Vecima Networks Inc.

Hello, this is the Coruscall conference operator. Welcome to Vesima Network's fourth quarter fiscal 2021 earnings conference call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Analysts and institutional investors who wish to join the question queue, simply press star then one on your touch-tone phone. you will hear a tone acknowledging your request. If you're using a speakerphone, please lift the handset before pressing any keys. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. Presenting today on behalf of Vesima Networks are Sumit Kumar, President and CEO, and Dale Booth, Chief Financial Officer, Today's call will begin with executive commentary on Vesimas financial and operational performance for the fourth quarter and year-end fiscal 2021 results. Lastly, the call will finish with a question and answer period for analysts and institutional investors. The press release announcing the company's fourth quarter and year-end fiscal 2021 results, as well as detailed supplemental investor information are posted on Vesima's website at vesima.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 30th, 2021 and 2020. Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable securities laws. All statements other than statements of historical fact are forward-looking statements. These statements include but are not limited to statements regarding management's intentions, 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-19 and the distinctive characteristics of Vesima's operations and industry and customer demand that may have a material impact on or constitute risk factors in respect of Vesima's future financial performance, as set forth under the heading Risk Factors in the company's annual information form dated September 23, 2021, a copy of which is available at cedar.com. In addition, although the forward-looking statements in this earnings call are based on what management believes are reasonable assumptions, such assumptions may prove to be incorrect. Consequently, attendees should not place undue reliance on such forward-looking statements. In addition, these forward-looking statements relate to the date on which they are made. VESIMA disclaims any intention or obligation to update or revise any forward-looking statements as a result of new information, future events, or otherwise, except as required by law. At this time, I would like to turn the conference over to Mr. Kumar to proceed with his remarks. Please go ahead.

Good morning, and welcome, everyone. Thank you for joining us. Fiscal 2021 was the breakout year we've long envisioned for Bessema. After years of investment, innovation, and persistence, we realized our long-held objective, capturing the first wave of our industry's wide-scale migration to distributed access architecture. And we translated this achievement into record top-line results. Dale will provide details of our full year and fourth quarter financial results in a few minutes, but let me start with a few of the important highlights. I'm very proud to report that we achieved the single best full year sales results in VESMA's 33 year history. Our fiscal 2021 sales grew to a record 124.2 million, an increase of 31% year over year. We also achieved exceptionally strong fourth quarter sales of $35.3 million, which were up 37% year-over-year and 11% quarter-over-quarter. That capped off a year in which each sequential quarterly revenue increase averaged nearly 10% from the first to the fourth quarter. And while it was a challenging year in which to produce these outstanding results in the midst of a global pandemic and worldwide supply chain constraints, We were successful in generating full year adjusted EBITDA of $12.3 million, even after integrating major operations from our acquisition. We turned in an excellent fourth quarter performance with adjusted EBITDA nearly tripling to $5.7 million. Our top line growth was led by our video and broadband solution segment, where sales more than doubled year over year, fueled by the rapid growth from our ANTRA DAA portfolio. As you know, our DAA sales were already building as we came into the fiscal year. Our acquisition of Nokia's DAA and fiber to the home portfolio in the first quarter added jet fuel to that momentum. The transaction dramatically accelerated a key component of our strategy to lead the industry's evolution to DAA. Specifically, it built on our own successful remote fly technology by adding market-ready 10-gig fiber-to-the-home access capability, and DOCSIS Remote MacFi cable access solutions. Those are two highly important additional pieces of the cable DAA ecosystem, and they're ones that we had intended to develop internally. The acquisition sped up our timeline, saving us several years and many millions of dollars of investment in product development. and it instantly established Vesma's portfolio as the industry's single strongest for high-speed data access network products. Vesma's breadth of solutions addresses the widest possible range of our customers' DAA needs, just as the market has begun its trajectory of widespread next-gen network adoption. As the fiscal year progressed, the number of customers placing orders for our DAA products grew from 3 to 38, and Entra sales lifted off along with that, growing from a little over 5 million in Q1 to 16.6 million in Q4. By year end, we achieved full year DAA sales of 42.6 million, up by seven times more than what we achieved last year. And Entra, which represented just 15% of our video and broadband solution segment sales in fiscal 2020, became the segment's number one product group, representing 57% of segment sales in fiscal 2021. I want to emphasize that this is just the beginning of the growth potential we see for our entire family of solutions. DAA is a once in a lifetime technology transition for the global cable industry, and it's a market expected to ultimately measure in the billions of dollars. Vesma is at the forefront of this opportunity with the industry's best portfolio of products and a rapidly growing base of tier one, two, and three operators, including some of the world's largest MSOs. So there's much, much more to come for MENTRA, and I'll talk more about that in our outlook. First though, let's look at some of the other contributors to 2021 performance. Within the video and broadband solution segments, fiscal 2021 was another excellent year for our Terrace QAM commercial video hospitality products. We saw a significant continued uptake during the year as our lead tier one customer continued to expand its hospitality footprint while preparing for a migration to the next generation Terrace IQ platform. This, together with our strong intro sales, more than offset the expected tail-off in demand for some of our other legacy commercial video products. In our content delivery and storage segment, we achieved solid annual revenue of $43.4 million, even as we navigated challenges stemming from the global pandemic. COVID-19 restrictions at some of our customers' operations slowed the integration of the record new business wins we achieved in fiscal 2020 and the delayed expected scale expansions of those new IPTV networks. Despite those challenges, we successfully fulfilled the largest ever contract for our media scale X solutions with a tier one customer in the Asia Pacific region during the year. We also added another five customers to our roster for IPTV new customers, and we increased CDS service revenues another 4% in fiscal 2021. In telematics, we continue to build out the segments recurring revenue contributions with the addition of new municipal fleet municipal government fleet subscribers, and introduction of new vehicle routing software during the year. I'm pleased to report that we also continue to expand our presence in the movable assets tracking market, an area Vesma has innovated in. We added 15 new customers and expanded the total number of movable assets being monitored to over 11,000 units. Taken as a whole, fiscal 2021 was a remarkable year for Vesma. And all the more so when you consider the pandemic-related challenges our industry and many others were dealing with. Our excellent long-term supplier and customer relationships proved really invaluable in helping us to manage supply chain issues. And we were able to leverage our strong financial position to drive working capital and stay ahead. We'll continue to rely on these strengths going forward, and I'm pleased to note that we're moving into fiscal 22 with a once again robust financial position. Even after investing in our organic and acquisitions-based growth and returning cash to our investors in the form of our regular dividends of $0.22 per share over the year, we ended the year with $28.9 million in cash and a strong $44.8 million in working capital. Now I'll turn the call over to Dale to provide more detail on our financial performance. Dale?

