Evertz Technologies Stock

Good afternoon, ladies and gentlemen, and welcome to Evertz Q1 and Fiscal 2027 Investor Call. This call is being recorded on Monday, September 14, 2026. I would now like to turn the conference over to Brian Campbell. Please go ahead.

Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2027 first quarter ended July 31, 2026, 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. Turning now to Evertz results. I'll begin by providing a few highlights, and then Doug will provide additional detail. First off, sales for the first quarter totaled $118.3 million, up 5.5%, including $58.9 million in software and services revenue, which represents 49.8% of the total revenue. International revenue in the quarter was $38.3 million, up $4.6 million or 17.5% from the prior year. Our sales base is well diversified with the top 10 customers accounting for approximately 49% of sales during the quarter with no one customer accounting for more than 10% of sales. In fact, we had 87 customer orders of over $200,000. Gross margin in the quarter was $69.3 million or 58.6%, down from 61.4% in the prior year. Net earnings were $8 million, resulting in fully diluted earnings per share of $0.10 for the quarter. Investment in research and development totaled $38.5 million. Evertz' working capital was $131.4 million, including cash of $2.5 million as at July 31, 2026. At the end of August, Evertz' purchase order backlog was more than $259 million and shipments during the month of August were $30 million. We attribute this 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 in the industry 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 DreamCutch IP replay and live production with Bravo Studio featuring the iconic Studer audio. Today, Evertz' Board of Directors declared a regular quarterly dividend of $0.205 per share payable on or about October 1. I'll now hand over to Doug Moore, Evertz' Chief Financial Officer, to cover our results in greater detail.

All right. Thanks, Brian. Good afternoon, everyone. Starting with revenue. After a slower start in May of 2026, sales were up just over 5% to $118.3 million in the first quarter of fiscal 2027 compared to the $112 million in the first quarter of fiscal 2026. Hardware revenue declined slightly quarter-over-quarter from $60.5 million to $59.3 million, while software and services revenue increased 14% from $51.6 million to $58.9 million in the current quarter. Revenue from software and services represented approximately 50% of the total revenue in the quarter. Looking regionally, quarterly revenues in the U.S./Canadian region were $79.9 million compared to $79.5 million in the prior year. While quarterly revenues in the international region were $38.3 million, an increase of $4.6 million or 17% compared to $32.7 million in the prior year. The International segment represented 32% of the total sales in the quarter. Gross margin for the quarter was $58.6 million as compared to $61.4 million in the prior year, and this quarter was within our target range. While down year-over-year, the gross margin, as I said, was within our target range, while our software and services revenue represented almost 50% of revenue, I'll note there was an increase in international revenue that counterbalance that a bit. It's also worth noting that at this time, we aren't being materially impacted by additional tariff costs. Turning to selling and admin expenses. S&A was $19.9 million in the first quarter. That's an increase of $0.9 million from the same period last year. And selling and admin expenses as a percentage of revenue were approximately 16.8% compared to 16.9% for the same period last year. Year-over-year, the increase in S&A expenses included around $300,000 in additional trade show and travel costs as we've attended more trade shows in the quarter year-over-year, particularly within the government and military sector. Sequentially, S&A is down about $0.8 million from Q4. That's just as a reminder, the largest driver there is the nonreoccurrence of NAV that happened in April of the prior year. Research and development expenses were $38.5 million in the first quarter that represented a $1.5 million increase over the same period last year. As a percentage of revenue, R&D expenses were 32.5% compared to 33% in the prior year. The increase in R&D expenses was driven by salaries of around $700,000 and also some patent-related professional fees for around $300,000. Investment tax credits for the quarter were $3.7 million as compared to credits of $3.3 million in the prior year. And stock compensation expense, while it's up less than $100,000 sequentially to $2.4 million, but it's up $1.3 million year-over-year. That increase year-over-year is driven by the equity-based RSU and share options we issued in December 2025 that are being recognized over the vesting period since issuance. Foreign exchange for the first quarter was a loss of $500,000 as compared to a foreign exchange gain of $0.7 million in the first quarter last year. Now turning to liquidity of the company. Cash net of bank indebtedness as at July 31, 2026, was $2.5 million. That's a large decline compared to cash of $19.1 million as at April 30, 2026. And that decrease is mostly driven by a sharp increase in raw materials inventory that we ended up bringing in during the quarter. Working capital was $215.1 million as at July 31, 2026, compared to $200.2 million at the end of April 30, 2026. Looking at cash flows for the quarter. The company generated cash from operations of $0.8 million, which is net of a $16 million negative change in noncash working capital and current taxes. If the effects of the change in noncash working capital and current taxes were excluded from the calculation, the company generated $16.8 million in cash from operations during the quarter compared to $16.8 million in the first quarter of fiscal 2026. As noted, the use of cash was driven by a large increase in raw materials inventory. We brought in approximately $20 million of raw materials in the quarter, largely consisting of memory, storage and servers driven by some of the supply chain increased lead times. The company used cash of $2.1 million for investing activities. That was principally driven by the acquisition of capital assets of $1.8 million and business acquisitions of $0.3 million. During the quarter, we acquired a small AV integrator the Ottawa region for $300,000. The company used cash and financing activities of $16.8 million, which was principally driven by dividends paid of $15.5 million. Finally, looking at our share capital position as at July 31, shares outstanding were approximately 75.7 million and options and share-based RSUs outstanding were approximately 4 million. Weighted average shares outstanding were 75.6 million and weighted average fully diluted shares were 77.6 million for the period ending July 31. That concludes the review of our financial results and position for the first quarter. 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, back to you.

Thank you, Doug. Ludy, we're now ready to open the call to questions.

With that, our first question comes from the line of Thanos Moschopoulos with BMO Capital Markets.

From a supply chain perspective, you mentioned greater investment in inventory for some of the components. To date, are you able to manage supply constraints? Or is it having any impact in terms of delayed orders or shipments or anything like that? And also have you been able to pass through the pricing increases on the component costs? Or how is that dynamic influencing your margins?

Yes, sure. So I'll address that. So on the supply chain, that's really -- it's trued up a big chunk of our cash as the lead times are being pushed out with this AI demand. during the quarter, we would have had some delays in server receipts in that. But as of today, we're not impacted by -- like we're not having part shortages or any kind of constraints in that regard. It's just really it's taken -- like I said, we've built up a lot of stock in memory and storage servers just to make sure we can deliver when we need to. And that's taken a lot of our cash out. On the cost side, so that's not a straightforward answer, I guess, I would say, whether you can -- it's a case-by-case basis on how you pass on costs. It's not a direct line, but it's not affecting our margins at the moment. Like we're still within our target range. We're getting healthy margins, and we don't forecast a decrease at this time.

And on tariffs, you mentioned no real impact to date. Do you expect that to remain the case? Is that a function of just being able to migrate your manufacturing to your U.S. operations? Or is it that there isn't a lot within your scope that's impacted by the U.S. tariffs?

The scope is a big factor. So there's multiple different methods we can build in the states, as you know, we can ship things around. But it's really -- it's not materially impacting us.

