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spk00: Hello, this is the Chorus Call Conference Operator. Welcome to Vesama Network's second quarter fiscal 2024 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'll 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 pick up the 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 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 2024 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 2024 results, as well as detailed supplemental information, are posted on Vesma's network at www.vesma.com under the Investor Relations heading. The highlights provided in this call should be understood in conjunction with the company's unaudited interim condensed consolidated financial statements. and accompanying notes for the three and six months ended December 31st, 2023 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 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 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 VESMA's operations and industry and customer demand that may have a material impact on or constitute risk factors in respect to VESMA's future financial performance as set forth under the heading Risk Factors in the company's Annual Information Form dated September 21, 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 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.
spk02: Thank you. Good morning and welcome everyone. Thank you for joining us. We achieved very strong operating performance again in the second quarter as we continue to successfully navigate the anticipated transition in DAA deliveries while preparing for the next wave of DAA growth. I'll start today with an overview of our second quarter achievements. Dale will follow with more details on our financial performance, and then I'll return to talk about our outlook going forward. Following several consecutive quarters of exceptional revenue growth and a tripling of sales over just three years, we anticipated that the first half of fiscal 2024 would be a short transition period for our Distributed Access Architecture, or DAA, business. Our customers were busy catching up and preparing to ramp project rollouts that were previously delayed by various project requirements, as we've talked about on earlier calls. Factors such as building labor capacity, permitting, utility make-ready, and many other project prerequisites that are very typical of large-scale network build-outs, along with supply of materials outside of ESMA's product lines. As a result, customers temporarily shifted from building up their product pipelines to increasing their rollouts and deployment activity using inventories we secured for them during the previous year's supply chain challenges. Now, at the midpoint in our 2024 fiscal year, we believe this transition is approaching its conclusion, and I'm proud to say we've managed through it very effectively. Our second quarter results include a total sales of $62 million, which are in line with our expectations, and we paired these sales with a strong gross margin percentage of 47.8%, while we also tightly managed our operations. That, in turn, helped us achieve second quarter adjusted EBITDA of $12.5 million, or over 20% in sales, and earnings of $0.15 per share, more than doubling quarter over quarter. In the Video and Broadband Solutions segment, our second quarter sales were up over 10% quarter over quarter as sales began to ramp. Specifically, second quarter VBS sales were up 11% compared to Q1. moreover enter daa sales which represent the lion's share vbs segment sales increased 13 quarter over quarter this is just an early indication of the continuing momentum we see ahead for enter daa and i want to comment today on some of the growth drivers that are starting to converge the first is our new erm3 remote pi device which we launched with charter during the second quarter the arm3 enables operators to easily upgrade their legacy hybrid fiber coax nodes to DAA, reducing time and cost while dramatically increasing broadband capacity. It's expected to be a key component of Charter's nationwide DAA rollout. Volume launch got underway in December, meaning we haven't yet seen a full quarter's worth of contribution from the program within our Q2 results. We expect this solution to be used for a substantial portion of Charter's footprint-wide cable access network upgrade to DAA. And as such, it represents a major multi-year revenue opportunity for Vecima. And we expect it'll start to provide more meaningful contribution to our results in the second half of the fiscal year. The second quarter also brought the launch of our new DOCSIS 4.0 Ready GAP or generic access platform node. This is the culmination of Vecima's EN9000 GAP platform, which we first demonstrated at a CableLab showcase in 2022. It's now ready to provide customers with a future-proof path to 10G, protecting today's network investments by ensuring operators can easily transition to future technologies, including DOCSIS 4.0 cable access and 10-gig remote OLT fiber-to-the-home applications. In October, we announced full availability of the GapNode, and just a few weeks ago, our lead Tier 1 customers certified it for use on their networks. We believe this marks the beginning of a long and exciting wrap-up for this powerful and future-ready new DAA solution. Of course, we've also been talking in recent quarters about the huge U.S. federal government push to get broadband access to underserved rural areas. Known as the BEAD program, this $42.5 billion program is the largest injection of federal funding into broadband