Q2 2022 Casa Systems Inc Earnings Call
Greetings and welcome to Casa systems second quarter 2022 earnings conference call. At this time all participants are in a listen only mode. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. Michael Picariello Director of Investor Relations. Thank you you may begin your presentation.
Thank you operator, and good afternoon, everyone Casa systems. It released results for the second quarter of fiscal year 2022.
At June 32022.
Afternoon after the market closed.
Did not receive a copy of our earnings press release, you may obtain it from the IR section of our website.
With me on today's call are Jerry Guo.
Oh, and Ed <unk> our CFO .
This call is being webcast and will be archived on the IR 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 how.
As such it 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 those.
From the projections described in today's discussion.
Any forward looking statements that we make on this call or in the earnings press or in the earnings release are based upon information, we believe as of today and 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.
I'll leave it will be helpful to investors to better understand their performance outperformance of our business trends I'd like to now turn the call over to Gerry Gerry.
Thanks, Michael Good afternoon, and thank you to off are joining Casa <unk> second quarter of fiscal year 2022 earnings call on today's call. In addition to covering our second quarter results I'll provide some insights into our progress on our mature product lines cable and Casa access.
Isis or CAD as well as updates our new cloud software and <unk> radio offerings building on some comments made on the last earnings call in May.
I'll also provide some updates on new customer wins and major opportunities ahead for us in the second half of 2022 and beyond.
As you saw in our press release, we are able to successfully continue our positive trajectory for Casas cloud native software solutions during the quarter.
However, as expected supply chain constraints continue to weigh on our second quarter financial performance.
Well, we have some sequential revenue improvement in the second quarter relative to the first quarter of this year results for the second quarter and six months ended June 30th 2022 or below results from the same period in the prior year and with an operating loss incurred at <unk>.
In Q2 2022.
While Ed will cover the financial results and drivers in more detail in his financial comments suffice. It to say we are working hard to address all matters within our control that impacted operating results for Q2, and the first half of 2022.
We also remain steadfast in our conviction that our revamped strategy for accelerating profitable growth in 2023 and beyond is the right path.
And our early actions have us on course to achieving our long term objectives.
Despite the near term financial results there were many positive developments in the quarter.
First Q2 was a very eventful quarter for Casa strategically highlighted by the Verizon deal announcement on April 18th.
For those who may not have been on earlier calls the Verizon announcement encompassed two things first.
Our results in a $40 million minority equity investment for a Verizon for a nine 9% stake in cost of shares.
In addition, it includes a major license deal for up to $140 million of total contract value for cost is cloud native <unk> core software for public or consumer.
Mobile edge computing deployment.
Importantly, this comes after Verizon evaluated or are there are alternatives on the market today for this solution.
It's a very strategic Verizon transaction is an important milestone for our <unk> and security Gateway technology as well as great validation for our go forward strategy and leadership position in cloud native <unk> and mobile edge computing solutions.
We are now several months into our strategic partnership with Verizon and I am pleased to say that everything is going well and on track.
I'm very excited about this transformative Verizon partnership and its impact on our business in 2023 and beyond.
Okay.
There were some very encouraging progress on several important underlying business metrics during the quarter specifically.
John bookings of nearly $93 million for the quarter. This bookings reflect $20 million from Verizon <unk> public back purchase orders in Q2 as well as many other booking awards across all geos during the quarter, including our quarter end order for <unk>.
$11 $5 million from an increasingly active U S based CSP customer for one of our access device products.
We also had a strong billings for the quarter of $91 million. This includes the $20 million Bill to Verizon in Q2 for which we have already been paid a $10 million as of late July and expect the remaining $10 million to be paid later in Q3.
Finally, total GAAP revenue for Q2 was $78 million up 10% sequentially over Q1 2022, despite the continued supply chain challenges.
It is important to note that while we did bill $20 million in Q2 for $5 core software already delivered to Verizon.
Q2 results only include $5 million of $6 six recognized revenue from the new Verizon and <unk> core contract in Q2 again, Ed will cover this in greater detail shortly.
Now I'd like to add some additional color and highlights on both our newer product lines cloud software and <unk> radios in our more mature product lines cable and cat I am pleased to report the following.
Starting with the <unk> small cell radios further to my comments during the May earnings call. When I mentioned, we would have news on our radio access networks fitness, we can now share that we signed and closed a contract with a large tier one CSP will.
We will be providing sub six small cell <unk> five radios to the CSP with expected orders of approximately $7 $5 million in Q3 for delivery. In 2023. This is a good validation of our <unk> technology and and product excellence.
We are also pursuing other major opportunities with other tier one csp's and I hope to be able to share even more success in the coming quarters.
Turning to our cloud software offerings.
