Q1 2023 Casa Systems Inc Earnings Call
Okay.
Hello, and welcome to the Casa systems first quarter 2023 earnings call and webcast.
Why should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to your host Dennis Dailey Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone. Casa systems released results for the first quarter of fiscal year 2023 and.
At March 31, 2023. This afternoon after the market close if.
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 Doc cockpit systems dotcom.
With me on today's call is darken, our chief financial Officer and in term CEO .
This call is being webcast and will be archived on the Investor Relations section of our website.
I turn the call over to Ed 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 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.
It 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.
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.
But it'll be helpful to investors better understand our performance business trends and with that.
I'd like to turn the call over to Ed.
Thank you Dennis and good afternoon, everyone. Thank you for joining us on our call today.
We issued three press releases and filed an 8-K this afternoon, including our first quarter 2023 financial results, which I'll cover in more detail momentarily.
Since reporting on our fourth quarter results in mid March the entire team at Casa systems has made great progress.
In streamlining our organization executing on our 2023 business plan by delivering market leading solutions to market.
Closing new sales deals.
And positioning ourselves to improve future profitability and I'm pleased with the considerable changes we have made.
But before I speak to our financial performance in the quarter I'm also very pleased to say that in one of our other press releases today.
We announced the execution of our strategic term lumpy transaction support agreement T. S. A.
With the majority of our lender group, which was formerly completed well extend our debt maturity.
Two December 'twenty 'twenty seven all as detailed in the 8-K, we filed on this T S. A matter today as well.
When the financing completed black TSA is finalized.
We will have a significantly extended the maturity date of this facility from December 2023 to December .
2027, which gives us the time and flexibility to continue with our efforts to significantly enhance shareholder value by executing on our preview.
Previously announced cash and capital efficient growth plan and our plan to further aggressively de lever there.
This is a significant milestone for Casa and we believe the support of the large majority of the lenders for the TSA demonstrates their confidence.
In our operating plan and the resiliency of our business.
As you can imagine in a comprehensive process like the one we just went through there are third parties involved looking at all aspects of our business.
I'm very pleased with the feedback, particularly on the competitive differentiation of our cloud and cable product offerings.
And our ability to capitalize on our core market segments, we are focused on.
Our market, leading product portfolios for cable access and cloud are complete with no major product portfolio gaps and with strong customer demand across all market segments.
I would finally like to thank the whole corporate team and the talented teams at J P. Morgan at Sidley Austin for all their hard work to allow us to announce this important PSA today and now we'd finally like to thank our terminal b debt holders for their steadfast support and considerable effort in getting this TSA agreement done.
Yeah.
Oh, the other press release, we issued this afternoon with a new virtual C cap in our P. D node customer win with Claro, Colombia.
This deal, which we originally thought would close in Q1 2023, but then it was delayed for a few weeks.
We dealt with some untruths being circulated by some of our back challenge competitors was great validation of the capabilities of our virtual C cap core and our P. D note offerings, which we've invested heavily in over the past few years.
And we hope to announce other like virtual C cap Corp.
And our P D no customer wins in the very near future.
This string of good news builds off the great momentum, we had last month, when we announced that our innovative D. A 'twenty 200 distributed access node the only F. P. G. A base DOCSIS floor already remote phy node in the industry.
Was successfully deployed with tier one cable msos in North and South America.
This solution is set industry benchmarks for our performance and flexibility.
D. A 'twenty 200 distributed access nodes provides cable operators with a flexible foundation that enables a smooth cost effective future transition to distributed cloud native environments.
Switching gears in mid April we announced also announced that LG, you plus a leading south Korean mobile network operator.
He's working with Casa.
And our partner E Tech systems to deploy our.
E node be gateway and security Gateway solutions, which will enable L. T. You to simplify its network improve therefore G service coverage and service quality and more easily capitalize on their growing market opportunity. We're continuing to work with multiple operators like LG plus in the region and we expect this deploy.
I mean to be first of many engagements for Casa.
Turning now to our strategic partnership with Verizon we remain on track and have achieved all delivery milestones to date horizon's confidence in our offering is an important validation of our.
Five G core and Mec solution, and our security Gateway software solution as well and it's good validation of our go forward strategy and leadership position in cloud Native five G chord mobile edge compute solutions, we expect increased GAAP revenues from our ryzen partnership and our second quarter and second half of 2023, given the progress we're making in the <unk>.
