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Edited Transcript of CASA.OQ earnings conference call or presentation 28-Oct-20 9:00pm GMT

·19 min read

Q3 2020 Casa Systems Inc Earnings Call Oct 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Casa Systems Inc earnings conference call or presentation Wednesday, October 28, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jackie Marcus * Jerry Guo Casa Systems, Inc. - Founder, Chairman, President, CEO & Secretary * Scott Bruckner Casa Systems, Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * Karan Juvekar * Scott Ross Fessler Stifel, Nicolaus & Company, Incorporated, Research Division - Associate * Timothy Paul Savageaux Northland Capital Markets, Research Division - MD & Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Casa Systems Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator or technical assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jackie Marcus. Thank you, Jackie. You may begin. -------------------------------------------------------------------------------- Jackie Marcus, [2] -------------------------------------------------------------------------------- Thank you, operator, and good afternoon, everyone. CASA Systems released results for the third quarter of 2020, ended September 30, 2020, this afternoon after the market closed. If you did not receive a copy of our earnings release, you may obtain it from the Investor Relations section of our website at investor.casasystems.com. With me on today's call are Jerry Guo, Chief Executive Officer; and Scott Bruckner, 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 as we currently see it, and as such, does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call or in the earnings release are based upon information that we believe as of today, and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. During the call, we may use non-GAAP measures if we believe it is useful to investors or we believe it will help investors better understand our performance or business trends. And with that, I'd like to turn the call over to Jerry. Jerry? -------------------------------------------------------------------------------- Jerry Guo, Casa Systems, Inc. - Founder, Chairman, President, CEO & Secretary [3] -------------------------------------------------------------------------------- Good afternoon, everyone, and thank you for joining us today as we discuss our third quarter results. The third quarter presented a number of highlights for us. I'm very pleased to share that our financial, operational, and strategic momentum accelerated during the third quarter. We delivered exceptional top line performance with double-digit revenue growth, both year-over-year and sequentially. The majority of our revenue in the quarter came from the growth drivers of our business, our wireless and fixed telco products. We had several wins in our fixed telco wireless segment in North America, Europe and APAC. This again indicates that major carriers are validating our technology over our competitors. Demand for our growth products increased. This is evident in our wireless backlog, which grew to $115 million, net of shipments. We now have good visibility into Q4. So we are raising our full year revenue guidance. This represents an important turning point for CASA. What's particularly gratifying for us is that this inflection point comes during a challenging business environment globally. We have the people of Casa Systems to thank for this. The hard work and commitment they demonstrated during these unprecedented times was truly inspiring. They are, without a doubt, best-in-class, and they have my deepest gratitude. Now on to the performance. During Q3, we grew our top line. We diversified our customer base. We grew our cash position, and we improved profitability. Third quarter total revenue were $105.7 million, a 29% increase year-over-year, and a 27% increase sequentially. This marked a significant improvement in our business that was driven by continued robust growth in fixed telco and wireless. As expected, cable was steady and consistent, accounting for $42.1 million of revenue.?Wireless and fixed telco now represents the bulk of our business, delivering 60% of revenue. This validates the strategic direction in which we have been taking our company. So, as we look at the road ahead, one of the biggest challenges we had is to dispel a commonly held misconception about the nature of our business. To some, we are seen primarily as a cable supplier in transition. That characterization is simply not accurate anymore. With our current revenue mix, to say that CASA is primarily about cable, is like saying that Amazon is only about books. As we achieve this milestone, we continue to add new customers for our wireless and fixed telco products. This further strengthens the foundation of growing new product revenue in Q4 and beyond. Turning to our product areas. Wireless revenue for the third quarter was $29.2 million, a 40% increase year-over-year, and a 76% increase sequentially. Wireless revenue in Q3 was fueled by a mix of organic and acquired products. 4G-5G cloud-native core, fixed wireless CPE, small cell core, and small cell radios. Additionally, during the quarter, we continued to lay the foundation for additional 5G revenue. We unveiled the first high-power 5G millimeter wave customer premise access device, which are now in customer trials. We added new wins in enterprise small cells, part of our focus on private and enterprise networks, and our 4G-5G cloud-native core with the wireless operators in North America and Asia. And we are deploying a large-scale 5G fixed wireless access project for a Tier 1 mobile operator in North America. All of this serves as a further proof point that Casa will be a key player in 5G.?In Q3, we also saw significant progress across our fixed telco product portfolio, with revenue of $34.5 million, representing year-over-year growth of 92%, and sequential growth of 43%. In Q3, we also saw a new Tier 1 fixed telco customer wins in Europe and North