Casa Systems, Inc. Price & Performance (CASA)

Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward looking statements that we make on this call or in the earnings release are based upon information we believe as of today, and 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 believe it will be helpful to investors to better understand our performance or business trends. And with that, I'd like to turn the call over to Michael. Michael? Thank you, Dennis, and thank you all for joining us today. Since joining Casa Systems in August, I've had the opportunity to spend time with many of our employees, customers and partners. These discussions further reinforce my decision to take the role as CEO due to the great global customer base of top tier communication service providers, our ability to quickly innovate our strong engineering team, and market leading cloud native virtualized network functions.

Both for wireline and wireless customers.

I see a company with industry leading technology, talented employees, and significant potential to disrupt legacy incumbent solution providers and change how the world communicates. Service providers around the world are beginning to utilize more flexible, agile and cost efficient virtualized solutions across cable, telco and wireless spaces and the total addressable market is both large and growing across all major geographies. Driving these transformations are strong use cases that incrementally monetize providers' networks. As well as continued convergence of DOCSIS fiber and wireless for broadband services. Casa is uniquely positioned to take advantage of these of both current and future spending with a combination of our virtual software offerings including CCAP, Packet Core, BNG and secure gateway solutions. Key to the adoption of these solutions will be strong partnerships to assist in systems integration, Operationalization and support of these virtualized platforms.

We are currently forming new partnerships with a combination of systems integrators value added resellers, OEMs and cloud service providers whose capabilities complement CASES and who can help us drive adoption of these solutions. [indiscernible] look forward to sharing more details on these new partnerships the very near future.

While many of these markets that Casa currently operates in are undergoing delayed transition for network updates, Casa continued to build momentum in 2023. The Q3 revenue came in at $62,100,000 which marks the Q2 in a row of quarter over quarter revenue growth.

Our financial strategy is to focus on cash and capital efficient operating results with a return to EBITDA profitability as well as consistent positive operating cash flow, so that we can remain in control of our own destiny.

As part of our ongoing transformation, we are continuing to evaluate non core asset sales that will help further delever our business. Such as the sale leaseback agreement for our headquarters building in Andover that was completed in late October. Will provide further details on that. And additional efforts we are taking to further delever our business shortly. Turning now to our product portfolio. I'm incredibly excited about the opportunities of our cloud software business. [indiscernible] is comprised of our industry leading cloud native virtualized packet core and small cell core portfolio. As well as our virtual B and G and virtual secure gateway.

We are currently forecasting that we will end fiscal year 2023 with approximately $25,000,000 of GAAP revenue, $35,000,000 of billings for our cloud software business. Growing at approximately 50% in fiscal year 'twenty three.

We currently have 10 customers over 100,000 in fiscal year 20 three revenue that utilized components of our cloud portfolio. More than half of which are in production. Our partnership with YTL, a leader of mobility services in Malaysia, which we initially announced last year, has taken another step forward our recent announcement, we outlined how our software helped them win the Ookla Award for the fastest mobile network in Malaysia as well as assisting their launch of the iPhone 15.

Our strategic partnership with Verizon has also continued to grow with both the adoption of new software components, as well as software developments to enable Verizon to monetize their 4 gs and 5 gs investments. With our growing pipeline, and continued growth from our current customers, we are on track for our cloud business to continue to grow approximately 50% in 2024. Focusing on B2B business outcomes such as mobile private networks, fixed wireless access, and IoT telematics. Our Access Device business continues to see wins as well in areas such as fixed wireless access broadband including our recent deployment we announced in September with U. S. Cellular. They selected Casa's new AurisLink fixed wireless access outdoor device that provides high speed broadband Internet [indiscernible] For homes and business to help expand U. S. Cellular's addressable market across diverse urban, suburban, and rural markets. As we look towards the future of our Access Device business, our focus will be on profitable deals utilize our market leading provisioning and management software and are outstanding customer support.

This decision will have a positive impact on our gross profit with an eye towards achieving our goal of returning the company to EBITDA profitability Within our Access Device business is also our 4 gs5 gs enterprise small cell business that has continued to scale as well.

