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

Greetings, and welcome to the Vecima Networks' Annual General Meeting. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to CEO and President, Sumit Kumar. Thank you. You begin.

Thank you. Ladies and gentlemen, the Annual General Meeting of Vecima Networks Inc. will now come to order. My name is Sumit Kumar, and I'm the CEO and President of the company, and I'll act as Chairman of this AGM. Due to COVID-19, this AGM is taking place only virtually. And after the conclusion of the formal part of the AGM, there will be a management presentation and opportunity for Q&A. I'll ask Peter Torn, the Corporate Secretary of the company to act as secretary for this meeting. Okay. With the consent of the meeting, I will ask also Olivia Craven of Computershare to act as scrutineer of the meeting. The secretary is tabled for inspection by any shareholder or proxy holder a confirmation that the notice calling this meeting was mailed to shareholders in accordance with the bylaws of the company and applicable law. With the consent of the meeting, the reading of the notice of the meeting will be dispensed with, and I'll ask the secretary to attend the confirmation of mailing to the minutes of this meeting as a schedule. Peter Torn will now read the Scrutineer's report. Go ahead, Peter.

Yes. Thank you, Sumit. So currently, with the Scrutineer's report, we have 26 shareholders by proxy representing 16,738,849 shares. And then we have 1 person in shareholder in-person representing 26,631 shares for a total of 27 shareholders holding 16,765,480 shares. This represents a percentage of outstanding shares represented at the meeting at 72.65%.

Okay. Thank you, Peter. And with that, I adopt the Scrutineer's report and declare accordingly that a quorum is present. As there is a quorum present and as adequate notice of the meeting has been given, I now declare this meeting to be regularly called and properly constituted for the transaction of business. As a matter of procedure, I ask the persons wishing to speak during this meeting, please identify themselves by name on the telephone and indicate that they are a shareholder, or if a proxy holder, their name and the name of the shareholder they represent by proxy. I've been advised that we have guests at this meeting other than shareholders and proxy holders, I do welcome all guests. However, I'd like to remind them that they don't know have a legal right to vote on any resolution and are not entitled to address or ask questions at this meeting. Given that this AGM is being held via telephone, all resolutions today will be by oral shareholder approval on the telephone. The financial statements of the company for the fiscal year ended June 30, 2021, and the report of the auditors thereon were mailed to applicable shareholders prior to this meeting. There are extra copies available for anyone wishing to review them. And I direct that the Secretary now table the same. If there are any questions which any shareholder would like to ask in respect of the financial statements and the report, I'd be glad to answer them now or call on others to do so. The next matter is the nomination and election of directors. The Board of Directors presently consists of 6 directors. Management proposes to elect 6 directors for the ensuing year. I now ask for someone to move a motion to fix the number of directors for the ensuing year at 6.

Yes, Dean Rockwell shareholder, so moved.

And who will second the motion?

Clay McCreery, shareholder. I'll second the motion.

Is there any discussion on this motion? Okay. All those in favor of the motion, please state your approval on the telephone. [Voting]

Aye.

Aye.

Aye.

Against? [Voting]

Okay. With that, I declare this resolution duly carried. It is now in order to proceed with the nomination of directors. This meeting is now open for nominations for election as a director for the ensuing year. I will now read the names of the persons nominated as directors as listed in the company's information circular: Dr. Surinder Kumar. Mr. T. Kent Elliott; myself, Mr. Sumit Kumar; Mr. Danial Faizullabhoy; Mr. Derek Elder; and Mr. James Blackley. The company has received the written consent of each of these nominees to act as a director of the company. Are there any further nominations? If there are no further nominations, I'll declare the nominations closed. I declare the nominations closed. Since the number of nominees is the same as the number of vacancies to be filled, I now ask for someone to move a resolution that the persons nominated for election as directors be elected as directors of the company to hold office until the next AGM, who will move the motion.

Dale Booth, shareholder, so moved.

