Vecima Networks Inc.

Hello, this is the Chorus Call Conference Operator. Welcome to Vesma Network's fourth 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 are using a speakerphone, please lift the handset before pressing any keys. Should anyone need assistance during the conference call, they may signal and operate it 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 fourth quarter and year-end fiscal 2022 results. Lastly, the call will finish with a question-answer period for analysts and institutional investors. The press release announcing the company's fourth quarter and year-end 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 audited annual consolidated financial statements and accompanying notes for the years ended June 30, 2022 and 2021. 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 or are beyond our control. A number of important factors could cause actual outcomes and results to differ materially from these 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 ESMA's 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 22, 2022, 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. FESMA 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. Fiscal 2022 was a year of outstanding momentum for Vesma, as we captured the first wave of the global industry transition to distributed access architecture. I'll start today with a review of some of the financial and operational highlights of a remarkable year. Dale will provide more detail on our financial results, and then I'll return to talk about what lies ahead for Vesma. I'm very proud to report that fiscal 22 brought another year of record-breaking top-line performance, as we achieved the best quarterly and full-year sales results in our 34-year history. Fourth quarter sales climbed 70% to $60 million year-over-year, while full-year sales grew by an exciting 50.4% to a record $186.8 million. Importantly, we leveraged this growth on the bottom line, with profitability momentum outpacing what we achieved even on the top line. On a full year basis, gross profit climbed by 59%. Adjusted EBITDA rose significantly to 31 million, up a remarkable 152%, or two and a half times higher than a year ago. And adjusted net earnings ramped to 41 cents per share. That's a year-over-year increase of 51 cents per share. These are simply excellent results, and even more so while in the presence of ongoing global supply chain challenges. The distinctive success of our strategies and tactics for managing supply chain constraints is evident not just in our very strong top-line growth, but also in a gross margin that bucked sector company trends and strengthened 2.6% to 48.2% in fiscal 2022. Our record results were led by our video and broadband solution segment, and more specifically, of course, by the dramatic growth in our intra-DAA sales. As you know, Entra momentum was building coming into the year, and it continued extensively as operators worldwide increased their capital investment into DAA. Our total customer engagements for Entra climbed to 91 during fiscal 2022, up from 71 at the start of the year. And quarter by quarter, Entra sales grew from 16.6 million in Q4 last year to 40 million in Q4 this year. We ended fiscal 22 with full year Entra sales of 107.3 million. That was two and a half times the Entra sales last year. I want to comment on Entra's broader growth trajectory, which tells a story of not only our sales tempo, but also highlights how compelling the product family has become to Vesma. In fiscal 2020, when we first commit sales of our new DAA products, Entra generated sales of about 5.3 million, and that represented about 6% of our total sales that year. One year later, interest sales have climbed to $42.6 million, lifting Vestal's full-year FY21 sales to $124 million. And now, at the end of fiscal 22, interest sales at $107.3 million have propelled full-year consolidated sales to $187 million, driving our top-line growth to a striking 50% plus. And this is just the beginning of what we see ahead for Entrep. The industry is still in the early innings of DAA adoption. DAA is expected to become a multi-billion dollar market as operators worldwide undertake this transformational evolution of broadband access networks. Networks that we believe are the very foundation of global progress. And the industry is heading into this journey with Vesma widely recognized as a leading global DAA technology partner. All of this strongly cements our multi-year strategy to provide not just the industry's most interoperable and technically differentiated offering of DAA technology, but also the most complete breadth of fiber and cable access solutions. And I'm pleased to report that we continue to build on our portfolio with multiple new DAA achievements in fiscal 22. Just to provide a few examples, we announced the world's first generic access platform or gap node, which sets the industry standard for unified access with a modular platform. We also introduced a new generation remote MACFI cable access module, the most flexible and highest capacity cable access platform on the market. And in partnership with Charter Communications, we demonstrated the reality of 10G DOCSIS 4.0 over hybrid fiber coax cable access networks, clocking blistering symmetrical downstream and upstream speeds in the process. And