Vecima Networks Inc.

Hello, this is the Chorus Call Conference Operator. Welcome to Vesima Networks' first quarter fiscal 2025 earnings conference call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Analysts and institutional investors who wish to join the question queue, simply press star and 1 on your touchtone phone. You'll 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 and zero. Presenting today on behalf of Vesima Networks are Sumit Kumar, President and CEO, Judd Schmidt, Chief Financial Officer. Today's call will begin with executive commentary on Vesima's financial and operational performance for the first quarter fiscal 2025 results. Lastly, the call will finish with a question and answer period for analysts and institutional investors. The press release announcing the company's first quarter fiscal 2025 results, as well as detailed supplemental investor information, are posted on Vesima's website at www.vesima.com under the investor relations heading. The highlights provided in this call should be understood in conjunction with the company's unaudited interim consolidated financial statements and accompanying notes for the three months ended September 30th, 2024 and 2023. Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable securities laws from which BESMA'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 but are not limited to statements regarding management's intentions, belief, or current expectations with respect to market and general economic conditions, future sales and revenue expectations, future costs, and operating performance. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict and or are beyond our control. BESMA 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 first quarter earnings report and press release for fiscal 2025 as well as its annual information form dated September 19, 2024 regarding the various factors assumptions, and risks that could cause actual results to differ. These documents are available on BESMA's website at www.besma.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.

Thank you. Good morning and welcome everyone. Thank you for joining us. Our 2025 fiscal year got off to a busy start with a number of strategic developments in our VBS and CDS segments. I'm going to start today with an overview of these and other highlights. Judd will follow with details on our first quarter financial performance, and then I'll return to talk about our outlook going forward. Starting with our video and broadband solutions segment, On October 11th, we announced our tuck-in acquisition of Falcon vSystems, which brought us two important new technologies. The first is called Principal Core, a platform virtual orchestration technology that Falcon has been developing over the past five years. It helps operators move towards their vision of convergence across multiple access platforms, cable and fiber access, and even mobile going forward. Meanwhile, it enables smooth multi-vendor and multi-core interoperabilities. The second is Falcon's test suite solution. This is an end-to-end test platform that lets operators significantly speed up and scale their DAA software upgrades, particularly in multi-vendor, multi-core environments. The access test suite drives substantially faster iteration, verification, and deployment for operator projects rolling out to millions of homes and subscribers. Noting again that DAA represents the first time that the industry is distributing software, compute, and intelligence out and into the network itself, and in so doing, unlocking materially higher capacity and performance. It's distributed access architecture in name and in function. Both technologies are critical for operators pursuing network convergence strategies, which aim to integrate different types of access networks and traffic into a single network and broadband services infrastructure in order to simplify management, speed deployments, and reduce costs. Simply stated, they're highly valuable technologies for operators. They're also an excellent fit for Vecima. As you know, flexibility and interoperability are key product differentiators for Vecima, and we expect principal core and test suite will become important components of our overall and wide-reaching set of cable and fiber access solutions. That in turn accelerates the roadmap and expansion plans we have for our Entra cloud platform overall, including VPON and our newly launched virtual cable modem termination system, or BCMTS. I should also point out that the lead customer for the Falcon V software platforms is Charter, also the lead customer for many of our own Entra DAA solutions. So this combination will advance convergence of the provisioning and orchestration layer across Charter's access ecosystem. And right out of the gate, it gives us a multi-year rollout agreement for our newly acquired products. In terms of other developments in the VBS segment, we need a completion of additional field trials for our ENTRA EXS1610 all-pond shelf as we prepare for broader deployments going forward. This is 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 particularly in footprints where their fiber access networks are higher in density. We also increased customer engagement for our new VCMTS platform during the quarter as we progressed lab trials with our lead Tier 1 customer and initiated new lab trials with additional Tier 2s and 3s. We continue to set our sights on initial revenue contribution from VCMTS software, possibly as soon as the latter part of this fiscal year. Q1 also brought us further advances for our next-generation DOCSIS 4.0 technology, as we demonstrated the interoperability of our DOCSIS 4.0 remote PHY device against third-party cores. And at the SCTE Tech Expo, we also showcased our new unified 4.0 platform with Cox Communications. In our content delivery and storage segment, we made significant strides with both our OpenCDN and dynamic ad insertion technologies. Earlier this week, we announced implementation of a first phase of dynamic ad insertion with Hotwire Communications in preparation for their full adoption of a dynamic targeting down the road. And in another key development, we announced an exclusive global agreement with Digital Harmonic yesterday to market its keyframe media optimization product. This is a very high value solution that substantially optimizes video quality and reduces bit rates while reducing costs for operators significantly. We'll begin offering it as a part of our comprehensive media scale suite of products starting immediately. So a number of key technology developments in both BBS and CDS as we started our new fiscal year, and each one builds on our industry-leading portfolio of DAA and IPTV products. In terms of operating results, sales in Q1 of 81.9 million represented the second highest quarterly sales in Vesma's history, and we're up 33% year over year. Our VBS segment drove the lion's share of this, led, of course, by next generation ENTRA sales. To add a bit of historical context again, four years ago, ENTRA contributed just 5.2 million to our Q1 sales. This quarter, that's grown to 68.3 million, an over 13-fold increase that underscores both the success and importance of our ENTRA DAA portfolio. Looking at some ENTRA highlights more closely, was another strong quarter for ERM3 remote PHY deliveries to Charter as part of their hybrid fiber coax upgrade initiative. As we've 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 VESMA, and one that's still in the initial phases of its rollout. Q1 also brought the first volume shipping of our new EN9000 GAP node platform, and deliveries are progressing well. The EN9000 is a powerful and future-proof solution that enables customers to easily transition to 10G, 10G, and DOCSIS 4.0 technologies, while protecting their current network investments. Our intra-optical 10G fiber access products were also a significant contributor to Q1 results, but not quite to the same extent as we've seen in previous quarters. This relates to the somewhat slower starting timeline for the US $42.5 billion federal BEAT program than initially expected. While our customers are still actively progressing their funded rural broadband fiber expansions, for the most part, they're doing so today with support from the existing Rural Digital Opportunity Fund. Looking at other parts of our BBS segment, you'll recall we've been anticipating a slowdown in our commercial video sales for some time now. Customers are shifting to next-gen technologies like Terrace IQ. These products are also increasingly accounted for under DAA categories. We saw a slowdown materialize in Q1 with a decrease in commercial video sales both year-over-year and quarter-over-quarter. Overall, however, it was a solid start to the year for our BBS segment with ongoing strength from Entra. Turning to our CDS segment, as we've discussed previously, sales in this segment tend to be more lumpy with timing of large projects able to produce significant quarterly swings. That was the case in Q1, as we experienced delays related to customer IPTV deployment projects and expansions. We expect to see those projects get underway again in Q2, helping to strengthen CDS results. Despite the project delays, the CDS segment did achieve very robust services sales in Q1, which underscores the strong and increasing support components of the business as the number and the size of deployed systems in the market continues to grow. Our telematics segment also had another good quarter as we continued to attract new customers for our very successful asset tracking business. We're now monitoring over 72,000 assets for over 200 customers. So, overall, a busy start to the year with key technology developments setting the stage for Vestma's future and ongoing growth. I'll be back to talk more about our outlook in just a few minutes, but first I'll turn the call over to Judd to review our financial results. Judd?