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen the fourth quarter and fiscal year 2021 results, news release, and MD&A and our fiscal year 2021 financial statements posted on Decima's website. I will present the relevant numbers in discussions around overall results, market segments, operational expenses, and the balance sheet. Please note that the results for the fourth quarter and full fiscal 2021 includes almost a full year of operating results from our acquisition of the Nokia cable access portfolio we acquired on August 7th, 2020. It also reflects the divestiture of our content agent business on March 31st, 2021. The results of content agent are now reported under discontinued operations. Starting with consolidated sales, for the three months ended June 30th, 2021, we generated sales of $35.3 million. This was an increase of 37% over the $25.7 million in Q4 last year, and an increase of 11% from $31.9 million in Q3 fiscal 2021. The year-over-year increase reflects an increase in product sales from the video and broadband solution segment, driven by our new Entra family of products. and partially offset by lower sales in the content delivery and storage segment, and further offset by foreign exchange related to a strengthening Canadian dollar. Within the video and broadband solution segment, for the fourth quarter of fiscal 2021, we generated sales of 23.5 million. This was up 124% from the 10.5 million in Q4 last year, and 8% higher than the $21.8 million in sales last quarter. Further deployments of our next generation DAA products contributed fourth quarter ENTRA revenues of $16.6 million, up sevenfold from $2.1 million in Q4 fiscal 2020, and up 31% from $12.7 million in Q3 fiscal 2021. Entra sales included 9.2 million from the DAA products acquired from Nokia. In all, Entra DAA platforms are now being sold to 38 operators across six continents. Fourth quarter Terrace family sales were down 42% to 2.4 million from the 4.1 million in Q4 fiscal 2020 and down 32% from the 3.5 million in Q3 fiscal 2021. reflecting tapering demand for our legacy products. Terrace QAM sales for the fourth quarter were up 21% to 4.4 million from 3.6 million in Q4 last year, but down 16% from the 5.2 million in Q3 fiscal 2021. We anticipate healthy demand for our Terrace QAM platform as operators continue their commercial rollout for the current generation while preparing for the next generation Terrace IQ platform. The quarter over quarter variance primarily reflects the timing of large orders. Content delivery and storage segment sales were 10.4 million in Q4 fiscal 2021, down 25% from the exceptionally strong 13.9 million in the fourth quarter of fiscal 2020, but 19% higher than the 8.8 million in Q3 of this year. These quarterly sales variances are typical for the CDS segment, and this lumpiness reflects the timing of large orders. Sales for fiscal 2021 were additionally impacted by the COVID-19 restrictions at some customer operations due to installation timeline slowing as the segment continued to consolidate its record new business wins from 2020. The total CDS segment sales included $6 million in product revenue, and $4.4 million in revenue from services. Turning to the telematic segments, in line with our expectations, sales in the fourth quarter were at $1.4 million, slightly higher than the $1.3 million in the same period last year, and on par with the $1.4 million last quarter. Gross margin for the fourth quarter was at 42.4%, with a gross profit of $15 million. An increase of 20% from the $12.5 million in Q4 fiscal 2020 and up 5% from last quarter's $14.3 million. Gross margin was down from the 45% achieved last quarter and the 49% in Q4 fiscal 2020. The lower than normal gross margin reflects the composition of our product mix and supply chain constraints for the period. lower sales in the CDS segment, as well as the negative foreign exchange impact of the strengthening Canadian dollar. Video and broadband solutions segment gross profits grew 127% to $9.3 million from the $4.1 million in the same period last year, and on par with the $9.3 million in gross profit last quarter. Gross profit margin of 40% was slightly higher as compared to 39% in Q4 fiscal 2020, but down from Q3 fiscal 2021, gross profit margin of 43%. The year-over-year decrease in gross margin reflects different product mixes each quarter, supply chain challenges, as well as the negative foreign exchange impact of the strengthening Canadian dollar. Gross margin in the content delivery and storage segment for Q4 decreased to 45% with a gross profit of 4.7 million from the 54% and 7.5 million in Q4 fiscal 2020. On a sequential quarterly basis, CDS gross