In addition to all the progress, we're making with Verizon I also wanted to highlight other customer engagements that demonstrate our growing success for our cloud Native software solutions in May we announced that cost entered a memorandum of understanding or Mou with the Vietnam post and telecommunications group.
The M P T V.
<unk> is a leading provider of digital and telecommunications services in Vietnam. The Mou was signed to a memorial is the plan that next generation network services in Vietnam, where the MPT selecting Casa as Theyre strategic software provider.
We also announced in June .
Malaysia service provider why T. L Communications has deployed cost us industry, leading cloud native axiom <unk> to power is <unk> network accelerating is digital transformation across Malaysia.
Our sales pipeline for our cloud native <unk> and <unk> opportunities as well as our cloud I'd be in Geo router product line is promising.
We're currently working on many other cloud native <unk> deals as well as other deals that include our cloud being Geo router product.
Like our cloud native <unk>, our cloud <unk> can replace traditional chassis based edge routers for BMG applications to provide the same benefits to wireline networks as our cloud native <unk> wireless networks as a reminder, our cloud BMG router offer a separation.
Of control and data plans and is designed for network edge deployment geographic redundancy and multi dimensional scaling so that service providers have.
Low latency high throughput service assurance, and agility and faster time to market.
These deals are with a tier one csp's on a global basis and some are in partnership with some of the leading public cloud Hyperscale and the large system integrated integrators, including coordinated joined sales initiatives with these partners, we expect to announce new cloud native software wins with the tier one.
Csp's later this year for both <unk> and <unk> and cloud <unk> solutions.
So I expect to be able to announce a new go to market partnership with a new distribution partner later in Q3 2022 as well.
Now turning to our more mature cable product line as noted in May we are continuing our deployment of our cloud native C cap core together with our remote phy nodes with multiple tier one operators and.
In addition, we are also.
In customer trials for our end to end remote Mac Phy solutions, we're seeing more interest from our leading cable customers to go to a remote phy in a remote Mac phy in the last few months, we are hopeful that with the support of both remote phy and the remote Mac phy, coupled with increased competitive dynamics that <unk>.
Cable providers mutual react too we will be in a good position to return to our cable broadband business to growth in 2023 and beyond.
Finally regarding fiber extension and our fixed wireless access devices product line, where we are expanding our fiber extension deployment in the United States and Europe beyond the original customer base in Australia. We received notification earlier. This week that we will be receiving a $10 million P O four.
Fiber extension products from a major customer in Europe .
We are also working on next generation offerings in this area with enhanced management higher port counts and XTS pond support which should provide us with the growth opportunities in 2023 and beyond even.
Our fixed wireless business. We are also making progress with both new products and new prospects and we believe that we will see a renewed momentum in fixed wireless in 2023 and beyond.
Lastly, I wanted to address the continued supply chain issues. Our results for the quarter were again impacted by Covid related supply chain challenges, particularly with respect to products and components that we source from some of our Asia based suppliers. It is hard to predict.
Precisely when the supply chain issues will be resolved based on visibility today, we believe supply chain issue will continue through Q3.
We're hopeful that we will begin to see some release in late 2022 or early 2023. We also recognize we are now in the inflationary environment and we are working with our suppliers to control costs.
In summary, we are working hard to navigate and adjust the economic uncertainties and COVID-19 related to supply chain issues. We face today, while we transform our business into cloud software focused connected cloud business I would like to thank all of these stakeholders.
For their hard work commitment and support of cost as we work through these near term challenges Casa as a thrive.
Casa has thrived throughout many economic cycles in the past and I am confident we will similarly get through this period.
We're undoubtedly building a solid foundation through our strategic transformation, we are on a growth trajectory next year and beyond as.
As we capitalize on large strategic rapidly growing market segments, such as cloud native <unk> and cloud native P&G router software for a major csp's I'm pleased with our pipeline growth and pending new partnerships and I believe we are setting the stage for delivering sustainable profitable long.
Term growth I will now turn the call over to Ed Ed.
Thank you Jerry and good afternoon, everyone and thanks for joining us on this very Hot August afternoon, Rick.
Guarding financial details for the quarter as Jerry mentioned from an overall perspective Q2 is actually a positive and very eventful quarter for Casa.
The license deal for our cloud native <unk> software with Verizon what up to 140 million PCV value.
Coupled with the $40 million nine 9% minority equity investment from horizon.
Being the major high LOE for the quarter as announced on April 18th.
And as Jerry mentioned in his comments a four month old Verizon partnership is actually off to a very good and fast start with everything on schedule.
As system business metrics.
Reflect underlying good business fundamentals for Q2 and as Jerry mentioned.
We actually had strong bookings during the quarter.
$92 7 million that reflects those bookings reflect $20 million of noncancelable Nonrefundable post Verizon received in Q2, which will be paid in full in Q3.
