Vecima Networks Inc. (VCM) Earnings Call Transcript

Hello, this is the Chorus Call Conference Operator. Welcome to Vecima Networks' first quarter fiscal 2027 results conference call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] Should you need assistance during the conference call, you may signal an operator by pressing star and zero. Presenting today on behalf of Vecima Networks are Sumit Kumar, President and CEO, and Judson Schmid, Chief Financial Officer. Today's call will begin with executive commentary on Vecima's financial and operational performance for the first quarter fiscal 2027 results. Lastly, the call will finish with a question and answer period for analysts and institutional investors. The press release announcing the company's first quarter fiscal 2027 results, as well as detailed supplemental investor information, are posted on Vecima's website at www.vecima.com under the Investor Relations heading. The highlights provided in this call should be understood in conjunction with the company's unaudited interim condensed consolidated financial statements and accompanying notes for the three months ended September 30, 2026 and 2025. Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable securities law from which Vecima's actual results could differ. Consequently, attendees should not place undue reliance on such forward-looking statements. All statements other than statements of historical fact are forward-looking statements. These statements include, but are not limited to, statements regarding management's intentions, beliefs, or current expectations with respect to market and general economic conditions, future sales and revenue expectations, and future costs and operating performance. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict and/or are beyond our control. Vecima disclaims any intention or obligation to update or revise any forward-looking statements as a result of new information, future events, or otherwise, except as required by law. Please review the cautionary language in the company's first quarter fiscal 2027 earnings report and press release, as well as its annual information form dated September 24, 2026, regarding the various factors, assumptions, and risks that could cause actual results to differ. These documents are available on Vecima's website at www.vecima.com under the Investor Relations heading and on SEDAR+ at www.sedarplus.ca. At this time, I would like to turn the conference over to Mr. Kumar to proceed with his remarks. Please go ahead.

