Vecima Networks Inc

TSX:VCM

Earnings Call Transcript 2021-Q3

[Operator]

Hello. This is the Chorus Call conference operator. Welcome to Vecima Networks Third Quarter Fiscal 2021 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 third quarter fiscal 2021 results. Lastly, the call will finish with a question-and-answer period for analysts and institutional investors. The press release announcing the company's third quarter fiscal 2021 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 and 9 months ended March 31, 2021 and 2020. 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 24, 2020, 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.

[Sumit Kumar, CEO, President & Non Independent Director]

Good morning, and welcome, everyone. Thank you for joining us today. Vecima generated significant growth in the third quarter as demand for our next-generation Entra distributed access architecture solutions continue to accelerate. I'll tell you more about what we achieved on today's call, starting with a review of our third quarter highlights. Dale will follow with our financial review, and then I'll return to discuss our outlook going forward. To start, Vecima achieved our best quarterly top line performance in over a decade with total sales growing to $31.9 million. Sales are up 29% year-over-year and 7% sequentially in 1 quarter. Gross profit also increased year-over-year to $14.3 million, and we achieved adjusted EBITDA of $2 million, a very solid performance driven by Entra, even as we encountered a particularly lumpy quarter for our Content Delivery and Storage segment, continued foreign exchange headwinds related to a strengthening Canadian dollar and product mix constraints during the quarter. Our third quarter gross margin dipped below our target range as a result of those factors. Much of our robust top line growth was driven by our Video and Broadband Solutions segment, where sales were up a powerful 128% year-over-year. Entra sales were the key to this growth. As you know, we've always anticipated a breakthrough year for our next-generation DAA portfolio in fiscal 2021, and that's clearly materializing. We grew third quarter interest sales to $12.7 million, a sixfold increase from a year ago. And on a sequential basis, Entra sales were up a notable 58% from last quarter. I'm pleased to report that multiple cable operators, including a growing number of Tier 1s began their DAA deployments with us during the quarter. This was in addition to the lead Tier 1 customer that began scale deployment in Q2. By the end of Q3, our rosters of customers actively ordering Entra products have grown to 33 MSOs. That compares to 24 customers as of our last earnings call in February, so 9 more ordering customers in just 6 weeks. Their orders also tracked broadly across Entra portfolio with wide coverage that included multiple customers in deployment and across all of our DAA technology, including Remote PHY, Remote MAC-PHY and 10G-EPON. We saw growing and compounding demand for our Remote PHY nodes, including ongoing scale deployment from the lead, first deployment of our new double density node and a significant new Tier 1 order for our compact Remote PHY node during the quarter. Meanwhile, demand and deployments for our Remote MAC-PHY and 10G-EPON fiber-to-the-home products are also accumulating with several customers, Tier 1s and others. We expect more acceleration on all 3 product categories in the quarters ahead. Vecima's DAA is winning. Remember that the DAA market is still in its very early phases, so while Vecima's progress is already very exciting, there's much more yet to come with many additional customers on a path to scaling DAA deployment. And we believe Vecima has the best DAA story in the industry as the market takes off. In total, by Q3's end, we were engaged with 61 MSOs worldwide. 50 of those are in lab trial, field trial or live deployment phases. Now looking at some of the other product families within the VBS segment, it was another very solid quarter for our commercial video products. We generated $3.5 million of Terrace family sales, following on the very strong performance of the second quarter. Also on the hospitality side, demand for our Terrace QAM platform was particularly robust, with sales up 49% year-over-year to $5.2 million during the period. The continued strong deployment of Terrace QAM benefits us both now and in the future, with the entire population of Terrace QAM platforms upgradable to our next-generation Terrace IQ solution when operators are ready. So excellent results right across the VBS segment. In our Content Delivery and Storage segment, the third quarter brought the type of pronounced quarterly revenue fluctuation that's typical for this business and which usually reflects the timing of large project-oriented orders. Third quarter CDS sales also reflected some of our first pandemic-related operating challenges. You'll recall that we brought on a record number of new IPTV customers in fiscal 2020. And our goal for this year has been to get that new business onboard and scaling up. That's been manageable through most of this year. But in Q3, we faced more COVID-19 related operating restrictions in terms of how travel restrictions prevented planned on-site activity. Those prolonged limitations impacted both our and our customers' ability to carry out on-site systems integration. While this created some short-term timing delays, we are making progress, and we've seen the pace picking up in Q4. We also made some excellent R&D advances in the third quarter as we continue to add new features and capabilities to our MediaScaleX platforms. The Content Delivery and Storage segment, tying to the eventual industry-wide migration to IPTV, continues to be a compelling component of our strategy. In the Telematics segment, we had another solid quarter with continued [ unit ] expansion among our growing base of municipal government customers. We also made further headway into the movable assets market, where we're now monitoring over 10,000 movable assets for customers in the restoration and emergency medical services industries. Overall, it was another significant quarter of growth for Vecima, with strong momentum on the DAA side. More to come as both DAA and IPTV continue to ramp up. And at this point, I'll turn the call over to Dale to provide more detail on our financial results.