And who will second?

Dean Rockwell, shareholder, seconded.

Is there any discussion on this motion? All in favor of this motion, please signify by speaking our approval into the telephone. [Voting]

Aye.

Aye.

Aye. Against? [Voting]

I declare this resolution duly carried. The next item of business before the meeting relates to the appointment of auditors of the company. I now ask for someone to move a resolution that Grant Thornton LLP Chartered Accountants be reappointed as auditors for the company for ensuing year and that the directors be authorized to fix their remuneration. Who will move the motion?

Clay McCreery, shareholder, I move the motion.

And who will second the motion?

Dale Booth, shareholder. I second the motion.

Thank you. Any discussion on the motion? Okay. All those in favor of this motion, please signify by speaking your approval into the telephone. [Voting]

Aye.

Aye.

Okay. I declare this -- against? [Voting]

Okay. I declare this resolution duly carry. Okay. Well, that will conclude the agenda for the formal part of the meeting, and I thank you for your attendance. So we'll now -- management will now provide an update on Vecima. If I can turn your attention to the webcast, if you're following there, the presentation materials will be displayed as we give our voiceover for management. So starting again at the beginning. Thank you again, everyone, for joining us today and giving us some opportunity -- another opportunity to talk about Vecima. Of course, we're incredibly excited about the future of our industry and of the company. Before we get started, just a kind reminder again from the previous slide of the standard warnings around forward-looking statements. Okay. We're starting with a high-level overview again of the company. Many of you are familiar with this, but we want to give a general description of where we come from. So Vecima's history of innovation has made us a core vendor to effectively the service provider industry for over 3 decades now. And where we began as we enable these cable operators to effectively invent and roll out the world's very first broadband, high-speed Internet networks, with Vecima's, our transmitter technology at the core of those networks. We also drove a transition that happened in the network from analog to digital networks with our Terrace platforms in the commercial vertical. And those platforms have been sold for over a decade directly to all tiers of cable operators. And then very importantly, over the last 8 years, we've been leading the industry to what we're calling a generational shift in the network technology that's starting -- just starting now. We're removing the network to delivering all of the video over the Internet and at the same time, driving Internet speeds to gigabits per second and broadband Internet speeds to the home and business, both over coaxial cable and fiber optical cable. So we're distributing technology into the network itself instead of having technologies and network being concentrated in large network hubs or central offices. We've combined some focused organic investment with some very important strategic acquisitions to build this powerful portfolio that we're going to walk you through today. So looking at the 3 business units, VBS segment, Video and Broadband Solutions on the left there, that's more than 60% of sales today. And that's where we're providing the solutions for the next generation of gigabit broadband Internet speeds to homes and businesses, again, over both coaxial cable and fiber optical cable. You'll hear a lot about that today, cable access and fiber access. Also in the VBS segment, that's where we're providing these leading video gateway platforms that these service providers are using to deliver video to commercial and hospitality properties those enterprise customers. CDS, Content Delivery and Storage about 35% to 40% of sales represents our IPTV or Internet-delivered video product portfolio. And again, that's used by operators and content owners to stream all of their video services to consumers over the Internet. So video being provided using the Internet as a network that provides the video as opposed to alternative legacy technologies. And finally, our small Telematics segment on the right there, about 4% of the businesses, that's where we're delivering SaaS-based and GPS-driven fleet management and asset tracking for about 20,000 vehicles and over 11,000 high-value assets. that's being used by customers like municipalities and commercial fleet operators to manage their high-value vehicles of assets using telemetry data that is streamed over [ there ]. It's an exciting part of the story on our market opportunity. And as you likely hear about every day, we're seeing that global demand for the Internet is just increasing very rapidly, more applications, higher speeds, more use cases in all of these ways using the network that are now fundamental to the way we all live and work and entertain and connect. So recently, of course, with the pandemic, that's only added fuel to the fire and where connectivity has become even more critical. And network utilization jumped up overnight, and that was over and above an already very rapidly increasing trend of bandwidth. So now we see on the left there, that the basis for most of this Internet consumption growth is this IP video or video being sent using and over the Internet. And that's being driven in a downstream direction by this explosion of these over-the-top video applications like Netflix, like Disney+, HBO Max as well as now more and more in the upstream direction by consumer produced video with applications that we're all using like Zoom and Teams and Webex. All of that has enabled, and in many cases, it's really forcing these service providers and cable operators to increase the broadband speeds into and out of our homes. So this bandwidth increase doesn't happen without some constant investment in the network. So will put some parameters on that investment profile in the next few slides here. So another element that's making things even more interesting is this competition