then we went on to beat our own record. So even as we've been capturing the first wave of industry DAA adoption, we've been preparing to lead the next. So this is truly an extraordinary moment in time for ENTRE and, of course, for Vesma. Looking now at other contributors to our fiscal 2022 performance, within the video and broadband solution segment, FY22 is another excellent year for our Terrace QAM, commercial video hospitality platform. We saw significant continued uptake during the year as our lead tier one customer continued to expand its hospitality footprint while preparing again for a migration to the next generation Terrace IQ platform. In our content delivery and storage segment, we maintained strong annual sales performance of 43.5 million in line with FY21 results. This was achieved despite supply chain and material shortages and pandemic related project delays that slowed some industry-wide transitions to IPTV. The year also brought some important achievements for that segment, including winning and executing the largest IPTV deal in our history. On the innovation front, we continued to advance our media scale family with multiple product enhancements, and another highlight of the year was demonstrating our standards-compliant open caching solution. As I mentioned last quarter, open caching is a significant new development for our service provider and streaming customers because it delivers video that looks and performs better on consumer viewing screens, while at the same time offering compelling business advantages to both streaming providers and operators. We believe open caching is an important component of the future of video streaming, and we're continuing to lay the groundwork for it in partnership with leading global content and service providers. In telematics, we continue to build on the segment's profitable recurring revenue contribution as we broaden deployments to municipal government customers. We also expanded our presence in the movable assets tracking market. We added 39 new asset tracking customers in fiscal 22 and more than doubled the total number of movable assets we monitor in the year to over 23,000 asset tags. In all aspects, fiscal 2022 was a pivotal year for Vespa. and we ended in a very strong financial position. Even after investing heavily in R&D and organic growth and returning cash to our investors in the form of regular dividends of 22 cents per share, we ended the year with 12.9 million in cash and a very strong 58.6 million in working capital. This positions us well to support the significant new growth we see ahead. I'll tell you more about that in just a few minutes. First, though, I'll turn the call over to Dale to provide our financial overview. Dale? Thank you, Sumit.

For the purposes of this call, we assume that everyone has seen the fourth quarter and fiscal year 2022 results, news release, MD&A, and our financial statements posted on BESMA'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 June 30th, 2022, we generated sales of 60 million. This was an increase of 70% over the 35.3 million in Q4 last year and an increase of 18% from 50.9 million in Q3 fiscal 22. The year-over-year increase reflects a sharp increase in product sales from the video and broadband solution segment driven by our new Entra family of products, partially offset by lower sales in the content delivery and storage segment. Within the video and broadband solution segment, for the fourth quarter of fiscal 22, we generated sales of 49.4 million. This was up 111% from the 23.5 million in Q4 last year and 34% higher than the 37 million in sales last quarter. Further deployments of our next generation DAA products contributed fourth quarter ENTRA revenue of $40 million, up 141% from $16.6 million in Q4 fiscal 21, and up 30% from $30.8 million in Q3 fiscal 22. In all, ENTRA DAA platforms are now being sold to 45 operators across six continents. Commercial video product sales grew to 8.8 million, an increase of 31% from 6.7 million in Q4 fiscal 21 and 43% from 6.2 million in Q3 fiscal 22. The increase in commercial video sales reflects continued strong demand for our Terrasquam platform as operators continued their commercial rollout for the current generation. This was partially offset by the anticipated tapering of demand for Terrace family products, including the TC600E. Content delivery and storage segment sales were 9.2 million in Q4, down 12% from the 10.4 million in the fourth quarter of fiscal 21, and 26% lower than the 12.5 million in Q3 of this year. This lumpiness reflects the timing of large orders. And these quarterly sales variances are typical for the CDS segment. Sales for fiscal 22 were additionally impacted by pandemic-related project delays, as well as supply chain and material shortages. The total CDS segment sales included $4.5 million in product revenue and $4.7 million in services revenue. Turning to the telematics segment, sales in the fourth quarter were at $1.3 million, slightly lower than the $1.4 million in the same period last year and in Q3 of this year. Gross margin for the fourth quarter was at 48%, with a gross profit of $28.5 million, an increase of 90% from the $15 million in Q4 fiscal 21, and up 19% from last quarter's $24 million. Gross margin was within our targeted range of 48% to 52%. Gross