Q1 2023 Haivision Systems Inc Earnings Call

Speaker 1: And.

Speaker 1: Other other.

Speaker 3: Good day ladies and gentlemen and thank you for standing by. The high vision conference call will be beginning at 5.35pm Eastern. Thank you.

Speaker 2: Please wait, the conference will begin shortly.

Speaker 1: Thanks for watching!

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Speaker 3: Good day, my name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the High Vision Q1 earnings call.

Speaker 3: All lines have been placed on mute to prevent any background noise.

Speaker 3: After the speakers are marked, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one.

Speaker 3: Mirka Wicca, President, CEO , and Chairman of High Vision, you may begin your conference.

Speaker 4: Thank you, Emma, and good afternoon, everyone.

Speaker 4: Thank you for joining us today to discuss the first quarter results of our fiscal year 2023.

Speaker 4: As demonstrated by the results we announced earlier today, demand for our products

Speaker 4: remain strong and our business fundamentals have never been better.

Speaker 4: The company achieved a record Q1 revenue of $34.1 million.

Speaker 4: which represents a 20.2% growth over Q1 of last year, as we continue to deliver top-line growth.

Speaker 4: And we also delivered an adjusted EBITDA of $2.1 million for Q1, which represented a 6.2% operating margin.

Speaker 4: Our transition away from the House of Worship managed services market is progressing extremely well. We expect this to be completed as planned by the end of April .

Speaker 4: Now we still however need to maintain the infrastructure, licensing and the cloud costs to service these clients until the end of April . Although we will begin to see results of this initiative mainly in our reduced COGS and to a lesser extent our opex during the second half of the fiscal year.

Speaker 4: The overall reduction should amount to approximately $500,000 per quarter.

Speaker 4: Well, a few key highlights to note.

Speaker 4: We recently launched our next generation critical visual collaboration platform called High Vision Command 360, we like to call it C360, during the ISC show in Barcelona. It was very well received and the sales teams are already busy building a sales pipeline.

Speaker 4: We recently launched our next generation critical visual collaboration platform called High Vision Command 360, we like to call it C360, during the ISC show in Barcelona. It was very well received and the sales teams are already busy in building a sales pipeline, especially within the international marketplace.

Speaker 4: We had successful deployment of the HiVision Pro Series transmitters on 5G private networks, the elections in Denmark with TV2, sailing competitions in Spain with Telefónica, and football in Germany with media broadcasts and Nokia.

Speaker 4: TV Technology magazine collected the Pro series transmitters, specifically the Pro 460, the best in market 2022, for innovation, feature set, cost efficiency and performance.

Speaker 4: And the SRT Alliance membership surpassed 600 members.

Speaker 4: as it celebrates its sixth year anniversary. An astounding feat in industry, truly establishing SRT as the industry stands for video streaming.

Speaker 4: celebrates its sixth year anniversary. An astounding feat in industry truly establishing SRT as the industry stands for video streaming. An Arboreto!

Speaker 4: Our High Vision Makedo X4 was awarded the best encoding hardware for live production at the 2022 Street Media Readers Choice Awards.

Speaker 4: And our most recent addition of Jean-Marc Racine as our Chief Product Officer is already making a positive difference on our product vision and strategy.

Speaker 4: is making instrumental progress in leading the development and product management teams.

Speaker 4: really building and help to build innovative products.

Speaker 4: Our 2023 plan to increase our revenue and profitability is well on track and we are pleased with our Q1 results.

Speaker 4: We continue to have a strong focus on IBITDA and continue to make this one of our top corporate priorities. The entire company is focused on efficiency and execution to make this happen.

Speaker 4: Let me quickly comment on the e-bird.

Speaker 4: expression of interest. I'm sure people will be asking some questions. Regarding the recent answer to the expression of interest that was made public on March 6, 2019,

Speaker 4: Now we are not clear whether Aritz's approach can actually be deemed a legitimate offer.