Okay. And then finally, any update in terms of your opportunity within government and defense and how the pipeline there has been progressing over the past quarter?

On the sales side, I could say it's lumpy in general in the quarter, it was between 5% to 6% of revenue. I don't know if Brian wants to add more color. But we are -- we did have some strong order intake in August from government sales, but I can't specifically quantify it, but I don't know if there's additional color you want to add, Brian?

So I would reiterate the strong order intake. We've been very active, both domestically in Canada, trying to increase our presence and position being a made in Canada solution, not just a Canadian goods for classification purposes, but we're -- with our campus in Burlington, our manufacturing operations and our 600 engineers and staff domiciled in Canada, we feel that we've got a very compelling solution to provide to Canadian government. And historically, we have had a very good position within the U.S. government and defense community and at times, NATO as well.

And your next question comes from the line of Paul Treiber with RBC Capital Markets.

Just a question just on the backlog. Sequentially, there was quite a large rise there. Was that concentrated in a few large contracts? Or is it fairly broad-based? And what's the underlying demand trend that you're seeing in the backlog?

I can comment on the backlog composition. So it's a pretty relatively broad-based increase. There's no specific contracts material of press releasing on their own. But there is some contracts in the $5 million to $10 million size, but that's not totally atypical. So it's a bit relatively broad-based. And then sorry, there was a second part there.

No, no. Just on the breadth, which you've discussed. The -- shifting to revenue with international being much stronger than U.S. The -- is there -- what was driving international in the quarter? And then conversely, like in terms of the U.S. or North America, was there -- were there any factors that were potentially weighing on demand that you haven't seen in previous quarters?

No. I mean, so the -- we are very project-centric. So there was a few projects that were completed internationally. So in particular, we had a few in Europe. That's just the lumpiness of the nature. As it relates to Canadian and U.S. demand, there's no specific factors to drive an offsetting decrease or like that. It's just really more the lumpiness of where the projects occur.

Okay. And then just lastly, just with more and more of your software incorporating some AI features, how do you -- how are you looking to manage AI-related costs that get embedded into software? Like do you anticipate lower margins on products with AI? Or is it relatively negligible?

Yes, I think it's the latter, relatively negligible. We don't change, I guess, the margin profile, whether they're AI embedded or not. It's -- yes, that's probably the best way to answer that.

And your next question comes from the line of Robert Young with Canaccord.

First question for me would be on the quarter-over-quarter dip in the software and services line. I think last year, it was the same type of dip quarter-over-quarter. So is there some seasonality there to understand? Or I understand it's up year-over-year, but what would be the driver of the quarterly -- the sequential drop?

It's not so -- the only really seasonality we would have in the sense of software and services is more towards Q3 when there's a lot of annual license renewals for calendar year ends. But even then certain customers are over various periods. Some of that's just driven by volumes. So it's not so much a seasonality as it is volume driven, I guess. But yes, there's no real -- other than -- like I said, other than the annual renewals of licenses, and there's nothing specific to point to for seasonality.

Okay. And then what was the driver of the year-over-year growth then in software and services?

Sure. So it's project-based. So there's a few projects that would have been completed. So there's a general baseline, if you look at our MDA in the last 8 quarters where there's a general baseline, I'll call it. But there is -- as projects get completed, sign-ups like SAT sign-up acceptances, then basically they get recognized into revenue. So if -- for example, there's a project in Europe that got signed off, it would go to revenue and international revenue.

Right. And then so over the last 8 quarters, as you know, the data in the MDA shows that you have a steadily increasing mix of software. And maybe you could just talk at a high level what the growth in that -- the percentage of revenue coming from Software as a Service, -- what's the driver of that?

That is the long-term trend of our business model having more -- we're still very hardware-centric, of course. But having software solutions that used to be solely hardware. Now there's software solutions. We have more service level agreements than we had in the past. It's just the long-term trend we've had in our business model.

And then the previous question about the growth in the backlog, first time we've seen that. Is that -- is the software and services line the driver behind that? Is it long duration programs or.

It's actually -- the current increase, the 9% is actually hardware. It's more hardware driven than it is actually software. So there's a big part of our contracts came in. Everything has got a mix, but they're hardware-centric is what I would say. So there are some of those contracts that we brought in were also government related, so -- which generally are more hardware-centric.

Okay. And then last question for me, just to push you a little harder on this mitigation of tariffs. In the past, you've said that you were protected under the NAFTA COMA, and it seems as though that's no longer a protection. And so I'm curious if you just get into maybe a little more detail around how you're mitigating? are you able to service all of your U.S. demand out of your U.S. manufacturing? And I guess I was kind of anticipating a higher level of U.S. revenue crowding in, in front of this increase in tariffs, which we didn't see. And so I'm just trying to get a better understanding of how you're mitigating and why there wasn't any early buying to avoid it.

So we're not -- the U.S. office is largely -- not everything is being produced out there. So it's more government-related projects, we'll say, is the focus. The majority of our products are currently being protected by the USMCA. The tariff -- there's the various codes that have been applied to products and the majority of our stuff is not being impacted at the moment. But it's a volatile situation, but at the moment, it's not.

Okay. So is that your assessment? Or is that an assessment of the -- like you've not been assessed tariffs to date on -- and it's because the codes related to the way you file don't line up with the codes provided in the [indiscernible].

Sorry, it's not that there's no impact of tariffs. like we've had -- there's been some marginal costs over the past year or so, right? But I mean, the majority of our stuff is not being -- is not assessed with tariffs.

And that's having no real expected impact on your margin structure or it's not a headwind to growth in the U.S. market?

Not materially, no.

And I'm showing no further questions at this time. I would like to turn it back to Brian Campbell for closing remarks.

Thank you. I'd like to thank the participants for their questions and to add that we are pleased with the company's performance during Q1 of fiscal 2027, which saw sales rise 5.5% to $118.3 million, including $58.9 million in software and services revenue, solid gross margins of 58.6% for the quarter, along with continued investments in R&D, which totaled $38.5 million in the quarter. We closed the first quarter of Evertz fiscal 2027 with significant momentum fueled by a combined purchase order backlog plus August shipments totaling in excess of $289 million by the growing adoption and successful large-scale deployments of Evertz IP-based software-defined video networking and cloud solutions by some of the largest new media and broadcast players in the industry and with government, defense and enterprise. And by the continuing success of our DreamCatcher Bravo 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. Thank you, and we look forward to having many of you join us on Wednesday, the 7th of October at our Annual General Meeting. Good night.

And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.

Good afternoon, ladies and gentlemen, and welcome to the Evertz Q4 Investor Conference Call. [Operator Instructions]

This call is being recorded on June 24, 2026. I would now like to turn the conference over to Brian Campbell, Executive Vice President of Business Development. Please go ahead.

Thank you, John. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our 2026 Fourth Quarter and Year ended April 30 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.

Turning now to Evertz results. I'll begin by providing a few highlights, and then Doug will provide additional detail. First off, we had record annual sales in excess of $0.5 billion, coming in at $515.8 million for the year. This includes revenue in the international region of $148 million, up 16% from the prior year. Reoccurring software, services and other software revenue increased 8% year-over-year, totaling $240.7 million in the year.

