Vecima Networks Inc.

Hello, this is the Course Call Conference Operator. Welcome to Vesima Network's third 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 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 the handset before pressing any keys. Should you need assistance during the conference call, you may signal the operator by pressing star, then zero. Presenting today on behalf of Vesima Networks are Sumit Kumar, President and CEO, and Dale Booth, Chief Financial Officer. Today's call will begin with executive commentary on Vesima's financial and operational performance for the third quarter of 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 third quarter fiscal 2024 results as well as detailed supplemental investor information are posted on Bessema's website at www.bessema.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 nine months ended March 31st, 2024. Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable securities laws from which VESIMA's actual results could differ. Consequently, attendees should not place undue reliance on such forward-looking statements. All statements other than statements of historical fact are forward-looking statements. These statements include and are not limited to statements regarding management's intentions, 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. BESIMA 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. Please review the cautionary language in the company's third quarter earnings report and press release as well as its 2023 annual report regarding the various factors, assumptions, and risks that could cause actual results to differ. These documents are available on Decima's website at www.decima.com under the Investor Relations heading and on CDAR at www.cdarplus.ca. At this time, I would like to turn the conference over to Mr. Kumar to proceed with his remarks. Please go ahead, sir.

Thank you. Good morning and welcome, everyone. Thank you for joining us. The third quarter brought the start of the major growth wave we've been anticipating, and with it, record financial performance, including a new high watermark for quarterly revenue and adjusted EBITDA. I'm going to begin today with an overview of our Q3 highlights and achievements Dale will follow more details on our financial performance, and then I'll return to talk about our outlook going forward. Starting with consolidated results, I'm thrilled to report that we beat our all-time quarterly revenue record with sales of $80.1 million in the third quarter. That represents almost 29.5% sequential growth from Q2. We paired this with strong gross margin percentage of 46.9%, which, in turn, helped us achieve the record adjusted EBITDA of $17.2 million and adjusted EBITDA margin of 21.5%. Earnings performance was also very robust, with adjusted earnings per share increasing to $0.31. That's up 72% from a year ago and more than double what we achieved last quarter in Q2. In particular, the third quarter was another breakout and record quarter for our video and broadband solutions segments. with sales of 68.2 million climbing 39% quarter-over-quarter from Q2. This growth was, of course, driven by our Entra DAA products as a planned ramp in the second half related to major DAA rollouts got underway, just as we expected, following the brief transition period in the first half. This included a sharp ramp in ERM3 remote-fired deliveries to Charter as part of their hybrid fiber coax upgrade initiative. As we mentioned previously, Charter intends to use our solution for a substantial portion of their footprint-wide cable access network upgrade to DAA. And as such, it represents a major multi-year revenue opportunity for Bessema, and that's only just beginning. Demand was also very strong for our inter-optical 10-gig pond products in Q3, as customers continued to broaden fiber-to-the-home deployments as part of funded rural broadband programs. So while significantly wrapping product deliveries into customer roll-up programs, we're also making major strides with new products during the quarter. Looking first at our EN9000 GAP node, I'm pleased to report that we achieved certification for this new Entra platform with a leading Tier 1 customer in Q3. The EN9000 is a powerful and future-proof solution that enables customers to easily transition to 10G and DOCSIS 4.0 technologies while protecting current network investments that they're making. We also completed lab trials and initiated field trials for our ENTRA EXS1610 all pond shelf. That's another innovative ENTRA solution that provides maximum flexibility for customers by enabling them to cost-effectively deploy fiber to the premises in any market or hub deployment configuration. Additionally, we unveiled our new ENTRA virtualized cable modem termination system platform during the quarter. So this is a natural next step marking Vestibule's move into the fast-growing VCMTS market, and it further adds to our already expansive Entra DAA offering for customers. As part of the Entra Cloud platform, our VCMTS solution leverages software that's underpinned by the common engine of our leading DAA intellectual property. Today, within our remote MACPy platform, that software already powers several multi-gig DAA deployments at our customers. We've now initiated BCMTS lab trials with a leading Tier 1 operator, and we expect field trials to commence in the fourth quarter of calendar 2024. Also on the entry front, early in the third quarter, we entered a U.S. manufacturing agreement for some of our fiber access products to ensure they meet Buy America requirements related to the U.S. BEAD program for fiber. The BEAD program is this major $42.5 billion U.S. initiative designed to bring high-speed broadband to underserved or unserved areas of the United States. We see vast opportunities for our fiber access products flowing from it, and this agreement helps ensure we can capitalize on them. Combined, these new products and programs are adding fuel to the already powerful intra-DAA growth engine that we have. We now have multiple pathways of growth converging, just as the industry demand for DAA is starting to accelerate. At the same time, the customer base for our Entra DA solutions is continuing to expand. By the end of the third quarter, engagements for Entra cable and fiber access are now approaching 200 unique program opportunities across 113 operators globally, with 58 customers ordering product today. That's up from 106 customer engagements and 50 ordering product a year ago, adding to the wave of demand that's now building for our Entra technologies and solutions. So, a phenomenal quarter for our BBS segment and ANTRA, with much more yet to come. Turning now to our content delivery and storage segment, sales of $10.2 million were lower year-over-year and quarter-over-quarter. Lumpy quarters are normal for this segment, as we've indicated before, mostly reflecting the timing of customer project rollouts and stepwise capacity expansions. CDS service revenues were very strong, growing 10% year-over-year, and contributing to strong Q3 gross margin results for the segment. Our solid service revenue performance reflects a steadily growing deployed base of media scale IPTV networks in the market. And we continue to grow that base in Q3, and we continue to grow that base in Q3 as we undertook further IPTV expansions with multiple customers. Turning to telematics, that segment also turned in record quarter with revenues of 1.7 million, up 3% year over year. We added another 10 new customers for our NERO asset tracking platform during the quarter, which in turn increased the number of movable assets we now monitor to over 64,000 units. We also received an order for approximately 300 additional Telematics subscriptions from an existing municipal government customer. Telematics also continues to be a highly profitable part of the business, with the segment achieving strong gross margin of 67.8% in the quarter. Overall, it was a simply excellent quarter for Vesma, and all across our operations, we continue to execute very successfully on our growth strategy. At this point, I'll turn the call over to Dale to provide more color on our Q3 results. Dale?

