Vecima Networks Inc

TSX:VCM

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Hello. This is the Chorus Call conference operator. Welcome to Vecima Networks First Quarter Fiscal 2024 Earnings Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [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 the executive commentary on Vecima's financial and operational performance for the first quarter of fiscal 2024 results. Lastly, the call will finish with a question-and-answer period for analysts and institutional investors.The press release announcing the company's first quarter fiscal 2024 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 unaudited interim condensed consolidated financial statements and accompanying notes for the years ended September 30, 2023 and 2022.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 21, 2023, 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 present with his remarks. Please go ahead, sir.

[Sumit Kumar, executive]

Thank you. Good morning, and welcome, everyone. Thank you for joining us. We achieved solid performance and positive operating results in the first quarter even as we navigate an expected short-term transition in Entra DAA deliveries. I'll start today with some of our key financial and business highlights for the quarter. Dale will follow with more details on our Q1 financial performance. And then I'll return to talk about our outlook going forward.Our results for the first quarter of fiscal 2024 were in line with our expectations and included sales of $61.5 million, a gross margin percentage of 47%, adjusted EBITDA of $8.1 million and adjusted earnings per share of $0.09. As we discussed with you last quarter, we started this year with an approaching short-term transition in the DAA macro environment. Our customers are now busy catching up and wrapping project rollouts that have been delayed by various lagging labor, permitting, utility make-ready and other project requirements that are typical of very large-scale network build-outs, along with supply chain challenges outside of Vecima's product lines.As a result, in Q1, they temporarily shifted from building up their product pipelines to managing the rollouts and deployment activity using the inventories that we successfully unlocked for them during last year's supply chain challenges. Correspondingly and as provided in our prior outlook, Entra deliveries in the quarter pulled back from recent highs after the very high growth we had in Entra sales over the last 2 years.When combined with a softer quarter for commercial video products, this resulted in Video Broadband Solutions segment sales of $44.1 million. I want to emphasize that while customer inventory rebalancing translated into reduced product uptake in the quarter, the activity occurring behind the scenes only accelerated as customers focused on both increasing the velocity of network upgrade projects and preparing for new material programs.Our customer engagements grew to 108 during the quarter. That compares to 95 in the same period last year. And not only have we added new engagements, but the depth and breadth of our existing customer relationships are growing as well.Throughout the period, we are actively working with some of the world's largest Tier 1 operators as they prepare for and execute wide-scale DAA network deployments. This included Charter, who will be rolling out our ERM 3 next-generation Remote PHY devices as part of their planned multiyear cable access network evolution. We expect our solution will be used for a substantial portion of Charter's footprint-wide cable access network upgrade to DAA.Another major movement is broad adoption of our 10G fiber access solutions that are being leveraged by some of the world's largest operators again to expand their networks to cover underserved rural homes with fiber to the premise. As you're probably aware, governments are investing heavily to close the rural-urban divide for high-speed Internet access, and Entra fiber access products are an integral part of that solution.We have also been preparing to launch our new generic access platform and other DAA Forever Nodes. The GAP node, as one example, sets a new industry standard for unified access with a future-proof modular platform that can span multiple generations cable and/or fiber access across a fully flexible and standards-based evolution and migration pathway.Subsequent to the quarter end, we also announced a new win with Orion Cable, where we'll support this operator's broadband expansion with our remote MACPHY cable access solution, one of the many architecture options our broad DAA portfolio in Entra allows us to flexibly serve by matching and meeting any customers' unique needs.Considering the 158 individual program opportunities for Entra cable and fiber access across 108 customers, the overall scope of Vecima DAA is playing a leading role in transforming networks and connectivity to the multi-gigabit future. We have multiple new products and programs and project expansions that we'll begin to layer as our fiscal year progresses, and together, we expect that to drive a new wave of Entra momentum, which, in turn, we expect will have an increasingly positive impact of our results in the second half, with more to follow in fiscal 2025.Overall, it continues to be an intensely busy and exciting time on the Entra front and we're very pleased to again experience the market enthusiasm first hand at the SCTE Cable-Tec Expo, which we attended a few weeks ago. Vecima's presence at the event highlighted and demonstrated not only our recent but also our combined and accumulative innovations and the full suite of Entra cable and fiber access solutions and MediaScale IPTV platforms.It'd be hard to overstate the volume of interest, the following we had, and the enthusiasm of response to our offerings. The entire exhibit was packed throughout with customer visits, demonstrations, meetings and the bustle of doing business. This industry transition to DAA is happening and Vecima is a recognized industry leader.Whether it's our dominant role in fiber and cable access products or our industry-leading work helping the Tier 1s migrate to the 10G network, we're clearly a company that customers are looking to and relying on for the most important technologies to deploy in a generation.Turning now to our Content Delivery and Storage segment. Fiscal 2024 got off to a great start with sales of 43% -- sales up 43% year-over-year to $15.7 million. This reflects both the growing base of customers for our IPTV solutions and expansions we undertook with a number of those customers during Q1.Again, operator customers are broadening their network footprints to give larger subscriber bases access to state-of-the-art live linear, on-demand and cloud DVR streaming on the IPTV fabric, while further migrating away from legacy QAM set top-based video.Subsequent to the quarter end, we also announced a new program with Blue Ridge Communications, which has engaged Vecima to support its video streaming expansion along with professional services that are aimed to monitor the live IPTV network and maximize their operational efficiency.I should add that CDS also turned its strong margin performance, reflecting a strong mix that included MediaScale cash expansion. So a great start to the year for the CDS segment.Turning to Telematics. That segment achieved a 14% increase in sales, both year-over-year and quarter-over-quarter, helping to get the year off to a strong start. We added 14 new movable asset customers during the quarter, which combined represent nearly 700 new telematics subscriptions. And we significantly increased the number of movable assets being monitored to over 57,000 units. We've almost tripled the number of movable assets on the system in just 1.5 years.Telematics also continues to be highly profitable as a part of our business, with the segment achieving adjusted EBITDA margin of 34% in the first quarter.Overall, it was a quarter of ongoing and exciting progress in VBS and excellent results from both our CDS and Telematics segments. And across all of our operations, we continue to focus on tightly managing the business and, in some cases, lowering operating costs to achieve greater efficiency.At the same time, we continue to advance our technologies with robust R&D investment, and thus further advancing our leadership in preparation for the major opportunities we see ahead.I'll tell you more about our view going forward in just a few minutes. But first, I'll pass the call over to Dale to provide more detail on our Q1 financial results. Dale?