Lots of the status of this very important and.
And large partnership and.
And finally before I go into the Q1 financial results I would like to note that the search for a permanent CEO remains active and ongoing and the board is interviewing candidates now for this role.
We look forward to announcing more on this in the coming few months.
Let's now move to our financial results for the first quarter.
Revenue for the quarter came in at $45 3 million, which was down 30% from a year ago, while our revenue performance came in slightly below our expectations due to the slip tightening of some cable ordered.
Due to the uncertainty regarding our terminal b status, including Claro, which we have now closed.
As well as timing of acceptance of our software delivery for one large cloud software contract. We believe we will see revenue contributions from both items in Q2, 'twenty 23, and this was solely a timing matter and not any type of competitive loss.
We continue to believe that revenue for the year will be within our guided range of 300 to 325 million and weighted toward the second half of the of the year given the timing of backlog shipments shifting some of our new 45, <unk> small cell radio offerings in the second half later stage pipeline deals, we expect to convert to revenue in two eight.
2023, and revenue recognition related to deferred revenues now in our balance sheet.
To provide investors with a clearer view of our performance. We modified how we are disclosing revenue by three product lines, which have similar attributes the revenue contribution by product offerings are easy easier to follow.
Breaking down revenue across our three product lines.
Our Q1 cloud revenue, which consist of our five G core and Mec software our security Gateway software product in a virtual PNG routing software. It was $4 2 million, which was up 86% from $2 3 million in the prior year.
Q1 cable revenue consisting of all products customarily associated with our cable line of business was $15 3 million.
Which was down 46% from $28 6 million in the prior year. The decline in cable was largely due to lower software license revenue during the quarter.
Finally, Q1 access revenue.
Which includes our access device products from our 2019 net com acquisition.
Plus our fortune five G enterprise small cell radio products was $25 8 million, which was down 23% from $33 5 million from the prior year.
Turning now to backlog. We currently have approximately 140 million in backlog product and service orders, including scheduled 20 twenty-three Verizon five G.
<unk> contract billings, bringing our total backlog deferred revenue and the remaining $92 million of future building billings under the horizon contract to be build in 'twenty 'twenty four and beyond.
To approximately $270 million.
As we noted last quarter. We also have approximately $57 million of closed multiyear contracted business for our fortune five T enterprise small cell radios with a major north American M and know where we get pose on an annual as ordered basis I want to note that this is not included in the backlog and deferred revenue numbers.
Mentioned and that the small cell radios will begin shipping in the second half of 2023.
Assuming to close contracts we have.
Yeah.
As we noted in our fourth quarter call in March we are continuing to see good improvements in supply chain and believe a significant majority of our backlog will ship in 2023.
Assuming there is no unanticipated deteriorate deterioration or supply chain.
In the future.
Moving to gross profit GAAP gross profit for Q1 came in at $18 2 million or 40% of revenue GAAP operating expenses for the quarter came in at $45 3 million, including $3 9 million in nonrecurring charges related to gerry's departure, as president and CEO in.
In March 2023.
And while outside of the first quarter. It's also important to note that in April 2023 we made the difficult decision to reduce our head count by approximately 13% across all functions and geos.
And to reduce non comp costs as well this was a necessary step to rightsize our cost structure to our revenue levels and was done surgically. So we could continue to innovate in cable and cloud retain our product lead and excellence and capitalize on future growth opportunities.
This realignment of resources would help cockpit towards our goal of returning to annual net adjusted EBIT positive results in 2023 and beyond.
Our GAAP operating loss for the quarter was $27 1 million.
This was primarily driven by our softer than expected Q1 revenue results and the nonrecurring $3 $9 million charge taken during Q1 has.
As mentioned the largest cable deal that did slip outside of Q1 is now closed. We also expect to receive formal acceptance and the software order that slipped outside of Q1 soon.
And we have taken action to reduce our cost structure in April 2023 has just announced.
Further it should be noted our operating cash burn was very modest in Q1, and only $8 4 million and this is important to recognize and reflects the high level of noncash charges flowing through our GAAP P&L.
Finally related to our Q1 P&L, our net loss for the quarter was $31 7 million or 33 cents loss per diluted share versus a net loss of $32 6 million in Q1 2022.
