Vecima Networks Inc.

Hello, this is the Chorus Call Conference Operator. Welcome to the Bessemer Network's third 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 then one on your touchstone phone. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. Should anyone need assistance during the conference call, they may signal an operator by pressing star then zero. Presenting today on behalf of SMA Networks are Sumit Kumar, President and CEO, and Dale Booth, Chief Financial Officer. Today's call will begin with executive commentary on Wessemer's financial and operational performance for the third quarter 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 third quarter fiscal 2023 results as well as a detailed supplemental investor information are posted on WESIMA's website at www.wesima.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 nine months ended March 31st, 2023 and 2022. Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable securities law. 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 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 material impact on or constitute risk factors in respect of Wissima'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 these earnings calls 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. Resuma 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, and welcome, everyone, to our third quarter conference call. With 12 quarters of rapid growth behind us and a remarkable more than two and a half times rise in run rate revenues in just two years, I'm pleased to report the Vesma's strong performance continued in Q3 as we set another high watermark for consolidated sales. Our third quarter revenues climbed an impressive 54% year over year, culminating in new quarterly consolidated sales, a new record of 78.3 million. As we expected, our video and broadband solution segment and specifically our next generation Entra products were the primary driver of these results. Entra sales climbed to $62.7 million during the quarter, more than double what we achieved in the same period last year. This was driven in part by the best quarter yet for our Entra optical products as we supported scale rollouts for broadly funded rural broadband expansions of fiber to the home. We also continue to realize strong sales for other Entra family products, including our remote PHY nodes. Looking at Entra sales as a whole, Vesma is clearly benefiting from our industry-leading portfolio of DAA cable and fiber access products, as well as our growing base of customers. Our total customer engagements for Entra grew to 106 broadband service providers worldwide in Q3, up from 83 a year earlier. And we've built up not just the number of relationships, but the depth and breadth of these relationships as well. In many cases of multiple network rollout programs across multiple product categories in cable and fiber access. As an example, during Q3, Charter Communications selected Decima to provide our new ERM3 next generation remote PHY devices for their planned cable access network upgrade. We expect our solution will be used for a substantial portion of Charter's footprint-wide cable access network upgrade to DAA. We also grew our presence in Asia with a strategic remote-fi win with Taiwan's largest cable operator. As we've expanded our customer base and built volumes, our share of the expanding global market for broadband access has grown as well. Deloro Group, a leading research group in the telecommunications space, recently released its market share calculations for the global DAA market in 2022. Vesma was again identified as the global market share leader in two key categories, remote optical line terminals and remote MAC5, and our shares grown in other categories as well. Looking at other contributors to our Q3 results, Our content delivery and storage segment generated a solid sales contribution of $11.8 million in Q3 on strong IPTV demand, as well as significant increase in CDS services revenues. The latter was up 31% year-over-year to a record $5.6 million in services in CDS. In terms of IPTV expansion activity, six of our existing customers undertook network expansions during the quarter, including a top 10 US cable operator. This customer is growing their network footprint to give a larger subscriber base access to state-of-the-art live, on-demand, and Cloud DVR streaming services on the IPTV fabric. Subsequent to the quarter end, we established a new partnership with Kadant, the largest independent platform for advanced TV advertising. Vesma is partnering with Kadant to use our media scale streaming solution with Kadant's Aperture platform to support and protect existing linear ad revenue as operators migrate to new IPTV platforms. This combination will also create opportunities for incremental, dynamically targeted advertising revenue. One additional achievement I want to mention is the continued success of our CDS solutions in supporting very large-scale live streaming events. During Q3, our IPTV customers streamed the Super Bowl live using our MediaScale platform with network capacity utilization exceeding all prior peaks in streaming traffic. Not only were these operators able to support a record level of traffic during the game, but they did so while maintaining 100% uptime and leading video quality. In the process, we continued to demonstrate the robustness and reliability of Esmo's streaming solutions at major viewership scales. Turning to our telematics segment, we achieved an excellent quarter with a 20% year-over-year increase in sales, It was our best quarter to date for movable asset customer wins. We added 60 new customers in all in assets, which combined represent over 300 new subscriptions. And we significantly increased the number of movable assets being monitored to over 40,000 units. That represents a 266% increase over a period of eight quarters in movable assets. Our results were further supported by continued rollout related to recent municipal government wins. I should add that Telematics also continues to be a highly profitable part of our business, with the segment achieving gross margin percentage of 65.1% in the third quarter. So, it was another quarter of broad execution for Bessema, and that included the bottom line, where we grew adjusted EBITDA by 44% year-over-year to $11.7 million, and earnings per share to $0.18 from $0.13 last year. But we also continue to see effects from the shifting landscape in terms of the supply chain and inventory. As you know, we've been highly successful in supporting our customers' network upgrades, even in the midst of very demanding and, in some cases, extreme global supply chain conditions. We've worked diligently to support customer demand and to fulfill large orders despite these major macro issues in the supply chain over the last two years. That execution has served to fuel the exceptional growth we've achieved over the past two years and also cemented our position as a go-to vendor for our customers. But it's come with higher materials, freight, and logistics costs, which have put pressure on our margins over the same period. In concert with that, as we've indicated before, different categories of cable and fiber access products carry varied margin profiles. As a larger industry-wide DAA rollout ramp, architecture trends in the marketplace are leading to an expected shift in product mix. We saw the margin impact of this in Q3, as Dale will discuss momentarily, and it influences our forward expectations as well. In addition, we've also begun to see the supply chain landscape start to shift relatively quickly to where supply in the pipeline has temporarily outpaced our customers' ability to physically get some of their installations done. The demand for network upgrades remains very strong, and the capacity increases are essential. But in some cases, there simply aren't enough workers, trucks, permitting, and construction capacity to make it happen as quickly as our customers would like and had planned. So we're now starting to see a different impact for the macro supply chain and inventory environment. And I'll talk more about how that influences our near-term delivery expectations when I return to discuss our outlook in a few minutes. But first, I'll pass the call over to Dale to provide more detail on our financial results. Dale?

