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Operator: Good afternoon, ladies and gentlemen, and welcome to the Evertz Q2 of Fiscal 2026 Conference Call. [Operator Instructions] I would now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Thank you. Please go ahead.
Brian Campbell: Thank you, Ina. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2026 second quarter ended October 31, 2025, with Doug Moore, Evertz' Chief Financial Officer; and myself, Brian Campbell. Please note that our financial press release and MD&A will be available on SEDAR and on the company's investor website. Doug and I will comment on the financial results and then open the call to your questions.
Brian Campbell: Turning now to Evertz' results. I will begin by providing a few highlights, and then Doug and I will provide additional detail. First off, sales for the second quarter totaled $132.7 million, up 18.4% sequentially from the prior quarter and revenue in the U.S./Canada region was $98.5 million, up 24% sequentially. Reoccurring software, services and other software revenue totaled $60.7 million in the quarter, an increase of 17.6% sequentially from the prior quarter. Our sales base is well diversified with the top 10 customers accounting for approximately 53% of sales during the quarter with no single customer accounting for more than 16% of sales. In fact, we had 98 customer orders of over $200,000 in the quarter. Gross margin in the quarter was $77.8 million or 58.6% compared to 59.3% in the second quarter of the prior year. Net earnings were $18.6 million, resulting in fully diluted earnings per share of $0.24 for the quarter. Investments in research and development totaled $36.6 million. Evertz' working capital was $205.7 million, including cash of $96.7 million as at October 31, 2025. Operational highlights for the quarter include Evertz' stellar presence at the International Broadcast Conference, where Evertz' innovative ENX converged media infrastructure platform was recognized with a TV Tech Best of Show Award and Evertz frame rate conversion platform, which is purpose-built for premium live sports and news production and global content delivery won a TVB Europe Best of Show Award. At the end of November, Evertz' purchase order backlog was more than $240 million and shipments during the month of November were $46 million. We attribute the strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation; increasing global demand for high-quality video anywhere, anytime; the ongoing technical transition to IP, IT and cloud-based architectures; and specifically to the growing adoption of Evertz' IP-based software-defined video networking solutions, Evertz IT and cloud solutions; our immersive 4K, 8K ultra-high definition solutions; our state-of-the-art DreamCatcher IP replay and live production with BRAVO Studio featuring the iconic Studer audio. And today, Evertz' Board of Directors declared a regular quarterly dividend of $0.205 per share payable on or about December 24. Furthermore, Evertz' Board of Directors also declared a special dividend of $1 per share, also payable on December 24. The special dividend reflects both the strong long-term operating performance of the company and its solid balance sheet, thereby enabling a distribution of cash over and above what is considered necessary to meet known commitments and maintain adequate reserves. I'll now hand over to Doug Moore, Evertz' Chief Financial Officer, to cover our results in greater detail.
Doug Moore: Thank you, Brian. Looking at revenue. So revenue was $132.7 million in the second quarter of fiscal 2026, a 6% increase compared to $125.3 million in the second quarter of fiscal 2025. For the 6 months ending October 31, 2025, revenues were $244.9 million, up $8 million or 3% from the 6 months compared to the 6 months ending October 31, 2024. Quarterly hardware revenue increased slightly year-over-year from $70.5 million to $72 million, a 2% increase, while Software and Services revenue also increased from $54.8 million to $60.7 million or 11%. Revenue from Software and Services represented approximately 46% of total revenue in the quarter. Year-to-date, hardware revenue is up 5% to $132.5 million for the 6 months period ending October 31, while revenues from Software and Services were up slightly to $112.4 million from $110.7 million.
Doug Moore: Looking at regional revenues. Quarterly revenues in the U.S./Canadian region were $98.5 million compared to $94.8 million in the prior year, while quarterly revenues in the international region were $34.2 million compared to $30.4 million in the prior year. The International segment represented 26% of the total sales in the quarter compared to 24% in the same period last year. For the 6 months ended October 31, international revenue was $66.9 million compared to $68.1 million in the same period last year, a decline of 2%. And then for the 6-month period ending international sales represented 27% of total sales compared to 29% in the same period last year. Gross margins for the quarter were 58.6% compared to 59.3% in the prior year. The gross margin is down sequentially for the past 2 quarters, driven by varied product mix delivered in the quarter, but overall was within our 56% to 60% target range. For the 6 months ending October 31, the gross margin was 59.9% at the very high end of that same target range.
