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Hello. This is the Chorus Call conference operator. Welcome to Vecima Networks First Quarter Fiscal 2023 Earnings Conference Call and Webcast. [Operator Instructions]
Presenting today on behalf of Vecima Networks are Sumit Kumar, President and CEO; and Dale Booth, Chief Financial Officer. Today's call will begin with executive commentary on Vecima's financial and operational performance for the first quarter of fiscal 2023 results. Lastly, the call will finish with a question-and-answer period for analyst and institutional investors.
The press release announcing the company's first quarter of fiscal 2023 results as well as detailed supplemental investor information are posted on Vecima's website at www.vecima.com under the Investor Relations heading. The highlights provided in this call should be understood in conjunction with the company's interim condensed consolidated financial statements and accompanying notes for the 3 months ended September 30, 2022 and 2021.
Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable securities laws. All statements other than statements of historical fact are forward-looking statements. These statements include, but are not limited to, statements regarding management's intentions, belief or current expectations with respect to market and general economic conditions, future sales and revenue expectations, future costs and operating performance. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict and/or are beyond our control.
A number of important factors could cause actual outcomes and results to differ materially from those expressed in these forward-looking statements. These factors include, but are not limited to, the current significant general economic uncertainty and credit and financial market volatility, including the impact of COVID-19 and the distinctive characteristics of Vecima's operations and industry and customer demand that may have a material impact on or constitute risk factors in respect of Vecima's future financial performance as set forth under the heading Risk Factors in the company's annual information form dated September 22, 2022, a copy of which is available at www.sedar.com.
In addition, although the forward-looking statements in this earnings call are based on what management believes are reasonable assumptions, such assumptions may prove to be incorrect. Consequently, attendees should not place undue reliance on such forward-looking statements. In addition, these forward-looking statements relate to the date on which they are made. Vecima disclaims any intention or obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law.
At this time, I would like to turn the conference over to Mr. Kumar to proceed with his remarks. Please go ahead.
Thank you, and welcome, everyone, to our first quarter conference call. Fiscal '23 is off to an incredible start with record quarterly financial results, strong performance across all product families and a number of technology achievements to talk to you about today.
To begin, I'm proud to say we achieved a new quarterly revenue record with first quarter sales climbing 127% year-over-year and 22% sequentially quarter-over-quarter to $73.4 million. Not only that, we deliver adjusted EBITDA performance of $17.2 million, which was 4x higher than what we achieved in Q1 last year and represents a new all-time quarterly record for the company. We also achieved excellent first quarter earnings performance of $0.41 per share. Not only was this 14x higher than the $0.03 per share generated in the same period last year, but it's also more than we achieved in all of fiscal 2022. So a truly remarkable start to the year.
Our Q1 performance was again anchored by our Video and Broadband Solutions segment and the tremendous success of our next-generation Entra Distributed Access Architecture solutions. VBS revenue was up 151% year-over-year to $61 million with Entra accounting for $53 million of segment sales. Interest sales will nearly triple of what we achieved in the same period last year, and they were up 32.5% sequentially. This is the highest sequential growth we've ever seen for Entra, and it reflects a number of Tier 1 and other customers deploying at scale in the quarter with our fiber access and cable access solutions. We were successful in leveraging our inventories and supply chain strengths to comprehensively meet their needs and address some of the backlog that's been building. While this led to exceptional Q1 revenues, we do expect a balancing in the growth of our Entra deliveries in Q2 as a result of some of the pull-ins that occurred during the quarter.
Overall, however, demand for DAA continues to accelerate, and we're seeing broad market adoption of Vecima Solutions. At quarter end, we were actively selling to 49 operators, including a growing number of Tier 1s. We now have deployments with 8 of the 12 largest cable operators in North America for our Entra Remote PHY, MAC-PHY and 10G EPON remote OLT nodes and 10G EPON chassis platforms. Having scale deployment with a Tier 1 operator is a big deal in our industry, but having adoption across so many of the top operators really speaks to our leadership in the industry. I should add that we also continue to hold the majority global market share for both 10G EPON remote OLT and Remote MACPHY nodes.
In terms of total global engagements, these have widened to 95 customers from 77 a year ago, and they include a significant and growing number of fiber access customers as well as customers turning to us for a combination of cable and fiber access solutions. Our ability to support these customers is really enhanced by our comprehensive DAA product portfolio. Vecima can provide an unmatched level of flexibility to operators as they embark on the evolution of their broadband access networks to the 10G future. Vecima also continued to lead on the innovation front in the quarter with important new product introductions and demonstrations.