Thanks, Sumit. Good morning. Good afternoon to everyone. Today, I'll be reviewing our first quarter fiscal 25 financial performance in more detail. And for purposes of this call, I'll assume that everyone has seen our Q1 fiscal 2025 news release, MD&A, and financial statements posted on Vesma's website. As Sumit indicated, we achieved a solid start to the year with our second best quarterly revenue of $81.9 million. That was up 33% year over year, although 6% below the all-time record performance we achieved in Q4. Our video and broadband solution segment contributed first quarter sales of $72.9 million, with revenues growing 65% year over year. As we expected, ENTRA DAA sales were the key driver. Supported by the volume rollouts of our new EN9000 gap node, our Q1 DAA sales grew 76% year over year. On a sequential quarterly basis, VBS segment sales were down 2%, reflecting an essentially flat quarter for ENTRA, together with the anticipated decrease in commercial video sales. At $4.5 million, commercial video products were 15% lower year over year and 23% lower quarter over quarter as customers transitioned to next generation platforms. In our content delivery and storage segment, we experienced a significant quarterly revenue fluctuation with Q1 sales of $7.2 million, decreasing 54% year-over-year and 35% quarter-over-quarter. As Sumit noted, lumpiness is normal for this segment, but we expect to see a solid recovery in Q2. Turning to telematics, this segment turned in another solid quarter with sales of $1.7 million, increasing 5% year over year as we achieved gains with our movable asset solution strategies. Gross profit for the first quarter increased 14% year over year to $34.2 million, reflecting higher sales partially offset by lower gross margin of 41.7% as compared to 48.8% last year. The shift in our gross margin is mostly product mix related and reflects the rollout of our new EN 9000 gap platform, which carries a lower margin profile. As well, the reduction in high margin CDS product sales impacted our Q1 margins. I also want to note that starting in fiscal 25, that in order to report more comparably to our competitors, we've changed the way we've recorded our sales commissions which are now being reported for the most part in operating expenses instead of cost of goods sold. This change has been reflected for all prior periods being reported and increased our gross margins between one and a half and two percentage points in those prior periods. Our first quarter operating expenses, including share based comp and acquisition related expenses, increased 2.3 million to $29.6 million. But as a percentage of sales, OPEX decreased 36% from 44% in Q1 of last year. The notable changes year over year were as follows. R&D expenses increased by $1.6 million to $11.9 million, reflecting higher salary and wage costs as we continue to invest in future product development. Investing in R&D is what keeps Vesima a leader in our space. Adjusting for deferrals, amortization of deferred development costs and income tax credits, our actual cash R&D investment increased to $15.1 million from $13.4 million, but as a percentage of revenues also decreased to 18% from 22% of revenues in Q1 of last year. First quarter sales and marketing expenses were $1 million higher at $9.4 million, mostly due to higher variable compensation, as well as additional expenses aimed at supporting future sales. As a percentage of revenue, our sales and marketing expenses decreased to 12% from 14% year over year. First quarter G&A expenses decreased by $700,000 to $7.5 million. This reflects a decrease in depreciation and amortization, partially offset by higher staffing costs and professional fees. As a percentage of sales, G&A expenses decreased to 9% from 13%. Taken as a whole, we maintained continued tight control of our operating expenses in Q1. We consider this to be a positive trend and continue to spend only where necessary to support the future growth of the company. Looking at our bottom line results, first quarter operating income was up 69% year over year to $4.5 million. This primarily reflects the higher VBS sales and partially offset by lower CDS sales despite overall lower consolidated gross margin percentages. We recorded a foreign exchange gain of a half a million dollars in the first quarter, which compares to a foreign exchange loss of $600,000 in the same period last year. A strengthening Canadian dollar positively impacted the translation of monetary liabilities, resulting in that FX gain. As a result, we achieved Q1 net income of $2.1 million, or 9 cents per share, which was up from $1.7 million, or 7 cents per share, in the same quarter of fiscal 24. Year-over-year revenue growth, together with stabilization of operating expenses, helped us increase our adjusted EBITDA to $11.6 million in Q1. That was 43% higher than in the same period last year where we saw $8.1 million of adjusted EBITDA. Now, turning to the balance sheet, we ended the fourth quarter with $2.2 million in cash as compared to $2.1 million last quarter to end fiscal 24th. Working capital of $83.5 million decreased slightly from the $84.9 million at the end of last quarter. Still solid, but we plan to continue to drive sales of existing on-hand inventories in order to further monetize this working capital component. Lastly, cash flow provided by operations for the first quarter increased to $24.4 million from $8.4 million during the same period last year. As a result of this $16 million increase in cash flow from operating activities, we were able to pay down our revolving line of credit by $15.8 million in the first quarter. our quarter end draw on our line of credit was sitting at $36 million. And as noted in our year end call, our draw on our line of credit peaked at 81.7 million at the end of the third quarter of fiscal 2024. So continued progress in paying down this line. On a final note, the Board of Directors Approved a quarterly dividend of five and a half cents per common share payable on December 16th, 2024 to shareholders of record as of November 22nd, 2024. It's important to note that this dividend will be designated as an eligible dividend for Canadian income tax purposes. Overall, despite a slight downturn in quarter over quarter revenues and a change in product mix affecting gross margins, we had a solid start to the year. Our robust year-over-year sales growth and continued tight control of our operating expenses helped us once again achieve strong bottom-line performance. Now back to Sumit to discuss our outlook update for the rest of the fiscal year.

