Vecima Networks Inc. (VCM.F) Q1 FY2026 Earnings Call Transcript & Summary

Welcome to Vecima Networks' First Quarter Fiscal 2026 Results Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [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 first quarter fiscal 2026 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 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 unaudited interim condensed consolidated financial statements and accompanying notes for the 3 months ended September 30, 2025 and 2024. 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, beliefs 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 or otherwise, except as required by law. Please review the cautionary language in the company's first quarter earnings report and press release for fiscal 2026 as well as its annual information form dated September 25, 2025, 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.

Thank you. Good morning, and welcome, everyone. Thank you for joining us. Please excuse my voice as I'm just getting over a cold today. Fiscal 2026 got off to a strong start with multiple achievements in the first quarter. I'm going to start today with an overview of the quarter's highlights. Judd will follow with a review of our financial results, and then I'll return to discuss our outlook before we take your questions. To start, I'm pleased to report we delivered another quarter of sequential quarterly revenue growth. Our consolidated revenues were up 3.4% quarter-over-quarter for Q1, building on the 7.5% sequential growth we achieved in Q4. Importantly, we paired this higher revenue with stronger gross margin performance as our product mix returned to a more favorable balance and we experienced less foreign exchange-driven volatility. Combined with our steadfast commitment to operating discipline, we achieved adjusted EBITDA of $11.5 million, an excellent result and up 71.2% as compared to Q4. Notably also, adjusted EBITDA margin increased to 16.2% from 9.8% in the fourth quarter. In our Video and Broadband Solutions segment, we delivered another quarter of strong performance as operators continue their transition to next-generation DAA platforms using Vecima's Entra solutions. By the end of the first quarter, our customer engagements for Entra had increased to 140 from -- up from 123 a year ago. To date, 68 of those customers have purchased Entra from Vecima. Our revenues, meanwhile, are coming from many different parts of the Entra portfolio, underscoring the depth and breadth of our industry-leading cable and fiber access solutions. One of the newer contributors in Q1 was our Virtual Cable Modem Termination System or vCMTS. As you know, we recorded first revenue for vCMTS in Q4, and we built on that in Q1 as we continue to advance towards the program with our lead Tier 1 customer. We also significantly increased engagement with additional customers during the quarter, including adding a new customer win in Europe in Q1. While Vecima is still in the early stages of our vCMTS journey, this technology represents a transformative achievement and advancement, virtualizing and substantially improving traditional hardware-based CMTS and CCAP systems to deliver far greater scalability, flexibility and operational efficiencies. It also offers much greater cost efficiency, reliability and performance together with a cloud-native architecture built entirely in software. Dell'Oro Group forecasts that the annual vCMTS market will reach about USD 350 million by 2028. Vecima is now firmly positioned as one of just 3 vendors worldwide that can offer a vCMTS solution of the quality and sophistication that's demanded by Tier 1 broadband service providers. We see a very exciting future for this technology and product line as the most significant additions to our revenue profile are still to come. We also achieved strong contribution again in Q1 from our EN9000, the industry's only GAP node, which is gaining deep adoption with customers. The EN9000 is a future-proof platform capable of being upgraded with multiple successive generations of DOCSIS for fiber-to-the-home technology. I'm pleased to report that we also received initial orders for the new Entra EN3400 version of the GAP node, which is a more compact and condensed variant of the EN9000. While this new node shares the vast majority of the design DNA of the EN9000, it's specifically targeted to multi-dwelling unit and enterprise applications that demand a streamlined variant. Related to that, it also represents new and incremental use cases above the Residential Cable Access segment and is expected to generate meaningful incremental revenue annually. Q1 also included growth in the Remote MACPHY category with a network expansion with a large U.S. Tier 2 customer occurring. Additionally, we won a new customer for a shelf-based Remote MACPHY device in the EMEA region. And on the fiber access side of the portfolio, Q1 was another particularly successful quarter where we saw ongoing strength from Entra Optical. We also continue to successfully roll out our newer Entra Principal Core and Access Test Platform solutions during the quarter. Principal Core again, is a virtual orchestration technology that aims to enable operators to converge cable, fiber and even mobile networks into a single seamless access platform. The Access Test Platform and simulators allow operators to validate and deploy DAA software upgrades at scale, dramatically speeding time to market for next-generation rollouts. During the quarter, we announced an important customer win with Liberty Global for the Access Test Platform, and we see more to come for both the Entra Principal Core and the Entra Access Test Platform. Another product group I want to mention is our Power Holdover Modules, which have also been enjoying strong adoption since we first began to roll them out in Q4. We see growing contribution from these innovative new products through fiscal 2026 and beyond. And on the topic of innovation, I want to comment on Vecima's impact at this year's SCTE Tech Expo in late September, far and away the industry's premier annual event. We had a standout presence at the show, drawing major attention and excitement as we revealed multiple industry and world-first innovations. This included a demonstration of concurrent 50-gig PON and 10-gig EPON over the same optical port in a live setting. This is a world-first achievement, which will give broadband service providers the ability to add 50-gig PON when and as needed while continuing to scale 10-gig PON and preserving those investments. Also on the fiber access side, we demonstrated our Entra EXS1610 All-PON Platform and vPON Manager, which delivers scalable, open interoperable and vendor-agnostic PON deployments through our open network ecosystem or Entra ONE Platform. And we showcased leading advances in DOCSIS 4.0, including live demonstrations of the cloud-native Entra vCMTS, powering the world's first dual downstream service group, DOCSIS 4.0 Remote PHY device, the Entra ERM422. Without question, we cemented our reputation as an innovation solution and technology leader in the industry. The response was exceptional and served as a fitting culmination to an impressive first quarter. Looking at our other business segments. In our Content Delivery and Storage segment, we had an excellent start to the year with revenues of $11.2 million and a gross margin of 60.7%. This was up both year-over-year and quarter-over-quarter, driven primarily by increased managed IPTV expansions with our customers. Importantly, we also saw increased dynamic ad insertion or DAI sales during the quarter, kicking off the implementation with a key customer while also securing Phase 2 orders. Other highlights included the introduction of our DAI Ingest Manager, which streamlines the management of advertising file assets. We view DAI as an important growth driver for its ability to empower customers to further monetize video. We also continue to advance our Open CDN platform as we develop the platform and engagements. Open Caching again allows operators to monetize the millions of over-the-top streaming video packets that are crossing their networks for free today, while at the same time, greatly increasing viewing quality and reducing caching costs for content providers. We expect this technology will evolve into a material growth driver in the long term. Turning to Telematics. We had another profitable quarter, which included the rollout with a large mobile asset customer with over 1,300 vehicles that we won recently, and we added another 14 new customers for our NERO Asset Tracking Platform. By quarter end, the Telematics segment had over 120,000 assets under management, including over nearly 22,000 vehicles and over 100,000 asset tags. As always, Telematics was a strong performer with gross margins of 67.6%. So overall, it was a quarter marked by significant achievements that further strengthen the foundation for Vecima's future growth. I'll return to talk about what we see next for Vecima in just a few moments. But first, I'll pass the call to Judd to provide our Q1 financial review. Judd?

