Q3 2019 Earnings Call

Greetings and welcome to Casa systems third quarter 2019 financial results Conference call.

At this time, all participants are in listen only mode.

A brief question answer session will follow the formal presentation.

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At this time I'll turn the conference over to Monica, Monica Gould and Investor relations for cost of systems.

School you may now begin.

Operator, and good afternoon, everyone costs are released results for the third quarter of 29 team.

Kemper 30 29.

Good afternoon after can like a CLO.

If you did not receive a copy of the earnings press release, you may obtain it from the Investor Relations section of our website at investors Dot Casa Gosh, that's kinda dotcom with me on today's call, our Gerrick well Chief Executive Officer.

Ceiling, Nicola Chief Financial Officer.

This call is being webcast will be archived on the Investor Relations section of our website.

Before I turn the call over to Jerry I'd like to note that today's discussion will contain forward looking statements based on the business environment as we currently see it and that's actually does include certain risks and uncertainties.

Please refer to our press release, and our SEC filings for more information specific risk factors that could cause your actual results could differ materially from the projections described in today's discussion.

Any forward looking statements that we make on this call. We're in the earnings release are based upon information that we believe as of today and we undertake no obligation to update these statements as resulted in your information or future events.

In addition to U.S. GAAP reporting we report certain financial measures do not conform to generally accepted accounting principles.

During the call we may use non-GAAP measures, if we believe it if you look investors.

Leave it will help investors better understand our performance business trends.

And with that I'd like to turn the call over to Jerry.

Good afternoon, everyone and thanks for joining us today as you may have already seeing no earnings press release revenue for the third quarter of 2019 came in below our internal expectations.

While results from an actress device products formally netcomm or are you in line with internal forecasts revenue from our cable products as well as revenue recognition from out wireless backlog well lighter than anticipated that Q3 short for even cable revenue and a wireless backlog revenue recognition was relate.

Two phase.

On cable, while we do see increased purchasing appetite from customers in Q3 timing for closing certain larger orders, what's more protracted that what do we have thing in previous quarters.

So without a handful of larger deals not or very close to closing unfortunately, it slipped out of the quarter based on it became clear to us on the last few days up Q3.

As a reminder of the last few days of each quarter is when we generally see larger orders close.

We view these revenue opportunities as delayed and anticipate that they will push out to kill for off this year, well Q1 2020 .

Oh wireless revenue recognition for part of how wireless backlog was delayed given that a few additional feature sport requested to be added to a product associated with a one off how large are purchase waters. We see this as only a temporary delay and in fact, we are already recognized and it's robin.

In the fourth quarter this will be reflected the out Q4 results.

Given these issues as far as the more protracted discussions we are seeing for all and myself to close larger orders.

We feel it prudent to lower our year end guidance Maurizio will discuss this in greater detail in his remarks later on during this call, but I will like to highlight a few points about our results for the third quarter and then briefly comment on our outlook for the remainder of this fiscal year.

First.

Although our third quarter revenue was lower than anticipated our overall business became much more diversified past, 52% off our revenue came from our cable business, 26% from our wireless business and 22% form all fixed telecom segment.

This diversification indicates progress towards transforming the business well provide you more stability you know revenue base in the future.

Regarding our cable second meant the cable market continues to be not digestion phase. We believe this will continue through the end up this year on a very likely extend into most of what 2020.

Well in this phase and that's so customers are primarily adding capacity to existing integrity at sicad chassis.

Although we do see revenue during the quarter from new products.

For cable, including our BBM cars I remote find those cable revenue for the third quarter was overwhelmingly from an integrated to see kind of hardware and software capacity upgrades.

Trial or stuff D.A. are progressing well how do we are not yes see in moves to a large scale deployment of D.A. products. We continue to believe that deployments of D.A., including virtual see cap are inevitable bought a we expect that D.A. rollouts in the near term well be very measured.

You bet, yes, I don't already announced whereas in this space. Additionally fund the meetings. We had earlier this month of the F.C.T. trade show, we believe that no single solution will fit or MISO knees and expect that our cable customers well deploy a mixed up solutions that are appropriate for each market.

These solutions include additional integrate to see cat capacity, our new Pdm cars extended spectrum DOCSIS remote phy remote Nok five that's why it's virtual sicad.

Given the unique breath <unk> product portfolio, we believed that we continue to be very well positioned to meet our customers' needs.

No matter.

What infrastructure solutions, they chose to deploy.

