Vecima Networks Q1 2024 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 4 speakers on the call.

Operator

This is the Chorus Call conference operator. Welcome to the Bessemer Network's First Quarter Fiscal 20 24 Earnings Conference Call and Webcast. As a reminder, all participants are in a listen only mode. And the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

Operator

Presenting today on behalf of Bessemer Networks are Sumit Kumar, President and CEO and Dale Booth, Chief Financial Officer. Today's call will begin with executive commentary on Bessemer's financial and operational performance for the Q1 of fiscal 2024 results. Lastly, the call will finish with a question and answer period for analysts and institutional investors. A press release announcing the company's Q1 2024 results as well as detailed supplemental investor information are posted on Bessema's website at www atbesima.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, 20232022.

Operator

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, 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 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.

Operator

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-nineteen and the distinctive characteristics of Bessemer's operations and industry and customer demand that may have a material impact on or constitute risk factors in respect of Bessemer'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, all of 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. Bessema 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.

Operator

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

Speaker 1

Thank you. Good morning, and welcome, everyone. Thank you for joining us. We achieved solid performance and positive operating results in the Q1, even as we navigated an expected short term transition and entered DAA deliveries. I'll start today with some of our key financial and business highlights for the quarter.

Speaker 1

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 Q1 of fiscal 2024 were in line with our expectations That includes sales of $61,500,000 a gross margin percentage of 47%, adjusted EBITDA of $8,100,000 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 There 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 Bessemer'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 of $44,100,000 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.

Speaker 1

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 ERM3 next generation Remote PHY devices as part of their planned multiyear cable access network evolution.

Speaker 1

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 10 gs 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've also been preparing to launch our new generic access platform and other DAA forever nodes. The GAAP node, as one example, sets a new industry standard for unified access with a future proof modular platform that can span multiple generations of cable and or fiber access across a fully flexible and standards based evolution and migration pathway.

Speaker 1

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 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 For Entra Cable and Fiber Access across 108 customers, the overall scope of ESMA 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 will begin to layer as our fiscal year progresses. And together, we expect that to drive a new wave of interim momentum, which in turn we expect will have an increasingly positive impact of our results in 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 firsthand at the SCT Cable Tech Expo, which we attended a few weeks ago.

Speaker 1

Vessima's presence at the event highlighted and demonstrated not only our recent, but also our combined and accumulated innovations and the full suite of Entra Cable and Fiber Access Solutions and BDS Scale IPTV platforms. It would be hard to overstate the volume of interest that The following we had and 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 at DAA is happening. Investment is a recognized industry leader.

Speaker 1

Whether it's our dominant role in fiber and cable access products or our industry leading work helping the Tier 1s migrate to the 10 gs network, We're clearly a company that customers are looking to and relying on for the most important technology 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 $15,700,000 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 qualms at top based video. Subsequent to the quarter end, we also announced a new program with Blueridge Communications, which has engaged Bessemer 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 to strong margin performance, reflecting a strong mix that included Mediascale cash expansion.

Speaker 1

So a great start to the year for the CDS segment. Turning to telematics, our 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 in just one and a half years.

Speaker 1

Telematics also continues to be highly profitable as a part of our business with the segment achieving adjusted EBITDA 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 and 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.

Speaker 1

Dale?

Speaker 2

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen our Q1 fiscal 2024 news release, MD and A and financial statements posted on Bessemer's website. I will present the relevant numbers in discussions around overall results, market segments, operational expenses and the balance sheet. Starting with consolidated sales. For the 3 months ended September 30, 2020 3, we generated sales of $61,500,000 This was a decrease of 19% over the 75 point $5,000,000 in Q4 of fiscal 2023 and a 16% decrease from the $73,400,000 in Q1 last year.

Speaker 2

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, 1st quarter sales for fiscal 2024 were $44,100,000 This was down 28% from the $61,000,000 in Q1 last year and 23% lower than the $57,000,000 in sales last quarter. Next generation DAA products contributed 1st quarter Entra revenue of $38,800,000 down 27% from $53,000,000 in Q1 fiscal 2023 and down 23% from $50,700,000 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 twenty twenty four 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.

Speaker 2

Commercial video product sales were $5,300,000 for the current quarter, a decrease of 27% from the $7,300,000 in Q1 fiscal 2020 3 and 15% lower than the $6,300,000 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 15,700,000 Q1 fiscal 2024 from the $11,000,000 in the same period last year and 4% lower than the record $17,100,000 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 $9,900,000 of product sales and $5,800,000 in services revenue.

Speaker 2

As always, we note that quarterly sales variances are typical for the CDS segment. Turning to the Telematics segment. Sales in the Q1 were $1,600,000 This was 14% higher than the $1,400,000 generated in both Q1 and Q4 of fiscal 2023. Gross margin for the Q1 of fiscal 2024 was at 46.9 percent with a gross profit of $28,800,000 a decrease of 15% from the $33,700,000 in Q1 fiscal 'twenty three and 25% from last quarter's $38,100,000 reflecting lower consolidated sales, partially offset by a higher gross margin percentage. We target a gross margin percentage of 45% to 49%.

