Vecima Networks Inc.

Hello, this is the Chorus Call conference operator. Welcome to Vesma Network's second quarter fiscal 2022 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 and one on your touchtone phone. You will hear a tone acknowledging your request. If you were 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 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 second quarter fiscal 2022 results. Lastly, the call will finish with a question and answer period for analysts and institutional investors. The press release announcing the company's second quarter fiscal 2022 results, as well as detailed supplemental investor information are posted on Vesma's website at www.vesma.com under the Investor Relations heading. The highlights provided in this call should be understood in conjunction with the company's interim condensed consolidated financial statements and accompanying notes for the three and six months ended December 31st, 2021 and 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. These statements include but are not limited to statements regarding management's intention, belief 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 slash 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 validity, including the impact of COVID-19 and the distinctive characteristics of SMS operations and industry and customer demand that may have a material impact on, or constitute risk factors in respect of ESMA'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 www.cdar.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. VESMA 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.

Thank you. Good morning and welcome everyone. Thank you for joining us. We have some really outstanding second quarter financial results to tell you about today, as well as a significant number of operational achievements. So let's get started. To begin, I'm proud to report that our sales accelerated to a record $43.6 million in the second quarter. That's the best quarterly revenue result in all of ESSIMA's 33-year history. Our pace of growth was also outstanding. On a year-over-year basis, we achieved sales growth of 47%, and our sales on a quarter-over-quarter basis were up a remarkable 35% sequentially. This world-class organic growth is driven by the tremendous demand momentum we're experiencing for our market-leading distributed access architecture and IPTV products. I also want to point out that these rapidly growing revenue results were achieved despite significant global supply chain challenges. I know most of you are familiar with the unprecedented material shortages impacting not just the tech sector, but virtually every industry. Obviously, Vesma is not immune to these forces, but our strategies to work closely with customers on long-term demand forecasts to very fluidly manage our suppliers and to invest in the working capital needed to build inventories are all paying off. I should add that our supply chain strategies, together with highly disciplined cost management, also helped us to deliver a strong gross margin of 50% in the second quarter. Between the top-line liftoff and the margin, we produced gross profit of $21.8 million, another all-time record for Vesima. We've also translated the fruits of this growth, The way we have designed the business model together with our execution allowed us to highly leverage our record top-line growth through to the bottom line. We nearly tripled adjusted EBITDA to $7.4 million year-over-year, and we ended the quarter with net income of $1.5 million and adjusted earnings per share of $0.06. We're very proud of these results, and it's tremendously satisfying to see the rewards of our multi-year strategies and investments reflect more and more in our financial results. Looking at performance across our business segments, it was another exciting quarter for video and broadband solutions, with sales of 27.2 million led by our next generation Entra DAA products. Entra sales climbed 130% year-over-year to 18.5 million, another new high for our DAA portfolio. This continued growth in Entra was achieved despite supply chain pressures that still limited our fulfillment in Q2. Demand over and above what we shipped in Entra was not only higher, but accumulated still more in the quarter, both between existing customer expansion and new customer wins. Our total customer engagements for Entra grew to 80 during the period, and by quarter end, we were actively selling to 43 customers, up from 39 the previous quarter. This included wins with new customers like GCI, which is Alaska's largest telecommunications provider. And subsequent to the quarter end, we announced Liberty Latin America is using ENTRO to support its expansion to ultra broadband services. While ramping new customers, we were also deepening our relationships with key industry leaders, including some of the largest tier ones in the world. Last quarter, I talked about charter communications, identifying Bessema as a key strategic partner at our industry's highest profile event. In Q2, Vesma and Charter took our partnership a step further as we successfully demonstrated the long-term hybrid fiber coaxial network over DOCSIS 4.0. Together, we demonstrated the reality of 10G as we clocked blistering broadband speeds, both downstream and upstream. Achievements like that