Vecima Networks Inc.

Hello, this is the chorus call conference operator. Welcome to BASMA Network's fourth quarter fiscal 2024 earnings conference call and webcast. As a reminder, all participants are in listening 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 touchtone phone. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up the handset before pressing the keys. If you need assistance during the conference call, you may signal an operator by pressing star and 0. Presented today on behalf of Blasphemy Networks are Sumit Kumar, President and CEO, and George Schmidt, Chief Financial Officer. Today's call will begin with executive commentary on BASMA's financial and operational performance for the fourth quarter and year-end 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 fourth quarter and year-end fiscal 2024 results as well as DTM supplemental investor information are posted on VESMA's website at www.vesma.com under the investor relations heading. The highlights provided in this call should be understood in conjunction with the company's audit annual consolidated financial statements and accompanying notes for the years ended June 30th, 2024 and 2023. Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable security laws, from which PASMA's actual results could differ. Consequently, SMDs should not place undue reliance on such forward-looking statements. All statements other than the 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 a guarantee of future performance and involve risks and uncertainties that are difficult to predict and or are beyond our control. thus not 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 fourth quarter earnings report and press release, as well as its 2024 annual report. Regarding the various facts assumptions and risks that could cause actual results to differ. These documents are available on BASMA's website at www.basma.com under the Investor Relations heading and on CEDAR at www.cedarplus.ca. At this time, I would like to turn the conference over to Mr. Kumar to proceed with his remarks. Please go ahead.