Thank you, Sumit, and thank you all for joining us today. For the purposes of this call, we assume that everyone has seen our third quarter fiscal 2024 news release, MD&A, and financial statements posted on Vesma's website. Starting with consolidated sales, we generated third-quarter revenue of $80.1 million, which was up 2% year-over-year and 29% quarter-over-quarter. The video and broadband solutions segment accounted for $68.2 million of these sales. That was an increase of 5% year-over-year and 39% quarter-over-quarter and reflects the ENTRE DAA sales momentum Sumit discussed. EAA sales as a whole accounted for 60.9 million of VBS sales. While not quite a match for the all-time high results of a year ago, they were 39% higher on a sequential quarterly basis. VBS segment sales also benefited from a strong contribution from our commercial video products as our lead customer increased orders for legacy TC600E products. This helped boost commercial video sales to 7.2 million. up 244% from a year ago, and 37% from Q2 of this year. While we're pleased with our strong Q3 commercial video results, overall, we view them as temporary. This part of our business continues to transition to next-generation platforms, and increasingly, our newer DAA-driven commercial video solutions are being accounted for as part of intra-family sales. Our content delivery and storage segments saw continued quarterly revenue fluctuations with sales of 10.2 million, decreasing 13% year-over-year and 9% quarter-over-quarter. This mostly reflects timing of orders, and as Sumit noted, quarterly sales variances are typical for this segment. Turning to telematics, this segment turned in another good quarter with sales of 1.7 million, increasing 3% year-over-year and 4% quarter-over-quarter. Gross margin for VESMA as a whole increased up 46.9%, up 340 basis points from 43.5% in the same period last year. This reflects improved margin performance from all three of our business segments, much of it related to an improved supply chain environment and lower expediting costs. It also reflects a very strong gross margin performance of 59.8% from our CDS segments. reflecting the increase in higher margin services revenues year over year. Turning to third quarter operating expenses, the notable changes year over year were as follows. R&D expenses decreased by 0.8 million to 11.3 million. This primarily reflects a targeted decrease in salary and wage costs and higher capitalized development costs, partially offset by increased costs for software and licensing. Sales and marketing expenses for the third quarter were $0.2 million lower at $6.7 million, mostly due to reduced trade show and promotion costs. Third quarter G&A expenses decreased by $0.5 million to $7.9 million. This reflects lower ERP program implementation costs year over year, as well as lower staffing costs. Other expense increased by $1 million to $1.3 million, reflecting a one-time $1.3 million advisory fee related to M&A activity in the third quarter. In total, our third quarter OpEx was $27.5 million, a decrease of $0.4 million year over year, but $2.6 million higher quarter over quarter. As we mentioned in our last call, operating expenses in the second half of this year were expected to be higher than in the first half as we support the ramp up of our sales. In the video and broadband solution segments, third quarter operating expenses were down 0.4 million year over year, reflecting a combination of lower G&A and sales and marketing expense, partially offset by the one time advisory fees related to M&A activity in the third quarter. Content delivery and storage operating expenses were generally flat year over year at 7.4 million. And in our telematics segment, operating expenses of 0.9 million were in line with prior year results. 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 decreased to 14.6 million or 18% of sales in the third quarter from 15.4 million or 20% of sales in Q3 last year. Looking at our bottom line results, third quarter operating income was up 64% year over year to 10.1 million. This primarily reflects the higher VVS sales and an overall stronger gross margin percentage year-over-year. We generated record third quarter adjusted EBITDA of $17.2 million, a year-over-year increase of $5.5 million, or 47%. This primarily reflects our higher gross margins as well as lower operating expenses. On a quarter over quarter basis, adjusted EBITDA increased by 4.7 million or 38%. We recorded a foreign exchange loss of 1.2 million in the third quarter, which compares to a foreign exchange gain of 0.2 million in the same period last year. This reflects a weakening Canadian dollar negatively impacting the translation of our monetary liabilities. That income from continuing operations for the quarter increased to $5.8 million or $0.24 per share as compared to $4.5 million or $0.18 per share for the same period of fiscal 2023. Turning to the balance sheet, we ended the third quarter with $3.3 million in cash up from $2.3 million in the same period last year. Working capital of 82.1 million decreased slightly from 83.7 million in Q4 fiscal 2023 and up slightly from 80.4 million at the end of Q2 fiscal 2024. We note that working capital balances can be subject to significant swings from quarter to quarter. Our product shipments are lumpy, reflecting the requirement 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 third quarter was $28.6 million as compared to cash provided by operations of $3.8 million during the same period last year. The $32.4 million increase in cash flow used in operations reflects a $35.6 million decrease in cash flow from non-cash working capital. partially offset by a $3.1 million increase in operating cash flow. On a final note, the Board of Directors approved a quarterly dividend of 5.5 cents per common share, payable on June 17, 2024, to shareholders of record as at May 24, 2024. It is important to note that this dividend will be designated as an eligible dividend for Canadian income tax purposes. So just to summarize, an excellent quarter with robust sales growth and tight control of operating expenses translating to a very strong profitability. Now back to Sumit.

