Vecima Networks Inc

TSX:VCM

Earnings Call Analysis

Earnings Call Transcript 2024-Q4

[Operator]

Hello. This is the Chorus Call conference operator. Welcome to Vecima Networks Fourth Quarter Fiscal 2024 Earnings Conference Call and Webcast.

[Operator Instructions] Presenting today on behalf of Vecima Networks are Sumit Kumar, President and CEO; and Jud Schmid, Chief Financial Officer. Today's call will begin with executive commentary on Vecima's financial and operational performance for the fourth quarter and year-end 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 fourth quarter and year-end 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 audited annual consolidated financial statements and accompanying notes for the years ended June 30, 2024 and 2023.

Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable security laws, from which Vecima's actual results could differ. Consequently, [indiscernible] should not place undue reliance on such forward-looking statements.

All statements other than the statements of historical facts are forward-looking statements. These statements include, but are not limited, to statements regarding management's intentions, beliefs 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 a guarantee of future performance and involve risks and uncertainties that are difficult to predict and/or are on beyond our control. 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. Please review the cautionary language in the company's fourth quarter earnings report and press release as well as its 2024 annual report.

Regarding the various facts, assumptions and risks that could cause actual results to differ, these documents are available on Vecima's website at www.vecima.com under the Investor Relations heading and on SEDAR at www.sedarplus.ca.

At this time, I would like to turn the conference over to Mr. Kumar to proceed with his remarks. Please go ahead.

[Sumit Kumar, executive]

Good morning, and welcome, everyone. Thank you for joining us. I want to start today by acknowledging and thanking Dale Booth, whose retirement we announced earlier this week. In the 13 years, Dale was a part of the Vecima team, including the past 5 years as our Chief Financial Officer. Dale has been instrumental to our growth and development.

As CFO, he helped deliver 5 years of growth and this past year, the best 6 months investments history. Dale made many other contributions to Vecima, including building, managing and mentoring a strong finance team.

One of the outcomes of that team building is that Jud Schmid, previously our VP Finance and Corporate Controller; is succeeding Dale as Chief Financial Officer. Jud has been a part of Vecima for a total of 9 years, including 7 directly with Vecima and 2 years of Concurrent, which we acquired in 2017. He's a highly experienced leader with deep knowledge of Vecima and public company finance. He also has significant management and executive experience, including as CFO with a number of large companies.

I'm delighted to welcome Jud to the senior executive team, and you'll hear from Jud directly today as he'll be providing the financial color on today's call. Before we get to that, however, I'm going to start with some commentary on the fiscal year and the fourth quarter.

As we expected, fiscal 2024 was a year of 2 distinctly different halves. During the first 6 months, the DAA environment was undergoing transition, in which customers caught up on delayed projects and worked through inventory we help them build through the previous year's supply chain challenges.

Those challenges began resolving in the second half as customers started to move forward with their DAA network upgrades, supported by multiple new Vecima product rollouts. With our sales momentum building again, we went on to achieve the best 6-month revenue and adjusted EBITDA results in Vecima's history.

That included back-to-back record revenue quarters, with Q3 sales climbing to an all-time high of $80.1 million and Q4 taking it up another notch to $87.5 million. In total, we achieved $291 million of sales in fiscal 2024, together with adjusted EBITDA of $53.8 million and adjusted earnings per share of [ $0.89 ] despite a slower first half.

Our Video and Broadband Solutions segment generated $236.1 million of the full-year sales, supported by record segment performance in both the third and fourth quarters. As we expected, Entra products accounted for the majority of these results.

We benefited from continued strong demand for our EntraOptical 10-gig EPON products for fiber-to-the-home as customers broaden those fiber-to-the-home deployments as part of funded rural broadband programs. But it was delivery of new Entra products that provided an even greater contribution.

The key highlight of our year was the introduction and ramp of deliveries of our new ERM3 Remote PHY devices to our lead customer, Charter. As we've discussed on previous calls, Charter's planning to use our solution for a significant portion of its footprint-wide hybrid fiber coax upgrade.