Speaker 4: As it is non-binding, expression of interest, and more importantly, they are unable to provide a binding transaction structure or price until they, a competitor, complete due diligence.

Speaker 4: I'm not sure how we could ever get to a more committed transaction without giving a competitor access.

Speaker 4: to do diligent materials. So it does get complicated.

Speaker 4: diligent materials. So it does get complicated.

Speaker 4: We will be required to enter into exclusive discussions with them and remember this is a non-binding and loosely defined expression of interest. There are certain expectations that will require being asked of myself and other significant high vision shareholders but to our knowledge these discussions haven't happened.

Speaker 4: I can tell you that speaking is High Vision's largest shareholder.

Speaker 4: I find the price point of their non-binding expression of interest unacceptable and would not be interested in voting for any proposal at this level. Again, that's me speaking as a shareholder. But the board of directors does have an obligation and fiduciary responsibility regardless of the expression of interest shortcomings.

Speaker 4: And the Board will study this and decide our actions, if any, in due course.

Speaker 4: The company remains focused on executing its growth strategy, expanding its market presence, and delivering innovative solutions to its customers. We believe that High Vision has a bright future ahead, and we are committed to maximizing long-term value for all our shareholders.

Speaker 4: We are confident in our ability to execute on our strategic plan and deliver continued growth and success.

Speaker 4: In closing, despite the economic headwinds and continued supply chain challenges, we expect our Q2 to be strong and consistent with our strategic plan and we feel very comfortable with our 2023 direction.

Speaker 4: We will of course continue to review our performance quarterly while maintaining a strong pulse on industry and market conditions.

Speaker 4: Although, we are very confident in our direction and expect to show growth in both our revenue and profitability in 2023.

Speaker 4: So with that, Dan, please continue with the detailed financials.

Speaker 5: Thank you, Mirko. Let's get into the numbers.

Speaker 5: Revenue for this first quarter of fiscal 2023 was $34.1 million, an increase of $5.7 million, or 20.2% from the same period in the prior year.

Speaker 5: We did close the AviWest transaction in April of 2020, so first quarter 2023 results include AviWest performance for the entire quarter.

Speaker 5: As discussed on previous calls, historically there was seasonality in our legacy business whereby the fourth quarter, which is commensurate with the US government year-end, is traditionally our largest quarter. The recently acquired business lines have a different seasonality, heavily weighted to the end of the calendar year.

Speaker 5: That's November-December timeframe. Thus, the revenue decline from prior quarter was absolutely expected.

Speaker 5: Recurring revenue, which we define as our cloud solutions and maintenance and support, is $7.5 million.

Speaker 5: These results are ahead of last quarter's performance by $400,000 and ahead of last year's performance by about a million dollars.

Speaker 5: Recurring revenue represented 22.2% of total revenue compared to 23.2% of total revenue in the prior year comparative period.

Speaker 5: Note that as part of our recent restructuring exercise, we decided to transition out of the house of worship market and expect cloud solution revenue in our second quarter to fall by more than half. Then we expect to be completely out of that business segment by the end of April .

Speaker 5: On a positive note, the House of Worship revenue is heavily dependent on the price of bandwidth and competitive offerings, including free offerings, that are putting down the pressure on cloud revenues and resulting gross margins.

Speaker 5: With that said, we remain very focused on increasing our maintenance and support revenue as we conform our maintenance and support offering across all entities.

Speaker 5: For this quarter, gross margins were 66.6%, downs from the 68% realized for the same period last year. As discussed on prior calls, we anticipated margins to slip from historical experience as margins for Abbey West offerings are below our historical margins.

Speaker 5: On a positive note, the recently announced price increase has improved the margins on our legacy products.

Speaker 5: However, the seasonality of our newly acquired product lines resulted in a higher percentage of our first quarter revenues from these newly acquired product lines, driving the momentary compression of margins this quarter.

Speaker 5: Further, although we are seeing supply chains revert to normal, we did incur between $300,000 and $400,000 in additional costs related to those hard-to-procure componentries.

