Vecima Networks Inc. (VCM) Earnings Call Transcript

Hello, this is the Chorus Call Conference Operator. Welcome to Vecima Networks' fourth quarter and full year fiscal 2026 results conference call and webcast. [Operator Instructions] Presenting today on behalf of Vecima Networks are Sumit Kumar, President and CEO, and Judd Schmid, Chief Financial Officer. Today's call will begin with executive commentary on Vecima's financial and operational performance for the fourth quarter and full year fiscal 2026 results. Lastly, the call will finish with a question and answer session for analysts and institutional investors. The press release announcing the company's fourth quarter and full year fiscal 2026 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 audited annual consolidated financial statements and accompanying notes for years ended June 30, 2026 and 2025. Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable securities laws, 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, belief, or current expectations with respect to market and general economic conditions, future sales and revenue expectations, 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 are otherwise, except as required by law. Please review the cautionary language in the company's fourth quarter and full year fiscal 2026 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. We closed out Vecima's fiscal 2026 year with a breakthrough fourth quarter that included our best ever quarterly financial results and another increase to our outlook. I'll start today with an overview of our Q4 highlights and of course some of the high-level achievements all through the past year. Judd will provide our fourth quarter financial review, and then I'll return to discuss the significant growth we see out ahead before opening the call to your questions. As a result of the divestiture of the telematics business in July, our remarks today are going to focus on the remaining continuing operations of our VBS and CDS segments only. The fourth quarter was the strongest in Vecima's history. As wide-scale DAA rollouts gained momentum, our Q4 consolidated revenues climbed 36% year-over-year to a record $91 million and 45% sequentially quarter-over-quarter. Our adjusted EBITDA more than tripled year-on-year to an all-time high of $18.9 million, achieving adjusted EBITDA margins of 20.8% in the quarter. These were deeply satisfying results, but I want to emphasize that they reflect just the early returns on Vecima's long-term strategy. As you know, broadband operators worldwide have been preparing for a once-in-a-generation technology transition to Distributed Access Architecture and DOCSIS 4.0 for many years now they've been preparing. Vecima has played a key role in this evolution, leveraging our deep experience and technical strengths and partnering closely with customers to provide them the innovative interoperable technologies that underpin these network transformations. It has taken sharp focus, significant investment, and an unwavering strategy to build the industry's most comprehensive portfolio of DAA cable broadband and fiber-to-the-home broadband access platforms. And today we've emerged as a leading global force in the next generation broadband access as wide-scale rollouts of these network upgrades those wide-scale rollouts translates into ramp and demand for our solutions. That's part of a wave that is really just starting to build. In our Video and Broadband Solution segment, fourth quarter revenue climbed to a record $80.1 million, up 38% year over year, as demand and sales for our next-gen Entra DAA products accelerated. This was driven in part by a significant ramp-up of deliveries to Charter Communications as we supported the expansion of their DAA rollout under our multi-year cable and fiber agreement with this leading Tier 1 operator customer. It also reflects our growing relationships with a large and ever-expanding base of operators worldwide. By year-end, we had broadband engagements with 150 customers, an increase of more than 100 customers over just a few short years. The expansion and deepening of our customer base also contributed to very strong sales for our Entra optical products, led by our SF4X optical line terminals for fiber to the home. Vecima was already the number 1 global market leader for remote OLT terminals, so this further builds on our position. And it underscores Vecima's increasingly important role as a critical supplier in the fiber to the home space, supported by our 10G+ fiber broadband capabilities. Shipments of our new ERM3 remote PHY modules also rose sharply in the quarter as we supported our customers' ongoing network upgrades, and demand continued to grow for our highly successful EN9000 GAP nodes. As we've discussed previously, the EN9000 provides operators with a flexible foundation that supports evolving DOCSIS and fiber-to-the-home technologies while reducing the need for future hardware replacements. So this underscores a significant network incumbency advantage. The very broad footprint of deployed access platforms is now established. Combined, Entra platforms are now providing multi-gigabit broadband connections to tens of millions of homes. And we expect this increasingly deep footprint to evolve through multiple generations of further broadband investment, allowing Vecima to monetize our widely deployed base of Entra platforms for years to come. Keep in mind that while achieving all-time record results from our existing Entra portfolio in Q4, we're also advancing new technologies that we expect will become a major new growth series of growth engines for Vecima. We made significant progress with our VCMTS solution in Q4, progressing trials with our lead Tier 1 customer, while also signing new agreements with additional major customers, including Videotron, a large Tier 1 operator in Canada. We now count 7 VCMTS wins, including 2 Tier 1s so far, with many new customers engaged, including several more Tier 1s, 2s, and 3s. In our commercial video portfolio, our next-gen Terrace IQ solution has also been gaining broad traction. Subsequent to year end, a major North American Tier 1 operator selected Terrace IQ for a broad commercial video network modernization spanning thousands of locations and properties. Just the last year, we secured multiple new design wins for Terrace IQ and other customers as well, including 3 Tier 1s and an additional Tier 2. But taken together, these achievements are setting the stage for sustained growth in the VBS segment, both in the near and the long term, and we fully expect to build further on the all-time highs we just produced. I'll talk more about that a little later in the call. Turning to content delivery and storage, the segment generated double-digit Q4 revenue growth, both year-over-year and quarter-over-quarter, as uptake of managed IPTV installations expanded. We also made excellent progress with our targeted Dynamic Ad Insertion solution as we continued to deploy Phase 2 with our lead customer, Hotwire Communications. DAI enables operators to deliver targeted, personalized advertising experiences, increasing video ARPUs without having to increase the rates to customers. So overall, it was an outstanding quarter for Vecima, one that marked a major milestone as we now embark on a significant new phase of growth. To ensure that we're positioned to take advantage of the exciting opportunities ahead, we've also undertaken some important strategic initiatives in recent months. In July, we divested our telematics business, enabling us to sharpen our focus on the fast-growing broadband access and streaming video businesses, while also boosting our balance sheet. In August, we announced 2 executive leadership appointments that will help support us on our path forward. While I'll remain, of course, as CEO of Vecima, we've elevated Clay McCurry to President and Chief Operating Officer, focused on Vecima's strategic performance and long-term growth. And Ryan Nicometto, who previously led our VBS segment as GM, has been promoted to the newly created Chief Product Officer role, where he's focused on executing the unified product strategy all across our platforms. So these appointments not only strengthen our leadership structure, they also recognize the important contributions Clay and Ryan have made to Vecima for many years now. Now I'll turn the call over to Judd to discuss our fourth quarter results, financials, and more detail.