deployment in U.S. history. Funding grants from the program are now starting to develop and will be supporting both new and incremental major capital spending projects for many of our customers. We expect our inter-fiber access products will be an integral part of their solution as they bring high-speed connectivity to underserved areas of the U.S. Already today, our inter-remoto LTs are heavily utilized by operators to significantly expand their footprints under the Rural Digital Opportunity Fund, or RDOF program, which will carry on in parallel with BEAD. The B program is over double the size of the RDOF program. Keep in mind that these are just three of the major near-term growth pathways that are now converging for Vesma. At the end of Q2, we had 184 unique program engagements for Entra, cable and fiber access, across 110 operators globally. As more customers, various DAA rollouts commence, they're adding to the wave of demand that's now building for our Entra technologies and solutions. The overall scope of the opportunity is immense, and as we move into the second half of fiscal 24, we expect it to start translating into strong revenue momentum for our BBS segment. Turning now to our content delivery and storage segment, Q2 sales of $11.3 million were lower than we anticipated. As you know, CDS quarterly sales are prone to lumpiness due to the typically large size of orders that are tied to IPTV project and capacity increase timings. That means a shift in customer timing can affect segment results, as was the case in Q2. But some of the noteworthy highlights of the quarter included a new engagement with Blue Ridge Communications to support its video expansion, as well as continued expansion with a number of other customers that are growing their footprints with our IPTV platforms. We also released new versions of our media skill origin and dynamic content products during the quarter. And another key achievement was a continued growth of our CDS services revenues, which are reflective of the growing base of media-scale IPTV platforms we now have out in the market. This, in turn, helped the CDS segment achieve a strong Q2 margin of 54.5%, despite the lower sales. Turning to telematics, the segment turned in another good quarter as we increased sales by 7% year-over-year. That growth reflects an addition of 10 new customers for our Nero asset tracking platform in the quarter, which in turn increased the number of movable assets we now monitor to over 59,000 units. Telematics also continues to be a highly profitable part of our business with the segment achieving strong EBITDA margins on a recurring SaaS business. So overall, it was a very solid quarter for Vesma again. And all across our operations, we continue to focus on the growth ahead while tightly managing the business and operating costs to achieve greater efficiency. At the same time, we continue to broaden our best-in-class technologies with robust R&D investment that's further advancing our leadership in preparation for the major opportunities we see ahead. I'll tell you more about our outlook for the business in just a few minutes, but first I'll pass the call over to Dale to provide more detail on our Q2 results. Dale?
spk03: Thank you, Sumit, and thank you all for joining us today. For the purposes of this call, we assume that everyone has seen our second quarter fiscal 2024 news release, MD&A, and financial statements posted on VESMA's website. Starting with consolidated sales, we generated second quarter revenue of $62 million, which was within expectations, but down 19% year over year. The video and broadband solution segment accounted for $49.1 million of these sales. which was 21% lower than in Q2 of last year. This primarily reflects the DAA transition Sumit referenced, with interest sales also decreasing 21% year over year. As Sumit noted, on a quarter over quarter basis, interest sales were up 13%, providing just a hint of the quarterly revenue momentum we're anticipating. Commercial video product sales, which are included in VBS results, We're stable quarter over quarter at 5.3 million, but down about 1.2 million from the same period last year. This reflects the transition to next generation platforms and the impact of some of our newer DAA driven commercial video solutions being accounted for as part of the entry family sales. In our content delivery and storage segment, we saw significant quarterly fluctuation with sales of 11.3 million. down 9% year-over-year and 28% quarter-over-quarter. This mostly reflects timing of orders, and we note, as always, that quarterly sales variances are typical of this segment. One notable achievement this quarter was seeing service sales surpass product sales for the first time, which reflects the strong and growing base of deployed media-scale platforms out there in the market. With another strong quarter for the telematics segment with sales of 1.6 million, increasing 7% from the 1.5 million in Q2 of last year. Gross margin for the company as a whole was 47.8%, which was at the higher end of our target range and up both year over year and sequentially. Turning to second quarter operating expenses, the notable changes year over year were as follows. R&D expenses increased by 1.3 million year-over-year to 11.6 million. This primarily reflects increased amortization of deferred development costs, prototyping materials, and software and licensing costs, offset by higher capitalized development costs quarter-over-quarter. Sales and marketing expenses for the second quarter were stable year-over-year at $6.6 million. Second quarter G&A