Live production replay specialist EVS said that leading media service provider NEP has committed to spend $8 million with the Belgium-based supplier to upgrade its production capabilities in the United States.
According to EVS, the deal includes an unspecified number of XT-VIA live production replay servers, LSM replay controllers, IPDirector content management system, and other products.
EVS will recognize the revenues associated with this order in Q3-Q4 2019 and Q1 2020, the time-frame the company says it will take for it to deliver and install the equipment in an unspecified number of NEP’s US-based outside broadcast vehicles.
The deal should increase EVS’s order backlog when it reports earnings next week. Whatever is not delivered during Q4 2019 will be reported as backlog at year-end.
The announcement of the deal comes about a week before EVS reports its results for the first half of 2019. Although EVS issued a brief trading update in May 2019, the company’s 1H 2019 results will be the first time it has reported financials since its Q4 2018 earnings announcement on February 21, 2019.
During the Q4 2018 earnings call, EVS Board Chairman and interim CEO Dr. Pierre De Muelenaere explained why the company had decided to change its reporting from quarterly to bi-annually saying:
“As you know, EVS used to report on a quarterly basis which, on one hand is nice, but on the other hand it’s a bit difficult because we have a business model and a business where we have very high volatility from one quarter to the other. And so, we communicate often that on something which is fairly volatile. And this is why we want to move to something which is more twice a year where we can have the consolidation of two quarter. And so, the change for this year will be the following, will limit our Q1 and Q3 information to trading update and then will really focus our full communication on twice a year, done twice a year instead of four times a year.
“We believe that with this change, it will be easier to – for the analysts and the investors to follow us because they would have more access to us twice a year with maybe more intense communication; and then of course, we will pass the message that it’s important to understand that the easiest business is volatile, and of course H1 is significant, H2 is significant. But what we achieve in one quarter, let’s say, is fairly volatile and sometimes could even be a bit misleading if we have slippage of some big deals or this kind of thing that can be a bit confusing.”
Consequently, when EVS reports is results next week, it will be the first time in six months that investors have heard directly from company management. Moreover, the company’s results are typically weaker in odd-numbered years (e.g. 2019) compared to even-numbered years when major sporting events such as the World Cup summer and winter Olympics, and the Euro Football Championship occur. Historically, EVS typically records more than €10 million generated through sales or rentals during even-numbered years.
For at least the last decade, EVS has telegraphed the impact on its financial results of even-odd year cyclicality. The company did such a good job that it is now widely-accepted that the financial performance of media technology suppliers – particularly those with high-exposure to top-tier live sporting events – is always better in even-numbered years than they were in odd numbered years.
This all changed in Q2 2018, when EVS reported it’s first-ever even-year revenue decline since 2002. Subsequently, the company reported that its full year 2018 revenues were €116.1 million, a decline of 2.3% compared to the previous (and odd-numbered) year.
Looking ahead to next week’s earnings release and full-year 2019 results, it would not be surprising if the company’s 2019 results lagged 2018 because EVS typically reports lower revenues in odd-numbered years.
In May 2019, EVS issued a trading update in which it reiterated full-year 2019 revenue guidance in the (relatively wide) range of €100 million to €120 million, four-fifths of which will result in a year-on-year revenue decline.
For example, if EVS hits the middle of its 2019 guidance range (€110 million), annual revenues will have declined 5.2% compared to 2018 (and will be 15.9% lower than the company’s last “up-year” in 2016). Using the same calculus, for EVS to post positive year-on-year revenue growth in 2019 its result must be in the top one-fifth of its full-year 2019 revenue guidance.
To illustrate this, we created the chart below that shows the company’s reported quarterly revenue between 2012 and 2018, along with a plot of the full year 2019 revenue guidance.
The even-odd year cyclicality is easy to see through 2016. As per past odd-numbered years, the company’s revenue declined in 2017; but unlike the historical trend, the company’s revenues also declined in 2018 (an even-year), although company management reminded investors that the 2nd half of 2018 was the company’s best in the last ten years, thanks in large part to the new XT-VIA platform.
The last column of this chart shows the company’s full-year 2019 revenue guidance range. If the company’s results come in at the low-end of the guidance range, the year-on-year percentage change between 2018 and 2019 will be -13.8%. If EVS hits the high-end of the guidance range, the year-on-year percentage change will be 3.4%.
If past performance is any indication of future performance, it stands to reason that EVS’s aggregate revenues in 2019 (an odd-year) will probably decline compared to 2018 (an even-year). During the company’s Q4 and FY 2018 earnings call, acting CEO De Muelenaere more or less told analysts he expected the first-half of 2019 to be weak, saying “So we believe that H1 will be much more challenging in 2019 than H2 and you can also let’s say, see that somehow with the fact that there is no evidence with the order book that we have at February 15 that we are starting, or let’s say, the year with a lot of orders are coming in, let’s say very easily at the beginning of the year. So we basically believe that more and more and you can see that with the split between quarter of the past years you can see that shift more and more towards strong Q4 which also mean delayed decision until later in the year. So we expect that a bit in 2019, but we cannot be sure about that because, so to speak our customers are a bit unpredictable, it depends sometimes on what they can sign in terms of deals if, they sign some deals where they absolutely need ultra-high definition then they will be forced of course to buy some additional equipment. But we can never predict what they will do on their side and when they will do it especially.”