Thank you, Jed. As we move forward, we see fiscal 2025 as a solid growth year for Vesma, with momentum building more strongly in the second half. On the DAA side, volume deployments of our platforms are continuing to ramp up, including the EN9000 gap node. By the second half, we expect to be layering in EXS1610 all-pond shelf deliveries together with another remote OLT variant we're introducing this year. And our new Falcon V solutions will also provide additional revenue opportunities as the year progresses. As I mentioned earlier, we've tempered our expectations of what we'll see from the U.S. BEAD program for this year. But over time, we expect this $42.5 billion U.S. rural broadband funding program to be a significant growth driver and opportunity for our fiber access portfolio. In the interim, we're continuing to see strong demand from operators accessing funding from the existing Rural Digital Opportunity Fund. Looking further ahead, our entry into the VCMTS market provides another significant growth driver opportunity for VESMA. All told, our multiple product rollouts and recent developments are creating a strong foundation for VBS growth in fiscal 2025 and beyond. Turning to our content delivery and storage segment, we anticipate a stronger second quarter as IPTV projects that were delayed in Q1 start to get underway. And we continue to see full year segment growth supported by existing and new customers' IPTV upgrades and expansions, as well as the continued rollout of our new dynamic ad insertion products. OpenCDN is also expected to start providing some contribution in fiscal 2025 with our first deployments expected in coming quarters. Added to this, we expect to realize opportunities for a new partnership with Digital Harmonic. The new keyframe technology offers massive savings and capacity increases for operators and is poised for wide scale adoption. This also provides access to new customers, creating opportunities to grow other lines of our media scale business in turn. Longer term, we continue to see robust future growth potential as IPTV and OTT streaming services markets continue to expand, and the open caching and dynamic advertising growth engines we have developed mature. Finally, in our telematics business, we expect continued profitable growth as demand for newer movable asset tracking services grows, and as additional subscriptions come in from the fleet tracking market. On a consolidated basis, we expect our product mix to deliver a gross margin slightly below our target range of 45% to 49% for the full year in fiscal 25, reflecting our product mix for the year, as Judd discussed. However, by year's end, we anticipate a significantly stronger exit run rate from gross margins, driven by increasing contributions from Enter Optical and our introduction of Enter VCMTS later in the year. In summary, we remain confident in the overall expansion of the business in fiscal 25. The convergence of opportunities in our BBS and CDS segments, combined with our expectation of continued profitable growth in the telematics segment, has created a foundation for strong full-year growth in fiscal 25 and a remarkable runway for BESMA's longer-term success. That concludes our formal comments 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 will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Steven Lee with Raymond James. Please go ahead.