Margin rates remain consistently strong, coming in at 59.3% versus 59.5% prior year and 58.8% 2 years ago. Total margin dollars were $306 million. Net earnings were $64.4 million, resulting in a fully diluted earnings per share of $0.83. Our sales base is well diversified with the top 10 customers accounting for approximately 44% of sales with no single customer accounting for more than 10% on a full year basis. In fact, we had 87 customer orders of over $200,000.

Turning to the fourth quarter. Sales were up 3% year-over-year to $131.6 million. Reoccurring software, services and other software was $65.8 million, an increase of 17% from the prior year. Gross margin in the quarter was $78.1 million versus $78.9 million in the fourth quarter previous year. Net earnings in the quarter were $15.2 million as compared to $13 million in the corresponding period last year. Fully diluted earnings per share were $0.20, up from $0.17 in the previous fourth quarter.

Operational highlights for the quarter included Evertz' stellar presence at the National Association of Broadcasters, NAB Show in Las Vegas, where Evertz won prestigious Future Best of Show awards distributed across the primary industry publications presented by TV Technology, the Bravo Best of Blade recognized for expanding multi-program live production capabilities from a single event, our ENX, an innovative media core designed specifically for hybrid IP and SDI facilities; X-CALIBER, a high-density encoding platform engineered for scalable media transport.

The MMA and Nucleus product won in the AV technology area for IPMX certified IP gateway solution built to bridge ProAV and broadcast environments with seamless IPMX and ST-2110 integration.

At the end of May, Evertz purchase order backlog was more than $237 million and shipments during the month of May were $33 million. We attribute the strong financial performance and robust combined shipments and purchase order backlog to channel and video services proliferation, increased global demand for high-quality video anywhere and anytime. The ongoing technical transition to IP, IT and cloud-based architectures in the industry 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.

Today, Evertz' Board of Directors declared a regular quarterly dividend of $0.205 per share payable on or about July 13.

I'll now hand over to Doug Moore, Evertz' Chief Financial Officer, to cover our results in greater detail.

Thanks, Brian, and good afternoon. Looking at revenues, despite a relatively slow start to the quarter, sales were $131.6 million in the fourth quarter of fiscal 2026, a 3% increase compared to the $127.8 million in the fourth quarter of fiscal 2025.

While for the year ending April 30, 2026, sales were $515 million, up $14.2 million or 2.8% from the prior year. Quarterly hardware revenue was $65.7 million. That's a decrease from $71.7 million in the prior year, while software and services revenue increased to $65.8 million from $56.1 million in the prior year.

For the year -- sorry, actually, revenue from software and services represented approximately 50% of the total revenue in the quarter. For the year, hardware revenue declined 1% to $275.1 million, while revenues from software and services increased 8% to $240.7 million from $222.6 million in the prior year. Annually, software and services revenue represented 47% of total revenue versus 44% in the prior year.

Looking at regional revenues. Quarterly revenues in the U.S./Canadian region were $94.2 million. That's a decline compared to $106.5 million in the prior year. However, this is more than offset by a $16 million increase in quarterly revenues in the international region, which were $37.4 million compared to $21.3 million in the prior year fourth quarter.

The International segment represented 28% of total sales in the quarter as compared to 17% in the same period last year. For the year ended April 30, 2026, revenues in the Canadian and U.S. region were down 2% to $367.8 million, while international revenues increased $20.8 million or 16% to $148 million. The increase in the year was driven by increased project deliveries in Western Europe, in particular.

For the year ending April 30, international sales represented 29% of total sales compared to 25% in the same period last year. Gross margin for the quarter was 59.3% compared to 61.7% in the prior year. It's worth noting the prior year comparative quarter was higher than typical, and the current quarter is more in line with our target range of 56% to 60%. For the year, the gross margin was 59.3%, which was also within the company's 56% to 60% target range.

Turning to selling and administrative expenses. S&A was $20.7 million in the fourth quarter. That's relatively consistent with the same period last year. S&A expenses as a percentage of revenue were approximately 15.7% as compared to 16.2% for the same period last year. Sequentially, selling and admin expenses were up approximately $10 million from Q3. That increase was driven by increased trade show and travel costs, which in turn was driven by our participation at the NAB trade show in the fourth quarter.

For the year ending April 30, selling and admin expenses were $77 million or 14.9% of sales as compared to $75.9 million or 15.1% of sales in the prior year. Research and development expenses were $37.7 million for the fourth quarter. That represents an increase of $1.2 million the prior year. And as a percentage of revenue, R&D expenses were 28.7% compared to 28.6% in the prior year.

For the year ending April 30, R&D expenses were $148.1 million or 28.7% of sales as compared to $146.8 million for the same period last year, an increase of approximately 1% year-over-year. Foreign exchange for the fourth quarter resulted in a gain of $400,000 as compared to a loss for the fourth quarter last year of $4.5 million. The fourth quarter of the current year -- sorry, during the fourth quarter of the current year, U.S. dollar versus Canadian dollar declined modestly from $1.38 to $1.37 to 1 as opposed to the fourth quarter last year where the U.S. dollar declined more significantly from $1.44 to $1.40 to 1. For the year ending April 30, foreign exchange resulted in a loss of $0.4 million compared to a gain of $0.2 million last year.

Turning to the discussion of liquidity of the company. Cash as at April 30 was $19.1 million, a decline compared to cash of $111.7 million as at April 30, 2025. The decline was primarily driven by the $136 million in dividends we distributed during the year, including the $75.5 million in special dividends that we paid during the third quarter. Working capital was $131.7 million as of April 30, 2026, compared to $206.9 million at the end of April 30, 2025.

Looking now at cash flows for the quarter. For the 3 months ended April 30, cash from operations were $18.4 million as compared to $33.3 million generated during the 3 months last year. If you exclude the changes in noncash working capital and current taxes, cash from operations were $19.1 million for the fourth quarter this year compared to $17.7 million for the same period last year.

In the quarter, the company used $3.9 million from investing activities. That's particularly for the acquisition of property, plant and equipment. And for the quarter, the company used $17.1 million for financing activities, $15.4 million of which was for the payment of dividends during the quarter. For the year, the company generated cash from operations of $76.2 million, which is net of a $10.2 million change in noncash working capital and current taxes. If the effects of that change were excluded from the calculation, the company generated $86.4 million in cash from operations during the year. The company used cash of $17.8 million for investing activities, which is principally driven by the acquisition of property, plant and equipment of $18.7 million, including the land and building we purchased outside Pennsylvania. And the company used cash and financing activities of $147.1 million, which as previously noted, was principally driven by dividends paid.

Finally, looking at our share capital position as at April 30, 2026. Shares outstanding were approximately 75.6 million and options and shares-based RSUs outstanding were approximately 4.2 million. Weighted average shares outstanding were 75.5 million and weighted average fully diluted shares were 76.8 million.

