Vecima Networks Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 5 speakers on the call.

Operator

Hello. This is the Chorus Call conference operator. Welcome to the Bessemer Network's 2nd Quarter Fiscal 20 24 Earnings Conference Call and Webcast. As a reminder, all participants are in listen only mode who wish to join the question Presenting today on behalf of Vesma Networks are Sumit Kumar, President and CEO and Dale Booth, Chief Financial Officer. Today's call will begin with executive commentary on Vesma's financial and operational performance for the Q2 fiscal 2024 results.

Operator

Lastly, the call will finish with a question and answer period for analysts and institutional investors. The press release announcing the company's Q2 fiscal 2024 results as well as detailed supplemental information are posted on Vessma's network at www.vesma.com under the Investor Relations heading. The highlights provided in this should be understood in conjunction with the company's unaudited interim condensed consolidated financial statements and accompanying notes for the 3 6 months ended December 31, 2023, 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.

Operator

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. 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 Vesma's operations and industry and customer demand that may have a material impact on or constitute risk factors in respect to Bessemer's future financial performance as set forth under the heading Risk Factors 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.

Operator

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. Vessma 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.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning and welcome everyone. Thank you for joining us. We achieved very strong operating performance again in the second quarter as we continue to successfully navigate anticipated transition in DAA deliveries, while preparing for the next wave of DAA growth. I'll start today with an overview of our 2nd quarter achievements.

Speaker 1

Dale will follow with more details on our financial performance and then I'll return to talk about our outlook going forward. Following several consecutive quarters of exceptional revenue growth and a tripling of sales over just 3 years, we anticipated that the first half of fiscal twenty twenty four will be a short transition period for our Distributed Access Architecture or DAA business. Our customers were busy catching up and preparing to ramp project rollouts that were previously delayed by various project requirements, as we've talked about on earlier calls. Factors such as building labor capacity, permitting, utility make ready and many other project prerequisites that are very typical of large scale network build outs, along with supply of materials outside of VESMA's product lines. As a result, customers temporarily shifted from building up their product pipelines to increasing their rollouts and deployment activity using inventories we secured for them during the previous year's supply chain challenges.

Speaker 1

Now at the midpoint in our 2024 fiscal year, we believe this transition is approaching its conclusion, and I'm proud to say we've managed through it very effectively. Our 2nd quarter results included total sales of $62,000,000 which are in line with our expectations, and we paired these sales with a strong gross margin percentage of 47.8%, while we also tightly managed our operations. That in turn helped us achieve 2nd quarter adjusted EBITDA of 12,500,000 or over 20 percent of sales and earnings of $0.15 per share, more than doubling quarter over quarter. In the Video and Broadband Solutions segment, our 2nd quarter sales were up over 10% quarter over quarter as sales began to ramp. Specifically, 2nd quarter VBS sales were up 11% compared to Q1.

Speaker 1

And moreover, Enter DAA sales, which represent the lion's share VBS segment sales, increased 13% quarter over quarter. This is just an early indication of the continuing momentum we see ahead for Enter DAA, and I want to comment today on some of the growth drivers that are starting to converge. The first is our new EIRM3 Remote PHY device, which we launched with Charter during the Q2. The EIRM3 enables operators to easily upgrade their legacy hybrid fiber coax nodes to DAA, reducing time and cost while dramatically increasing broadband capacity. It's expected to be a key component of Charter's nationwide DAA rollout.

Speaker 1

Volume launch got underway in December, meaning we haven't yet seen a full quarter's worth of contribution from the program within our Q2 results. We expect this solution to be used for substantial portion of Charter's footprint wide cable access network upgrade to DAA. And as such, it represents a major multiyear revenue opportunity for Bessemer, and we expect it will start to provide more meaningful contribution to our results in the second half of the fiscal year. The second quarter also brought the launch of our new DOCSIS 4.0 ready GAAP or generic access platform node. This is the culmination of ESMA's EN9000 GAAP platform, which we first demonstrated at our Cable Lab Showcase in 2022.

Speaker 1

It's now ready to provide customers with a future proof path to 10 gs, protecting today's network investments by ensuring operators can easily transition to future technologies, including DOCSIS 4.0 cable access and 10 gigabytes Remote OLTE Fiber TO the Home applications. In October, we announced full availability of the GAAP node, and just a few weeks ago, our lead Tier 1 customer certified it for use on their network. We believe this marks the beginning of a long and exciting ramp up for this powerful and future ready new DAA solution. Of course, we've also been talking in recent quarters about the huge U. S.

