Casa Systems, Inc. (CASA) CEO Jerry Guo on Q1 2020 Results - Earnings Call Transcript

Casa Systems, Inc. (NASDAQ:CASA) Q1 2020 Results Conference Call April 30, 2020 5:00 PM ET

Company Participants

Monica Gould - IR

Jerry Guo - CEO

Scott Bruckner - Interim CFO & SVP

Conference Call Participants

Erik Lapinski - Morgan Stanley

Bharat Daryani - JP Morgan

Scott Fessler - Stifel

Nate Hitchcock - Needham & Company

Tim Savageaux - Northland

Operator

Greetings and welcome to the Casa Systems First Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

At this time, I will now turn the conference over to Monica Gould, Investor Relations for Casa Systems. Ms. Gould, you may begin.

Monica Gould

Thank you, operator, and good afternoon everyone. Casa released results for the first quarter of 2020 ended March 31, 2020 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, Chief Executive Officer; and Scott Bruckner, Interim Chief Financial Officer and Senior Vice President.

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 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 Guo

Good afternoon everyone, and thanks for joining us today as we discuss Q1 results. We know that this is a difficult time for everybody. So, I would like to begin by expressing our gratitude for you joining the call, and on behalf of Casa Systems, I want to extend our sincere wishes for you and your families to stay safe and healthy.

In Q1 of 2020, we start to see results from executing on our strategy of growing our revenue by expanding our customer base and footprint in our cable business, and by expanding our addressable market to new business segments like wireless.

Let me now turn to the details of the quarter. Total first quarter revenue was $83.6 million of which approximately $43 million or 51% came from our cable business. $22.4 million or 27% came from wireless and $18.2 million, or 22% came from our fixed telco business. From the revenue compensation, you can tell that our business has become more diversified with only around half of our revenue coming from cable.

We also saw good progress in all of our newer product areas including DAA solutions, 4G and 5G wireless Packet Cores, radio access network and fixed wireless access. Another highlight I would like to point out too is reduced customer concentration.

During the first quarter, we had two 10% or greater customers, one of which was a Tier 1 wireless service provider. The other was a converged wireline and wireless broadband service provider. Together, these two customers accounted for 35% of our revenue versus 49% in the same period last year-and 53% in the fourth quarter of 2019.

Turning now to our product areas. Revenue from cable, both products and services in the first quarter was $43 million, a 23% increase over the same period in 2019. Excluding services, first quarter cable product revenue was up 33% over Q1, 2019. As I noted earlier, the growth in cable sales in Q1 is due to expanded customer base and the footprint.

Customer purchases during the quarter included a significant increase in hardware shipments both sequentially and a year-over-year, including integrated CCAP chassis and DAA nodes. I'm also happy to report that we have converted two virtual CCAP core trials to purchase orders, beating competition with the technical advantages in our virtual CCAP core.

Wireless revenue for the first quarter was $22.4 million with contributions are radio, fixed wireless access and wireless software. During the quarter, we continue to make progress on recognizing revenue from our backlog with a sizable shipment of our strand radios to a Tier 1 North American mobile network operator.

While we make progress in sales and revenue recognition of wireless products, we are expanding our customer trial efforts in both consumer 4G and 5G wireless networks as well as in 4G and 5G solutions for enterprise networks, and industry verticals. These solutions rely on a combination of our products, including 4G and 5G Packet Cores, mobile edge computing, indoor small cells and machine to machine gateways.

We had hoped to preview these solutions at Mobile World Congress in Barcelona this year, but with the event cancelled, we have shifted to a virtual booth that we will soon be launching to showcase these and other solutions for wireless networks. The virtual booth will be made available on our website.

Finally, at the end of the first quarter, our largest backlog stood around $26 million and included our 4G and 5G indoor and outdoor radios, fixed wireless access devices, and our cloud native 4G and 5G Packet Cores products.

In fixed telco, revenue for the fourth quarter was around at 22% of sales, driven largely by sales of our fiber to the distribution point products. At the same time, we continue to extend our customer effort in our virtual BNG router and multiservice router products.

