Q3 2022 Casa Systems Inc Earnings Call

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Greetings welcome to toss a systems third quarter of 2022 earnings call.

This time all participants.

A question and answer session will follow the formal presentation.

You said you want to require operator assistance during the conference police plus stores you on your telephone keypad.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your House Denis Daly Director of corporate development and Industrial Relations. Please go ahead.

Thank you operator, and good afternoon, everyone cost of the system to release the results for the third quarter of fiscal year 2022 ended September 30th 2022. This afternoon. After the market closed if you did not receive a copy of our earnings press release, you may have seen it from the Investor Relations section of our web site.

And investors <unk> systems Dot com.

Today's call or Jerry Guo, our Chief Executive Officer in Edinburg gain our Chief Financial Officer. This call is being webcast will be archived on the Investor Relations section of our website.

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

Refer to our press release, an R. S. P. C. Finally for more information on the specific risk factors that could cause our actual results to differ materially from the projection describing today's discussion.

Any forward looking statements that we make on this call or in their earnings or at least 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.

Since the U S gap reporting we report certain financial measures that do not conform to generally accepted accounting principles.

During the call we meet non-GAAP measures. If we believe it is useful to investors or believe it will be helpful to investors to better understand our performance or business trends.

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

Thank you Dennis Good afternoon now thank you all for joining Casas third quarter, a fish called 2022 earnings call.

The first nine months of plenty of time to have been critical in customer validation of Casa cell.

Eating provider Clough native core software for a wireless and wireline networks and in laying the foundation for growth in all physical broadband technology a solo shows a recent customer engagements continue to highlight all progress.

And some examples I would offer.

Within all cloud software product group, we continue to make tremendous progress without cloud nuclear five G caught since the announcement opt out law $140 million T. C V multiyear license and contract off our cloud in 85 G Corps for consumer networks and 40 million.

Strategic equity investment from Verizon in April .

We announced.

A partnership with a cuco clouding August and have been jumping they are working on multiple customer projects, which I want these spots in greater detail shortly.

There are many on their cost them Rotten partner projects being actively worked on the Verizon at Google Cloud Public news is great validation off our differentiated and I'll surely clown native software.

What do you expect to be able to announce additional customer partner successes for our cloud native software offerings in the coming months.

Within all cable product group progressed here is evidence by our increased cable revenues in Q3 20 twenty-two despite cut a 10 year supply chain challenges.

And that we expect continuously quite show improvement revenue in Q4 form the shipment our backlot cable orders at a new cable deals.

We continued to expand our Richardson capital I read them, all find no deployment with a leading them the cell policy in North America and an internationally.

But overall 2020th two has continued to be a low spent yeah for most of our cable M. S O a customer base.

However, we expect significant changes and cable broadband span in the coming year.

And we are laying the foundation for growth in 2020th three by working with them. That's how it's worldwide without eating next generation technologies.

Distributed product categories, including virtuous he kept cool I never even <unk>.

S. A mate manager underwritten, though knock five <unk>.

I will discuss all pipelines seem more detail later.

Within our cat product group as discuss all Earth is August earnings Court.

We have worked hard to cultivate new major customer relationships with the major telco operators in North America, as well as a new customers and distributors in Europe and half closed large order I seen Q2 engine to meet with these new customer and partners.

This is not provides us and do a lot of side two improved caddell results in 2023.

Given that backlogged orders, we have problem days, new customers, which are now slated.

First deliberate in 2023.

Within an hour must how around product group Ah.

We also discuss all August earnings call, we announced new Ryan contracts with a major in North America Mobile network operator, you in August .

Do you expect to close more radio deals with the major mobile network operators. So in a way expectant video access network revenue to grow significantly in the country, but nicely in 2023 based.

Based on the progress we have made your own tiny tiny too.

In summary, well the the progress is not reflected in our top line revenue results, yet our strategy I'll be investing heavily on D and deliberate market leading.