margin was up from the 42% achieved in Q4 fiscal 21 and from the 47% last quarter. The improvement in gross margin reflects a higher margin product mix, foreign exchange improvements, and higher sales in the VBS segment. These gains were slightly offset by lower CDS sales and supply chain issues during the period. Video and broadband solution segment gross profit grew 147% to 23 million from the 9.3 million in the same period last year and 42% with the 16.2 million in gross profit last quarter. Gross profit margin of 47% was significantly higher as compared to 40% in Q4 fiscal 21 and slightly higher from Q3 fiscal 22 gross profit margin of 44%. The year over year increase in gross margin reflects significantly higher sales together with a higher margin product mix. Gross profit in this content delivery and storage segment for Q4 decreased slightly by 2% to $4.6 million with a gross margin of 50% from the $4.7 million and 45% in Q4 fiscal 21. On a sequential quarterly basis, CDS gross profit was 33% lower than the 6.9 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 0.9 million with a gross margin of 66%. similar to the $1 million in gross profit and 68% gross margin in Q4 fiscal 21 and the gross profit of $0.9 million and 63% gross margin 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 increased to $11.4 million from $5.4 million in Q4 fiscal 21, primarily reflecting the hiring of additional R&D employees, the amortization of deferred development costs, higher licensing and subcontracting costs, as well as decreased capitalization 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 the fourth quarter increased to $6 million from $3.6 million in the same period last year. This increase was due to higher staffing costs as well as increased travel, entertainment, and trade show costs as travel and business restrictions related to COVID-19 were eased. G&A expenses increased to $6.5 million in Q4 2022 from $4.3 million in Q4 fiscal 21, primarily reflecting the additional staffing, ERP implementation, software licensing, and subcontracting costs. Other expense was $0.8 million in Q4 fiscal 22, a decrease from other income of $1.5 million in Q4 fiscal 21. due to U.S. federal grant credits received in fiscal 21 compared to an impairment of deferred development costs in the current period in our CDS segment. Total OPEX and Q4 increased to $24.7 million from $11.6 million during the same period last year. This increase primarily reflects higher operating expenses in the video and broadband solutions and the content delivery and storage segments. Video and broadband solutions operating expenses increased to $15.8 million from $6.1 million in Q4 fiscal 21. The $9.7 million year-over-year increase primarily reflects additional expenses for research and development, sales and marketing, and general and administrative activities, all related to sales growth. Content delivery and storage operating expenses were higher at $8 million in Q4 fiscal 22 as compared to $4.9 million in Q4 fiscal 21. Increases reflect year-over-year higher expenditure on research and development, sales and marketing, and general and administrative activities related to planned sales growth. 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 12.7 million or 21% of sales from 8.9 million or 25% of sales in the same period last year. The increase reflects higher staffing costs and higher costs for software licensing, subcontracting, and prototyping as our next generation product families move closer to full-scale commercial deployment. In our bottom line results, we reported an operating income of $3.8 million in Q4 fiscal 22 as compared to $3.4 million in Q4 fiscal 21. The $0.4 million increase was mainly due to an increase in contribution from the video and broadband solution segment from next generation Entra DAA products, partially offset by an increased operating cost from the CDS segment. Adjusted EBITDA grew to $11.1 million from $5.7 million in the prior year quarter and up from $8.1 million last quarter. The fourth quarter foreign exchange gain was $1.4 million compared to a foreign exchange loss of $0.7 million in the prior year period. Net income from continuing operations for the quarter was 3.5 million or 16 cents per share from a net income of 1.4 million or 6 cents per share in Q4 fiscal 21. Overall, a very strong quarter. Turning to the balance sheet, we ended the fourth quarter with 12.9 million in cash up from 10.6 million in the third quarter. Working capital increased to 58.6 million from $54.9 million in Q3 fiscal 22 and $44.8 million in Q4 last year. 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 and waited for a quarter. Finally, cash flow provided by operations for the fourth quarter was $10.4 million, as compared to cash flow provided by operations of $12.9 million during the same period last year. The $2.5 million decrease reflects a $7.6 million decrease in cash flow from non-cash working capital, driven primarily by the building of inventory to support growth and minimize supply chain constraints, partially offset by a $5.1 million increase in operating cash flow. So just to summarize, another strong quarter with continued sales growth and solid gross margin and adjusted EBITDA in the midst of challenges due to the global supply chain. Now back to Sumit.