Next, I would like to comment on the impact that COVID-19 is having on our business and then discuss our operations as we work to meet increasing demand for our products.

First, on our business, to the latter part of the quarter, as broadband subscribers across the globe began to work and a study from home, our customers, cable, wireless and fixed telco service providers experienced at a sudden dramatic increasing upstream and industrial traffic on their networks.

We noticed this shift in particular during March for all access technologies. North American cable companies, for example, reported seeing a greater than 30% increase in bandwidth consumption in March alone. While wireline the traffic increased by a range of 17% to 37% with a median increase of 25%, and the wireless network operators reported growth in wireless data traffic of just under 10% while wireless voice traffic increased by as much as 24%.

Because we supply network infrastructures equipment and customer premise equipment to enable outer broadband services across all access technologies, these trends began to drive strong demand for our products toward the end of the quarter with our existing customers in cable, wireless and a fixed telco. So readout, we ended the first quarter with an order backlog of $90.5 million, which will be joined down throughout the year.

Second, on our operations, as a responsible company, the health and the safety of our employees are most important. Since mid-March, most of our R&D employees are working from home. As a supplier to the communications service industry, we are deemed at business that provides essential services and as a result have been able to keep our operations up and running.

Globally, all the companies manufacturing facilities are currently fully operational as those of our contract manufacturers. For our access devices products with some of our contract manufacturing and supply efforts in China, we do see a very short period of disruption. But as we are now operating normally, we do not currently expect to see material negative impact from this overall result for the year.

As we noted on our last earnings call, we have the image beyond hand for our infrastructure products and are generally able to meet this increased demand. However, we continue to work with our supply chain, which remains open as well as with our contract manufacturers to ensure that, inventory is not depleted and to augment the manufacturer of products, where the demand has been particularly high.

Finally, we are in a strong position from a liquidity standpoint. During the quarter, our cash balance increased by $21 million, or almost 19%. In addition to our receivables and inventory balances, we have sufficient cash on the balance sheet to operate the business for an extended period of time, based on our common operating structure. Scott, will discuss this in more detail in his remarks later on this call.

I would like to end my remarks by noting that, we remain in a strong position to help our customers during this time of accelerated need. As we have learned from previous times of crisis and uncertainty, being connected moves high up on the list of people are spending priorities, and the communication becomes a vital service. As a result, for where we sit today, we remain comfortable with a guidance we outlined on our last earnings call.

We've previously noted, how caution around cable MSO spending during the first half of the year. This has obviously changed given the abrupt shift in the demand environment. We continue to believe that mobile operators will continue to roll off 5G networks this year and the increased composite of 4G networks at the same time. We still expect wireless to be a material component of our 2020 revenue.

With that, I will ask Scott to comment our financial results in more detail.

Scott Bruckner

Thank you, Jerry, and good afternoon everyone. I will start by reviewing our first quarter 2020 financial results and then given the unique environment that we find ourselves in, I would also like to discuss our outlook for the remainder of the year. For the first quarter of 2020, as Jerry noted, total revenue was $83.6 million, which compares to $35.5 million in the first quarter of 2019 and $112.9 million in the first quarter of 2019.

Revenue from the acquired Netcomm business during the first quarter was approximately $30 million. Given that we are seeing high demand for Netcomm products, Netcomm remains fully on track to meet our full year expectation. Excluding the contribution from Netcomm, our first quarter revenue increased 51% year over year.

Total product revenue was $73.8 million in the first quarter of which 53.9 million or 73% was from hardware and 19.8 million or 27% was from software. This compares to $26.7 million of total product revenue in the first quarter of last year with 13.4 million or 50% from hardware and 13.3 million or 50% from software.

In terms of total revenue, hardware sales during the first quarter accounted for 64% compared to 38% in the prior year quarter. The increase in hardware revenue, which is similar to what we saw in the fourth quarter, is accounted for by three primary factors.