We are proud to be one of a handful of U. S. Based RAN companies in the world Our focus is industry leading solutions for scalable indoor enterprise small cell deployments for in building coverage, either enhancing existing DAS or replacing it.

Given our current customer deployments we expect revenue this year to be north of $10,000,000, representing year over year growth above 50%.

We expect this level of growth to continue in fiscal year 2024 as we continue to add new customers in Europe and North America. Turning now to Cable, where the transition to DOCSIS 3.1 and 4.0 for high speed services along with the transition to a virtual CCaaS core NDAA, will continue to provide Casa significant opportunities moving forward. Are migrating to Casa's portfolio and away from end of life equipment replacing legacy solutions from vendors that have exited the business.

We are also excited about participating in new markets with our MSO utilizing virtual BNG to support their fiber to the home, and wireless installations.

We have several customers in production as well as multiple proof of concepts with Tier one MSOs. Convergence of fiber to the home, DOCSIS and fixed wireless access broadband is the perfect application for our flexible virtual BNG solution. However, as with most vendors serving this market, there has been a slowdown in spend during these transitions. Which have MSOs utilizing current capacity in their networks as well as reducing inventory build through later stages of the pandemic time frame.

After revenue growth in Q2 2023 as compared to [indiscernible] These factors drove meaningful decline of 42% in our cable [indiscernible] and we expect to see similar dynamics in the Q4 of this year. That said, it is important to note that this shortfall in revenue is not to competitive market share losses but rather the delays associated with these transitions.

Before I turn the call over to Ed, would like to note that we still have a lot of work ahead of us to achieve our transformational goals We are making meaningful progress on achieving these goals by expanding our team with proven industry veterans, modifying our product strategy to leverage our technical differentiation to accelerated growth and fine tuning our partnership strategy.

Our financial strategy continues to focus on to EBITDA profitability and generating consistent positive cash flow. As we look towards 2024, we believe we are very well positioned to be a dynamic leader with our market leading product portfolio growing sales pipeline, and expanded partner ecosystem. With that said, I would now like to turn call over to Ed to review our financial results for the quarter.

Thank you, Michael, and good afternoon to everyone on the call. Michael mentioned, revenue for the quarter came in at $62,100,000, up 7% from the prior quarter. Breaking down the revenue across our product lines for the Q3, Cloud revenue was $11,500,000, an increase of $9,500,000 from the prior year and up $9,200,000 from the prior quarter of 2023. Cable revenue was $17,500,000, which was down 42% from $30,200,000 from the prior year and down thirty 7% from $27,500,000 in the prior quarter As Michael just mentioned, the decrease in cable revenue was driven by a slowdown in spending from cable MSOs as these MSOs focused on utilizing existing capacity in the networks and this decline was not market share losses. Competitively, we continue to do very well as evidenced by our recent Claro Columbia win earlier this year among other factors. Access revenue includes our Access Device products from our 2019 NetComm acquisition, plus our 4 gs and 4 gs 5 gs radio products [indiscernible] $33,100,000, which was down 4% from $34,600,000 from the prior year, but was up 17% from the prior quarter. Driven by sales of our RAN product which increased by almost 100% from the prior quarter.

Moving now to gross profit. GAAP gross profit for the Q3 was $25,900,000 or 42% of revenue Gross margin during the quarter was impacted by a noncash charge to increase our inventory obsolescence reserve by 7,900,000 Excluding the impact of this non cash charge, 54%, reflecting the higher mix of very high margin cloud software revenue we realized in Q3 2023. GAAP operating expenses for the quarter came in at forty $4,300,000, This increase is largely driven by a four point $7,000,000 noncash and non recurring impairment charge recorded during Q3 for the sale and leaseback of our and or headquarters. [indiscernible] Our GAAP operating loss for the quarter was $18,400,000 $12,600,000 of this loss was related to non cash inventory reserves and the aforementioned $4,700,000 non cash impairment charge, on the sale and leaseback of the building and 2.3 related to non recurring workforce charges during the quarter. Finally, related to our Q3 P and L, our GAAP net loss for the quarter was $25,600,000 or $0.26 loss per diluted share versus a net loss of 31 point $2,000,000 in Q3 of 2022. Our 25,600,000 dollars net loss in the quarter also includes $10,700,000 in interest expense, which includes $4,000,000 of charges reflected in interest expense related to noncash amortization of deferred debt issuance cost We also had a $3,800,000 noncash gain related to the fair value under the warrant liability from Q3 during Q3.