Doug Moore: Turning to selling and administrative expenses. S&A was $19.1 million in the second quarter, an increase of $0.7 million or 4% from the same period last year. And selling and admin expenses as a percentage of revenue were approximately 14.4% compared to 14.7% for the same period last year. Sequentially, S&A is up approximately -- sorry, sequentially $0.5 million from Q1. That includes a $0.8 million increase in trade shows and travel costs quarter-over-quarter, the largest driver of which was our attendance at the IBC show. For the 6 months ending October 31, S&A expenses were $37.7 million or 15.4% of sales compared to $36 million or 15.2% of sales for the same period last year.
Doug Moore: Research and development expenses were $36.6 million for the second quarter, which represents a $0.3 million increase from the same period last year. As a percentage of revenue, R&D expenses were 27.6% compared to 29% in the prior year. Sequentially, R&D expenses were declined $0.4 million from the first quarter, July 31. The decline was primarily due to lower salary and benefit costs, including the impact of less co-ops that we have in the Q1 during the summer. For the 6 months ending October 31, R&D expenses were $73.6 million compared to $73.7 million for the same period last year.
Doug Moore: Investment tax credits for the quarter were $4.4 million compared to credits of $3.6 million in the prior year second quarter. And then FX for the second quarter resulted in a gain of $0.8 million. It's pretty consistent with the foreign exchange gain of $0.8 million in the second quarter last year. While for the 6 months ending October 31, foreign exchange resulted in a gain of $1.5 million compared to a gain of $0.8 million in the same period last year. And that foreign exchange gain was predominantly driven by a weaker Canadian dollar compared to the U.S. dollar, which closed at approximately [ $1.4 million ] as at October 31, 2025.
Doug Moore: Now looking at the liquidity of the company. Cash as at October 31, 2025, was $96.7 million. That's a decline of cash compared to cash of $111.7 million as at April 30. And working capital was $205.7 million as at October 31, 2025, compared to $206.9 million at the end of April 30, 2025.
Doug Moore: Now looking at cash flows for the quarter. The company used cash from operations of $5.4 million, which is net of a $26.3 million change in noncash working capital and current taxes. If the effects of the change in noncash working capital and current taxes are excluded from the calculation, the company would have generated $25.2 million in cash from operations during the quarter. The biggest use of cash and working capital during the quarter relates to a $19.9 million decrease in payables that was driven by the disbursement of bonuses in the quarter and the net release of $8.1 million in deferred revenue in the quarter. The company used cash of $6.4 million for investing activities, which was principally driven by the acquisition of capital assets and those acquisition of capital assets included the acquisition of land and building that we were renting outside of Pittsburgh, Pennsylvania. That's the facility where we're increasing our manufacturing capabilities. The company used cash and financing activities of $17 million, which was principally driven by dividends paid of $15.1 million and lease payments of $1.1 million. Subsequent to the past quarter end, so just recently, we also renewed our NCIB, which will have an effective date of December 11.
Doug Moore: Finally, looking at our share capital position as at October 31, 2025. Shares outstanding were approximately 75.5 million and options and share-based RSUs outstanding were approximately $2 million. Weighted average shares outstanding were 75.5 million and weighted average fully diluted shares was 76.6 million as of October 31. That concludes the review of our financial results and position for the second quarter. Finally, I would like to remind you that some of the statements presented today are forward-looking, subject to a number of risks and uncertainties, and we refer you to the risk factors described in the annual information form and the official reports filed with the Canadian Securities Commission. Brian?
Brian Campbell: Thank you, Doug. Ina, we're now ready to open the call to questions.
Operator: [Operator Instructions] And your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.