On the fiber side, we launched our new Entra EXS1610 All-PON 10G shelf solution, which broadly supports the most widely deployed PON standards. This gives service providers the ability to shorten time to market for the fiber-to-the-home rollouts. It also provides Vecima with access to a vast new addressable market, valued at nearly $2 billion annually.
On the cable side, we successfully demonstrated our 10G capable DOCSIS 4.0 leadership in partnership with a top global Tier 1 operator. And we showcased our ability to unlock multi-gigabit symmetrical speeds on existing infrastructure. In the process, we highlighted the massive capacity that can be achieved through incremental upgrades to the cable access network using our DAA nodes. We also recently announced a next-generation Remote PHY Device. Our new ERM322 module is the industry's most interoperable and can be used either on our platforms or to extend the life of third-party cable access nodes. So our Entra portfolio just keeps getting bigger and better and more innovative. And with it, our DAA momentum continues to build.
Looking now at some other contributors to our Q1 results. In our commercial video family, we achieved another solid quarter with sales up 19% year-over-year on higher Terrace family sales. This further added to the substantial results from our VBS segment.
In our Content Delivery and Storage segment, sales increased 63% year-over-year and 19% quarter-over-quarter. There is strong demand for our media scale solutions as operators continue to transition to and expand their IPTV services. In Q1, we added an additional telco win for our IPTV linear Cloud DVR and Video-on-Demand platforms. We also carried out expansions with existing customers, including a large Tier 1 customer in the Caribbean and Latin America region.
And I'm pleased to report we added a customer win for our new community cash solution. This is a solution that combines our media scale platform with our Terrace family commercial video products to save bandwidth used for video delivery and improve the broadband experience for subscribers. We also released 2 new product iterations during the quarter, including enhanced versions of our origin and cash products in MediaScale. So important achievements for the CDS segment in Q1, together with solid growth.
In our Telematics segment, performance remained strong in the first quarter with sales at a multiyear high and very strong adjusted EBITDA margin performance. We generated additional deployments with municipal government fleet customers and grew our base of asset tracking customers with the addition of 12 new customers. We're now monitoring over 28,000 units with our asset tracking solutions.
Additionally, Telematics achieved an excellent gross margin percentage of 66% for the quarter. So overall, it was a terrific start to what we expect will be another year of record momentum for Vecima.
And now I'll turn the call over to Dale to provide more detail on our first quarter financial performance. Dale?
Thank you, Sumit. For the purposes of this call, we assume that everyone has seen our first quarter fiscal 2023 news release, MD&A and financial statements that are posted on Vecima's website. I will present the relevant numbers and discussions around overall results, market segments, operational expenses and the balance sheet.
Starting with consolidated sales. For the 3 months ended September 30, 2022, we generated record sales of $73.4 million. This was an increase of 120% over the $32.4 million in Q1 last year, and an increase of 22% from the $60 million in Q4 fiscal 2022. The significant year-over-year increase reflects a sharp increase in video and broadband solution sales, combined with stronger content delivery and storage sales and the positive foreign exchange impact of a weaker Canadian dollar.
Within the Video and Broadband Solutions segment, we generated sales of $61 million. This was up 151% from the $24.3 million in Q1 last year, and 23% higher than the $49.4 million last quarter, as customers transition to next-generation networks using Vecima solutions as well as our success in meeting the needs of Tier 1 customers undertaking larger scale DAA employments during the period.
Our Entra next-generation DAA products contributed first quarter sales of $53 million, up a significant 192.4% from the $18.4 million in Q1 fiscal 2022 and up 32.5% from the $40 million in Q4 fiscal 2022. Commercial video family sales for the quarter were $7.3 million, up 19% from $6.1 million in Q1 fiscal 2022 and down 17% from $8.8 million in Q4 last quarter as expected.
Terrace family sales were up year-over-year, primarily due to the timing of sales as compared to early fiscal 2022. And demand for our TerraceQAM platform remains healthy, although somewhat lower year-over-year as operators continue their commercial rollout for the current generation.
In the Content Delivery and Storage segment, first quarter revenues were $11 million or 63% over the $6.8 million in Q1 last year and 19% higher than the $9.2 million in Q4 fiscal 2022.