Moving to wireless we continue to believe that our prospects in wireless a strong given that our products every city in positive recognition.

Yes Act, we were awarded best New Fiveg technology at broadband walled forum or do you have this amount for our innovative coverage to Fiveg core solution. This solution combined with our fixed telco virtual being G coverages mobile and fixed networks simplifies.

Network design reduces operating costs for a service providers and enable us subscribers to use services seamlessly as they move between mobile and fixed connectivity.

Additionally, we recently announced that sprint has chosen cost as a key indoor wireless solutions partner for large scale deployment of cost assistance hepatitis most out to improve datacom coverage and species in residences and the businesses. The Pep always the first central sell from spreading that offer us.

Our non tethered why fight back her option as compared to that stand or you then have connection required and traditional Santos house.

For the third quarter, we continue to make progress on recognize our revenue from our backlog in spite of delay I mentioned earlier for the third quarter approximately 9% up total revenue excluding access devices was from wireless products.

We continue and we expect that wireless revenue excluding access devices for fiscal 2019 remains on track for 10% to 20% topline revenue contribution.

Including a revenue from our access device business for Q3, our wireless product revenue accounted for approximately 26% of our total revenue.

Oh wireless backlog now stands at around $42 million, which includes outstanding orders for our access device products off this amount approximately $28 million is from our organic backlog net revenue recognized.

Includes new wireless orders received during the third quarter.

Well I expect that wireless we've continued to grow on absolute basis, and as a percentage of our revenue year over year, we anticipate that revenues out of backlog growth well be lumpy doing the initial ramp up phase of Fiveg network build outs.

We believe that this is a normal pattern for new technology adoption during wage first Morris Dr. Priddy orders and revenue well I'm more steady ramp you spend from followers is generally they followed by a spending at all.

Yeah, our fixed telco segment, we are receiving considerable recognition for the coverage network solution as well able to create.

That's an example, I've already mentioned the pairing up our virtual being Gee with our innovative coverage to fiveg core to create a seamless experience for subscribers as they move between fixed and wireless networks.

Before moving onto Murrysville I would like to update you on our trial activity and discuss our recent change that we made to our traffic to test this policy.

Because of the significant increase in trial activity, we have seen over the last few quarters, what imposed a higher revenue a threshold for our child for qualification during the third quarter.

Yes, well helps to ensure to offense first.

So how do we have sufficient resources to a property to support our trials and second the other potential return on Chalian <unk> investments remains very attractive.

Oh last quarter I noted that we were supporting Wanda 13 trials with 65 unique customers during the second quarter.

This included 36 in wireless eight you fix telco and 69 cable during the third quarter, having implemented our new child policy. We supported 87 trials with a 52 unique customers a farmer uninsurable number for US. This net up four trials, we've already two or.

Interest for our Fiveg <unk> and have asked a cable products and includes a new trials. We added in Q3 flower wireless course at about <unk> solutions and a virtual routers offer 87 trials. In Q3 20 are you in wireless 80, and fix telco under 59 cable.

Finally regarding our outlook for the remainder of the year, we have lowered our revenue guidance to a range up $255 million to $200 million to $70 million to reflect two offense.

First related to cable continued digestion and associate delays in D.A. orders that roll off and the longer time that it is taken to close a larger capacity orders from our cable customers second the delays that I mentioned already Io revenue recognition from our artists backlog and the Lumpiness, we may see in that.

Near term wireless backlog growth with that I want my radio to comment our financial results in more detail.

Thank you Jerry and good afternoon, everyone I will start by reviewing our third quarter 2019 financial results and then discuss our revised outlook for the fiscal 2019 year.

Total revenue in the third quarter of 2019 was 81.8 million, which compares to 71.5 million in the third quarter of 2018, and 52.1 million in the second quarter of 2019 revenue from the acquired Netcomm business was 34.5 mill.

<unk> during the third quarter, excluding revenue from the acquired Netcomm business revenue decreased 34% year over year.

Total product revenue was 71.3 million in the third quarter of 2019 of which 55.5 million or 78% was from hardware and 15.8 million for 22% was from software.

This compares to 60.8 million of total product revenue in the third quarter of last year, with 24.1 million or 40% from hardware and 36.7 million worth 60% from software.

Hardware sales during the third quarter accounted for 68% of 20 revenue compared to 34% in the prior year quarter. The increase in a hardware revenue was primarily driven by the acquisition of the Netcomm business, which added 34.2 million during the third quarter of 20.