not only underscore Vesma's partnerships with world-class operators, but they also highlight our position as a leading provider of preeminent next-generation technology solutions. Our progress is also translating into market share gains. The telecommunications market research group, Deloro, recently identified Vesma as the current market share leader in two major DAA product categories, remote MACFI and fiber-to-the-home remote optical line terminals. Of course, we have significant market strength in remote PHY, cabinet-based 10 gig EPON, and DAA video products as well. And we're continually strengthening our position as we add new features and enhancements to our expanding portfolio of cable and fiber access network products. Simply stated, Vesma has built the industry's strongest DAA offering, the largest and most comprehensive portfolio of solutions, the most advanced technologies, and now some of the fastest technology as we drive the future of the 10G network. We're leading the way in the massive new worldwide market for DAA, and with every passing quarter, we're continuing to build on that lead. Looking at other contributors to the excellent BBS segment performance in Q2, it was another strong quarter for Terrace QAM, with sales increasing to $4.9 million. That was up 61% year-over-year and 3% quarter-over-quarter, as our lead customer continued to expand its hospitality footprint. Keep in mind again that every Terrace Qualm platform we sell is upgradable to our new next generation TerraceIQ platform. We already have more than 10 customers in trials with TerraceIQ, and during Q2, we continue to advance this new platform with additional IP streaming formats and functionality. We see TerraceIQ providing significant growth area for us going forward as we start to upgrade our widely deployed base of TerraceQualm platforms. To put the size of the opportunity into perspective, we currently boast an 85% market share with TerraceQualm in commercial video. And because TerraceIQ can be utilized anywhere and everywhere with an IPTV feed, the entire commercial hospitality vertical is addressable with the platform. That represents a significant opportunity for Vecima as TerraSite Q has rolled out both for upgrades and new sites where, again, its adaptation of video into the commercial property really shines. Turning now to our content delivery and storage segment, it was a record quarter for CDS and revenues climbed to $15 million off of our highest ever quarterly order flow. This was a significant rebound from Q1 when we experienced some pandemic-related scheduling delays with some of our customers. During the second quarter, customers got back on track with IPTV deployments and expansions again filling the pipeline. New business wins added to our momentum and included the largest IPTV network contract to date for our MediaScaleX products. We also brought on new customers in various regions of North America. The end result was an impressive CDS sales growth of 27% year-over-year and 121% sequentially. And the CDS business wins continued into the third quarter. We recently announced that BreezeLine, previously Atlantic Broadband, selected Vesima for IPTV deployment on its network. That's a significant win, covering a large number of subscribers through BreezeLine's network and their top 10 operator footprint in the U.S. In total, our MediaScaleX solutions are now in use by over 35 operators worldwide, who collectively serve a base of over 100 million subscribers. So that provides a tremendous base of opportunity, with many of these operators poised for further IPTV expansion, and it represents a large collective global footprint, addressable with a shift to open caching. It's generally agreed that every major telco, MSO, and mobile operator is actively looking at migrating to IPTV today. It's a required element in their network to fulfill video content consumption and to provide the best possible end-to-end user experience. Vesma has the technology and solutions to support them and to empower them to further leverage these networks for monetizing video. During the second quarter, we successfully completed interoperability tests under the Streaming Video Alliance's open caching standard with our MediaSkillX platforms. This means that we're positioned to supply open caching solutions to our existing base of customers, and they're once again over 100 million subscribers in their footprint. So lots more to come from CDS. In our telematics segment, The second quarter brought continued profitable performance, along with a number of new business wins. We increased our deployments in high-value verticals, including the municipal government and movable asset markets. And I'm pleased to report we brought on 12 new customers for our Nero asset tracking platform. We're now monitoring over 16,000 units with our asset tracking solution, a significant increase. And as always, profitability in the telematics segment remained very strong, with Telematics achieving trailing 12-month adjusted EBITDA of $1.95 million and an adjusted EBITDA margin of 35%. Overall, it was an outstanding second quarter for Vesma, with all parts of the business performing very strongly. And now I'll turn the call over to Dale to provide some more detail on our second quarter and first half financial results. Dale?

