Vecima Networks Inc.

Hello, this is the Caress Call Conference Operator. Welcome to the Wessemer Network's fourth 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 1 on your touch-tone 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 you need assistance during the conference call, you may signal an operator by pressing star and zero. Presenting today on behalf of Wessemer Networks are Sumit Kumar, President and CEO, and Dale Booth, Chief Financial Officer. Today's call will begin with executive's commentary on Wessemer's financial and operational performance for the fourth quarter and year-end 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 fourth quarter and year-end fiscal 2023 results, as well as a detailed supplemental investor information, are posted on WESMA's website at www.wesma.com under the Investor Relations heading. The highlights provided on this call should be understood in conjunction with the company's audited condensed annual consolidated financial statements and accompanying notes for the year ended June 30th, 2023 and 2022. Certain statements in this conference call and webcast may constitute forward-looking statements with 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, belief, or current expectation with respect to market and general economic conditions, future sales and revenue expectations, future costs, and operating performance. These statements are not guarantee 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 WESIMA's operations and industry and customer demand that may have a material impact on or constitute risk factors in respect of WESIMA's future financial performance as set forth under the heading risk factors in the company's annual information form dated September 21st, 2023, 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 play undue reliance on such forward-looking statements. In addition, these forward-looking statements relate to the date on which they are made. WESMA 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 2023 was another record-breaking year for Vesma as we furthered our position as a leading innovator and essential partner supporting the global wide-scale migration to distributed access architecture and IPTV. I'll start today with a review of some of the financial and operational highlights of the year. Dale will provide more detail on our financial results Then I'll return to talk about what lies ahead for Vesma. To begin, I want to impress upon the fact that, by every measure, fiscal 2023 was a remarkable year, teeming with growth, innovation, and performance. All three of our business segments rose sharply over our already exceptional fiscal 2022 results, and together turned in the best top and bottom line results in Vesma's history. On a full year basis, sales increased 62.4% to $303.4 million. That was after achieving 50.5% year-over-year growth in fiscal 2022, leading to Vesma sales now being almost two and a half times what they were just two years ago. And we continue to leverage this growth through to the bottom line. Gross profit climbed by nearly 58% to $142 million. Adjusted EBITDA was up 93% to $59.8 million. and adjusted net earnings per share nearly tripled to $1.19 per share from $0.41 last year. Of course, these are all record results for Vecima. Our performance was once again led by our video and broadband solution segment, and more specifically, by further dramatic growth for our entro family of products. As we continue to ride the first wave of the global cable industry's wide-scale migration to distributed access architecture, Entra's sales more than doubled from $107.3 million in fiscal 2022 to $222.1 million in fiscal 2023. Entra continues to be our fastest-growing product family and represented 73% of fiscal 2023 total sales. To put this into perspective, consider that just three years ago, Entra accounted for just over $5 million, or about 5% of ESMO's consolidated sales. In total, our customer engagements for Entra climbed to 107 during fiscal 23, up from 91 at the start of the year. And 51 of those customers are now using our Entra cable and fiber access products in their networks. This includes deployments with eight of the top 12 largest cable operators in North America, which provides a strong indicator of estimate leadership in the DAA landscape. And our relationships with these customers continue to expand in fiscal 2023. As an example, Charter Communications, one of the world's largest cable operators, chose our new Entra ERM3 solution as one of the backbones of the major DAA rollout it plans to implement in fiscal 2024. We also work closely with Charter to demonstrate multi-gigabit speed symmetrical DOCSIS 4.0 at various industry events during the year. And subsequent to year end, we recently announced the VESA 1 Charter have entered into a warrant agreement that has the potential to further expand the strong strategic partnership that our two organizations have already built. Subject to achieving significant multi-year purchase targets of products and services, the successful realization of that agreement is expected to align with the accompanying growth of strong shareholder value. Another highlight for ENTRE in fiscal 2023 was strong growth on the fiber access side of our portfolio. as we supported the supply of substantial rural broadband connectivity capacity last year. As you're probably aware, governments are investing heavily to close the rural-urban divide for high-speed internet access, and ENTRA products are an integral part of that solution. Now, I