Q1 2020 Earnings Call
[music].
Greetings and welcome to the Casa systems first quarter 2020 earnings call.
At this time, all participants are in listen only mode.
A brief question answer session will follow the formal presentation.
If anyone should issued a core operator assistance during the conference. Please press star zero from your telephone keypad.
Please note this conference is being recorded.
At this time I'll turn the conference over to Monica Gould Investor Relations for coastal systems.
Schools you may begin.
Thank you operator, and good afternoon, everyone.
So released results for the first quarter of 2020 ended March 31, 2020. This afternoon. After the market close if you did not receive a copy of earnings press release, you may obtain it from the Investor Relations section of our website at investors Dot Casa Dash systems Dot com.
With me on today's call or Gerrick, Whoa, Chief Executive Officer, and Scott Bruckner interim Chief Financial Officer, and senior Vice President.
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 as such does include certain risks and uncertainties.
Please refer to our press release in RCC filings for more information on this specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion.
Any forward looking statements that we make on this call or in the earnings release are based upon information that we believe as of today and we undertake no obligation to update these statements as result of new information or future events.
In addition to U.S. GAAP reporting we report certain financial measures that you not conform to generally accepted accounting principles.
During the call we may use non-GAAP measures. If we believe it is useful to investors or we believe a little help investors better understand or performance or business trends.
And with that I'd like to turn the call over to Jerry.
Good afternoon, everyone and thanks for joining us today passed with this caused our Q1 results. We note that this is a difficult time for everybody. So I would like to begin by expressing our gratitude for you joining the call and on behalf of Costless itself I want to extend our since your wishes.
Well, you and your families to stay safe and healthy.
In Q1 off 2020, we'll start to see results from executing our strategy up growing our revenue by expanding our customer base and footprint in our cable business.
And by expanding our addressable market to new business segments like wireless.
Let me now turn for the details for the quarter.
Total first quarter revenue was $83.6 million off which approximately $43 million or 51% came from our cable business.
$22.4 million for 27% came from wireless.
And $18.2 million or 22% came for merrell fixed telco business.
From the revenue composition, you can tell it that our business has become more diversified with only around how far revenue coming from cable.
We also saw good progress you all of our newer product areas, including D.A. solutions, Fourg and Fiveg wireless packet core radio access networks and fixed wireless access.
Another highlight I would like to point out tool is.
Reduced customer concentration.
During the first quarter, we had to 10% or read or customers, one of which was a tier one wireless service provider.
Yeah, there was a converged wireline and wireless broadband service provider.
Together these two customers accounted for 35% off our revenue versus 49% in the same period last year and a 50% in the fourth quarter of 2019.
Turning now to our product areas.
Revenue from cable both products and services in the first quarter was $43 million.
23% increase over the same period in 2019.
If floating services first quarter cable product revenue was up 33% overall Q1 office opened 90.
As I noted earlier that growth in cable sales in Q1 is due to expanded customer base and the footprint.
Customer purchases during the quarter included a significant increase in hardware shipments both sequentially and year over year, including integrated see cab chassis and a D.A. knows.
I'm also happy to report that we have converted to a virtual seek how core trials to purchase orders, beating the competition with the technical advantages, even our virtual teacup core.
Wireless revenue for the first quarter was $22.4 million with contributions from our radio fixed wireless access and at wireless software.
During the quarter, we continue to make progress on recognized in revenue from our backlog with a sizable shipment Oh pharma stranded radios to appeal, one North American mobile network operator.
Well, we make progress in sales and revenue recognition of wireless products, we are expanding our customer trial efforts in both consumer fourg to Fiveg wireless networks as well as seem Fourg and Fiveg solutions for enterprise networks and the industry verticals.
These solutions rely on a combination off all products, including Fourg and Fiveg Apociii course, mobile edge computing indoor small cells and machine to machine gateways.
We had hoped to preview this solutions at mobile work mobile World Congress in Barcelona, this year, but whether you've been canceled we have shifted to a virtual booth that we will soon be launch into showcase these and other solutions for wireless networks.
The virtual board will be made available on our website finally.
At the end of the first quarter, our wireless backlog stood around $26 million and included our Fourg and Fiveg indoor and outdoor videos.