Good morning and welcome everyone. Thank you for joining us. Our fiscal 2027 year got off to an exceptional start as we set yet another record for quarterly revenue performance and achieved powerful year-over-year growth in adjusted EBITDA and earnings per share. Start today with an overview of our first quarter highlights. Judd will provide our financial review, and then I'll return to discuss our outlook before opening the call to your questions. To begin, as wide-scale broadband rollouts continue to gain momentum, our first quarter revenues climbed to $95.1 million, a new all-time quarterly revenue record for Vecima. That was up 37.5% year-over-year and 5% quarter-over-quarter. Our adjusted EBITDA performance grew 72% year-over-year to $18.7 million, representing an adjusted EBITDA margin of 19.7%. And we grew Q1 earnings to 24 cents per share, which in just one quarter exceeded what we achieved in all of last year. These very strong results were led by our broadband access solution segment, which as of Q1 has been realigned to focus fully on the Entra family products. Revenue in this segment climbed 39% year-over-year and came very close to matching the all-time record revenue we achieved in Q4. This was driven in part by continued uptake from our lead customer, Charter, as we support their extensive network-wide DAA rollout under our multi-year agreement. It also reflects our growing relationships with a large and expanding base of operators worldwide. By quarter end, we had broadband engagements across both cable broadband and fiber-to-the-home with 162 customers, an increase of 22 customers year-over-year. That spans over 300 individual broadband product engagements, meaning that many customers work with Vecima with pull-through across multiple product categories. In many cases, this includes both cable and fiber broadband at a single customer and spans across the wide Entra platform we have built, including nodes, RPDs, vCMTS intelligence, and of course, PON. In terms of specific product highlights, our EN9000 GAP Node platform enjoyed a particularly strong quarter. We also ramped up deliveries of our EN3400 node, which is a compact version of the EN9000. I want to remind you again of these platforms' strategic importance. Both are modular and flexible foundations that are designed to support evolving DOCSIS and fiber-to-the-home technologies. And as such, they're pivotal technologies that give us a significant network incumbency advantage. We've discussed previously that the EN9000 is a lower-margin product on a standalone basis, but one that pays long-term dividends by housing successive generations of higher-margin access modules in later periods. We started to see this dynamic in action in Q1, as we achieved a significant increase in sales of next-gen ERM3 remote PHY nodes, which are used in conjunction with the EN9000 and EN3400. Our broad footprint of the EN9000s and EN3400s is expected to go on supporting future generations of Entra cable and fiber access products for many years to come. And on the topic of next-gen products, Q1 brought important achievements as we advanced our new solutions. On the vCMTS front, we significantly increased the number of committed purchasing and deploying customers for the software platform over the last few quarters, with a marked acceleration in our engagements and wins. We now count multiple wins, including two North American Tier 1s. And we have many additional customers engaged, including several more Tier 1s, 2s, and 3s. During the quarter, we made meaningful progress towards field trials with our lead Tier 1 customer. We also expanded trials with Videotron, our Canadian Tier 1 customer. Under our agreement with Videotron, we'll be supplying a combination of Entra vCMTS, EN9000 nodes, and ERM3 RPDs to upgrade and modernize their next-gen DOCSIS network. This is an exciting broadband build-out that partners leading Canadian operators with a globally leading vendor also based in Canada. We've also made important progress with our next-gen fiber access solutions during the quarter. That included the start of commercial lab testing of Entra XGS-PON with a North American Tier 1 customer. Similar to 10G EPON, where Vecima is a global market share leader, XGS-PON is a foundational layer that's going to enable operators to deliver symmetrical multi-gig fiber broadband to homes and businesses, while preparing for future upgrades to even faster 50G PON. So together, XGS-PON and 50G PON open up a huge $3.2 billion addressable market for Vecima. And given that we're already the dominant market leader in PON remote optical line terminals, or remote OLTs, globally, and we have been for the past five years, we're approaching that market with a significant competitive advantage that's already established. That reflects our track record of building material market share in every segment we address, especially during generational transformations in technology. We expect that winning strategy will translate to meaningful market share. I'm pleased to add that Entra XGS-PON with vPON Manager, Entra vCMTS, and Entra Access Simulators were all named winners in this year's prestigious Diamond Technology Reviews, building on our global reputation. One other fiber achievement I'd like to mention is our continued progress on our EXS1610 all-PON solution. It is designed to help operators flexibly deploy high-speed fiber broadband while protecting their existing technology investments by enabling all of 10G EPON, XGS-PON, and Combo PON all in one platform. We've broadened customer engagements and expanded feature sets for this product during the period. So in a market that's increasingly deploying both cable and fiber access solutions, our ability to provide exceptional, interoperable, and future-proof cable and fiber solutions is creating significant new growth pathways for Vecima. Turning to our content delivery solution segment, which now encompasses the Terrace family commercial video products with our mediaScale portfolio, revenue climbed an impressive 32% year-over-year and 36% quarter-over-quarter. Those gains include continued uptake of managed IPTV installations and further deployment of our targeted dynamic ad insertion solution. But the significant growth driver for this CDS segment in Q1 was the ramp-up of our next-gen TerraceIQ commercial video solution. As we previously announced, during the first quarter, a major North American Tier 1 operator selected TerraceIQ for a broad commercial video network modernization, and that's expected to span thousands of locations. Vecima's legacy commercial video platforms have underpinned that operator's video offering in the commercial vertical for several years already. We delivered the first tranche of next-gen platforms during the quarter, driving the surge in TerraceIQ sales and nearly tripling what we achieved with this product in all of fiscal 2026. This is just the start of what we expect from TerraceIQ as we build our long-term leadership in the commercial video market. We currently have design wins with five Tier 1s and numerous Tier 2s, with more expected. As those rollouts get underway and expand, we expect TerraceIQ will position us to drive high growth rates in CDS, similar to what we're achieving in the broadband access segment. So, an exciting time for both of our segments, and overall, a very strong start to the year for Vecima. Now I'll turn the call over to Judd to discuss our first quarter results in more detail. Judd?