Thank you. Hey, guys. My first question, Sumit, is on Charter. When they reported this, they said their CapEx for the year came in lower than expected. They spoke of software certification and integration. Does that impact your rank? Would that mean any way?

Oh, thanks, Stephen. Good morning. Yeah, so, you know, I think, as you said, Charter kind of provides some color around where they're standing today. And, you know, as we've always said, they're conducting a major upgrade program. You know, a major Tier 1 operator like this has to do significant qualification verification efforts on a system-level basis. That includes not only, you know, Vesma's remote PHY products, but, you know, the virtual CMTS all the way downstream to the modems and, you know, upstream on the provisioning and billing systems. So that takes, you know, they have to work, you know, through a significant process of verification on the complete software integration. Now, as we've talked about for a long time, I mean, Vesma excels at that integration effort and interoperability. So, you know, we're in good stead in that regard. But on a system basis, you know, it is taking them the requisite time to launch that program. The good news is that, you know, this phase that's, you know, attached to this overall cable access upgrade, the stage to move to DAA for the first time is anticipated to get underway as we go forward.

Okay. And then on the press release on Digital Harmonic, can you give us some more colors to me? Are you expecting this partnership to drive revenues in fiscal 25? We are.

I mean, there's a lot of built-up demand in the customer set. We've got global exclusivity in media and telecom. And the solution stands apart for its capability to reduce bit rates and increase quality by leveraging things like generative AI and machine learning. And that's what's very attractive to a very broad set of potential customers, including operators and streamers and content providers. So this is incremental savings and pit rates, incremental improvements in quality from anything they're doing with encoding and transcoding today. And it's based on patented technology on the AI side and the signal analysis and what's happening there. So it's very unique, it's very attractive, and there's a lot of opportunity in the funnel. So we are expecting contribution to build into the picture this year.

And so is there a startup phase or even in Q2 we start to see contribution?

Q2 is probably a little bit quick on that side. Of course, conversations and engagements have been ongoing, you know, even before we announced the agreement. So, you know, that's continuing to develop. So, you know, somewhere in this fiscal year, we're expecting to see things, you know, come into the overall consolidation in the CDS segment from Keyframe. Got it.

Okay. And then my last question to me is the commentary on big delays in Do you have any BID revenues in your fiscal 2025 forecast at this point or not really?