expenses decreased to $6.4 million, an improvement of $1.1 million. This reflects the targeted lower staffing costs we implemented in Q4 fiscal 2023 and lower ERP program implementation costs year over year. Other expenses remain flat at $0.1 million. In total, we reduced second quarter OPEX to $24.9 million, a decrease of 1% year over year and 5% quarter over quarter. Costs are expected to increase in the second half of fiscal 2024 to support the sales growth anticipated. In the video and broadband solution segment, operating expenses for the quarter were down 0.5 million year over year, reflecting a combination of lower G&A expense partially offset by higher R&D expense. Content delivery and storage operating expenses were 0.1 million lower at 7.4 million. And in our telematics segment, operating expenses were slightly higher at $1 million, reflecting an increase in R&D expense. 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. Patrick Corbett, Adjusting for deferrals amortization of deferred development costs and income tax credits actual r&d investment increased to 15.2 million or 25% of sales in the second quarter from 13.2 million or 17% of sales in Q2 last year, as we continue to invest in our next generation products. Looking at our bottom line results, we reported a second quarter operating income of 4.7 million as compared to 10.7 million in the same period last year. This primarily reflects the transition period for our DAA business, partially offset by lower expedite costs as supply chain challenges eased. We generated second quarter adjusted EBITDA of 12.5 million as compared to 15.8 million last year. reflecting lower sales partially offset by higher gross margins. On a quarter-over-quarter basis, adjusted EBITDA increased by 4.3 million, or 54%, from the 8.1 million in Q1. Foreign exchange gain in the second quarter increased to 1.8 million from a foreign exchange loss of 0.1 million in the prior year period. This reflects the positive impact of a stronger US dollar on our results. And income from continuing operations for the quarter was 3.6 million or 15 cents per share as compared to 8.1 million or 35 cents per share for the same period of fiscal 2023. Turning to the balance sheet, we ended the second quarter with 2.6 million in cash as compared to 2.3 million in the same period last year. Working capital of 80.4 million at the end of Q2 was lower than the 83.7 million recorded in Q4 fiscal 2023, but on par with Q1 of fiscal 24. 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-end weighted for a quarter. Lastly, cash flow used in operations for the second quarter was $13.2 million, as compared to cash flow used in operations of $12.2 million during the same period last year. The $1 million increase reflects a $13 million decrease in operating cash flow partially offset by a $12 million increase in cash flow from non-cash working capital. On a final note, the Board of Directors approved a quarterly dividend of 5.5 cents per common share, payable on March 18, 2024 to shareholders of record as at February 23, 2024. It's important to note that this dividend will be designated as an eligible dividend for Canadian income tax purposes. So just to summarize, another solid quarter as we continue to maintain tight control of our operations. Now back to Sumit.
spk02: Thank you, Dale. As we look ahead to the balance of fiscal 2024, VESMA is on the cusp of a major new phase of growth and development for the business. As I mentioned earlier, a number of growth pathways are converging. just as operators worldwide are launching upgrades to their broadband and IPTV networks. We expect this to have a significant and positive impact on our results in the second half. In our video and broadband solutions segment, we anticipate a major uptake in sales starting in Q3. We expect our quarterly run rate to reach new highs by year end, with momentum expected to build into fiscal 2025 and beyond. In our content delivery and storage segment, overall demand for our IPTV and open caching solutions remain strong. However, the Q2 shift in project timing has led to an adjustment in our expectations for the year. We now expect the CDS segment to achieve fiscal 24 sales results similar to the strong performance we achieved in fiscal 23. Longer term, we continue to see robust future growth potential as the IPTV and OTT streaming services markets continue to expand. Finally, in our telematics business, we expect consistent incremental growth from the fleet tracking market and increasing demand for our new removable asset tracking services. The latter has become an important driver of segment differentiation and gains in recent quarters. On a consolidated basis, we expect our fiscal 2024 revenues will be in line with the all-time record results we achieved in fiscal 2023, despite the slower first half this year. And in summary, we're more than excited about Vesma's prospects, both in the near and the longer term. We're on the cusp again of the next major wave of growth, and as we move into the second half, we're resoundingly executing on multiple multi-year opportunities. Between a large and growing order backlog, one of the world's most comprehensive portfolios of next-gen DAA and IPTV technologies covering both fiber and cable access, strong partnerships with some of the world's largest Tier 1 operators, and a solid financial position, we're uniquely positioned to capture this next wave. We look forward to reporting on our achievements in the coming quarters. And that concludes our formal comments. We'd now be happy to take questions. Operator?