The ERM3 quickly became our top-selling product in fiscal 2024, helping to drive record Q3 and Q4 revenue performance and more than doubling our Remote PHY sales on a full-year basis. In Q4, we also kicked off deployments of another important new product, our EN9000, Generic Access Platform, or GAP node, which provides operators with a future-proof path to 10G. We wrapped up manufacturing of this node in preparation for anticipated strong adoption in fiscal 2025.

Also in Q4, we initiated shipments of our new Entra EXS1610 ALL-PON Shelf, which enables customers to cost-effectively deploy fiber-to-the-home in any market or hub deployment. And we continue lab trials of our new Entra vCMTS for virtualized cable modem termination system with our lead Tier 1 customer, while securing additional customer engagements for this new Entra Cloud platform.

I want to emphasize that each one of these products represents a major new growth driver for Vecima. Combined, they form a powerful catalyst for growth that promises to propel Entra's results in fiscal 2025 and future years.

I should add that subsequent to the year-end, we also paved the way for access to the massive USD 42.5 billion Broadband Equity, Access and Deployment fund, or BEAD program, as we commence manufacturing of some of our fiber-to-the-home optical products with a partner in the U.S. This now enables us to meet Buy America provisions under the program, giving us access to huge new opportunities for our fiber access portfolio in Entra. So a very big year for Entra developments and deployments that carries on.

And it's clearly no surprise that Entra was our fastest-growing product family again in fiscal 2024, representing 73% of our consolidated sales. In total, our customer engagements for Entra climbed to 115 during the year, up from 107 at the start of the year. And [ 62 ] of those customers are now purchasing our Entra cable and fiber access products for use of the networks.

This includes deployments with 8 of the top 12 largest cable operators in North America, which provides a strong indicator of Vecima's continued leadership in the DAA landscape.

Looking now at highlights from our other business segments. Our Content Delivery and Storage segment generated sales of $48.2 million in fiscal '24. While that was [ 8% ] lower than the previous year, our results included a 10% increase in higher-margin services revenue, reflecting the growing list of customers for a deployed base of MediaScale IPTV network solutions. This in turn contributed to strong segment gross margin performance of 56.7% for the year, up from 53.1% in fiscal '23.

Our CDS results included initial revenue also from the successful launch of our new Dynamic Ad Insertion solution with 2 U.S. customers in Q4, with further customer additions being expected in fiscal 2025. That's an important new offering for Vecima and one that significantly supports our customers' ability to monetize their video assets.

On the innovation front, we released new versions of our MediaScale Origin and dynamic content products, which include additional Dynamic Ad Insertion features, along with other important advances in the offering aligned with customer objectives. And we launched a new next-generation recording system for Media Scale cloud DVR during the year.

We also made important strides in our standards-compliant development of the MediaScale Open CDN open casting platform, which we expect to evolve into a material growth driver for the business in the long term.

Once again, open casting allows operator to, for the first time, monetize the millions of OTT streaming video packets crossing their networks for free today, while at the same time, greatly increasing viewer quality of experience and reducing caching costs for the streamers.

Turning to Telematics, we continue to build on the segment's profitable recurring revenue contribution as we advance uptake of our successful movable asset tracking platform. We added 50 new asset tracking customers during the year and increased the total number of movable assets we monitor to over 68,000, an increase of 20,000 from last year. This, in turn, helped us grow sales in Telematics in the fourth quarter by approximately 22% year-over-year. And our Telematics segment achieved a strong gross margin of 67.5%.

So overall, the year of across-the-board achievements for Vecima, and we ended in a strong financial position with $84.9 million of working capital and a $30 million reduction in our short-term borrowings between Q3 and Q4. That was after continuing to invest in working capital, R&D and organic growth and returning cash to our investors in the form of our regular dividends of $0.22 per share across the year.

Vecima is moving forward in an excellent position to capitalize on the significant growth opportunities we see ahead. I'll tell you more about our outlook in just a few minutes. First, though, I'll turn the call over to Jud to provide our fourth quarter financial review. Jud?