Again, the closing of the House of Worship business should improve gross margins going forward as that offering tended to be a below the average performer in terms of gross margins.

Upon the full shutdown, we expect to be able to eliminate approximately half a million dollars in quarterly fixed costs from our cost of sales, and we should see the full benefit of this additional savings in the beginning of our third quarter.

Total expenses for the first quarter was $23.7 million, an increase of $3.9 million when compared to the same period in the prior year.

The year over year increase is largely related to compensation expenses of $1.9 million, again largely related to the Avi West transaction in April of 2022.

Generally speaking, our cost structures have always been heavily weighted towards people costs and the Abby West transaction added 81 people, 79 of whom are still with us.

We ended the quarter with 401 people compared to 338 employees a year ago.

In addition, increases in depreciation and amortization expenses related to acquired assets and intangibles added about 1.1 million in additional OPX.

And travel expenses increased by about $600,000 as we return to pre-pandemic normalcy.

When we last discussed the annual impact of the recent restructuring, we believed the reorganization would generate an $8 million in annual savings. When we normalize our OPEX to exclude the impact of exchange rate variances, we believe

OpEx in this recently completed quarter fell $1.9 million when compared to the prior quarter.

We have further opportunities for OpEx savings once we close the House of Worship business completely and are optimistic that we've achieved the goal set out for us last quarter.

When we normalize for share-based payments, depreciation of fixed assets, and amortization of intangibles, total OPEX was $20.6 million.

an increase of 3 million from the prior year, or an increase of only 17%. Thus, we are seeing operational efficiencies when we compare the increase in OPEX to the year-over-year revenue growth of 20.2%.

The result is an adjusted EBITDA for the quarter of $2.1 million.

flat compared to the $2.1 million of adjusted EBITDA for the same period in the prior year.

After a disappointing third quarter and a restructuring exercise last quarter, the adjusted EBITDA performance is...

shows the earning potential of the company on a go-forward basis. The adjusted EBITDA margin for this quarter was 6.2% albeit lower than our annual expectation and certainly lower than our goal of 20%.

Although we believe the recent quarter is more clearly demonstrating our cost structure in the near term, we are really just beginning to see the benefits of our restructuring plan and there is additional opportunities going

Net loss for the quarter was 1.4 million compared to a net loss of a half a million for the same period in the prior year. As was the case with EBITDA, the quarter's net income was impacted by the increased headcount related to Abby West, additional depreciation and amortization, and an increase in travel and marketing costs post-COVID.

With respect to the balance sheet, we ended the quarter with cash balances of $12.7 million and ended the year with $15.2 million outstanding on the Clutter facility.

Thus, one can say the cash increase for the quarter, net of proceeds from the line of credit was about $2.9 million.

Total assets at quarter end were $146.6 million, a decrease of $2 million from the end of fiscal year 2022.

The decrease in assets is largely the result of amortization of intangible assets which decreased by 1.4 million. Just as a note amortization in this recent quarter was about two million dollars.

However, assets were also impacted by movements in exchange rates, particularly intellectual property denominated in the euro.

The exchange rate for the euro moved from approximately 1.35.

The exchange rate for the euro moved from approximately 1.35 to about 1.45 at the end of this recent quarter.

Total liabilities at quarter end were $56.9 million, a decrease of $1.4 million from fiscal 2022 year end. This decrease in total liabilities in quarter was despite the $4 million increase in total

in the amount outstanding on the line of credit.

and the $2.1 million increase in deferred liability.

The certain liabilities are related to our recurring revenue models. The sales did decrease by 5.5 million during the quarter.

As we settled $1.5 million related to restructuring costs, we paid $1.2 million in commissions and bonuses related to fourth quarter performance. And as a reminder, our fourth quarter was a record revenue quarter for us.

We've reconciled purchase price payables related to the Abby West transaction and of course we paid our invoices for inventory purchases related to the fourth quarter and first quarter revenue.