want to note that while full-year ENTRA growth was exceptionally strong, we are anticipating a momentary deferment in ENTRA's momentum at the start of fiscal 2024. This reflects a short-term transition currently underway in the DAA macro environment. Over the past few years, Bessemer has been effectively responding to extremely challenging supply chain conditions. These challenges continue through much of fiscal 23, and we were distinctly successful in helping our customers secure the inventories they needed to support their planned rollout programs. While Vecima's exceptionally strong supply chain management led to fulfillment of customer orders on schedule, in some cases, customer projects, on the other hand, got delayed due to lagging construction, labor, permitting, utility make ready, and other requirements for these very large scale network build outs. As we enter Q1, we're now seeing a measure of timing realignment and project cadence, tying to a brief transition where customers are working to catch up on and ramp project rollouts using the inventories we've unlocked for them. That's led to some short-term pushouts in order delivery dates starting in Q1, even as backlog for the L-quarters continues to build. I want to emphasize that we expect this to be a relatively transient intermission in what is a much broader wave of DAA adoption and growth. DAA is becoming a multi-billion dollar market as operators worldwide undertake this transformational evolution of broadband access networks. And the industry is heading into this journey with Vesma widely recognized as the leading DAA technology partner. We're on the cusp of another major wave of growth and extremely well positioned to benefit. Looking now the highlights from our other business segments, our content delivery and storage segment turned in impressive performance with annual sales growing 20.3% to 52.3 million in fiscal 2023. We finished the year on a high note with record Q4 sales performance of $17.1 million, an 85% increase over last year. This drove those strong full-year results. The year's highlights included multiple IPTV expansions with existing customers, along with new customer wins. As we've highlighted before, with respect to the many new IPTV program wins we've achieved over the past few years in CDS, when customers initiate managed IPTV platforms, They typically start by rolling out to just a starting subset of their overall video subscribers. They then have the expectation to gradually migrate the remaining bulk of legacy video subscribers to the next generation video fabric represented by MediaScale. In fiscal 2023, we saw a significant increase in this type of activity. After attaining the expected success and benefits associated with IPTV, customers drove step-ups in migration, expansion, and corresponding capacity purchase increases for MediaScale IPTV. On the innovation front, we continue to advance our MediaScale portfolio with multiple product enhancements, including major new releases in our Origin and Cache product families, as well as a new MediaScale video platform enabling operators to refresh old video-on-demand infrastructure and expand their content libraries while leveraging existing back office investments and deploying IPTV ready origins and storage. We also continue to develop our standards compliant open caching solution. As we've mentioned, 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 offering compelling business advantages. We believe open caching is the future of video streaming, and we're continuing to lay the groundwork for it in partnership with leading global content and service providers. Finally, in telematics, we continue to build on the segment's profitable recurring revenue contribution as we advance uptake for Nero Global Tracking, our growing movable asset tracking platform. In fiscal 2023, we added 58 new asset tracking customers, and more than doubled the total number of movable assets we monitor in the year to over 48,000 TAGs. In every aspect, fiscal 2023 was a powerful year for Vesma, and we ended in a very strong financial position with $83.7 million in working capital and modest long-term debt of $14 million. That was after investing heavily in working capital, R&D and organic growth, and returning cash to our investors in the form of our regular dividends, of $0.22 per share. I also want to note that we undertook a realignment of our workforce at the close of fiscal 2023. The changes, which involved about 10% of our workforce, are expected to provide a corresponding reduction in our run rate operating expenses compared to Q4, excluding restructuring costs, stock-based compensation, and other expense in the fourth quarter. For the full year, net of any planned staff additions and other incremental OPEX increases through the year, we expect an 8.5% decrease compared to the fourth quarter OPEX. I want to point out that the staffing reduction was proactively associated with adjustments we've anticipated in the market needs and therefore predominantly program alignment related. While the downsizing was driven primarily by our go-forward program needs, needs, it also speaks to our continued commitment to efficiency and student management as we enter the first half of fiscal 2024. The combination of programmatic OpEx adjustments, robust working capital and product readiness for new large-scale programs means we're balanced and very well positioned to support the significant ongoing 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 review. Dale?