Fixed wireless access devices, and our cloud native Fourg and Fiveg packet core products.
Yeah fix telcos revenue for the fourth quarter was around that 22% of sales driven largely by sales of our fiber to the distribution point products at the same time, we continue to expand our cost about try effort.
Virtual BMG router and multi service router products.
Next I will act to comment on the impact not Colby 19 is having on our business and then discuss our operations as we work to meet increasing demand for our portals.
First our business.
Toward the latter part of the quarter as broadband subscribers across the globe began to work in the study from hold our customers cable <unk> wireless and six telco service providers experienced a sudden dramatically increasing upstream and downstream traffic on their networks.
We noticed this shift in particular that due on March four or access technologies.
North American cable companies for example report you see a greater than 30% increase in bandwidth consumption in March alone.
Wireline network traffic increased by a range up 17% to 37%.
With a media increased 25%.
And that wireless network operators reported growth in wireless data traffic of just under 10% well wireless voice traffic increased by as much as 24%.
Because we supply network infrastructure equipment and customer premise equipment to enable ultra broadband services across all access technologies.
These trends began to drive strong demand for all products to what the ended the quarter with our existing customers in cable <unk> wireless and ethics telco.
That's a result, we ended the first quarter with an order backlog of a 90 $490.5 million, which will be drawn down throughout the year.
Second our operations.
Asset responsible company, the health and safety of our employees our most important.
Since mid March most of our R&D employees are working from home.
As a supplier to the communications service industry, we deem that business that provides essential services and as a result have being able to keep pollo operations up Iran globally, all the company's manufacturing facilities, apparently 40 operational as those up.
Our contract manufacturers.
For our access devices products with some of our contract manufacturing supply efforts in China, We do see a very short period up disruption fast, but yes. We are now operating normally we do not currently expect to see material negative impact from these results for the year.
As we noted on our last earnings call. We have the inventory on hand for our infrastructure products and are generally able to me this increased demand.
However, we continue to work with our supply chain, which remains open as well as with all contract manufacturers to ensure that you mentioned is not depleted and to augment the manufacturer of products, where demand has been particularly high.
Finally, we are you in the strong position from a liquidity standpoint.
During the quarter, our cash balance increased by $21 million almost 19%.
In addition to our good receivables at the you mentioned policies, we have sufficient cash on the balance sheet to operate the business for an extended period of time based on our Carlin operating structure.
Scott will discuss this in more detail in his remarks later on this call.
I would like to end my remarks by noting that we remain strong position to help our customers. During this time of accelerated need.
So we have learned from previous times of crises and uncertainty being connected moves high up on the list. So people are spending priorities.
Communications becomes a vital service as a result file where we sit today, we remain comfortable with the guidance, we outline our last earnings call.
We previously noted how caution around cable msos spending during the first half of the year. These SaaS, obviously changed given the abrupt shipped in the demand environment.
We continue to believe that mobile operators will continue to roll out Fiveg networks. This year and the increased capacity to Fourg networks at the same time.
We still expect wireless to be a material component of our 20 tied to revenue.
With that I'll ask Scott to comment our financial results in more detail.
Thank you Gerry and good afternoon, everyone I will start by reviewing our first quarter 2020 financial results and then given the unique environment that we find ourselves.
I would also like to discuss our outlook for the remainder of the year.
For the first quarter of 2020 is Jerry noted total revenue was $83.6 million.
Which compares to $35.5 million.
First quarter of 2019 and $112.9 million in the fourth quarter of 2019.
Revenue from the acquired Netcomm business during the first quarter was approximately $30 million.
Given that we are seeing high demand for net comes products Netcomm remains fully on track to meet our full year expectation.
Excluding the contribution from Netcomm or first quarter revenue increased 51% year over year.
Total product revenue was $73.8 million in the first quarter of which 53.9 million or 73% was from hardware.
And 19.8 million or 27% was from software.
This compares to $26.7 million of total product revenue in the first quarter of last year with 13.4 million for 50% from hardware and 13.3 million or 50% from software.
In terms of total revenue.
Hardware sales during the first quarter accounted for 64% compared to 38% in the prior year quarter.
The increase in hardware revenue, which is similar to what we saw in the fourth quarter is accounted for by three primary factors.