First, the inclusion of Netcomm in our results revenue from which is all hardware related. Second, increased radio shipments from our wireless backlog, as Jerry noted. And third, increased chassis shipments up 33% year-over-year and 56% sequentially and DAA node shipments in our cable segment.

As Jerry mentioned, from an end market perspective, our business continued to be more diversified as we made further progress in the wireless and fixed telecom markets. During Q1 approximately 51% of our revenue or $43 million came from cable, which was up 23% from a very week to one a year ago. Another 27% or $22.4 million came from wireless and 22% or 18.2 million was from fixed telecom by comparison, nearly 100% of our revenue in the prior year quarter was from cable.

Our consolidated GAAP gross margin for the first quarter of 2020 was 51% compared to 69% in the first quarter of 2019. The year-over-year decrease in our gross margin was primarily driven by the higher mix of hardware revenue, including our wireless radio products during the quarter. The acquisition of Netcomm, which has lower gross margins, as we stated previously, and beginning in the latter part of the quarter, an increase in air freight costs related to COVID-19.

Turning to expenses, total GAAP operating expenses in the first quarter of 2020 were $46.2 million, compared to $38.6 million in the first quarter of 2019 and $49.5 million in Q4. The year-over-year increase in total operating expenses was primarily due to the inclusion of operating expenses from Netcomm.

But on a sequential basis, operating expenses were down by around 7%, largely driven by decreased personnel costs from the headcount rebalancing we undertook late last year, as I announced on our last earnings call. And later in the quarter, the reduction in SG&A from lower travel and tradeshow expenses due to COVID-19.

Headcount at March 31 2020, total 968 employees compared to 997 employees as of December 31 2019. The reduction in headcount was related to additional elimination of overlapping functions, following our acquisition of Netcomm, and further rebalancing of R&D and sales resources during Q1 to address the higher growth we anticipate in our wireless and fixed telecom markets during 2020 and beyond.

Our adjusted EBITDA in the first quarter of 2020 was $3.7 million, compared to negative $7.7 million in the first quarter of 2019. While on a GAAP basis, we did have an operating loss of approximately $3.5 million. GAAP net income for the quarter was positive at $1.2 million, or on a fully diluted basis, $0.01 per share. This compares to a GAAP net loss of $15.3 million or negative $0.18 per diluted share in the prior year quarter. The positive GAAP net income and fully diluted EPS in Q1 of this year were primarily from a tax benefit of $9.3 million that we booked during the quarter related to NOL carrybacks permitted by the CARES Act stimulus package.

Our non-GAAP net income and fully diluted EPS would have been positive this quarter, except for an adjustment that we made for the full amount of the tax benefit we recorded that I just described. We made this adjustment because the tax benefit primarily came from the leasing some of the valuation allowance that we recorded against our U.S. deferred tax assets balance and then was added back to our non-GAAP net income last quarter.

As a result, for non-GAAP reconciliation this quarter, we subtracted from non-GAAP net income the amount of the tax benefit. Think of it as a valuation allowance give back, if you will, to our deferred tax assets balance in order to achieve the tax benefit from NOL carry backs. This amounted to a $9.3 million GAAP expense that caused our non-GAAP net income and fully diluted net income per share to be negative.

Non-GAAP net loss for the first quarter of 2020 was $5.3 million inclusive of the negative $9.3 million adjustment. This compares to a non-GAAP net loss of $11.6 million in the first quarter of 2019. Non-GAAP net loss per fully diluted share was $0.07 for the first quarter of 2020, again, including the negative $0.11 per fully diluted share adjustment. This compares to non-GAAP diluted net loss per share of $0.14 in the first quarter of 2019.

Turning now to liquidity, as Jerry mentioned, we do remain in a very strong position. Free cash flow for the quarter was $25.7 million compared to negative $15.7 million in the first quarter of 2019. We ended the first quarter with cash and cash equivalent of $134.8 million, which is up from $113.6 million on December 31st, and total debt of $292.7 million, which does not mature until the end of 2023.