Good morning and welcome everyone. Thank you for joining us. I want to start today by acknowledging and thanking Dale Boot, whose retirement we announced earlier this week. In the 13 years Dale was a part of the Vesma team, including the past five years as our Chief Financial Officer, Dale's been instrumental to our growth and development. As CFO, he helped deliver five years of growth and this past year, the best six months in Vesma's history. Dale made many other contributions to VESMA, including building, managing, and mentoring a strong finance team. One of the outcomes of that team building is that Judd Schmidt, previously our VP Finance and Corporate Controller, is succeeding Dale as Chief Financial Officer. Judd has been a part of VESMA for a total of nine years, including seven directly with VESMA and two years with Concurrent, which we acquired in 2017. He's a highly experienced leader with deep knowledge of VESMA and public company finance. He also has significant management and executive experience, including as CFO with a number of large companies. I'm delighted to welcome Judd to the senior executive team, and you'll hear from Judd directly today as he'll be providing the financial color on today's call. Before we get to that, however, I'm going to start with some commentary on the fiscal year in the fourth quarter. As we expected, fiscal 2024 was a year of two distinctly different halves. During the first six months, the DAA environment was undergoing a transition in which customers caught up on delayed projects and worked through inventory we helped them build through the previous year's supply chain challenges. Those challenges began resolving in the second half as customers started to move forward with their DAA network upgrades, supported by multiple new Vesma product rollouts. With our sales momentum building again, we went on to achieve the best six-month revenue and adjusted EBITDA results in Vesma's history. That included back-to-back record revenue quarters, with Q3 sales climbing to an all-time high of $80.1 million and Q4 taking it up another notch to $87.5 million. In total, we achieved $291 million of sales in fiscal 2024, together with adjusted EBITDA of $53.8 million and adjusted earnings per share of $0.89, despite a slower first half. Our video and broadband solutions segment generated 236.1 million of the full year sales, supported by record segment performance in both the third and fourth quarters. As we expected, ENTRO products accounted for the majority of these results. We benefited from continued strong demand for our ENTRO Optical 10 gig EPON products for fiber to the home as customers broaden those fiber to the home deployments as part of funded rural broadband programs. But it was delivery of new Entra products have provided an even greater contribution. A key highlight of our year was the introduction and ramp of deliveries of our new ERM3 remote PHY devices to our lead customer, Charter. As we've discussed on previous calls, Charter's planning to use our solution for a significant portion of its footprint-wide hybrid fiber coax upgrade. The ERM3 quickly became our top-selling product of fiscal 2024, helping to drive record Q3 and Q4 revenue performance and more than doubling our remote buy sales on a full year basis. In Q4, we also kicked off deployments of another important new product, our EN9000 Generic Access Platform or GAP node, which provides operators with a future-proof path to 10G. We wrapped up manufacturing of this node in preparation for anticipated strong adoption in fiscal 2025. Also in Q4, we initiated shipments of our new ENTRA EXS1610 All Pond Shelf, which enables customers to cost-effectively deploy fiber to the home in any market or hub deployment. And we continue lab trials of our new ENTRA VCMTS, or Virtualized Cable Modem Termination System, with our LEED Tier 1 customer, while securing additional customer engagements for this new ENTRA cloud platform. I want to emphasize that each one of these products represents a major new growth driver for Vecima. Combined, they form a powerful catalyst for growth that promises to propel enter results in fiscal 2025 and future years. I should add that subsequent to the year end, we also paved the way for access to the massive $42.5 billion U.S. Broadband Equity Access and Deployment Fund, or BEAD program, as we commence manufacturing of some of our fiber-of-the-home optical products with a partner in the US. This now enables us to meet Buy America provisions under the program, giving us access to huge new opportunities for our fiber access portfolio in ENTRA. So a very big year for ENTRA developments and deployments that carries on. And it's clearly no surprise that ENTRA was our fastest growing product family again in fiscal 2024, representing 73% of our consolidated sales. In total, our customer engagements for ENTRA climbed to 115 during the year, up from 107 at the start of the year. And 62 of those customers are now purchasing our ENTRA cable and fiber access products for use in the networks. This includes deployments with eight of the top 12 largest cable operators in North America, which provides a strong indicator of ESSIMA's continued leadership in the DAA landscape. Looking now at highlights from our other business segments, Our content delivery and storage segment generated sales of 48.2 million in fiscal 24. While that was 8% lower than the previous year, our results included a 10% increase in higher margin services revenue, reflecting the growing list of customers for a deployed base of media scale IPTV network solutions. This in turn contributed to strong segment gross margin performance of 56.7% for the year, up from 53.1% in fiscal 23. Our CDS results included initial revenue also from the successful launch of our new dynamic ad insertion solution with two US customers in Q4, with further customer additions being expected in fiscal 2025. That's an important new offering for Vesma, one that significantly supports our customers' ability to monetize their video assets. On the innovation front, we released new versions of our media scale origin and dynamic content products, which include additional dynamic ad insertion features along with other important advances in the offering aligned with customer objectives. And we launched a new next-generation recording system for MediaScale Cloud DVR during the year. We also made important strides in our standards-compliant development of the MediaScale OpenCDN open caching platform, which is expected to evolve into a material growth driver for the business in the long term. Once again, open caching allows operators to, for the first time, monetize the millions of OTT streaming video packets crossing their networks for free today, while at the same time greatly increasing viewer quality of experience and reducing caching costs for the streamers. Turning to telematics, we continue to build on the segment's profitable recurring revenue contribution as we advance uptake of our successful movable asset tracking platform. We added 50 new asset tracking customers during the year, and increased the total number of movable assets we monitor to over 68,000, an increase of 20,000 from last year. This, in turn, helped us grow sales in telematics in the fourth quarter by approximately 22% year-over-year, and our telematics segment achieved a strong gross margin of 67.5%. So, overall, a year of across-the-board achievements for Vesma, and we ended in a strong financial position. with 84.9 million of working capital and a $30 million reduction in our short-term borrowings between Q3 and Q4. That was after continuing to invest in working capital, R&D, and organic growth, and returning cash to our investors in the form of our regular dividends of 22 cents per share across the year. Decima is moving forward in an excellent position to capitalize on the significant growth opportunities we see ahead. I'll tell you more about our outlook in just a few minutes, First, though, I'll turn the call over to Judd to provide our fourth quarter financial review. Judd?