On a non-GAAP basis, we had a loss of $24 5 million or 26 cents loss per share and reported adjusted EBITDA loss of $16 2 million as reflected in the schedule as shown in our press release.
Turning to our balance sheet, we ended the quarter with cash cash equivalents and restricted cash.
Of $115 6 million, our cash balance at March 31, 2023 was down approximately $14 million compared to December 31, due primarily to an approximately $2 million reduction in our term loan b debt. Another $2 9 million use of cash for financing activities some modest fixed.
Asset purchases and the modest operating cash burn during the quarter as just mentioned.
We ended the quarter with high quality accounts receivables of approximately $47 5 million, which excludes major billings.
We are in the process of issuing in Q2 related to our Verizon contract.
Further I'm pleased to say that our long term debt, which was 274 million as of 331 22 is now down to $223 million, reflecting great progress on our Delevering plan.
Finally, we are reiterating our annual 2023 revenue guidance of 300 million to $325 million in positive net adjusted EBITDA results for the year.
As noted earlier, we expect 2023 to be backend weighted.
And our guidance based on visibility into our backlog.
Deferred revenue and later stage pipeline deals.
Including large expansion deals with major customers, which we expect to convert into revenue later this year.
So to wrap up the team and I are incredibly excited about the recent developments at Casa from our recent customer wins to new successful customer deployments to the progress we're making in our important partnership for horizon. We're on the right path to drive growth and returned a net adjusted EBITDA profitability and we.
We'll soon have the December 'twenty three maturity overhang, formerly resolved with the support of this majority of term loan b lenders pursuant to the TSA, we announced today.
I want to thank the entire team at Casa for their dedication to serving our customers and staying focused on our long term goals. During this time of transition.
I'll now turn the call over to the operator to open the line for any questions operator.
Thank you well 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.
If you'd like to remove your question. Please press star two one moment. Please while we poll for questions. Our first question is coming from Simon Leopold from Raymond James Your line is that life.
Thanks for taking the question a handful of things one more on the housekeeping one is.
With the redefined segments will you be posting essentially yeah, yeah, our pro forma so that we could see what the trending has been with the new segmentation over the last.
Eight quarters.
To help with kind of forecasting and identification of trends is that something you plan to do or can do.
Yes, Simon will do that.
Great that was an easy one.
Get they'll get a little harder.
Only one cloud.
What do you expect for your interest expenses going forward with the with the new term b and congratulations for getting that done.
Yeah, I think you're right. So I think the interest.
The interest rate structure is in the 8-K, you know as we close it later in Q2, it should be kind of a sofa plus 6.5 somewhere around 10%, so slightly higher but still a very good market rate.
Okay, and what is sort of the normalized expense run rate now because I guess the recent cuts were done during the current quarter. So really I'm trying to get a better sense of where do you think operating expenses settle in the second.
Let's call. It three Q4, Q Opex budget, what are you thinking.
Yeah. So we did do the right sizing our assignment one surgical in nature and it preserved our ability to grow in our core market segments, including you know cable and cloud and ran them you know in total we took out about on an annualized basis, excluding severance charges, we took out about 20.
8 million.
Of expense with the April action.
You know that said, we are continuing to invest in certain areas like you know cable and cloud and elsewhere, but the annualized savings from that April event was was roughly $28 million.
Great and then in terms of an update on the Verizon Prague.
Progress I think AR at the end of the last quarter. There was I believe 120 million left.
And the project you only recognized a fraction of revenue last year.
What are your expectations for how much of that Verizon project.
Into the 2023 forecast.
Yeah. So very good question, we did recognize only a fraction last year I think we build them 20 million and got paid from Verizon 20 million in nonrefundable payments in 2022, and only took you know about a 7 million of six and a half for $7 million, we actually recognized no revenue from Verizon in Q1 'twenty.
Twenty-three. So we're just waiting on the formal acceptance, but the project itself is going great and I would expect a more meaningful revenue contributions from Verizon in Q2 and in the second half of 2020 three.
Great I'll I'll cede the floor at this point thanks for taking the questions. Good question Simon Thank you.
Thank you. Your next question today is coming from Tim Southern Hills from Northland Capital markets. Your line is now live.
Good afternoon.
Can you hear me okay.
Yeah, Hey, Tim.