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen the fourth quarter and fiscal year 2023 results, news release, and MD&A, and our fiscal year 2023 financial statements 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 June 30, 2023, we generated sales of $75.5 million. This was an increase of 26% over the $60 million in Q4 last year and a 3% decrease from the $78.3 million in Q3 fiscal 2023. The year-over-year increase reflects higher sales from the video and broadband solution segment combined with record fourth quarter sales in our content delivery and storage segment. Within the video and broadband solution segment for the fourth quarter of fiscal 2023, we generated sales of $57 million. This was up 15% from the 49.4 million in Q4 last year and 12% lower than the 64.8 million in sales last quarter. Next generation DAA products contributed fourth quarter entry revenue of $50.7 million, up 27% from the $40 million in Q4 fiscal 2022, but down 19% from the $62.7 million in Q3 fiscal 2023. We anticipate a resurgent of demand momentum in the second half of fiscal 2024 as we begin to launch major DAA rollouts with key customers. In all, Entra DAA platforms are now being sold to 51 operators across six continents. Commercial video product sales were $6.3 million for the quarter, a decrease of 29% from the $8.8 million in Q4 fiscal 2022, but almost three times higher than the $2.1 million generated in Q3 fiscal 2023. The year-over-year change reflects a transition to next-generation platforms and the impact of some of our newer DA driven commercial video solutions being accounted for as part of the intra-family sales. The quarter over quarter improvement reflects stronger than expected TC600E sales in Q4. Content delivery and storage segment sales delivered a record quarter with 17.1 million in Q4 fiscal 2023, an 85% increase from the 9.2 million in the fourth quarter of fiscal 2022, and up 45% compared to the 11.8 million in Q3 of this year. Our record Q4 performance reflects significant IPTV expansion activity with customers together with strong services revenue. CDS segment sales for Q4 fiscal 2023 included 10.3 million of product sales and 6.8 million in services revenue. As always, we note that quarterly sales variances are typical for the CDS segment. Turning to the telematic segment, sales in the fourth quarter were 1.4 million, consistent with expectations. This was slightly higher than the 1.3 million generated in the same period last year, but lower than the 1.7 million in Q3 of this year. Consolidated gross margin for the fourth quarter was at 50.5%. with a gross profit of $38.1 million, an increase of 34% from the $28.5 million in Q4 fiscal 2022 and up 12% from last quarter's $34.1 million, above our targeted range of 45% to 49%. Gross margin was also up from the 48% achieved in Q4 fiscal 2022 and the 44% last quarter. The improvement in gross margin reflects higher sales and margins in the CDS segment, combined with improved gross margin offset by lower sales in the video and broadband solution segment. Video and broadband solution segment gross profit grew 21% to $27.9 million in the fourth quarter of fiscal 2023 from the $23 million in the same period last year and up 4% from the $26.7 million in gross profit last quarter. Gross profit margin of 49% was slightly higher as compared to 47% in Q4 fiscal 2022, and significantly higher than the Q3 fiscal 2023 gross profit margin of 41%. The year-over-year increase in gross profit reflects higher sales compared with reduced expedite costs in our commercial video products, a large software feature sale for commercial video, and a favorable deferred revenue adjustment resulting from a change in contract terms. Gross profit in the content delivery and storage segment for Q4 fiscal 2023 increased significantly by 99% to $9.2 million from the $4.6 million in Q4 of fiscal 2022. CDS gross margin of 54% for the quarter was also higher than the 50% gross margin for the same period last year. On a sequential quarterly basis, CDS gross profit was 47% higher than the 6.3 million generated last quarter, and CDS gross margin was slightly higher than the 53% achieved in Q3 fiscal 2023. Year-over-year changes in gross profit and gross margin reflect a higher percentage of high-margin software sales in the product mix and an increase in sales in the current quarter as compared to in the same period last year. In the telematics segment, gross profit in the fourth quarter increased to $1 million with a gross margin of 72% from the $0.9 million in gross profit and 66% gross margin in Q4 fiscal 2022. and gross profit of $1.1 million and 65% gross