Last week Evertz announced its earnings result for the first quarter of its 2021 fiscal year, which covers the three-month period ending July 31, 2020. The results are a telling data point about the impact of the COVID Disruption to the media technology supplier community.
Evertz revenues (CAD) for the quarter (May 1, 2020 – July 31, 2020) were down 46% versus the year-earlier quarter, fiscal Q1 2020 (May 1, 2019 – July 31, 2019). Trading in North America was especially challenged, with Evertz recording a 51% decline in revenues in the region.
In the preceding quarter (fiscal Q4 2020), for the period ending April 2020, Evertz had only recorded a year-over-year decline of 14% versus the same three-month period in 2019.
At the time of Evertz’ FY Q4 disclosure (June 30, 2020), the revenue result (a decline of 14%) seemed like a positive sign about the magnitude of the revenue disruption for the media technology sector. Measured against other public data points in the market this was a surprisingly resilient figure considering more than half of the quarter had spanned the disruption introduced by COVID. In contrast, Grass Valley Q1 2020 revenue was down 41%.
Foreshadowing the challenges of the current quarter was the shipment disclosure for May 2020 detailed in the FY Q4 2020 results. Shipments in May 2020 were less than 50% of the May 2019 figure.
During the current quarter’s call with analysts, Evertz management attributed the significant revenue decline in the quarter to the “extraordinary COVID pandemic,” which caused customer shutdowns, travel restrictions, and put several projects on hold. The resulting disruption delayed customer deliveries and installations since access to customer facilities was restricted. This then prevented Evertz from recognizing the revenue associated with contracted business.
Management’s description of the revenue environment is consistent with the Company’s disclosures for August shipment data and contracted backlog. At the end of August, Evertz backlog was C$118 million, the largest in the Company’s history. August shipments were C$36 million, more in-line with pre-COVID levels.
A revenue decline of 46% often requires making difficult decisions throughout a company’s operations. The below chart highlights the major income statement categories for current quarter results, and how those categories compare versus the year-earlier period, previous quarter, and on a comparative basis.
Despite the significant revenue decline, Evertz managed to maintain profitability, though at much depressed levels than its typical margin profile. For example, last year’s first quarter fiscal operating margin was 17.1%.
Supporting Evertz operating results was assistance from the Canadian government totaling C$12.3 million during the quarter. Expressed as a function of the quarter’s revenue, this assistance from the Canadian government was more than 20% of the quarter’s revenue, though it was recognized in the financial results as a reduction of expense.
R&D expenses for the quarter may have dropped by C$6.1 million versus the year-earlier, but headcount increased. Wage subsidies (recorded as a decrease in expense) were C$6.7 million during the quarter. In simple terms, the assistance of the Canadian Government enabled Evertz to grow its R&D investment in the face of a 46% decline in revenue.
(For those technology end-users reading the above passage, have you asked your suppliers whether R&D investments have been impacted by the events of 2020?)
Evertz financial filings indicate the headcount increase was “to address recent growth in the cloud-based business and support anticipated increases in cloud-based opportunities.”
As we have noted in several recent podcast, the current disruption is highlighting the considerable expense of sales and marketing in the global media technology sector. Almost 80% of the reduction of Evertz SG&A expense in the quarter was attributable to reduced selling activities, travel restrictions, and salary reductions. An immediate benefit of not being able to sell is not having to pay the expenses of sales. The balance of the decline in SG&A was attributable to further government assistance.
Management is expecting these government programs to scale back in the coming months.
What to Expect in the Remainder of 2020?
An interesting thought experiment comes from equity analyst Thanos Moschopoulos of BMO Capital Markets. If you were to estimate Evertz’s next quarter (period August – October) revenue result as a straight-line of August shipments (i.e. three months of C$36 million) then Evertz quarterly revenue plot would look like the following chart.
The optimist would see optimism in that geometric pattern. The pessimist would admonish it is an estimate and only a single quarter. Regardless of your state of mind on the industry environment, it is an interesting data point to track in future articles about the market.
Press release on Evertz FY Q1 2020 Results
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