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spk02: Hello, and welcome to the CASA Systems first quarter 2023 earnings call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Dennis Daly, Investor Relations. Please go ahead.
spk01: Thank you, operator, and good afternoon, everyone. Casa Systems released results for the first quarter of fiscal year 2023 and in March 31st, 2023, this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the investor relations section of our website at investors.casa-systems.com. With me on today's call is Ed Durkin, our Chief Financial Officer and Interim CEO. This call is being webcast and will be archived on the investor relations section of our website. Before I turn the call over to Ed, I'd like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it. And as such, it does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call or in the earnings release are based upon information we believe as of today and undertake no obligation to update these statements as a result of new information or future events. In addition to US GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. During the call, we may use non-GAAP measures if we believe that it's useful to investors or believe it'll be helpful to investors to better understand our performance or business trends. And with that, I'd like to turn the call over to Ed. Ed?
spk04: Thank you, Dennis, and good afternoon, everyone. Thank you for joining us on our call today. We issued three press releases and filed an 8K this afternoon, including our first quarter 2023 financial results, which I'll cover in more detail momentarily. Since reporting on our fourth quarter results in mid-March, the entire team at Casa Systems has made great progress in streamlining our organization, executing on our 2023 business plan by delivering market-leading solutions to market, closing new sales deals, and positioning ourselves to improve future profitability. And I'm pleased with the considerable changes we have made. But before I speak to our financial performance in the quarter, I'm also very pleased to say that in one of our other press releases today, we announced the execution of our Strategic Term Loan B Transaction Support Agreement, TSA, with a majority of our lender group, which, when formally completed, will extend our debt maturity to December 2027, all as detailed in the 8K we filed on this TSA matter today as well. When the financing completed by PSA is finalized, we'll have a significantly extended maturity date of this facility from December 2023 to December 2027, which gives us the time and flexibility to continue with our efforts to significantly enhance shareholder value by executing on our previously announced cash and capital efficient growth plan and our plan to further aggressively delever. This is a significant milestone for CASA, and we believe the support of the large majority of the lenders for the TSA demonstrates their confidence in our operating plan and the resiliency of our business. As you can imagine in a comprehensive process like the one we just went through, there are third parties involved looking at all aspects of our business. I'm very pleased with the feedback, particularly on the competitive differentiation of our cloud. and cable product offerings and our ability to capitalize on the core market segments we are focused on. Our market leading product portfolios for cable access and cloud are complete with no major product portfolio gaps and with strong customer demand across all market segments. I would finally like to thank the whole CASA team and the talented teams at JPMorgan and Sidley Austin for all their hard work to allow us to announce this important TSA today. And I would finally like to thank our Term Loan B debt holders for their steadfast support and considerable efforts in getting this TSA agreement done. The other press release we issued this afternoon was a new virtual CCAP and RPD node customer win with Claro Columbia. This deal, which we originally thought would close in Q1 2023, but then was delayed for a few weeks, as we dealt with some untruths being circulated by some of our fact challenge competitors, was great validation of the capabilities of our virtual CCAP core and RPD node offerings, which we've invested heavily in over the past few years. And we hope to announce other like virtual CCAP core and RPD node customer wins in the very near future. This string of good news builds off the great momentum we had last month when we announced that our innovative technology DA2200 distributed access node, the only FPGA-based DOCSIS IV already remote-fied node in the industry, was successfully deployed with Tier 1 cable MSOs in North and South America. This solution has set industry benchmarks for performance and flexibility as our DA2200 distributed access nodes provides cable operators with a flexible foundation that enables a smooth, cost-effective, future transition to distributed cloud-native environments. Switching gears, in mid-April, we also announced that LGU+, a leading South Korean mobile network operator, is working with KASA and our partner E-Tech Systems to deploy our E-Node-B Gateway and Security Gateway solutions, which will enable LGU to simplify its network, improve, therefore, G-Service coverage and service quality, and more easily capitalize on their growing market opportunity. We're continuing to work with multiple operators like LGU Plus in the region, and we expect this deployment to be first of many engagements