Thanos Moschopoulos: On the gross margin, clearly, it was within your targeted range, but a little lighter than the last 2 quarters. Is that just typical volatility in product mix? Or is there anything else to call out that maybe some impact from the initial ramp of your U.S. facilities or something like that?
Doug Moore: No, it's really a product mix. There's not really a specific item to call out that materially impact the margin. I think that's part of the reason we are -- we have that volatility. We expect that volatility, but that's part of the reasons why we're hesitant to change our target range from that 56% to 60%. And we're still at the strong end of that. But yes, it's really just the volatility driven by product mix that we happen to deliver in the quarter.
Thanos Moschopoulos: R&D spend has been relatively stable in recent quarters, which I mean, from my perspective, is a healthy dynamic. Is that reflective of maybe greater OpEx discipline on your part? Is it reflective maybe of just how you feel about the strength of the competitive position and thus not needing to ramp up that investment relative to competitively? Or what's the dynamic there?
Doug Moore: No. I think there was a significant ramp-up a couple of years ago that were partially due to inflationary factors with, quite frankly, hiring and retaining engineers. Some of that broader inflationary drivers have subsided to some levels anyway. But no, R&D is still a major commitment of Evertz to as an investment. So it's really the salaries -- the inflationary factors on salaries kind of going back to more historical norms as opposed to we dealt with a couple of years ago.
Thanos Moschopoulos: Great. And then, Brian, just in terms of the overall environment, what you're hearing from your customers coming out of IPC, is it sort of status quo? Or is there anything else? Any changes that you'd highlight in recent weeks or months regarding customer priorities or propensity spend.
Brian Campbell: We continue to have a very robust backlog, and you can see from the month shipments in November, along with a very strong quarter. We're firing on most of the cylinders. So we had increases in the North American and international regions in sales. So we have been seeing continued adoption of Evertz products from our customers. They have projects that they want to execute on, and we have the products to be able to help them with those needs.
Operator: And your next question comes from the line of Robert Young from Canaccord Genuity.
Robert Young: Maybe just a little more around the decision to issue the special dividend. I mean, you've renewed the buyback. You increased the quarterly dividend and you're issuing a special dividend. So I was wondering if you could give us some sense of the decision-making behind that and the timing. And maybe if you could take it one step further just to give us a sense of where you see the balance sheet in the near term after that and what it means for your confidence in the near term?
Brian Campbell: So the Board does make a decision regarding the dividends and the special dividends. The timing is consistent with prior special dividends that we've had. The balance sheet still remains pristine with a cash position and no debt. And we are confident, as you can tell, with the business prospects we've got going forward. We continue to invest very heavily in R&D and have a very robust product portfolio. So we're in very good shape as an organization. And with respect to M&A activities going forward, we still have full flexibility.
Robert Young: Okay. And then maybe I just take one of Thanos' questions a little further, the gross margin. It is notable that the recurring software is up quarter-over-quarter, but the gross margins are down. And although it is at the higher end of the range, it is at the low end of where we've seen it over the last several quarters. And so I'm just trying to understand the dynamic there. Is that the international revenue taking higher? I'm just trying to understand what is that's driving that because it doesn't make sense to me.
Doug Moore: Well, I mean, I think there's always going to be volatility. So international revenue, you're correct, and generally has a little bit lower margin. But it really is -- it's not as simple as saying U.S. region sales are up, therefore, margins up or Software and Services up, therefore, it's up. It really is driven by a general product mix. And we've had volatility in the past through -- although it slightly above that target range, I think there's not really one item to point to.
Brian Campbell: I guess another point to make is, in the quarter, we did have some pretty significant customer concentration. So often very significant customers may get higher discounting.
Robert Young: Okay. And then we're just around the corner from the renegotiation of [ CUSMA ]. And I know that you guys as a management team have been trying to prepare operations in the U.S. ahead of that. Could you give us a summary of where you are on that and how comfortable you are if [ CUSMA ] ends without a replacement deal?
Doug Moore: Yes. I mean -- so currently, from -- as of today perspective, so again, the vast majority of what we're selling is USMCA compliant and therefore, not being impacted by the tariffs when we sell through to the United States. We do continue to build up manufacturing capabilities outside Pittsburgh, Pennsylvania. That's the acquisition of the building and land there to exert a bit more control on as we build out that facility. It is a work in progress, but we continue to progress.
