Q2 2020 Casa Systems Inc Earnings Call
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Greetings and welcome to the cost of systems second quarter 2020 financial results Conference call.
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As a reminder, this conference is being recorded its my pleasure to introduce your host Jackie markets. Please go ahead.
Thank you operator, and good afternoon, everyone. Katherine systems released results for the second quarter of 2020 ended June Thirtyth 2020. This afternoon. After market close if you do not received a copy of our earnings press release, you may obtain that from our Investor Relations section of our website at investors Dot catheter systems dotcom.
On today's call, our Gerry well Chief Executive Officer, That's got Bruckner interim Chief Financial Officer, and senior Vice President. This call is being webcast and 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, an RFP SEC filings for more information on the specific risks that could you cause our actual results could differ materially from the projections described in today's discussion.
Any forward looking statements we may make on this call or in the earnings release are based upon the information that we believe as of today and undertake no obligation to update these statements as a result of new information future events.
In addition to U.S. GAAP reporting we report certain financial measures do not conform to generally accepted accounting principle.
During the call we may use non-GAAP measures. If we believe it did useful to investors I believe it will help investors better understand our performance what business trends.
With that I'd like to turn the call over to Jerry Jerry.
Good afternoon, everyone and thanks for joining us today as we discussed our second quarter resolved before I discuss all financial and operational results I would like to take a moment to extend my sincere. Thanks to the tremendous team we have at Casa systems for they are a waiver and dedication and believe.
During our business.
We are you unprecedented times and I'm proud to say that our organization remains focused on his commitment to provide that technology infrastructure necessary to keep people connected I hope all of you or your families I'll stay safe and healthy.
Let's turn to our performance in the second quarter, you I'll first full quarter armed other global pandemic. We once again delivered a strong results. This came from executing our strategy of driving revenue growth products, continuing to diversify our revenue and cost.
My base and focusing on improving our profitability and free cash flow.
Before providing details on the quarter I would like to outlined several highlights from Q2.
We've delivered strong topline performance at $83.4 million, which wall Street, and bionics, Bandied paradox printing and higher demand for all wireless and the fixed telco products as well as continued stability, our cable segment, which represent.
We had approximately $42.6 million or 51%.
Notably during Q2, almost 50% off our revenue came from products that we did not offer you end up comparable period of 2019.
We continue to make progress all wireless initiate years wireless comprised 20% of our Q2 revenue or $16.6 million an hour wireless backlog grew to $84.8 million up from $26 million.
End of Q1.
We have significant was how long does that fixed how coat second events during the quarter with a tool was <unk> wireless packet core to what is your virtual be a g. and the multi service routers and two wins access devices.
We also made progress on reducing our customer concentration.
We only had 210% or greater customers in the quarter, which accounted for 39% have all relevant.
This compares to 410% of greater customers in Q2, so with all the non team, which accounted for 51% of all revenue.
And finally, we ended the quarter with a GAAP operating profit of $1.3 million and maybe it on marching up 11.2% and free cash flow all $15.5 million.
Yes short, we're very pleased with our progress that results from a financial operational and strategic perspective, as we navigate that yet terribly environment without losing sight of our longer term objectives.
Let's now turn to all <unk> areas.
Wireless revenue for the second quarter was $16.6 million all wireless backlog of almost $85 million you included our fourg to fiveg fixed wireless access devices.
Enterprise small cells small cell course, and fourg to Fiveg pocket course.
Even though the timing of that deployments of all fiveg infrastructure products depends on our customers timing.
And the industry rather it is we're particularly pleased with the progress we are making with outside you call solutions for example.
We have lost last week that we collaborated with H.P.E., an orange to demonstrate a cloud native outside your core network that kind of recognized degraded quality of service for our mission critical service or application on a common networks lies and automatically self correct. It does this.
By creating a new dedicated networks lies on demand.
We collaborated with a major network operator to successfully demonstrate the was first delivery of a long distance multi gigabit fiveg fixed wireless service use a millimeter wave.
And we are using the process of deploying a large scale fiveg fixed wireless access project for a tier one customers to deploy broadband customer service that will launch later this fall.
Turning to cable revenue, including both products and services was 42 point of seems to me that dollars almost flat sequentially I know relatively flat year to date compared to the same period.
2019.
First cable sales over the past several quarters hobbies, holding relatively steady between $40 million in a $15 million per quarter. This is encouraging following several consecutive quarters of spending reduction by cable operators beginning in the second half second quarter up 2018.
Second for the fourth consecutive quarter as we continue to diversify our business with the increased sales of wireless and the fixed telco products people revenue has shifted from almost 100% about revenue to know around 50% of our total revenue. This represents a positive shift.