Those bookings also reflect good orders across all geos, including the large end of quarter order.
Approximately $11 5 million from an increasingly active U S based CSP for one or access to price products.
Went into backlog.
Similarly, we had strong quarterly billings of $91 million in Q2, 2022, including $20 million built to Verizon.
And we had essentially booking billings being approximately 30% higher than GAAP revenue for the quarter.
So as the GAAP revenue total GAAP revenue was $70 8 million for the quarter down compared to Q2, 2021, but up 10% sequentially over Q1 2022.
And as Jerry mentioned, while we did get $20 million in Noncancelable Nonrefundable post from Verizon in Q2, which will be fully paid in Q3.
Q2, GAAP revenue results only include $5 million of software revenue for the quarter.
And that's due to the complex provisions of the Verizon contract.
And its many performance obligations or deliver both over many years.
Coupled with the revenue recognition rules under ASC 606.
And as we go forward, we expect to recognize low single digit revenue for right for horizon in each of Q3 and Q4 2022 as additional code drops occur.
With the remainder of the revenue recognized in 2023 and beyond over the remaining term of the Verizon contract.
Breaking down the revenue across our product lines in customary format, which most on this call are familiar with.
Second quarter wireless revenues were $28 5 million down from Q2, 2021, but up $6 million or 27% from Q1 2022.
Cable revenues came in at $25 2 million down from Q2 2021.
So down from $28 6 million in Q1, 2022 and cable as Jerry noted can be lumpy, but we do believe growth was ahead for cable for the factories, Jerry mentioned, including competitive dynamics.
And finally fixed telco revenue came in at $17 1 million in Q2, 2022 flat with the same period in 2021 and up 30% from the $13 2 million recorded in Q1.
2022.
And as Gary mentioned during Q2 2022, we continue to have supply chain issues, and we had about $11 5 million in backlog orders that we had planned to ship in the quarter that we were unable to ship due to unexpected supply chain delays.
Finally, as to the macro picture of backlog and deferred revenue.
When you consider all factors firm backlog deferred revenue at June 30th.
Remaining Verizon $120 million, Unbilled, PCV value, which is subject to horizon's future acceptance.
We're in much improved condition with an overall increase of approximately 71% from $193 million as of 12 31 21.
Approximately 329 million.
June 32022.
Moving down from revenue to gross profit GAAP gross profit dollars for the quarter came in at 26 $6 million with a GAAP gross margin as a percent of revenue at 37, 6%.
With the lower than expected gross margin results in Q2, primarily due to noncash inventory and warranty related charges of approximately $4 7 million as a result of some end of life announcements and changes to future sales estimates for some inventory items.
As well as to a lesser extent revenue mix issues with wireless and cable revenues.
Along with other factors.
On a pro forma basis, if you exclude that $4 7 million noncash inventory charge in Q2.
Margin would've been $31 3 million or approximately 44% of revenue within the quarter and going forward. We look ahead, we expect improved gross margins as we see.
<unk> mix of higher margin cable ran in software revenues.
And that should allow us to get back to our historical gross margin profile.
Turning now to operating expenses Q2, GAAP operating expenses increased to $44 8 million as compared to $41 9 million in Q2, 2021, and it was relatively flat with the $45 million in Q1 2022.
The fact that we are continue to invest in our product offerings across all lines of business.
As well as investing in our distribution capacity and go to market functions.
Regarding our operating loss for the quarter similar to Q1 2022, the operating loss was $18 1 million with the beneficial impact of higher Q2 revenue levels, including higher software revenues offset by a like amount of inventory charges within the quarter.
Below the operating line non operating income and expense for Q2 was as expected relative to income taxes. During the quarter, we actually recorded an income tax benefit of $4 million.
This was primarily due to a change in our estimated annual effective tax rate for the year among other complex factors.
And by way of a quick update we spoke in Q1 about the R&D tax law change.
Which resulted in us having a significant tax provision expense in Q1 2022.
That R&D tax law has not yet been repealed retroactive effect, but we in our tax advisors are hopeful this will indeed occur.
In the second half of 2022 before Ian.
And finally related to P&L comments, our net loss for the quarter was $16 7 million versus $32 6 million in Q1 2022.
Q1, 2022 quarter reflected the the tax provision I just mentioned.
Turning to our balance sheet for a minute.
We have a strong liquidity position, we're working capital balance of approximately $257 million a quarter end with $199 million in cash, including approximately $3 million of restricted cash and cash is up appreciably over year end and Q1 2022.
End of quarter balance that cash reflects the $40 million received from the horizon equity investment in mid April .
It does not reflect the $20 million in nonrefundable license payments, though that we're going to get from horizon $10 million, which we got at the end of July and the remaining $10 million in September .