for bandwidth services to the home is back, the bandwidth wars are back. So as broadband has grown, the investment model for all of these service providers has changed and improved. And you combine that with things like government subsidies. And we're seeing the network operators are increasing speeds and then pushing networks deeper into both urban and rural populations worldwide globally. The urban setting, also service providers will continue to invest both to maintain but also to grow this leading market share that they've built in broadband and also to capitalize on all this new wireless traffic that's happening with 5G to backhaul that traffic into the wireline network is very important. Likewise, in rural setting, what they're doing is they're curing the digital divide and investing heavily in a [ rural networks ]. And of course, being a provider of the key technology solution that service providers and operators are using to move to these networks of the future, Vecima is really set up to capitalize on these heavy investments that are being made into broadband Internet. Next slide, please, team. Thank you. So over the last several months, also many of our existing and long-term customers have received funding commitments from governments like the U.S. government and return for building out rural broadband area into rural areas. And more than that, even we're also seeing to leverage those planned footprint expansions by adding their own capital to the funding to build even broader networks. We're seeing that the new U.S. administration also wants to expand this with additional funding aimed at really reaching 100% of the U.S. with broadband. And even outside of the U.S., of course, we're also seeing that other governments are creating similar types of legislation to help drive this investment into broadband access for everyone. Back to the U.S., they just passed $65 billion for broadband services in their infrastructure bill, and we'll see other geographies push as well. So it's really hard to argue that the momentum in business conditions are setting up for a very favorable and long-term investment cycle in the broadband network. The key for Vecima is our products directly address this, and they're differentiated and proven and market-ready as this funding is ramping. So again, once again, more fuel to the fire moving these networks to this generational shift to gigabit speeds. So translating that into some real-world spending and investments that are happening in the network. So currently, according to Dell'Oro, service providers spend over USD 2 billion annually on access infrastructure that's happening today. And that spend is expected to increase to $2.8 billion by 2025. You can categorize that spend into a couple of different areas. I talked about it earlier, fiber access, which again is providing high-speed data services via fiber-optic cable to the home, commonly called fiber to the home or FTTH and cable access. Again, we're -- that leverages the existing coaxial cable to the home to provide comparable ultra high-speed broadband services that are on par with fiber, but able to leverage that coaxial cable, that's well deployed all over the world. We've broken the annual spend into some categories to better describe our focus, that's the most focus in the market. So shaded in gray as the legacy fiber and cable access products and in blue are the next-gen technologies. And those are aimed at providing what you can think of as 10x the bandwidth that's available to most of us today. Vecima's entire focus, of course, in fiber and cable access is the next generation of products, services, solutions. And we're going to see that segment grow itself from about $600 million in calendar '20 to over $2 billion in calendar 2025. So initially, our organically developed products addressed about 25% of this next-generation spend. But with our acquisition of the Nokia's Cable Business Unit last year, we pulled in our road map of products effectively by 2 to 4 years to put ourselves in a position where we address the majority of this next-generation market. Just a bit over a year, 1.5 years ago, we landed our first Tier 1 operator customer. You're going to see later today how fast that customer count has grown. 39 buying customers at the end of the September quarter, 75-plus engagements all around the world, and that's grown from 3 and 25 from customers engagements at the start of fiscal '21, so last June, June of 2020. So very rapid penetration growth that we've had translating to this increased scope that we're showing here. So as we look forward, after integrating the organic and acquired teams, Vecima has one of the largest and most focused R&D or engineering teams in the world on this next-generation network technology that the industry, like I said, is intending to roll out at a very global scale. So we'll be incrementally augmenting our portfolio with variants that tied to specific local needs that sometimes international customers have for localized versions of products, telco customers as opposed to cable operators have other standards that they favor. So as we augment the portfolio even further with this kind of most focused leading team in the market, we further expand our addressable portfolio. And beyond that, by being a leader in the market that we are today, we're authoring these even newer generations of standards for the industry on things like DOCSIS 4.0 where they materially drive the speed up again over both coax and fiber to the home. So although we don't provide corporate fiscal guidance, we're giving everyone a sense here of our goals associated with market share in this global broadband access market. We achieved about $13 million in calendar '20 or 7% of the available market based on the products we had in production at that time. And as we move ahead, we believe we're going to continue to increase our market share at the same time as the overall market is expanding rapidly. So I'm going to turn the presentation over to Dean Rockwell, our Executive Vice President for a review of some of the technology. Go ahead, Dean.