In our business consistent with a one off our key strategic objectives.
Third similar to what do we saw in Q1 Q2 was marked by higher demand for all cable hardware, including increased shipments of our integrated the sicad chassis and the D.A. knows.
Including our Gen. Two knows in order to meet growing demand for both downstream and upstream bandwidth.
If the telco revenues for the fourth quarter was around $24 million or approximately 29% of sales representing quarter over quarter growth of 32% growth.
Growth in our fixed telco segment was driven largely by continued a strong demand for our fiber to the distributor important and fixed broadband products I see employees worldwide continued to work from home in the second quarter.
I would now like to update you on how koby non team is affecting our business.
As I noted earlier, we saw you increased demand for all products some of which we believe is cold it related.
This was a particularly evident in our access device segment.
Which includes our fourg to Fiveg fix while those fixed broadband fiber to the distribution point products.
Second our operations remain I interrupted which enabled us to meet demand during the quarter. However, as order volumes for our access device products increased significantly we don't taken measures to minimize the potential impact Luckily 19, all our supply chain to meet deliver.
The schedules.
Finally, as Scott will discuss in more detail that you increased demand Joel improved gross profit dollars and that liquidity in the quarter.
I'm very pleased with all performance during the second quarter, and particularly pleased with how quickly we have been able to leverage our expanded a range of products across our entire customer base to meet the needs during the cold they depend demick.
We're continuing to execute our strategy, which is evident in our results well the current macro environment crazed additional risk for our business.
Given our strong first half performance I remain optimistic about our ability to showed strong performance in the second half of 20 and 20.
I don't really I do want to say that we believe we are well positioned for long term profitable growth through greater approved that ability you know results, a divestment and development of a higher margin products and ultimately the expansion of our customer base. There is more work to be done and we are well I'll wait to achieving these goals.
With that I'll ask Scott to comment on our financial results in more detail.
Thank you Gerry and good afternoon, everyone.
Jerry mentioned this was a strong quarter for concept, we drove profitability and we generated meaningful free cash flow as we delivered a diverse suite of products to meet the growing demand for connectivity during the cobot 19 pandemic.
Revenue exceeded our expectations and we delivered a GAAP operating profit and strong EBITDA.
And as Jerry mentioned, we also grew on wireless backlog gives the result of strong wireless product demand.
We entered the second half of 2020 with greater financial flexibility and an improved cost structure, which we believe we'll continue to enable us to deliver profitable growth.
Okay, let's turn to our second quarter results.
Total revenue was above our internal expectation at $83.4 million and compares to $52.1 million in the second quarter of 2019.
$83.6 million in the first quarter of 2020.
Revenue from the acquired Netcomm business during the second quarter was approximately $37.5 million, which was up 25% sequentially.
Excluding the contribution from Netcomm or second quarter revenue decreased 12% year over year.
This was largely as a result of lower spending by our cable customers, who Q2 2020, that's compared to the prior year quarter. When we saw a catch up spending after a very anemic Q1 of 29 team.
No if we exclude the contribution from that come on a year to date basis cable revenue was flat year over year.
In total revenue was up around 14% due to the contribution of wireless.
And regarding cable is Jerry noted.
Average quarterly revenue has been very stable in the range of $40 million to $50 million for the past several quarters.
To provide additional detail.
Total product revenue, excluding services was $72.1 million in the second quarter.
Of which $58 million, where 80% was from hardware and $14.1 million or 20% must from software and this compares to $42.2 million of total product revenue in the second quarter last year.
With $19.2 million warm, 45% from hardware.
And $23.1 million or 55% from software.
In terms of total revenue hardware sales during the first quarter accounted for 70% compared to 37% in the prior year corridor.
The increase in hardware revenue, which is similar to what we saw last quarter is accounted for by two primary factors.
First because of the transition to work from home, we saw strong demand for our access device products, which enable quicken activity all of which are hardware.
And second during the quarter, we saw high volume of chassis in D.A. node shipments as Jerry mentioned in our cable segment.
Table accounted for approximately 51% to total revenue, which is a decrease from 97% in the second quarter of 2019.
Well wireless and fix telco revenue increased to 20%.
And 29%, respectively from 3% and zero percent in the prior comparable period.
And as Jerry mentioned.
We increased our wireless backlog by almost 225% <unk>.
84.8 million Dollarss, and we expect to work through this backlog over the course, who the next few quarters.
Consolidated gross profit for the quarter was $43 million at a 52% gross margin.
Compared to 51% in Q1 of this year.
And 75% in the second quarter 2019.