First the inclusion of Netcomm in our results revenue from which is all hardware related.
Second increased radio shipments from our wireless backlog is Jerry noted.
Third increased chassis shipments up 33% year over year, and 56% sequentially and da node shipments in our cable segment.
As Jerry mentioned from an end market perspective, our business continued to be more diversified as we made further progress in the wireless and fixed telecom markets.
During Q1, approximately 51% of our revenue or $43 million came from cable, which was up 23% from a very weak Q1, a year ago.
Another 27% or $22.4 million came from wireless.
And 22% or 18.2 million with from fixed Telecom My comparison, nearly 100% of our revenue in the prior year quarter was from cable.
Our consolidated GAAP gross margin for the first quarter of 2020 was 51%.
Compared to 69% in the first quarter of 2019.
The year over year decrease in our gross margin was primarily driven by higher mix of hardware revenue, including our wireless radio products during the quarter.
The acquisition of Netcomm, which has lower gross margins as we stated previously.
And beginning in the latter part of the quarter, increasing airfreight costs related to cope with 19.
Turning to expenses total GAAP operating expenses in the first quarter 2020 were $46.2 million compared to 38.6 million in the first quarter of 2019 and 49.5 million in Q4.
The year over year increase in total operating expenses was primarily due to the inclusion of operating expenses from netcomm, but on a sequential basis operating expenses were down by around 7% largely driven by decrease personnel costs from the head count rebalancing, we undertook late last year as I announced on our last earnings.
Call and later in the quarter a reduction in asked DNA from lower travel and Tradeshow expenses due to covert 19.
Head count at March 30, Onest 2020 totaled 968 employees.
Compared to 997 employees as of December 31st 2019.
The reduction in headcount was related to additional elimination of overlapping functions. Following our acquisition of Netcom and further rebalancing of R&D and sales resources during Q1 to address the higher growth, we anticipate in our wireless and fix telecom markets during 2020 and beyond.
Our adjusted EBITDA on the first quarter of 2020 was $3.7 million compared to negative $7.7 million in the first quarter of 2019.
Well on a GAAP basis, we did have an operating loss of approximately $3.5 million.
GAAP net income for the quarter was positive at $1.2 million or on a fully diluted basis, one cents per share.
This compares to a GAAP net loss of $15.3 million or negative 18 cents per diluted share in the prior year quarter.
The positive GAAP net income and fully diluted EPS in Q1 of this year were primarily from a tax benefit of $9.3 million that we booked during the quarter related to Noel carry backs permitted by the cures Act stimulus package.
Our non-GAAP net income and fully diluted EPS would have been positive this quarter.
Except for an adjustment that we made for the full amount of the tax benefit we recorded that I just described.
On gap net income the amount with the tax benefit think of it as evaluation allowance give back if you will to our deferred tax acid balance in order to achieve the tax benefit from interwell carry backs.
This amounted to a 9.3 million dollar non gap expense at caused or non gap net income and fully diluted net income per share to be negative.
Non gap net loss for the first quarter of 20 $25.3 million inclusive of the negative 9.3 million dollar adjustment.
This compares to a non gap net loss of $11.6 million in the first quarter of 2019.
Non gap net loss perfectly deluded share with seven cents for the first quarter of 2020 again, including the negative 11 cents per fully diluted share adjustment.
This compares to non gap diluted net loss per share a 14 cents in the first quarter of 2019.
Turning out to liquidity as Jerry mentioned, we do remain in a very strong position.
Free cash flow for the quarter was $25.7 million.
Impair to negative $15.7 million in the first quarter of 2019.
We ended the first quarter with cash and cash equivalent of $134.8 million, which is up from $113.6 million on December 31st.
And total debt of $292.7 million, which does not mature until the end of 2023.
As of March 31st inventory declined to $81 million from $93.6 million at your in 2019, while receivables declined to $55.5 billion from approximately $93.7 million at year end 2019, and this was due to.
Strong collections during the quarter.
In the current environment.
Well, we have offered extended payment terms for certain customers. The aging of our receivables remains very good with less than 1%.
Greater than 90 days.
During the quarter, we did repurchase just over 1.2 million shares for approximately $3 million under our share repurchase program.
