Earnings Transcript for CASA - Q3 Fiscal Year 2022

Operator: Greetings, and welcome to Casa Systems Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Dennis Dailey, Director of Corporate Development and Investor Relations. Please go ahead.

Dennis Dailey: Thank you, operator, and good afternoon, everyone. Casa Systems released results for the third quarter of fiscal year 2022 ended September 30, 2022, 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.casa-systems.com. With me on today’s call are Jerry Guo, our Chief Executive Officer; and Ed Durkin, our Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to Jerry, I’d like to note that today’s discussion will contain forward-looking statements based on the business environment 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 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 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 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?

Jerry Guo: Thank you, Dennis. Good afternoon, and thank you all for joining Casa’s third quarter fiscal 2022 earnings call. The first nine months of 2022 have been critical in customer validation of Casa as a leading provider of cloud-native core software for wireless and wireline networks and in laying the foundation for growth in our physical broadband technology solutions. Our recent customer engagements continue to highlight our progress. And as some examples I would offer. Within our Cloud software product group, we continue to make tremendous progress with our cloud-native 5G core since the announcement of the $140 million TCV multi-year licensing contract of our cloud-native 5G core for consumer networks and $40 million strategic equity investment from Verizon in April. We announced a partnership with the Google Cloud in August and have been jointly working on multiple customer projects, which I will discuss in greater detail shortly. There are many other customer and partner projects being actively worked, and the Verizon and Google Cloud public news is great validation of our differentiated and our truly cloud-native software. We expect to be able to announce additional customer and partner successes for our cloud native software offerings in the coming months. Within our Cable Product Group, progress here is evidenced by our increased cable revenues in Q3 2022 despite continued supply chain challenges, and we expect continued sequential improvement in revenue in Q4 from the shipment of backlog cable orders and new cable deals. We continue to expand our virtual CCAP core and remote node deployments with the leading MSOs, both in North America and internationally. But overall, 2022 has continued to be a low spend year for most of our cable MSO customer base. However, we expect significant changes in cable broadband spend in the coming year. And we are laying the foundation for growth in 2023 by working with MSOs worldwide with our leading next-generation technologies in all distributed product categories, including virtual CCAP core and remote PHY. As a manager and remote MACPHY, I will discuss our pipelines in more detail later. Within our GAAP product group, as discussed on our August earnings call, we have worked hard to cultivate new major customer relationships with the major telco operators in North America as well as the new customers and distributors in Europe and have closed large orders in Q2 and Q3 with these new customers and the partners. This now provides us a good line of sight to improve GAAP results in 2023 given the backlog orders we have from these new customers, which are now slated for delivery in 2023. Within our small cell RAN product group, as we also discussed on our August earnings call, we announced new RAN contracts with a major North American mobile network operator in August. We expect to close more radio deals with a major mobile network operator soon, and we expect radio access network revenue to grow significantly and contribute nicely in 2023 based on the progress we have made during 2022. In summary, while the progress is not reflected in our top line GAAP revenue results yet, our strategy of investing heavily in R&D and delivering market-leading innovative products for our customers across all of our product groups in order to help our customers expand their networks and maximize their capabilities positions us well for renewed growth in 2023 and beyond. Despite this progress and increasing demand for our products, our financial performance in the quarter does not reflect our 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 experienced continued challenges from our supply chain partners in Asia and sub-chip availability issues, which limited our ability to ship products to customers. As a result of these supply chain issues and a few other factors, revenue for the quarter was $66.9 million, which is down 6% from the prior quarter. While we experienced a decline in revenue from our wireless and the fixed telco segment, we did see a 20% improvement in our cable revenue compared to Q2 2022 due to an uptick in demand from our existing customers, and we expect this positive momentum for cable to continue in Q4 and into 2023. And we’ll cover the Q3 financials in more detail in this section, including gross margins, operating expenses and balance sheet metrics and we are pleased to take questions on this retrospective financial results. As I look forward, I do believe growth in both top lines and bottom lines is ahead across all product groups as we execute on our strategy and complete our transformation with my belief routing the following. Cloud Software Product Group, our cloud software product group includes our cloud-native 5G core software and our virtual BNG routing software. As I mentioned, we have the great Verizon $140 million TCV licensing deal for our 5G core software for consumer networks. We are on track with our development deliverables under this agreement. Verizon paid out $20 million in licensing fees in Q3 2022. And we have another $120 million for bill in increments of $24 million per year, and that is a great foundation to build on. As communication service providers continue to transform their wireless and wireline networks using cloud-native technologies, we are providing them with options to build their 5G core functions and BMG functions over private clouds or public clouds. Our new Google Cloud partnership announced in late August is a public cloud or hybrid cloud option that is progressing well, and we are actively working with the Google Cloud and joint customer engagements, and we expect to be able to announce a few wins in the coming months. We have great inbound interest from our other cloud providers and system integrators to work with us on both consumer public networks and mobile private networks. After evaluating and integrating our software, our partners have determined that it is indeed truly cloud-native and able to seamlessly integrate with their cloud platforms. This seamless integration of Casa’s cloud-native 5G core functions with cloud platforms will enable communication service providers to realize the value of 5G, fast and flexible deployment of new services, fast reconfiguration and slicing of networks, automated operations and secure, reliable and resilient networks. Finally, we are seeing strong demand for our virtual BNG router product line on both private cloud and public cloud as well, which should contribute to 2023 results. On Cable Product Group, as I mentioned earlier, there was continued pause in cable spend in 2022 as cable MSOs evaluated future product technical directions remote PHY or remote MACPHY as you may have seen in recent press articles, several of the largest MSOs made the technology directions decisions and are moving forward with RFPs and spending plans for 2023 and beyond. We believe that there are only two virtual CCAP cores deployed in live networks today, and Casa has one of them. Virtual CCAP core is the key to next-generation cable broadband upgrade and Casa has the leading technology in virtual CCAP core as well as in remote PHY nodes. In this regard, and with the exception of Comcast, we are working closely with every other major cable MSO now. Based on our extensive customer engagement, we believe we are well-positioned to compete for what we believe is a coming wave of renewed cable network upgrade and capital spend and have a complete product portfolio ready today to meet whatever product technique direction that cable MSOs would like to proceed with. Based on the engagement we have with the leading MSOs, including live valuation – lab evaluation and a few trials of our virtual CCAP core and the remote PHY nodes, 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 MSOs to go with the virtual CCAP core and remote PHY position us very well to capitalize on upcoming increase in cable MSO CapEx spend. Just like the virtual CCAP core and remote PHY, Casa is also leading in remote MACPHY node technology and FMA manager. This gives us a complete cable product portfolio ready today to meet any direction that cable MSOs want to go. Access Devices Product Group, as mentioned on earlier calls, our 2022 GAAP results were impacted by product end-of-life decision in 2021 with one large CSP, where that CSP did some final sizable product lines in 2021. This was a significant component of 2021 GAAP revenues that did not repeat in 2022. This did impact GAAP results in the first nine months of 2022 as well as for the three months ended September 30, 2022, as compared to Q3 2021. This 2021 end-of-life matter also masked the great progress we made cultivating new customer and partner relationships in North America and Europe for our fiber extension and fixed wireless access products. I believe we have made good progress backfilling this 2021 CSP end-of-life matter, and this will be evident in the expected renewed growth in our GAAP product groups in 2023. Radio Access Network Product Group finally adds to radio. We’ve invested in our small cell radio R&D over the last few years and have proven products that have been deployed today. We now have 5G small cell supply contract with a Tier 1 CSP for product delivery in 2023. We expect to close additional rent contracts with other Tier 1 mobile network operators soon. Given the strong interest we have seen in 5G small cells in the last few months, we expect our small cell radio to have significant revenue growth in 2023. In summary, I expect we’ll see top line growth across all product groups in 2023 based on the visibility I have today. While we are not prepared to provide the 2023 guidance at this time we will provide the 2023 annual guidance after we complete our 2023 operating and financial plan. Finally, as mentioned in our press release, our Board authorized us to buy back $50 million of our existing debt as part of our plan to delever. We are pleased to report that we purchased and retired approximately $40 million of debt this week. Implicit in this debt retirement is our confidence in renewed top line growth and improved financial results coming in 2023. Ed will provide more details in his commentary on this transaction as well as progress and plans to refinance our remaining Term Loan B debt, which matures in December 2023. Before I turn the call over to Ed, I want to spend a few moments addressing the supply chain headwinds that continue to hinder our ability to ship completed products to customers briefly. We continue to work closely with our key chip suppliers, and we are seeing an improvement in supply from these partners. We are hopeful there will be fewer COVID-related disruptions and closures within our Southeast Asia partners in the coming months, and we are aggressively working on our contingency plans to ensure we can meet demand. We have seen the lead times for certain components, slowly get better over the past couple of quarters, and we are optimistic that this trend will continue over the next couple of quarters. As I noted in our Q2 call, which I still believe is correct today, these issues will begin to abate in 2023. Finally, we are working closely with our vendors, partners and customers to manage inflationary pressures and control costs. In conclusion, Casa is at a critical inflection point in our transformation. We are partnering with the right partners across all product groups accessing new markets around the world and strategically investing in our R&D capabilities. I strongly believe we are setting the stage for improved performance and long-term sustainable growth moving forward. I’d now like to turn the call over to Ed to review the financials. Ed?