The year over year decrease in or gross margin was primarily driven by the higher mix of hardware revenue during the quarter and this was largely from the acquisitions Netcomm.
Gross profit, however was higher year over year and exceeded our expectations due to higher revenue in Q2.
Okay, and lower operating expenses.
As we manage our diverse mix of higher and lower margin products. One of my objectives as the interim CFO of Casa has been to focus on increasing our overall profit dollars and our free cash flow and during the second quarter. We achieved this with operating leverage that was driven by higher revenue and operating expense management.
All while keeping our R&D and sales costs aligned with our near and medium term growth opportunities.
Total GAAP operating expenses in the second quarter were $41.8 billion compared to $35.6 million in the second quarter of 2019.
And $46.2 million in Q1.
The year over year increase in total operating expenses was due to the inclusion of operating expenses from the acquired Netcomm business.
However, on a sequential basis.
Operating expenses were lower by around 10% largely due to reduce costs that include.
Lower professional services event and travel <unk> costs from Cobot 19.
The Australian dollar hedge we put into place in March for Australian operating expenses.
Our fourth quarter 2019, head count reduction as part of implementing synergies from our acquisition of Netcomm.
And finally, our fourth quarter 2019 headcount rebalancing.
To ensure that our R&D and sales resources are appropriately aligned with our growth product areas and we expect to maintain this lower level of operating expenses throughout the remainder of 2020.
Our adjusted EBITDA in the second quarter of 2020 was $9.4 million compared to $9.5 billion in the second quarter 2009 tea.
Additionally, on a GAAP basis.
We posted an operating profit of approximately $1.3 million GAAP net income for the quarter was negative 3 million or on a fully diluted basis negative four cents per share and this compares to GAAP net income of 1.2 million or one cents per diluted share in the prior year quarter.
Non-GAAP net income for the quarter was positive zero point $7 million or one cents per diluted share.
Turning now to some balance in liquidity items.
Free cash flow for the quarter was $15.5 billion compared to negative $15.7 million in the second quarter of 2019.
We ended the second quarter with cash and cash equivalents.
$149.1 million, which is up from $113.6 million as of December 31st.
Total debt was $292.2 million, which does not mature until the end of 2023.
As of June 30th inventory declined to $86 million from $93.6 million at year end 2019.
But was up from $81 million at the end of Q1 due largely to increased order volumes in our access device business.
Accounts receivable declined to $53.1 million from $93.7 million at year end 2019.
And from $55 million at the end of Q1, and this was due to strong collections in the first half of the year.
In the current environment.
While we have continued to offer extended payment terms to a very small number of customers in Latin America in Asia.
The aging of our receivables remains very good with fewer than 1% of greater than 90 days.
Okay now turning to our outlook for the year as Jerry noted we're off to a strong start as we begin the second half of 2020.
We're entering the third quarter with a robust backlog, which as I mentioned, we'll be working through during the next few quarters. Additionally, we are deeply embedded with the largest global broadband service providers wireless fixed and cable with many of our new product initiatives across multiple geographies.
And we remain confident that several of these initiatives will contribute to our growth into our profitability.
Finally, our more diverse product portfolio has strategically position Casa to benefit from the various phases of our customers procurement cycles and this should help us to mitigate certain volatility in our business. So based on this and from where we stand now we do believe that we will end 2020 in a strong.
Position.
And that our full year topline guidance could be conservative.
Having said that we like all companies are navigating the challenges associated with the pandemic and these challenges could have an impact on the timing of trial completion as we're seeing in five GT cut.
Component procurement.
Shipping schedules and product or solution deployment by our customer. So well. We are currently very optimistic about a strong second half.
We believe that any update to our guidance should wait until before or during our third quarter earnings call I do want to repeat however, what I said in our previous call.
It's higher demand for access device products.
Gross margin not gross profit will likely be at the lower end of our guidance range.
Before turning the call back to the operator to start the Kubernetes section I would like to Echo Jerry's words of appreciation I want to express our deep gratitude to our staff.
Suppliers and manufacturers around the world. We've continued to work under unprecedented conditions to help us meet the increased demand from customers for our products. Thank you.
Operator, we're now ready to take some questions.
Thank you we will now be conducting a question and answer session.
If he would like to ask a question. Please press star one under telephone keypad confirmation total indicate your line is it. The question Q. You May proceed start to if you would like to remove your question from the Q.
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Our first question comes from meta Marshall with Morgan Stanley. Please go ahead.
Hi, Tim This is Eric on per meter. Thanks for taking our question maybe just to start from US can you give us an update on what progress you've had with distributed architecture projects and maybe on that.
If you feel there's an architecture I missed those are coalescing around or if they're all still different.