Thanks, Sumit. Good morning, everyone. I'll walk through our fourth quarter financial performance in more detail. For the purposes of this call, I'll assume that everyone has seen our Q4 fiscal '26 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. As we've said over the past few months, we expected the fourth quarter of fiscal '26 to mark the start of an accelerated growth period for Vecima, and that's exactly what played out. This quarter's results came in as we anticipated. And as Sumit noted, the results I'll be discussing today reflect the continuing operations of our VBS and CDS segments. Results from our telematics segment, which we sold in July 2026, are reported as discontinued operations and are not part of my commentary today. Starting with consolidated sales, fourth quarter revenue grew sharply to a record $91 million, an increase of 36% year-over-year and 45% quarter-over-quarter. Our Video and Broadband Solution segment contributed a record $80.1 million of this revenue, up 38% year-over-year and 53% higher than in Q3. Our next generation Entra DAA products remain the key revenue driver in our VBS segment with record Entra sales of $77.3 million, growing 42% year-over-year and 57% on a sequential quarterly basis. Commercial video sales added another $2.8 million to our VBS results in the quarter, reflecting the continued transition to next-generation platforms, as well as some of our newer DAA-driven commercial video products now included in our Entra family revenues. In our Content Delivery and Storage segment, fourth quarter revenues came in at $10.8 million, up 26% from the same period last year and 1% higher than in Q3. As we typically note, quarterly fluctuations are typical for the CDS segment. Gross margin improved significantly in the fourth quarter to 45.4%, up from 26.3% in the fourth quarter last year. The adjusted gross margin rose to 45% in Q4, up from 36.7% in the fourth quarter of fiscal '22. That strong year-over-year improvement largely reflects the absence of last year's significant inventory write-down and unfavorable product mix, along with the greater portion of higher margin Entra optical and software sales in this year's mix. Sequentially, both gross margin and adjusted gross margin were somewhat lower than in Q3, reflecting a modestly less favorable product mix. Turning now to fourth quarter operating expenses on a year-over-year basis, OPEX of $29 million was down $5.7 million year-over-year. On a sequential basis, it increased slightly by $600,000 from Q3. R&D expenses for the fourth quarter increased to $12.6 million, or 14% of sales, from $11.7 million, or 18% of sales last year. This was primarily a result of higher amortization of deferred development costs as more of our development investments moved into commercial production. This is 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 $16.9 million, or 19.9% of revenues in the fourth quarter, up from $15.3 million or 23% of revenues a year ago as we continue to prioritize our investment in future product development and our innovation pipeline. Sales and marketing expenses decreased slightly to $9.2 million, or 10% of sales, from $9.4 million, or 14% of sales last year, reflecting operating leverage in our sales and marketing cost base and continued discipline in variable selling costs. And G&A expenses of $6.7 million, or 7% of sales, were up from $6.2 million, or 9% of sales in the same period last year. We remain focused on closely monitoring our operating expenses, and we don't anticipate significant OPEX increases in the near term. Continued discipline on our OPEX is a key part of how we get to our bottom line financial goals. We continue to incur interest expense related to our revolving line of credit, other debt, and accounts receivable factoring programs. With debt levels expected to come down and cash flow continuing to improve, we anticipate lower interest expense in 2027. A quick note on taxes. Our effective tax rate of 41% is higher than usual, primarily due to the write-offs of the B.C. generated investment tax credits in Canada related to our telematics business and provision to return adjustments in both Canada and the U.S. That being said, we pay virtually no cash taxes in fiscal '26 thanks to our substantial bank of tax attributes in Canada, and also changes to the U.S. tax laws regarding the deductibility of R&D expenses. We know may see some cash taxes in the U.S. in fiscal '27, depending upon how results come in, but we expect our effective tax rate to be much lower than this past quarter. Turning to the bottom line, we significantly strengthened fourth quarter operating income to $12.3 million compared with a loss of $17.1 million in the same period last year. The $29.4 million improvement primarily reflects higher VBS segment sales combined with lower impairment expense and inventory allowances as compared with a year ago. Net income also improved this quarter, coming in at $5.4 million or 22 cents a share from a net loss of $13.3 million or 55 cents loss per share in the fourth quarter of fiscal '25, a huge improvement. Adjusted earnings per share for the fourth quarter grew to 21 cents per share from a loss of 6 cents per share last year. Turning to the balance sheet, working capital continues to improve, with working capital being $62.9 million at June 30, 2026, which increased from $51.2 million at June 30, 2025, reflecting our efforts to pay down our debt. Cash flow provided by operations for the fourth quarter increased to $24.8 million from $18.9 million during the same period last year, driven mainly by current period results rather than changes in working capital. Finally, our net debt position, defined as total debt, less cash, and lease liabilities, continues to improve. At year end, our total net debt stood at $40.7 million, which is down from $54.4 million at the end of Q3. Going forward, we'll keep on strengthening our balance sheet to further debt reductions. On a final note, the Board of Directors approved a quarterly dividend of 5.5 cents per common share, payable on November 9th to shareholders of record as of October 16th, 2026. It's important to note that this dividend will be designated as an eligible dividend for Canadian income tax purposes. Now back to Sumit.