Speaker 1

Federal government push to get broadband access to underserved rural areas. Known as the BEED program, this $42,500,000,000 program is the largest injection of federal funding into broadband deployment in U. S. History. Funding grants from the program are now starting to develop and will be supporting both new and incremental major capital spending projects for many of our customers.

Speaker 1

We expect our Enter Fiber Access products will be an integral part of their solution as they bring high speed connectivity to underserved areas of the U. S. Already today, our renter or motor LTs are heavily utilized by operators to significantly expand their footprints under the Rural Digital Opportunity Fund or RDOF program, which will carry on in parallel with BEAT. The BEAT program is over double the size of the RDOF program. Keep in mind that these are just 3 of the major near term growth pathways that are now converging for Bessemer.

Speaker 1

At the end of Q2, we had 184 unique program engagements for ENTRE, cable and fiber access across 110 operators globally. As more customers' various DAA rollouts commence, they're adding to the wave of demand that's now building for our Enter Technologies and Solutions. The overall scope of the opportunity is immense. And as we move into the second half of fiscal 'twenty four, we expect it to start translating into strong revenue momentum for our VBS segment. Turning now to our Content Delivery and Storage segment.

Speaker 1

Q2 sales of $11,300,000 were lower than we anticipated. As you know, CDS quarterly sales are prone to lumpiness due to the typically large size of orders that are tied to IPTV project and capacity increased timings. That means a shift in customer timing can affect segment results as was the case in Q2. But some of the noteworthy highlights of the quarter included a new engagement with Blue Ridge Communications to support its video expansion as well as continue to expand to a number of other customers that are growing their footprints with our IPTV platforms. We also released new versions of our media skill origin and dynamic content products during the quarter.

Speaker 1

And another key achievement was the continued growth of our CDS services revenues, which are reflective of the growing base of media scale IPTV platforms we now have out in the market. This in turn helped the CDS segment achieve a strong Q2 margin of 54.5 percent despite the lower sales. Turning to telematics, the segment turned to another good quarter as we increased sales by 7% year over year. That growth reflects the addition of 10 new customers for our neuro asset tracking platform in the quarter, which in turn increased the number of movable assets we now monitor to over 59,000 units. Telematics also continues to be a highly profitable part of our business with the segment achieving strong EBITDA margins on a recurring SaaS business.

Speaker 1

So overall, it was a very solid quarter for Bessemer again. And all across our operations, we continue to focus on the growth ahead, while tightly managing the business and operating costs to achieve greater efficiency. At the same time, we continue to broaden our best in class technologies with robust R and D investment, thus further advancing our leadership in preparation for the major opportunities we see ahead. I'll tell you more about our outlook for the business in just a few minutes. But first, I'll pass the call over to Dale to provide more detail on our Q2 results.

Speaker 1

Dale?

Speaker 2

Thank you, Sumit, and thank you all for joining us today. For the purposes of this call, we assume that everyone has seen our Q2 fiscal 2024 news release, MD and A and financial statements posted on Bessemer's website. Starting with consolidated sales, we generated 2nd quarter revenue of $62,000,000 which was within expectations, but down 19% year over year. The Video and Broadband Solutions segment accounted for $49,100,000 of these sales, which was 21% lower than in Q2 of last year. This primarily reflects the DAA transition Sumit referenced, with Entra sales also decreasing 21% year over year.

Speaker 2

As Sumit noted, on a quarter over quarter basis, Entra sales were up 13%, providing just a hint of the quarterly revenue momentum we're anticipating. Commercial video product sales, which are included in VBS results, were stable quarter over quarter at $5,300,000 but down about $1,200,000 from the same period last year. This 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 the Entra family sales. In our Content Delivery and Storage segment, we saw significant quarterly fluctuation with sales of $11,300,000 down 9% year over year and 28% quarter over quarter. This mostly reflects timing of orders and we notice always the quarterly sales variances are typical of this segment.

Speaker 2

One notable achievement this quarter was seeing service sales surpass product sales for the first time, which reflects the strong and growing base of deployed media scale platforms out there in the market. It was another strong quarter for the Telematics segment with sales of $1,600,000 increasing 7% from the $1,500,000 in Q2 of last year. Gross margin for the company as a whole was 47.8%, which was at the higher end of our target range and up both year over year and sequentially. Turning to 2nd quarter operating expenses, the notable changes year over year were as follows. R and D expenses increased by $1,300,000 year over year to $11,600,000 This primarily reflects increased amortization of deferred development costs, prototyping materials and software and licensing costs, offset by higher capitalized development costs quarter over quarter.