Thank you, Dale. While our Q3 results were deeply satisfying, we believe they represent just the beginning of the momentum we see ahead for Bessemer. As I mentioned earlier, a number of growth drivers are converging, just as operators worldwide are launching major multi-year upgrades to their networks. In our VBS segment, we expect to see a further ramp up of our quarterly run rate in Q4, as we continue to support our customers' rollout plans with our growing portfolio of Entra DAA cable and fiber access products. We anticipate another record quarter for Entra sales in Q4, with momentum expected to build still further through fiscal 2025 and beyond. In the CDS segment, overall demand for our IPTV and open caching solutions remains strong. However, shifts in project timing continue to affect our expectations for the full year in fiscal 24. We now expect the CDS segment to achieve fiscal 2024 sales results similar to or slightly lower than the strong performance we achieved in fiscal 23. Longer term, we continue to see the robust future growth potential as the IPTV and OTT streaming services markets continue to expand and the open caching and dynamic advertising growth agents mature. Finally, in our telematics business, we expect consistent incremental growth from the fleet tracking market and continued increases in demand for our new removable asset tracking services. The latter has become an important driver of segment differentiation and gains in recent quarters. Overall, we're expecting a strong finish to the year as we build on Q3's record results and establish another compelling run rate in the fourth quarter. All told, for fiscal 24, after factoring in the first half transition, along with the timing shift in our CDS expectations, we expect full-year consolidated revenues to be modestly lower than the all-time record results we achieved in fiscal 23. But after producing nearly 30% growth in Q3, with more to come in Q4, our run rate is expected to put us on a path for substantial annual growth going forward. We expect significant year-over-year top-line gains building again for fiscal 25. We also continue to target a gross margin percentage in the 45% to 49% range, which, combined with our OpEx model, is expected to support excellent full-year adjusted EBITDA performance both this year and next. In summary, this is a tremendously exciting time for Vesma, with compelling prospects both in the near and the longer term. Our market position is incredibly strong. We continue to expand our product portfolio with innovative new solutions, and our relationship with customers is growing and strengthening. as we support their increasingly wide-scale rollouts. The next major wave of growth is upon us. Investima is executing very effectively all across the business as we capture the multiple multi-year opportunities in our markets. That concludes our formal comments for today. We'd now be happy to take questions. Operator?