With respect to the remaining integration plans.

supporting Abby West to a common accounting system, and bringing Abby West products to North America.

For high vision MCS, the integration has been a bit more complicated and progress has been slower than we hoped. However, our focus has been on fully integrating our development teams and most of the heavy lifting related to that initiative was completed on March 1st. There's still a bit of cleanup.

remainder of the year.

With respect to the headwinds we've discussed in earlier calls, component pricing and delivery schedule seem to have stabilized. This quarter's expenditures for componentry purchase outside of normal channels continued to be modest. Find us at the MOD enjoyment website and give us your ideas and captcha

In the recent closed quarter, we incurred approximately $300,000 to $400,000 in incremental costs of sales related to these difficult to procure components.

And we maintain that approximately two-thirds of the incremental costs incurred to secure our supply chain have been recognized thus far. So the investments in incremental inventories, board redesigns, identifying alternative sources of supply, and the

insourcing certain activities, investing in third-party systems, and employing senior supply chain expertise seems to have paid off.

Our supply chains are more resilient and flexible than ever.

and none of our customers have suffered any delays in shipments. The headwind related to finding qualified people also seems to be easing a bit, albeit with some ongoing challenges.

At the last call, we were a bit concerned about the impact of the recently announced reductions in headcount and the hiring freezes on the rest of the organization.

We were also concerned that the holiday season might disguise a retention problem that would show itself after the first of the year. However, we have not seen any acceleration or departure, any acceleration of departures after the holidays. In fact, we have not seen any acceleration or departure.

turnover in this recently completed quarter seems to have reverted back to the pre-pandemic levels. Yes, we have frozen hiring except for essential positions. Unfortunately, the essential positions that were difficult to hire in the past

Continue to be challenging going forward.

Beyond supply chains and employment issues, travel and trade shows are back.

We saw a $600,000 increase in travel expense when compared to the first quarter of fiscal 2022. Now about half of that incremental increase is related to sales efforts. The other half is related to our professional services and install, which is a sign that the business continues to grow. The return to trade shows is complete.

and we will be exhibiting at a number of the larger international trade shows and a significant number of the regional industry specific trade shows.

This is a note, our second quarter will include incremental costs related to our participation at NEB, the world's largest broadcast show. In terms of expectations for the remainder of the year, despite that many enterprises and government customers may be feeling some pain.

and we are transitioning out of the House of Worship managed services business, meaning a reduction of last year's revenue in this market.

our overall revenue continue to show growth. Thus our revenue guidance for the full year, which factors in the reduction in House of Worship revenue, is still expected to be between 130 and 135 million this year.

We also expect to see expansion of our adjusted EBITDA margin as we continue to exploit synergistic opportunities and we have visibility to achieving double-digit adjusted EBITDA margins.

That concludes my prepared remarks. I'm passing the microphone back to you Mirko and then we'll open the floor to questions.

Thanks, Dan. I think we should open up for questions then. Emma, if you can help us out? Certainly. As a reminder, if you would like to ask a question, press star followed by the number 1 on your telephone keypad.

Your first question today comes from Robert Young with Canaccord. Your line is now open.

Hi, good evening. Maybe just I'll clarify something you said very end there, Dan about double digit EBITDA margin. What was what was the implication there? Was that an expectation the short run medium term? I missed whatever you said around that. We think we're going to be able to get.

to that double digits in adjusted EBITDA. Gonna take us a little bit of time to get there, but by end of the year, we should be seeing that quite solidly.

I think last quarter you said that double digits is probably too high an expectation for 2023. So you're a little more positive on that. Is that a good way to read it? Relative to maybe last quarter?

No, I think last quarter you'd said that double digits was probably too high an expectation for 2023 So you're a little more positive on that. Is that a good way to read it relative to maybe last quarter? Correct, yes.

Okay and then as talking about guidance,

The quarter is better than we had modeled by, I think, five million or more. And so I'm curious why

Why not bump the guidance? Are you being conservative or is there some seasonality that we should be thinking about?

