Casa : Q3’22 Earnings Call Transcript

Casa Systems Q3'22 Earnings Call Transcript

November 3, 2022, 5pm ET

Operator

Greetings, and welcome to Casa Systems third-quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Dennis Daly, Director of Corporate Development and Investor Relations. Please go ahead.

Dennis Daly, Director of Corporate Development & Investor Relations

Thank you, operator, and good afternoon, everyone. Casa Systems released results for the third-quarter fiscal year 2022 ended September 30, 2022, 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, our Chief Executive Officer, and Ed Durkin, our Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

Before I turn the call over to Jerry, I'd like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it, and as such it 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.

Casa Systems Q3'22 Earnings Call Transcript

November 3, 2022, 5pm ET

Any forward-looking statements that we make on this call or in the earnings release are based on information we believe as of today and 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 Jerry. Jerry?

Jerry Guo, Chief Executive Officer of Casa Systems

Thank you, Dennis. Good afternoon and thank you all for joining Casa's third-quarter fiscal 2022 earnings call. The first nine months of 2022 have been critical in customer validation of Casa as the leading provider of cloud-native core software for wireless and the wireline networks, and in laying the foundation for growth in our physical broadband technology solutions.

Our recent customer engagements continue to highlight our progress, and there are some examples I would offer. Within our cloud software product group, we continue to make tremendous progress with our cloud-native 5G core since the announcement of the $140 million TCV multiyear license and contract of our cloud-native 5G core for consumer networks, and the $40 million strategic equity investment from Verizon in April.

We announced a partnership with the Google Cloud in August and have been jointly working on multiple customer projects which I will discuss in greater detail shortly. There are many other customer and partner projects being actively worked, and the Verizon and Google Cloud public news is great validation of our differentiated and our truly cloud-native software. We expect to be able to announce additional customer and partner successes for our cloud-native software offerings in the coming months.

Casa Systems Q3'22 Earnings Call Transcript

November 3, 2022, 5pm ET

Within our cable product group, progress here is evidenced by our increased cable revenues in Q3 2022, despite continuous supply chain challenges. And we expect continued sequential improvement in revenue in Q4 from the shipment of backlog cable orders and the new cable deals. We continue to expand our virtual CCAP core and remote PHY node deployments with the leading MSOs both in North America and in internationally. But overall, 2022 has continued to be a low spent year for most of our cable MSO customer base.

However, we expect significant changes in cable broadband spend in the coming year, and we are laying the foundation for growth in 2023, by working with MSOs worldwide with our leading next-generation technologies in all distributed product categories, including virtual CCAP core and remote PHY, FMA manager and in remote MACPHY. I will discuss our pipelines in more detail later.

Within our CAD product group as discussed on our August earnings call, we have worked hard to cultivate new major customer relationships with the major telco operators in North America, as well as the new customers and distributors in Europe, and have closed large orders in Q2 and Q3 with these new customers and partners. This now provides us good line of sight to improve CAD results in 2023, given the backlog orders we have from these new customers which are now slated for delivery in 2023.

Within our small cell RAN product group, as we also discussed on our own August earnings call, we announced new RAN contracts with a major North American mobile network operator in August. We expect to close more radio deals with a major mobile network operator soon, and we expect radio access network revenue to grow significantly and contribute nicely in 2023, based on the progress we have made during 2022.

In summary, while the progress is not reflected in our topline GAAP revenue results yet, our strategy of investing heavily in R&D and delivering market-leading innovative products for our customers across all of our product groups in order to help our

Casa Systems Q3'22 Earnings Call Transcript

November 3, 2022, 5pm ET

customers expand their networks and maximize their capabilities positions us well for renewed growth in 2023 and beyond.

Despite this progress and increasing demand for our products, our financial performance in the quarter does not reflect our potential or our expectations for Casa going forward, and we continue to work hard to overcome the issues impacting our financial performance. In particular, we experience continued challenges from our supply chain partners in Asia and sub chip availability issues, which limited our ability to ship products to customers.

As a result of these supply chain issues and a few other factors, revenue for the quarter was $66.9 million, which is down 6% from the prior quarter. While we experienced a decline in revenue from our wireless and the fixed telco segments, we did see a 20% improvement in our cable revenue compared to Q2 2022, due to an uptick in demand from our existing customers. And we expect this positive momentum for cable to continue in Q4 and into 2023.

Ed will cover the Q3 financials in more detail in his section, including gross margins, operating expenses, and balance sheet metrics. And we are pleased to take questions on these actual retrospective financial results. As I look forward, I do believe growth in both top lines and bottom lines is ahead across all product groups, as we execute on our strategy and complete our transformation, with my belief rooted in the following: Cloud software product group. Our cloud software product group includes our cloud- native 5G core software and our virtual BNG routing software. As I mentioned, we have the great Verizon $140 million TCV license and deal for our 5G core software for consumer networks. We are on track with our development deliverables under this agreement. Verizon paid us $20 million in licensing fees in Q3 2022, and we have another $120 million to bill in increments of $24 million per year, and that is a great foundation to build on.

As communication service providers continue to transform their wireless and wireline networks using cloud-native technologies, we are providing them with options to build

Casa Systems Q3'22 Earnings Call Transcript

November 3, 2022, 5pm ET

their 5G core functions and BNG functions over private clouds or public clouds. Our new Google Cloud partnership announced in late August is a public cloud or hybrid cloud option that is progressing well, and we are actively working with the Google Cloud on joined customer engagements. And we expect to be able to announce a few wins in the coming months.

We have great interest from our other cloud providers and system integrators to work with us on both consumer public networks and mobile private networks. After evaluating and integrating our software, our partners have determined that it is indeed truly cloud- native and able to seamlessly integrate it with their cloud platforms. This seamless integration of Casa's cloud-native 5G core functions with the cloud platforms will enable communication service providers to realize the value of 5G: fast and flexible deployment of new services, fast reconfiguration and slicing of networks, automated operations, and secure, reliable, and resilient networks. Finally, we are seeing strong demand for our virtual BNG router product line on both private cloud and the public cloud as well, which should contribute to 2023 results.

On cable product group, as I mentioned earlier, there was continued pause in cable spend in 2022, as cable MSOs evaluated future product technical directions, remote PHY or remote MAXPHY, as you may have seen in recent press articles. Several of the largest MSOs made their technology direction decisions and are moving forward with RFPs and spending plans for 2023 and beyond. We believe that there are only two virtual CCAP cores deployed in live networks today, and Casa has one of them. Virtual CCAP core is the key to next-generation cable broadband upgrade, and Casa has the leading technology in virtual CCAP core, as well as in remote PHY nodes.

In this regard and with the exception of Comcast, we are working closely with every other cable operator now. Based on our extensive customer engagement, we believe we are well-positioned to compete for what we believe is a coming wave of renewed cable network upgrade and capital spend and have a complete product portfolio ready today to meet whatever product, technical direction, that cable MSOs would like to proceed with. Based on the engagement that we have with the leading MSOs, including