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen our third quarter fiscal 2023 news release, MD&A, and financial statements that are posted on VESMA's website. I will present the relevant numbers and discussions around overall results, market segments, operational expenses, and the balance sheet. Starting with consolidated sales, for the three months ended March 31st, 2023, we generated record sales of 78.3 million. This was an increase of 54% over the 50.9 million in Q3 last year and an increase of 3% from the 76.2 million in Q2 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 64.8 million. This was up 75% from the 37 million in Q3 last year and 4% higher than the 62.3 million last quarter. as customers continued their transition to next-generation networks using Bessema's solutions, as well as our success in meeting our customers' undertaking of large-scale DAA fiber access deployments during the quarter. Our intra-next-generation DAA products contributed third-quarter sales at $62.7 million, up a significant 104% from the $30.8 million in Q3 fiscal 22 and up 13% from the $55.7 million in Q2 fiscal 2023. Third quarter sales for commercial video, which include Terrace Quan and Terrace Family Products, were $2.1 million, down 66% from $6.2 million in Q3 fiscal 2022, and down 68% from $6.5 million in Q2 fiscal 2023. As expected, commercial video sales are 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 intra-family sales. In the content delivery and storage segment, third quarter revenues were $11.8 million, or 6% lower than the $12.5 million in the prior year quarter, and 5% lower than the $12.4 million in Q2 fiscal 23. GDS segment sales for the Q3 fiscal 23 period included $6.2 million of product sales and $5.6 million of services revenue. GDS sales reflects IPTV expansions with six existing customers, including a top 10 US cable operator 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 a strong finish for the content delivery and storage segment in the last quarter of fiscal 23. Turning to the telematics segment, sales of 1.7 million in the third quarter were 20% higher than the 1.4 million achieved in Q3 of fiscal 22, and 8% higher than the 1.5 million in Q2 last quarter, reflecting an increase in the customer base and number of assets and tags being monitored in our telematics segment. Consolidated gross margin for the third quarter was 43.5%, down from 47.1% in Q3 fiscal 22, and 47.3% in Q2 of fiscal 23. This primarily reflects a different product mix between the periods. Supply chain constraints, including elevated freight and logistics costs, as well as a more volume-oriented margin profile on certain products as we begin to fulfill larger orders. As noted in our MD&A, we have revised our targeted gross margin percentage to 45% to 49% to reflect the expected product mix profile in our entra cable and fiber access product lines as the DAA market further scales. We expect in the next several quarters that gross margin will trend slightly below or in the lower end of this range, while elevated expedite costs from past supply chain constraints remain within our cost of goods sold as materials transition from the balance sheet to product deliveries. Video and broadband solutions gross margin was 41% in the current quarter. This was lower than the 44% in Q3 of last year and the 46% in Q2 last quarter. The VBS gross margin primarily reflects significantly stronger sales partially offset by a different product mix with lower margins compared to the prior year period. Gross margin in the content delivery and storage segment increased to 53% from 51% in Q2 last quarter, but down from the 55% in Q3 last year. The year over year change reflects a change in customer and product mix. In the telematics segment, gross margin of 65% in the third quarter was higher than the 63% in Q3 fiscal 22, but lower than the 68% in Q2 fiscal 2023. Turning to third quarter operating expenses, the notable changes year over year were as follows. R&D expenses increased to $12.1 million in the third quarter from $8.8 million in Q3 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, and higher amortization, 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 $6.9 million from $4.7 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 $8.4 million in the quarter from $6.1 million in Q3 fiscal 22, primarily reflects higher staffing costs increase in insurance costs, and professional fees. Total OpEx in Q3 fiscal 23 increased to $27.9 million from $19.8 million during the same period last year. The year-over-year increase primarily reflects additional operating expenses related to higher sales in the video and broadband solution segment and associated support costs. 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 15.4 million, or 20% of sales, from 5 million or 23% 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 deployment. We reported an operating income of $6.1 million in Q3 fiscal 23 as compared to operating income of $4.1 million in Q3 fiscal 22. The increase is primarily due to higher BBS sales, partially offset by a different products mix, and increased operating expenses to operate the year-over-year increases in sales. Net income for the third quarter increased to $4.5 million, or $0.18 per share, from $3 million, or $0.13 per share, in Q3 fiscal 2022. Turning to the balance sheet. We ended the third quarter with 12.3 million in net bank overdraft compared to 8.1 million as at the end of the prior quarter. The decrease in cash in the quarter mainly reflects deferred development costs of 6.4 million, capital expenditures of 1.1 million, dividends paid of 1.3 million, partially offset by positive cash flow from operating activities of 3.8 million, proceeds from exercise options of $0.5 million, and net repayment of debt of $0.3 million. Moving on, our strong working capital position increased to $91.1 million from $89.1 million as at the end of the prior quarter. 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 provided by operating activities for the third quarter was $3.8 million, as compared to cash flow used in operating activities of $3.9 million during the same period last year. The $7.7 million increase in cash provided by operating activities reflects a $4.4 million increase in cash flow from non-cash working capital, combined with a $3.3 million improvement in operating cash flow year over year. We'll now turn it back to Sumit.