As of March 31st, inventory declined to $81 million from $93.6 million at year end 2019, while receivables declined to $55.5 million from approximately $93.7 million at year end 2019, and this was due to strong collections during the quarter. In the current environment, while we have offered extended payment terms for certain customers, the aging of our receivables remained very good with less than 1% at greater than 90 days.

During the quarter, we did repurchase just over 1.2 million shares for approximately $3 million under our share repurchase program; with respect to our plans for the remainder of our buyback program, as we have done in the past, we will continue to review current business development to determine the best use of our capital.

I would now like to comment on our outlook for the year. As Jerry noted in his remarks, the COVID-19 pandemic has increased the need for our customers to invest in communications infrastructure in order to address materially increased traffic on their networks. This has created strong demand for our products, as was evident in our quarter in backlog of almost $91 million.

With that said, we are currently reiterating the guidance we issued on our last earnings call and to summarize, we continue to expect total revenue to be between $340 million and $360 million. While we continue to expect our full year gross margin to be in the range of 50% and 60%, given increased air freight costs and a higher mix of hardware revenue that we may see throughout the remainder of the year. We believe that gross margin could be at the lower end of this range for full year 2020.

We do not anticipate that this will have a negative impact on items lower down on the income statement as we could see some benefit from lower operating expenses as a result of COVID-19 related cost reductions in certain SG&A items, like travel, marketing, trade shows and also from Australian dollar FX gains. So, we still expect adjusted EBITDA to be in a range of $33 million and $43 million, non-GAAP diluted EPS to be in the range of $0.0 to $0.12 and a loss on GAAP EPS in the of negative $0.4 to negative $0.16.

Before turning the call back to the operator to start the Q&A session. I would like to echo Jerry's words of appreciation and express our deep gratitude to our staff, suppliers and manufacturers around the world, who has continued to work under unprecedented conditions to help us to meet the increased demand from customers for our products.

Thank you, operator, back to you.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

Erik Lapinski

Eric on for Meta here. Maybe just starting off with some of the strength you saw in wireless, knowing the core is particularly good. Can you help us to better understand how much of that was installed in the quarter versus any revenue that you're waiting for acceptance? And then maybe continuing on that, where you kind of expect the run rate for the wireless business in 2020?

Scott Bruckner

Okay. So, it's Scott here. Let me answer that question. The revenue that you saw booked during the quarter was all from stuff that was installed and obviously past acceptance. In the backlog that's where you're going to see things that are awaiting acceptance with your POS. You'll find that that is evenly distributed across all of our products. So, I think if you assume that third in wireless and third in cable and third in fix, you'll be pretty spot on the demand that we saw across the board during the quarter.

Erik Lapinski

Got it. That's helpful. And then maybe just similarly on cable, like seeing that there's -- you'll likely expect some capacity add in Q2 to maybe accommodate traffic. But how do you see that playing out during the year? Would that kind of potentially leads to maybe more front half loaded revenue, as you kind of look ahead to Q3 and Q4?

Jerry Guo

Well, this is a very difficult question to forecast what the second half is going to look like. We do see that there is going to be a continued demand in bandwidth across the types of service providers whether the cable or wireless or telco. We do say that demand is not going to all of a sudden go stops. And we cannot accurately forecast that's going to very high elevated level. We don't know that yet.

Scott Bruckner

I may add a couple of things. Like, if you think about the way we think about where our growth will come from in revenue this year, there's business as usual capacity upgrades, and we don't exclude the possibility that we could continue to see those as normal throughout the year. Second, there are new customers and additional footprint with existing customers, which we saw in Q1 as Jerry noted, in fact most of the year over year growth in cable for the quarter came from that.

And we don't exclude the possibility, we could see some of that this year is certain of our competitors a focus less on the cable space. There's the COVID-19 bump, and as Jerry talked about, we started to see that demand in the latter part of the quarter. And then the question is whether that continues throughout the year and then there's new technology, which the efforts in our focus on that paid off with two virtual CCAP POs, and we're hoping to see more of that throughout the year. But again, I agree with Jerry on that point highly uncertain.