Speaker 2

Sales and marketing expenses for the 2nd quarter were stable year over year at $6,600,000 2nd quarter G and A expenses decreased to $6,400,000 an improvement of $1,100,000 This reflects the targeted lower staffing costs we implemented in Q4 fiscal 2023 and lower ERP program implementation costs year over year. Other expenses remained flat at $100,000 dollars In total, we reduced 2nd quarter OpEx to $24,900,000 a decrease of 1% year over year and 5% quarter over quarter. Costs are expected to increase in the second half of fiscal twenty twenty four to support the sales growth anticipated. In the Video and Broadband Solutions segment, operating expenses for the quarter were down $500,000 year over year, reflecting a combination of lower G and A expense, partially offset by higher R and D expense. Content delivery and storage operating expenses were $100,000 lower at $7,400,000 And in our Telematics segment, operating expenses were slightly higher at $1,000,000 reflecting an increase in R and D expense.

Speaker 2

I note that reported R and D expense in the 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 increased to 15,200,000 or 25 percent of sales in the 2nd quarter from $13,200,000 or 17% of sales in Q2 last year as we continue to invest in our next generation products. Looking at our bottom line results, we reported the 2nd quarter operating income of $4,700,000 as compared to $10,700,000 in the same period last year. This primarily reflects the transition period for our DAA business, partially offset by lower expedite costs as supply chain challenges eased.

Speaker 2

We generated 2nd quarter adjusted EBITDA of $12,500,000 as compared to $15,800,000 last year, reflecting lower sales, partially offset by higher gross margins. On a quarter over quarter basis, adjusted EBITDA increased by $4,300,000 or 54 percent from the $8,100,000 in Q1. Foreign exchange gain in the 2nd quarter increased to $1,800,000 from a foreign exchange loss of $100,000 in the prior year period. This reflects the positive impact of a stronger U. S.

Speaker 2

Dollar on our results. Net income from continuing operations for the quarter was $3,600,000 or $0.15 per share as compared to $8,100,000 or 0 point 3 5 dollars per share for the same period of fiscal 2023. Turning to the balance sheet. We ended the 2nd quarter with 2.6 $1,000,000 in cash as compared to $2,300,000 in the same period last year. Working capital of $80,400,000 at the end of Q2 was lower than the $83,700,000 recorded in Q4 fiscal 2023, but on par with Q1 of fiscal 'twenty four.

Speaker 2

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. Lastly, cash flow used in operations for the Q2 was $13,200,000 as compared to cash flow used in operations of $12,200,000 during the same period last year. The $1,000,000 increase reflects a $13,000,000 decrease in operating cash flow, partially offset by a $12,000,000 increase in cash flow from non cash working capital.

Speaker 2

On a final note, the Board of Directors approved a quarterly dividend of $0.055 per common share payable on March 18, 2024 to shareholders of record as at February 23, 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, another solid quarter as we continue to maintain tight control of our operations. Now back to Sumit.

Speaker 1

Thank you, Dale. As we look ahead to the balance of fiscal 2024, Bessemer is on cusp of a major new phase of growth and development for the business. As I mentioned earlier, a number of growth pathways are converging just as operators worldwide are launching upgrades to their broadband and IPTV networks. We expect this to have a significant and positive impact on our results in the second half. In our Video and Broadband Solutions segment, we anticipate a major uptick in sales starting in Q3.

Speaker 1

We expect our quarterly run rate to reach new highs by year end, with momentum expected to build into fiscal 2025 and beyond. In our Content Delivery and Storage segment, overall demand for our IPTV and Open Caching solutions remain strong. However, the Q2 shift in project timing has led to an adjustment in our expectations for the year. Now expect the CDS segment to achieve fiscal 'twenty four sales results similar to the strong performance we achieved in fiscal 'twenty three. Longer term, we continue to see robust future growth potential as IPTV and OTT streaming services markets continue to expand.

Speaker 1

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. On a consolidated basis, we expect our fiscal 2024 revenues will be in line with the all time record results we achieved in fiscal 2023, despite the slower first half this year. And in summary, we're now we're more than excited about Vessimo's prospects, both in the near and the longer term. We're on the cusp again of the next major wave of growth.