[Dale Booth, Chief Financial Officer]

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen our third quarter fiscal 2021 press release 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. Please note that results for the third quarter of fiscal 2021 includes just under 8 months of operating results from our acquisition on the Nokia Cable Access portfolio we acquired on August 7, 2020. And it also reflects the divestiture of our content agent business on March 31, 2021. The results of ContentAgent are now reported under discontinued operations. Starting with consolidated sales. For the 3 months ended March 31, 2021, we generated sales of $31.9 million. This was an increase of 29% over the $24.7 million in Q3 last year and an increase of 7% from $29.7 million in Q2 fiscal 2021. The year-over-year increase reflects an increase in product sales from the Video and Broadband Solutions segment, driven by our new Entra family of products and partially offset by lower sales in the Content Delivery and Storage segment, and further offset by foreign exchange- related to a strengthening Canadian dollar. Within the Video and Broadband Solutions segment, for the third quarter of fiscal 2021, we generated sales of $21.8 million, that was up 128% from the $9.6 million in Q3 last year and 32% higher than the $16.5 million in sales last quarter. Further deployments of our next-generation DAA products contributed third quarter Entra revenue of $12.7 million, up 6x from $1.8 million in Q3 fiscal 2020, and up 58% from $8 million in Q2 fiscal 2021. Entra sales included $6 million from the DAA products acquired from Nokia. In all, Entra DAA platforms are now being sold to 33 operators across 6 continents. Third quarter Terrace family sales were down 16% to $3.5 million from the $4.1 million in Q3 fiscal 2020, and down 33% from the $5.2 million in Q2 fiscal 2021, reflecting a return to more typical levels following a strong second quarter ordering activity. Terrace QAM sales for the third quarter were $5.2 million, up 49% from $3.5 million in Q3 last year and up 61% from $3.2 million in Q2 fiscal 2021. We anticipate healthy demand for our Terrace QAM platform through the balance of fiscal 2021 as operators continue their commercial rollout for the current generation while preparing for the next-generation Terrace IQ platform. Content Delivery and Storage segment sales were $8.8 million, down from the $11.8 million in the second quarter of fiscal 2021. These quarterly sales variances are typical for the CDS segment, and this lumpiness reflects the timing of large orders. Sales for the third quarter were additionally impacted by COVID-19 restrictions, had some customer operations due to installation timelines slowing as the segment continued to consolidate its rig -- record new business wins from fiscal 2020. The total CDS segment sales included $4.6 million in product revenue and $4.2 million in revenue from services. Turning to the Telematics segment. In line with our expectations, sales in the third quarter were at $1.4 million, slightly higher than the $1.3 million in the same period last year and on par with the $1.4 million last quarter. Gross margin for the third quarter was at 45% with a gross profit of $14.3 million, an increase of 12% from the $12.8 million in Q3 fiscal 2020, but down 3% from last quarter's $14.7 million. Gross margin was down from the 50% achieved last quarter and the 52% in Q3 fiscal 2020. The lower-than-normal gross margin reflects the composition of our product mix for the period as well as the negative foreign exchange impact of the strengthening Canadian dollar. Video and Broadband Solutions gross profit grew 108% to $9.3 million from the $4.5 million in the same period last year. Gross profit margin was down at 43% as compared to 47% in Q3 fiscal 2020. Gross profit for the segment was up 30% from $7.1 million and on par with the gross profit margin of 43% last quarter. The year-over-year decrease in gross margin reflects different product mixes each quarter as well as the negative foreign exchange impact of the strengthening Canadian dollar. Gross margin in the Content Delivery and Storage segment for Q3 decreased to 47% from 53% in Q3 fiscal 2020 and 56% last quarter. The year-over-year changes in gross margin reflect a lower percentage of high-margin software sales and a decrease in sales in the current quarter as compared to the prior year quarters. In the Telematics segment, gross margin in the third quarter was 66%, slightly down from the 70% last quarter and in Q3 fiscal 2020. The decrease reflects higher product costs in the current quarter. Turning to third quarter operating expenses. The notable changes year-over-year were as follows: R&D expenses increased to $7.5 million from $5.6 million in Q3 fiscal 2020, primarily reflecting higher staffing costs related to the Nokia portfolio acquisition as well as increased software licensing costs in the current quarter as our next-generation product families move closer to deployment. 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 third quarter increased slightly to $3.6 million from $3.5 million in the same period last year. This increase was due to higher staffing costs from the Nokia portfolio acquisition, partially offset by lower travel, entertainment and trade show expenses year-over-year as a result of COVID-19 restrictions. G&A expenses increased to $4.4 million in Q3 fiscal 2021 from $4 million in Q3 fiscal 2020, primarily reflecting the additional costs associated with the newly acquired operations. Total OpEx in Q3 increased to $15.7 million from $13.1 million during the same period last year. This reflects higher operating costs in the Video and Broadband Solutions segment reflecting the addition of operating expenses related to the newly acquired Nokia cable access technology portfolio. 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 quarter increased to $9.2 million or 29% of sales from $6.6 million or 26% of sales in the same period last year. The increase reflects higher expenditure from the Nokia portfolio, higher staffing costs and software licensing costs as our next-generation product families move closer to full-scale commercial deployment. We reported an operating loss of $1.4 million in Q3 fiscal '21 as compared to an operating loss of $0.3 million in Q3 fiscal '20. The $1.1 million increase was due to a $2.8 million decrease in contribution from the Content Delivery and Storage segment, partially offset by a $1.6 million increase from the VBS segment and a $0.1 million increase from the Telematics segment year-over-year. The current year quarter was impacted by the foreign exchange loss of $0.8 million compared to a foreign exchange gain of $2 million in the prior year quarter. Net income for the quarter was $2.2 million or $0.10 per share from net income of $0.7 million or $0.03 per share in Q3 fiscal '20. Turning to the balance sheet. We ended the third quarter with $23 million in cash and short-term investments, up from the $20.8 million in the second quarter. Working capital decreased slightly to $46 million from $46.2 million in Q2 fiscal 2021. We note that working capital balances can also be subject to significant swings from quarter-to-quarter. Our 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. Finally, cash flow provided by operations for the third quarter was $4.2 million, as compared to cash flow provided by operations of $2.4 million during the same period last year. The $1.8 million increase reflects a $5.2 million increase in cash flow from noncash working capital and $3.4 million decrease in operating cash flow. Now back to Sumit.

