Vecima Networks Inc.

Hello, this is the Chorus Call Conference Operator. Welcome to Vesama Network's second quarter fiscal 2023 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 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 of fiscal 2023 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 2023 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, 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, 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 volatility, including the impact of COVID-19 and the distinctive characteristics of ESSMA'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 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 to our second quarter conference call. I want to start today by telling you that our second quarter performance exceeded our expectations. You'll recall that we entered Q2 expecting revenues to level out as we rebalanced Entra orders after a particularly strong first quarter. Instead, Entra sales continued to ramp up to a new record, led by our Entra optical fiber access solutions. Combined with solid results from the content delivery and storage segment, we achieved another quarterly revenue record and Q2 consolidated sales climbed to $76.2 million. That was up 75% year-over-year and represented yet another 4% sequential growth after the 22.5% quarter-over-quarter growth that we delivered in our record Q1. And we once again paired these record revenues with excellent bottom-line performances. demonstrating the leverage in our model. Q2 adjusted EBITDA of $15.8 million and earnings per share of $0.35 were up two times and six times, respectively, compared to the same period last year. Vesma has now achieved more EBITDA and EPS in the first six months of fiscal 2023 than we did in all of fiscal 2022. These are significant achievements, especially when you consider our ability to navigate the current supply chain environment while continuously increasing product output at existing and new customers alike. In our view, there's opportunity for even stronger performance ahead. Our Q2 results were once again anchored by our video broadband solutions segment and the tremendous success of our next generation Entra DAA solutions. Entra sales climbed to 55.7 million during the quarter, more than triple what we achieved in the same period last year. As I mentioned, fiber access was a big part of the story, but demand-driven in part by the wide rural broadband rollout underway in the U.S. We were successful in leveraging our supply chain strengths to help our customers expand their fiber networks to more people and to more places. And in the process, we reached a major milestone with one of our U.S. Tier 1 customers. That operator has now deployed a total of more than 20,000 Teji, Pod, Fibre to the Home ports using our solution. Our Record Q2 Entra results were further supported by solid demand for our cable access products, including RemoteFi and RemoteMacFi nodes and Entra Video, and by the ongoing shift to scale deployment by an ever-widening base of customers across both cable and fiber access. We're now actively selling Entra solutions to 50 operators, including some of the biggest cable and fiber network operators of the world. and our global engagements have widened to 101 customers from 80 a year ago. Entra continues to deliver on the vision we've had for the broadband networks of the future. Looking out at other factors in our Q2 results, in our commercial video product family, sales were lower year over year as customers lined up their network densification programs and prepared to shift to next generation platforms like TerraceIQ. This is a transition we've been working towards for some time. Additionally, a portion of our commercial video solutions have become DAA-driven and are now within our Etro family of solutions. Turning to our content delivery and storage segment, we achieved 13% sequential quarterly sales growth at CDS in Q2 as we started to see a resurgence in IPTV momentum and, more particularly, expansion activity. Those network expansions have always been a part of our model within the many new customers and IPTV network launches we've conducted in recent years. Three of our existing U.S. customers undertook significant expansions of their IPTV networks using our media scale solutions during the quarter, and we expect more to follow. Operators are starting to shift their focus back to IPTV expansion following pandemic-related priority on broadband. We're seeing significant subscriber uptake, licensing capacity increases on those nascent IPTV networks we helped build in recent years. And I'm pleased to report we also initiated sales of our new dynamic ad insertion solution during the quarter. This is an important capability for operators wanting to improve monetization of their IPTV linear services, which is most of them, of course. And we advanced technology and market development on our open cache architecture, which we believe can become a significant growth driver for the CDS segment. During the quarter, we completed the world's first