for CASA. Turning now to our strategic partnership with Verizon, we remain on track and have achieved all delivery milestones to date. Verizon's confidence in our offering is an important validation of our 5G core and MEX solution and our security gateway software solution as well. And it's good validation of our go-forward strategy and leadership position in cloud-native 5G core and mobile edge compute solutions. We expect increased gap revenues from our Verizon partnership in our second quarter and second half of 2023, given the progress we are making and the positive status of this very important and large partnership. And finally, before I go into the Q1 financial results, I would like to note that the search for a permanent CEO remains active and ongoing, and the board is interviewing candidates now for this role. We look forward to announcing more on this in the coming few months. Let's now move to our financial results for the first quarter. Revenue for the quarter came in at $45.3 million, which was down 30% from a year ago. While our revenue performance came in slightly below our expectations due to the slip timing of some cable orders, due to the uncertainty regarding our terminal B status, including Claro, which we have now closed, as well as timing of acceptance of a software delivery for one large cloud software contract, we believe we will see revenue contributions from both items in Q2 2023, and this was solely a timing matter and not any type of competitive loss. We continue to believe that revenue for the year will be within our guided range of $300 to $325 million and weighted toward the second half of the year, given the timing of backlog shipments, shipments of our new 4G, 5G, small cell radio offerings in the second half, later stage pipeline deals we expect to convert to revenue in 2H 2023, and revenue recognition related to deferred revenues now on our balance sheets. To provide investors with a clearer view of our performance, we have modified how we are disclosing revenue by three product lines, which have similar attributes. The revenue contribution by product offerings are easier to follow. Breaking down revenue across our three product lines, our Q1 cloud revenue, which consists of our 5G core and MEC software, our security gateway, software product in a virtual BNG routing software was $4.2 million, which was up 86% from $2.3 million in the prior year. Q1 cable revenue consisting of all products customarily associated with a cable line of business was $15.3 million, which was down 46% from $28.6 million in the prior year. The decline in cable was largely due to lower software license revenue during the quarter. And finally, Q1 access revenue which includes our access device products from our 2019 Netcom acquisition, plus our 4G, 5G enterprise small cell radio products was 25.8 million, which was down 23% from 33.5 million from the prior year. Turning now to backlog, we currently have approximately 140 million in backlog product and service orders, including scheduled 2023 Verizon 5G MEC contract billings, bringing our total backlog, deferred revenue, and the remaining $92 million of future billings under the Verizon contract to be billed in 2024 and beyond to approximately $270 million. As we noted last quarter, we also have approximately $57 million of closed multi-year contracted business for our 4G, 5G enterprise small cell radios with a major North American M&O contract. where we get POs on an annual as ordered basis. I want to note that this is not included in the backlog and deferred revenue numbers I just mentioned, and that these small cell radios will begin shipping in the second half of 2023, pursuant to close contracts we have. As we noted in our fourth quarter call in March, we are continuing to see good improvements in supply chain and believe a significant majority of our backlog will ship in 2023. assuming there is no unanticipated deterioration in our supply chain in the future. Moving to gross profit, GAAP gross profit for Q1 came in at $18.2 million or 40% of revenue. GAAP operating expenses for the quarter came in at $45.3 million, including $3.9 million in non-recurring charges related to Jerry's departure as president and CEO in March 2023. And while outside of the first quarter, it's also important to note that in April 2023, we made the difficult decision to reduce our headcount by approximately 13% across all functions and geos and to reduce non-headcount costs as well. This was a necessary step to right-size our cost structure to our revenue levels and was done surgically so we could continue to innovate in cable and cloud retain our product lead and excellence and capitalize on future growth opportunities. This realignment of resources will help CASA towards our goal of returning to annual net adjusted EBITDA positive results in 2023 and beyond. Our gap operating loss for the quarter was $27.1 million. This was primarily driven by our softer than expected Q1 revenue results and the non-recurring $3.9 million charge taken during Q1. As mentioned, the largest cable deal that did slip outside of Q1 is now closed. We also expect to receive formal acceptance on the software order that slipped outside of Q1 soon. And we have taken action to reduce our cost structure in April 2023, as just announced. Further, it should be noted our operating cash burn was very modest in Q1 at only $8.4 million. And this is important to recognize and reflects the high level of non-cash charges flowing through our GAAP P&L. Finally, related