Thank you, Sumit. This next few slides are intended to give you an overview of our products and give you an idea of where they actually fit into the network and really to get to the spend that Sumit was just talking about. So to understand the role and scale of our products, we break them into 2 groups: core, sometimes called the data center or cloud; and the Edge, which is made up of hubs, homes, apartments and commercial buildings. On this slide, we're using a large Tier 1 operators as a case study to provide a visual of the scale for each of our business lines and products. In this use case, the operator has 21 data centers across the country, which are feeding roughly 2,000 hubs. These hubs are fiber connected to more than 180,000 nodes nationwide. Using both fiber and coax, these nodes connect 30 million-plus homes to the Internet and TV programming. In addition, they serve over 2 million small and medium-sized businesses as well as 275,000 enterprise customers. To meet the demand for their Internet and IP video products and services in the coming years, this customer will need to increase its node count significantly, providing a major growth opportunity for Vecima. This major node expansion poses a real estate issue for operators. Yesterday's technology would have forced operators into a massive real estate build, which would slow down progress and reduce margins. As we will show you in more detail later in the presentation, Vecima's architecture will virtualize the control and management that resides in these hubs today, and move them to the data center or cloud. Vecima's technology drives a 5x reduction in real estate and power consumption for operators. Without going to a distributed architecture, this expansion would not be economically feasible due in part to the increase in hub sites, whereas going to a distributed architecture results in a reduction of the number of hub sites. Before we can properly explain the benefits of our solution, it's important to understand the legacy architecture. In the past, in order to upgrade a neighborhood, an operator would need to place a big iron chassis in the hub, multiplied in our scenario x2000 and place analog nodes in the field. This architecture is slow to roll out, is real estate rich and provides lower quality of experience as compared to next-generation access architectures. So what can we do? Our products across our portfolio focus on centralizing control while distributing processing. Our distributed access products centralized all of the core functionality decoupling it from the Edge processing. This change directly improves signal quality, which will positively impact truck rolls, improve the quality of service, shorten the time to market and further increase high-speed data services. And the reduction to space and power utilization is truly game changing for operators due to legacy technologies, service providers lease or own a lot of real estate and managing a lot of power. The next-generation access products provide significant savings. At this point, I would like to hand off to our Chief Operating Officer, Clay McCreery.