Thanks, Sumit, and thank you for the introduction earlier. I just wanted to offer my sincere thanks to Dale, who is not only my boss but my friend, and I certainly wish him well in his retirement. I'm grateful for the opportunity to serve ESIMA as its CFO in what will undoubtedly be an exciting future for the company. Thanks to Sumit, the board, and the rest of the management team for their vote of confidence. Good morning to everyone who's here with us on the call today. I'll be reviewing our fourth quarter financial performance in more detail. And for the purposes of this call, I'll assume that everyone has seen our Q4 and year-end fiscal 24 news release, MD&A, which provides much more detail than what I'll be covering today, and financial statements posted on VESMA's website. As Simba indicated, we had a great quarter to end the fiscal year. Starting with consolidated sales, we achieved a strong close to the year with record fourth quarter revenue of $87.5 million, and that was up 16% year-over-year and 9% on a sequential quarterly basis. Our video broadband solution segment accounted for $74.7 million of these sales, with revenues growing 31% year-over-year and 9% quarter-over-quarter to achieve a new all-time segment height. As we predicted, Entra DAA sales were the key driver of this record performance. Supported by the Entra product rollouts that Sumit discussed earlier, our Q4 DAA sales grew 35% year-over-year and 13% quarter-over-quarter to a new quarterly high of $68.7 million. VBS segment sales also included a $5.9 million contribution from our commercial video products. In our content delivery and storage segment, we continue to experience quarterly revenue fluctuations with Q4 sales of $11.1 million, decreasing from the record quarter we achieved in Q4 of last year, but increasing 8% as compared to Q3 of this year. Each customer's purchasing cycle for CDS products are different. This results in the lumpiness in quarter to quarter CDS revenues that we see. I'm pleased to note, though, that our CDS segment continued to benefit from higher margin services revenues. Services revenues were up 10% year over year. Turning to telematics, this segment turned in another growth quarter with sales of $1.8 million, increasing 22% year over year and 4% quarter over quarter as we continue to achieve gains with our movable asset solution strategies. Turning to fourth quarter operating expenses, the notable changes year over year were as follows. R&D expenses increased by $1.9 million to $11 million. This primarily reflects a targeted decrease in salary and wage costs at the beginning of fiscal 24 and higher capitalized development costs as we continue to invest in future product development. Sales and marketing expenses for the fourth quarter were $700,000 higher at $8.5 million, mostly due to higher salaries and wages, as well as additional expenses aimed at supporting future sales, such as trade show participation. Fourth quarter G&A expenses increased by $600,000 to $8.5 million. This reflects higher staffing costs, as well as expenses aimed at supporting future growth within the organization. Other expenses decreased by $1.4 million to $200,000, reflecting a $2.4 million gain on the sale of our office property in Victoria, partially offset by advisory fees for our failed acquisition of CASA systems and the settlement of third-party support contracts, both non-recurring. In total, our fourth quarter OPEX was lower at $28.5 million, a decrease of $4.2 million year over year. As I just noted, I encourage each of you to read our MD&A for more details in this area. Also, as noted in our past calls, reported R&D expense in a period is typically different than the actual R&D expenditure. That's because certain R&D expenditures are deferred until product commercialization. Adjusting for these deferrals, amortization of deferred development costs and investment tax credits, our actual cash R&D investment increased to $15.6 million or 18% of revenues in the fourth quarter from $15.3 million or 20% of revenues in Q4 of last year. Looking at our bottom line results, fourth quarter operating income was up 125% year-over-year to $12.2 million. This primarily reflects the higher VBS sales partially offset by an overall lower gross margin percentage of 46.5% as compared to 50.5% in the same period last year. The change in gross margin percentage was largely driven by a different product mix in the VBS segment as well as a lower percentage of high margin CDS sales in our overall revenue mix. We recorded a foreign exchange loss of $2 million in the fourth quarter, which compares to a foreign exchange gain of $1.3 million in the same period last year. A weakening Canadian dollar negatively impacted the translation of monetary liability, resulting in this FX loss. As a result, I'm pleased to report we achieved Q4 net income of $8.3 million, or 34 cents a share, which was up sharply from $5.1 million, or 21 cents per share, in the same period of fiscal 23. Our record revenues, together with a tighter control of operating expenses, and despite the foreign exchange loss, helped us increase adjusted EBITDA to $16 million in Q4. That was 5.8% higher than in the same period last year. Turning now to the balance sheet, we ended the fourth quarter with $2.1 million in cash as compared to $2.3 million in the same period last year. Working capital of $84.9 million increased slightly from $83.7 million in Q4 of fiscal 23 and $82.1 million at the end of last quarter. While working capital has remained relatively consistent over the last several quarters, The components of working capital can be subject to significant swings from quarter to quarter. Our product shipments can be lumpy, reflecting 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 provided by operations for the fourth quarter increased to $36.1 million from $4.6 million during the same period last year. As a result of this $31.5 million increase in operating cash flows, we were able to pay down our revolving line of credit by $30 million in the fourth quarter, which had peaked at $81.7 million at the end of the third quarter. On a final note, the Board of Directors approved a quarterly dividend of 5.5 cents per common share, payable on November 4th, 2024, to shareholders of record as at October 11, 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, we had an excellent fourth quarter with robust year-over-year sales growth and tight control of operating expenses, helping out to close out the year with a strong bottom-line performance. Now back to Simmons.