Even though they do products for our customers across all of our product groups in order to help our customers expand out in the works and maximize that color palette tastes positions us well for renewed growth in 2023 and beyond.

Despite this progress an increase in demand for our products our financial performance in the corner does not reflect all potential.

Or our expectations for Casa going forward and we continue to work hard to overcome the issues impacting our financial performance.

In particular, we experience continued challenges from a supply chain partners in Asia and stop chip availability shows which are limited our ability to ship products to customers.

As a result of their supply chain shoes, and if you are the factors revenue for the quarter was $66.9 million, which is down 6%.

From the prior quarter, well, we experiment that declining revenue from my wireless and a fixed halko Sacramento, we did a C. At 20 per cent improvement or a table revenue compared to Q2 20 twenty-two due to not taking demand for my existing customers and I never expected positive momentum for cable to.

Oh, you can kill four and into a tiny tiny three.

And we will cover the Q3 finance shows the more detail you know he's section, including gross marches operating expenses and balance she'd metrics.

We are pleased to take questions on this sharp retrospective financial results.

As I look forward I do believe brought in both top lives and bottom line is is a head.

All <unk> oops Ah sweet execute on our strategy Uncomplete our transformation.

With my beliefs routine that following.

Clough software product group.

Our cloud software group includes our cloud and native five G Corps software and olive virtual being G routing software.

As I mentioned we.

We have that great Verizon $140 million T C D. A license and deal for our five G. A core software from for consumer networks. We are on track without development deliberate bows under this agreement.

Ryzen paid $20 million in licensing fees in two or three of 2022.

And we have another one in $20 million to build your inquiry mindset $24 million per year.

And that is a great Foundation Toyota.

As communications service providers continue to transfer from their wireless and the wireless networks using cloud Nathan technologies, we are providing them down with options to deal with their five G. A koala finishes and being G function is over private clause or poverty claws.

Our new Google Cloud partnership announced in late August is a public cloud or hybrid called option that is progressing well and we are actively working with the Google cloud I joined customer engagements and we expect to be able to announce a few wins Nick how many months.

Yeah.

We have great in by inches, Vermont on the cloud provider I was in the system integrator is to work with us on both consumer of poverty networks, and the mobile private networks after evaluating and integrating our software all partners have determined that it is indeed, a truly cloud ATM unable to a similar they integrated with.

They are cloud platforms.

This stimulus integration of Carthage chlorinated five G. A core functions with the cloud platforms will enable communications service providers to realize the value of five G fast and flexible deployment of new services.

Fast reconfiguration, and slicing up networks automated operations and secure reliable and resilient and networks.

Finally, we are seeing a strong demand for our virtual b and G. A router product lines.

Both private cloud and the public cloud as well.

Which should country you are trying to trying to three results.

On cable product group as I mentioned earlier, there was continue to pause in People's span in 2022 cable msos evaluated a future product technical directions.

Five or remote macrophyte as you may have seen in recent press articles several of the largest M. S. I was amazed that technology is the directions eustatius.

And ER I'm moving forward with Rfp's spending plans for 2023 and beyond.

We believe that there are only two of retro chic half course deployed in life network's today and Casa has one of them wrote Jesse cap core is the key to the next generation cable broadband operate in Casa asked that leading technology and even virtual C Cup call as well as the original find those.

In this regard and with the exception of Comcast we are working closely with every other major cable episode now.

Based on our way extensive comic customer engagement. We believe we are well positioned to compete for what we believe is a common way if I renewed a cable network upgrade and capital spend and have a completed product portfolio ready today to meet whatever product needs direction that table.

M. S. I was all like to proceed with.

Based on the engagement that we have with the leading nso's, including alive valuation.

Laughter evaluation on a few trials alfaro virtual seek have caught in a remote find knows we have built a very strong sales pipeline of large cable deals we expect to close in the near future.

The recent decisions of several large M. S. I was to go with the virtual C cap caught in remote five position I said very well to capitalize on humming, increasing capital and cable M. S old Capex spent.