I think there's definitely some seasonality that we have to be aware of. We kind of mentioned that the first quarter tends to be down when compared to our fourth quarter. There's a seasonality that we've been the beneficiary of. Fourth quarters are commensurate with the government year-end, so usually we see a big pop in that quarter. We think the second quarter is going to be quite buoyant as well based on the work that's been done thus far.

The summer tends to be a little bit quieter. And then again, we're going to be back into our fourth quarter where we have big expectations. Okay, that's very helpful, Cadence. And then the next question for me would just be around some of the Mirko or data. You'd said that there was some headwinds in the government and enterprise end markets.

Are you still seeing that same sort of level of headwind or is it relenting getting worse the same?

Let me take that one. I think what we're definitely still seeing in the commercial enterprise space that we are seeing some headwinds, but what we're seeing within our solution set that we've been pushing mainly with the C command 360 sales, our pipeline is actually pretty robust and we're seeing some great traction.

especially since also coming off from the ISC show. So we're very buoyant that in our space, in our solutions, we seem to be pretty buoyant. But we do still see that in general, those types of accounts, whether it's the banks, the pharmaceuticals, are still being very cautious, but in our solutions, we feel pretty confident.

Okay, and then last question, the comments on the e-integration, particularly on MCS, I think you said that it was nearing completion. Is that including the certifications that you needed for US Secret? Is that all completed or do you have an end in sight there?

and then I'll pass it on. Yeah, let me sort of correct something. I don't think I said that it was completed. We completed the first most impactful element of it. It's a four-phase approach. So that first element was to work with development teams, make sure that they are fully integrated, make sure that the resources are made available to them.

to those developers so we can build those product sets.

efficiently and that is done. The next step will move into production then we'll move into another area thereafter. So it's going to take a little bit more time. I would say you know we had planned for us to take at least three or four quarters to get done.

So that's where we are with respect to the integration there. But the clearance, that's not a milestone event for us. I'm not exactly sure what you're trying to get at.

Um, I my impression was that there was something that was

My impression was that there was something that was outstanding there last quarter. Maybe I'm incorrect.

I don't think so. We're still operating. We still have a good relationship with everyone out there. That's not on the critical path that I'm aware of. Okay. Thanks for the clarification then. I'll pass the line. Thanks. So, thank you very much.

Your next question comes from the line of Nick Korokaran with Acumen Capital. Your line is now open.

Hey guys, I think Rob asked most of the questions I had. The only one I have is going back to the adjusted EVA margin. How should we maybe take them both to build through the year? I'm sorry, I was not able to hear that.

Yeah, I'm thinking of the adjusted year-to-year margin through the year. How should we think about the build from Q1 to Q4?

Well, I think that the message we're trying to say is that we've gotten ourselves right-sided as expectation and our business is relatively, our opex is relatively flat in terms of the majority of our expenses. The big modification that we might see are the big trade shows or the big marketing efforts.

that may make our OPEX go up and down. So it really is based on your revenue model with a relatively fixed OPEX.

and down. So it really is based on your revenue model with a relatively fixed fixed OPEX with the variability of marketing.

And just to be clear, Q1, Q2 and Q4 are expect to be strong and then Q3 is the season for quarter. It's a summer? Q3 tends to be not only the two summer months, especially international and especially in Europe .

but it's also very low in the government space as well. So kind of get it tends to be a very, very, or the lowest quarter of all four quarters for sure.

And then maybe going back to the Evert's expression of interest, have you formed a special committee to review that author?

At the moment it's at the board level and the board is taking actions. We just want to get past our earnings call and that's their next step and they said that they're going to review it and get back in due course.

At the moment it's at the board level and the board is taking actions. We just want to get past our earnings call and that's their next step. They said that they're going to review it and get back in due course. Great, that's all for me. Thank you.

Thank you Emma. I just want to thank all our investors and analysts online for their continued support of High Vision and I look forward to speaking with all of you again in June when we discuss our Q2 results.

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