Thanks, Sumit. Good morning to everyone who's with us on the call today. I'll be reviewing our first quarter financial performance in more detail. And for the purposes of this call, I'll assume that everyone has seen our Q1 fiscal 2026 news release, MD&A and financial statements posted on Vecima's website. Starting with consolidated sales. We generated first quarter revenue of $71.1 million, which is up $2.3 million or 3.4% from Q4 of last year. Our Video and Broadband Solutions segment first quarter sales for fiscal '26 accounted for $58 million on par with sales of $58.1 million for the fourth quarter of last year. Our next-generation Entra DAA products generated $55 million, slightly higher than the $54.6 million last quarter and 19% lower than the $68.3 million in Q1 of fiscal '25. Commercial Video contributed $2.9 million to the VBS balance for Q1 as compared to $3.4 million last quarter and $4.5 million in the same period last year. Results for this product line are keeping with expectations as they reflect the continued transition to next-generation platforms and as some of the newer DAA-driven commercial video solutions are being accounted for as part of the Entra family sales. In our Content Delivery and Storage segment, we experienced a significant quarterly revenue jump in Q1 of fiscal '26 to $11.2 million from sales of $7.2 million in Q1 fiscal '25 and $8.6 million in Q4 of fiscal '25, an increase of 55% and 30%, respectively. And as always, we note that quarterly sales variations are typical for the CDS segment. The year-over-year increase reflects a significant increase in product sales and slightly higher service revenue. Segment sales for the first quarter of fiscal '26 included $5.1 million of product sales and $6.1 million of services revenue as compared to $1.4 million in product sales and $5.9 million in service revenue in the same period last year. In our Telematics segment, first quarter sales grew 10% year-over-year from $1.7 million in Q1 of fiscal '25 and were 9% lower than the $2.1 million in the fourth quarter of last year, with the year-over-year gains reflecting the increase in the number of tags and assets now being monitored. Regarding gross margin, rebounding to our expectations, our reported first quarter gross margin increased to 42.1% from gross margin of 27.3% in Q4 of fiscal '25 and 41.7% in Q1 of fiscal '25. As adjusted for inventory reserves and warrant expense, first quarter adjusted gross margin increased to 43.9% from adjusted gross margin of 37.4% in Q4 and adjusted gross margin of 42.3% in Q1 of last year. The increase primarily reflects a more favorable product mix in this first quarter. Turning now to first quarter operating expenses. These decreased by $7.9 million quarter-over-quarter to $28 million from $35.8 million, which included a $6.9 million impairment charge related to our intangible assets and decreased by $1.6 million from $29.6 million year-over-year. Notable year-over-year changes in the first quarter of fiscal '26 are as follows: G&A expenses decreased to $6.6 million or 9% of sales from $7.7 million, also 9% of sales due to lower salary expense resulting from our Q2 fiscal 2025 restructuring. Lower fixed asset depreciation and lower subcontractor expenses also contributed. Sales and marketing expenses decreased to $8.8 million or 12% of sales from $9.4 million, also 12% of sales, reflecting lower salary expenses again from our Q2 restructuring as well as decreased commission expense and conference costs. Research and development expenses increased to $12.1 million or 17% of sales from $11.6 million or 14% of sales. This is primarily a result of higher amortization of our deferred development costs, additional research and development costs from our Falcon acquisition, partially offset by the savings of our restructuring program implemented last year. As we continue to note, some of our R&D expenditures are deferred until product commercialization. And so reported R&D expense in a period is typically different than the actual cash expenditure. Adjusting for this, our actual cash R&D investment was $14.4 million or 20% of revenues in the first quarter, down from $14.8 million or 18% of revenues in Q1 of last year as we continue to emphasize our investment in our innovation pipeline and future product developments. We continue to show that we can monitor and control our operating expenses to contribute to our bottom line results. And looking at our bottom line results, we reported first quarter operating income of $1.9 million compared to operating income of $4.5 million in the same period last year. The decrease of $2.6 million primarily reflects lower revenues from our VBS segment, combined with additional inventory allowances and an increase in the amortization expense just noted for our deferred development costs, these being partially offset by the reduction in operating costs as a result of