[Dale Booth, executive]

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen our first quarter fiscal 2024 news release, MD&A and financial statements 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, 2023, we generated sales of $61.5 million. This was a decrease of 19% over the $75.5 million in Q4 of fiscal 2023 and a 16% decrease from the $73.4 million in Q1 last year. The year-over-year change reflects the anticipated temporary slowdown in Video and Broadband Solution product orders, partially offset by stronger year-over-year performance from the Content Delivery and Storage and Telematics segments.Within the Video and Broadband Solutions segment, first quarter sales for fiscal 2024 were $44.1 million. This was down 28% from the $61 million in Q1 last year and 23% lower than the $57 million in sales last quarter.Next-generation DAA products contributed first quarter Entra revenue of $38.8 million, down 27% from $53 million in Q1 fiscal 2023 and down 23% from $50.7 million in Q4 fiscal 2023 as anticipated, reflecting challenges experienced by our customers from a labor and permitting perspective, which has caused a temporary delay in large-scale network build-outs and as they utilize the inventory we successfully unlocked for them in the previous year.We anticipate a resurgence of demand momentum in the second half of fiscal 2024 as we begin to launch major DAA rollouts with key customers. In all, Entra DAA platforms are now being sold to 51 operators across 6 continents.Commercial video product sales were $5.3 million for the current quarter, a decrease of 27% from the $7.3 million in Q1 fiscal 2023 and 15% lower than the $6.3 million generated in Q4 fiscal 2023. The year-over-year change reflects the transition to next-generation platforms and the impact of some of our newer DAA driven commercial video solutions being accounted for as part of Entra family sales.Content Delivery and Storage segment sales grew 43% to $15.7 million in Q1 fiscal 2024 from the $11 million in the same period last year and 4% lower than the record $17.1 million achieved in Q4 of fiscal 2023. The significant year-over-year increase in CDS' sales reflects a broader customer base following last year's new business wins as well as expansions within existing customers. Segment sales for the Q1 fiscal 2024 period included $9.9 million of product sales and $5.8 million in services revenue. As always, we note that quarterly sales variances are typical for the CDS segment.Turning to the Telematics segment. Sales in the first quarter were $1.6 million. This was 14% higher than the $1.4 million generated in both Q1 and Q4 of fiscal 2023.Gross margin for the first quarter of fiscal 2024 was at 46.9% with a gross profit of $28.8 million, a decrease of 15% from the $33.7 million in Q1 fiscal '23 and 25% from last quarter's $38.1 million, reflecting lower consolidated sales, partially offset by a higher gross margin percentage. We target a gross margin percentage of 45% to 49%.Gross margin is now impacted by noncash warrant expense as warrants issued to a customer are recorded as sales incentives under IFRS accounting. Adding back the $0.6 million in warrant expense in the quarter, adjusted gross margin is 47.9%.Gross margin was up from the 45.9% achieved in Q1 fiscal 2023 and down from the 50.5% last quarter. The improvement in gross margin year-over-year reflects an increased proportion of higher-margin CDS sales in our overall product mix.Video and Broadband Solutions segment's gross profit for Q1 fiscal '24 was $18.6 million, 31% lower than the $26.8 million achieved in Q1 of fiscal '23 and 33% lower than the $27.9 million achieved in Q4.Gross profit margin of 42.1% for the first quarter was lower compared to 43.9% in Q1 last year and 48.9% in Q4 of fiscal '23. The year-over-year decrease in gross profit reflects lower segment sales combined with the noncash warrant expense recorded in the current period.Gross profit in the Content Delivery and Storage segment for Q1 increased by 53% to $9.2 million from the $6 million in the same period last year and CDS gross margin of 58.5% for the quarter was also higher than the 54.5% gross margin for the same period last year and the 53.8% generated in Q4 of fiscal '23. The year-over-year increase in CDS' gross profit reflects the higher sales together with the stronger gross margin.On a sequential quarterly basis, CDS gross profit for the current quarter was consistent with the $9.2 million generated in Q4 of fiscal '23, reflecting stronger gross margin performance, offset by lower quarter-over-quarter sales.In the Telematics segment, gross profit in the first quarter increased slightly to $1.1 million with a gross margin of 64.9% from the $1.0 million in gross profit and 66.1% gross margin in Q1 fiscal '23 and the gross profit of $1 million last quarter, but lower than the Q4 fiscal '23 gross margin of 72.4%. The year-over-year improvement in gross profit was mainly the result of increased customer deployments and higher sales in the current quarter.Turning to first quarter operating expenses. The notable changes year-over-year were as follows: R&D expenses decreased to $10.3 million in the current quarter from $10.7 million in Q1 fiscal '23, primarily reflecting an increase in capitalized