successful multi-tenant test of an SVTA open caching standards compliant system with VESMA's media scale. Before I move on, I want to touch on what additional CDS achieved with this past quarter. which involved demonstrating the robustness and reliability of our streaming solutions at scale. During the FIFA World Cup, a major Tier 1 MSO in Latin America achieved both record streaming viewership and record performance using our platform to stream the tournament. This was achieved amid the explosive and record streaming magnitude that occurred during the World Cup, and the customer networks performed as designed to meet this exceptional demand. So, an important quarter with many achievements for our CES segment. Our telematics segment also turned in a meaningful quarter with the win of a new municipal contract in British Columbia covering about 100 vehicle subscriptions. It was also our best quarter to date for movable asset customer wins. We added 12 new customers in all for movable assets, which combined represent over 200 new subscriptions. And we significantly increased the number of movable assets being monitored to over 35,000 units. This represents a 200% increase over a period of just seven quarters. Telematics continues to be a highly profitable part of our business, with the segment achieving a gross margin percentage of 67.6% for the quarter. Another major highlight in Q2 was a highly successful common share offering we closed in December to provide further growth capital with gross proceeds of $17 million. On the day of closing, the company's share price closed at a market capitalization of approximately $464 million. Response to the offering was very strong, with subscription demand far exceeding our initial $10 million deal size, to which we responded with a $7 million upsizing, while still not filling the overall subscription demand. We're very pleased that even at a time of challenging equity markets, that investors have a clear thesis on our growth strategy, the trends in our business and industry, and our responses to strong customer demand and the supply chain factors. Overall, it was a highly busy and very successful quarter, and it sets the stage for an even stronger performance in the second half. I'll come back to tell you more about what we see in our outlook in just a few minutes, but first I'll ask Dale to provide more detail on Q2 and first-half financial performance. Dale?

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen our second quarter fiscal 2023 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, 2022, we generated record sales of 76.2 million. This was an increase of 75% over the 43.6 million in Q2 last year and an increase of 4% from the 73.4 million in Q1 fiscal 2023. The significant year-over-year increase reflects a sharp increase in video and broadband solution sales and the positive foreign exchange impact of a weaker Canadian dollar partially offset by lower content delivery and storage sales year over year. Within the video and broadband solution segment, we generated sales of 62.3 million. This was up 129% from the 27.2 million in Q2 last year and 2% higher than the 61 million last quarter as customers continued their transition to next generation networks using Vesima solutions. as well as our success in meeting the needs of Tier 1 customers undertaking larger scale DAA fiber access deployments during the quarter. Our Entra Next Generation DAA products contributed second quarter sales of $55.7 million, up a significant 202% from the $18.5 million in Q2 fiscal 2022, and up 5% from the $53 million in Q1 fiscal 2023. Second quarter sales for commercial video, which include Terrace QAM and Terrace Family Products, were $6.5 million, down 25% from $8.7 million in Q2 fiscal 2022, and down 10% from $7.3 million in Q1 last quarter. As expected, commercial video sales are moderately lower year over year as customers transition to next generation solutions. And as a portion of our commercial video solutions become DAA driven and are accounted for as part of the entra family sales. In the content delivery and storage segment second quarter revenues were 12.4 million or 17% lower than the 15 million in the exceptionally strong Q2 last year, but 13% higher than the 11 million in Q1 fiscal 2023. Segment sales for the Q2 fiscal 2023 period included $7.3 million of product sales and $5.1 million of services revenue. CDS sales reflect IPTV expansions with three existing customers during the period. As always, we note that quarterly sales variances are typical for the CDS segment. The demand for Vesma's IPTV and open caching solutions continues to increase as IPTV customers initiate network expansions and we expect moderate sales growth for the content delivery and storage segments in fiscal 2023. Turning to the telematics segment, as expected, sales of 1.5 million in the quarter were slightly higher than the 1.4 million achieved in both Q1 last quarter and Q2 of fiscal 2022. Consolidated gross margin for the second quarter, was 47.3%, up from 45.9% in Q1 2023, but down