Just like the and virtuous he got caught in a remote fine Cos I. It's also leading a remote macrophyte no technology and F M. A manager there.

This gives us a complete table product portfolio ready today to meet any direction that cable M. S. O is one to go.

Access devices product group as mentioned not already of course, our 2020 tube cap results or impacted by a product end of life decisions in 2021 with one large C. S. P. Whereas I C. S. P did some final sides of all product buys in 2021. This was a significant component.

<unk> 2021 cat revenues that did not repeating 2022.

They did impact cat resolved in the first nine months of 2022 as well as for the three months ended September 30th 2022, as compared to a cure 320 21.

There's 2021, and that's alive matter also mask a great progress, we made cultivating new customer and partner relationships in North America, and Europe for our five year extension and fixed wireless access products I believe we have made good progress Backfilling does 2020.

Why does C. S P enough life matter and this will be evident in the expected renewed growth in our cat product groups in 2023.

We do access network product group finally asked to radio with invested in our small cell radio R&D over the last few years and have proven products that have been deployed today.

Now I have five G small cell supply contract with a tier one C. S. P for a productive liberating 2020th we we.

We expect to close additional ran contracts with other T O Y a mobile network operators soon.

Given the strong interest we have five G. It's more of the house and the last few months, we expect our small cell video to have significant revenue growth in 2023.

In summary, I expect we'll see top line growth.

Cross off product groups in 2020 at three based on the visibility I have today.

Well, we're not prepared to provide that 2020th three types of guidance at this time.

We will provide at 2020th and he'll guide us after we complete our 2020 at the operating out of 590.

Financial plan.

If I don't eat as mentioning our press release, all our board authorized osteo buyback $50 million off our existing debt as part of our planning to deliver.

We're pleased to report that we purchased a retired approximately $40 million of that this week.

Implicit in this debt retirement is all confidence renewed top line growth and improved financial results coming in 2023.

And it will provide more details in his commentary on this transaction as well as progress on plans to refinance our remaining terminal and be that which mature C. In December of 2023.

Before I turn the call over to Ed I don't want to spend a few moment adjusted in debt.

Supply chain head was that continue to hinder our ability to a ship completed products to customers briefly.

We continue to work closely with our key chip suppliers and we all see an improvement in their supply problem days partners, well hopefully that won't be fewer of Kobe related disruption instead of closer us within all of Southeast Asia partners in the coming months and we are aggressively working on our contingency plans too.

Sure, we kind of made me mad.

We have seen the lead times for a certain components slowly get better over the past couple of quarters in the way of optimistic that does try to walk continue over the next couple of quarters.

I Sighed notating hour.

Q to call, which I still believe is corrupt today. These issues will begin to obey it in 2023.

Finally, we are working closely with our vendors partners and customers to manage your inflationary pressures and control costs.

In conclusion Casa is at a critical inflection point you can always transformation.

We are partnering with the right partners across.

Ross all product groups access to new markets around the world and the strategically investing even hour R&D cause abilities.

I strongly believe we are setting the stage for improved performance Ah long term sustainable growth moving forward.

And I would like to turn the call over to add three review the financials at.

Okay, Great C E O overview, and thanks, Jerry and good afternoon, everyone and thanks for joining us today.

I'll keep my preface some common short Jerry cover things very well in his opening remarks.

I'd first like to reiterate the Verizon license deal for cloud Native five G. Standalone Mac software is continuing to progressive plan and that's evidenced by the 20 million and licensing.

He used a Peterson Q3 2022.

And I do think it's very safe to see the whole concept team is excited about the further progress we've made with our multi year transformation towards software and cloud as evidence you know first by district strategic Verizon deal, we announced in April and then further validated by the late August 20, twenty-two announcement of our strategic partnership with Google Cloud, which is also.

Going really well.

And I think it's safe to say, we're really excited about the really the considerable opportunities that lie ahead for.

<unk> across.

