Vecima Networks Inc.

Hello, this is the chorus call conference operator. Welcome to Vesna Networks fourth 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 wish to join the question queue. Simply press star and one on your touchtone phone. You'll hear tone acknowledging your request. If you're using a speaker phone, 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 zero. Presented today on behalf of Vesna Networks Sumit Kumar, president and CEO and George Shemit, chief financial officer. Today's call will begin with executive commentary on Vesna'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 Vesna's website at .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 lab cast may constitute forward-looking statements within the meaning of applicable security laws from which Vesna'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 markets and general economic conditions, future sales and revenue expectations, future costs and operating performance. These statements are not guarantee of future performance and involve risks and uncertainties that are difficult to predict and or are beyond our control. Vesna 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 Vesna's website at .vesna.com under the investor relations heading and on tether at .tetherplus.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 wanna start today by acknowledging and thanking Dale Booth whose retirement we announced earlier this week. In the 13 years Dale was a part of the Vesna 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 Vesna's history. Dale made many other contributions to Vesna, including building, managing and mentoring a strong finance team. One of the outcomes of that team building is that Judge Schmidt, previously our VP finance and corporate controller, is succeeding Dale as chief financial officer. Judge has been a part of Vesna for a total of nine years, including seven directly with Vesna 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 Judge to the senior executive team and you'll hear from Judge directly today as he'll be providing the financial color on today's call. Before we get to that, however, I'm gonna 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 -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 89 cents, despite its lower 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, Entra products accounted for the majority of these results. We benefited from continued strong demand for our Entra Optical 10-gig EEPON products for -the-home as customers broadened those -the-home deployments as part of funded rural broadband programs. But it was delivery of new Entra products that provided an even greater contribution. A key highlight of our year was the introduction and ramp of deliveries of our new ERM3 remote PI 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 PI sales on a full year basis. In Q4, we also kicked off deployments of another important new product, our EN9000 Generic Access Platformer GAP node, which provides operators with a future-proof path to 10-g. 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 -the-home in any market or hub deployment. And we continued lab trials of our new Entra VCMTS, or Virtualized Cable Modem Termination System, with our lead 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 Vesima. Combined, they form a powerful catalyst for growth that promises to propel Entra 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 BEDE program, as we commenced manufacturing of some of our -the-home optical products with a partner in the U.S. 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 Vesima'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 .7% for the year, up from .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 Vesima, 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 operating aligned with customer objectives. And we launched a new next generation recording system for media scale cloud DVR during the year. We also made important strides in our standards compliant development of the media scale open CDN, open caching platform, which we expect to evolve into a material growth driver for the business in the longterm. 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 advanced 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, the 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. Vesma 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's not only my boss, but my friend. And I certainly wish him well in his retirement. I'm grateful for the opportunity to serve Vesma 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 Sumit 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 high. 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 GNA 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 .5% as compared to .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 .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 evolving 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 11th, 2024. It's important to note that this dividend will be designated as an eligible dividend for Canadian income tax perpetrators. So just to summarize, we had an excellent fourth quarter with robust -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 Simit.

Thank you, Jud. Looking ahead, we share a revenue momentum continuing to build in fiscal 2025, as we leverage our world-leading portfolio of DA and IPTV solutions. On the DAA side, multiple tier one MSOs are now underway with major network rollouts supported by Vesma'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-pwned shelf, in addition to another remote LTE 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, we're positioned to access opportunities related to the $42.5 billion .S.B. Broadband Infrastructure Funding Program in calendar 25. Longer term, our natural entry into the VCMTS market provides another important growth opportunity for Vesma. 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 cashing products with more customers should also contribute to strong performance from our CDS segment. Over the longer term, we can 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 wanna note that we're anticipating gross margin near two 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 creative 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 the lead customer matches them with the ERM3 remote pie 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'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any key. To withdraw your question, please press star then two. 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 got a couple of questions. Can you give us an update on how your trials with the tier one is going? When does it move to field and when's your first days of revenues?