With respect to our plans for the remainder of I buyback program as we've done in the past we will continue to review current business of elements to determine the best use of our capital.
I would now like to comment on our outlook for the year.
Jerry noted in his remarks, the covert 19 pandemic has increased the need for our customers to invest in communications infrastructure in order to address materially increase traffic on their networks.
This is created strong demand for our products as was evident in our quarter and backlog of almost $91 million.
That said we are currently reiterating the guidance we issued on our last journeys, calling to summarize we continue to expect total revenue to be between $340 million and $360 million.
[noise] well, we continue to expect our full year gross margin to be in the range of 50% and 60%.
Given increased airfreight costs at a higher mix of hardware revenue that we may see throughout the remainder of the year.
We believe the gross margin could be at the lower end of this range for full year 2020.
We do not anticipate that this will have a negative impact on items lower down on the income statement as we could see some benefit from lower operating expenses as a result of covert 19 related cost reductions in certain S.G. any items like travel.
Marketing trade shows and also from Australian dollar F.X. games.
So we still expect adjusted EBITDA to be in the range of $33 million in $43 million.
Non gap deluded D.P.S. to be in the range of zero cents to 12 cents at a loss on Gabby P.S. in the rain [noise].
Gives me in the range of negative for sense.
To negative 16 cents.
Before turning the call back to the operator to start that you in any session.
I would like to Echo Jerry's words of appreciation and express our dream deep gratitude to our staff suppliers and manufacturers around the world who have continued to work under unprecedented conditions to help us meat increased demand from customers for our products.
Thank you operator back to you.
Thank you well now they conduct in question and answer session.
I'd ask a question. Please press star one on your telephone keypad and a confirmation tell indicate airliners and the question cue.
You May press start to if you like to move your question from the queue.
Subsistence using speaker equipment, it may be necessary to pick up your handset for pressing the star keys. One on please all we pull for questions.
[laughter].
Thank you are first question is from the line of met a Marshal was Morgan Stanley. Please you see with your question.
Hi theme you are gone per meta here. Thanks for taking our question, maybe just starting off with the strength you saw in wireless <unk> course regularly. Good can you help us to better understand how much of that was sold in the quarter versus maybe revenue that you're waiting for acceptance and then maybe continue.
That where you kind of expect the runway deeper in the wireless business and 2020.
Okay. So it's got here, let me let me answer that question. The revenue that you saw a book during the quarter was all from stops it was installed and obviously past acceptance in the backlog, that's where you're going to see things that you know are waiting acceptance with their P.O. is you'll find that that is evenly disk.
Attributed across all of our product. So I think if you assume that a third in wireless uncertain cable and a third and fix you'll be pretty spot on on the demand that we saw across the board during the quarter.
Got it that's helpful. And then maybe just slowly on cable seeing that there is.
<unk>.
Likely expecting capacity at the queue to to maybe a comedy traffic, but how do you see that playing out during the year would that tiny potentially lead to maybe more from half wounded rubbing you as you kind of look ahead to Q3 and she bore.
Well not [laughter] difficult question to a forecast what the you know what the the second half is going to look like.
We we do see that there is going to be continued demand in bed with across the types of service providers, whether the cable wireless or <unk>, we do stuff that demand is not gonna you know all all of sudden goals stops and.
No we would we cannot accurately forecast that's going on you know and you know very high eliminated level, we don't know that yet.
Okay.
<unk> I may add a couple of things like if you think about the way, we I think about where our growth will come from and revenue. This year. There it's business as usual capacity upgrades and we don't exclude the possibility that we could continue to see those as normal throughout the year second their new customers and additional footprint with existing.
Customers, which we saw on two one is Jerry noted in fact, most of the year over your growth in cable for the quarter came from that and we don't exclude the possibility we could see some of that this year is certain of our competitors <unk> focus less on the cable space. There's the Kobe 19 bump in as Jerry talked about we started to see that demand in.
The latter part of the quarter and then the question is whether that continues throughout the year.
And then there's new technology, which you know the efforts in our focus on that paid off with two virtual seek out P.O. is and you know, we're hoping to see more of that throughout the year, but again I agree with Jerry on that quite highly uncertain.