margin last quarter. The year-over-year improvement in gross margin was mainly the result of lower 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 $12.9 million in the current quarter from $11.4 million in Q4 fiscal 2022 primarily reflecting the hiring of additional R&D employees, the amortization of deferred development costs, higher licensing costs, partially offset by increased capitalized development 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 $7.8 million in from $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 expenses. G&A expenses increased to $8.0 million in Q4 fiscal 2023 from $6.5 million in Q4 fiscal 2022, primarily reflecting the additional staffing, travel and entertainment, training and development, and contracting costs. Restructuring costs were $1.2 million in Q4 fiscal 2023 compared to nil in Q4 of fiscal 2022. The increase is a result of restructuring activities undertaken in Q4 fiscal 2023 to better align the company's resources with their strategy and outlook. Operating cost savings will occur in fiscal 2024 as a result of this restructuring. Other expenses were $1.6 million in Q4 fiscal 2023, an increase from other income of $0.8 million in Q4 fiscal 2022. This primarily relates to cancellation penalties incurred on supplier contracts that were incurred in fiscal 2023. Total off-ex in Q4 increased to $32.7 million from $24.7 million during the same period last year. This increase primarily reflects higher operating expenses in the video and broadband solution segment. Video and broadband solution operating expenses for the quarter increased to $23.8 million from $15.8 million in Q4 fiscal 2022. The $8 million year-over-year increase primarily reflects additional expenses for research and development, sales and marketing, general and administrative activities, and staffing. all related to sales growth. Content delivery and storage operating expenses were $8 million in both Q4 fiscal 2023 and Q4 fiscal 2022. Higher expenditures on research and development and general administrative activities were offset by a one-time impairment charge in the fourth quarter of fiscal 2022. I note the 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 current quarter increased to 15.3 million or 20% of sales from 12.7 million or 21% of sales in the same period last year. The year-over-year increase reflects higher staffing costs higher costs for software licensing as our next-generation product families move closer to full-scale commercial deployment. In our operating results, we reported an operating income of $5.4 million in Q4 fiscal 23 as compared to $3.8 million in Q4 fiscal 22. The $1.6 million increase was primarily due to higher sales in the content delivery and storage segments partially offset by increased operating expenses in the VBS segment with higher R&D and staffing aimed at supporting future growth. Adjusted EBITDA grew to $15.1 million this quarter from $11.1 million in the prior year quarter and up from $11.7 million sequentially. Foreign exchange gain was $1.3 million in Q4 fiscal 2023 as compared to $1.4 million in the prior year period. Net income for the quarter increased to 5.1 million or 21 cents per share from a net income of 3.5 million or 16 cents per share in Q4 fiscal 2022. Overall, a very solid quarter. Turning to the balance sheet. We ended the fourth quarter of fiscal 2023 with 2.3 million in cash as compared to 12.9 million in the same period last year. Working capital increased to $83.7 million in the current quarter from $58.6 million in Q4 last year, but decreased from the $91.1 million in Q3 fiscal 2023. 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 issues like contracts with greater than 30-day payment terms also affect working capital, particularly if shipments are back-end weighted for a quarter. Lastly, cash flow provided by operations for the fourth quarter was $4.6 million as compared to cash flow provided by operations of $10.4 million during the same period last year. The $5.8 million change reflects a $7.3 million decrease in cash flow related to non-cash working capital, partially offset by a $1.5 million increase in operating cash flow. On a final note, in terms of the quarterly dividend, the Board of Directors approved a quarterly dividend of 5.5 cents per common share payable on November 6, 2023, to shareholders of record as at October 13th, 2023. I would like to point out that this dividend will be designated as an eligible dividend for Canadian income tax purposes. So just to summarize, another strong quarter with continued sales growth and a solid gross margin and adjusted EBITDA. Now back to Sumit.