[Sumit Kumar, CEO, President & Non Independent Director]

Thank you, Dale. As we move into the final quarter of fiscal 2021, we're anticipating an excellent conclusion to this pivotal year with the breakthrough in VBS growth upon us and with all segments putting up solid performance. On the VBS side, high levels of utilization across our customers' networks have put tremendous pressure on operators to pull in capacity expansion, pull-in of investments that were already penciled in to grow their networks. As a result, we're seeing operators accelerating their broadband access network investments that have always been their priority. This is translating into burgeoning demand for Entra DAA products, and we expect our momentum will continue to speed through the fourth quarter and into fiscal 2022. As I mentioned earlier, our lead Tier 1 customer has already shifted to scale deployment. Overall, other Tier 1, 2 and 3 operators are either in or moving towards scale deployment as well. At the same time, a broader set of MSOs is moving from lab trials to initial field deployments. Once again, I want to emphasize that many of these customers are engaged across multiple parts of the Entra DAA portfolio, Remote PHY, Remote MAC-PHY, 10G-EPON fiber-to-the-home optical, management and video solutions. The opportunity is broad-based and very exciting for Vecima. The only note of caution I want to raise is that while Vecima is right in the midst of such strong opportunity growth, we're not alone in encountering some short-term uncertainty in the global technology supply chain. We've done a good job to get ahead of this in a prudent way, managing our supply chain and investing in working capital to get out in front of inventory needs and anticipated customer demand. But managing it prudently also means that our RAP potential in the short-term is, of course, not unlimited. Recent global supply constraints for components, like increasing lead times for silicon chips, could create some supply gated shipping ceilings down the road. And if we see sensible moves to expedite by digesting some expedite costs, we could see some associated temporary pressure on margins on some product categories. On balance, we're well positioned right now in terms of meeting our customers' growing needs and to fuel Vecima's growth and we'll be prudently aggressive in continuing to source the supply we need. But obviously, this is something we're monitoring closely. In our Content Delivery and Storage segment, demand for IPTV and open caching solutions also remains strong. As we move into the fourth quarter, we expect to carry on with the work of onboarding and scaling the many new customer wins from last year, while continuing to navigate the pandemic environment. Based on visibility today, we expect CDS sales will normalize for their lumpiness in the fourth quarter, and we see segment sales being similar to what we achieved in fiscal 2020. Keep in mind that IPTV is nearing its own shift to scale deployment. And while at the moment, I think it's fair to say that operators are somewhat more focused on their access network investments for broadband data services, we're well positioned to capitalize on the IPTV trend going forward, IPTV being the driver and consumer of the access network capacity. Put the market opportunities of DAA and IPTV together, and Vecima has a long runway of growth ahead of us. I'll quickly add that in addition to DAA and IPTV growth, we see continued demand for our Terrace QAM solution and emerging opportunities for our next-generation Terrace IQ solution through the balance of the year. The commercial video as a part of VBS is expected to grow year-over-year in fiscal '21 as well. And as before, we're anticipating continued incremental demand in our Telematics segment as well. Overall, we're in the midst of a very busy fourth quarter and expecting continued top line growth to wind up this outstanding year. While we continue to experience foreign exchange headwinds with the Canadian dollar remaining strong, we generally expect gross margins to strengthen as our product mix shifts to include a larger proportion of higher-margin products and license sales. In particular, more of the access network content is accruing to Vecima products in the MAC-PHY and 10G-EPON realms, and associated with that is an increased margin profile. Moving beyond the year-end, we see realization ahead of the vast potential for our growing portfolios of DAA and IPTV solutions and a very promising future for Vecima. We look forward to telling you more about that growth and progress in the quarters ahead. And that concludes our formal comments for today. We'd now be happy to take questions. Operator?

[Operator]

[Operator Instructions] As there appears to be no further questions, this concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.