This concludes the review of our financial results and position for the fourth quarter and year-end. And 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 refer you to the risk factors described in the annual information form and the official reports filed with the Canadian Securities Commission. Brian, back to yourself.

Thanks, Doug. John, we're now ready to open the call for questions.

[Operator Instructions]

Our first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

It was a nice acceleration in the growth rate for your software business this quarter. Is there anything in particular that you would call out in that regard or just sort of the ongoing trend and driver that we talked about in prior quarters?

I can call out -- there's a couple of larger project milestones that we met in the quarter that would have caused the growth, $7 million, $8 million in additional software and services revenue that was released from deferred revenue. There's ongoing releases and deferrals throughout the year, but that's a bit more substantial than typical. So if I had to call it something, there's 2 projects that made up between $7 million and $8 million worth of software and service revenue releases.

Okay. Would that be onetime revenue? Or is that recurring revenue that's now been coming online?

It would be more of a project-based onetime milestone.

Okay. That's helpful. With respect to the hardware side of the business, I mean, obviously, a lot of price inflation happening with components. We did see consistent margins this quarter. But going forward, how should we think about that dynamic? Would you expect to be able to pass through those costs and maintain margins? Or what do you think on the component side?

We are seeing some challenges, of course, in bringing in parts and increased costs, especially with memory, particularly in other aspects. The target range remains the same with that 56% to 60%. We manage pricing we need to, but I don't think -- I can't directly say everything would be passed along, but our target range remains the same and doing our best to mitigate those cost increases.

Okay. And last one for me. Brian, any update of note with respect to U.S. government and defense opportunities on your side of the border?

Yes. So we are very encouraged by the U.S., international and domestic opportunities that we see for Evertz much of a dual-purpose technologies where we have decades of domain knowledge and expertise demonstrated in the live news, sports at the highest level, then those technologies common criteria certified NIAP listed for installation in secure facilities, and we have routing platforms that can handle the top secret and other levels as well, too.

So we're very well positioned to be able to grow with that area. It's something that we do have significant experience in some high-profile locations that we can't necessarily speak to. But what we have done is increase our emphasis and awareness domestically and also internationally. So we've opened up the Evertz' office in Colorado Springs, and we have one in Ottawa as well, too. You may have seen that we participated with the Canadian delegation that included the Canadian Secretary of State for Defense Procurement and CEO of DIA into the SAHA Defense and Aerospace exhibition in Istanbul. That was quite a large event and contingent, and we were front and center there. So those initiatives were continue to work very strongly, and I'll pass over to Doug to add a little bit more color to that financial color.

Yes. I mean from a quantification perspective, I mean, we don't separately disclose sales to government, military in our financial statements. However, I could comment that over the past year, sales to government, military, aerospace customers combined to be over $50 million in the year and also over 10% of revenue. So just to give you some kind of context of the scope.

Your next question comes from the line of Robert Young from Canaccord Genuity.

Great to hear the context around the defense sector. I was wondering if you could go a little bit deeper there and just to talk about how you're going to market. Are you doing that with a partner? Are you building out any partner relationships specific to defense? Are you pursuing any specific opportunities in defense currently with partners? Can you talk about the go-to-market?

So the answer is yes to all of the above. We have in the past done so like that. Many of the large installations that we have in the U.S. or NATO areas have been through U.S. or international large prime contractors. So Evertz providing very meaningful subsystems and solutions, secure environments. There's more public context around that. So you may have seen recently that Evertz joined ATHORA as a foundational partner advancing sovereign Canadian defense interoperability. This is led by Calian and Evertz brings real-time operational infrastructure, secure networking, data transport and data transport expertise to these next-generation defense modernization opportunities that we're seeing domestically in Canada.

Similarly, Evertz has joined Babcock's Team INSPIRE to provide next-generation strategic communications for the Canadian Armed Forces. Babcock is a U.K.-based prime contractor that we have experience with as well, too. So those are a couple of the recent public domain relationships that we're very much leaning into and are significantly contributing to these opportunities.

Great to hear about all those efforts. That $50 million revenue number you shared, how would that compare with the last 5 years, for example? Are you seeing a meaningful increase in opportunities or any increase in deal size? Is there anything to put context around how much of that defense spend or defense opportunity is new and how much has already been a part of Evertz's business?

So that would be roughly a 12% increase over the prior year. It's been lumpy because of big projects in the past and we would foresee it to be like that in the future. But we are looking at large programs. Those don't happen instantaneously. As you know, you often go through a RFI stage RFP and then contracting definitely takes time, but we're really encouraged by the opportunities we see in front of us.

Yes. Maybe last question for me would be around the CUSMA renegotiations. You still manufacture the bulk of your product in Canada, and I'm curious about what you might have done to prepare for any change in that? I know the North American revenue base has declined in the last 2 quarters. And I'm curious if that's a function of upcoming CUSMA or if there's some other factor? And then I'll pass on.

Yes. I mean I can comment that we continue to ramp up capacity outside Pittsburgh there. So now we spent -- during the year, we spent between $7 million and $8 million. And I think $3 million or $4 million was associated with the land and building, but also additional equipment and leasehold improvements to ramp up our ability to manufacture just outside Pittsburgh there in Indiana. But currently, the vast majority of what we're selling is USMCA compliant and not being subjected to tariffs. So it's something we'll have to monitor and address. But as of this time, it's not a huge, at least a clear impact.

Well, I guess the question I'm trying to ask is if the negotiations were to yield like an end to that agreement, what would -- how should investors be thinking about how well Evertz is prepared?

Yes. So I mean, we will have to additional capacity to our United States facility, but we will have 6 months to fully address those plans properly.

Your next question comes from the line of Paul Treiber from RBC Capital Markets.

Thanks for the detail on the Defense business. Just another one, if I may, on defense. Defense revenue, is it skewed more towards hardware or reoccurring software? Or does it match the mix of the entire company?

So it would be more skewed towards hardware. Software is a large component of the modernization issues, and it is part of those sales to that sector. We do not have the analysis to tell you currently what the product mix is. We're not disclosing that at this time.

Okay. That's helpful. Second question is just on the international revenue growth. You mentioned there's a degree of lumpiness due to the project timing. Was it related to those -- I think there's 2 projects milestones that you hit. Were those in Europe?

No, actually, they're in North America. They're not correlated in this case. This is just project deliveries that happened to be in Q4 in the international region. So they're not related in this case.

Okay. And when you look forward to international, I mean, do you see that momentum and growth in international sustained? And is that segment going through a period of stronger growth here?

We did significantly release -- we had an improvement in Western Europe for sure. So there's still a fair amount of political unrest in certain jurisdictions. But year-over-year, there was definitely an improvement in the U.K. and Western Europe.

Okay. And then just lastly, during the quarter, I mean, obviously, there's the conflict in the Middle East. There's also the World Cup in North America. With all those large events going on, were there any -- did the conflict have any impact on procurement discussions, what you've seen through the quarter? And then conversely, like the World Cup, was there a benefit from the World Cup in the quarter?

Benefit for the World Cup would happen in prior quarters as infrastructures updated their facilities well in advance of the actual events in similar to the way the Olympics and other events happen.