Okay great.
So I'm just kind of working through this.
Our debt agreement and does this leave you with still with some maturities at the end of the year.
Over the old agreement.
So the belief is that we will get substantially all of the term loan b lenders to sign onto this you know this first phase was to get the 60% we have signed up today, but.
There are mechanisms.
Mechanisms that can be put in place now with this majority to incent the remaining AR.
Lenders to join in and in the sense of Us and and J P. Morgan is that substantially all will sign on and in any type of stuff will be very minimal if any at the end of the year.
Okay.
And now you've got.
60% of it going out to 'twenty, seven or 40 million pay down.
And about 50.
The remaining.
That that you hope to convert to the same twenty-seven status does that.
Accurate I, yeah that that's correct him, but again this is part of the strategy and again, we expect substantially all to sign onto this new deal.
Got it.
So the question about the quora win I mean can.
Can you give us any metrics on kind of the size and importance of that opportunity for you guys and how significant or customer that could be say relative.
Relative to big customers, you've had in the past or.
Any kind of metrics do you want to toss out there.
Yeah, well it was a great validation of our virtual C. Capricorn our P. D note Tim in terms of size. It was you know mid to high single digit millions.
It was particularly gratifying to win that and that.
We had to deal with some fear uncertainty and doubt that some of our truth challenged competitors, we're selling after our March announcement, but you know they have confidence in us and we're very pleased to announce that win in and we do think there is substantial land and expand inside of inside of Claro as well.
Got it and.
You know given.
The push outs into Q2, where you know what I'm, assuming you might have a fair bit of visibility there I know you reiterated annual guide but.
You had given I think you have a lot of essentially a lot of parts moving in the right direction in Q2, which is the.
The avenues up and expenses down [laughter].
Well be able to give us a little more color on what your expectations are here short term.
Yeah, so that as part of the success plan revenue up expenses down I think in mid March when we gave guidance for the year. We did guide that it was going to be you know.
Half weighted plan, but we've got good visibility given the you know high backlog, we have entering the year. The you know big growth in in deferred revenues on our balance sheet, which ultimately will flow into our topline revenues I'm actually a very strong sales pipeline across all four market segments.
You know cable CAD cloud and ran them.
The fact that we're gonna start shipping our fortune 50 small cell.
Radios in the second half pursuant to that close contract. We also got some great expansion opportunities inside some of our largest customers are you know again.
Or where I'm, having success with our land and expand our cohort sales model that you're familiar with.
So yeah, I mean, all those factors are going to combine to allow us and in our opinion to.
Attain that revenue guidance, we provided in and candidly, we just got a very a high single digit million cable order from a major customer in.
In North America. This past week that will ship for revenue in the second half. So it's a combination of all those factors that allow us to have confidence in our annual topline.
Topline and bottom line guidance.
Okay, Great and one last question for me and you mentioned.
No ryzen revenue recognized and I realize that's probably separate from from cash but.
You know despite that you put up gross margins in the 40% range in the quarter.
You know I.
Yes.
I don't know what a normalized quarterly Verizon contribution lizards software contribution, but I guess my question is if there is such a thing.
What should that add to gross which are gross margins look like with a more normalize.
Either Verizon or if you want to say tier one cloud software contribution.
Yeah. So you know.
In terms of the margin it would probably be in the low nineties as they.
Gross margin as a percent of revenue I'm, you know from a GAAP 606, Rev. Rec point of view, it's a little complex, but are the margins on the cloud side are going to be very very high.
Alright, thanks very much.
You're welcome.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over for any further or closing comments.
No I got I guess to close up our first thank you everyone for joining us today look it's been a really busy few months at Casa and you know the whole team is working truly tirelessly to address the issues that we're facing us and we believe you know great progress has been made.
As we enter Q2, we're bringing strong business momentum into the quarter.
We're really pleased after a lot of late nights and hard work on the TSA announcement today and with this term loan B cloud now moving away. We've also engaged Piper Sandler to assist us in assessing the potential for for select noncore product line divestitures, while we double down on.
Cloud cable and select access device offerings, and we'll continue to update everyone on our progress during the coming coming months with with more press releases around customer wins and additions to the team that will be forthcoming soon so.
Please stay tuned and thank you for your continuing support and interest in castle.
Thank you operator.
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.