On a non GAAP basis, we had a net loss of $20,200,000 or $0.20 loss per share and reported a net adjusted EBITDA loss of $6,100,000 as reflected in the schedules shown in the back of the press release. Turning to our balance sheet. We ended the quarter with cash, cash equivalents and restricted cash were approximately $49,700,000 [indiscernible] Our cash balance at September 30, was down $16,300,000 compared to June 30, due primarily to our net loss for the quarter timing of payables, and a large quarterly debt service payment made in September 2023. We ended Q3 with $37,400,000 of high quality receivables These receivables are from the very financially capable MSOs and CSPs and our receivable collection experience remains excellent. As Michael mentioned earlier, in the call, we've recently completed a sale and leaseback for our Andover, Massachusetts headquarter in October. As a result of the sale leaseback agreement, we received approximately $6,000,000 of net proceeds will be used to help pay down our term loan B debt and further delever our business. The interest savings from this debt pay down will more than cover the operating expense increase we will see as part of this transaction. And the sale of the building gives us the flexibility to rightsize our office space needs as we embrace a hybrid and more geographically diverse workforce.

As part of our financial strategy, we're also evaluating the sale of other non core assets that we can use to help further deliver our business. As noted in our earnings release today, we're adjusting our full year 2023 guidance to a range of $205,000,000 to 225,000,000 dollars. The decrease in guidance is being [indiscernible] driven by the delay in cable MSO spend that Michael mentioned earlier as well as some Telco customers pushing out deliveries of Backlog Access Device orders into 2024 to manage their own inventory levels Again, it is important to reiterate that this softness is not due to competitive market share losses but rather due to delays in new purchases Delays in deployments of awarded virtual CCAP deals and delays in timing of delivery of backlog orders from Q4 '23 into the first half of twenty twenty four. [indiscernible] Our guidance also being impacted to a lesser degree from the timing of shipments from some of our Access Device customers, which we have agreed to push from Q4 to the first half of twenty twenty four. I'm very pleased that cloud and RAM revenues and business momentum exceed our expectations and that our growth expectations for these strategic market segments for 2024 looks strong.

Given the shortfall in revenue for the second half 2023, we no longer expect to be net adjusted EBITDA positive for the year, As part of our current 2024 planning process and consistent with our North Star goal of returning to EBITDA and cash flow positive Operating results we are evaluating our cost structure to make sure it better aligns with our future revenue and gross margin outlook. Finally, regarding our backlog and deferred revenue New metrics. Deferred revenue? And we have $96,000,000 remaining of future billings the Verizon contract to be built in 2024 and beyond, which brings our total backlog, deferred revenue and future Verizon billings to approximately $232,000,000 dollars. As we noted last quarter, we also have approximately $40,000,000 of remaining closed contracted business for our 4 gs, 5 gs enterprise small cell radios with a major North American mobile network operator that began shipping in q 3 where we get POs on an annual as ordered basis, And we also have an award from a major European cable customer for a virtual CCAP core project With approximately $53,000,000 of estimated TCV value that we will begin deployment in 2024 and continue over the next few years.

I would like to note that these last 2 award agreements are not included in the backlog deferred revenue numbers I cited and will be reflected as we receive buying purchase and delivery orders for shipment deployment to these customers. Before I turn the call over to the operator, to open the line for questions, I would finally like to wrap up by discussing our ATM program which we have received many questions on from investors since August. Our ATM program was put in place in Q3 to have it on hand if we ever needed it as we complete the transformation Michael mentioned and return to profitable operating results, given our current share price, currently have no plans to use our [indiscernible] program to issue any shares. I'll now turn the call over to the operator to open up the line for any questions. Operator? Thank you. Now be conducting a question and answer session.

Thank you.

Our first question is from Tim Savageaux with Northland Capital Markets. Please proceed with your question.