[Judson Schmid, executive]

Thanks, Sumit, and thank you for the introduction earlier. I just wanted to offer my sincere thanks to Dale, who is not only my boss, but my friend, and I certainly wish him well in his retirement. I'm grateful for the opportunity to serve Vecima as its CFO in what will undoubtedly be an exciting future for the company. Thanks to Sumit, the Board and the rest of the management team for their vote of confidence.

Good morning to everyone who is here with us on the call today. I'll be reviewing our fourth quarter financial performance in more detail. And for the purpose of this call, I'll assume that everyone has seen our Q4 and year-end fiscal '24 news release, MD&A, which provides much more detail than what I'll be covering today, and financial statements posted on Vecima's website.

As Sumit indicated, we had a great quarter to end the fiscal year. Starting with consolidated sales, we achieved a strong close to the year with record fourth quarter revenue of $87.5 million, and that was up 16% year-over-year and 9% on a sequential quarterly basis.

Our Video Broadband Solutions segment accounted for $74.7 million of these sales, with revenues growing 31% year-over-year and 9% quarter-over-quarter to achieve a new all-time segment high.

As we predicted, Entra DAA sales were the key driver of this record performance. Supported by the Entra product rollouts that Sumit discussed earlier, our Q4 DAA sales grew 35% year-over-year and 13% quarter-over-quarter to a new quarterly high of $68.7 million. VBS segment sales also included a $5.9 million contribution from our Commercial Video products.

In our Content Delivery and Storage segment, we continue to experience quarterly revenue fluctuations with Q4 sales of $11.1 million, decreasing from the record quarter we achieved in Q4 of last year, but increasing 8% as compared to Q3 of this year.

Each customer's purchasing cycle for CDS products are different. This results in the lumpiness in quarter-to-quarter CDS revenues that we see. I'm pleased to note, though, that our CDS segment continue to benefit from higher-margin services revenues. Services revenues were up 10% year-over-year.

Turning to Telematics, this segment turned in another growth quarter with sales of $1.8 million, increasing 22% year-over-year and 4% quarter-over-quarter as we continue to achieve gains with our movable asset solution strategies.

Turning to fourth quarter operating expenses, the notable changes year-over-year were as follows: R&D expenses increased by $1.9 million to $11 million. This primarily reflects a targeted decrease in salary and wage costs at the beginning of fiscal '24 and higher capitalized development costs as we continue to invest in future product development.

Sales and marketing expenses for the fourth quarter were $700,000 higher at $8.5 million, mostly due to higher salaries and wages as well as additional expenses aimed at supporting future sales such as trade show participation.

Fourth quarter G&A expenses increased by $600,000 to $8.5 million. This reflects higher staffing costs as well as expenses aimed at supporting future growth within the organization.

Other expenses decreased by $1.4 million to $200,000, reflecting a $2.4 million gain on the sale of our office property in Victoria, partially offset by advisory fees for our failed acquisition of Casa Systems and the settlement of third-party support contracts, both nonrecurring.

In total, our fourth quarter OpEx was lower at $28.5 million, a decrease of $4.2 million year-over-year. As I just noted, I encourage each of you to read our MD&A for more details in this area.

Also, as noted in our past calls, reported R&D expense in a period is typically different than the actual R&D expenditure. That's because certain R&D expenditures are deferred until product commercialization. Adjusting for these deferrals, amortization of deferred development costs and investment tax credits, our actual cash R&D investment increased to $15.6 million or 18% of revenues in the fourth quarter from $15.3 million or 20% of revenues in Q4 of last year.

Looking at our bottom line results, fourth quarter operating income was up 125% year-over-year to $12.2 million. This primarily reflects the higher VBS sales, partially offset by an overall lower gross margin percentage of 46.5% as compared to 50.5% in the same period last year. The change in gross margin percentage was largely driven by a different product mix in the VBS segment as well as a lower percentage of high-margin CDS sales in our overall revenue mix.