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're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue.

The first question comes from Jim Byrne of Acumen Capital.

Please go ahead.

Good morning, guys. So maybe you could just expand on the recent distribution deals that you announced, I think, in Denmark and Germany, and just give us an idea of how meaningful those types of deals could be.

Yeah, thanks, Jim. I think, you know, as we've seen, and we've had several of those successive distributor agreement announcements for the reseller channel, we've always felt that there's a a strong relationship that can flow when you have a world leading technology vendor like us in the key CapEx spend areas of operators globally. And that ties to an opportunity for strong best of breed channel partners in the regions to be an army on the ground for us and to really leverage the technology we bring to bear to generate results for operators locally in those regions. You know, we've been signing on these partners. It's part of our broader strategy to really, you know, reach every single broadband service provider in the world with this portfolio and intro we've built. And internationally, these tier two and three customers do typically work through these resellers, distributors, or system integrators that help them locally on the ground there. So, you know, again, we're working with some of the best partners in every region, and you're seeing that reflected in these announcements with respect to, new agreements that we're bringing up with channel partners.

Just maybe order of magnitude, what does that channel partner, you know, revenue stream look like today? And, you know, how big of, you know, how big of a contribution could that make in the next few years?

You know, I think it's meaningful today. You know, we're seeing as, you know, consistent with operators being in the very early innings of DAA rollouts generally. You know, we're just getting started in some respects with a number of those channel partners, but the early, you know, wins that they're bringing to the table have been meaningful to us already. So I'm not going to, you know, really dial in on where we're at today in terms of contribution from the reseller channel. But, you know, we have great, you know, opportunity and, you know, overall addressable market that's coming to bear through those types of partners globally. And, you know, we expect it to be meaningful to our entry results in fiscal 25.

Okay, perfect. And then maybe just last one for me. Just give us a reminder of where the DAA rollout is in Europe, kind of relative to North America.

Yeah, you know, as before, you know, in EMEA, they have a differing competitive environment, whether it's with the, you know, telcos with fiber or overbuilders or whatnot. And there's different dynamics than, you know, the U.S. market that's typically moving earlier in the cycle to a network infrastructure evolution or transformation that we're creating with EAA. So we have seen that cadence in EMEA, but now, term by term, we're getting further deployment activity going in that region. So like anywhere else in the world, the need for 10 achieving multi-gigabit speeds over all types of access networks is common around the world. You know, but they have different competitive factors there and then that, you know, changes the timing perhaps potentially a little bit from behind the U.S. and CALA is another region. So I think as I said before with respect to the question on the channel partners, we do start to see that moving towards meaningful contributions to our overall ENTRA.

Perfect. Thanks, guys. Thanks, Jim. The next question comes from .

Please go ahead.

Hey, good afternoon. Just on the bid for assets, can you just update us to where the process currently stands and just any of your expectations around interest from other companies in these assets?

Yeah, just thanks. I think, you know, I'm not really willing or able to provide more information on the open call today. You know, I'll just add that, of course, we have a strong investment thesis. We firmly believe in investment, you know, being in a completely unique position in the marketplace between our software and our IP and our strength and the portfolio and our customer set with the virtualized cable access. You know, we invented that. So that's essential, you know, a kind of Parties like Vesma, I think, is essential to delivering a solid outcome to the industry from these assets. We have, of course, a very well-proven track record of doing that with our acquisitions and making them very strong for the industry, particularly when they're very complementary to what we're doing in DA and 10G. As always, whether we accelerate with M&A or we leverage on the organic talent we have bring these leading solutions to the market, you know, we do expect to be a major player in the overall market, including the VCMTS. So, you know, we'll be happy to provide updates as, you know, that discussion matures.

I understand. Maybe just thinking a bit more broadly then, given what's happened with CASA and maybe just kind of considering the financial condition of some of the competitors both in and outside of the cable plants, Can you just speak to what you're seeing on the competitive landscape and maybe how it could be influencing some of your conversations with your customers?