spk00: Thank you. We will now begin the question and answer session for analysts and institutional investors. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. Our first question comes from Jesse Pitlak from Cormark Securities. Please go ahead.
spk04: Hey, good afternoon. In the release, you mentioned that you're seeing entry order sizes increasing. Can you just give a sense of the magnitude of the increases?
spk02: Yeah, Jesse, I think that we've seen that, as I mentioned, this first half kind of inventory work down factor has been underway for our customers while they ramp in the field. We've always had, you know, pretty good visibility from our customers. I think I've mentioned that during the supply chain constraints, you know, the last several years, our customers have been really great about working with us to give us long-term visibility. And that's, you know, giving us a good sight picture for what we expect in the second half. You know, in terms of magnitude, I think What I've said is we're going to start to move towards new highs in sales. In fiscal 23, we had some of our highest growth in ENTRA, came out with about $222 million in sales. As we move into the second half, you've got the first half ENTRA sales reported, but we're expecting to get by year's end on a run rate that represents a significant ramp for ENTRA compared to say Q4 of 23, you know, setting up to pursue in the range of up to 60% higher quarterly run rates year over year, Q4 to Q4. So, you know, we are seeing a significant ramp and I hope that gives you a sense of the magnitude. Yeah, that's helpful. Thank you.
spk04: Maybe just kind of moving over to BEAD funding. You know, now that it's kind of getting closer to being allocated, Like, is that changing how maybe some of the cable operators are approaching their deployment planning? Are you seeing them better positioned to now make decisions? Are you seeing them making any changes with maybe some decisions they've already made?
spk02: You know, I think that with respect to if you look at the conjunction of RDOF and BEAD, we've seen that some of the, you know, tier one cable operators in the U.S. have been you know, most addressable in terms of their access to those funding programs. And, you know, they've been very successful all right off to this point when you consider, you know, where the BEAD census blocks are targeted for underserved rural areas. The Tier 1 cable operators that we work with have very good, you know, addressability to that funding program. So, you know, the way that we think about it is, you know, they're accelerating their RDOF deployments as we speak. You can see some of the material publicly available from some of the Tier 1s that we work with and that are, you know, focused on the RDOF program. And they've, you know, ramped in calendar 23. They see a continuing ramp in calendar 24 for RDOF itself, and that carries on through calendar 26. And then B, you know, as we get through calendar 24 and these programs, you know, get through their final solidification on granting of the awards to the ISPs from the states, you know, that layers over top and it's double the size of an overall program. So they're doing really well in terms of IRR on RDOF. So, you know, it's very much, you know, the picture that's being represented to us is that they get to lean into this success that they've had with RDOF and layer and bead. That's helpful.
spk04: And then maybe just one last one for me. You know, there's been some kind of commentary floating around the industry that some cable operators are maybe more seriously considering using extended or enhanced DOCSIS approaches instead of moving ahead with DA and DOCSIS 4.0 at this time. Just wondering if you're seeing anything like that from where you sit.
spk02: Yeah, I think we're still in this phase where we're early in the DOCSIS 3.1 cycle. That itself gets us to gigabit upstream, multi-gigabit downstream, and the product availability and readiness of the operators in terms of their qualification is a go for DOCSIS 3.1 DA. DOCSIS 4.0 gives them that next layer in the future, and extended spectrum is a component of DOCSIS 4.0. so they can get to a more symmetrical, you know, 10G type service. You know, I think operators saying they can leverage this cable access network footprint they have with very, very efficient capital spending to get to gigabit speeds comparable or very competitive with fiber to the home. And then they can, of course, focus their greenfield new footprint build on fiber to the home itself. So, you know, I think with respect to extended spectrum and 4.0, that's part of the future. It's one and the same thing in large part, and what we're seeing is that DOCSIS 3.1 is what they're going to be focused on for the next period of time, and DOCSIS 4.0 is available to them to continue ramping the speeds and leveraging that CapEx efficiency on the cable access network.