Thanks. Hi, and good morning, Steven. Yeah, thank you. So as I mentioned in our prepared remarks, we're making solid progress in our VCMTS lab trials with that lead tier one customer. And that's been happening really for some time and carrying on through calendar 24. I don't wanna get perfectly specific on when we're transiting to field trial with that customer, but suffice it to say every tier one operator has a program that involves lab trials, friendly field trials, and then market field trials and we anticipate we're in good stead to follow that cadence with that tier one operator through fiscal 25. And as far as revenue contribution, I think that we have our sights set on potentially having contribution in fiscal 25. But it's a very big picture move for us in terms of addressing that TAM and the VCMTS segment of the market. I've said before that our IP is our software that we instantiate in the beginning in the Mac file node and 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 a core customer of ours on the remote file 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 a little bit early for me to put out some specific metrics on that. But again, suffice it to say, broadening growth in those engagements with other customers for VCMTS, Vesma being a market leader in DAA, as we've said, it's clear that the market is looking for the solution from us. We're building it, moving it forward with the tier one. That's the playbook we tend to follow because we understand that a lead tier one's definition of the requirements are very strong as it relates to the rest of the market. So we do have a broadening base of engagements and we'll provide updates as we can.

Got it, thank you.

Thanks, Steven.

Once again, analysts and institutional investors who would like to ask a question should press star, then one on the tier touched on phone. The next question comes from Jasbit Lack from Cormac Security, please go ahead.

Hey, good afternoon. Just with respect to the BEDE 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, yeah, good morning and good afternoon, Jesse, thanks. I mentioned the BEDE program we see is working its way forward in the process. As we understand it, multiple of the states have received their grants from the federal government in the US and they're progressing towards defining their projects and selecting the subgrantees, which in this case are the broadband service providers and our customers. So that's all working through now. As you can see, we've staged our manufacturing, got complying with the US build requirements. We announced that a couple of weeks ago. So we're well prepared with our fiber portfolio from when those official programs transition to award. I think our customers are working that forward and I think you'll hear from the market in general, the industry in general that we're expecting calendar 25 to be the year that BEDE starts to roll out. It's important to also note that that's superimposed and in parallel with the ARDOF program, that 20 billion rural broadband program that's been running for about two to three years now. So both of these are gonna happen in parallel. So there's many, many millions of new fiber to the home passings that are gonna be occurring in the US for the next several years. So that's a long time constant, it's a lot of money, a lot of planning to be done there. So we're seeing good signs that calendar 2025 is gonna be a great year for BEDE.

Okay, that's helpful. And I guess in terms of how you're thinking about 2025, revenue momentum for the DAA product family, is this partially contingent upon that BEDE money opening up? And I guess my question is more so if BEDE 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, you know, other things will 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. ARDOF 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 and 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 the home deployments as well. So, you know, I think that we're accounting for BEDE, but we're not necessarily dependent on it.

Got it. That's helpful. Maybe switching topics a little bit, you know, in the past, you've spoken to targeting 25% market share in the cable and fiber access categories that you're in. You know, 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 in the, 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, the home remote OLTs for several years in a row. Same thing for remote MAC-Fi and cable access. And, you know, I've also communicated that as our customers wind up, you know, not wind up, rev 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 remote PHY 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, our views on our overall market share target.

All right, appreciate that. And then maybe one final question, just on the IPTV side. You know, what do you think it's gonna take for OpenCash and Torii to start 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 gonna 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 problems with the IPTV. They had a lot of momentum on getting eyeballs onto their platforms, but, you know, the costs have become a factor for them. So it's taking that, you know, 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 there are cruiser, you know, and how much they have to bill out or 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, you know, what we're seeing is that, you know, 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, you know, 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 gonna gain momentum for us and, you know, going forward and it will, you know, we're in business development, and it will continue to take time.

All right, thank you for the 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 touch-tone phone. We'll pause for a moment so any additional callers may join the queue. Thank you. 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.