All of our products groups, that's cable cat clouded ran and as Jerry said do look forward to improve results in 2023.

So with those processing comments done I'd like to get into the details for the quarter ending 930 2022.

Revenues for the corner came in at 66.9 million with Q3 revenues impacted by ongoing supply chain issues as well as some delays not losses and.

Cable do you, which we expect to close in Q4 or early twenties twenty-three.

[noise] breaking down the revenue result across product lines.

Third quarter wireless revenue was 21.4 million down 25 per cent from Q2 20 twenty-two. This decline is due to continue supply chain matters as backlog remains strong for our wireless access device hardware products.

On the cable side cable revenues came in at 30.2 million 20 per cent increase over the prior quarter.

The increasing cable revenues driven by renewed demand from our cable customers. We actually believe this positive cable meant is gonna continue into Q4 and further into 2023 for the reasons Jerry site, including you know some recent decision by some major cable msos on their technical direction.

Which should serve us really well and croton, our sales pipeline for cable deals.

The vast majority of which aren't we.

With a large global cable customer installed base, which are inherently lower risk deals than you know new logo pipeline opportunities.

Moving to fix telco revenues, which includes a virtual b and she router and or fixed wireless access.

Advice hardware products Ah revenues here came in at 15.3 million and 11 per cent decline Ah Ah from Q2, 20 twenty-two again as a result of supply chain matters.

And finally.

During Q3 2022, we had approximately 7 million in backlogged orders that we were unable to ship for revenue recognition do supply chain delays.

And.

Extra quarter or total backlog, a deferred revenue on the balance sheet and and remaining under 20 million a future billings under the Verizon contract.

You know approximately $330 million.

And then regarding back log in to put a finer point on this you know if if you exclude the $120 million a future Verizon billings, which are scheduled to be.

Build an incremental about 24 million per year over the next five years as we deliver an acceptance occurs.

We believe a significant majority of the remaining backlog will ship for revenue in 2023, again, obviously assuming no.

Unanticipated deterioration in supply chain commitments occur in the future.

So moving off of revenue and not too gross profit gap gross profit for the quarter came in at 14.4 million. It's important to note that you know that includes.

Includes a warranty.

Element of cool.

A 12.9 million recorded we didn't cost of revenue.

Given it's related to a warranty matter and that's related to the customer.

Matter of disclosing our second quarter 10-Q.

And we also had modestly increased inventory serve charges from 1.7 million that go into cost revenue and on a pro forma basis. When you exclude those two charges. In Q3, you know gross margins would have been 29.1 million or approximately 43 per cent of revenue.

And finally, a good gross margins I I would say, we do expect that we'll see improved gross margins alongside a better mix of higher merging cable ran in software revenue going forward, which is good.

Turning top operating expenses Q3 gap operating expenses were 44.5 million and in line with prior quarters I think it's important to recognize would continue to invest.

In Ah product offerings across all product groups.

And you know that's important to notice that position as well for this renewed growth in 2023 to this point.

And as Jerry mentioned, you know within their cable product group, we're really only one of two providers globally that offers are ready for primetime.

Virtual C cap course solution and demand for this is growing fastest Jerry mentioned and we are engaged with every major cable msos globally other than Comcast on opportunities for a cable product suite.

And within cloud, we know we have a differentiated truly cloud native offering is validated by Verizon The G. C P and we have many other.

Ecosystem partners cloud providers, a size large cap tech companies, you know very interested in working with Casa on our cloud offerings.

Access device group you know our technical excellence. There is allows us close those new telco customers Jerry mentioned.

And we actually I'm I'm Goin' discussions with other telcos for a cat products, including select new products, which are also tech technically differentiated and finally in our ran group you know the R&D investments, we have made and continue to make our bearing what I'll call bookings fruit.

Evidenced by the ran contracts the Jerry mentioned, which should contribute to revenues and 2023 is deliveries on the new on these new ran supply contracts occur.

