Q3 2021 Casa Systems Inc Earnings Call
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Hello, and welcome to the cockpit systems third quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn.
The call over to Jacky markets Investor Relations. Please go ahead. Thank you operator, and good afternoon, everyone. Kathy systems released results for the third quarter of 2021 ended September 30th 'twenty 'twenty. One this afternoon after the market closed.
If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at investors Dotcom dotcom.
Dot com.
With me on today's call are Jerry Guo Chief Executive Officer, and Scott Bruckner, Chief Financial Officer.
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, and our SEC filings for more information on the 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 a result of new information or future events.
In addition to U S. GAAP reporting we report certain financial measures that do 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 it will help investors better understand our performance or business trends.
And with that I'd like to turn the call over to Gerry Gerry.
Good afternoon, everyone. Thank you for joining us today as we discuss our third quarter results.
Even though we had a very solid start to our fiscal year. During the first half we successfully managed to avoid any material impact.
From what I know very widespread supply chain issues.
We delivered record growth and profitability.
Fortunately I cannot say the same about the third quarter.
We are seeing across our industry.
Our third quarter results were impacted by what's the name of supply chain issues.
To add some color, we estimate that the revenue impact from delayed deliveries across all product lines in the quarter amounted to approximately $11 million.
With a global shortage of continually into Wassa in Q3, we are now facing order lead times for certain components up over a year.
Finally, lower revenue from supply chain delays also meant lower year over year gross profit our gross profit margin in Q3. It was lower also because the higher percentage of hardware product revenue than we normally see each quarter.
Without it the problem.
A few customer a softer order delays that are we expect to recognize as revenue in Q4.
While we anticipated that supply and logistic challenges all the temporary rate.
We do expect them to continue for at least the fourth quarter of this year and likely into 2022.
As you saw in your press release, we are updating our guidance to reflect this current reality. We did mentioned on our previous earnings calls that we would revise our assumptions you have supply chain disruptions got worse.
Fortunately and as I just laid out they have.
Scott will provide our revised guidance assumptions in his remarks later on this call, but please bear in mind that the supply chain situation, it's a very fluid.
Our revised guidance is based on the best information that we have today.
Having said this I want to reiterate that short term or quarterly blips you can always I was in no way diminish our expected long term growth trajectory.
In fact, we continue to see a Korean demand for all products, particularly in wireless we continue to have a very large backlog across our products and we fully expect to benefit materially from Argos.
<unk> and the deployment of our mobile private networks, we will provide more details about all of this and about our growth expectations.
November at your Investor day, while industry wide supply chain and logistics constraints made this a tough quarter. We did see several significant successes in Q3 to name a few.
It kind of shows cost US you know they T. A fixed wireless access devices and affords commvault packet core as a package solution to bring reliable high speed internet to underserved communities in rural areas.
We announced an exclusive agreement with Bell, Canada to provide a new five year six fixed wireless access devices.
Dallas Wireless home Internet service this will deliver a broadband to customers in small towns and rural communities.
And Vodafone successfully tested our open architecture at these aggregates, you're the virtue of being G. Router in a multi vendor solution, we believe that our virtual being she will disrupt the industry by being the first and only product that can work with a separate hardware and the software provided by multiple vendors as such.
It helps our customers to assiduously scale and deploy new features and they have their time to market in launching new services.
With that let me turn to our results.
Which again reflect significant supply chain headwinds total revenue for the quarter came in at $99 $2 million, a 6% decline year over year.
Adjusted EBITDA was $5 $5 million on.
On a year to date basis, however, revenue of $296 million was up eight 6% over the comparable period in 2020.
On a year to date EBITDA of $37 $4 million was up 24, 5% over EBITDA in the first three quarters of 2020.
Moving on to our product areas.
Starting with wireless despite supply chain headwinds wireless revenue was $44 $2 million, that's up 26% sequentially up 51% year over year I know represents 45% of our total revenue in the quarter.
Wireless revenue growth in Q3, it came from continuous success in our <unk> five <unk> packet core and the fixed wireless access devices.
Our wireless backlog at the end of the quarter remain at large and stood at $101.2 million.
In addition to the product successes I mentioned earlier, we continue to make progress with our cloud native cloud solutions. Both in terms of your industrial recognition by cloud leaders like Intel Red hat, Amazon and Google as well as in terms of customer adoption.