We recorded a foreign exchange loss of $2 million in the fourth quarter, which compares to a foreign exchange gain of $1.3 million in the same period last year. A weakening Canadian dollar negatively impacted the translation of monetary liability, resulting in this FX loss. As a result, I'm pleased to report we achieved Q4 net income of $8.3 million or $0.34 a share, which was up sharply from $5.1 million or $0.21 per share in the same period of fiscal '23.

Our record revenues, together with a tighter control of operating expenses and despite the foreign exchange loss, helped us increase adjusted EBITDA to $16 million in Q4. That was 5.8% higher than in the same period last year.

Turning now to the balance sheet. We ended the fourth quarter with $2.1 million in cash as compared to $2.3 million in the same period last year. Working capital of $84.9 million increased slightly from $83.7 million in Q4 of fiscal '23 and $82.1 million at the end of last quarter.

While working capital has remained relatively consistent over the last several quarters, the components of working capital can be subject to significant swings from quarter-to-quarter. Our product shipments can be lumpy, reflecting 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 from -- by operations for the fourth quarter increased to $36.1 million from $4.6 million during the same period last year. As a result of this $31.5 million increase in operating cash flows, we were able to pay down our revolving line of credit by $30 million in the fourth quarter, which had peaked at $81.7 million at the end of the third quarter.

On a final note, the Board of Directors approved a quarterly dividend of $0.055 per common share payable on November 4, 2024 to shareholders of record as at October 11, 2024. It's important to note that this dividend will be designated as an eligible dividend for Canadian income tax purposes.

So just to summarize, we had an excellent fourth quarter with robust year-over-year sales growth and tight control of operating expenses, helping out to close out the year with a strong bottom line performance.

Now back to Sumit.

[Sumit Kumar, executive]

Thank you, Jud. Looking ahead, we see our revenue momentum continuing to build in fiscal 2025 as we leverage our world-leading portfolio of DAA and IPTV solutions. On the DAA side, multiple Tier 1 MSOs are now underway, with major network rollout supported by Vecima's next-gen cable and fiber access solutions, with more set to follow.

In our Video and Broadband Solutions segment, our new products are acting as important growth drivers in this environment. We anticipate near term that our contributions from our ERM3 Remote PHY devices and EN9000 Generic Access Platforms will position us for a solid start to the growth year.

The EXS1610 All-PON Shelf, in addition to another remote OLT variant we're introducing this year, are also expected to build on this momentum as the year progresses. And with our U.S. manufacturing now in place for the applicable parts of our fiber access portfolio, we're positioned to access opportunities related to the USD 42.5 billion BEAD broadband infrastructure funding program in calendar '25.

Longer term, our natural entry into the vCMTS market provides another important growth opportunity for Vecima. As these various rollouts begin to build on one another and as more MSOs worldwide start their own network upgrades, we see our full-year Entra revenue momentum continuing in fiscal '25, particularly in the second half.

Turning to our Content Delivery and Storage segment, we anticipate further expansion of demand for our IPTV solutions from existing and new customers in the year ahead. The rollout of our new Dynamic Ad Insertion and open caching products with more customers should also contribute to strong performance from our [ CDS ] segment.

Over the longer term, we continue to see even higher growth potential as the many facets of IPTV we empower gain further momentum and as our newer products become bigger contributors to our results and growth.

Finally, we're anticipating sustained profitable growth in our Telematics segment as demand for our asset tracking services grow and as we continue to build on our [ free ] tracking subscriptions. Overall, on a consolidated basis, we're anticipating another strong year of growing annual revenues in fiscal 2025.

Based on our product rollout road map, I want to note that we're anticipating gross margin near to or in the lower end of our target range of 45% to 49% for the year. That reflects our expectation of a significant volume of EN9000 platform node sales in our product mix over the coming quarters.