The operating loss for the quarter did increase to 30.1 million over 18.1 in queue to this is influenced by many factors, but when you're just for the rare.

A crude warranty provision recording cost of revenue in the 1.7 million increase in inventory reserves I think that quarterly context improves.

And finally related to Pinel comments are net loss for the quarter was 31.2 million versus a net loss of 18.8 in Q2 2022.

That increase in the net loss is primarily the result of the 12.9 million a crew accrual related to the Ah warranty matter.

As well as the other items they just covered in before moving off of the piano.

And specifically related to this warranty provision of 12.9 million I'm I'm guessing there'll be many questions on this and.

We have to be limited and judicious comments, given the discussions to formally and finally resolve are still ongoing but what we can say is this.

This customer dispute was related to one product delivered to one customer back in the 2019 timeframe and further limited to one faulty component in one lakh a product that doesn't extend to a full product line.

The root cause of the issue appears to be a third party sub contract manufacturers substitutes.

Restrict component in this product without anyone's knowledge or approval, that's not formerly comply with technical specs.

And so now we're working with this truly great customer, who we've had a long standing relationship over many years on an amicable business settlement to the really this unfortunate and complex matter and we will provide more details wants to finalize but that's the nature in totality of that's Q3 12.9 million dollar charge.

Moving off the piano to the balance sheet. We can can you have a great liquidity position, where the working capital balance of 234 million a quarter and and with 196 point.

6 million in cash, including approximately 3 million and restricted cash and that strong cash balance. That's September 30 was down only very slightly approximately $2 million from Kashi June 30th 2022.

[noise] further you know notwithstanding the Q3 and your date of Crudele losses, you know.

I think you should take note that caches currently up 39 million compared to 12, 31, 21, and I'll swap over 930 21.

In our year to date operating cash flow is positive at 11.7 million.

And the increase in cash in positive operating cash flow for nine months at the 930 is a function of many things, including number one you know limited capex spend it's a capex light business. We also have strong April a our payments from Ah excellent Ah high pedigree customer base. It reflects the 40 million Verizon equity.

Best friend in April we announced it reflects about $14 million of tax cash refunds in Q1.

Also reflects like a high level of non-cash charges and a net loss between depreciation amortization non-cash stock-based comp that approximates $20 million.

It's it's a function of an increase in deferred revenue overall and for Verizon specifically.

He received 20 million in cash from Verizon for license payments in Q3, but we've only recognize 6 million of gap revenue through 930.

Also a function of the accrual for the warranty settlement provision of 13 million in Q3.

[noise] inventory reserve increases about 6 million in 2022, and hopefully this cash contact is helpful. As as strong cash positions. You know provides is a great foundation as we go forward into two 422 and then.

Other than to.

2023.

So moving off of cash a quarter and we had net receivables about 49 million in an inventory balance of about 82 million.

And to wrap up the balance sheet or gross that was approximately 275 million.

And on this matter and is highlighted in the earnings release, we're pleased to report we did reduce our debt.

Ah since the corner close by about 41.7 million face value.

Catching her balance sheet to repurchase is that.

At a modest discount department and retire it.

And we will consider additionally purchases as part of the ride Delevering plan and.

And at the risk of stating the obvious implicit in the use of cash to retire the approximately 42 million face value.

Is the strong confidence we have for renewed top line growth and return to profitability in 2023 for all the reasons share recovered in his remarks.

Beyond this good debt repurchase in retirement. We're also pleased to say we are actively evaluating options for the refinance the remainder of the term loan be that matures at the end of December 2023.

In this regard we formally engaged in investment bank that specializes in these matters to work with US we're making good progress on this refinancing front and we and they are optimistic will have this resolved in the coming few months.

And you know as we execute 320 22 and in turn the page cute for in 2023, you know we aren't disappointed with the gap accrual result, but we are confident will improve in Q4 and rebound considerably in 2023 is all of our product groups continue to contribute to 2023 top line.

Else.

And.