So not directly to Q4.

Okay. So it's no late catch-up of those deployments?

No.

There are no further questions at this time. I will now turn the call over to Brian Campbell. Please continue, sir.

Thank you, John. I'd like to thank the participants for their questions and to add that we are pleased with the company's performance during fiscal 2026. We saw record sales of $515.8 million, including $240.7 million in software and services revenue, solid gross margins of 59.3% for the year, which together with Evertz's disciplined expense management, yielded earnings per share of $0.85. We are entering into fiscal 2027 with significant momentum fueled by over $33 million of shipments in May with a combined purchase order backlog plus shipments totaling in excess of $270 million by the continued operator adoption of and successful large-scale deployments of Evertz's IP-based software-defined video networking and cloud solutions by the largest broadcast, new media service providers and enterprises in the industry, by the continuing success of DreamCatcher, Bravo and our state-of-the-art IP replay suite, and we're very encouraged by the opportunities in the government, defense and aerospace sector.

With Evertz's significant investments in software-defined IP, IT and cloud technologies, the over 600 industry-leading SDN deployments and our capabilities of the staff, Evertz is poised to build upon our leadership position in the sector. Thank you, and good night.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Good afternoon, ladies and gentlemen, and welcome to the Evertz Q3 Investor Conference Call. [Operator Instructions] This call is being recorded on Wednesday, March 4, 2026.

I would now like to turn the conference over to Brian Campbell, Executive VP of Business Development. Please go ahead, sir.

Thank you, John. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2026 third quarter ended January 31, 2026, 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 investor website. Doug and I will comment on the financial results and then open the call to your questions.

Turning now to Evertz' results. I'll begin by providing a few highlights, and then Doug will provide additional detail. First off, sales for the third quarter totaled a record $139.3 million, up 5% sequentially from the prior quarter. This includes revenue in the international region of $43.7 million, up 27.7% sequentially. Recurring software, services, and other software revenue increased 12.3% year-over-year, totaling $62.5 million in the quarter.

Our sales base is well diversified with the top 10 customers accounting for approximately 44% of sales during the quarter, with no single customer accounting for more than 16% of sales. In fact, we had 107 customer orders of over $200,000. Gross margin in the quarter was $81.2 million, or 58.3% compared to 57.8% in the third quarter of the prior year. Net earnings were $18.7 million, resulting in fully diluted earnings per share of $0.24 for the quarter. Investment in research and development totaled $36.7 million. And Evertz working capital was $133.2 million, including cash of $24.8 million as at January 31, 2026.

At the end of February, Evertz's purchase order backlog was more than $246 million and shipments during the month of February were $32 million. We attribute this strong financial performance and solid 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 in the industry; and specifically the growing adoption of Evertz's IP-based software-defined video networking solutions Evertz's IT 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, the Board of Directors declared a regular quarterly dividend of $0.205 per share payable on or about March 20.

I will now hand over to Doug Moore, Evertz's Chief Financial Officer, to cover our results in greater detail.

All right. Thanks, Brian, and good afternoon, everyone. So the sales were $139.3 million in the third quarter of fiscal 2026. That's a 2% increase compared to $136.9 million in the third quarter of fiscal 2025. For the 9 months ending January 31, 2026, sales were $384.2 million, up $10.4 million, or 3% for the 9-month period ending January 31, 2025.

Quarterly hardware revenue was $76.8 million, a decrease from $81.2 million in the prior year, while software and services revenue increased to $62.5 million from $55.7 million in the prior year. Revenues from software and services represented approximately 45% of the total revenue in the quarter. Year-to-date, hardware revenue is up 1% year-over-year to $209.3 million for the 9 months ending January 31, 2026, while revenues from software and services is up 5% to $174.9 million from $166.4 million in the prior year. Year-to-date, software and service revenue represented approximately 46% of total revenue over the period.

Looking at regional revenue. Quarterly revenues in the U.S./Canadian region declined 3% to $95.6 million compared to $99.1 million in the prior year. This was more than offset by a 15% increase in quarterly revenues in the international region, which were $43.7 million compared to $37.8 million in the prior year. The International segment represented 31% of total sales in the quarter compared to 28% in the same period last year.

For the 9 months ending January 31, revenues in the Canadian and U.S. region were up 2% to $273.6 million, while international revenue increased 3% to $110.6 million compared to $105.9 million in the same period last year. For the 9 months period ending January 31, international sales represented 29% of total sales compared to 28% in the same period last year.

Gross margin for the quarter was 58.3% as compared to 57.8% in the prior year. And then for the 9 months ending January 31, the gross margin was 59.3%. Both the quarter end and year-end gross margin percentages were within the company's 56% to 60% target range.

Looking at S&A expenses. S&A was $18.6 million in the third quarter, a decline of $0.6 million, or 3%, for the same period last year. Selling and admin expenses as a percentage of revenue were approximately 13.3% compared to 14% for the same period last year. Sequentially, selling and admin is down approximately $0.5 million from Q2. The decline is primarily driven by the timing of tradeshow and promotions costs, which decreased about $900,000, as in Q2, we attended our IBC tradeshow last quarter.

For the 9 months ending January 31, selling and admin expenses were $56.3 million, or 14.7% of sales as compared to $55.2 million, or 14.7% of sales for the same period last year. Research and development expenses were $36.7 million for the third quarter. That represents a $0.1 million increase over the same period last year. As a percentage of revenue, R&D expenses were 26.4% compared to 26.7% in the prior year.

For the 9 months ending January 31, R&D expenses were $110.4 million, or 28.7% of sales, as compared to $110.2 million for the same period last year. ITCs for the quarter were $4.8 million as compared to ITCs of $3.6 million in the prior year third quarter. Foreign exchange for the third quarter resulted in a loss of $2.3 million as compared to a gain for the third quarter ended January 31, 2025, of $3.9 million.

The largest driver behind the current period loss was the translation of U.S. dollar assets into Canadian dollars, given the decline of the U.S. dollar versus the Canadian dollar over the quarterly period. We had closed October 31 at approximately 1.4:1 U.S. to Canadian, and that dropped to approximately 1.3612 as at January 31. For the 9 months ended January 31, foreign exchange resulted in a loss of $0.8 million compared to a gain of $4.7 million in the same period last year.

Turning to the discussion of liquidity of the company. Cash as at January 31, 2026, was $24.8 million, a decline compared to cash of $111.7 million as at April 30, 2025. The decline was primarily due to $91 million in dividends distributed in the quarter, including $75.5 million in special dividends paid during Q3. Working capital was $133.2 million as at January 31 compared to $206.9 million at the end of April 30, 2025.

Looking at cash flows for the quarter. The company generated cash from operations of $29.3 million, which is net of a $4.4 million change in noncash working capital and current taxes. If the effects of change in noncash working capital and current taxes were excluded from the calculation, the company generated $24.9 million in cash from operations during the quarter. It's worth noting we did use about $10 million in cash and inventory in the quarter as we purchased some [ standby ] products and also securing parts for planned production. We increased raw materials.