Speaker 1

And as we move into the second half, we're resoundingly executing on multiple multiyear opportunities. Between a large and growing order backlog, one of the world's most comprehensive portfolios of next gen DAA and IPTV technologies covering both fiber and cable access, strong partnerships with some of the world's largest Tier 1 operators and a solid financial position, we're uniquely positioned to capture this next wave. We look forward to reporting on our achievements in the coming quarters. And that concludes our formal comments. We'd now be happy to take questions.

Speaker 1

Operator?

Operator

Thank you. We will now begin the question and answer session for analysts and institutional investors. Our first question comes from Jesse Pytlak from Cormark Securities. Please go ahead.

Speaker 3

Hey, good afternoon. In the release, you mentioned that you're seeing Entra order sizes increasing. Can you maybe just give a sense of the magnitude of the increases?

Speaker 1

Yes. Jesse, I think that we've seen that, as I mentioned, this first half kind of inventory work down factor has been underway for our customers while they ramp in the field. We've always had pretty good visibility from our customers. I think I've mentioned that during the supply chain constraints, as you know, over the last several years, our customers have been really great about working with us to give us long term visibility. And that's giving us a good sight picture for what we expect in the second half.

Speaker 1

In terms of magnitude, I think what I've said is we're going to start to move towards new highs and sales. In fiscal 'twenty three, we had some of our highest growth in Entra, came out with about $222,000,000 in sales. So as we move into the second half, you've got the first half Entra sales reported, but we're expecting to get by year's end on a run rate that represents a significant ramp for Entra compared to say Q4 of 'twenty 3, setting up to pursue in the range of up to 60% higher quarterly run rates year over year Q4 to Q4. So we are seeing a significant ramp and I hope that gives you a sense of the magnitude.

Speaker 3

Yes, that's helpful. Thank you. Maybe just kind of moving over to bead funding. Now that it's kind of getting closer to being allocated, like is that changing how maybe some of the cable operators are approaching their deployment planning? Are you seeing them better positioned to now make decisions?

Speaker 3

Are you seeing them making any changes, maybe some decisions they've already made?

Speaker 1

I think that with respect to if you look at the conjunction of RDOF and BEAT, we've seen that some of the Tier 1 cable operators in the U. S. Have been most addressable in terms of their access to those funding programs. And they've been very successful or up to this point when you consider where the bead census blocks are targeted for underserved rural areas. The Tier 1 cable operators that we work with have very good addressability to that funding program.

Speaker 1

So the way that we think about it is they're accelerating in their RDOF deployments as we speak. You can see some of the material from publicly available from some of the Tier 1s that we work with and that are focused on the RDOF program and they've ramped in calendar 'twenty three. They see a continuing ramp in calendar 'twenty four. For RDOF itself and that carries on through calendar 'twenty six and then B, as we get through calendar 'twenty four and these programs get through their final solidification on granting of the awards to the ISPs from the states, that layers over top and it's double the size of an overall program. So they're doing really well in terms of IRR on RDOF.

Speaker 1

So it's very much the picture that's being represented to us is that they get to lean into the success that they've had with RDOF and Layer and B.

Speaker 3

That's helpful. And then maybe just one last one for me. There's been some kind of commentary floating around the industry that some cable operators are maybe more seriously considering using extended or enhanced DOCSIS approaches instead of moving ahead with DA and DOCSIS 4.0 at this time. Just wondering if you're seeing anything like that from where you sit?

Speaker 1

Yes. I think we're still in this phase where we're early in the DOCSIS 3.1 cycle. That itself gets us to gigabit upstream, multi gigabit downstream and the product availability and readiness of the operators in terms of their qualification is a go for DOCSIS 3.1DA. DOCSIS 4.0 gives them that next layer in the future and extended spectrum is a component of DOCSIS 4.0 so they can get to a more symmetrical 10 gs type service. I think operators are saying they can leverage this cable access network footprint they have with very, very efficient capital spending to get to gigabit speeds comparable or very competitive with fiber to the home.

Speaker 1

And then they can, of course, focus their greenfield new footprint build on fiber to the home itself. So I think with respect to extended spectrum and 4.0, that's part of the future. It's 1 and the same thing in large part and what we're seeing is that DOCSIS 3.1 is what they're going to be focused on for the next period of time and DOCSIS 4.0 is available to them to continue ramping the speeds on and leveraging that CapEx efficiency on the cable access network.

Speaker 3

Okay. Thanks for that. That's informative. I'll pass the line.

Speaker 1

Thanks, Jesse. Thanks, Jesse.