At this point, I think we've looked at it very realistically. With respect to BID, I think about 55, 56 states and territories have gone through this Volume 2 or Phase 2 of the initial application process. now they're moving to the final proposal phase where they select ISPs and submit all the details of their plans. They have up to a year to do that, you know, after they complete that phase two of the application. So, you know, we're seeing things as continuing to develop. But, you know, in the context of the timeframe of fiscal 2025, you know, I think our forecast is more driven by the existing RDOF program. Thank you.

Thanks, Steven. The next question comes from Ryan Kuntz with Needham.

Please go ahead. Hi. Thanks for the question. And I hear your commentary submit on, you know, gross margin down on product mix of the entra nodes versus RPDs. And I wonder if you can comment on how you think about that mix going forward relative to your gross margin commentary for the year. And is there... Is there a different procurement process for those two different products from your major customers?

Yeah, thanks, Ryan. Good morning. Good afternoon. Yeah, I think that when we talk about the influence of the mix and the distinction between the the N9000 GAP platform and things like the RPD module. We've said the RPD modules, of course, where largely the software is implemented and that carries a higher margin profile for us. On the other hand, the N9000 GAP node, while it may be a lower margin product in a sense, it continues to offer this very strong uh, result for the end customer in the sense of the modularity and the future proofing of the network it affords. And what we can do is, uh, once you have that footprint of, of things like the 9,000 gap platform, um, you know, strong into, into the cable plan, you can upgrade the software modules with that time and time again, um, within it. Um, so, you know, it's the blending of those that we look at overall with respect to, you know, how it influences a margin profile within fiscal 25. Um, you know, there is this, uh, especially with respect to tier one operators, this opportunity to buy the, the, the, the module separately from the, from the platform. And we've, you know, we've, we've implemented a lot of uptake for the, for the RPD modules already and getting ready for this upgrade. Um, and now, you know, we're in the phase where they're, they're matching those up with the, with the gap platform. You know, so that's going to be a continued influence in the mix for us, especially in the first half of fiscal 25, leading into Q2. So, you know, we're expecting that uptake of the GAAP platform to be a bit of a headwind in our mix overall in BBS for Q2. But, you know, once we get into the second half, then that starts to even out a bit more. optical products come into the picture uh as a higher proportion of our vbs segment again um with ardolf and the fiber of the home programs there um so you know we've had a little bit of this this this tier one timing aspect where there's modules preceding platforms um and ultimately the two are deployed together right i mean are you seeing a follow-up there are you seeing uh customers like you know buy the gap node maybe only partially

configured and be able to add more modular capacity as time goes forward?

Yes, and, you know, very much so. So, you know, when a tier one, for example, is buying a GAP platform standalone, you know, today they may have some inventory of 3.1 RPDs to match and populate within it. Of course, as we go to 4.0, we even have fiber access modules in the roadmap for the GAP platform. So, you know, there is this opportunity set, of course, to fill in with modules separately from the platform.

Got it. And then a quick follow-up on your Falcon test product. Sounds like some good traction there. Are you seeing some traction there with the subscription-type pricing model for that, or – tier ones are still requiring more of a license type model?

Yeah, I think, you know, especially in that set of technologies and orchestration and verification, you know, the favorite model is still in the view of license capacity, you know, on that basis. But, you know, there's a significant amount of traffic over time to add to the license picture in terms of how much capacity is flowing through those products. So, yes, you know, while it's not necessarily a subscription basis, you know, it does tie quite directly to how much they're leveraging the solution.

Got it. That makes perfect sense. And then just the last one on the product side, you know, a lot of talk about evolution to smart amps and different ways to implement the different features there. Are there requirements in your – node and GAP-type products that you have to implement to support these new different approaches to smart amps at all? Or how does that affect your product line, I guess is my question.

Yeah, I mean, big picture, of course, when you're looking at 4.0 generally, especially unified 4.0, there's still how you lower down segment that between between extended spectrum and FDX. So I think, you know, I'll try to distinguish those two categories a bit. So when you're doing extended spectrum, of course, you know, you're going to 1.8 gigahertz and smart amps aren't really a factor in that equation. And when we talk about our engaged customer set, we continue to see, of course, everything is the unified technology. But in terms of instantiation of that, we see a little bit more preference for extended spectrum. Of course, as any of our potential customers move towards an FDX and they're thinking, then the interop with the smart apps will be a factor.

Got it. Perfect. That's all I've got. Thanks for the questions.

All right. Thanks, Ryan.

Analysts and institutional investors who would like to ask a question should press star and then one on their touchtone phone. We will pause for a moment so any additional callers may join the queue. As there appears to be no further questions, This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.