This post reviews several talking points from the Devoncroft Summit | Amsterdam on business model change and also builds on the excerpts of posts from the 2018 Big Broadcast Survey.
It is helpful to illustrate the business model change with a specific example, and I’ve chosen to use Evertz given the proximity to Evertz’ fiscal first quarter results and its recent press release of a “Massive Scale” public cloud deployment.
Time permitting I will attempt to post article on other technology suppliers. For parties interested in a deeper review of the data referenced below, this is available in the 2018 Big Broadcast Survey reports available for purchase. We are also making the collateral from the Devoncroft Summit | Amsterdam available for purchase.
A Case Study on Purchase Model Transition
There were several interesting points raised during Evertz’ recent earnings results. In particular, the question and answer session with analysts covered some important topics on changing purchase models in the media technology sector.
Responding to a series of question from Anshu Deora of Raymond James, Evertz’ CFO Anthony Gridley added the following commentary on how the Company’s backlog (plus shipment) has changed as an indicator of future sales. “I would also add that going back six or seven years ago, the correlation between the backlog and the conversion of the backlog was much more linear and easier to predict.”
Let’s put some figures behind Anthony’s statement. The below chart shows a scatter plot of Evertz’ quarterly revenue (adjusted for FX) against the backlog (plus shipment) for the previous quarter. The time period is the first 16 quarters of Evertz as a public company.
Consistent with Anthony’s statement, the relationship is clearly linear in the above chart. I’ve added the trend line for effect. For those interested in the statistical explanation, the linear regression has an R2 value of 0.83. The R2 value describes the goodness of the fit, with a value of 1 describing a perfect linear (predictive) relationship.
Now, let’s contrast the above against an identical plot, but for the most recent 16 quarters of performance.
As illustrated in the above chart, the linear relationship is substantially less. For the most recent four years the R2 value is much lower at 0.41. In practical business terms, the linear relationship has weakened and there is much greater variability in the revenue profile. Please note this is not a good/bad commentary on Evertz as revenue has consistently grown. Rather it is an observation on the changing nature of how equipment is being bought and sold in the media technology sector.
The movement to next-generation technology architectures such as IP-based infrastructure and cloud environments running specialized software is also a business model transition. I have argued in several public forums, most recently at the Devoncroft Summit | Amsterdam, the business model component is the more challenging aspect for both customers and technology suppliers.
There are several data points describing the business model transition. One lagging indicator is the revenue profile of media technology suppliers such as illustrated above. (Purchase data being a leading indicator).
Returning to the Evertz FQ1 2019 earnings call, Brian Campbell (EVP Business Development, Evertz) offered the following explanation for the breakdown of the traditional linear relationship between backlog and upcoming revenue. “…There is a lot more variability of revenue than we had five years ago when a majority of our revenue was just recognized in shipping. So now it is much more project driven than it was five years ago” stated Campbell.
HD Transition vs. IP Transition
There is a related point about the industry drivers of the past versus the industry drivers of the next five years. This is best made by comparing and contrasting the HD transition with the current transition to IP-based infrastructure. Again, I will use Evertz as the example.
The ‘Growth Strategy’ section of Evertz’ June 2006 IPO prospectus began, “The Company’s goal is to extend its leadership in the key HDTV growth sub-segments of the broadcast equipment industry.” The management team certainly did just that.
Below is a dual plot of the global HD penetration (gathered each year in Devoncroft’s Big Broadcast Survey) and Evertz’ revenue through 2016. I’ve taken some liberties with the chart to better accentuate the point: the statistical relationship between Evertz’ revenue growth and the media industry’s progress in transitioning to HD is strong – highlighted by an R2 value of 0.89. Again, the actual data pictured below is available in the Big Broadcast Survey reports.
The HD transition was mentioned as a growth driver over the course of a decade of Evertz earnings calls. The below chart shows correlation; the consistent highlighting of the HD transition as a growth driver by Evertz’ management team is great evidence for causation.