In fact, we have seen our five G cloud native core network functions chosen by a major North American mobile network, operator, and a mobile network operator in the APAC region to name just a couple.
And finally.
Our cloud software products continue to gain traction will have a wider moat to mitigate the impact of hardware supply chain disruptions.
Moving on to fixed household fifth how core revenue was $21 million in Q3 and accounted for 21% of our total revenue. This is down 39% year over year, but it's up 22% on a sequential basis.
As I previously mentioned the Lumpiness, we have the thing off this telco revenue has been due to product and customer concentration, which we had been working towards resolving we believe that that 22% sequential growth in this product area is evidenced that gets calculated beginning to gain traction both with fiber extension products.
All virtual <unk> router products.
Before moving on to cable, let me point out that revenue from our new product areas that fixed wireless accounted for.
65% of our Q3 revenue.
Finally, let's turn to cable cable revenue in the quarter, it was $34 million or 34% of revenue. While this was down 19% year over year I would note that a majority of the negative impact from supply chain was in cable normalized for this impact we believe our cable revenue would have been.
Within the $45 million to $50 million range that we have been seeing each quarter.
Part of the supply chain issues.
Cable demand continued to be relatively stable with most of our customers opting for extended life in their existing integral to see cap architecture, well we will.
Well. They also investing you hi, Ana misplaced as they await deployed by remote Mac Phy.
Before turning the call over to Scott to review, our detailed financial results for the quarter and our outlook for the remainder of 2021 I want to thank our best in class team members, who worked extremely hard to try to minimize the impact of the supply chain environment, our customers and our company there.
Their efforts are responsible for the exception of products, we have developed and for our continued success in expanding our customer and revenue base.
With that said I'd like to turn the call over to Scott Scott.
Thank you Jerry and good afternoon, everyone.
As Jerry mentioned, our third quarter results were unfortunately impacted by what are now widespread supply chain disruptions and component shortages.
So, let's just dive right into the numbers.
Revenue for the third quarter came in at $99 $2 million that is down 6% year over year and the decline in revenue was driven entirely by supply chain disruptions.
You already mentioned these disruptions reduced our top line by approximately $11 million in the quarter.
If we break this down on revenue across our product lines, let's start with wireless.
Third quarter wireless revenue was up 51% year over year at $44 $2 million were 45% of total revenue and a strong quarterly performance was driven by continued success with our fixed wireless access solutions.
We're also seeing growing industry recognition for our cloud <unk> to five <unk> products.
Starting to see customer traction in these products.
Turning to cable as Jerry already pointed out a majority of the 11 million supply chain impact and our cable revenue. So cable revenue came in lighter than usual at $34 million or 34% of total revenue in the quarter.
In our fixed telco revenue came in at $21 million or 21% of total revenue.
Fixed telco revenue was down year over year, but revenues are up 22% sequentially.
And we believe this indicates that we are making progress in addressing revenue lumpiness in fixed telco.
Reducing customer and product concentration.
Okay, let's move down the income statement.
GAAP gross profit for the quarter came in at $46 million that is down 22, 8% year over year, but its up almost 3% year over year on a year to date basis.
Our GAAP gross margin in the third quarter came in at 49% and this is well below where we normally see gross margin.
And it resulted primarily from a couple of songs from orders that pushed out of the quarter. Jamie has already mentioned this in his remarks.
We do expect to see the software revenue recognized in Q4, and then expect our gross margin to return to within a more normal range in the fourth quarter and for the full year.
Turning to GAAP operating expenses Opex for the quarter was $42 6 million.
The decline of 2% relative to Q3 2020.
And for the fourth quarter I do expect Opex to increase you'd be in a range of approximately $45 million to $47 million and this is largely due to additional R&D head count will start hitting our income statement in Q4.
Yeah.
We did have a GAAP operating loss of $2 million in the third quarter, but.
On a non-GAAP basis, we had an operating profit of $3 $1 million.
After interest and other expenses, we had a GAAP net loss of $876000 and I should point out that our GAAP. Net income result was positively impacted by a net tax benefit of $5 $3 million that we accrued during the quarter and this was related to the cares Act.
On a non-GAAP basis, we had a net loss of $4 $1 million.
Adjusted EBITDA for the quarter was $5 5 million or five 5% of revenue.
This is down 67, 6% from the third quarter of 2020.
But on a year to date basis, EBITDA is up by almost 25% year over year.