America. Turning to cable. Revenue was $42.1 million. Cable sales over the past 6 quarters have been relatively steady. To give you a clear sense of the degree to which our business has been transformed, our percentage of revenue from cable has gone from almost 100%, a little over a year ago to now just 40%, all related to the growth of our wireless and fixed telco revenue. This is a pivotal shift in our business. In Q3, as we have seen the last 2 quarters, COVID-19 continue to drive demand for our products. On supply chain, short-term shipment delays have been resolved. What we continue to address are limited cases of component lead times for some of our products. This could push some of our backlog into Q1. Finally, I'd like to update you on our outlook for the fourth quarter and the fiscal 2020. Due to increased demand for our wireless and fixed telco products, we believe that we are on track to exceed the high end of our revenue guidance range. Based on our performance year-to-date as well as our enhanced visibility from our large backlog, we are raising our full year revenue guidance to $370 million to $380 million. Scott will provide more detail in his remarks in a moment. In summary, we are outperforming our expectations in spite of a challenging macroeconomic environment. I am optimistic about our ability to drive long-term profitable growth with the more predictable results and expanded customer base. While there is more work to be done, we are well on our way to achieving these goals. With that, I would like to ask Scott to discuss our financial performance in more detail. -------------------------------------------------------------------------------- Scott Bruckner, Casa Systems, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Jerry. Good afternoon, everyone. As Jerry mentioned, this was an exceptionally strong quarter for Casa, and I'm very pleased with the results we had in the third quarter. It was a quarter in which we saw significant growth in our top line, the revenue mix shift we've been seeking, and that 60% of our revenue now coming from our wireless and fixed telco products, higher gross profit dollars, both year-over-year and sequentially, increased operating leverage that drove higher year-over-year and sequential operating profit, GAAP and non-GAAP EPS and EBITDA, increased cash on our balance sheet, as I told you we would deliver. And perhaps what is the most tangible sign of our business progress, we saw another significant increase in our wireless backlog. Turning now to our third quarter results. Revenue for the quarter came in at $105.7 million. That's up 29% year-over-year and 27% sequentially. In terms of growth, this is exactly the range that we've been working very hard to get back to. Looking at our product segments, wireless revenue for the quarter was $29.2 million, or 27.6% of revenue. This was up 40% year-over-year and 76% sequentially. Fixed telco revenue came in at $34.5 million, or 32.6% of revenue, and this was up 92% year-over-year and 43% sequentially. And cable revenue for the quarter came in at $42.1 million, or 39.8% of our revenue. To emphasize a point that Jerry was making, the percentage of our business driven by cable is going down while overall growth is up by double digits. While our gross margin in the quarter came in at 49.7%, our gross profit for the quarter is $52.6 million. That's up 34% year-over-year and 22% sequentially. This is what's driving our profitability further down on the P&L and also fueling resources for investment in growth while allowing us to reduce our financial leverage. Total GAAP operating expenses in the quarter were $43.5 million, a 9% decline relative to the third quarter of 2019, and a 4% increase relative to the second quarter of 2020. The slight increase in GAAP operating expenses relative to the second quarter was due primarily to increased commission expenses from higher sales in the third quarter from our significant growth and also from increased R&D in 5G. I continue to expect GAAP opex to be in an average quarterly range of $42 million to $44 million. Non-GAAP opex was $39.5 million, and that's an 8% decrease from our non-GAAP operating expense in the third quarter of 2019. Adjusted EBITDA for the third quarter of 2020 was $17 million. Sequentially, that's up 81%, and year-over-year, up over 300%. Additionally, we delivered an operating profit of $9.1 million, and a profit before tax of $5.9 million, both figures representing significant sequential increases as well. Provision for income tax for the third quarter was $2.4 million, and we expect tax for the full year to be a benefit of approximately $10 million, and this is based in part on adjustments that we anticipate being able to take from the CARES Act. GAAP net income was $3.5 million or $0.04 per share on a fully diluted basis, and that's a significant improvement relative to the GAAP net loss of $8.5 million or negative $0.10 per fully diluted share in the third quarter of 2019, and a net loss of $3 million or negative $0.04 per fully diluted share in the second quarter of 2020.?Non-GAAP net income came in at $5.9 million or $0.07 per fully diluted share, which compares to a non-GAAP net loss of $2.9 million in the third quarter of 2019, and a non-GAAP net income of $0.7 million in the second quarter of 2020. Let me now turn to our balance sheet and briefly discuss our liquidity profile. We ended the quarter with a cash balance of $157.2 million. That's up 4.7% sequentially, and 38% year-to-date. Total debt includes our term loan B balance of $288.8 million, which as a reminder, doesn't mature until the end of 2023, and $6.5 million of our revolver that we drew down during the quarter, and this was to bridge a refinancing of the mortgage on our Andover office facility. Total inventory increased by $12.5 million in the quarter, and this was related to our increased backlog, a good portion of which we expect to ship during Q4. Accounts receivable increased by $13.1 million due to increased order volume and the timing of certain orders during the