Let me answer that.
In the cable space, HM Mandiant and Misos I still thinking about the right architecture moving full where there is no single architecture, everybody is going up to this point. So we do think is going to take some time for them to figure out what the right architecture is going.
To be and and this process could be longer than a the termination no generational change.
Thanks, that's helpful. And then maybe just kind of if I can ask another one.
As you're now having more quarters in just within that common core Casa business.
Can you maybe give us an updated if you're seeing any success cross selling products between those customers.
I definitely we are cross selling into a much larger customer base.
And Ah we are seeing quite a bit successes at this point and I cannot name the particular customers because that's the you know the confidence for convention confidentiality with the customers, but we are seeing multiple instances of success at this point.
Got it and many of its Scott here, maybe if I could just add one other comment to that you know it's very interesting that since we acquired Netcomm. We are actually having success is Jerry noted out talking about our products rather than discrete products, but its solutions and that is created openings for us to solve keep problems with our cost.
Rumors that we weren't able to do before we had solutions are products that extended from the core of the network all the way inside a customer premise, including for enterprises. So in fact, some of the stuff that we are working on.
With some of our customers and I think we mentioned on the last call is helping our customers create private networks for enterprises, most large and small and that creates a lot of cross selling opportunities.
Got it that's helpful. Thank you and then if I could just ask one more maybe on the gross margin front I understand kind of coming in at the lower end the range from makes the hardware, but I'm wondering if youve seen any margin pressure across the wireless portfolio.
No. We haven't been in fact, you know I again. This let me start off by saying that with the wireless portfolio. These are a lot of these are brand new products I mean, a lot of what we're doing in in wireless isn't fiveg. So it's very early to even be talking about you know price compression or ER.
Margin pressure. So you know the 50% to 60% range that we've been guiding on and then in fact, what I said in my remarks, it would likely come in at the low end to the range is really a function of two things one. It's the fact that we are selling more hardware and you know in this environment just because it enables very very quick connectivity.
A lot of what we're selling in wireless happens to be on the access device side side of the business, but also the other comment that I would make is that and we've talked about this before we did say that in earlier stages and build out we could see you know more hardware sales.
And then software sales as networks or sorry, as our customers work to densify their networks by deploying radios by deploying equipment inside customer premises and then sort at some of the longer term stuff you know as they then move to build out and deploy their consumer cores and then in a fiveg and.
Higher meant separate cores for enterprise environments as well. So I think you know what you will see in the near term is the gross margin being at the lower end of our guidance range, but you know it but what what helps us over the long term <unk>. It was a couple of things that we have a diverse portfolio.
We have products like our cable hardware and licenses that continue to deliver strong gross profit dollars in the near term while were we're growing our higher gross margin products and services in both wireless and fix Teleco Jerry talked about several of the software wins, we saw there and that should get reflected in revenue within the next year, but additionally, even.
On our or axis device products, we are working as we've noted on higher margin add ons to the access devices that are software that should help to increase those margins as well.
Got it that's really helpful. Thank you congrats on the quarter guys.
Thank you.
Our next question how surface the beep chatter Jay with JP Morgan. Please go ahead.
Yeah, Hi, guys. Thanks for taking my question business out, but it sounds like something so I think it's just not to be wireless segment and the backlog that you highlighted can you give us the sand so how much of backlog this will be realized or was it ticking up 2020, and how much is more loan them conceiving I think you made a calling dad that some of the.
Side, do you try and activity with something less than that seems to be spilling into sick enough. So just plain, who get a sense of how much is one year, though was a smaller with them.
Yeah, I can I can answer that and then maybe jury wants to chime in on some of the Fiveg activities. So as we noted a good portion of the backlog was comprised of some are access device products that you know both a function of the current environment. So our customers are trying to get connectivity very very quickly to their customers, but also.
So the phase in build out you know with Fiveg.
So.
As as a result is that those things could get deployed relatively quickly which is why they said that we would be working through the backlog over the next next several quarters. So we anticipate working through a lot of the backlog, 80% to 90% of it you know within the next within the next three to four quarters.
Okay got it Ah that's helpful and it if I could just less than the fixed telephony segment I mean, I think it was 30% of the revenues and what does a much smaller than what you were expecting it to send isn't yet, though who would benefit but can you walk through maybe this isn't the deal side because the meal for the second.
And if you could just also give us depends on how does the mix, although a little between cable and wireless and big central for the from here. Thanks.
Let me I'll take that cemig or the fits what does that the fix telco side is also showing strong growth.
As a indicated by this quarter and we do see that grows so going for it and in the future quarters as well.