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen our second quarter fiscal 2022 news release, MD&A, and financial statements that are posted on VESMA'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 three months ended December 31st, 2021, We generated sales of $43.6 million. This was an increase of 35% over the $32.4 million in Q1 fiscal 2022, and an increase of 47% from $29.7 million in Q2 last year, and led by an increased demand for our ENTRA family of DAA products and record sales for our MediaScaleX IPTV solutions. The year-over-year increase reflects the growth of the video and broadband solution segment driven by our new ENTRA family and our commercial video family as our hospitality customers prepare for migration to next-generation products as well as the expected gains in our content delivery and storage segment as multiple customers continue to forge ahead with their IP video deployment plans. Within the video and broadband solution segments, we generated sales of 27.2 million. This was up 65% from the 16.5 million in Q2 last year and 12% higher than the 24.3 million last quarter as customers began their transition to next generation networks using Bessemer's solutions. Our Enter Next Generation DAA products contributed record second quarter revenue of $18.5 million, up 130% from the $8 million in Q2 fiscal 2021, and up 2% from $18.1 million in Q1 last quarter. While still in the early stages of the shift to DAA, a rapidly expanding group of Tier 1, 2, and 3 customers have begun their transition to next-generation networks. Commercial video family sales for the quarter grew to $8.7 million, up 4% from $8.4 million in Q2 fiscal 2021, and sequentially up 42% from $6.1 million in Q1 last quarter, reflecting continued strong demand for our Terrace QAM platform as operators continued their commercial rollout for the current generation while preparing for the next generation Terrace IQ platform. In the content delivery and storage segment, second quarter revenues were $15 million as compared to $11.8 million in Q2 last year and $6.8 million in Q1 fiscal 2022. Segment sales for the Q2 fiscal 2022 period included $11.3 million of product sales and $3.7 million of services revenues. The significant quarter-over-quarter increase in CDF sales reflects early movement on IPTV expansions to customer networks, as well as a return to activity on certain pandemic-delayed projects. Demand for Vesma's MediaScale X IPTV and open caching solutions remains strong, and we expect another solid quarter in Q3 fiscal 2022. On a full-year basis, we continue to anticipate high single-digit to low double-digit growth for the content, delivery, and storage segments in fiscal 2022. Turning to the telematics segment, as expected, sales of $1.4 million in the second quarter were on par with the $1.4 million achieved in the same period last year, and up slightly from the $1.3 million last quarter. we anticipate an incremental growth in demand from the fleet tracking market in fiscal 2022, along with continued gradual growth in demand for our asset tracking services. Gross margin for the second quarter was 50.1%, up from 48.5% in Q1 2022, and 49.6% in Q2 of fiscal 2021. The year-over-year improvement reflects a higher margin product mix, harshly offset by continued foreign exchange headwinds related to a strength in Canadian dollar, and increased expediting costs related to supply chain constraints. Video and broadband solutions gross profit margin was 47% in the current year quarter. This was higher than the 43% a year ago, and on par with the 47% in Q1 of fiscal 2022. The stronger VBS gross margin reflects a higher margin product mix, partially offset by foreign exchange headwinds related to strengthening Canadian dollar and increased expediting costs related to supply chain constraints. Gross margin in the content delivery and storage segment was at 54% in the quarter, up from 50% in Q1 last quarter, but down slightly from the 56% in Q2 last year. due to variations in product and customer mix. The telematics segment gross margin in the quarter increased to 69% from the 63% in Q1 last quarter and on par with the 70% in Q2 fiscal 21. Turning to second quarter operating expenses. The notable changes year over year were as follows. R&D expenses increased to 8.4 million in the quarter from $7 million in Q2 fiscal 21. This increase reflects higher amortization of deferred development costs, increased headcount, and software 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. Sales and marketing expenses for Q2 fiscal 22 increased to $4.6 million from $3.5 million in the same period last year. The increase in sales and marketing expense primarily reflects higher staffing costs to support the increase in sales year over year, as well as an increase in travel, entertainment, and trade show expenses as travel and business restrictions due to COVID-19 have been reduced. G&A expenses at $5.5 million in the quarter were up from the $4.6 million in Q2 fiscal 21, reflecting ERP implementation and software licensing costs, additional new hires, and subcontracting costs. Total OPEX in Q2 increased to $18.5 million from $16.3 million during the same period last year. This reflects higher operating expenses in both the BBS and CDS segments related to cost to support the increased sales activity, as well as the increase in R&D to support the development of our next generation of products. I noticed 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 $9.7 million, or 22% of sales, from $8.9 million, or 30% of sales, in the same period last year. This increase reflects higher staffing costs, increased software licensing costs, and a general increase in overhead as we move our next generation product families closer to commercial deployment. We reported operating income of $3.3 million in Q2 fiscal 22 as compared to an operating loss of $1.6 million in the same period last year. The $4.9 million increase in operating income was driven by an increase in contribution from all three segments. Net income for the quarter was $1.5 million or $0.06 per share. This compares to a net loss of $3.1 million or $0.14 per share in Q2 fiscal 21. Turning to the balance sheet, we ended the second quarter with $10.3 million in cash. The decrease in cash in the quarter mainly reflects the continued strategic buildup of inventory by $1.7 million in the quarter. Other non-cash working capital of $3.4 million, capital expenditures of $2 million, and dividends of $2.5 million, offset by positive cash flow of $5.7 million before deferred development of $3.7 million. Working capital decreased to $42.5 million from $44.8 million at June 30, 2021. We note that working capital balances can be subject to significant swings from quarter to quarter. The timing of our product shipments are lumpy, reflecting the requirements of our major customers. Finally, cash flow from operations for the second quarter increased to cash provided by operations of $1.4 million from cash used in operations of $0.5 million during the same period last year. The $1.9 million improvement reflects a $4.4 million increase in operating cash flow from operations, offset by a $2.5 million decrease due to non-cash working capital. Now back to Sumit.