Speaker 2

Gross margin is now impacted by non cash warrant expense as warrants issued to a customer are recorded as sales incentives under IFRS accounting. Adding back the $600,000 in warrant expense in the 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 'twenty four was 18,600,000 31% lower than the $26,800,000 achieved in Q1 of fiscal 'twenty 3 and 33% lower than the $27,900,000 achieved in Q4. Gross profit margin of 42.1% for the first Quarter was lower compared to 43.9 percent in Q1 last year and 48.9% in Q4 fiscal 'twenty 3. The year over year decrease in gross profit reflects lower segment sales combined with the non cash warrant expense recorded in the current period.

Speaker 2

Gross profit in the Content Delivery and Storage segment for Q1 increased by 53 to $9,200,000 from the $6,000,000 in the same period last year, and CDS gross margin of 58.5 percent for the quarter was also generated in Q4 of fiscal 'twenty three. 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 $9,200,000 generated in Q4 fiscal 'twenty three, reflecting Stronger gross margin performance offset by lower quarter over quarter sales. In the Telematics Segment gross profit in the Q1 increased slightly to $1,100,000 with the gross margin of 64.9% From the $1,000,000 in gross profit and 66.1 percent gross margin in Q1 fiscal 'twenty 3 And the gross profit of $1,000,000 last quarter, but lower than the Q4 fiscal 'twenty three 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.

Speaker 2

Turning to Q1 operating expenses. The notable changes year over year were as follows. R and D expenses decreased 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.

Speaker 2

Sales and marketing expenses for the Q1 increased to $7,400,000 from 6.3 $1,000,000 in the same period last year. The year over year increase in sales and marketing expense primarily reflects an increase in non cash Inventory allowances, combined with higher staffing costs, partially offset by lower trade show expenses. G and A expenses increased to $8,000,000 in Q1 fiscal 'twenty four from $5,600,000 in Q1 fiscal 'twenty three. 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 $200,000 in Q1 fiscal 'twenty four compared to 0 in Q1 fiscal 2023.

Speaker 2

Total OpEx in Q1 fiscal 'twenty four increased to $26,100,000 from $22,700,000 during the same period last year and down from $32,700,000 in Q4 fiscal 'twenty three. The year over year increase primarily reflects the ramp up of growth related support costs over fiscal 'twenty two and 'twenty three, partially offset by strategic cost reduction initiatives implemented in the Q4 of fiscal 2023. Video and broadband solutions operating expenses for the current quarter increased to $18,300,000 from $15,300,000 in Q1 fiscal 'twenty three, but decreased from the $23,800,000 in Q4 fiscal 'twenty three. The $3,000,000 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 $7,000,000 in Q1 fiscal 'twenty four as compared to $6,600,000 in Q1 fiscal 'twenty three, but lower than the $8,000,000 in Q4 of fiscal 2023. The $400,000 year over year increase reflects higher expenditures on general and administrative costs to sports sales growth, partially offset by the shifting of sales and marketing expenses to be more in line with segment revenue generation.

Speaker 2

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 and D expense in a period is typically different than the actual expenditure. That's because certain R and D expenditures are deferred until product commercialization. Adjusting for deferrals, Amortization of deferred development costs and income tax credits. Actual R and D investment for the current quarter decreased to $13,400,000 or 22 percent of sales from $13,500,000 or 18% of sales in the same period last and down from the $15,300,000 or 20 percent of sales in Q4 fiscal 'twenty 3, representing the restructuring that occurred in June.

Speaker 2

The slight decrease year over year reflects cost Savings initiatives undertaken in the Q4 of fiscal 'twenty three, 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 $2,700,000 in Q1 as compared to $11,000,000 in Q1 of last year. The year over year decrease in operating income was primarily due to lower sales in the BBS segment, partially offset by higher sales and margin in the CDS segment. Adjusted EBITDA decreased to $8,100,000 this quarter from $17,200,000 in the prior year quarter and $15,100,000 last quarter. Foreign exchange loss was 0 600,000 in Q1 fiscal 2024 as compared to a foreign exchange gain of $1,300,000 in the prior year period.

Speaker 2

Net income from continuing operations for the quarter was $1,100,000 or 0 point 0 $7 per share from a net income of 9,500,000 or $0.41 per share in Q1 fiscal 'twenty three. Turning to the balance sheet. We ended the Q4 of fiscal 'twenty three with $2,300,000 in cash as compared to $12,900,000 in the same period last year. Working capital increased to $79,000,000 in the current quarter from $66,800,000 in Q1 last year, but decreased from the $83,700,000 in Q4 fiscal 'twenty 3. We note that working capital balances can also be subject to significant swings from quarter to quarter.