So, the $8 million deal with NEP could make a meaningful difference to the company’s 2019 performance, especially as the announcement says that deliveries will occur during the last four months of 2019 and extend into early 2020.
Time will tell how the company fares during the full year 2019. What’s more interesting is how the company will perform in 2020, which includes the European soccer championships, the Tokyo Olympics, and the US presidential election.
Historically, this trifecta of big events (plus many others that will occur in 2020) would be a boon to EVS. For example, in 2016 EVS reported a year-over-year revenue increase of 10.4% for the full-year, and an astonishing 70% year-on-year revenue increase for Q2. In 2012, EVS’s revenue jumped 29% compared to the previous year and reached an all-time high of €137.9 million
Of course, past performance may not be a reliable indicator of future performance, particularly at a time when the media technology industry is changing radically to support new business models and consumer preferences, and these forces will increasingly impact suppliers of media technology hardware and software products like EVS.
NEP has more than one billion dollars on strategic M&A to achieve global operational scale and is now pioneering new ways of working, including the centralization or live production resources. As evidenced by NEP’s Andrews Hub in Australia (where EVS replay servers and other systems are deployed), once you have achieved operational scale you can start to drive meaningful efficiency savings by taking advantage of increased connectivity and the centralization of resources. Whether you call it “remote production,” “REMI,” “at-home production,” “home-run production,” or “centralized production,” there’s no doubt that broadcasters are increasingly centralizing live production workflows. It seems self-evident that the number of remote productions will only increase from here, but centralizing production hardware is just the beginning.
Once deployed at scale, remote production flips traditional business models on their head. Rather than the current status-quo where equipment and personnel produce two or three events a week, the same resources can produce two or three events a day.
Many broadcasters plan to take remote production principles much farther, believing they can deploy completely decentralized production workflows where equipment and personnel in multiple locations work together on a live event.
Speaking at the 2019 Devoncroft Executive Summit | Las Vegas, Discovery EVP Global Engineering & Operations Simon Farnsworth said the company plans to invest ~$70 million in its European sports business to “completely change our model to remote production.”
Farnsworth told the Devoncroft audience that the company’s goal is to move to a “REMI on steroids” model for live production.
To achieve this, Discovery plans to build two centralized private-cloud data centers connected to control rooms in 15 European capital cities by a 100GbE wide area network (WAN). All equipment, including mainframes for production switcher, replay servers, and graphic systems will be housed in each of the two data centers. The 15 facilities will have control surfaces, but no dedicated processing hardware.
Using this approach, Discovery will generate significant cost-savings. Unfortunately for production technology vendors, much of these savings will come at their expense because Discovery’s “hub-and-spoke” approach requires substantially less product.
For companies that make live production equipment, including switchers, graphics systems, and replay servers, this is not a good thing.
As we wrote in our analysis of Sony’s acquisition of a 45% equity stake in Nevion, “existential threat” may be a more appropriate description of the long-term impact of at-scale REMI deployments on live production technology suppliers. Looking at this scenario from a mid-2019 perspective, we find it impossible to quantify fully the financial impact REMI will have on technology suppliers. However, once REMI has been deployed globally, and at scale, it may not be too outrageous to think that the total addressable market for product categories that can be centralized could fall by 30 percent, or even more.
So, what does all this mean for EVS and its $8 million deal with NEP? Although there is no specific mention in the EVS press release about 4K/UHD or IP being a driver for the NEP order, the announcement does supports De Muelenaere’s point that big contracts are more likely to be booked in the second-half of 2019 (we’ll find out about 1H 2019 next week).
It’s also worth noting that the EVS press release specifically states, “all new systems will be installed in mobile trucks facilities operating across the US market,” which implies these products are destined for traditional outside broadcast use cases and not for a new US-version of NEP’s Andrews Hub and 100% REMI workflows. So, this contract seems like a traditional outside broadcast deal – either to refresh existing trucks or to build new ones.
However, the 2020 Olympics are now less than one year away, and it is a near-certainty that broadcasters including but not limited to Discovery’s Eurosport will make extensive use of REMI-enabled workflows. After Tokyo, the next major live production technology spending driver is likely to be the renewal of NFL Football TV rights in the United States, one of – if not the – most expensive broadcast rights packages in the world.
When the current NFL TV deal was signed in 2011, the winning broadcasters agreed to pay the league a total of more than $3 billion per season for the next eight years. Subsequently, the TV rightsholders entered into contracts with services providers such as NEP, who then acquired (actual) truck-loads of live production technology equipment from suppliers including Calrec Audio Canon, ChyronHego, Cobalt Digital, Evertz, EVS, Fujinon, Grass Valley, RTS Intercom Systems, and Vizrt, among others
The last NFL TV rights deal was a boon for technology suppliers. It remains to be seen whether the league’s next TV deal will be structured differently and include significant levels of REMI deployments as per Discovery’s Eurosport plans mentioned earlier.
We will be discussing the commercial and financial implications of ever-increasing connectivity and REMI workflows with industry thought-leaders at the 2019 Devoncroft Executive Summit | Amsterdam, which is scheduled for September 12, from 12PM – 6PM at The Koepelkerk at the Amsterdam Renaissance Hotel. We look forward to seeing you there.
Press Release: EVS Strikes Major Deal with NEP to Upgrade Their Us Production Activities
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