Robert Young: If tariffs suddenly apply to your product, if a renegotiation isn't successful, what does that look like for Evertz, I guess? And just at a high level, if you can just give us a sense of what your planning looks like to deal with something like that?
Doug Moore: There would be certain products that we would increase manufacturing out of that facility. We would not be able to push every single product there at this point in time. But certainly, we would ship some builds there as opposed to here. There as being the United States as opposed to Canada. But we continue to build on the amount of products we can build there.
Robert Young: Okay. Would you believe that the gross margin target range would still be something you could maintain?
Brian Campbell: Yes.
Robert Young: Okay. And then last question for me, just on the portion of the backlog that you expect to convert in the next 12 months, that would be helpful. I'll pass it on.
Doug Moore: So I guess it would be about 40% is more than 12 months out, so that's 60% in the next 12 months.
Operator: [Operator Instructions] Your next question comes from the line of Paul Treiber from RBC Capital Markets.
Paul Treiber: Just a question on the recurring software revenue in the quarter. It was quite strong. You mentioned a number of different product areas that you did see strengthen. But specifically, could you speak to like was there any outliers that drove the momentum in the quarter? And then do you see -- looking forward, do you see it sustained? Or should we expect it to be sustained in the $60 million-plus range going forward?
Doug Moore: So there is some lumpiness to it because it's recurring software and other Software and Services as well. So there are times when you could have software-based projects that have acceptance net, so where you would have a bit of a spike, I guess, you'd say. If you look at the past 8 quarters, there's a general range that kind of has been falling through, but there's definitely some peaks, I'd say, within that quarter-to-quarter.
Brian Campbell: So looking at it over the trailing 12 months, if you do that on a rolling basis, we're at $224 million of recurring Software and Services and software. And it's now that's 44% of a trailing 12-month basis. So we're in and around that 40% to 44% range. And we do suggest that you look at it on a trailing 12-month basis.
Paul Treiber: Okay. That's helpful. Secondly, just can you remind us or outline the company's traction in the defense market? And specifically, where I'm going is the Canadian Federal Government announced a number of initiatives to boost defense spending and make other investments. Do you see opportunities for Evertz within the Canadian Department of Defense?
Doug Moore: Yes, we do. And we're actively pursuing them. We have historically had good success with U.S. and at times NATO partners. So that's not the business that we've had over the past years. And we do have key elements of our technologies that are common criteria certified and NIAP listed, allowing us to sell into those products into government facilities. So that is definitely a key focus of ours, and we have been spending an increasing amount of time with the Canadian Government as they've increased the spending initiative and dialogue with specifically Canadian content. We fall front and square as a dual-use innovation leader and are exactly the type of company that the Canadian Government and Defense should support.
Operator: There are no further questions at this time. I will now hand the call back to Mr. Campbell for any closing remarks.
Brian Campbell: Thank you, Ina. I'd like to thank the participants for their questions and to add that we are pleased with the company's performance during Q2 of fiscal 2026, which saw sales of $132.7 million, including $60.7 million in Software and Services revenue, solid gross margins of 58.6% in the quarter, which together with Evertz' disciplined expense management, yielded quarterly earnings per share of $0.24. We are entering the second half of Evertz' fiscal 2026 with significant momentum fueled by over $46 million of shipments in November, with a combined purchase order backlog plus shipments totaling in excess of $286 million by the continued adoption and successful large-scale deployments of Evertz' IP-based software-defined video networking and cloud solutions with the largest new media and broadcast players in the industry and with government, defense and enterprise and by the continuing success of DreamCatcher Bravo, our state-of-the-art IP-based replay and production suite. With Evertz' significant investments in software-defined IP, IT and cloud technologies, the over 600 industry-leading IP SDN deployments and the capabilities of our staff, Evertz is poised to build upon our leadership position in the broadcast and media technology sector. Thank you, and good night.
Operator: And this concludes today's call. Thank you for participating. You may all disconnect.