Thank you, Dean. Here on the next couple of slides, we're going to focus on our Content Delivery and Storage business as well as our Terrace video gateway products. So starting in the data center, similar to our distributed access products, our products, process, package and store IP video for both live and on-demand content. As operators scale that content, expand their network and add customers, our Edge caching and streaming expands as well. Our Edge cache takes an IP video source from the data center and streams high-quality content to consumers. Even deeper in the network, as operators service small and medium-sized business and enterprise customers, our Terrace video gateway had been managing their video needs for more than a decade. This solution allows operators to deliver video in its native state, across their network and we adapt that format to the individual needs of each commercial property. This is true for analog to digital, SD to HD, HD to 4K, and of course, the move is ever more important as we move to IP video. Go to the next slide. There are a number of other important drivers that relate to the transition of legacy video to a full IP video solution. Here, we're going to highlight 2 of them. So first, the move results in a dramatic reduction in the cost of set-top boxes and other customer premise equipment that they provide with their service, thereby reducing CapEx and improving the ROI. Think in this situation, you're going from those big set-top boxes to very small IP devices or even just utilizing applications running on smart televisions, Apple TVs or [indiscernible], that type of type of thing. Secondly, historically, legacy video used the majority of the available bandwidth in the fiber or coax as part of that delivery service. The move to IP video allows the operator to dedicate the entire capacity in the coax cable or fiber to high-speed data. And that's really what's going to help drive them in the industry and their networks to support of 10G initiatives. So the combination of the 3 products, both the MediaScaleX, IP video delivery, commercial video that I've reviewed and the cable and fiber access, sometimes we refer to as distributed access that Dean reviewed really gives Vecima a unique advantage in the market. We're the only vendor today globally that has all 3 in -- across their portfolio. Going away from us in any of the 3 areas means there's multiple vendors that would need to be provided. This has given us sort of externally with our operator partners, some scale from a sales and marketing perspective, commercial benefits to that. We focus more on the strategic side in this area, and there's numerous benefits sort of come out of having the 3 parts. Go to the next slide. This is just a slide that takes off of the last one that shows really whether you have next-generation cable access, fiber access, IP video distribution or commercial video IP gateways, we have all 4 of those components where we do not have a single other component that matches up. I'm going to transition to some operational numbers in the business, so you can see sort of how our performance has tracked over the last several quarters. First, we've built a global blue chip base of customers. As Sumit talked about earlier, we've been working with these operators for over 30 years. We have long relationships across six continents. There is -- this is just a sample of the customer base that we do business with around the world. And focusing for a minute on the cable and fiber access side of the business, we've begun showing these numbers over the last several quarters to really help you understand the growth and trajectory of the business. So our customer order growth, as Sumit said, over 6 short quarters has gone from 3 customers to 39 actively buying customers, and our engagements have grown to 77. Something that's really important on this slide is the pie chart on the right that shows engagements by products. Because we have Remote PHY, MAC-PHY and EPON through both our organic development and the acquisition of the Nokia Cable Business Unit, our team has transitioned to a much more consultative approach in their sales process. We work with customers to meet them where they are, to move them to these next-gen technologies and then give them a path forward as they go over the next decade or more as they continue to increase capacity across their network. On the next slide, you'll see the results of that. We've had 65% top line revenue growth over the 8 quarters were showing here. And the new products in our portfolio have now accounted for 47% of total revenue and growing very rapidly. So with that, I'm going to turn it over to Dale Booth, our CFO, to review financial metrics.

Thank you, Clay. Just a reminder that our year-end is June 30, and we report in Canadian dollars. The top 3 boxes are fiscal data and the bottom 3 boxes are quarterly. Starting with the fiscal data, annualized revenues have been growing each year, and 2021 was a record year for Vecima. Gross margin within range for each of the fiscal years, and Vecima has delivered positive adjusted EBITDA each fiscal year. On a quarterly basis, we see Q1 fiscal '22 was impacted by the sector-wide supply chain constraints. Quarterly gross profit growth, we see that quarterly -- quarter-over-quarter. In Q1, we see strong gross profit and gross margin. And in Q1, we see strong adjusted EBITDA in spite of those supply chain constraints. Next slide, please, Dean. Here, we see a solid balance sheet, which includes cash of $18 million, working capital of $42 million and minimal debt with bank debt of just under $1.5 million. We continue with our quarterly dividend payment of $0.055 per share per quarter, and this has recurred regularly since October of 2014. With that, I'll pass it back to Sumit.