Let me turn to our balance sheet.
We ended the third quarter in a strong liquidity position with a 14, 8% year over year increase in our working capital.
At the end of the quarter, we had 157 $5 million in cash.
Net receivables of almost $81 million.
Turing almost $92 million and payables of $22 $8 million.
There was a 7% sequential decrease in our cash balance and this was driven by a 13% decline in payables and a 23% increase in receivables and the increase in receivables is simply due to timing of orders we received in the quarter.
At the end of the quarter, our gross debt was $285 $5 million down from $286 2 million at the end of Q2 this year.
But at the end of October we paid off the full outstanding balance of $6 $5 million on our revolver and so this left us with gross debt of $279 million.
Before we open up the call to Q&A I would like to comment on our guidance for the remainder of the fiscal year.
As Jerry and I, both noted in our remarks supply chain issues did have an impact on our third quarter results and in fact throughout the quarter. These issues increasingly diminished visibility on where our financial results would end up at quarter end.
And while we do see supply chain constraints is only temporary.
We don't expect to have visibility or the supply chain situation to improve materially as we get through the fourth quarter of this year and then into the first quarter or two of 2022 and we've taken all of this into account.
We're revising our guidance.
Also attempted to are more on the conservative side and building our updated year end forecast.
So for 2021.
Now expect the following.
Revenue.
394 million to $404 million.
Adjusted EBITDA 45 million to $52 million.
GAAP operating income $15 million to $21 million.
Non-GAAP operating income, 36% to $42 million.
GAAP EPS negative <unk> <unk> to positive <unk>.
Non-GAAP EPS <unk> <unk> to.
2014.
Okay before I conclude I want to echo some of what Jerry said.
In spite of the disruptions that we're seeing across our industry. We are still benefiting from strong demand for our products and you see that in a very strong growth and profit results for seven consecutive quarters prior to Q3.
Our strong growth in wireless in Q3, any particular, our commitment to and focus on the cloud.
And the revenue that we are now booking from rural infrastructure deployments as Jerry noted regarding media common Bell, Canada, So <unk> four significant tailwind for us.
And they're just starting to bear fruit.
Quarterly basis, our results may not always be linear.
But we continue to believe that there is significant medium term annual growth in our business.
And we will outline this in more detail during our Investor day on November 19.
With that let me turn the call back over to the operator for Q&A.
Operator.
Thank you will now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
You May press star two if you'd like to move your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one once again that far wanted to be placed in the question queue. One moment. Please while we poll for questions. Our first question today is coming from meta Marshall from Morgan Stanley. Your line is now live.
Hi, This is current on for meta.
So understanding that gross margins were sort of impacted by the software order that may have been pushed to Q4 I guess I was just wanted to get more color on what the Cogs impact was from supply chain versus that software order in and if you can give any more detail on which one was maybe our guests which weren't impacted more or any numbers.
Behind that that'd be helpful.
Yes, so we Fortunately did not see big Cogs impact from supply chain and in fact, one of the things that we've been working on pretty aggressively to make sure that if there are increased freight cost or an increased component costs, we're able to pass those along to our customers and to date.
We've been extremely successful at that so the gross margin impact had less to do with what was going on in Cogs and it had almost 100% to do with the fact that these two sizable software orders got pushed into the fourth quarter and in fact, if I add that back to the quarter. We are in a gross margin range that's fairly consistent.
With what we've been delivering over the past seven or eight quarters.
Got it that's helpful and you answered my follow up on the ability to pass on pricing. So thank you for that appreciate the time.
Thank you as a reminder, Thats star one to be placed in the question queue. Our next question today is coming from Simon Leopold from Raymond James Your line is now live.
Thanks for.
The question a couple of things I wanted to clarify.
Metric that Scott gave us on Opex I believe.
You said $45 million to $47 million in the fourth quarter wanted to verify is that a GAAP or a pro forma number yes.
Yes that is a GAAP number.
Okay, Great that's what I thought.
And.
In terms of your comment right right around that on gross margin. You basically are have indicated gross margin should be similar to what we saw in the second quarter is what youre expecting in the fourth quarter. I think you said that just wanted to confirm.
I didn't say second quarter, what I said was that with the software orders that we do expect to see in the fourth quarter and based on the estimates that we have for Q4 right now we expect gross margin to get near to closer or at similar to what we've seen previously.