Ed Durkin: Okay. Great CEO overview and thanks, Jerry, and good afternoon, everyone, and thanks for joining us today. I’ll keep my prefacing comment short as Jerry covered things very well in his opening remarks. I’d first like to reiterate the Verizon license deal for our cloud-native 5G stand-alone Mac software is continuing to progress as planned, and that’s evidenced by the $20 million in licensing fees they paid us in Q3 2022. And I do think it’s very safe to say the whole Casa team is excited about the further progress we’ve made with our multi-year transformation towards software and cloud as evidenced, first, by the strategic Verizon deal we announced in April and then further validated by the late August 2022 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 really the considerable opportunities that lie ahead for Casa across all of our product groups, that’s cable, CAD, cloud and RAN and as Jerry said, do look forward to improved results in 2023. So with those prefacing comments done, I’d like to get into the details for the quarter ending 9

Operator:

Jerry Guo: Thank you for joining us today. We are continuing to make progress in our strategic partnerships to bring our innovative technology to new markets. We are well on our way to achieving our multi-year transformation to become a leading provider of cloud native software and the physical infrastructure technology solutions for mobile, cable and fixed networks. I’m encouraged by the team we have assembled and look forward to sharing our achievements with you next quarter. Thank you.

Operator: Thank you. This concludes today’s conference. Thank you for your participation. You may now disconnect.