quarter. And in spite of the receivables increase, the aging of receivables in the quarter remained very attractive, with less than 1% at greater than 90 days. Shifting to our supply chain. Look, we are not immune to the disruptions that COVID has brought, but we have managed better than most in executing on our delivery deadlines. And in Q4, we will continue to take steps to try to mitigate any impact to our customers. Turning now to our outlook. We are entering the fourth quarter with year-to-date revenue at 76% of the way toward achieving the high end of our full year revenue guidance range. During the year, we saw significant growth in both our new product revenues and our backlog with stronger activity than expected, and this includes increasing momentum in our 5G and our fixed telco products. Wireless backlog at the end of Q3, as Jerry mentioned, stood at $115 million. That's a 36% sequential increase from our previous backlog, and this is net of new orders, deliveries, and acceptances during the quarter. While a possible second wave of COVID-19 absolutely brings uncertainty with it, we believe that we are on track to exceed the high end of our full year guidance range. So, as Jerry already mentioned, we are updating our full year guidance range as follows: revenue, $370 million to $380 million. Gross margin, with hardware comprising a substantial portion of our revenue, gross margin will likely be at the very low end of our range, but with revenues expected to be up, we expect gross profit dollars to be in line; adjusted EBITDA, $38 million to $44 million; GAAP net income between $4 million and $10 million, or between $0.05 and $0.10 per fully diluted share; non-GAAP net income between $7 million and $13 million, or between $0.09 and $0.14 per fully diluted share. The EPS updates that I just outlined are based on our expectation of both higher revenue and higher profitability for the full year, as well as a substantial tax benefit that we expect to book in the fourth quarter. So, in conclusion, we're really proud of our performance year-to-date. This quarter demonstrates our ability to execute on what we said we would deliver. Before turning the call back to the operator, I do want to echo Jerry's kind words, and I want to express our gratitude to our staff, suppliers, and manufacturers worldwide who continue to do exceptional work in these difficult times. So with that, we're ready to start the Q&A. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from Metam Marshall with Morgan Stanley. -------------------------------------------------------------------------------- Karan Juvekar, [2] -------------------------------------------------------------------------------- This is Karan Juvekar on for Meta, thanks for the question. So I just want to ask quickly, when it comes to fixed wireless growth, is there any project-based completion risk in 2021? -------------------------------------------------------------------------------- Jerry Guo, Casa Systems, Inc. - Founder, Chairman, President, CEO & Secretary [3] -------------------------------------------------------------------------------- We don't believe so. We have been working with multiple customers on new product acceptance, we believe it's well under control. -------------------------------------------------------------------------------- Karan Juvekar, [4] -------------------------------------------------------------------------------- Got it, thank you, and if I could just ask one more. On the wireless business, could you give a sense of where you're seeing the growth, like small cells or software? And as you look at the pipeline, what is that mostly composed of? -------------------------------------------------------------------------------- Jerry Guo, Casa Systems, Inc. - Founder, Chairman, President, CEO & Secretary [5] -------------------------------------------------------------------------------- Yeah, so we -- yes, you know that we do have multiple products in the wireless segment. We have 4G-5G packet core, small cell core, and fixed wireless access devices, and the small cell radio. We do see growth in all categories. We are not able to actually segment them at this point. -------------------------------------------------------------------------------- Scott Bruckner, Casa Systems, Inc. - CFO [6] -------------------------------------------------------------------------------- Yes. I would just -- the one thing that I would add to that, I'm probably very close to our backlog. I would say that of the 115 million in the backlog, it's a pretty good mix of all of our products, that extend from core to small cells, small cell radios, also for private networks and enterprise, and then also the fixed wireless access products. Karan Juvekar% Got it, thank you. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question comes from Scott Fessler with Stifel. -------------------------------------------------------------------------------- Scott Ross Fessler, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [8] -------------------------------------------------------------------------------- As more 5G deals start to flow in, which likely carry better margins than 4G, but on the other hand, are still hardware heavy, what should be the net effects on margin longer term? -------------------------------------------------------------------------------- Scott Bruckner, Casa Systems, Inc. - CFO [9] -------------------------------------------------------------------------------- So look, we don't necessarily focus on that. In terms of the product mix, hardware and software, what we focus on, and I think that was evident in the last quarter, is growing our top line and growing our gross profit dollars. As I mentioned, this was evident in the third quarter where we grew gross profit 34% year-over-year and 22% from the second quarter, and that drove profitability all the way down on the P&L. And we think that, that's an exceptional achievement, and that will continue to be our focus. -------------------------------------------------------------------------------- Scott