Thank you, Judd. Our long-term strategy of positioning Vecima at the forefront of our transforming industry is translating into the strong and profitable growth we saw in the fourth quarter. And we're confident this is just the beginning of the growth ahead. You'll recall that in our last outlook, we raised our projection for calendar '26 revenue growth to 22.5% to 30%. Today, we increased that further with calendar '26 revenue expectations now rising to 27% to 32% growth versus calendar 2025. Looking further ahead, we expect our momentum to keep building through fiscal '27 with a revenue growth outlook of 30% to 35% versus fiscal 2026. Based on our projected demand profile, we also anticipate a very strong adjusted EBITDA margin of approximately 20% in both calendar '26 and fiscal '27. We expect, of course, our growth to be led by our Video and Broadband Solutions segment as we continue to support both our lead Tier 1 and 76 other customers in their wide-scale DAA network deployments. These are major multi-year upgrade programs encompassing our Entra remote PHY products, including our EN9000 and ERM RPD platforms and our Entra optical fiber access platform centered around fiber to the home remote OLT nodes. And we're building on our revenue base as we increase deployment of newer Entra products across multiple customers. Those include, for example, the EN3400, a new, smaller version of the EN9000 GAP node, the EM210 standalone 10-Gig EPON module, and our Power All-Over modules. So as we move forward, our fiber access products are playing an increasingly important role as operators expand fiber to the home deployments and invest in next-gen architectures. As a recognized leader in remote OLT technology and with support for standards like XGS-PON and the emerging 50G PON and all PON architectures, we're ideally positioned to be a major player in the global expansion of fiber-to-the-home networks. In our Content Delivery and Storage segment, we're anticipating steady overall operating performance as we continue to focus on driving revenue growth through both managed IPTV expansions and our rollout of DAI. Beginning next quarter, results in this segment will encompass our commercial video portfolio, including Terrace IQ, which is expected to start providing meaningful contribution as the 2027 fiscal year progresses. That change in the segments aligns our reporting segments going forward with the sales, execution, and the market characteristics that are common between our MediaScale IP video platforms and the Terrace portfolio, while also providing some more direct visibility into results for our cable and fiber broadband platforms. So, as of next quarter, the 2 operating segments we report under will be Content Delivery Solutions and Broadband Access Solutions. As we enter fiscal '27, fresh off all-time highs in revenue and adjusted EBITDA, we see a broad and compelling growth runway ahead. Entra's continued expansion across new platforms, design wins and customer relationships, together with a network footprint that's underpinning broadband access for millions of homes and businesses worldwide, positions us for continued momentum for years to come. Notably, our 30% to 35% growth outlook for fiscal year '27 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, which we expect will be increasingly meaningful drivers of performance in fiscal '28 and beyond. Our broad and innovative portfolio of interoperable cable and fiber broadband access products and IPTV solutions gives us multiple engines for growth, with Vecima at the forefront of the technology shaping future network architectures. And against that backdrop of accelerating wide-scale multi-gigabit broadband adoption, Vecima is really ideally positioned to remain a leader in a multi-year infrastructure investment pipeline as it grows to greater scale. We've never been more confident in Vecima's future. The opportunities before us are substantial, with multiple catalysts across our product portfolio and customer base still in the early stages of realization, and we look forward to executing on them and reporting on our progress in the periods ahead. That concludes our formal comments for today. We now be happy to take questions. Operator?