Operator

Our next question comes from the line of Samik Chatterjee with JP Morgan. Please proceed with your question.

Bharat Daryani

Hi guys. Thanks for taking my question. This is actually Bharat on for Sumit. So the first question I had was on the virtual CCAP purchase orders that you highlighted. I mean can you give us a sense of any revenue range shipping from those orders? And when can we start to see those deployments materializing? It is more back half loaded this year or more into next year?

Jerry Guo

We booked the deals and some of them are ready to deploy. We expect revenue recognition in the next quarter or two.

Bharat Daryani

And then second question on just the cash. I mean you had a nice free cash flow in the quarter. So just wanted to understand what are the levers there? And near term, do you see more working capital benefit for you guys and that cash can contribute positively going from there?

Jerry Guo

Yes. So, as we noted on the last call, we were forecasting that we would be free cash flow positive for the remainder of this year, largely given the amount of revenue that's in our guidance and where we see our OpEx for the year. So, we do expect the degree of operating leverage and given the revenue we're forecasting. In the quarter, as you dig through the numbers, I think you'll see that a lot of the cash came from conversion of receivables into cash and also a decrease in the inventory. So some cash tied up in inventory that began to ship both in wireless and on the chassis side. Those were the two big contributors for the quarter.

Operator

Our next question is from the line of Scott Fessler with Stifel. Please proceed with your question.

Scott Fessler

Hey guys, you touched on this a bit already, but I just wanted to go back to it. In cable, are you seeing customers just like to upgrade their existing network infrastructure or customers still looking to move ahead with next-gen products like DDA and virtual?

Jerry Guo

Well, we actually have seen both, and we basically our cable business really stands on two legs. One is that, we have a really nice deployed customer base and footprint that continues to generate revenue for us. When people add bandwidth in a hurry, that's the quickest way, we continue to see customers doing quite a bit of that. At the same time, we are shifting DDA solution including virtual CCAP core.

Scott Fessler

Got you. So, I guess just to rephrase. So are you suggesting that the current customers are just trying to do upgrades within their footprint, but new customers looking to come on or evaluating the next-gen products?

Jerry Guo

No, I wasn't suggesting that. The existing customers could be evaluating both, but given the time pressure, the easiest, the fastest and the lowest cost ways for them to continue to add what they have deployed. And we see a lot of that at this point.

Operator

Thank you. [Operator Instructions] The next question is coming from the line of Rich Valera with Needham & Company. Please proceed with your question.

Nate Hitchcock

Good afternoon. This is Nate on for Rich. Thanks for taking my questions. So just to return to the virtual CCAP purchase orders, so I was curious, the sequential improvement of virtual CCAP demand. I was wondering, if that was more circumstantial based on COVID and potential restrictions from on-site rollouts or if it was a result of the ongoing trials that you had? And then the follow-up would be how the ongoing trials are currently trending? I believe 35 to 40 ongoing trials last quarter. And I was wondering, if there's progress in there as well or more on the conversion front? Thank you.

Jerry Guo

Well, the conversion was based on ongoing trials. Virtual CCA doesn't work on its own. You actually have to add a remote fine node in the field. There's a lot more onsite work to actually deploy a virtual CCAP than just expanding the existing bandwidth with -- deploying the integrated with CCAP. So, there's a lot more onsite work. So to convert that, they actually have to be doing trials for a while to achieve it.

Nate Hitchcock

Great, I think you've answered the question. So then, on prior call you talked about protracted deal time for some large orders that slipped from the third quarter, fourth quarter. And then also, the majority of those have been closed in the fourth quarter, but I was wondering if this trend has been consistent sequentially or because you made process with this? And how this has been impacted due to increased demand from COVID? Thank you.