the restructuring in Q2 of last year. Lastly, we reported a first quarter net income of $0.2 million or earnings per share of $0.01 compared to net income of $2.1 million or $0.09 per share in the same period of fiscal '25. Additionally, our adjusted EPS for the first quarter was $0.05 per share compared to adjusted EPS of $0.12 per share in the same period of last year. Turning now to the balance sheet. We ended the first quarter with $8.6 million in cash, up from $3.4 million at the end of last quarter. Working capital of $53.8 million increased from $51.2 million at the end of last quarter. As we discussed in our MD&A, the components of working capital can be subject to significant swings from quarter-to-quarter. Product shipments can be lumpy as they reflect fluctuating requirements of our major customers. Contract timing issues like those with greater than 30-day payment terms also affect working capital, particularly if shipments are back-end weighted for a quarter. Lastly, cash flow provided by operations for the first quarter decreased to $6.6 million from $24.4 million during the same period last year, primarily as a result of the changes in working capital components just noted. During the current quarter, we also closed on the second tranche of our EDC debt of $10 million. Despite this additional debt, our net debt position is down from a high of $92 million in Q3 of fiscal '24 to $60.7 million for the first quarter of fiscal '26. On a final note, the Board of Directors approved a quarterly dividend of $0.055 per common share payable on December 22, 2025, to shareholders of record as of November 28, 2025. 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. As we move forward into Q2, we're tracking towards continued strong financial and operational performance in fiscal '26, supported by our broad Era product rollouts in the VBS segment and growing demand for our IPTV and DAI solutions in the CDS segment. We expect to pair this with improved gross margins through the year, reflecting a more balanced product mix and continued normalization of foreign exchange volatility. We anticipate our VBS segment will lead our performance in fiscal '26. As our customers' network upgrades roll out, their existing inventories come into better balance and our new Entra products and platforms provide added revenue. I want to note, however, that we expect that recent industry consolidation activity is likely to lead to some timing lumpiness between third and fourth quarters, accepting the more powerful demand acceleration we've been anticipating into early fiscal '27. In our Content Delivery and Storage segment, we continue to see a stronger year ahead, supported by contributions from our new DAI solutions as well as continued IPTV expansions with new and existing customers. Although as we always know, quarter-to-quarter performance and lumpiness in this segment tends to be of a lumpy nature. And in our Telematics segment, we're anticipating steady and profitable performance from the Recurring Software Subscriptions business on vehicles and assets. Overall, we expect full year results in fiscal 2026 to include solid revenues, a steady improvement in gross margins and strong adjusted EBITDA performance, well above last year's levels. We're moving forward, highly confident in Vecima's future. We boast the industry's broadest and deepest portfolio of innovative interoperable cable and fiber access products. And we have multiple growth engines supporting our momentum as global adoption of DAA ramps up and IPTV continues to expand. Our innovation and our significant achievements in both DAA and IPTV have laid the foundation for growth and increased profitability, not just this year, but for years to come. This concludes our formal comments for today. We'd now be happy to take questions. Operator?

[Operator Instructions] Our first question today is from Steven Li with Raymond James.

Can you comment on RDOF deployments? Like how is it going? And will that also be impacted by the industry consolidation you referred to?

Yes. No, thanks, Steven. I think RDOF has been a very successful program for the customers that are using Vecima's Remote royalties and our Entra Optical platform to penetrate and achieve those passings. And it's been a strong contributor of growth -- of growth for our customers, especially some of the larger Tier 1 customers we have. And that program has been a source of continued progress and commitment to the rollout. I think that the pace has been very steady and growing over the last several years. There's quite a bit left to do. So from the kind of influence of the consolidation activity, I don't think we see that as having any influence on the RDOF program considering that it's such a valuable expansion for our customers.

[Operator Instructions] As there appear to be no further questions, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.