Hi. Good afternoon. Couple of questions here. You mentioned And the goal for EBITDA profitability a couple of times. It sounds like you're maybe in the middle of developing those plans. You've talked specifically about 24 for a couple of segments. Not a couple of others. But understanding that may still be underway in terms the cost cutting as well. Do you have a sense of what you might hope for in terms of targeting our return to EBITDA profitability or EBITDA profitability in general And how much cash do you need to get there?

And I have a follow-up.

Yes, Tim. I'll take that. And Michael can weigh in also. We are going through the 2024 you know, planning process now. As Michael mentioned, it is our North Star to return to operating cash flow positive and EBITDA profitability in 2020 and beyond and we're working through that now.

I think we don't have guidance for 2024's levels of EBITDA profitability, we would plan on providing that in our February March call when we provide guidance for the year.

In terms of cash to get there, I think we should be fine on that front.

We did burn some cash in Q3. Expect to use some cash in Q4, but expect to be cash flow positive [indiscernible] And you know, we we are looking at the cost structure too, and and we'll do what is needed to to right size that once we finish our 2022 revenue and gross margin planning.

Yes. And Tim, it's Michael. I'll just follow on that. I think it's just really important, and I wanted to make it very clear that if there was any expectation that the sole focus of the company was going to be continued focus just on top line growth. I think it's pretty clear coming off of this that we pivoted towards obviously continuing to try to grow the company and we've great growth in some of the business lines as I mentioned but we have to get consistently back to profit and cash flow positivity. Right? So the way that I think we're approaching it is look above the line first and look at the mix of the the products that you're selling, as well as types of deals that you're taking down. And as Ed talked about on a pro form a basis, our gross margin actually expanded to the positive in the quarter. We're going to continue to focus on that. Then you've also obviously gotta look below the line as well. And we'll be making the right calls as any solid business would on how we right size our cost basis as well.

Right. So it looks like the inventory charge in the quarter, you are probably somewhere close to breakeven.

Is that fair enough for a positive EBITDA?

So does that give a sense of what the business could look like in the future in terms of maybe a lower top line but higher margins?

Yes. I think that's right, Tim. There are a lot of activity flowing through the P and L and it is an operating loss of $18,400,000. But when you you back out the noncash charge for the inventories, of $7,900,000, which is in cost goods sold, you back out the impairment charge for the building of $4,700,000 in OpEx back out the non recurring workforce charge of $2,300,000 in COGS and OpEx and you back out the stock based comp amortization and depreciation of $5,300,000 also in COGS and OpEx. The operating loss picture gets considerably better. So Very active quarter with lots of kind of one time charges, but you're right. If you look through and you know, the picture, looks better on an operating loss basis. And we'll continue to improve that and again make the necessary adjustments we need to make to ensure we're positive in 2024.

Okay, great. And as you look at Q4, I mean, any you made some comments, but I don't know if we ever recast last year on cable. But Generally, where do you expect the segments to kind of move in Q4 as Is it really just Verizon revenue coming out or are there any other big moves quarter to quarter from the segment basis, you you can call out I would just say upfront, I'll let Ed comment as well. Traditionally, as I look back on the trend of the business, we usually have a very strong Q4 and especially in the cable space. Where we were able to traditionally bring in some additional business, both the hardware and software licenses with year end spend etcetera. But as you've heard pretty much everybody, selling into this industry, right? There's just been a fairly significant pullback in spend and and certainly the MSOs wanting to take advantage of utilizing any inventory that they had purchased and prepurchased during the pandemic. So So that's obviously having an effect on us as well as the rest of our peers. And as we said that we expect that to go into Q4 as well.

Thank you. There are no further questions at this time. Like to hand the floor back over to Michael Glickman for any closing comments.

Okay. Well, thank you again for joining us today and we are continuing to make tremendous progress towards bringing our leading products to market during this period of transition and transformation. With our growing pipeline, continued expansion growth from current customers and our focus to further delevering our business, I'm confident that Casa is on the right path towards returning to EBITDA profitability I would like to thank all the talented team members for their tireless work and dedication to the business. And also thank our customers and our stakeholders for their continued steadfast support We look forward to keeping you all updated on our progress during the Q4 call and our plans for 2024. Thank you.

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