from the 50.1% in Q2 of fiscal 2022. This primarily reflects supply chain constraints, which resulted in higher expense costs. We target a gross margin percentage of 48 to 52%. Video and broadband solutions gross margin was 46% in the current year quarter. This was slightly lower than the 47% in Q2 of last year, but higher than the 44% in Q1 last quarter. The VBS gross margin primarily reflects significant stronger sales and product mix, partially offset by higher expedite costs. Gross margin in the content delivery and storage segment decreased to 51% from 55% in Q1 last quarter and from 54% in Q2 last year. The year over year change reflects a change in customer and product mix. In the telematics segment, gross margin of 68% in the second quarter was slightly lower than the 69% in Q2 fiscal 2022, but higher than the 66% in Q1 fiscal 2023, reflecting the increase in sales in the current quarter. Turning to second quarter operating expenses, the notable changes year over year were as follows. R&D expenses increased to 10.3 million in the second quarter, from 8.4 million in Q2 fiscal 22, as we continue to invest in research and development to support the launch of new products. The increase reflects hiring of additional R&D employees and higher licensing and prototyping costs, partially offset by an increase in capitalized development costs. Until these new products are commercialized, development costs are deferred to future periods. Sales and marketing expenses increased to $6.6 million from $4.6 million in the same period last year. This increase primarily reflects higher staffing costs as well as an increase in travel and entertainment as COVID-19 travel restrictions have lifted. G&A expenses increased to $7.5 million in the quarter from the $5.5 million in Q2 fiscal 2022, primarily reflecting additional staffing ERP implementation costs, software licensing costs, and professional fees. One-time costs of approximately $0.6 million will not reoccur. Total OPEX in Q2 fiscal 2023 increased to $25.3 million from $18.5 million during the same period last year. This reflects additional operating expenses tied to higher sales in the video and broadband solutions, combined with a 0.7 million increase in stock-based compensation, and 0.6 million in general and administrative one-time items. 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 13.2 million or 17% of sales from 9.7 million or 22% of sales in the same period last year. The increase reflects higher staffing costs and increased costs for software licensing and prototyping in the current year quarter as our next generation products move closer to commercial development. We reported an operating income of $10.7 million in Q2 fiscal 2023 as compared to operating income of $3.3 million in Q2 fiscal 2022. The significant increase was primarily due to higher VBS sales partially offset by higher expiry costs resulting from supply chain constraints and increased operating expenses to manage the year-over-year increase in sales. Net income for the second quarter increased to $8.1 million or $0.35 per share from $1.5 million or $0.06 per share in Q2 fiscal 2022. Turning to the balance sheet, we ended the second quarter with $8.1 million in net bank overdraft. The decrease in cash in the quarter mainly reflects a buildup of inventory by $26.3 million in the quarter other working capital increases of 0.4 million, capital expenditures of 0.4 million, deferred development costs of 5.2 million, dividends paid of 2.5 million, withholding taxes on PSUs of 1.4 million, and other debt, interest, and cash taxes of 1.8 million, partially offset by adjusted EBITDA of 15.8 million, and net proceeds from common share issuances of $15.9 million. Just to expand on the common share issuances in the quarter, which we completed at a pivotal point in our growth story, the net proceeds from the issuance of the $15.9 million were used to support our working capital requirements in response to the anticipated high demand for our next generation solutions and to navigate supply chain constraints while minimizing debt service costs. It's important to note that the common share offerings are oversubscribed, demonstrating the belief in our path forward and ability to grow revenue and capture market share. Moving on, working capital increased to $89.1 million from $58.6 million as at June 30, 2022. We note that working capital balances can be subject to significant swings from quarter to quarter. Our product shipments are lumpy, reflecting the requirements of our major customers. Finally, cash flow used in operations for the first quarter was $12.2 million, as compared to cash flow from operations of $1.4 million during the same period last year. The $13.6 million increase in cash used in operations reflects a $21.5 million decrease in cash flow from non-cash working capital driven primarily by the buildup of inventory to support growth and minimize the impact of supply chain constraints. Partially offset by a $7.9 million improvement in operating cash flow year over year. Now back to Sumit.