Thank you, Judd. Looking ahead, we see our revenue momentum continuing to build in fiscal 2025 as we leverage our world-leading portfolio of DAA and IPTV solutions. On the DAA side, multiple Tier 1 MSOs are now underway with major network rollouts supported by Bessemer's next-gen cable and fiber access solutions, with more set to follow. In our video and broadband solution segment, our new products are acting as important growth drivers in this environment. We anticipate near term that our contributions from our ERM3 remote PI devices and EN9000 generic access platforms will position us for a solid start to the growth year. The EXS1610 all-pond shelf, in addition to another remote LT variant we're introducing this year, are also expected to build on this momentum as the year progresses. And with our U.S. manufacturing now in place for the applicable parts of our fiber access portfolio, for position to access opportunities related to the $42.5 billion USD broadband infrastructure funding program in calendar 25. Longer term, our natural entry into the VCMTS market provides another important growth opportunity for Bessemer. As these various rollouts begin to build on one another, and as more MSOs worldwide start their own network upgrades, we see our full year entry revenue momentum continuing in fiscal 25. particularly in the second half. Turning to our content delivery and storage segment, we anticipate further expansion of demand for our IPTV solutions from existing and new customers in the year ahead. The rollout of our new dynamic ad insertion and open caching products with more customers should also contribute to strong performance from our CDS segment. Over the longer term, we continue to see even higher growth potential as the many facets of IPTV we empower gain further momentum and as our newer products become bigger contributors to our results and growth. Finally, we're anticipating sustained profitable growth in our telematics segment as demand for our asset tracking services grow, and as we continue to build on our free tracking subscriptions. Overall, on a consolidated basis, we're anticipating another strong year of growing annual revenues in fiscal 2025. Based on our product rollout roadmap, I want to note that we're anticipating gross margin near to or in the lower end of our target range of 45% to 49% for the year. That reflects our expectation of a significant volume of EN9000 platform node sales in our product mix over the coming quarters. Standalone cable access nodes like the EN9000 typically carry a lower margin profile, with margins from the overall platform becoming more accretive over time as our higher margin software driven access modules are populated within that platform. In the first half of fiscal 25, we expect a higher proportion in the product mix from EN9000 as a lead customer matches them with the ERM3 remote buy modules we've been shipping through fiscal 2024. Overall, we're highly confident in the ongoing expansion of the business in fiscal 2025. As the industry accelerates its move to DAA and IPTV, we have multiple new growth engines in place to help us leverage many opportunities to drive our momentum. Our market position remains very strong with exceptional products, broad and growing customer relationships, and our investment in continuous technology innovation secures our place at the forefront of our industry. We're genuinely excited about the opportunities we see ahead across our operations, and we look forward to continuing to reward investors' confidence in us in fiscal 2025. That concludes our formal comments for today. We'd now be happy to take questions. Operator?