I wonder so thank you very much.
Thank you.
X. question comes from the line us to make her chatterji with J.P. Morgan.
He is your questions.
Oh, Yeah, Hey, guys I'm sticking my question is is actually brought up on for something awesome <unk> well I had was on D. would change. He kept lunches are those that do I. Let it can you give us a sense of any they've been Neil then should think of from those odds and when can be start to see those deployment until manipulating it has more.
Backup go to this year or a more didn't go next yeah. Thanks.
We we we we booked the you know the the deals and some of them are renting deployed we expect.
Revenue recognition in the next support or two.
Okay. Yeah. Thanks for that and then a second question on just the cash I mean, you had a nice feet cash flow in the court. So just wind wasn't assigned or whatever he was dead and Neo don't do you see <unk> benefit for you guys and that cashed in contribute.
<unk> going from there thanks.
Yeah. So as we noted on the last call. We we're forecasting that we would be free cash flow positive for the remainder of this year largely given the amount of revenue that tune our guidance and where we see our up x. for the year. So we do expect a degree of operating leverage given the rabbit. We're forecasting in the quarter is you dig through the numbers I think you'll see again a lot of.
The cash came from conversion of receivables into into cash and also a decrease in the inventories are some cash tied up in inventory that began to ship both in wireless and on the chassis side. It was where the two big contributors for the quarter.
Thank you. Thank you for taking questions.
My next question is from the line of Scott Fesler, what stiefel, because you see with your questions.
Hey, guys you touch on this a bit already but I just wanted to go back to it in cable or you're seeing customers just like to upgrade their existing network infrastructure or customer. So looking to move ahead with Nixon products like get it D.A. in virtual.
Well, we actually it has been bowls and you know we basically all kinds of business really stands on two legs. One is that we have a really nice deployed you know a customer base and it would print that continues to to generate.
A new for us when people add bandwidth inherited that the quickest way, we continue to see <unk> doing quite a bit of that and the same time, we are shifting D.A. solutions, including a virtuous you see kind of course.
<unk> so.
I guess just.
Just to rephrase. So are you, suggesting that the current customers are just trying to do upgrades within their footprint, but new customers looking to come on are evaluating the next send products.
No I wasn't suggesting that the existing customers could be evaluating both but you know given a a time pressure. The easiest. The fact is and the lowest cost ways for them to continue to add into what they have deployed and.
We see a lot of that this point.
Got it okay. Thank you.
Mmm.
Thank you as a reminder, you impress star one to ask a question. The next question is coming from the line of rich So that was neat them and company. Please just use your question.
Hi, good afternoon. This <unk> on turrets. Thanks for taking my questions. So just to return to the virtual sitcom purchase orders. So I was curious improve the sequential improvement in.
<unk> take kept a man and I'm just wondering if that was more circumstantial based on covert potential restrictions from.
On on site Rollouts or if there's a result of but.
Ongoing trial. So you had none the follow up would be how the on ongoing trials are currently trending I know is believed 35 to 40 ongoing trials last quarter and I was wondering if there is progress same mare as well or more on the conversion from thank you.
Oh, well the the the commercial was based on ongoing trials <unk> <unk> doesn't work on this phone you actually have to add remote find knows in the field that there's a lot more honest that work to ask them to deploy <unk>, then just expanding the existing bandwidth.
With with the deploy there anyway. So yeah. So it does a lot more honest network. So into account road that you actually have to be doing trials for awhile to achieve it.
Great I think you're answered the question. So then.
On the prior call your talk about about <unk> protracted.
A deal time for some large orders that slept from the third quarter fourth quarter. It and then.
So the majority of those have been closed in the <unk> in the fourth quarter, but was wondering if this trend has.
Ben consist in sequentially or or or or causes made progress what's that saying how this has been impacted or due to the increase man from cold, but thank you yeah. Yeah sure. So yeah. So all that revenue has been recognized in the fourth quarter and as we mentioned on our last call. We expected to see the remainder of it [noise] recognizing the first quarter that happen.
I I wouldn't necessarily characterize that trend is not making progress because when you are deploying a new product you're often working in Allentown acceptance criteria. You are often working with the customer to do some fine tuning so they're a lot of variables that come into play that affect the timing.