Stand-alone cable access nodes like the EN9000 typically carry a lower margin profile, with margins from the overall platform becoming more accretive over time as our higher-margin software-driven access modules are populated within that platform. In the first half of fiscal '25, we expect a higher proportion in the product mix from EN9000 as a lead customer matches them with the ERM3 Remote PHY modules we've been shipping through fiscal 2024.

Overall, we're highly confident in the ongoing expansion of the business in fiscal 2025. As the industry accelerates its move to DAA and IPTV, we have multiple new growth engines in place to help us leverage many opportunities to drive our momentum.

Our market position remains very strong with exceptional products, broad and growing customer relationships and our investment in continuous technology innovation secures our place at the forefront of our industry. We're genuinely excited about the opportunities we see ahead across our operations, and we look forward to continuing to reward investors' confidence in us in fiscal 2025.

That concludes our formal comments for today. We'd now be happy to take questions. Operator?

[Operator]

[Operator Instructions] Our first question is from Steven Li with Raymond James.

[Steven Li, analyst]

Thank you guys. Sumit, on your vCMTS, I got a couple of questions. Can you give us an update on how your trials with the Tier 1 is going? When does it move to field? And when is your first [ phase ] of revenues?

[Sumit Kumar, executive]

Steven. So as I mentioned in our prepared remarks, we're making solid progress on our vCMTS lab trials with that lead Tier 1 customer. And that's been happening really for some time and carrying on through calendar '24.

I don't want to get perfectly specific on when we're transiting into field trial with that customer. But suffice it to say, every Tier 1 operator has a program that involves lab trials, friendly field trials and then market field trials. And we anticipate we're in good stead to follow that cadence with that Tier 1 operator through fiscal '25.

And as far as revenue contribution, I think that we have our sights set on potentially having contribution in fiscal '25, but it's a very big-picture move for us in terms of accessing that TAM in vCMTS segment of the market. I've said before that our IP is our software that we instantiated in the beginning in the MACPHY node and very, very migratable to a virtualized architecture.

And that's all coming to bear at that engagement we have with the Tier 1 operator, who has been a core customer of ours on the Remote PHY nodes in the past as well.

[Steven Li, analyst]

Got it. And then, Sumit, secondly, so aside from that Tier 1 customer, how many other operators you have trialing your vCMTS? Can you talk a little bit about that?

[Sumit Kumar, executive]

Yes. It's a little bit early for me to put out some specific metrics on that, but again, suffice to say, the broadening growth in those engagements with other customers for vCMTS, Vecima being a market leader in DAA, as we've said, it's clear that the market is looking for the solution from us. We're building it, moving it forward with the Tier 1.

That's the playbook we tend to follow because we understand that a lead Tier 1's definition of the requirements are very strong as it relates to the rest of the market. So we do have a broadening base of engagements, and we'll provide updates as we can.

[Operator]

[Operator Instructions] The next question comes from Jesse Pytlak from Cormark Securities.

[Jesse Pytlak, analyst]

Just with respect to the BEAD program, could you maybe share what you're hearing from some of your customers with respect to the timing on when some of the funding for these projects could be released?

[Sumit Kumar, executive]

Yes. No, I mentioned the BEAD program we see is working, it's way forward in the process. As we understand it, multiple of the states have been -- received their grants from the federal government in the U.S.. And they're progressing towards defining their projects and selecting the sub grantees, which in this case, are the broadband service providers and our customers. So that's all working through now.

As you can see, we've staged our manufacturing got complying with the U.S. build requirements. We announced that a couple of weeks ago. So we're well prepared with our fiber portfolio from when those official programs transition to [ awards ]. I think our customers are working forward. And I think you'll hear from the market in general, the industry in general that we're expecting calendar '25 to be the year that BEAD starts to roll out.

It's important to also note that that's superimposed and in parallel with the RDOF program, that $20 billion rural broadband program that's been running for about 2, 3 years now. So both of these are going to happen in parallel. So there's many, many millions of new fiber-to-the-home passings that are going to be occurring in the U.S. over the next several years.