Thanks, Sumit. Good morning everyone. I'll walk through our financial performance for the first quarter of fiscal 2027 in more detail. For the purposes of this call, I'll assume that everyone has seen our Q1 fiscal 2027 news release, MD&A, and financial statements posted on Vecima's website. Please refer to today's news release and our MD&A for definitions and reconciliations of the non-IFRS financial measures I'll be referencing. To reiterate, the results I'll be discussing today reflect the continuing operations of our renamed broadband access solutions and content delivery solutions segments with their new product mixes. Comparative periods have been restated to conform to the new structure. Results from our telematics segment, which we sold in July 2026, were reported as discontinued operations and will not be part of my commentary today. As we anticipated, the accelerated sales pace that started in the fourth quarter carried into the new fiscal year. Our first quarter consolidated revenue grew to a record $95.1 million, an increase of 37.5% year-over-year. That's also 5% higher than the $91 million in Q4. In our broadband access solution segment, sales were up 39% year-over-year to $76.5 million. And they were similar to the record $77.3 million achieved in the fourth quarter of fiscal 2026, as we continue to benefit from very strong demand for our next-generation Entra DAA products. In our content delivery solution segment, first quarter sales grew to $18.6 million, up 32% from the $14.1 million in the same period last year, and they were 36% higher than the $13.6 million achieved in Q4. As Sumit mentioned, the CDS sales growth was led by strong demand for our Terrace products. The reported gross margin improved slightly in the first quarter to 41.6% from 41.4% in Q1 of last year, but was down from the 45% achieved in the fourth quarter of last year. The year-over-year increase reflects a smaller inventory write-down this quarter of $300,000 compared with $1.2 million in Q1 of last year. Additionally, the quarter-over-quarter decrease reflects a less favorable product mix within BAS and lower margins in CDS. Looking at adjusted gross margin, which disregards non-cash inventory write-downs and warrant expense, this was 41.9% as compared to 43.3% in Q1 of fiscal 2026 and 45% in Q4, which primarily reflects changes in product mix. By segment, BAS adjusted gross margin improved to 38.9% from 37.7% a year ago, while CDS adjusted margin was 54.1% versus 64.9%, reflecting a less favorable product and services mix in CDS. First quarter operating expenses of $30.7 million were up $3.8 million from Q1 of last year and $1.7 million higher sequentially. As a percentage of sales, operating expenses fell to 32% from 39% a year ago, reflecting operating leverage on the higher sales. R&D expenses for the first quarter increased to $13.4 million, or 14% of sales, from $11.8 million, or 17% of sales in the same period last year. This was primarily a result of higher salaries together with higher amortization of deferred development costs as more of our development investments, including the EN3400 and vCMTS, moved into commercial production, these being offset by higher capitalized development costs related to our future product offerings. As we mentioned, each quarter we defer some of our R&D expenditures to future periods until our products begin commercialization. And so reported R&D expense in a period is typically different than the actual cash outlay. Adjusting for this, our actual cash R&D investment was $16.8 million, or 18% of revenues in the first quarter, up from $14.1 million, or 20% of revenues a year ago, as we continue to prioritize our investment in future product development and our innovation pipeline. Sales and marketing expenses increased to $10.3 million, or 11% of sales, from $8.5 million, or 12% of sales last year. This reflected a $1.1 million provision for slow-moving finished goods inventory and higher commissions associated with our stronger first quarter sales, partially offset by lower trade show and advertising expenses. The decrease as a percentage of sales reflects the operating leverage in our sales and marketing cost base and continued disciplined variable selling costs. G&A expenses of $6.5 million, or 7% of sales, were up from $6.1 million, or 9% of sales in the same period last year. The increase mainly reflects higher salaries and benefits including variable compensation on higher sales and higher software licensing costs, partially offset by lower subcontractor costs. One item to point out is that we expect our internal AI initiatives will ultimately save us on third-party licensing costs going forward. We continue to incur interest expense related to our evolving line of credit, other debt, and accounts receivable factoring programs. Finance expense decreased to $1.7 million from $2.9 million a year ago, primarily on lower factoring costs ($1 million versus $1.8 million) and lower interest on our revolving line of credit. We also recorded a foreign exchange gain of $0.5 million compared with $900,000 last year. With debt levels expected to come down and cash flow continuing to improve, we anticipate lower interest expense in the full fiscal 2027 year. Regarding income taxes, as noted in our year-end call, we paid virtually no cash taxes in fiscal 2026, thanks to our substantial bank of tax attributes in Canada, and also changes to the U.S. tax laws regarding deductibility of R&D expenses. We may see some very limited cash taxes in the U.S. in fiscal 2027, depending upon our final results for the year. For Q1, income tax expense was $1.7 million compared with a $300,000 recovery last year. This year's $1.7 million tax expense is entirely deferred rather than in cash. Turning to the bottom line, we strengthened first-quarter operating income to $8.8 million from $1.7 million in the same period last year. The significant $7.1 million improvement is primarily due to a $9.9 million increase in BAS segment gross profit on substantially higher sales, partially offset by higher segment operating expenses. BAS delivered operating income of $6.1 million versus a loss of $700,000 last year, and CDS operating income grew 13% to $2.7 million. Adjusted EBITDA increased 72% to $18.7 million, or 19.7% of sales, from $10.9 million, or 15.7% of sales in Q1 of last year. That was similar to the $18.9 million we achieved in the fourth quarter when the margin was 20.8%, reflecting the lower gross margin I described earlier in the current period. Net income also improved in the quarter, climbing sharply to $5.9 million, or 24 cents per share, from $100,000, or nil per share, in the first quarter of fiscal 2026. The 24 cents per share in one quarter exceeded the 20 cents per share from continuing operations that we earned in all of fiscal 2026, as Sumit pointed out earlier. Net income from discontinued operations was $5.6 million, or 23 cents per share, primarily reflecting the gain on the sale of Telematics, which brought total net income for the quarter to $11.5 million, or 47 cents per share. Additionally, our adjusted earnings per share from continuing operations for the quarter grew to 29 cents from 4 cents last year. That includes a foreign exchange gain of 2 cents per share this year compared with 4 cents per share last year. Turning to the balance sheet, working capital of $67.9 million at September 30, 2026, increased from $62.6 million at June 30, reflecting higher cash, receivables, and inventory, and lower current debt, partially offset by higher payables and the removal of Telematics assets that were classified as held for sale at the end of June. Cash flow provided by operations for the first quarter increased to $13.2 million from $6.8 million during the same period last year. The $6.4 million increase reflects a $10.4 million increase in operating cash flow, partially offset by a $4 million decrease in net working capital. Additionally, within our cash from investing activities, the initial proceeds of $14.5 million for the sale of our telematics business were received at closing and contributed to our decrease in net debt for the quarter. We also repaid the $5 million shareholder loan in full and $1.3 million of our EDC loans in the quarter. And we expect to receive the remaining $1.9 million from Lantronix for the sale of Lantronix by the end of calendar 2026. Our net debt position, defined as total debt less cash and lease liabilities, continues to improve. Total net debt decreased to $24.9 million, down from $40.7 million at the end of Q4. Going forward, we'll keep focusing on strengthening our balance sheet through further debt reduction. In September, we also completed the acquisition of Akleza's CableDiag platform for $700,000 in cash with additional deferred and contingent payments that increase our reported liabilities to $4.2 million. We ended the quarter with $55.2 million of availability on our $75 million line of credit and with $14 million drawn. Finally, the Board of Directors approved a quarterly dividend of $0.055 per common share, payable on December 21, 2026, to shareholders of record as of November 27, 2026. As always, it's important to note that this dividend will be designated as an eligible dividend for Canadian income tax purposes. And before handing it back to Sumit, I wanted to mention that Vecima will be presenting at some upcoming virtual and in-person investor conferences to get our great story out there. Thank you. Check our website and press releases for more information. Now back to Sumit.

