 33% increase over operating income from the first quarter of 2018.  Operating margin for Q2 2018 was 23.8% versus 9.4% in Q2 2017 and 20.8% in Q1 2018.

Vizrt, like many technology companies, capitalizes a portion of its R&D expenditure associated with certain projects (this is consistent with IFRS accounting standards).  I have agreed to disagree with the accounting profession on this practice.  My principal complaint is the practice serves to artificially increase margins, at least during the early years of adoption.  Adding back the capitalized R&D yields an operating margin in Q2 2018 of 15.6%, 820 basis points lower.

Net loss for Q2 2018 was $2.8 million.  In the year-earlier period, Q2 2017, Vizrt recorded a net loss of $1.8 million, and in the preceding quarter a net income of $7.3 million.  It is important to note the interest payments to bondholders and foreign currency fluctuations have a material influence on Vizrt’s net income.

Cash and cash equivalents ended the quarter at a balance of $29.6 million, down from $36.9 million at the end of Q1 2018.

Frequent readers of these post may have noticed I am loath to quote adjusted figures.  A consistent application of the strictures of accounting is a large portion of the value of financial reporting.  Vizrt’s Q2 reports are a good example of my rationale.  The primary audience of Vizrt’s financial reports are bondholders, so I understand management’s focus on reporting EBITDA (earnings before interest, taxes, depreciation, and amortization) since it represents the monies available to pay interest.  My primary interest in following the results of Vizrt and other suppliers in the sector is to better understand operational performance and by extension broader sector developments.  In this context EBITDA is a useful measure when it approximates cash flow generated from operations. The reported measure of recurring EBITDA for the quarter was $10.2 million (30% margin), yet in the quarter Vizrt consumed $7 million of cash.   

Revenue by Geography:

• Revenues from EMEA for the quarter were $14.5 million, an increase of 13.1% in comparison to Q2 2017 and a decline of 3.3% against the preceding quarter. For Q2 2018 EMEA accounted for 42.3% of overall revenue, versus 45.8% in Q2 2017 and 51.0% in Q1 2018.
• Revenues from the Americas region were $9.7 million during the second quarter of 2018, a year-over-year increase of 32.1% and a sequential increase of 54.9%. Americas represented 28.4% of total revenue in the quarter, compared to 26.4% in Q2 2017 and 21.4% in Q1 2018.
• Revenues from the Asia-Pacific geography during the second quarter of 2018 were $10.0 million, a 29.2% increase over Q2 2017, and an increase of 23.8% against Q1 2018. Asia-Pacific accounted for 29.3% of total sales in Q2 2018.  During the year-earlier period Asia-Pacific contributed 27.8% of sales and in Q1 2018 Asia-Pacific contributed 27.7% of total revenue.

Operating Expenses by Category:

• Research and development (“R&D”) expenses in the quarter were $2.1 million, a 56.6% decrease versus the same period a year ago, and a decrease of 31.8% versus the previous quarter. In terms of total sales, R&D expenses represented 6.1% of revenue in the Q2 2018, compared to 17.1% in Q2 2017 and 10.4% in Q1 2018.  The decline in R&D expense is in part attributed to the accounting decision in the quarter to capitalize $2.8 million of R&D expenditure (versus $1.1 million in the year-earlier period).  When including this capitalized portion of R&D, total R&D expenses were 14.2% of total sales.  However, this is still a noticeable decrease in R&D investment.  Some of the decline is likely attributable to efficiencies realized during the centralization of R&D activities during 2017.
• Sales and marketing (“S&M”) expenses in the quarter were $9.4 million, an increase of 13.8% against the year earlier period and an increase of 11.8% versus Q1 2018. S&M expenses were 27.5% of total sales in the quarter.  This compares to 29.6% in Q2 2017 and 28.6% in Q1 2018.
• General and administrative (“G&A”) expenses in the quarter were $3.7 million, an increase of 23.2% versus the same period a year ago, and an increase of 28.9% versus the preceding quarter. As a percentage of sales, G&A expenses represented 10.9% of revenue in the quarter, versus 10.9% in Q2 2015 and 9.9% in Q1 2018.

Business Outlook:

Vizrt’s management provided the following commentary on the Company’s second quarter performance, “The improvements come as the large number of strategic initiatives implemented during the last 18 months are starting to show result. The changes have touched a number of areas with the objective of increased efficiency, speed and customer satisfaction.”

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