So it's a long time constant, lot of money, a lot of planning to be done there. So we're seeing good signs that calendar 2025 is going to be a great year for BEAD.

[Jesse Pytlak, analyst]

Okay. That's helpful. And I guess, [ BEAD ], in terms of how you're thinking about 2025 revenue momentum for the [ DAA ] product family? Is this partially contingent upon that BEAD money opening up? And I guess my question is more so if BEAD gets kind of pushed out again just because that seems to be kind of what happened in 2024, would that change how you're thinking how fiscal '25 shapes up for you?

[Sumit Kumar, executive]

As we always do our planning, obviously, looks at multiple layers. I mentioned multiple growth engines for us in fiscal '25. We, of course, have attributed on some of the pipeline to be in the next fiscal year in the second half, but that's not to say that if things delay that -- other things will pick up that component. So obviously, we build a pipeline that is in excess of our plan for the fiscal year. And [ BEAD ] is a component, RDOF is a component in and of itself.

Obviously, the cable access network upgrades that are happening to allow operators to get to 10-gig services with cable passings, which are tremendously more cost-effective in fiber, in areas where they're not funded; that's a big part of our plan for fiscal '25 as well. And there's some international fiber-to-the-home deployments as well. So I think that we're accounting for BEAD, but we're not necessarily dependent on it.

[Jesse Pytlak, analyst]

Got it. That's helpful. Maybe switching topics a little bit. In the past, you had spoken at targeting 25% market share in the cable and fiber access category that you're in. Thinking about some of the competitive disruption that's happened in the industry, has this changed your thinking at all on your kind of targeting 25%? And any idea where you might be market share-wise today?

[Sumit Kumar, executive]

Yes. So I think with the consolidation that happened, we mentioned what the Casa acquisition -- play out in -- that occurred, and there's one less vendor in the space to an extent. So you can generally think there's 3 vendors that are buying for all the market share.

We maintain the view that the 25% is a solid target for us, accounting for all of the cable and fiber access. And in fact, I've said before that we've had this worldwide leading market share in the fiber-of-the-home [ remote OLTs ] for several years in a row. Same thing for remote MACPHY and cable access.

And I've also communicated that as our customers wind up -- ramp up their programs in the sequence of the overall industry, our share in Remote PHY would continue to increase. And we have seen that in the last 6 months. Our market share is leading in terms of Remote PHY for the first 6 months of calendar '24 that have been reported so far by the market research.

So overall, everything carries on the same way, one less competitor in the space and provides, if anything, a tailwind for our views on our overall market share target.

[Jesse Pytlak, analyst]

All right. Appreciate that. And then maybe one final question, just on the IPTV side. What do you think it's going to take for open caching to restart gaining some momentum? I think the benefits seem fairly clear, but it doesn't seem like operators and costumers are really prioritizing investment in this area at this point. And what's it going to take to change that?

[Sumit Kumar, executive]

Yes. I think the streamers have had some challenges. I think, at a consumer level, we hear a lot about that in terms of the -- they had a lot of momentum on getting [ eyeballs ] onto their platforms, but the costs have become factor for them. .

So it's taking that -- I think it's just that sequence of time where their focus was on growth, heavily focused on growth for the last several years, and they were getting that growth. But they are changing their focus to the cost out of the equation now because the ARPUs are -- and how much they have to [ bill ] out are going up. You've seen some advertising come into the picture as well.

So cost is becoming important for them. What's very important and has always been important for them is the quality of experience. And when you use open caching, you put these Edge caches much deeper into the ISP network than one layer up at the peering point. That dramatically improves the quality of experience for subscribers, which is important for their market share.

So I think what we're seeing is that it's a very clear value proposition to both the broadband service provider, our customers and the streamers overall, both on the quality and the reduction of the cost move on traffic for both, for the streamer and monetizing that traffic for the first time for the operator.

So we view it as a when, not if scenario. And we anticipate that this is going to gain momentum for us and -- going forward. And it will -- we're in business development, it will continue to take time.

[Operator]

[Operator Instructions] 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.