We have high quality accounts receivable of about $68 million, including $20 million from horizon as of June 30th lower inventory balances lower payables and accrued expenses and higher deferred revenues as earlier mentioned.
And to wrap up a quick discussion on the balance sheet total senior debt was $275 2 million down slightly from $276 1 million to $12 31 21.
As you recall during our May earnings call, we announced that we are suspending our formal guidance for 2022 until we have the ability to reinstate that suspension of guidance continues.
Given the many inherent uncertainties around supply chain inflation taxes and other matters.
My final comments before opening up the call to Q&A.
I'd like to reiterate some of the key points Gerry made as well is that some of our aon early observations, namely that.
And the four short months I've been here I've been very impressed with the tech team.
Sense of urgency of Casa and I've also been very impressed with the amazing pedigree of marquee customers we have.
Like Verizon and many other global tier one CSP.
I've also been.
Very pleased with the volume and high profile of global tier ones. We have in our forward looking sales pipeline and work many of these deals with major cloud Hyperscale.
I actually believe Gerry and team were absolutely prescient in deciding to invest through cloud native software many years ago and he then invasion envisioned anticipated where the market was heading and we're now leveraging there was multi year investments in cloud native <unk> core and <unk> software solutions, which are competitively.
Differentiated as compared to legacy incumbent offerings, and we are executing on that connected cloud strategy. We previewed in November 2021.
That progress and execution, that's been validated by Verizon and <unk>.
And we expect to be able to publicly announce further validation as we close the other tier ones Csp's now in later.
The later stages of the sales cycle.
And I do believe we're going to be able to announce some new and interesting go to market partnerships in the near future. Given this differentiate tech platform, which is complementary to offerings of other major players in this new ecosystem.
So all of these tangible data points collectively give us the conviction and confidence that we are indeed on the right path transforming Costco from a hardware centric business to a software and cloud centric business, which should enable accelerated growth enhanced profitability and.
An increase enterprise value in 2023 and beyond.
So with that I'd like to turn the call back over to the operator to open the line for questions operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two to remove your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset.
By pressing the star keys, one moment, while we poll for questions.
Our first question comes from the line of Simon Leopold with Raymond James You May proceed with your question.
Hi, guys. This is Victor Chu in for Simon Leopold can you remind us what components for what products are seeing the most impact from supply chain headwinds and whether you've observed any material changes in the dynamics that kind of lead you to anticipate.
Movement that you mentioned in the second half.
Victor.
Let me answer that.
We did see a supply change impacting.
In actually all three of our.
Hardware businesses, including cable.
Our radio.
And access devices.
Yes.
Okay.
Are you seeing any changes you are seeing any improvement are you observing any improvement that leads you to kind of be more optimistic that it improves.
Sure.
Yeah, we see the impact will continue.
In Q3, we do hope to see them.
Things are going to turn around.
Late 2022 in early 2020.
Okay.
I wanted to clarify the gross margin commentary did I hear correctly that there was.
Some one time expenses that drove the margin contraction or was there some impact from product mix as well.
Quarter.
So the biggest impact on margins.
Noncash $4 7 million.
Charged to cost of goods sold related to inventory and warranty reserves. So when you take.
Take that out.
The margins are more in our customary range in.
That was the primary driver of the merger and margin compression during the quarter.
Okay, Okay got it.
And just let me see just more general question, a common theme from cable operators in the most recent reports as an acknowledgment the fixed wireless access appears to be.
There are more material concern to them now than it has been in the past can you frame your views on this trend and help us understand what the implications are for <unk>.
Yeah, we actually are.
I've seen the same thing and just like how we set in the written remarks that until we see the competitive.
Dynamics are going to drive for cable operators to start spending.
More on the Capex next year, and that's why we see that trend toward.
Hi split as well as a distributed architecture like a remote.
By a remote Mac phy.
We do see the same trends that you mentioned.
Okay.
But not.
You don't expect anticipate too much of a material impact this year, but more of a next 2023.
Thanks.
And.
Yeah.
We do not see.
Yeah.
Speaking of impact and in the short term given the.
Supply chain cost trend.
And the hardware orders, we would it would take longer to deliver and what the all the cable operators can do is buy licenses to come back that are competitive pressure.
Okay got it great. Thank you.
Yeah.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue. One moment, while we poll for questions.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Jerry Guo for closing remarks.
Thank you for joining us today, we remain confident that we are on the right track to accomplish our multiyear transformation into a leading provider of cloud native software and physical infrastructure technology solutions for mobile cable and fixed networks our pipeline is strong.
Our business fundamentals are healthy our product development remains on track we are attracting a new class of global go to market partners, which we believe will provide us critical distribution leverage in the future and our growing backlog is indicative of the profitable revenue growth.
We believe we can deliver sustained well into the future I look forward to updating you on our progress.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation or the rest of your day.
Okay.
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