Okay, great. So now now past the checks there I wanted to talk a little bit about what's going on in the fixed wireless opportunities for you.
One of the things I've been trying to figure out is whether your business cares about the spectrum being used whether the operators are using mid band where millimeter and if you have any observations in terms of the trends and opportunities and what it may or may not mean to your particular role in that.
That opportunity.
Finally, let me answer that question are we we do actually go after all that different type of bands I, usually classify them into three categories. One is that the CVR as the you know the free or lightly.
Licensed.
And that's relevant in the U S and especially in the rural.
Area and the odd off money like that and we are deploying with our spectrum and we think that's going to be significant opportunities in the next couple of years and we also are deploying in.
The license to sub six so thats you know the operators pay normal prices for the first six and then we have deployment in that.
In that area and we have also won some deals.
In the millimeter wave domain and and those are relatively new of course, and Oh, we do see that to be a growing us well going forward.
And is it your impression that the favorite spectrum is more likely to be <unk> mid band it as opposed to millimeter. That's my impression just wanted to see if you see it that way.
Well, our millimeter wave is a fairly hum.
Constrained to a certain geographical regions and certain operators theyre not.
Widespread for sub six.
And 70.
77, and 78, you you'll pretty much see it across the globe anyway. So in terms of where it's applicable I do see sub six to be the most popular.
Thank you Anna.
On the cable side of the business.
I'm, assuming that the components that are tightly constrained where semiconductors.
And I guess, what I'm trying to get a better understanding of it.
What sort of led to the issue in terms of were you surprised by your supplier did you have limited inventory or did the your supplier breach it.
And all of our commitment with you in order to satisfy somebody willing to pay more what what was sort of the back story to how this played out during the quarter.
Assignment as the surprise part it was.
The last thing.
Sure.
We thought you know we had a a normal schedule you whats committed but it wasn't a surprise.
So it's a D commit.
Hearing about that and yes, that's the New award.
We have yeah here.
Lately.
Okay. No I appreciate that thank you very much for taking the questions. Thanks for the clarification.
Okay.
Thank you as a reminder, Thats star one to be placed in the question queue. Once again Thats star one to be placed in the question Q1 moment. Please what would you poll for further questions.
Our next question is coming from Tim So as you roll from Northern capital Your line is alive.
Hi, sorry about that good afternoon.
A question on.
And you mentioned a couple of wins I don't know if those are orders into backlog yet kind of on the wireless side, but I guess the overall question is you talked about.
Kind of the direction of your wireless backlog.
Some specificity in the past I Wonder if you have.
Any further comment on that.
In terms of when you've talked about strong revenue growth.
And also given the supply issues, maybe any broader commentary about orders or backlog across the rest of the business.
Tim Let me let me take the question on backlog I think Jerry did mentioned what the wireless backlog is.
It's over $100 million. So it came in a little bit from the second quarter. That's because you saw the wireless growth.
In the third quarter pretty significant growth, both sequentially and year over year those orders always come in on a lumpy basis, and it's our perspective that even at over $100 that backlog is still sizeable we do expect it to grow going forward.
Okay, and then to follow up and it looks like based on where you are guiding that we expect revenue of sleep.
Lee.
In the quarter.
Assuming a fair bit of that and I don't know how much is kind of a catch up on the software side and cable I.
I Wonder if you can give us a little more color across your business segments.
As to how you expect Q4 to look mix wise relative to Q3.
Yes, so look when we when we looked at our fourth quarter. We did it based on the best information that we have today and that's information that comes from our backlog and then from the daily updates that we receive on inventory and and also.
Supply delivery schedules across each of our products.
As we've said consistently wireless remains our key growth driver and we do expect wireless to grow in the fourth quarter.
Cable is flat it remains relatively flat, although having said that with the supply chain delays hitting cable in particular and this is all just so you guys understand what's going on.
A lot of this information comes to us at the end of the quarter, we talked about Decommit, but this is for next generation products. So we are receiving orders building our backlog to go and deploy nextgen equipment.
And we're just being held up by the pacing of chipsets that so that we can build our products and send them out to our customers in fixed wireless.
Fixed wireless could be slightly down in the fourth quarter.
Okay. Thanks very much.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
Thank you everyone for joining us today before ending the call I want to remind everyone that Casa systems will be hosting a virtual investor day on November 19th. We appreciate you joining us today and look forward to updating you on our business.
Long term vision on November 19, Thank you.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
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