Operator

Our next question comes from Ryan Koonce of Needham and Co. Please go ahead.

Speaker 4

Thanks for the question. I saw your announcement on the GAAP node at a Tier 1. Can you tell us a little bit about that and kind of how that's customer there is thinking about that platform? Thanks.

Speaker 1

Sure. Thanks, Ryan. I appreciate the question. I think we've talked a little bit about the emergence of the generic GAAP node. It's the generic access platform.

Speaker 1

And what that platform is intended to do, I think as you know, the cable operators have evolved their networks over decades, starting from analog video to the first broadband access, now moving to gigabit broadband, and then leveraging the DOCSIS 3.1 DAA followed by DOCSIS 4.0. But they've also grown through consolidation and acquisitions. So you found yourself with some of the world's leading Tier 1 operators in the space having accumulated a lot of fragmentation in their hardware in the field and we have all these older analog nodes, in some cases up to dozens and dozens of varieties of node enclosures from that history, that long history to manage and that becomes problematic in terms of fragmentation. So as the industry is moving towards DAA and generally, us along with a key lead Tier 1 operator have standardized a future forward platform that is modular in nature that can move away from that fragmentation of dozens and dozens of legacy analog nodes and allow us to have a gap platform that lives for decades to come. It has things like power supplies with multiple voltage levels, a CAN bus, which is an automotive standard for command and control between modules, backplanes, lots of thermal efficiency.

Speaker 1

Thermals are very important in terms of a node enclosure for cooling, these active electronics that we're getting. And it gives them really that future proof platform and more of a single SKU environment in terms of how they train their work first too and operate the network. And it's migratable all the way from cable access to even putting fiber to the home modules in that platform, putting edge compute in that platform. So I think the Tier 1 that we're partnered up with here is planning to leverage it. We're the first to market and that represents a fantastic opportunity for us.

Speaker 4

Yes, sounds like so it's a bit of a premium for the kind of lifetime, lifecycle flexibility you get on that platform? Yes, I

Speaker 1

think a very modest premium, but it gives that kind of lifetime usability out of the platform. And I think when we think about DAA generally moving to a bespoke DAA node versus a GAAP DAA node is very similar in terms of their CapEx.

Speaker 4

Got it. And in terms of just a follow-up question on your comments around Charter and your product there, it's primarily the ERM3 that's a retrofit going in for Charter and that's initially for DOCSIS 31, if you could confirm? And also in terms of kind of your outlook for share in this big program, how do you think about that in the big picture over the next couple of years?

Speaker 1

Yes. So I think it is DOCSIS 3.1 to start, and that makes a lot of sense for what the target is of the program over the initial couple of years. I think there's some detail provided by the customer in that regard over what type of service they plan to unlock. And in terms of how we think about share, we are one of the awardees and so is another vendor. And we both have platforms in terms of the RPD modules that are expected to be used for significant portions of the network.

Speaker 1

And they tend to look at things perhaps in a market by market basis, and we expect it to be relatively even split is how we think of it. And I don't want to get into perfect detail about where we are versus the other vendor. But I think it's clear that both of us are involved and we expect a very nice program and scale rollout across the network.

Speaker 4

Great to hear. Sumit, thanks for that color and that's all I've got.

Speaker 1

Thank you. All right. Thanks, Ryan. Thanks, Ryan.

Operator

Once again, analysts 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.

Powered by Quartr

Key Takeaways

  • In Q2, Bessemer reported $62 million in revenue, a 47.8% gross margin, $12.5 million in adjusted EBITDA (over 20% of sales) and $0.15 EPS, despite a 19% year-over-year sales decline during the DAA transition.
  • Management said the transition in Distributed Access Architecture (DAA) deliveries is nearing completion as customers shift from inventory buildup to network rollouts, setting the stage for a major second-half growth ramp.
  • Bessemer launched the EIRM3 Remote PHY device with Charter for DOCSIS 3.1 upgrades and unveiled its DOCSIS 4.0-ready GAAP node, both expected to drive multiyear revenue as operators modernize networks.
  • Federal broadband programs (RDOF and the larger BEAD fund) are accelerating rural deployments, and Bessemer’s Entra Fiber Access products are positioned to capture significant share of this new funding.
  • For fiscal 2024, Bessemer expects a strong second half with VBS sales peaking by year-end, CDS segment matching last year’s results, and overall revenues in line with its record performance in fiscal 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
Vecima Networks Q2 2024
00:00 / 00:00