Scott Bruckner

Yes. Sure. So, yes, so all that revenue has been recognized in the fourth quarter, and as we mentioned on our last call, we expected to see the remainder of it recognized in the first quarter and that happened. I wouldn't necessarily characterize that trend is us making progress because when you are deploying a new product. You're often working on an acceptance criteria. You are often working with the customer to do some fine tuning.

So, there are a lot of variables that come into play that affect the timing. The products that we deployed that were affected were not only brand new to the customer, but novel pieces of technology. And so they did require additional time to be integrated into networks. But we have not seen that, in the first quarter just given the nature of the demand.

Operator

Thank you. [Operator Instructions] Our next question is from Tim Savageaux with Northland. Please proceed with your question.

Tim Savageaux

Hi. Good afternoon and congrats on the results. I'll apologize in advance. I'm hopping on late, so if this question is redundant or silly, please forgive me. And it's really sort of twofold and it looks like and you kind of indicated this in your update late March and you may have seen some upside in terms of capacity on the cable side bumping out, and some solid year over year growth in the cable business. I wonder if you're looking at is more of a pull forward or whether given the results we've seen. You think you might be able to grow in cable this year on the one hand. And then on the other, with that mix, I would have expected gross margins to be higher, just probably went through the dynamics there, but that was my potentially redundant question is about margin mix and why we came out where we did, given what should be more capacity and less hardware?

Jerry Guo

Yes, one of the actually trends we have seen in, especially in late Q1 and early part of this quarter is that, we do see a more hardware purchase even on the cable side. We did ship quite a bit of as wireless hardware both the radio and fixed wireless access. But even for cable, we do see a little bit more hardware shift, and that means that the operator cannot merely turning on more licenses to satisfy the demand. It got to the point that you have to add hardware in order to meet the demand. So all in all, we actually have more hardware shipment that explains that, the gross margin.

Scott Bruckner

Yes, and Tim, just to give you a couple of numbers and then on a like for like basis, a year ago, first quarter, 2019 hardware comprise 38% of Casa revenue, in the first quarter of this year -- sorry, 38% last of Q1, 2019. In the first quarter of 2020, it was 45%. As I noted on the call, we saw a big uptake in the number of chassis. We saw an uptick in the number of nodes, as operators are building out their networks.

And part of I think the chassis demand, in addition to when Jerry was saying, that software just wasn't enough to meet the capacity is that, as Jerry noted on the call, we added new customers and new footprint. So, you're starting off again with basic equipment, the integrated CCAP, and we hope that, that will then lead to software sales going forward for additional capacity.

Tim Savageaux

Well that actually is, speaks pretty directly to the other part of my question, which is about prospects for growth in cable. Given that you've got a more chassis intensive, hardware intensive mix, so it seems like the likelihood that, maybe this is not a pull forward but a footprint in fill scenario. So as you look at you, I guess 183 million or so in cable revenue, last year and leaving your guidance on change. Have your assumptions changed, wireless versus fix versus cable in terms of growth relative growth rates?

Jerry Guo

Not necessarily. Look, I think what we assumed and what we noted on the last call and what you've seen in the last couple of quarters is it, we're kind of stabilizing for the near term at about 50% of our revenue from cable and then wireless and fixed being evenly split. The one change that I did know, I don't know if you heard the remarks, was that there, there is a possibility that we would continue to see more hardware, throughout the remainder of the year. And so, in our gross margin assumption, our guidance between 50% to 60%, we could end up in the lower half of that of that guidance range. But other than that, we're sticking to the guidance that we gave.

Tim Savageaux

Fair enough. And did you guys talk 10% customers for the quarter?

Scott Bruckner

We did and we noted that customer concentration was down significantly. So this quarter there were only 2%, 10% or greater customers. It was not one of our usual 10% customers, and those two customers comprise only 35% of revenue as opposed to almost half the revenue in previous quarters.

Operator

Thank you. At this time, I'll turn the floor back to Jerry Guo, CEO for closing remarks.

Jerry Guo

Thank you to everyone for joining us today. We look forward to updating you on our progress next quarter.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.