Ross Fessler, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [10] -------------------------------------------------------------------------------- Great, thanks. And then sort of going off that with the software piece, once the hardware is installed, is there then an opportunity for very high-margin work there with software coming in on top of it, or services beyond that running over that hardware? -------------------------------------------------------------------------------- Jerry Guo, Casa Systems, Inc. - Founder, Chairman, President, CEO & Secretary [11] -------------------------------------------------------------------------------- Yes, on both. -------------------------------------------------------------------------------- Scott Ross Fessler, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [12] -------------------------------------------------------------------------------- All right. Thank you thank you. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Tim Savageaux with Northland Capital Markets. -------------------------------------------------------------------------------- Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [14] -------------------------------------------------------------------------------- Just a couple of questions. As we look into Q4, you're applying kind of flat to maybe up slightly, depending on where you are in the range. revenue-wise, a couple of questions about that. I mean, do you expect the mix between your segments to change in any material way Q4 to Q3? And given your commentary around margins, I'm assuming you're not building any -- some of what we've seen historically, kind of a capacity add or budget flush on the cable side into Q4? And I have a follow-up from there. -------------------------------------------------------------------------------- Jerry Guo, Casa Systems, Inc. - Founder, Chairman, President, CEO & Secretary [15] -------------------------------------------------------------------------------- Tim, thank you. We are still looking at both the new bookings as well as the backlog drawdown at this point. We're not able to answer that the final mix yet at this point. We -- traditionally, you know our customers tend to have year-end budgets, but we do not want to count on that. -------------------------------------------------------------------------------- Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [16] -------------------------------------------------------------------------------- Okay. Well then I'll move on to margins. Scott, you guided margins right down to the low end of -- the gross margin, to the low end of the range for the year. And so my question is, when you talk about kind of a hardware-heavy mix. I think in previous quarters this year, that comment has been as focused on cable as anything else, adding capacity and adding hardware to address those issues. Is that -- does that remain the case, or do we also look at maybe the wireless segment, or other -- or fixed telco is also having a more hardware-heavy mix in terms of what's moving the margins around? -------------------------------------------------------------------------------- Jerry Guo, Casa Systems, Inc. - Founder, Chairman, President, CEO & Secretary [17] -------------------------------------------------------------------------------- Yes. Tim, let me actually answer from a product mix. On the hardware side, we do have several hardware products in all segments. And we have CCAP chassis and the DAA nodes for cable, and we have DPUs in the fixed telco side, and we also have fixed wireless access devices as far as small cell radios, and those are all hardware components. And we did see a mixture in this past quarter in Q3. -------------------------------------------------------------------------------- Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [18] -------------------------------------------------------------------------------- Okay, and last question for me. Obviously, the fixed telco side is the real or among the real standouts here in the quarter in terms of growth. I wonder if you might be able to kind of drill down from either a customer geographic or fiber versus distribution point or high-speed copper application standpoint and give us a little more color on what's driving that growth? -------------------------------------------------------------------------------- Jerry Guo, Casa Systems, Inc. - Founder, Chairman, President, CEO & Secretary [19] -------------------------------------------------------------------------------- Well, we do see that COVID-19 is driving some of that demand growth. But on the other hand, there is secular growth of bandwidth demand probably continue to drive that, and we find it very hard to separate those. And in general, it's the bandwidth demand driving the shipment in this quarter. -------------------------------------------------------------------------------- Timothy Paul Savageaux, Northland Capital Markets, Research Division - MD & Senior Research Analyst [20] -------------------------------------------------------------------------------- Great. Thanks very much. -------------------------------------------------------------------------------- Jerry Guo, Casa Systems, Inc. - Founder, Chairman, President, CEO & Secretary [21] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Thank you. There are no further questions at this time. I'd like to turn the floor back over to Mr. Guo for any closing remarks. -------------------------------------------------------------------------------- Jerry Guo, Casa Systems, Inc. - Founder, Chairman, President, CEO & Secretary [23] -------------------------------------------------------------------------------- Well, thank you, operator. As Scott and I mentioned in our earlier remarks, we are well positioned to take advantage of the 5G acceleration and shift of network functions to the cloud. Thank you, everyone, for joining us today. We look forward to updating you on our progress next quarter. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.