Thank you, Dale. Okay. I'll give you an overview of the leadership team and the Board and we'll move to the conclusion and Q&A. So the senior management team, as you see here, collectively has about 125 years of combined industry experience. And we really worked hard to assemble this broad blend of deep technical expertise public company financial management and global go-to-market sales and marketing within this team, building this organization with many years of industry experience. So this combination is really what's allowed us to navigate this complicated and changing environment over the last several years very successfully and in the overall sense, the bench strength that we've built with a well-honed and multi-decade industry experience within this team and their organizations below them, it's very highly valued by our customer base. Board of Directors is led by our Founder and Chairman, Dr. Surinder Kumar, and they bring a very broad range of experience that's especially valuable as we set off on what we're thinking of as a high-growth year for Vecima. Our independent directors have run public companies, they've run silicon production companies, large service provider networks and multinational technology companies. And we believe this group on the Board provides us with a very valuable oversight and guidance at strategic planning tied specifically to our industry and customer base. I'll talk a little bit more to give you a summary of the competitive advantages we've described throughout the presentation today. So first and foremost, we've taken a very open approach to our software development and hardware development. And that's been very important to us achieving these large number of design wins as Clay showed you in the operating metrics. Our solutions are interoperable, very flexible, do not lock the customers into any particular design, we can consult with them, as Clay said. And that's been our strategic philosophy in these products as we develop them has been very successful. We have, I said earlier about our focus and the team we've built being the most focused vendor in the industry. That's reflected here in terms of our investments in R&D that we've made. We've accumulated over $350 million in engineering investment in this market. And that, of course, provides a significant market lead and a hurdle to new entrants. The most wide and complete ecosystem, all of the solutions operators need to migrate to IP video, to migrate to next-generation fiber and cable access driving the network to that 10G future. It's all part and parcel of the many, many platforms we've built to allow us to consult with customers as they're making this generational shift in the network. The global sales and marketing team is amongst the best in the world, decades of experience, like I talked about in the leadership team. And the fact, as Clay talked about that we're the only vendor that offers all 3 of the key solutions that service providers are deploying going forward. It leverages our sales and marketing team to be able to work with customers in all of the key investment areas of the network. And of course, the combination of all these factors has established us the very high amount of credibility in the market built over those 3 decades of leadership that we've had as a vendor in the space. So needless to say, very excited about the future. But virtue, everything we've talked about today, we've built a position for Vecima to be a global leader in IP video delivery and cable and fiber access. And we have a market-leading portfolio as we -- as the market grows in those investment spaces for our customers. Our customers having within the industry, a very strong dynamics fueling their investments; broadband demand, as we talked about, the shift to distributing the network to the next-generation architecture, this annual investment and spend in the network growing rapidly and in many cases, being funded as well. Acquisitions have been a very important part. We've been successful with integrating very game-changing strategic acquisitions that have positioned Vecima for the success as the market has grown -- emerged and grown. And of course, as Dale talked about, operational -- as Clay and Dale talked about, the operational financial track record is proven and strong. Our acquisition and organic strategy in conjunction has been very effective, and the team is well positioned and has the track record to take us to the future. So just a sampling on the next slide of some recent highlights you may have seen in our press releases and these have occurred over the last several weeks and we refer shareholders to our website to read more about these important announcements that reflect our progress most recently. And with that, operator, I'll turn it back to you to allow for Q&A.

[Operator Instructions] There are no questions at this time. So I'd like to pass the call back over to management for any closing comments.

Thank you again, everyone, for joining us today, and we look forward to updating everyone after our second quarter earnings call in February, and speaking again next year to report more on our ongoing success.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, enjoy the rest of your day.