The company used cash of $7 million for investing activities, which was principally driven by the acquisition of capital assets in the quarter, including the acquisition of an airplane for $4.4 million, replacing aircraft previously sold during the year. The company used cash from financing activities of $92.4 million, which, as noted, was principally driven by dividends paid of $91 million, including the special dividend of $75.5 million.

Finally, looking at our share capital position. At January 31, 2026, shares outstanding were approximately 75.5 million and options and share-based RSUs outstanding were approximately 4.5 million. Weighted average shares outstanding were 75.5 million and weighted average fully diluted shares were 76.7 million as at January 31.

That concludes the review of our financial results and position for the third 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, back to yourself.

Thank you, Doug. John, we're now ready to open the call to questions.

[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

North American growth was clearly a little bit slower, recognizing you had strong growth internationally. But just with respect to North America, anything you'd call out as far as what you're seeing in the environment? Or is that just reflective of project timing, which, as we know, can be sometimes lumpy?

Dennis, it's Brian. I'm actually on a remote cell phone here in Ottawa at a defense conference event, and you were breaking up a little bit there. Could you repeat the question for us?

I was just asking about the slower growth in North America during the quarter, whether you've seen any change in the end markets or whether that's just reflective of project timing and lumpiness?

I would advise that it's more reflective of timing and lumpiness. So we haven't seen a significant change, and we are heading into the NAB events in the tail end of April, where we're going to be connecting again directly with many customers on site. So it's -- we're quite excited by that.

Clearly, defense is topical. So maybe on each side of the border, we've seen Canada focusing on ramping up domestic procurement. And in the U.S., you're obviously you've been investing in building out your operations. Can you update us in terms of what you're seeing in terms -- with respect to defense opportunities?

We're definitely encouraged by the steps that are being taken on multiple fronts, whether that's government initiatives that mandate the defense -- Canadian defense sector and the internal people as well, too. So that is -- it tends to be a longer-term sales cycle, but it's all quite encouraging. And we're very intent on devoting sufficient resources to help the Canadian government as they're moving forward. As you know, we have had successes over the years in the U.S. and with NATO partners.

And then maybe one last one for me. OpEx has been relatively stable in recent quarters, which is good to see that expense discipline. Any puts and takes as we think about the near-term OpEx trajectory? Or should this be representative of the run rate near term?

No. The big thing to call out there is like while Q2 had IBC, Q4 has NAB or N-A-B. So that is a pretty significant show for us. Just from a Q3 to Q4 perspective, you can -- I would expect an increase of $1.5 million to $2 million. The same with on the Q4 front as we ramp up for a show. We -- a little bit harder to forecast, but we do often have some increases in R&D materials and prototypes, which is historically the last couple of years anyway been about an extra $0.5 million in Q4. And then beyond Q4, there's nothing specific to call out other than inflationary matters.

Your next question comes from the line of Robert Young from Canaccord Genuity.

Brian, I think you noted you were attending the Ottawa Conference on Security Defense earlier in the call. I think I heard that. Could you talk about what you're showing at the conference? What are the products that you're displaying to a defense customer? What are the areas where you think Evertz could be meaningful in supplying the Canadian defense establishment?

Yes. So it isn't as much a tradeshow as you're familiar with the NAB and IBC. So we're attended conference, but we're definitely continuing to reinforce and make strong relationships on multiple fronts. And it is the monitoring command and control solutions or transport, as you know, core elements of our key technologies are Common Criteria and NIAP certified. And that plays very well to the direction that's being taken by much of the new spending initiatives.

So no specific product areas that you're in a sales motion at this conference. Is there anything worth highlighting? I understand you're highlighting products that you have certifications related to. But is there any -- what product areas would you highlight as particularly relevant to a defense customer?

So Rob, other than the ones I articulated previously, which is the command and control relevant ones, which are multiviewers, signal processing, the DreamCatcher Live Production solutions, that whole family of technical operations center, live production, replay, storage solutions, all -- and transport all fall into categories that would be of demand and of course, the RF solutions of which we have many, and we're at the forefront of the DIFI push, which is the digitization of IF and RF solutions.

Also noted you added SOC 2 to the Evertz.io product, which -- maybe if you could just give us a sense of what that opens up for Evertz. Is that a meaningful addressable market change?

It's very early days. I don't have anything to add there.

And then the backlog ticked up for the first time in quarter-over-quarter, sequentially it ticked up for the first time in a while. Is that driven by like maybe a weaker level of February shipments? Or is it -- is there another factor to call out there?

Doug, do you want to handle that?

Yes, sure. It's just -- again, there's some lumpiness in projects, whether we deliver or they come in, some significant orders come in at a time. But it's just a reflection of strong demand. So you are correct that the February shipments are a bit light. That's fair. But yes, the growth in backlog, I think, $6 million quarter-over-quarter is very positive, but I think it's not directly attributable to 1 item. I would say it's just strength across and strong demand.

Maybe last question. You noted the inventory build in the quarter. Is that driven by anything in the pipeline or maybe unannounced programs that you've won.

No...

Something that's not -- go ahead. I'm sorry.

No, it's actually -- it's more driven by market, I guess, procurement realities with -- there's some memory -- certain components like memory on allocation where we have to secure parts to guarantee our ability to ship. So it's more driven by the procurement side and then seeing there's certain products on allocation or potential company shortages that we're using some of the cash to stockpile.

[Operator Instructions] Your next question comes from the line of Paul Treiber from RBC Capital Markets.

Just a question on recurring software and services revenue was strong again this quarter. Is there anything to call out in terms of either unusuals or project completion? Or do you see it as continue to grow in these low double digits here?

I think you still have -- if you track it for the last 8 quarters, there's been a strong trend in growth. And there's not a milestone of achieved a $10 million, or something like that. But there's always some volatility based on project completion and milestone completion. So it's not a specific 1 contract to point to, and there will be some peaks going forward. But you'll see over the past 8-plus quarters or more really, 12 quarters, it's been growing, if you look at the trend, so.

And then international, the strength in international is the highest quarterly level in a number of years. Has anything changed in terms of your momentum there and the drivers of that growth and what's driving that?

A lot of the growth in the current quarter, at least compared to the prior year, it was a couple of projects in Europe that we completed. I don't know it's really a macro thing to call out necessarily than the lumpiness and volatility, in this case, helping us in the quarter.

And then just lastly, just on gross margins, it ticked down a little bit sequentially. Does that relate to international or some of these larger projects, the mix may have a lower gross margin than the past?

Yes. the main driver, of course, is the product mix. But in this case, there is some drag due to international margins being a bit tighter than elsewhere. So it's still well within the range. It's still a strong margin, but there will be volatility even going forward. But yes, there's a bit of a drag in the quarter with the international sales.

And then just lastly, just on the topic of gross margins. With memory costs going up, how will that impact gross margins? Is it a relatively small portion of your BOM that it's basically immaterial from a consolidated point of view?