spk04: Okay, thanks for that. That's informative.
spk02: I'll pass the line. Thanks, Jesse.
spk04: Thanks, Jesse.
spk00: Once again, analysts and institutional investors who would like to ask a question should press star and 1 on their touchtone phone. We will pause for a moment so any additional callers may join the queue. Our next question comes from Ryan Kuntz of Needham & Co. Please go ahead.
spk01: Thanks for the question. I saw your announcement on the gap node at a tier one. Can you tell us a little bit about that and kind of how that's positioned versus traditional DA platforms and how your customer base, including your key customer there, is thinking about that platform? Thanks.
spk02: Sure. Sure. Thanks, Ryan. I appreciate the question. You know, I think we've talked a little bit about the emergence of the generic gap node. It's, you know, the generic access platform. And what that platform is intended to do, I think, as you know, the cable operators have evolved their networks over decades, starting from analog video to the first, you know, broadband access, now moving to gigabit broadband. And then, you know, leveraging the DOCSIS 3.1 DA, followed by DOCSIS 4.0. But, you know, they've also grown through consolidation and acquisitions. So, you know, you found yourself with some of the world's leading Tier 1 operators in the space, having, you know, accumulated a lot of fragmentation in their hardware in the field. And we have all these older analog nodes, you know, in some cases up to dozens and dozens of varieties of of, you know, node enclosures from that history, that long history to manage, and that becomes problematic in terms of fragmentation. So, you know, as the industry is moving towards DA and generally, you know, us along with a key lead tier one operator have standardized a future, you know, a future forward platform that is modular in nature that can, you know, move away from that fragmentation of dozens and dozens of legacy analog nodes and allow us to have a gap platform that lives for decades to come. You know, it has things like, you know, power supplies with multiple voltage levels, you know, a CAN bus, which is an automotive standard for command and control between modules, backplanes, you know, lots of thermal efficiency. Thermals are very important in terms of a node enclosure for cooling. You know, these active electronics that work in it. And it gives them really that future-proof platform, you know, and more of a single SKU environment in terms of how they train their work first to and operate the network. And it's migratable all the way from cable access to, you know, even putting fiber to the home modules in that platform, putting edge compute in that platform. So, you know, I think the tier one that we're partnered up with here is planning to leverage it. um, you know, we're the first to market and, and, you know, that represents a fantastic opportunity for us.
spk01: Yeah. Sounds like a bit of a premium for the kind of lifetime life cycle flexibility you get from that platform.
spk02: Yeah. It's a very modest premium, but it gives that, that kind of, yeah. You know, lifetime usability out of the net, out of the platform. And, and, um, you know, I, I think, uh, when we think about DA and generally moving to a bespoke DA node versus a gap DA node is very similar in terms of their CapEx.
spk01: Got it. And in terms of a follow-up question, your comments around charter and your, uh, your product there, it's primarily the ERM three, that's a retrofit going in, uh, for charter. And that's initially for DOCSIS 3.1, if you could confirm. And also, um, In terms of kind of your outlook for SHARE and this big program, how do you think about that in the big picture over the next, you know, couple years?
spk02: Yeah. So I think, you know, it is DOCSIS 3.1 to start, and that makes a lot of sense for what the target is of the program over the initial couple of years. I think there's some, you know, detail provided by the customer in that regard over what type of service they plan to unlock. In terms of how we think about share, we are one of the awardees and so is another vendor. We both have platforms in terms of the RPD modules that are expected to be used for significant portions of the network. They tend to look at things perhaps in a market by market basis and we expect it to be relatively even split is how we think of it. I don't want to get into perfect detail about where we are versus the other vendor, but I think it's clear that both of us are involved, and we expect a very nice program and scale rollout across the network.
spk01: Great to hear. Sumit, thanks for that, Carla, and that's all I've got. Thank you.
spk02: All right. Thanks, Ryan. Thanks, Ryan.
spk00: Once again, analysts and institutional investors who would like to ask a question should press star and 1 on their touchtone phone. We will pause for a moment so any additional callers may join the queue. As there appears to be no further questions, this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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