Just as additional context on this you know the optimism and confidence in the future it.

It is rooted in the fact that we have to mature product groups, you know cat cable and cat.

And two new product Swiech sweets, which we have internally funded over the past five years really as a result of of Gerry's prescient vision to invest ahead of the curve anticipating where the market was headed.

Now as we stand here and look forward there is a lot to be optimistic about across all these product groups. Specifically you know for a cloud software product group, we've got the great Verizon hundred 40 million T C V licensing deal.

Which we're on track with our development deliverables as reflected in the payments in Q3, we've got another hundred 20 million to build in increments of 24 million per year to Verizon This delivery and acceptance occurs and you know that's a great foundation to build on and on Verizon This new Goo cloud partnership.

Which is progressing well and as Jerry mentioned, we expect to be able to announce a few customer wins with G. C. P in the coming months.

We further have strong inbound interest from other cloud providers and their size, who have evaluated a cloud native software.

You know determined that is indeed truly cloud native and who also want to engage with us and go to market activities.

Finally, we're seeing strong demand for a virtual b and G routing software.

As well and that will help 20 twenty-three too.

Turning the cable as you already mentioned there was a bit of a pause and cable spend an early 2022 and see cable episodes evaluated future product technical direction, such as you know V Spiritualty cap course.

And is is now public and as Jerry mentioned several of the largest Msos have me. These technologies decision and are moving forward with you know rfps and spending plans for 2023.

And they're also dealing with subscriber losses Ah two alternative technologies, which is generally when cable capex spending typically ramps and again in this regard and with the exception of Comcast We're working with every other major cable lemme see Emma so globally now and again, we're only one of two providers that have you know a ready for prime time virtue.

You'll see cap core which is of high interest to them.

And you know based on our extensive extensive cable customer engagements, we believe we're really well position to.

To compete for what we believe is a coming wave of renewed cable M. S. O Capex Bend and this will in your to our benefit in 2023 and moving over to access devices. You know our 20 twenty-two cab access device results were impacted by that product and of life decision.

Jerry mentioned that occurred in 2021.

But the good news is while it's not showing up in a gap revenue line, yet because we have to build and ship new orders. We have made great progress cultivating those new customer and partner relationships in North America, and Europe , and getting sizeable bookings for fixed wireless access and fiber extension products.

Much of which remains in backlog today, and and you know these new orders from slow into revenue in 2023, as we deliver on the orders in 2023.

And finally as to Iran product group, we've invested again heavily in our small cell radio R&D over the past few years and we have proven products ready for market. Today, we now have new ran supply contracts with a tier one North America telco and we expect the clothes and other ran current contract with an international operator soon and.

<unk> contributed to 20 twenty-three revenues and gross margins and well.

So so it's for these primary reasons as well as a host of other reasons. We do believe you know 2023 should be eight year free new growth and return to profitability for <unk>.

You know this confidence was reflected in the debt pay down we announced a.

And we appreciate everyone's patience as we complete what I believe is really an amazing transition transformation of Casa over the coming few months.

And you know finally as Jerry mentioned, we will provide annual guidance in Q1 of 2023 upon completion or a financial plan you know for that year. So.

You know we do thank you for your continued support and interest in Casa and look forward to sharing our progress as we complete this transformation and with that I'd like to turn the call back over to the operator to open the line for questions operator.

Thank you.

Ladies and gentlemen, we won't.

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One moment, please while I pull for questions.

Ladies and gentlemen, there are no further questions at this time I'd like to turn the call over to Mister Jerry Jerry well for closing remarks.

Thank you for joining us today.

We are continuing to make progress in our strategic partnerships to bring our technology to a new market, we are well on our way to achieving.

Transformation to become a leading provider flung lithium software and the physical infrastructure technology solutions mobile cable in a big networks I'm encouraged by the team.

We have assembled and look forward to sharing our shipments with you next Clinton. Thank you.

Thank you. This concludes today's conference. Thank you for your participation you might know disconnect.