Segment sales for the Q1 fiscal 2023 period included $6.4 million of product sales and $4.6 million of service sales. The significant year-over-year increase in CDS sales reflects the addition of a new customer during the quarter, expansions with existing customers and favorable order timing as compared to last year.
As always, we note that quarterly sales variances are typical for the CDS segment. The demand for Vecima's IPTV and open casting solutions continues to increase, and we expect moderate sales growth for the Content Delivery and Storage segment for fiscal 2023.
Turning to the Telematics segment. Sales of $1.4 million in the first quarter were slightly higher than the $1.3 million achieved in both Q1 and Q4 of fiscal 2022 as expected. Gross margin for the first quarter was 46%, down from 48% in Q1 2022 and 48% in Q4 of fiscal 2022. This primarily reflects supply chain constraints, which resulted in higher expedite costs as well as onetime inventory allowances related to legacy product inventory. We target a gross margin percentage of 48% to 52%.
Video and Broadband Solutions gross margin was 44% in the current year quarter. This was lower than the 47% a year ago and the 47% in Q4 fiscal 2022. The lower VBS gross margin primarily reflects supply chain constraints, which resulted in higher expedite costs as well as onetime inventory allowances related to legacy product inventory.
Gross margin in the Content Delivery and Storage segment increased to 55% from 50% in Q1 last year and 50% in Q4 last quarter, due to higher sales and higher service revenues for the quarter. In the Telematics segment, gross margin in the quarter increased to 66% from 63% in Q1 fiscal 2022, and was slightly higher than the 65.7% in Q4 fiscal 2022, reflecting an increase in customer acquisitions and sales in the current quarter.
Turning to first quarter operating expenses. The notable changes year-over-year were as follows: R&D expenses increased to $10.7 million in the quarter from $8 million in Q1 fiscal 2022 as we continue to invest in research and development to support the launch of new products. The increase reflects hiring of additional R&D employees, higher licensing and prototyping costs, partially offset by an increase in capitalized development costs. Until these new products are commercialized, development costs are deferred to future periods.
Sales and marketing expenses increased to $6.3 million from $4.1 million in the same period last year. This increase primarily reflects higher staffing costs as well as an increase in travel, entertainment and trade show expenses as COVID-19 travel restrictions have lifted. G&A expenses increased to $5.6 million in the quarter from the $4.7 million in Q1 fiscal 2022, primarily reflecting additional staffing, ER implementation costs, software licenses and travel and entertainment costs.
Total OpEx in Q1 increased to $22.7 million from $17.5 million during the same period last year. This reflects additional operating expenses tied to our higher sales in both the Video and Broadband Solutions and Content Delivery and Storage segments. And note that reported R&D expense in a period is typically different than the actual expenditure, that's because certain R&D expenditures are deferred in total product commercialization.
Adjusting for deferrals, amortization of deferred development costs and income tax credits, actual R&D investment for the quarter increased to $13.5 million or 18% of sales from $9.6 million or 30% of sales in the same period last year. The increase reflects higher staffing costs and increased cost for software licensing and prototyping in the current year quarter as our next-generation products move closer to commercial deployment.
We reported an operating income of $11 million in Q1 fiscal 2023 as compared to an operating loss of $1.8 million in Q1 fiscal 2022. The significant increase was primarily due to higher VBS and CDS segment sales, partially offset by lower gross margins and the operating expenses to manage the increase in sales year-over-year. Net income for the quarter increased to $9.5 million or $0.41 per share from $0.7 million or $0.03 per share in Q1 fiscal 2022.
Turning to the balance sheet. We ended the first quarter with $2.5 million in net bank overdraft. The decrease in cash in the quarter mainly reflects the buildup of inventory by $14.6 million in the quarter, an increase in prepaid expenses of $7 million, other noncash working capital of $2.8 million, capital expenditures of $9 million -- $0.9 million, partially offset by positive cash flow from operations of $11.7 million. Working capital increased to $66.8 million from $58.6 million as at June 2022. We note that working capital balances can be subject to significant swings from quarter-to-quarter. Our product shipments are lumpy, reflecting the requirements of our major customers.
Finally, cash flow used in operations for the first quarter increased to $7.2 million as compared to $4.5 million during the same period last year. The $2.7 million increase in cash flow used in operations reflects a $15.7 million decrease in cash flow from noncash working capital, partially offset by a $13 million increase in operating cash flow.
Now back to Sumit.