Yeah, I'd rather not go into too much detail again, Jesse. You know, I think that, you know, I think everyone's well aware of the participants in the market and how the market share works, you know, particularly in the VCMTS. We do think that, you know, there is a need in the industry for vendor diversity in the virtual solution. We will address that with our organic platform. But these assets represent another opportunity to also do so. And we'll see that, again, I believe that we are uniquely capable of making assets perform for the industry and deliver a solid solution. But we'll, again, provide updates as that discussion culminates.

Okay. And then maybe just on the balance sheet, you know, leverage has been coming up. You temporarily increased your credit line. You do have that bit out there for the CAATS assets. Can you just run through your thinking around how you're going to, how you plan to manage the balance sheet and maybe what kind of debt levels you're comfortable with carrying?

Yeah, I think, you know, you've seen we've hit the 17.2 million on the EBITDA on the run rate. So that gives you a sense on what type of leverage ratios should be available to, you know, you know, these, You know, companies like Fessima, you know, we are very confident in having multiple sources of available liquidity and funding, you know, inclusive of any consummation of M&A. Again, you know, as you might expect for a company of our size, scale, performance, the EBITDA run rate we have, we do feel like we have numerous paths to capital available to us. And, you know, we'll bring those to bear as necessary.

All right. That's all from me. I'll pass the line.

Thanks, Jesse.

Thanks, Jesse.

The next question comes from Ryan Kuntz of Needham and Company. Please go ahead.

Thanks for the question. I wonder, Suman, if you could give us some color on the mix of DAA nodes versus fiber that you're seeing in terms of demand here in the first half of the calendar year relative to your your recent results and your expectations for 2Q?

Yeah, I think, you know, we are seeing, of course, you know, with some of the new program wins that have been accelerating as we enter calendar 24, of course, the cable access is becoming a growth driver most recently for Entra. But we do have, you know, ongoing broad deployment on the rural broadband programs with fiber. And we know that bead is still in the future overall for that set of products. We have world leading market share in 10 gig, remote OLTs on the fiber access front. So in recent quarters, the mix is probably slightly more cable access heavy in our intra portfolio, of course, with these new major tier one programs running. On the field front, the hard off deployment of fiber is accelerating through calendar 24. As we continue to see operators work through their inventory and ramp up their field deployments of fiber in the home, we're expecting some really good tailwinds on the fiber access front to emerge through calendar 24 as well. then when bead comes into the picture you know that that creates a tremendous headwind for or tailwhip for uh fiber access for us um in parallel to you know these tailwinds we've got going in the cable access side right that's really helpful um and you mentioned your large uh program ramping uh you know how would you maybe uh qualify your your visibility there um on that big program you feel like you've got um a

firmer kind of grasp of what kind of the rest of the calendar year looks like, at least for the company, in terms of expectations to ship?

We do have, you know, good visibility, as you could expect, with a major tier one operator, major program that's underway. There's a lot of crisp focus on the planning cycle over the next three years that they have to conduct for this infrastructure upgrade they're going to do across their HFC network. So along with that, it's important to them and important to us that we have good visibility into the profile. Of course, you know, as always with major tier ones, major network upgrades, you know, quarter to quarter fluctuation is totally normal. You know, they've got to get their labor going and all that. But, you know, in the bigger picture sense, when we look calendar year to calendar year, the visibility is solid and strong and consistent with everything we've seen. And that allows us to execute like we planned.

That's great. And one last if I could. Congrats on the gap node kind of moving to the next key milestone here. What's your updated view on when you see, you know, the gap product lines really start to, you know, achieve chronic critical mass in terms of, you know, substituting for traditional nodes?

Yeah, I think, you know, we've talked about before that what gap allows operators to do is, you know, go modular and future proof. Whereas they have these multi dozens of legacy nodes from all the incremental upgrades over the years. Um, or, you know, emanating consolidation of other operators, you know, has led them to a place where they've got too much fragmentation and legacy nodes. And then we need to go to 1.8 gigahertz capability. You know, we're adding incremental power rails, the thermal capacity that's necessary to go to symmetrical 10 gig and beyond that in the future if you move those nodes to fiber. So, you know, this vision of, you know, the long-term, you know, multi-decade living node is coming, you know, to fruition within GAP. And we expect that, you know, like we said, we have the tier one go through certification of it very recently. So we're expecting, you know, us to look at contribution coming in this calendar year in a meaningful way. All right.

Great to hear that, Sumit, and thanks for the questions.

All right. Thanks, Ryan. Thanks, Ryan.

Once again, analysts and institutional investors who would like to ask a question should press star and 1 on your touchstone 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.