Production and playout video server specialist EVS reported Q2 2018 financial results.  Revenues for the second quarter of 2018 were €21.2 million, a decrease of 24.8% over Q2 2017 results, and a decrease of 7.5% versus the preceding quarter, Q1 2018.  Excluding the effect of exchange rate movements and big event rentals, the EVS’s Q2 2018 revenue decreased 35.3% versus the year earlier period.

Management had guided investors to expect a softer start to 2018 based on the strength of the fourth quarter of 2017 and the depressed order book levels to start the year.

In total, the first half of 2018 revenues decreased by 16.5% compared to the first half of 2017.  Driving the decline was a steep decrease in revenues from OB van customers, which exhibited a 52.7% decline in sales in the first half of 2017.  In terms of geography, the Americas led the decline with a 35.2% decrease in 1H 2018 versus 1H 2017.

A decline in even year revenues (compared to the year-earlier odd year) is unusual because EVS sales have historically (meaningfully) increased in even years because of equipment demand from large live events such as the Olympics or World Cup.  In fact, even-year first half growth has occurred for EVS every year since 2002 when the Company began publishing quarterly reports.  EVS has been particularly sensitive to large sporting events.  For example, EVS revenue increased over 70% year-over-year in Q2 2016, attributable to upgrades for the Rio Olympics.

The inconsistency of the Q2 result is best highlighted with a visual presentation.  Below is a chart of EVS quarterly revenue from the first quarter of 2012 until the current quarter, Q2 2018.  I’ve denoted the previous revenue levels for the second quarter of the even years of 2012 (London Olympics), 2014 (Brazil World Cup), and 2016 (Rio Olympics).

In fairness, the reader should keep in mind that current financial periods of EVS have the misfortune of being measured against the Company’s tremendous historical results.

EVS’s management team devoted much of today’s call to explaining the cause for the revenue decline and guiding investors to expect a strong second half performance.

My recording of the call did not have the necessary fidelity to transcribe those statements.  I am working to obtain a higher quality transcript or recording, and will update this post once obtained.  In the interim, I will review my observations from listening to the call.

For the second quarter in a row, the prepared remarks of management included a conspicuous assertion that EVS is not losing market share. Management reiterated this point during today’s call.  (As an aside, the implications of this statement are profound for the broader media technology market.  We will explore this market dynamic in the upcoming Devoncroft Executive Summit.)

Instead, management cites market circumstances as the primary reason for depressed operating performance.  In the case of the US region, the EVS team noted the negative impact of ongoing, large mergers of US-based media companies, which the team believes is adding to the overall structural impact of cord-cutting.

Management also started the call by citing the sluggish adoption of 4K/UHD equipment as another cause of lower revenues.  This was a notable change to earlier statements made by EVS’s management team about the potential of 4K/UHD to drive sales.  Beginning as early as the second quarter 2016, EVS set modest expectations around 4K/UHD upgrades.

“We see that the adoption of 4K and IP progressed across all geographies with more concrete discussions that we have now on those subjects with our customers. We are very happy with the order book and the evolution, but we still don’t want to have too much excitement as we know that part of the uptake of these new technologies will be included in the traditional lifecycle of upgrades,” said then CEO Muriel De Lathouwer on EVS’s Q2 2016 conference call.

During the question and answer session with analysts, EVS’s CFO Yvan Absil clarified that the equipment upgrade cycle itself is being delayed, and a part of that delay is attributable to lower levels of interest in 4K/UHD (which is a capability of next-generation products).  Mr. Absil added emphasis on the lack of adoption of 4K/UHD in the US region, where customers have exhibited negligible interest in upgrading thus far.

In addition, Pierre De Muelenaere, EVS’s Chairman and Interim CEO since the departure of Muriel De Lathouwer, offered a lengthy commentary on the nature of product upgrades in the media technology sector (again, I will update this post with the full quote).  From my notes, in Mr. Muelenaere’s experience, the media sector purchases new products to replace old products primarily when new product features are perceived to have sufficient incremental value to justify the expenditure.  At this time, EVS’s new products (Dyvi, Xeebra, XT VIA, and X-One) have new features and capabilities that customers are only beginning to appreciate, and the task of the EVS team is to better educate the market on the value of these features. The team further feels it has made substantial progress with these new products and the second half performance should reflect these efforts.

Other Financial Metrics from Q2 2018

Net profit for Q2 2018 amounted to €8.4 million (€0.62 per share), an increase of 52.4% compared to the year earlier period and €2.1 million (€0.16 per share) in the preceding quarter.  Substantially all of the profit in the second quarter resulted from a favorable income tax charge of positive €8.1 million, which included a €7.6 million tax gain from the Belgium government for R&D investments in the country.

Gross margins for the quarter were 64.8%, a near 1000 basis points decline from the 74.5% level in Q2 2017, and a decrease of 400 basis points when measured against Q1 2018.  Gross margins decline were attribute to lower revenue levels and lower margins associated with newer products.