development costs, partially offset by higher prototyping materials, software and licensing costs.We continue to invest in research and development to support the launch of new products. Until these new products are commercialized, development costs are deferred to future periods.Sales and marketing expenses for the first quarter increased to $7.4 million from $6.3 million in the same period last year. The year-over-year increase in sales and marketing expense primarily reflects an increase in noncash inventory allowances combined with higher staffing costs, partially offset by lower trade show expenses.G&A expenses increased to $8 million in Q1 fiscal '24 from $5.6 million in Q1 fiscal '23. The year-over-year increase primarily reflects additional staffing, professional fees, software licenses and training costs in support of realized and planned sales growth.Other expense was less than $0.2 million in Q1 fiscal '24 compared to $0 in Q1 of fiscal 2023. Total OpEx in Q1 fiscal '24 increased to $26.1 million from $22.7 million during the same period last year and down from $32.7 million in Q4 fiscal '23. The year-over-year increase primarily reflects the ramp-up of growth-related support costs over fiscal '22 and '23, partially offset by strategic cost reduction initiatives implemented in the fourth quarter of fiscal 2023.Video and Broadband Solutions operating expenses for the current quarter increased to $18.3 million from $15.3 million in Q1 fiscal '23, but decreased from the $23.8 million in Q4 of fiscal '23. The $3 million year-over-year increase primarily reflects additional expenses for research and development, sales and marketing, general and administrative activities and staffing in preparation for anticipated sales growth.Content and delivery and storage operating expenses were higher at $7 million in Q1 fiscal '24 as compared to $6.6 million in Q1 fiscal '23, but lower than the $8 million in Q4 of fiscal 2023. The $0.4 million year-over-year increase reflects higher expenditures on general and administrative cost to support sales growth, partially offset by the shifting of sales and marketing expenses to be more in line with segment revenue generation. The quarter-over-quarter decrease was primarily attributable to the shift in sales and marketing expenses, as outlined above, combined with lower stock-based compensation.I 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 until product commercialization. Adjusting for deferrals, amortization of deferred development costs and income tax credits, actual R&D investment for the current quarter decreased to $13.4 million or 22% of sales from $13.5 million or 18% of sales in the same period last year and down from the $15.3 million or 20% of sales in Q4 fiscal '23, representing the restructuring that occurred in June. The slight decrease year-over-year reflects cost savings initiatives undertaken in the fourth quarter of fiscal '23, partially offset by increased costs for software licensing and prototyping in the current year quarter as our next-generation products move closer to commercial development.In our operating results, we reported an operating income of $2.7 million in Q1 as compared to $11 million in Q1 of last year. The year-over-year decrease in operating income was primarily due to lower sales in the VBS segment, partially offset by higher sales and margins in the CDS segment.Adjusted EBITDA decreased to $8.1 million this quarter from $17.2 million in the prior year quarter and $15.1 million last quarter. Foreign exchange loss was $0.6 million in Q1 fiscal 2024 as compared to a foreign exchange gain of $1.3 million in the prior year period.Net income from continuing operations for the quarter was $1.1 million or $0.07 per share from a net income of $9.5 million or $0.41 per share in Q1 fiscal '23.Turning to the balance sheet. We ended the fourth quarter of fiscal '23 with $2.3 million in cash as compared to $12.9 million in the same period last year. Working capital increased to $79 million in the current quarter from $66.8 million in Q1 last year, but decreased from the $83.7 million in Q4 of fiscal '23.We note that working capital balances can also be subject to significant swings from quarter-to-quarter. The product shipments are lumpy, reflecting the requirements of our major customers. Other timing issues like contracts with greater than 30-day payment terms also affect working capital, particularly if shipments are back-end weighted for a quarter.Lastly, cash flow provided by operations for the first quarter increased to $8.4 million as compared to cash flow used in operations of $7.2 million during the same period last year. The $15.6 million change reflects a $28.6 million increase in cash flow from noncash working capital, partially offset by a $13 million decrease in operating cash flow.On a final note, in terms of the quarterly dividend, the Board of Directors approved a quarterly dividend of $0.055 per common share payable on December 18, 2023, to shareholders of record at November 24, 2023. It is important to note that this dividend will be designated as an eligible dividend for Canadian income tax purposes.So just to summarize, another solid quarter with sales, gross margin and adjusted EBITDA as expected. Now back to Sumit.