He 19.

From an end market perspective, approximately 52% of our revenue in the quarter was from cable, 26% from wireless customers and 22% was from our fixed telecom business.

Our wireless revenue included 16.6 million for Netcom, and 4.3 million from core cause a products.

Our wireless backlog, excluding netcomm decreased to 28 million down from 31 million in the second quarter of this year.

Our consolidated GAAP gross margin for the third quarter of 2019 was 47.9% down from 79.6% in the third quarter of 2018.

Excluding acquisition accounting items, our consolidated non-GAAP gross margin was 53.1%. This decrease in our gross margin was primarily driven by a higher portion of hardware revenue during the quarter and the acquisition of Netcomm, which has lower gross margins.

Excluding that cob core cause a gross margins were 70.6% during the third quarter of 29 team.

Turning to expenses total GAAP operating expenses in the third quarter of 2019 were 48 million compared to 34.3 million in the third quarter of 2018. The increase in total operating expenses was primarily due to the acquisition of Netcomm, which added a lot.

Good point 5 million in operating expenses and that this you know acquisition related expenses totaling 2.1 million.

Headcount at September Thirtyth, 2019 totaled 1066 employees compared to 812 employees as of June Thirtyth 2019. The increase is driven by 229 incremental employees at July 1st 2019, resulting from the Netcomm acquisition.

Our adjusted EBITDA in the third quarter of 2019 was 4 million compared to 27.2 million in the third quarter of 2018, primarily due to higher income from operations in the prior year period.

We recorded a net a tax benefit.

5.6 million in our provision for income taxes during the third quarter driven by incremental benefit from federal R&D income tax credits exercises in sales of equity awards by our employees and adjustments to the overall effective tax rate due to a pre tax loss in the third quarter up 2019.

non-GAAP net loss for the third quarter of 2019 was 2.9 million compared to non-GAAP net income of 20.6 million in the third quarter of 2018.

non-GAAP basic net loss per share was three cents.

For the third quarter of 2019 compared to non-GAAP diluted net income per share of 22 cents for the third quarter of 2018.

Free cash flow for the quarter was a negative 4.9 million compared to a positive 10 million in the third quarter of 2018.

Negative free cash flow during the quarter was driven by lower net income higher income tax receivables and deferred tax assets offset by a lower accounts receivable balance our dsos at the end of the 2019 third quarter was 62 days versus 94 days in the prior year.

Our period.

We ended the third quarter with cash and cash equivalents of 124.6 million and total debt of 293.8 million.

During the quarter, we did not repurchase any shares under our share repurchase program. We continue to review current business developments to determine the best use of our capital.

I would like now to turn to our guidance for fiscal 2019 as Jerry discussed we are lowering our outlook for the year due to continued digestion in the cable market.

And associated delays in D.A. orders and Rollouts delays in revenue recognition from our wireless backlog and protracted discussions with the msos with respect to large orders.

For the full year of 29 team. We now expect total revenue to be between 255 million and 270 million compared to our previously issued guidance of between 320 million and 350 million Oh. This amount we expect revenue from the acquired net com business to continue to be.

Approximately 70 million to 80 million.

We expect our full year gross margin to be in the range of 50, and 60% our full year cause a standalone gross margin, which excludes netcomm, it's expected to be between 60 and 70%.

Adjusted EBITDA is now expected to be in the range between zero and 10 million compared to our previous guidance of 40 million and 50 million.

We anticipate non-GAAP diluted loss per share to be in the range of 15, and 25 cents compared to previous guidance non-GAAP diluted income per share of 20 and 30 cents.

We now expect GAAP diluted loss per share to be in the range of 35, and 45 cents compared to previous guidance of GAAP diluted income per share of zero and 10 cents.

Stock based compensation is expected to be approximately approximately 11 million in 2019.

We continue to make good progress with our integration of Netcomm during the quarter. Today, we have achieved 1 million of cost synergies and we continue to expect to recognize total annualized cost savings of 7.8 million within the next 12 months. We also continue to expect accretion of approximately two cents on enough.

non-GAAP per share basis in 2019 and between seven and eight cents in 2020 from deal synergies.

[noise] overall, while the third quarter was challenging and we are disappointed with our lowered outlook for the year. We believed that our pipeline of opportunities remain strong fiscal 2019 has minute transition year for the company and we believe we're well positioned to capitalize on these growth opportunities ahead of us.