We will now begin the question and answer session for analysts and institutional investors. To join the question queue, you may press star then one on your telephone keypad. You hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any key. To withdraw your questions, please press start and queue. We'll pause for a moment as callers join the queue. Our first question is from Steven Lee with Raymond James. Please go ahead.

Thank you, guys. Sumit, on your VCMTS, I've got a couple of questions. Can you give us an update on how your trials with the Tier 1 is going? When does it move to field, and when is your first taste of revenues? Thanks.

Good morning, Stephen. Yeah, thank you. As I mentioned in our prepared remarks, we're making solid progress in our BCMTS lab trials with that lead Tier 1 customer, and that's been happening really for some time and carrying on through calendar 24. I don't want to get perfectly specific on when we're transiting the field trial with that customer, but suffice it to say every Tier 1 operator has a program that involves lab trials, friendly field trials, and then market field trials and and you know we anticipate we're in good stead to follow that cadence with that tier one operator through fiscal 25 you know and uh as far as revenue contribution i i think that you know we have our our site set on on potentially having contribution fiscal 25 um but you know it's a it's a very big picture move for us in terms of address you know accessing that tan and the vcmts you know segment of the market i've said before that our ip is You know, our software that we instantiated in the beginning in the Mac-Fi node and, you know, very, very migratable to a virtualized architecture. And that's all coming to bear at that engagement we have with that tier one operator who has been, you know, a core customer of ours on the remote-fi nodes in the past as well.

Got it. And then, Sumit, secondly, so aside from that tier one customer, how many other operators you have trialing your VCMTS? Can you talk a little bit about that?

Yeah, it's, you know, a little bit early for me to put out some specific metrics on that. But, you know, again, suffice it to say, you know, the, you know, broadening growth in those engagements with other customers for VCMTS, Vesma being a market leader in DAA, you know, as we've said, it's clear that, you know, The market is looking for the solution from us. We're building it, moving it forward with the Tier 1. That's the playbook we tend to follow because we understand that, you know, a lead Tier 1's definition of the requirements are very strong as it relates to the rest of the market. So, you know, we do have a broadening base of engagements and, you know, we'll provide updates as we can.

Got it. Thank you.

Thanks, Stephen.

Once again, analysts and institutional investors who would like to ask a question should press start then one on their touchtone phone. The next question comes from Jess Fitlak from Cormac Security. Please go ahead.

Hey, good afternoon. Just with respect to the BEAD program, can you maybe share what you're hearing from some of your customers with respect to the timing on when some of the funding for these projects could be released?

Hey, good morning. Good afternoon, Jesse. Thanks. Yeah, no, I mentioned the VIE program we see is working its way forward in the process. You know, as we understand it, you know, multiple of the states have been, you know, received their grants from the federal government in the U.S., and they're progressing towards defining their projects and selecting the subgrantees, which, you know, in this case are the broadband service providers and our customers. So that's all working through now. As you can see, we've, you know, staged our manufacturing, got compliant with the U.S. build requirements. We announced that a couple of weeks ago. So we're, you know, well prepared with our fiber portfolio for when those, you know, official programs transition to awards. You know, I think our customers are working that forward, you know, and I think you'll hear from the market in general, the industry in general, that, you know, we're expecting 25, calendar 25 to be the year that that bead starts to roll out. It's important to also note that that's superimposed and in parallel with the RDOF program, that 20 billion rural broadband program that's been running for about two to three years now. So both of these are going to happen in parallel. So there's many, many millions of new fiber to the home passings that are going to be occurring in the US over the next several years. So it's a long time constant. It's a lot of money, a lot of planning to be done there. So, you know, we're seeing good signs that calendar 2025 is going to be a great year for B. Okay, that's helpful.