[Sumit Kumar, executive]

Thank you, Dale. As we look ahead to the balance of the year, Vecima is on the cusp of a major new phase of growth and development. Around the globe, MSOs are playing significant capital investments to upgrade their broadband and IPTV networks. This is essential as service providers worldwide continue to grapple with competitors and invest in their core broadband business to both protect and enhance their market share while expanding their footprints. We're exceedingly well positioned in this large and growing market. As a core broadband supplier for the global industry with unrivaled DAA and IPTV product portfolios and a very strong market position, Vecima is poised to realize our share of this far-reaching opportunity ahead.In our Video and Broadband Solutions segment, we are moving closer to major rollouts with key customers, and we see multiple pathways to grow. While the exact timing of these various rollouts will always be customer dependent, and by their nature, the program should be thought of on the overall trend versus quarter-to-quarter. We see our momentum trend building strongly in the second half of fiscal 2024.In our Content Delivery and Storage segment, we expect growing demand for our IPTV and open cashing solutions will contribute to solid year-over-year growth in fiscal '24.On a full year basis, we're anticipating CDS sales gains in the low double digits. And over the longer term, we continue to see robust future growth potential as IPTV and OTT streaming services markets continue to expand.Finally, in our Telematics business, we expect consistent incremental growth from the fleet tracking market and increasing demand for our new removable asset tracking services. The latter has become an important driver of segment differentiation and gains in recent quarters.Overall, we continue to anticipate respectable full year consolidated sales growth for Vecima in fiscal '24, with notable gains in our run rate in the third and fourth quarters.Longer term, our outlook is highly compelling. We're continuing to demonstrate the full deployment potential of our technologies as we support our customers' wide-scale network transformation. And we're repeatedly breaking new ground and ultra-high-speed connectivity.Our leadership position is growing. And we remain highly confident in both our market position and in Vecima's ability to capture the major multiyear opportunities in the captivating DAA and IPTV markets.That concludes our formal comments for today. We'd now be happy to take questions. Operator?