Thank you, Judd. Turning now to our outlook, we continue to anticipate year-over-year revenue growth of 30% to 35% in fiscal 2027, along with an EBITDA margin of approximately 20%. I want to note, however, that based on a slight change in customer timing, some Entra deliveries really intended for late Q2 are now expected to shift to early Q3. So as a result of that shift in delivery timing, we revised our calendar year outlook for 2026 to approximately 20% revenue growth as compared to calendar 2025, with an adjusted EBITDA margin of about 18%. Irrespectively, as I just mentioned, we continue to anticipate fiscal 2027 consolidated revenue growth of 30% to 35%. We expect our broadband access solution segment will continue to lead our growth as we support both our lead Tier 1 and 80 other customers in their wide-scale DAA network deployments. We're expecting strong demand for a wide range of Entra DAA solutions in fiscal 2027, including our ERM3 and ERM4 remote PHY devices, EN9000 and EN8800 cable broadband platforms, as well as our highly successful Entra optical fiber-to-the-home portfolio centered around our remote OLT nodes. Adding to this, we anticipate increased deployment of the EN3400, the EN210 standalone 10G EPON module, and our power holdover modules. In our content delivery solution segment, Terrace family sales are poised to continue expanding in the quarters ahead as our lead Tier 1 customer continues its major multi-year network upgrade using TerraceIQ. Additional operators are also beginning their own rollouts with that platform. We also anticipate continued steady performance with our mediaScale portfolio as we focus on driving revenue growth through managed IPTV expansions and our rollout of DAI. Combined, we're on track for a sustained and expanding period of growth. Remember that our 30% to 35% revenue growth outlook for fiscal year 2027 contemplates only the early stages of contribution from Entra vCMTS and DOCSIS 4.0 RPDs, XGS-PON, and several other platforms now entering the market. We expect these newer products will become meaningful and compounding drivers of performance in fiscal 2028 and beyond. I want to emphasize again the increasingly important role we see for our fiber access products. Leveraging our existing global market share leadership in the remote OLT tech, we expect to participate fully in the global expansion of fiber-to-the-home networks through XGS-PON, extending our reach beyond just cable across the entire broadband span, which includes traditional telco operators. Vecima expects to capitalize on the emerging 50G PON and all-PON evolution projected to become pervasive globally over time. As in cable access, where we've achieved significant market share in every category we focused on, this major evolution in technology is expected to cause every operator worldwide to re-evaluate their vendor and purchasing decisions and open the door for major expansion of Vecima's fiber access products. Overall, we have multiple engines for growth at Vecima at the forefront of the technology shaping future network architectures. As I said earlier, this is a very exciting time for Vecima, and we look forward to reporting to you on our progress going forward. That concludes our formal comments for today. We'll now be happy to take questions. Operator?