profit was 14% higher than the 4.1 million generated last quarter. The year-over-year changes in gross profit and gross margin reflect a lower percentage of high margin software sales in the product mix and a decrease in sales in the current quarter as compared to the prior year quarter. In the telematics segment, gross profit in the fourth quarter was $1 million with a gross margin of 68%, slightly down from the 70% in Q4 fiscal 2020, but up from the 66% last quarter. The year over year decrease in gross margin reflects higher product costs in the current quarter. Turning to fourth quarter operating expenses, the notable changes year over year were as follows. R&D expenses decreased to $5.4 million from $6.7 million in Q4 fiscal 2020, primarily reflecting higher deferred development costs as a result of the addition of product lines acquired from Nokia, lower amortization of deferred development costs, partially offset by higher staffing costs related to the Nokia portfolio acquisition, as well as increased software licensing costs as our next generation product families move closer to deployment. We continue to invest in research and development to support the launch of new products. Until these new products are commercialized, development costs are deferred to future periods. Sales and marketing expenses for the fourth quarter increased to $3.6 million from $3.0 million in the same period last year. This increase was due to higher staffing costs from the Nokia portfolio acquisition. G&A expenses increased to $4.3 million in Q4 fiscal 2021 from $3.9 million in Q4 fiscal 2020, primarily reflecting the additional costs associated with the newly acquired operations. Other income was $1.5 million in Q4 fiscal 2021, an increase from $0.3 million in Q4 fiscal 2020 due to U.S. federal grant credits received in the current period. Total OpEx in Q4 decreased to $11.6 million from $13.3 million during the same period last year. This decrease primarily reflects lower operating expenses in the video and broadband solutions and the content delivery and storage segments. I note that reported R&D expense in a period is typically different than the actual expenditure. That's because certain R&D expenditures are deferred until product commercialization. Adjusting for deferrals, amortization of deferred development costs, and income tax credits, actual R&D investment for the quarter increased to 8.9 million or 25% of sales from $6.6 million, or 26% of sales, in the same period last year. The increase reflects higher expenditures from the Nokia portfolio, higher staffing costs, and software licensing costs, as our next generation product families move closer to full-scale commercial deployment. In our bottom line results, we reported an operating income of $3.4 million in Q4 fiscal 21, as compared to an operating loss of $0.8 million in Q4 fiscal 20. The $4.2 million increase was mainly driven by a $5.8 million increase in contribution from the video and broadband solution segment and a $0.1 million increase in contribution from telematics segment year over year, partially offset by a $1.7 million decrease from the CDS segment. Adjusted EBITDA grew to $5.7 million from $3.8 million in the prior year quarter and up from $2 million last quarter. The fourth quarter foreign exchange loss was $0.7 million compared to $0.5 million in the prior year period. And income from continuing operations for the quarter was $1.4 million or $0.06 per share compared to a net loss of $0.9 million or 0.04 loss per share in Q4 of fiscal 2020. Overall, a very strong quarter. Turning to the balance sheet. We ended the fourth quarter with $28.9 million in cash, up from $23 million in the third quarter and practically having no bank debt. Working capital decreased to $44.8 million from $46 million in Q3 fiscal 2021 and $55.3 million last year. We note that significant working capital balances can also be subject to swings from quarter to quarter. Our product shipments are lumpy, reflecting the requirements of our major customers. Other timing issues, like contracts with greater than 30-day payment terms, also affect working capital, particularly if shipments are back-end weighted for a quarter. Finally, cash flow provided by operations for the fourth quarter was $12.9 million as compared to cash flow provided by operations of $2.5 million during the same period last year. The $10.4 million increase reflects a $9.2 million increase in cash flow from non-cash working capital and $1.2 million increase in operating cash flow. So just to summarize, another strong quarter despite the challenges due to COVID-19 and the global supply chain challenges. Now back to Sumit.