And I guess, you know, in terms of how you're thinking about 2025 revenue momentum for the DAA product family, is this partially contingent upon that B money opening up? And I guess my question is more so if B gets kind of pushed out again, just because that seems to be kind of what happened in 2024, would that change how you're thinking how fiscal 25 shapes up for you?

You know, as we always do, our planning obviously looks at multiple layers. I mentioned multiple growth engines for us in fiscal 25. We, of course, have attributed some of the pipeline to Bede in the next fiscal year, in the second half. But that's not to say that, you know, if things delay, that other things won't pick up that component. So obviously, you know, we build a pipeline that is in excess of our plan for the fiscal year. And, you know, Bede is a component. RDOF is a component in and of itself. Obviously, you know, the cable access network upgrades that are happening to allow operators to get to 10 gig services with, you know, cable passings, which are, you know, tremendously more cost effective than fiber in areas where they're not funded. That's a big part of our plan for fiscal 25 as well. And there's some international fiber to home deployments as well. So, you know, I think that we're accounting for bead, but we're not necessarily dependent on it.

Got it. That's helpful. Maybe switching topics a little bit. In the past, you've spoken to targeting 25% market share in the cable and fiber access categories that you're in. Thinking about some of the competitive disruptions that's happened in the industry, has this changed your thinking at all on your kind of targeting 25% and any idea where you might be market share-wise today?

Yeah, so I think, you know, with the consolidation that happened, we mentioned what the CASAC, you know, play out that occurred. And there's, you know, one less vendor in the space to an extent. So, you know, you can generally think there's three vendors that are vying for all the market share. You know, we maintain the view that the 25% is a solid target for us, you know, accounting for all the cable and fiber access. And in fact, you know, I've said before that we've had this worldwide leading market share in the fiber of the home remote OLTs for several years in a row. Same thing for remote MACFI and cable access. And, you know, I've also communicated that as our customers wind up, you know, not wind up, ramp up their programs in the sequence of the overall industry, you know, our share in remote PHY would continue to increase. And we have seen that in the last six months. You know, our market share is, you know, leading in terms of removal pie for the first six months of calendar 24 that have been reported so far by the market research. So overall, you know, everything carries on the same way. One less competitor in the space and, you know, provides, you know, if anything, you know, a tailwind for that, that our view is on our overall market share target.

I appreciate that. And then maybe one final question, just on the IPTV side, you know, what do you think it's going to take for open caching to restart getting some momentum? The benefits seem fairly clear, but it doesn't seem like operators and streamers are really prioritizing investment in this area at this point. What's it going to take to change that?

Yeah, I think the streamers have had some challenges. I think, you know, at a consumer level, we hear a lot about that in terms of their, you know, They had a lot of momentum on getting eyeballs onto their platforms, but the costs have become a factor for them. So it's taking that, I think it's just that sequence of time where their focus was on growth, heavily focused on growth for the last several years, and they were getting that growth. But, you know, they are changing their focus to the cost side of the equation now because their ARPUs are, you know, and how much they have to bill out are going up. You've seen some advertising come into the picture as well. So cost is becoming important for them. What's very important and has always been important for them is the quality of experience. You know, and when you use open caching, you put these edge caches much deeper into the ISP network than, you know, one layer up at the peering point. that dramatically improves the quality of experience for subscribers, which is important for their market share. So I think what we're seeing is that it's a very clear value proposition to both the broadband service provider, our customers, and the streamers overall, both on the quality and the reduction of the cost to move that traffic for both for the streamer and monetizing that traffic for the first time for the operator. So we view it as a, you know, when not if scenario, and we anticipate that, you know, that this is going to gain momentum for us and, you know, going forward. And it will, you know, we're in business development. It will continue to take time.

All right. Thank you for being insightful. I'll pass the line.

Thanks, Jesse.

Once again, analysts and institutional investors who wish to ask a question should press star and one on their touchstone phone. We'll 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 line. Thank you for participating and have a pleasant day.