[Operator Instructions] The first question will come from Jim Byrne with Acumen Capital. Please go ahead.

Yes, good morning guys. Just thinking about kind of production capacity, and your exposure to U.S. tariffs. I know you would move some manufacturing down there in the past couple of years. Kind of pushing here $400 million in sales annualized. Just thoughts on, you know, further requirements to move manufacturing down there, or maybe just a commentary on kind of production capacity today and how that does that for the tariff situation.

Yeah, thanks, Jim. So, yeah, I think I've said for some time that we've envisioned the growth upcoming here and the production capacity is well situated for that, both in our Canadian operations as well as our international partners in contract manufacturing. So we believe we've set up for the scale that's required and there's room to add further shifts into that and into that manufacturing operation that team's been built up to do so. So, from the perspective of the revenue envelope, we've got a lot of growth that we can work towards ahead. So I think on the tariff side, like many other companies, you know, not just those with this large Canadian presence, but, you know, all around the world, you know, global companies have faced a bit of this heightened uncertainty since early '25 with how the U.S. is shifting their approach to trade. You know, and while the nature of our industry does mean at the moment that a high amount of our sales of course, are to U.S. customers. I think what I've tried to outline to the beginning of that changing environment is that, you know, Vecima has always been very strategically well positioned by design, you know, for almost 40 years now, we've been, the broadband technology leader, we've always maintained full control and ownership and in-house designed IP in our manufacturing process. So in addition, of course, to the IP in our design and product designs and software and hardware. So that's a bit of a contrast to, you know, to other organizations that might completely, you know, outsource their manufacturing, but Vecima has always owned that process and all the designs that are out. So the reasons for that, you know, have been many, not just on the trade side, but we have this complete agility in volumes and the production and product mix, you know, quick turns on design changes and the ability that we have to, you know, manage through and pivot around some of the supply chain challenges that we've seen, you know, in recent years between the pandemic and the memory stuff that's going on, the integration of acquisitions we've done, you know, where we've already exercised that capability to move the manufacturing several times and as we've digested and integrated those acquisitions. So, you know, I think all that is to say as this heightened trade uncertainty came up in the U.S., we have this very strong inherent capability to manage it as you know, in the way that we've always built our products. Again, where we own that complete design manufacturing process. So the most recent situation with the tariffs that came into effect in the summer, we've already made any needed adjustments and those are actually quite minor in practice. And you know, as unpredictable as that environment may be going forward region by region and how the U.S. is doing trade. You know, given where we're at today, what we've said with our outlook, it encompasses anything that's applicable. It's quite narrow in scope in terms of exposure there. And, you know, our overall sales profile has got that well managed. And, you know, in isolated cases that there are some some tariffs that are in effect, you know, our ASPs have handled that well and, you know, with a small exposure while still being totally competitive and gaining the market share anyway. So overall, you know, we're quite satisfied with our position and this core competency, again, has improved allowed us to be agile there.

Okay, that's really helpful. And then maybe for you, Judd, just thinking about, you know, with this ramp up in growth and sales, maybe just talk about the working capital here for fiscal '27. I would assume that you probably need some investment, maybe just in inventories and.

But maybe just help me understand kind of that working capital situation.

Yes, Jim, we see a steady growth over the last couple of years. The quarters of the year with really not a lot of growth in inventory other than to, you know, just make sure we have the goods on hand to get them back out the door. But it's not going to be anything like it was a couple years ago where things got a little large on that side, you know, AR will naturally grow depending upon timing of when those sales take place. But overall, we should be generating cash, paying down our debts, and using those funds to reinvest in the company. But we do see some working capital improvements throughout the year.

Okay, and then maybe just lastly, Sumit, I guess, you know, obviously visibility must be good with your revised outlook. Maybe what could go wrong. You know, we've had some hiccups in the past with some major customers kind of shifting their plans. Would that potentially happen again or you just feel like you've got enough kind of broad-based exposure now that no single customer can really sideline this outlook.