Thank you, Dale. As we look ahead at what lies ahead for Bessema, I believe we've reached an inflection point. We've captured a clear leadership position in the vast DAA market, and we're exceptionally well positioned to leverage and build on that lead. We've assembled the world's most complete DAA portfolio built on the industry's best technology, and we've been selected as a technology partner to a growing list of Tier 1, 2, and 3 MSOs, including some of the world's largest cable operators. We currently have 71 customer engagements for DAA. 38 of these customers are already using our products, and many of them are now transitioning to scaling deployments. Another 33 of our customer engagements are in various stages of DAA development. They represent near-term opportunities for additional design wins and follow-on deployments, adding to the projected demand for ENTRA. At the same time, we're continuing to attract new customer engagements as more and more operators initiate their own DAA transitions and turn to Vesma as a differentiated technology partner. This is a true technology wave and its momentum will continue to build. We know that the companies that capture the first wave are uniquely positioned to benefit from not just the initial network build-outs, but the years of augmentation and upgrades that follow. Vesma has successfully captured DAA's first wave, and it positions us for a remarkable trajectory. Keep in mind that DAA is just one of our growth engines. Our content delivery and storage segment represents significant additional opportunities as we address the rapidly growing managed IPTV and over-the-top markets for streaming services. In the year ahead, we anticipate steady improvement in our ability to integrate and expand the significant new business winds of the past two years. And over the longer term, we see significant growth potential. The IPTV market is on pace to nearly double in size by 2026. and will depend on reliable and scalable solutions like those provided by our MediaScaleX portfolio. In our Terrace family of products, we anticipate continued demand for the current generation Terrace QAM and making way for the long-term migration to the next generation Terrace IQ in lockstep with the overall network transition, which will ultimately happen to IPTV. And in our telematics business, we expect consistent incremental growth from the fleet tracking market and we anticipate increasing demand for our newer movable asset tracking services. Overall, we see a very exciting year ahead for VESMA as our multi-year investment, technology, and strategic acquisition strategy is fully realized. My one note of caution continues to be the challenges related to current global supply chain disruptions that could temper near-term growth or margins, and the COVID-19 pandemic's capacity to present changes in the pace of customer network evolution. Overall, though, we're extremely confident in our market position and in Vesma's ability to capture the major opportunities ahead. We expect the year ahead will be an exciting one for Vesma as the DAA market takes off and IPTV demand continues to build. For many years now, we've remained steadfast in our vision for the networks of tomorrow while bringing them to life today. Through a combination of invention, development, and curation via successful consolidation, we've assembled the best technology in the industry. And I can think of no other time when the opportunity has been so great or so immediately upon us. In the weeks, months, and years to come, I look forward to demonstrating how this will translate into the company's success as Vesma embarks on this exciting trajectory of growth. We're highly energized about what lies ahead for Vesma, and looking forward to our exciting new achievements in fiscal 22. That concludes our formal comments for today, and we'd now be happy to take questions. Operator?