Joining us now for queuing, they will be Scott Bruckner Senior Vice President of corporate development in strategy with that I will now turn the call back to the operator to start the Q and a session. Thank you.

Thank you.

I'll now be conducting a question and answer session. If you wanted to ask a question. Please press star one from your telephone keypad and the confirmation telling the indicate your line is in the question Q.

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One moment, please all the poll for questions.

Thank you.

Our first question is from Mehta Marshall Morgan Stanley . Please proceed with your question.

Great. Thanks, guys I.

I mean I think.

The question that I have is really you know you noted that.

You, probably it's going to be mostly capacity adds until kind of the end of 2020 from your prepared script, which I would assume it's kind of timing of when do you think somebody is distributed architectures are.

Site. It's I guess you know that's the first part of the question, but you know you noted.

Optimistic about kind of the business then the next year.

I guess I'm, just wondering like I understand the netcomm pieces going okay, and the wireless piece, yeah, you'll get some revenue traction, but what is it about kind of the cable piece of the business that is giving you competence to be optimistic currently thanks.

[noise] made up and jet and as Jerry here, Let me answer that question we.

We continue to believe the cable will be in ER digestion period.

For a few quarters.

Wade.

But we do see be a guess deployed going forward on and but it's not like everybody is going to deploy D.A. at the same time. So we do see the progress in D.A.. So that's you know providing some often not optimism for us.

In seeing that things will improve in or in the paper sector and we also see a very good progress on the wireless or from a redesign to the poor side as well.

Got it and then maybe on the wireless side you know I think there had been kind of this maybe 20 million bogey out there of.

Revenue that was essentially a contract is that would be recognized this year. So just.

Like refreshing on how much of that you think well get recognized this year would be helpful.

Yeah, so merits a itself. So we did slightly north of 4 million in the quarter for the year were slightly north of 6 million.

We had a number of of items that got pushed out into Q4, Oh, we're still confident with with that or would that projection that you noted.

And we're already starting to see some that revenue get recorded.

In the in the fourth quarter already in the month of October and so that gives us confidence that we'll we'll get to that projection.

20 million or so on wireless revenue.

Great. Thanks, guys.

Yes.

Thank you that's your my Dream Me Press Star one to ask a question. The next question comes from the line of Rich Valera with Needham and company. Please proceed with your question.

Yeah, I guess another big picture question about how you're thinking about the the upgrade cycle around sort of D.A. architecture.

The major cable companies are still talking about like I think longer term trends of decreasing capital intensity. So wondering if they're going to look sort of substitute spending on current generation with spending on next generation as opposed to having sort of a big incremental capex spend as as they've done in prior cycles. Just wondering if you have any thoughts on that.

Whether we'll see that sort of big spend like we've seen historically or if the cable guys have gotten more efficient.

And maybe tighter with their capex.

On the historical spend up cable guys. So we're encouraged by you know typically two things one is that the bandwidth growth.

Yes.

Okay.

You know two years ago, we're seeing 40% to 60% or bandwidth growth and the bandwidth growth currently is that a lower level and that I thought it varies across the you know from account to account.

The other one less competition on and you know with the fiber and.

I went to the home now was a company nuts that was not that driver for cable spent but we do believe that the bandwidth a growth and well resumed to some extent and ER that future fiveg well, we encouraged competition, that's well be besides the fiber to the premise we.

No, we don't think and I listened to short term Don to cable to spend is going to go back to the level. We saw in like two years ago.

But.

We also do not believe is gonna be at that.

At this level forever.

Sure.

Then just a question on Fiveg can you give us a sense of how leverage you are to Fiveg you know what maybe part of your portfolio or if your active active wins or engagements how much of that as fiveg related and just what kind of traction you're saying I'm on the fiveg part of the portfolio [noise].

Well, we have about three paradox Ah that are related to Fiveg and we have a factor you core.

That's actually a also part of the conversation or with a fixed mobile convergence, so and the second winds actually fives you radio.

And the third one is from the acquired a asset Duff and Netcomm the fiveg fixed access devices. So we are.

Currently we have won deals in a in a on the cost side as well there on the reduced side, we expect to win deals on the access devices.

The next a few quarters.

Okay. That's helpful. Thank you.

Q.

Thank you.

At this time I'll turn the floor back to Jerry glow for closing remarks.

Thank you to everyone for joining us today, we look forward to updating you on our progress next quarter.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.