The products that we deployed that were affected we're not only brand new to the customer but novel pieces of technology and so they did require additional time to be integrated into networks, but we have not seen that in the first quarter just given the nature of the demand.
Okay. Thank you for taking the questions.
Thank you.
Anyway for Star Wonder if you'd like to ask a question at this time.
[laughter].
Oh next question is from the line of Tim seven him with North Island, plus your C. with a question.
[laughter].
Hi, good afternoon, and congrats on the results and [noise].
I'll apologize in advance I'm hopping on late sort of this question is redundant or silly [noise].
Please forgive me.
And it's really sort of two fold it looks like and then you're kind of indicated this in your update and late March you may have seen.
Some upside in terms of capacity on the cable sorry pumping them out.
And.
[noise] and consolidate your over your growth from the cable business.
I Wonder if you're looking that is you know more of a poll forward or whether given their results. We've seen you'd think you might be able to to grow and cable this year on the one hand.
And then on the other with that Nick I would have expected growth Americans to be higher guys, probably went through the dynamics there but.
That was my potentially redundant.
Question is about margin mix and why we came out where we did given.
What should be more capacity unless hardware.
Yeah, we one of the actually trends we have seen in you know, especially a late Q1 and already part of this quarter is that we we do see more hardware purchase is even on the cable aside you know we'd we'd need this shit.
Kind of of the ER wireless hardware, both the radio and fix access.
Success, but even for cable, we'd D.C. I'd be more <unk> not means.
You know the operators cannot meet on the turning on a more licenses to satisfy the demand.
<unk> you got to the plan that you have to add Hon rain water tools and needs to be man.
You know we so you know you know Orient, where we actually have more you know how to be more harm hotter shit man nice place that that yeah. The gross margin yesterday.
Yeah, and Tim just to give you a couple of numbers and then on a like for like basis, a year ago first quarter 2019 hardware comprise 38 per cent of costs are revenue.
In the first quarter of this year I, sorry, 38% <unk> Q1, 19 in the first quarter of 2020. It was 45%. So as I noted on the call. We saw a big uptake in the number of <unk>.
Upticking the number of nodes as operators are building up their networks and part of I think the chassis demand. In addition to where Jerry was saying that software just wasn't enough to meet the capacity is that is Jerry noted on the call. We added new customers a new footprint. So you're starting off again with basic equipment, the integrated see cap and we hope to.
Well then lead to software sales going forward for additional capacity.
<unk>.
Well, yeah that actually is.
Speaks pretty directly to the other part of my question.
Which is about you know your prospects for growth from cable given that you've got a more.
Jesse intensive hardware intensive mix like you know it seems like the likelihood that.
Maybe this is.
No I'm not a pull forward, but you know a footprint in phil's scenario. So as you look at your I guess, yeah, 183 million or so and cable revenue.
Last year have you know in leaving your guidance sudden change have your assumptions changed.
You know wireless versus fix versus cable in terms of.
You know grow relative growth rates.
Not necessarily I, you know look I think what what we assumed in what we noted on the last call and what you've seen in the last couple of quarters as it were kind of stabilizing for the near term at about 50 per cent of our revenue free cable.
Then wireless and fixed being evenly split the one change that you know I did note and I don't know if you've heard the remarks Where's that there there is a possibility that we would continue to see more hardware throughout the remainder of the year and so in our gross margin assumption our guidance between 50 to 60 per cent we <unk>.
And you know in the lower half of that of of that guidance range, but other than that we are you know we're we're sticking to the guidance that we gave.
Fair enough and did you guys talk 10% customers so the quarter.
We did and we noted that customer concentration was down significantly. It's you know this quarter. There were only 210 per cent or greater customers. It was not one of our usual, 10% customers and knows to customers comprised only 35% of revenue as opposed to almost half the revenue in previous quarters.
Okay I'll take it all the rest of it off line before I ask seven more questions that you've already answered bright color okay.
Thank you.
At this time off turn the floor back to Jerry close C.E.O. for closing remarks.
Mm.
Thank you to everyone for joining us today, we look forward to updating you all programs next quarter.
Thank you. This concludes today's conference you may just catch alliances. This time. Thank you for your participation.
Mm.
[laughter].