More simply, it is reasonable to conclude Evertz grew in large part because of the positioning of its product portfolio with the HD transition. As a reminder, the HD transition was the largest driver of spend in the media technology sector for well over a decade.
My colleague Joe Zaller reviewed the specific figures on the mature state of the HD transition during the 2017 Devoncroft Summit and punctuated the analysis with the following observation: “if your business relied on the HD transition, then you need to find a new business.”
Aligning the two discussions, Evertz benefited from the HD transition and its revenue model was highly predictable because the purchase of HD equipment was a capital expenditure planned by customers in a (relatively) reliable manner.
Turning our attention to the transition to IP-based infrastructure, we published the Devoncroft M&E IP Adoption Index to allow for a public reference on the industry’s current and anticipated adoption of IP-based technology. It is pictured below for your reference.
I am now going to list the closest thing to a public disclosure Evertz provides on its IP-based technology installations, which are occasional references to individual and cumulative installations ahead of major trade events. The only commentary I will add is to suggest a relationship between the acceleration of the number of installations disclosed by Evertz’ with the slope of the index.
- July 2014:
“Evertz is leading the IP Revolution and will be showcasing its already deployed SDVN 10GE solution at IBC 2014.”
- April 2015:
“Over the past year, Evertz SDVN technology has been globally deployed in industry leading facilities all over the world”
- September 2015:
“Evertz, a global leader in video/audio innovation, today announced that AMC Networks has gone live with the world’s first 10GbE playout facility using Evertz Software Defined Video Networking (SDVN) solutions.”
- April 2016:
“With over 40 global installations of its Software Defined Video Networking (SDVN) solutions, Evertz continues to lead the transition to IP.”
- September 2016:
“With over 50 global installations of its Software Defined Video Networking (SDVN) solutions, Evertz continues to lead the transition to IP.”
- April 2017:
“Evertz SDVN is the only fully deployed IP infrastructure solution available today and has been on-air continuously with over 80+ installations since 2014.”
- August 2017:
“With over 80 deployments globally since 2014, Evertz is leading the transition to IP with its SDVN IP-based solutions.”
- April 2018:
“With over 100 global deployments since 2014, Evertz is leading the industry transition to IP with its SDVN IP based solutions.”
- September 2018:
“Evertz leads the industry with IP deployments spanning across 400+ installations globally since 2014.”
It is important to remember there is no industry clearing house for establishing what is and is not an SDVN IP-based solution. In other words, the figures disclosed by Evertz are also compiled by Evertz.
Once more, I am using Evertz – and its public disclosures – to illustrate a market development and not attempting to make a statement on Evertz.
To tie the above disclosures on IP deployments to Evertz’ backlog, here is another relevant excerpt from Brian Campbell during the earning’s call:
“…the backlog most definitely has significant components of our new products – the IP-based software defined networking solutions, the cloud playout whether it’s on-premise, hybrid, or public cloud, and our IP-based DreamCatcher, replay and live productions. Those new solutions have been driving our sales very significantly for quite a while and they do represent a significant component of our backlog.”
The logical chain I have attempted to construct is the following: (i) Evertz grew in large measure in line with the industry’s transition to HD equipment, (ii) Evertz’ backlog exhibited a linear relationship to revenue in the next quarter because of how HD equipment was bought and deployed, (iii) Evertz’ backlog no longer exhibits a strong linear relationship with the next quarter’s revenue, and (iv) Evertz’ backlog in recent years includes a significant component of IP equipment.
Those observations are explained by the differences in how IP-based equipment (and cloud services) is bought and deployed versus more traditional broadcast equipment (as in the HD transition). The difference in purchase models is necessitating a change in the business model of suppliers.
There is a much longer discussion required to review how business models are changing and what it means for individual customers and suppliers. We will revisit this topic in subsequent posts, so pleased do register to receive announcements on articles.
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