We will now begin the question and answer session for analysts and institutional investors. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. The first question comes from Ryan Koontz with Needham & Co. Please go ahead.

Great. Thanks for the question. Really nice quarter, guys. In the quarter just passed, did you talk about customer concentration at all? Was it pretty similar to what we've seen historically or any discussion about customer mix there?

Yes, we've reported on that, Ryan. Thanks for the question. I think quarter after quarter, you know, I think we have, as everyone knows, a very significant Tier 1 customer, a major and now the largest broadband operator in North America. And that's been an important part of our business and growth over the last several years and continues to be. But at the same time, with 162 engagements we have, and a broader set of 80-plus customers also starting their rollouts, we expect that to change over time and lessen the kind of concentration on one customer.

Got it. And maybe in terms of supply, can you comment on the supply environment these days? Obviously, memory has been an issue. I hear other things like PCBs and other parts are difficult to come by. How are you combating that? And is that affecting your ability to ship product at all?

Yes, I think we're doing pretty well with that as we go. Obviously, on a macro supply chain side of the equation, I think every kind of vendor is facing these challenges. We feel good about our order coverage spanning well into calendar 2027, and we have infrastructure allocations. Our volumes on the network side rather than the customer premise side are a different order of magnitude, so that also helps. And our customers are being great partners managing through this with us in strong partnerships. So we've been very successful, have good coverage, and we've got to continue to manage that effectively, and we think that we have been doing that. It has been a little bit of a headwind in the margins as it is for many people, you know, but that leaves upside in the future going forward. And I think that's accounted for in some of what you're seeing on the margin trends between the fourth and first quarter, in addition to the way as we are seeing that evolving scope on the supply chain start to have a little bit of influence in where we're sitting, and our longer-term target of pushing towards the upper 40s is still in play as more software comes into the mix.

Got it. That's helpful. On the push out into the March quarter there, any kind of general rationale there? Is that customer decisions based on their kind of inventory and pace and these sorts of things? Anything stand out there as far as rationale?

Yes, I think, as many of you know, our largest customer, they've been executing on some really big plans, a major merger, an integration after that merger, and a network transformation all at once, and all that's been pretty well publicized. And they have this renewed focus on subscriber growth and churn reduction, customer loyalty, and all of that really plays out really well for Vecima, both in the short and the long term. But network quality, capacity, and resiliency are really at the heart of everything we bring to the table for that customer. So it is normal to see some seasonality show up at the end of calendar years, as operators work to either pull in or push out based on financial objectives. And sometimes that involves pull-ins, sometimes it involves spend moving out past the boundaries. So trying to be cautious about the near-term statements, but everything that we're seeing that's moved really from December is going to early Q3. So that's why it supports reiterating this 30% to 35% outlook we have for the fiscal year, irrespective of seeing a little bit of that movement in Q2. Thank you.

Yeah, definitely. And maybe a question on product. I don't know if we've talked about it. I don't think we've talked about it before, but just this power holdover capability, is this relatively new, customer-driven? I know there's been a lot of kind of iterations around battery type approaches in the node. It's a pretty noisy environment on power, any kind of commentary there you have around what this brings for your customers and opportunity for share gains?

Yes, thanks for that. It's a good point. And as I just spoke to, network quality, reliability, resiliency is a big part of their market share in terms of broadband subscribers. And that's an important part of, as we move the cable network to DAA, to DOCSIS 3.1, DOCSIS 4.0, vCMTS, we also want to continue to drive the increases in the quality of the network. Power holdover modules are important for lots of operators in terms of managing through... We're putting software deep in the network for the first time, so we don't want to go through reboots when we have a hiccup in the power supplies or the grid. The holdover modules very effectively allow you to do that, and to prevent fault or reboot timings and whatnot. So that's become more and more important at our lead customer and propagating out through other customers along with the expansion they're doing with their acquisitions. Technology-wise, supercapacitors and lithium and all that, that's all in play. But what we're looking at is how many of those milliseconds we can hold past when you see a hiccup in the grid, and that's getting to a really strong spot.

Very cool. And is that product for your GAP node specifically, or which products will have the holdover capability?

Yes, so all of the GAP, the EN9000, it will move also the EN8800 platform, which has been the lead at another customer, as you know. And the SF4X and the remote OLT on the 10G EPON as well has carried that. So basically, all the node platforms are building into getting power holdover capability within them.

Great. Super. That's all I've got. Thanks for the questions.

All right. Thanks, Ryan.