Yes. What we do is we analyze BOMs on an individual level. So if there's markable cost increases, we may have to address that through pricing. But it's not -- in the current quarter it hasn't affected margins necessarily. It's really just having to acquire -- use cash to basically acquire inventory, so we have it there to ship basically when we need it. So it hasn't really been a drain on margins, but it is causing us to react with procurement.

There are no further questions at this time. I will now turn the call over to Brian Campbell. Please continue, sir.

I'd like to thank the participants for their questions and to add that we are pleased with the company's performance during Q3 of fiscal 2026, which saw record sales of $139.3 million, including $62.5 million in software and services revenue, solid gross margins of 58.3% in the quarter, which, together with Evertz's disciplined expense management, yielded quarterly earnings of $0.24 per share despite a foreign exchange loss of $2.3 million in the quarter.

We're entering into the last quarter of fiscal 2026 with significant momentum fueled by over $32 million of shipments in the month of February with a combined purchase order backlog plus February shipments totaling in excess of $278 million; by the continuing adoption and successful large-scale deployments of Evertz's IP-based software-defined video networking and cloud solutions by the largest broadcast, new media, service provider, and enterprises in the industry; and by the continuing success of DreamCatcher BRAVO, our state-of-the-art IP replay production suite.

With Evertz's 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 while further penetrating government and defense. Thank you, and good night.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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?

Thank you, Doug. Ina, we're now ready to open the call to questions.

[Operator Instructions] And your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

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?

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.

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?

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.

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.

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.

And your next question comes from the line of Robert Young from Canaccord Genuity.

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?

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.

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.

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.

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.

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?

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.

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?

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.

Okay. Would you believe that the gross margin target range would still be something you could maintain?

Yes.

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.

So I guess it would be about 40% is more than 12 months out, so that's 60% in the next 12 months.

[Operator Instructions] Your next question comes from the line of Paul Treiber from RBC Capital Markets.

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?

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.

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.

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?

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.

There are no further questions at this time. I will now hand the call back to Mr. Campbell for any closing remarks.

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.

And this concludes today's call. Thank you for participating. You may all disconnect.

Good afternoon, ladies and gentlemen, and welcome to the First Quarter Evertz Conference Call. [Operator Instructions] This call is being recorded on Wednesday, September 10, 2025. I would now like to turn the conference over to Mr. Brian Campbell, Executive Vice President of Business Development. Please go ahead, Mr. Campbell.

Thank you, Constantine. Good afternoon, everyone, and welcome to Evertz Technologies conference call for our fiscal 2026 first quarter ended July 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.

Turning now to Evertz results. I'll begin by providing a few highlights, and then Doug will provide additional detail. First off, sales for the first quarter totaled $112.1 million, including $51.6 million in software and services revenue, representing 46% of total revenue. Our sales base is well diversified with the top 10 customers accounting for approximately 50% of sales during the quarter with no one customer accounting for more than 9% of sales. In fact, we had 114 customer orders of over $200,000.

Gross margin in the quarter was $68.8 million or 61.4% up from 59.4% in the prior year. Net earnings were $11.9 million, up 22% from the prior year, while fully diluted earnings per share were $0.15 for the quarter. Investment in research and development totaled $37 million in the quarter. Evertz' working capital was $202.6 million, including cash of $124.3 million as at July 31, 2025. At the end of August, Evertz' purchase order backlog was more than $252 million and shipments during the month of August were $41 million.

We attribute the strong financial performance and robust combined shipments and purchase order backlog to channel and video service proliferation, increasing global demand for high-quality video anywhere, anytime, the ongoing technical transition to IP, IT and cloud-based architectures in the industry 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 and Evertz' state-of-the-art DreamCatcher IP replay and live production suite with BRAVO Studio featuring the iconic Studer audio.

Today, Evertz' Board of Directors declared a regular quarterly dividend of $0.20 per share payable on or about September 25. I'll now hand over to Doug Moore, Evertz' Chief Financial Officer, to cover our results in greater detail.

All right. Thank you, Brian. Starting with revenue. After a slow start in May of 2025, sales were $112.1 million in the first quarter of fiscal 2026, a slight increase compared to $111.6 million in the first quarter of fiscal 2025. Hardware revenue increased quarter-over-quarter from $55.7 million to $60.5 million, while software services revenue decreased from $55.9 million to $51.6 million in the current quarter. Revenue from the Software Services segment there represented approximately 46% of the total revenue in the quarter.

Looking at regional revenue. Quarterly revenues in the U.S./Canadian region were $79.5 million compared to $73.9 million in the prior year, while quarterly revenues in the international region were $32.7 million compared to $37.7 million in the prior year. The International segment represented 29% of total sales in the quarter as compared to 34% last -- the same period last year. Gross margin for the quarter was 61.4% as compared to 59.4% in the prior year and slightly above our target range. While the gross margin was above our target range for the second quarter in a row, that's largely being driven by product mix, including a relatively high proportion of higher-margin software service revenue in the quarter.

Turning to selling and admin expenses. S&A was $18.6 million in the first quarter, an increase of $1 million from the same period last year. And selling and admin expenses as a percentage of revenue were approximately 16.6% as compared to 15.8% for the same period last year. Sequentially, S&A is down approximately $2 million from Q4. That's largely driven by the non-reoccurrence of NAV, which we attended in April of this year.

R&D expenses were $37 million for the first quarter. That represents a $0.3 million decrease over the same period last year. As a percentage of revenue, R&D expenses were 33% compared to 33.5% in the prior year. The higher percentage is largely being driven by softer revenue in Q1 this year and last. Investment tax credits for the quarter were $3.3 million.

Foreign exchange for the first quarter was a gain of $0.7 million as compared to a foreign exchange gain of less than $1 million in the first quarter last year. U.S. dollar closed at approximately $1.38 on July 31, not significantly different from its closing rate as at April 30.

Turning to a discussion of liquidity of the company. Cash as at July 31 was $124.3 million, increasing compared to cash of $111.7 million as at April 30. Working capital was $202.6 million as at July 31 compared to $206.9 million at the end of April 30. The company generated cash from operations of $33.5 million. That includes $18 million change in noncash working capital and current taxes. The effects in the change in noncash working capital and current taxes were excluded from the calculation, the company would have generated $15.5 million in cash from operations during the quarter.

The company used $0.5 million for investing activities, which was principally driven by the acquisition of capital assets of $1.4 million and partially offset by proceeds of disposals of $900,000. The company used cash and financing activities of $20.2 million, which was principally driven by dividends paid of $15.1 million and the repurchase of capital stock under our NCIB plan of $3.8 million, which translated to approximately 317,000 shares purchased and canceled in the quarter.

Finally, looking at our share capital position as of July 31. Shares outstanding were approximately 75.5 million and options and share-based RSUs outstanding were approximately 2.1 million at the end of the quarter. During the quarter, approximately 2.7 million options expired. Weighted average shares outstanding were 75.5 million and weighted average fully diluted shares were 76.6 million for the year -- or the period ended July 31, 2025.

That concludes the review of our financial results and position for the first 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 our annual information form and the official reports filed with the Canadian Securities Commission. Brian, back to yourself.

Thank you, Doug. Constantine, we're now ready to open the call to questions.