to our Q1 P&L, our net loss for the quarter was $31.7 million or $0.33 loss per diluted share versus a net loss of $32.6 million in Q1 2022. On a non-GAAP basis, we had a loss of $24.5 million or $0.26 loss per share and reported adjusted EBITDA loss of $16.2 million as reflected in the schedule shown in our press release. Turning to our balance sheet, we ended the quarter with cash, cash equivalents and restricted cash of $115.6 million. Our cash balance at March 31, 2023 was down approximately $14 million compared to December 31 due primarily to an approximately $2 million reduction in our term loan B debt, another $2.9 million use of cash for financing activities, some modest six asset purchases, and the modest operating cash burn during the quarter, as just mentioned. We ended the quarter with high quality accounts receivables of approximately 47.5 million, which excludes major billings. We are in the process of issuing Q2 related to our Verizon contract. Further, I'm pleased to say that our long-term debt, which was 274 million as of 3-31-22, is now down to $223 million, reflecting great progress on our delevering plan. Finally, we are reiterating our annual 2023 revenue guidance of $300 million to $325 million in positive net adjusted EBITDA results for the year. As noted earlier, we expect 2023 to be back in weighted, and our guidance is based on visibility into our backlog, deferred revenue, and later stage pipeline deals. including large expansion deals at major customers which we expect to convert into revenue later this year so to wrap up the team and i are incredibly excited about the recent developments at casa from our recent customer wins to new successful customer deployments to the progress we're making in our important partnership for horizon we're on the right path to drive growth and return to net adjusted ebitda profitability And we will soon have the December 23 maturity overhang formally resolved with the support of this majority of term loan B lenders pursuant to the TSA we announced today. I want to thank the entire team at CASA for the dedication to serving our customers and staying focused on our long-term goals during this time of transition. I'll now turn the call over to the operator to open the line for any questions. Operator?
spk02: Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. If you'd like to remove your question, please press star 2. One moment, please, while we poll for questions. Our first question is coming from Simon Leopold from Raymond James. Your line is now live.
spk03: Thanks for taking the question. A handful of things. One more on the housekeeping front is With the redefined segments, will you be posting essentially a pro forma so that we can see what the trending has been with the new segmentation over the last eight quarters, just to help with kind of forecasting and identification of trends? Is that something you plan to do or can do?
spk04: Yes, Simon, we'll do that.
spk03: Great. That was an easy one. They'll get a little harder. What do you expect for your interest expenses going forward with the new term B? And congratulations for getting that done.
spk04: Yeah, thank you. So I think the interest rate structure is in the 8K. You know, as we close it later in Q2, it should be kind of SOFR plus 6.5, somewhere around, you know, 10%. So slightly higher, but still a very good market rate.
spk03: Okay. And what is sort of the normalized expense run right now? Because I guess the recent cuts were done during the current quarter. So really, I'm trying to get a better sense of where do you think operating expenses settle in the second, let's call it 3Q, 4Q, OpEx budget? What are you thinking?
spk04: Yeah. So we did do the right-sizing budget. It was surgical in nature, and it preserved our ability to grow in our core market segments, including, you know, cable and cloud and RAN. You know, in total, we took out about, on an annualized basis, excluding severance charges, we took out about $28 million of expense with the April action. That said, we are continuing to invest in certain areas like, you know, cable and cloud and elsewhere. But, you know, the annualized savings from that April event was roughly $28 million.
spk03: Great. And then in terms of an update on the Verizon progress, I think at the end of the last quarter, there was, I believe, $120 million left in the project. You had only recognized a fraction of revenue last year. What are your expectations for how much of that Verizon project is baked into the 2023 forecast?
spk04: Yeah, so very good question. We did recognize only a fraction last year. I think we billed them $20 million and got paid from Verizon $20 million in non-refundable payments in 2022 and only took, you know, about $7 million of $6.5 or $7 million. We actually recognized no revenue from Verizon in Q1 2023. So, We're just waiting on a formal acceptance, but the project itself is going great, and I would expect more meaningful revenue contributions from Verizon in Q2 and in the second half of 2023. Great.
spk03: I'll cede the floor at this point. Thanks for taking the questions.
spk04: Good question, Simon. Thank you.
spk02: Thank you. Next question today is coming from Tim Savageau from Northland Capital Markets. Your line is now live.
spk05: Good afternoon. Can you hear me OK?
spk04: Yeah. Hey, Tim.
spk05: OK, great. So I'm just kind of working through this debt agreement. And does this leave you still with some maturities at the end of the year over the old agreement?