Thank you, Dale. Turning now to our outlook. In our Video and Broadband Solutions segment, we anticipate continued acceleration of demand for our Entra DAA products on a full year basis. According to the Dell'Oro Group, the leading industry forecaster, cable operators are responding to competitive expansion from fiber and fixed wireless access providers by leveraging both the cable and fiber access solutions that position them to succeed in a highly flexible way. That competition is encouraging cable operators to upgrade their networks now rather than later. And is driving a wave of investment into DAA broadband access technologies. We're certainly seeing the ramp-up in demand for the broad portfolio of DAA products that we provide.
We're seeing the same thing on the fiber access side with particularly strong demand for our 10G EPON products. The rural broadband rollout in the U.S. is also continuing to drive major network expansions as operators work hard to construct vast new fiber-to-the-home connections and provide equitable broadband access for all. So we're well positioned to meet or exceed our expectations for substantial Entra growth in fiscal 2023, and we're excited about what we can achieve this year.
Our confidence continues to be supported by a strong backlog of purchase orders and binding forecasts that are providing excellent visibility into the band levels going forward. I'd once again caution that global supply chain disruptions continue to have the potential to interfere with timely order delivery while also increasing expedite costs and putting pressure on our margin potential.
Overall, however, our strategy of maintaining higher than normal inventories of finished goods and raw material to address these challenges is working. And we've increased our investment in working capital to support this strategy, backed by a very robust backlog. In our Terrace family of products, we anticipate continued demand for the current generation TerraceQAM. As we continue to progress qualification for the long-term migration of customers to the next-generation TerraceIQ alongside the overall network transition to IPTV.
Looking at the Content Delivery and Storage segment, demand for our IPTV and open caching solutions continues to build. While we're anticipating moderate growth for the segment in fiscal '23, we see this making the way for higher growth potential over the mid to longer term as IPTV projects and expansions gained further momentum and our newer open caching solutions become an important new driver of CDS performance. And in our Telematics business, we expect consistent incremental growth from the fleet tracking market and increasing demand for our NERO Global asset tracking services.
Overall, we remain highly confident in our market position and in Vecima's ability to capture this major multiyear opportunity in the fast-growing DAA and IPTV markets. With an exceptional record break in first quarter behind us, we're looking forward to an extraordinary and busy year and many more achievements to tell you about over the course of fiscal 2023.
That concludes our formal comments for today, and we'll now be happy to take questions. Operator?
[Operator Instructions] Our first question comes from Jesse Pytlak from Cormark Securities.
Can you just elaborate a little bit on what you mean by balancing of shipments with respect to Entra in the current quarter?
Sure. Yes. So as I said out customer demand has being growing our backlog has been growing significantly. We're operating in the presence of as we all know macro supply chain constrains and we've been managing that very thoughtfully and aggressively in fact over the course of -- over the last 2 years at this point of managing supply chain. So our customers are conducting mass scale constructions and upgrades and that involves labor, rolling out this new generation networks. They are underway on a transformation of their networks.
So we have these backlogs and our opportunity through all of our effective supply chain management, we unlocked the opportunity in Q1, more shipping out from our factory and through the supply chain and the materials. So of course, to support our customers' projects, we moved it and took advantage of the opportunity on the material side. So we saw some pull in our Entra revenue, if you will, from Q2 into Q1. The overall backlog continues to grow, the overall natural demand is much higher than you're seeing in our results today. But when we look at our supply chain factors for the second quarter, we feel like there's a balancing where you could see the first 2 quarters start to average in the same ballpark. And overall, fiscal '23, creating broader growth profile than we even had last year in Entra. So that's how we're looking at it.
Okay. Got it. And then in terms of kind of the investment in inventory that you keep pursuing it. Is there maybe a dollar level that you see settling out at or maybe a base level?
I think as you've seen the working capital has grown, the inventory and prepaids have grown, and I've talked before about how the supply chain factors have led to lead times pushing out 52, 70 weeks in some cases. So in parallel, we've had all this growth in demand from our customers for Entra and forecasting visibility that has moved out over a long period of time once customers started partnering very effectively with us in forecasting their need a year plus out.
So we've been building inventory to match to the order flow and backlog we have, and you see that represented and what's happening. So I'm not going to pinpoint a specific number. We do feel like we're making great progress on the working capital inventory front, we should get ourselves to a position maybe towards the end of calendar '22, entering calendar '23, second half of fiscal year, we could start to see things level out, but we're being purposely pursuant of the working capital to support our customers and the backlog that we have.