[Operator]

[Operator Instructions] The first question comes from Jim Byrne of Acumen Capital.

[Jim Byrne, analyst]

Sumit, I just wonder if I could get your thoughts on Charter's comments recently about just their rollout of the broadband, rural broadband versus maybe delaying some of their upgrade of their HFC.

[Sumit Kumar, executive]

Yes. No, thanks, Jim. I think as you noticed, and you would -- if you picked up on some of the commentary they provided. I think it reflects that these adjustments are very normal immaterial in terms of timing. What they're doing, they're looking at as a total package of network evolution and expansion between the cable access and the fiber access. So they're working towards this converged gigabit connectivity solution, as I call it. And that involves investment in capital in both the cable network and the fiber network that they're growing with the rural broadband funding.So when we think about it, again, reflects nothing out of the normal modest timing shifts and emphasis shifts between those 2 investment areas for them. They've got 55 million passings. They're adding 1.5 million plus passings on rural fiber-to-the-home. So they'll trade off when they need to do this work on the cable access network or the fiber access network.In either case, that's all well aligned with our thoughts on the long-term programs.

[Jim Byrne, analyst]

Good. That's great. And then just thinking about some of the cost-saving initiatives that you implemented, are you as kind of done there? Are you kind of right-sized the investment on R&D and the team that's on the R&D side for what you see for the future?

[Sumit Kumar, executive]

Yes. I think we do feel well modeled as we stand today. I want to emphasize that we always look at that efficiency. It was largely program alignment driven in terms of the programs we want to invest in rather than purely OpEx driven. Of course, we gained some OpEx efficiency. And that positions us well. And we've seen that reflected in generating solid EBITDA in the first quarter of the $8.1 million and positioning us for what we see happening when we carry on with this momentum in the second half.So we feel good about where we position the model that allows us to invest, of course, as we continue to work at this long-term growth opportunity that remains the case. Based on our exiting run rate in fiscal '24, we want to maintain a solid footing on investment and maintain and grow this market share leadership we've built in both DAA and cable and fiber access. So it's a balance point and we feel comfortable with it.

[Jim Byrne, analyst]

Okay. Perfect. And then maybe one for you, Dale. Just big build in inventories in the quarter, I noticed. Just give us an idea of what the working capital might look like over the course of the fiscal year.

[Dale Booth, executive]

Well, I would say that with the changes you had mentioned. And as we build up for our new Charter deployment, we will see some additional inventory build-up that will occur in Q2-Q3. But after that peak, we're expecting that our working capital will start to draw down on the inventory levels as we ramp up our sales in Q3 and Q4.

[Operator]

[Operator Instructions] So our next question is from Jim Burn of Acumen Capital.

[Jim Byrne, analyst]

Yes. Sorry, I'll just jump back on here. So maybe just give us an idea. But I know we don't typically talk about kind of some of the products and the advantages at length. But maybe just looking at this GAAP node, what need does that fulfill? And what does that opportunity look like in the future?

[Sumit Kumar, executive]

Sure. No, I appreciate that, Jim. I think if you look at the Cable Access network, historically, it's evolved super many migrations from analog to digital video to the first broadband now moving to the gigabit broadband. And in the course of so doing, the industry has gotten to this point where there's a lot of variation and the hardware that's out in the field. And that has its challenges in terms of maintenance and support, in terms of how the field techs manage those many different SKUs. And these -- we always talk about these old analog nodes, moving them to distributed access digital node. And that is a major transformation of the network. And in parallel with that, we see operators moving to a more unified hardware ecosystem that's more modular, that a single line. Some of these largest Tier 1 operators have dozens and dozens of different variance of hardware in the network.So we build a modular platform, it's migratable, it's upgradable. We can put today, of course, thinking about putting DAA DOCSIS 3.1 40 modules in it for cable access. We can migrated modules in that same housing with the same power supplies, fiber-to-the-home over time. We can even look at adding some wireless line cards or some compute line cards.So it gives them a future-proof platform and takes them away from this fragmentation they've had in the network in the past and so doing, that's expected to improve their quality and their serviceability of their network.

[Operator]

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.