[Operator Instructions] Your first question is from the line of Robert Young from Canaccord Genuity.

First place I'd like to start is the gross margins, strong. Can you remind us what your target is and whether there's any intent to adjust that? And then I think you said that software was down in the mix year-over-year in the quarter, but you also said that the gross margins were driven by high-margin software. So if you could just maybe provide a little more color around, you may bridge between those 2 things so I can understand what's going on there.

So first of all, note that there's a lot of volatility in our margin. It's driven by product mix. So we haven't -- we're not changing our target at this point. It's 56% to 60%. We have had 2 quarters now that have exceeded that. But of course, just 3 quarters ago, we were at 57% before we adjust our target range, we had a greater track record of variance there.

Yes so the comments on the -- driven by the software and service revenue. So first of all, that includes software and services. And year-over-year, you're correct, it's down the software and services year-over-year, even as a proportion. But as a proportion over the past 3 quarters, it's increased.

So our software revenue is generally higher margin than, of course, services or hardware. And being at 46% is part of the reason why that product mix pushed it up. So even Q1 last year was high 59s, so with a high proportion. But it's not a direct mathematical calculation, but there's certainly a correlation between higher proportion of software and services and margin.

Is there anything worth calling out like product-wise, what is the -- like what is the product that is driving the high margin? Like a category you'd highlight?

No. I mean there's a significant portfolio of products that are within software and services, right? So I will remind that there's 2 different types of software and services recognized that's some over time. So whether it's SLAs, warranties, and then there's other components that are -- could be a software site acceptance that triggers a release of revenue. So it is -- fortunately, it's a fair mix of products that go into that category.

Okay. So what could have happened here is like a milestone in software revenue recognition at high margin or something like that? Is that good...

That happens every quarter projects that get released in that manner.

Okay. And then the other notable thing that jumped out to me was the cash balance, quite high. Maybe I know that you always say that it's a decision driven by the Board, but I was hoping you can give us some insight into the thought process, how you would go about deploying that capital, whether it's M&A or dividend. If you can give us a sense of the thought process, that would be helpful.

So Rob, the thought process is quite consistent. We have distributed via regular quarterly dividends, which have been increasing in each of the last 5 years. Now cash has been building up to a very significant level. We are -- we do continue to look at acquisition opportunities. But again, the acquisitions have to align with our growth and long-term strategic plan such that they provide very good shareholder value over the long haul. And those -- that thought process is what the Board considers each quarter.

I will also highlight that Q2 often has a large negative cash flow swing in working capital. Last year in Q2, we used cash from -- and working capital of $30 million, including $20 million payables. That's coinciding with looking ahead to past Q2s are forward and behind. That's often we pay our incentive plans out in Q2, which is cash.

Looking ahead, we're also looking at acquiring a building that we are currently leasing for CAD 2.5 million to CAD 3 million. So there is some significant today, the cash balance, but we do expect the cash to decrease over the next quarter.

And not a normal course issuer bid is in effect.

Okay. And then the last question before I hand it off to someone else. Just a high-level product question, 2 part. You're just fresh at IBC. But maybe you could give us a sense of what the areas of interest in the Evertz product lineup are? And the second part would be just everyone is looking at the Oracle results this morning and there's enormous amount of infrastructure build in the data center.

And I thought maybe there's an opportunity for you to talk about potential applications for your IP switching product given the deterministic nature and if there's an application inside of that data center build or something that you're looking at, and then I'll pass the line.

So Rob, IBC does begin on Friday. So yes, we are looking forward very much to seeing our customers over the weekends and resuming the relationships. So we're very excited by the lineup of products that we're releasing and reinforcing our long-term commitment to investment in R&D and innovation. Of course, the IP-based and cloud-based solutions are a very integral part of our product portfolio and a big driver. So we are excited by those opportunities and not just in the data center, but in customer facilities as well to on-premise and in the cloud.

The next question is from the line of Thanos Moschopoulos from BMO Capital Markets.

Just with respect to M&A opportunities, we've heard the comments from some other companies that there's kind of more stuff available as of late. PE has been kind of looking to monetize assets and so forth. Are you seeing more M&A opportunities in the past or anything you see on that front?

Thanos, you were breaking up. I didn't hear all of your question, but I believe you asked, are we seeing more opportunities than in the past?

Yes.

I would say it's a fairly consistent level of acquisition opportunity. So there are targets available. And as I said, we do investigate and analyze those opportunities, but we're very selective in terms of ensuring that we've got alignment with Evertz' portfolio of products and our growth areas that we're looking at, whether it's in our core markets or adjacent markets. And so that is an ongoing process.

Okay. Can you update us on your U.S. expansion, how that's proceeding and whether we should be mindful of any cost or margin implications as that continues to ramp up in the near term?

So I can give you an update for sure. So our location in India, Pennsylvania, just outside Pittsburgh, we're continuing to ramp up capacity there. It's not fully operational in the sense that we can't manufacture everything there at this point, but we're continuing to ramp that up. To date, we've -- in that part of that expansion, we've incurred about a little over $2 million in costs that we've already incurred. And then we do -- that's a building we currently lease that we will be planning on purchasing and hopefully closing this quarter, which will cost an extra $2.5 million to $3 million. I'm sorry, I don't know if there was a second part of that question, but...

Yes, just whether we should still got any margin implications as you continue to ramp up production there and that becomes maybe a larger part of the relative mix?

There will be certainly some additional -- as there already is, some additional costs incurred by having some, say, redundant staff, you would say, having people here and there doing similar things. But at this point, it's not overly material. So it's not -- I'm not able to specifically quantify a significant impact. I don't expect a significant impact at this time.

And any update you can provide in terms of what you're seeing from customers outside of broadcast and media, so be it in AV or in other parts of other end markets?

So we continue to have good traction and success in the adjacent markets, specifically our Evertz AV. However, the press releases are somewhat sparse from that customer set. Oftentimes, government and military installations do not provide those press releases. So that is very much a focus of part of our business and a successful part. However, I can't provide you additional color.

On a relative basis, can you comment on whether that's growing any faster or slower than the broadcast media market?

It has greater potential for us as it's a newer market.

Thank you very much. There are no further questions at this time. I'd like to turn the call back over to Mr. Brian Campbell for closing comments.

I'd like to thank the participants for their questions and to add that we are pleased with the company's performance during Q1 of fiscal 2026, which saw sales of $112 million, including $51.6 million in software and services revenue. Strong gross margins of 61.4% for the year, up from 59.4% in the prior year, along with continued investments in R&D totaling $37 million in the year.

We closed the first quarter of fiscal 2026 with significant momentum fueled by combined purchase order backlog plus August shipments totaling in excess of $293 million, by the growing adoption and successful large-scale deployments of Evertz' IP-based software-defined video networking and cloud solutions by some of the largest broadcast, new media service provider and enterprises in the industry 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, providing high reliability reliable, innovative solutions to customers and delivering to shareholders. Thank you. We look forward to having many of you join us on Wednesday, the 1st of October at our Annual General Meeting. Good night.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.