Okay. And then maybe just one final question, if I may. Can you just talk a little bit about how you're thinking about managing your cash position as it's kind of given where it is today, the investments that you are making in inventory that we just talked about? And then also, obviously, your R&D planning?
Yes, yes. Sure. And just to start, I'd remind everyone that we have relatively little long-term debt on the balance sheet at about $15 million long term. That includes some of the lease obligations. So and additionally, it's important to note that in Q1, we generated over $10 million in operating cash flow. So that's underway.
We did invest in working capital tied to all of this growth again in Q1 with a $20 million plus in inventory and prepaid increases. We have a strong $25 million-plus operating line of credit available to us at good terms to help us manage these timing puts and takes as we've seen. And then, of course, we have the -- they are in AP flowing about $20 million in real estate, a little over half of that is attached to the long-term debt vehicle.
And we think that capitalization is very fluid for us. We have strong inventory balance, and we also have access potentially to the equity markets if the market conditions suggest that we should go in that direction, supported by our growth, then we, of course, have our shelf perspectives out there as well. So that's some opportunity if we need to support some more working capital.
[Operator Instructions] Our next question is from Steven Li with Raymond James.
Sumit, the GAP node that you unveiled last year, is this just for MACPHY or can it be both for Remote PHY and MACPHY deployments?
It certainly can be for both deployments and the very nature of the Generic Access Platform, that's GAP node is designed to be a universal modular platform in conjunction with one of our key Tier 1 customers, in fact, getting very involved in specifying that platform. And certainly, remote MACPHY and Remote PHY, and even in the future, fiber-to-the-home EPON -- XGS-PON can move towards that platform.
Have you started to ship it?
So I'm not going to get into too much detail, of course, we're continuously in trial and shipping, as you can imagine, is in the near term.
Okay, perfect. And then also recently, you announced the EXS. I'm also wondering, is this shipping or what's the expected time line?
Yes. We're moving towards the lab qualification processes for that platform. We're right in the midst of early output of it as we typically go through a cycle of putting product into labs and then going through field trials and whatnot. So that's quite imminent.
Got it. And then Sumit, just one more question. You referenced backlog a few times. Can you comment on the size of it or maybe if you grew sequentially, if your backlog grew sequentially?
Certainly did grow sequentially and I don't want to get totally specific, but suffice it to say the backlog remains very material, and it's growing continuously, like I just said, order of magnitude, think of it as equivalent to multiple quarters at the current top line run rate, an order of -- on the order of a full year at that with delivery date timings naturally set across both the next 1.5 years.
Our next question is from [indiscernible], a private investor.
Sumit, congratulation on a blowout quarter. So I got a question about the accounts receivable. Are they all within the 30-day limit or?
Yes. So I mean, of course, we've got a little bit of a spectrum of terms with our customers, larger customers, of course, have their model and how they negotiate terms on payment terms. And there's generally this spectrum between net 30 and net 60 terms on our receivables. And absolutely, in terms of on-time payments and all that, things are fantastic on the AR receivables.
So there's no concerns there at all.
Never.
No, we have no collection issues whatsoever [indiscernible].
Now another thing is with this shelf prospectus, that's been in place for some time. It's always been -- I mean, it looked like it could be a constraint going forward with your backlog growing. So are you contemplating anything in near future and perhaps get a NASDAQ listing or split the shares, like the liquidity of the shares has always been a problem.
True. True. It's been a challenge. And of course, all options are always being considered as it's prudent to do. And with our type of growth, both the shelf perspectives, whether it's the Canadian market or considering the U.S. market, that's all on the table and relevant when we're talking about the growth pace that we've attracted. We do think that there's opportunity to improve the liquidity through potential offering at the same time at providing some incremental support for the working capital that we need. So it's all subject to market conditions and a window of timing making sense. So I look at it as a potential opportunity in the sense of whether Canadian listing, the U.S. listing. We do think that we're presenting some very attractive value in terms of a stock.
Yes. Well, to me, it looks like perhaps a bear market for now is over at least looking forward to the next 6 months or a year. So opportunity the timing may be correct.
Yes, the market conditions getting on the other side.
Or even just splitting the shares, have you ever thought of that?
Not in specific detail, of course, all options are often considered, but I don't think I would put too much specificity around that today.
As there appears to be no further questions. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.