spk04: Yeah, so the belief is that we will get substantially all of the Term Loan B lenders to sign on to this. You know, this first phase was to get the 60% we have signed up today, but there are mechanisms that can be put in place now with this majority to incent the remaining lenders to join, and the sense of us and JP Morgan is that substantially all will sign on, and any type of stub will be very minimal, if any, at the end of the year.
spk05: Okay. And as it stands now, you've got 60% of it going out to 27%. a 40 million pay down and about 50 kind of remaining that you hope to convert to the same 27 status. Is that accurate?
spk04: Yeah, that's correct, Tim. But again, this is part of the strategy. And again, we expect substantially all to sign on to this new deal.
spk05: Got it. Another question about the CLARA win. Can you give us any metrics on kind of the size and importance of that opportunity to you guys and how significant a customer that could be, say, you know, relative to big customers you've had in the past or any kind of metrics that you want to toss out there?
spk04: Yeah, so it was a great validation of our virtual CCAP core and our PD nodes, Tim. In terms of size, it was, you know, mid to high single digit millions. it was particularly gratifying to win that in that, um, you know, we had to deal with some fear, uncertainty, and doubt that some of our truth challenge competitors were sewing after our March announcement, but, um, you know, they have confidence in us and, and we're very, uh, pleased to announce that win. And, and we do think there is substantial land and expand inside of, inside of Claro as well.
spk05: Got it. And, you know, given, um, the pushouts into Q2 where, you know, I'm assuming you might have a fair bit of visibility there. I know you reiterated annual guide, but given I think you have a lot of, potentially a lot of parts moving in the right direction in Q2, which is revenues up and expenses down, I wonder if you might be able to give us a little more color on what your expectations are here short term.
spk04: Yeah, so that is part of the success plan, revenue up, expenses down. I think in mid-March when we gave guidance for the year, we did guide that it was going to be, you know, second half weighted plan, but we've got good visibility given the, you know, high backlog we have entering the year, the, you know, big growth in deferred revenues on our balance sheet, which ultimately will flow into our top line revenues. actually a very strong sales pipeline across all four market segments, you know, cable, CAD, cloud, and RAN. The fact that we're going to start shipping our 4G, 5G small cell radios in the second half pursuant to that closed contract. We also got some great expansion opportunities inside some of our largest customers. You know, again, we're having success with our land and expand cohort sales model that you're familiar with. So, I mean, all those factors are going to combine to allow us, in our opinion, to attain that revenue guidance we provided. And candidly, we just got a very high single-digit million cable order from a major customer in North America this past week that will ship for revenue in the second half. So it's a combination of all those factors that allow us to have confidence in our annual top-line and bottom-line guidance.
spk05: One last question for me. You mentioned no Verizon revenue recognized. I realize that's probably separate from cash, but despite that, you put up gross margins in the 40% range in the quarter. I don't know what a normalized quarterly Verizon contribution is or software contribution, but I guess my question is, if there is such a thing, You know, what should that add to gross? What should gross margins look like with a more normalized either Verizon or if you want to say tier one cloud software contribution?
spk04: Yeah, so, you know, in terms of the margin, it would probably be in the low 90s as a, you know, gross margin, the percent of revenue. You know, from a GAAP 606 RevRec point of view, it's a little complex, but the margins on the cloud side are going to be very, very high.
spk02: All right. Thanks very much. You're welcome. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.
spk04: No, I guess to close up first, thank you, everyone, for joining us today. Look, it's been a really busy few months at CASA, and You know, the whole team is working truly tirelessly to address the issues that we're facing us. And we believe, you know, great progress has been made. As we enter, you know, Q2, we're bringing strong business momentum into the quarter. We're really pleased after a lot of late nights and hard work on the TSA announcement today. And with this Terminal B cloud now moving away, we've also engaged, you know, Piper Sandler to assist us in assessing the the potential for select non-core product line divestitures while we double down on cloud, cable, and select access device offerings. And we'll continue to update, you know, everyone on our progress during the coming months with more press releases around customer wins and additions to the team that will be forthcoming soon. So please stay tuned, and thank you for your continuing support and interest in CASA. Thank you, Operator.
spk02: Thank you. That does conclude today's teleconference and webcast. We disconnect our line at this time and have a wonderful day. We thank you for your participation today.
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