There for the rest of the year.
And we do see that that trend will continue you know, we know Scott talked about tough for like us.
Several quarters full quarters now we are we have a table roughly around that they have 2% the wireless and if it telcos around the 50% and we continue to see that a wireless and it says telcos on growth drivers for US we see you know.
Cable continues to be stable.
Not you know yeah, we don't see a huge growth in the short term, we see them to be stable, but ah well I'll for us to grow and we and wireless and it fits telcos not the growth drivers in the next few quarters.
Thank you. Thank so much for taking my question.
Our next question comes from tip, Sabic I with Northland Capital markets. Please go ahead.
I heard me, how good afternoon and congrats on the results wanted to ask a few questions about.
The backlog increase in wireless, which is obviously a pretty notable and Jerry you mentioned I think a half a dozen wins spread across various product categories and I guess my questions are can you characterize those win.
Maybe five GE versus four G. or Scott I think you spoke to this a little bit before but it sounds like there might be a higher.
Could be a higher margin profile that backlog given the software element to some of what you mentioned.
And if you compare characterizes wins kind of.
Geographically U.S. versus international or you know tier one carriers or or others. So in general just looking for a lot more color.
On the on the backlog increase.
Oh, Hi, 10, so we thought that for the Oh, we characterize them as significant wins and we have more wins, but a you know we just mentioned a few more significant lists and they are a mixture of Ah Ah Ah Fourg and Fiveg and.
Yeah, except the two cases axis devices, our hardware the others I'm wants software centric solutions or pure software solutions. So we do see a a continued progress in fiveg as last actually accountable fourg inside your together.
Okay. So it sounds like you know for the second half you would expect.
Kind of your fixed wireless access revenues to to grow and you've already commented or.
Fixed telecom.
So as you look at my guess those are there.
The historical element for MEDCOM. So your board are pretty strong remember forget calm in the quarter.
It sounds like you expect both of those.
Elements to her to grow in the second half got accurate.
Where do we expect to wireless and it fits telco to grow you know they come that you know they are they cut this oppose that the infrastructure side as was the access and devices side, but a you know as a whole the wireless and this telco at least we expect them to grow.
Yeah, and Tim remember, what what Jerry said in his remarks that <unk>. So in part you're right. We are seeing a lot of a lot of tailwinds in the access device business right now, but we noted that there are several significant wins in virtual BMG multi service routers and also.
We talk about access devices, but you know this is a combination of both our software and I'm certain things that that will sit and customer premises well and Jerry did mention.
Some of the Fourg and Fiveg success is the course expenses that were having so you know over time I think you're going to start seeing you know a shift in the balance you know right now it's a little bit heavy on access side that start shifting over the course of the next 12 to 18 months to see both.
A combination of what we contribute on the infrastructure. So I know we pulled in from access.
Got it and Tim.
So not nonetheless, you asked so is about the geographic distribution and we did have successes in both the North America with a tier one operators as well as a.
Tier one operators in a pack.
Got it.
Last question for me and I'll pass it on you mentioned kind of the.
Stability on the cable side.
And it sounds like you expect that to kind of continue throughout the year I Wonder if you could talk about you know the puts and takes from cable.
Right and in the first quarter, you saw strength, there, though without.
Since its from the floor customer.
Given your comments about concentration we are seems like some of them ever terms, but I wonder if you can sort of talk about what you might be seeing in terms of capacity demand.
From work from home.
And.
Sure, which is theoretically to tell when that gets sort of like what might be offsetting that to drive kind of an overall stable profile.
Yeah, we would be notice that the Kobe 19 is driving tidball creators to a two plays well orders I'm hardware.
And primarily driven by a number of subscribers a subscriber increases they have asked why has that Austrian bandwidth demand growth.
And so you know you know more hotter is actually a is a welcome a news for us in the sense that they increase our footprint and they are so and.
The increase the capacity we happened a few it for future software licenses, but although role and we don't you know we haven't seen you know and.
Spend increase you know you can tell from the operators or Capex, we witnessed in you know real spend increase and we think that at least in the short term that's gonna be stable.
Great. Thanks very much.
Thank you I would like to turn the floor over to Jerry for closing comments.
[noise] [noise] [noise]. Thank you operator as stanadyne mentioning our earlier remarks, we believe we have to arrive team and a diverse part on mix. This school critical element as well allow us to continue.
Security all strategy of growing our business by expanding our footprint continuing to diversify our revenue and the focus on improving profitability and free cash flow. That's due to everyone for joining us today, we look forward to updating you on our progress next quarter.
This concludes today's teleconference. You may disconnect. Your lines at this time is thank you for your participation.
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