Operating profit for the second quarter of 2018 was €0.5 million, down 93.8% compared to the second quarter of 2017 and down 76% versus the first quarter of 2018.  Operating margin for the quarter was 2.3%, a sharp decline against the 28.0% operating margins from the same period last year and the 8.1% operating margin achieved during the first quarter of 2018.

Research and development (“R&D”) expenses for the second quarter of 2018 were €5.7 million, or 27.1% of total revenue, a decline of 4.2% versus the R&D expense in Q2 2017, and a decline of 20.2% against Q1 2018.  As a percentage of sales, R&D expense was 21.3% of total revenue in Q2 2017 and 31.3% during Q1 2018.

Selling and administrative expenses for the second quarter of 2018 were €7.1 million, or 33.3% of total revenue, representing a decline of 6.7% over the second quarter of 2017, and an increase of 8.2% versus the preceding quarter.  As a percentage of sales, selling and administrative expense was 26.8% of total revenue in Q2 2017 and 31.3% during Q1 2018.

EVS ended the quarter with 497 employees, down slightly from 507 at the end of the first quarter of 2018, and down from the 479 employees at the end of Q2 2017.

Revenue by Destination:

• Revenues from Outside broadcast vans during the second quarter of 2018 were €6.4 million, a 61.5% decrease versus the second quarter of 2017, and a 33% decrease compared to first quarter of 2018. For the second quarter of 2018, this segment contributed 30.0% of the total revenue, which compares to 58.5% in Q2 2017 and 42.3% in Q1 2018.
• Revenues from Studio & others during the quarter were €11.0 million, up 3.1% compared to the year earlier period, and up 23.5% versus the preceding quarter. For the second quarter of 2018, this segment contributed 51.9% of total revenue, a decline versus the contribution of 37.8% in Q2 2017 and 39.1% in Q1 2018.
• Revenues from Big sporting event rentals during the quarter were €3.8 million, an increase over the $1.0 million from the year-earlier period, and a 10.1% decrease versus the first quarter of 2018. For the second quarter of 2018, this segment contributed 18.0% of total revenue, an increase versus the 3.5% contribution in Q2 2017, and in-line with the 18.5% contribution in the first quarter of 2018.

Revenue by Nature:

• Systems revenue in the quarter was €18.4 million, down 28.5% versus Q2 2017, and a decrease of 8.0% against Q1 2018. During the second quarter of 2018, Systems revenue represented 86.7% of total revenue, comparable to the 91.1% in Q2 2017 and 87.7% in Q1 2018.
• Services revenue was €2.8 million for Q2 2018, up 13.2% versus the year ago period, and a rise of 3.7% compared to Q1 2018. Contribution to the second quarter of 2018 revenue was 13.2% of the total, which is in-line with the contribution of 8.8% in Q2 2017 and 12.1% in Q1 2018.

Revenue by Geography:

• Revenue from EMEA (excluding events) in the second quarter was €9.6 million, down 15.0% against last year’s comparable quarter, and a rise of 44% compared to Q1 2018. Sales in EMEA (excluding events) accounted for 45.2% of EVS’s revenue during the quarter.  This compares to 39.9% of total revenue during the second quarter of 2017 and 29.1% during first quarter of 2018.
• Americas’ revenue for the second quarter of 2018 was €2.7 million, a decrease of 70.8% versus the year-over-year period, and a decrease of 58% compared to the preceding quarter. Americas accounted for 12.8% of total revenue during the quarter, down from 33.0% of total revenue during Q2 2017 and 28.3% in Q1 2018.
• Q2 2018 revenue from the APAC region was €5.1 million, down 23.2% versus last year’s quarter, and a slight decline of 6.6% versus the preceding quarter. APAC accounted for 23.9% of total revenue in the Q2 2018, versus a contribution of 23.4% during Q2 2017 and 23.9% in Q1 2018.

Business Outlook:

The order book stood at €44.3 million as of August 25, 2018.  Management expects all of the order book to get recognized during 2018, with two-thirds occurring in the third quarter of 2018.  The current order book represents an increase of 18.4% over the order book at the same time last year, and an increase of 37.1% compared to the order book on May 10, 2018.

As part of the earnings release, management reiterated the previous revenue guidance for full year 2018 of €115 million to €130 million.  In both the earnings release and on today’s call, management cited an increasing momentum around new products including the XT-VIA platform, which began shipping on August 3rd.

Summing up management’s optimism, Pierre De Muelenaere, Chairman of the Board and Interim CEO said, “We expect an acceleration of the business in this second half and hence remain confident in the achievement of our earlier announced revenue guidance.”

Related Content:

Press Release: EVS Q2 2018 Results

Presentation: EVS Q2 2018 Results

Press Release on “innovation box” tax benefit

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