Thank you. We will now begin the question and answer session for analysts and institutional investors. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your headset before pressing any key. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question is from Jim Barn with Acumen Capital. Please go ahead.

thanks very much um congrats on the quarter guys i just wanted to dig in about the customer conversion uh obviously you're seeing a nice jump in engagements and customer orders um maybe you could just talk about um you know how how is that conversion rate uh how's it been and what do you expect for the future

Great. Great. Yeah, no, Jim. Sure. Thanks. Thanks for joining. And I'll get to your specific question in a moment. I think one thing I wanted to do is, as I've been sometimes done over the last few quarters, given that it's top of mind for everyone, just wanted to set the stage with some more big picture color on ENTRE again before going to the question. But, you know, like I said, we're really pleased and beyond that really excited about this rapid progress that the company has been making on ENTRE. in the last seven quarters with this rapid momentum into FY21, which is really a breakthrough year for Entra with the sales going up, like we said, seven times year over year to the 42.6 million that we put out. You know, we made definitive progress across, you know, a high and growing list of these customer engagements that we're talking about and you asked about the conversion on. And that translated into, you know, meaningful revenue territory growing, you know, in the last six quarters from 1.1 million to 16.6 million per quarter in interest sales. So, you know, following the 5 million in fiscal 20 up with the 42.6, just as DAA is just getting started as a market with these lead tier ones, twos, and threes and standing out their activity and deployments, you know, it's all really strikingly positive for VESMA and And, you know, we're proud that we're passing almost 14 million homes with EnterDAA technologies for this, you know, multi-gigabit broadband internet service that we put together. So, you know, the engagement count, as you asked about, has grown from 25 at the start of the year to 71 at the end of Q4 that we reported today. And likewise, you've seen the number of buying customers increase from from three to 38 over that same period over the year. So that's a reflection, if you will, partially of the conversion rate. The engagement count itself growing from the 25 and then 61 in Q3, 71 in Q4 reflects people being added into the list. I won't say that the list always remains with the same name, but generally it does. in terms of the customer staying in the engagement and flowing through the sales cycle pipeline and converting to those 38 that we have into scale deployment and purchasing with us. So, you know, we're seeing signs of a very strong conversion rate and those engagements going all the way through the sales cycle.

Okay, that's great. And then maybe just on the CVS segment, you mentioned the outlook remained quite strong and you saw a bump and the Japanese revenue for the quarter from the deployment of that major contract. Maybe just digging in a little bit more on what you're seeing, following maybe some restrictions lifting, are you seeing a ramp up in activity and deployments for that segment?

Great, yeah. And we are. As we mentioned today, and we've been talking about leading up to today's reporting that You know, we, we, we saw some, some, perhaps, you know, this is the segment of business that was most directly exposed to some delays from the pandemic where customers typically with these projects, we will roll out local systems, integration, onsite activity. You know, integration and launch, if you will, covering a defined swath of subscribers with IPTV services. And that requires some intense project planning together with our customers. And as you can imagine, with the pandemic, we encountered timing adjustments and those projects carrying on complicated projects. So, we had these 13, the record 13 new IPTV wins in 2020. in fiscal 20, and we followed that up with five more wins for IPTV and CDS in fiscal 21. So a total of 18 new customers are added over the last two years. So we've had this expanding pipeline of these new deployments for IPTV systems with MediaScale X. So the interesting part there is that while there have been some timing adjustments because of the pandemic factors, that pipeline has remained consistent throughout and The nature of the business is that once you launch, then you have subscriber uptake of the services, and then definitely customers envision expansion of capacity over time. And that's what slowed our sales performance in fiscal 21. But when we look at it, fiscal 19 to fiscal 20, we were targeting 20% growth, and we achieved something like 30%. And when you take the two-year average sales, fiscal 21 and 20 for CDS, that average is actually very well in line with the 20% growth that we anticipated from fiscal 19. So we've had timing adjustments, but we're now past a lot of that and moving into 22 with the growth in scope again, expansion, launch, all of that activity that we had been building with the new customer ad. And, you know, we expect to be in meaningful growth territory again, perhaps to the tune of double-digit growth in CDS.

Okay, that's great. That's all from me. Thank you. Thanks, Jim. Thanks, Jim.

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

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