Speaker 2

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. Lastly, cash flow provided by operations for the Q1 increased to $8,400,000 as compared to cash flow used in operations of $7,200,000 during the same period last year. The $15,600,000 change reflects a $28,600,000 increase in cash flow from non cash working capital, partially offset by a $13,000,000 decrease in operating cash flow. On a final note, in terms of the quarterly dividend, the Board of Directors approved in May 23.

Speaker 2

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.

Speaker 1

Thank you, Dale. As we look ahead to the balance of the year, Bessemer is on the cusp of a major new phase of growth and Development. Around the globe, MSOs are planning 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.

Speaker 1

As a core broadband supplier for the global industry with unrivaled DAA and IPTV product portfolios and a very strong market position, Bessemo 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 growth. While the exact timing of these various rollouts will always be customer dependent 2nd half of fiscal twenty twenty four. In our Content Delivery and Storage segment, we expect growing demand for IPTV and Open Caching solutions will contribute to solid year over year growth in fiscal 'twenty four. On a full year basis, we're anticipating CDS sales gains in the low double digits.

Speaker 1

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. Continue to anticipate respectable full year consolidated sales growth for Vessma in fiscal 'twenty four, with notable gains in our run rate in the 3rd and 4th quarters. Longer term, our outlook is highly compelling. We're continuing to demonstrate the full deployment potential of our technologies as we for our customers' wide scale network transformations and we're repeatedly breaking new ground in ultra high speed connectivity.

Speaker 1

Our leadership position is growing and we remain highly confident in both our market position and Envestimo'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

Thank you. We will now begin the question and answer session for analysts and institutional investors. The first question comes from Jim Byrne of Acumen Capital. Please go ahead.

Speaker 3

Yes. Thanks, guys. Look, Sumit, I was just wondering 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?

Speaker 1

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 and immaterial in terms of timing. What they're doing, they're looking at as a total package 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.

Speaker 1

So when we think about it, again, reflects nothing out of the normal, Modest timing shifts and emphasis shifts between those two investment areas for them. They've got $55,000,000 passings. They're adding $1,500,000 plus passings on rural fiber to the home. So they'll trade off when they need to do Does this work on the cable access network or the Viber access network? In either case, that's all well aligned with our thoughts on the long term programs.

Speaker 3

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

Speaker 1

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 Q1 of the 8,100,000 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 This long term growth opportunity that remains the case based on our exiting run rate in fiscal 'twenty four.

Speaker 1

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

Speaker 3

it. Okay. It's perfect. And then maybe one for you, Dale. Just Big build in inventories in the quarter, I noticed.

Speaker 3

Just give us an idea of what the working capital might look like over the course of the fiscal year?

Speaker 2

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 buildup 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.

Speaker 3

Okay. That's perfect. Thanks, guys.

Speaker 1

Thanks, Jim.

Speaker 2

Thanks, Jim.

Operator

So our next question is from Jim Byrne of Acumen Capital. Please go ahead.

Speaker 3

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?

Speaker 1

Sure. No, I appreciate that, Jim. I think If you look at the Cable Access network historically, it's evolved for many migrations from analog to digital video to the 1st 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 in 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.

Speaker 1

And these old we always talk about these old analog nodes, Moving on to Distributed Access digital node, and that is a major transformation of the network. And in parallel with that, we see Moving to a more unified hardware ecosystem that's more modular, but the single line, some of these largest Tier 1 operators Have dozens and dozens of different variances of hardware in their network. So we build a modular platform. It's migratable. It's It's migratable, it's upgradable.

Speaker 1

We can put today, of course, thinking about putting DAA DOCSIS 3,140 modules in it for cable access. We can migrate 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. It gives them a future proof platform and takes them away from this fragmentation they've had in the network in the past. And In 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.

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Key Takeaways

  • Q1 fiscal 2024 results were in line with expectations with $61.5 million in sales, a 47% gross margin, $8.1 million adjusted EBITDA and $0.09 adjusted EPS despite a short-term DAA transition.
  • Video Broadband Solutions segment sales fell 28% year-over-year to $44.1 million as customers rebalanced inventories and faced deployment delays, yet engagements rose to 108, setting up a strong second-half ramp with major DAA rollouts for Charter and Orion Cable.
  • Content Delivery and Storage sales grew 43% to $15.7 million, driven by IPTV solution expansions and new wins like Blueridge Communications, yielding robust margins from a healthy product-service mix.
  • Telematics revenue increased 14% to $1.6 million with 14 new customers and over 57,000 monitored assets, maintaining high profitability in movable-asset tracking.
  • Looking ahead, the company expects a resurgence in DAA deployments in the second half of fiscal 2024, low-double-digit full-year CDS growth, continued telematics expansion and disciplined R&D and cost management to fuel multiyear broadband and IPTV opportunities.
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Earnings Conference Call
Vecima Networks Q1 2024
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