Vecima Networks Inc. ($VCM)

Welcome to Vecima Networks Third Quarter Fiscal 2026 Results Conference Call and Webcast. 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 third 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 third 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 and 9 months ended March 31, 2026 and 2025. 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 third quarter earnings report and press release of 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.

Good morning, and welcome, everyone. Thank you for joining us. In our third quarter earnings release this morning, we not only reiterated our expectation of a near-term resurgence of growth, but we also increased our outlook. I'm going to start today's call with some comments on our updated outlook before moving on to an overview of our third quarter highlights. Judd will provide our financial review, and then I'll return to wrap up before we take questions. You'll recall that in our last outlook, we were anticipating major growth momentum for calendar 2026, with revenue increases of between 20% and 30% compared to calendar 2025. I'm pleased to report that expectations for near-term customer demand have not only been confirmed, but they've also expanded, leading to today's upward revision. We're now anticipating year-over-year revenue growth for calendar '26 in the range of 22.5% to 30%. And together with an expected adjusted EBITDA margin of 20%, we're anticipating year-over-year adjusted EBITDA growth of between 74% and 85% for the same period. With the increased demand coalescing, our raised outlook is underpinned by customer purchase orders and forecasts, with clear visibility into increased volumes in the near-term. We're already seeing this start to materialize. As we move into Q4, we continue to see strong revenue momentum that positions us to reach a new quarterly high in the near-term, with sustained growth expected thereafter, and that's Q4 fiscal '26. On the broadband side, there are multiple growth drivers supporting this outlook. First, we're broadly supplying one of our largest customers, Charter Communications, as they expand their wide-scale DAA network deployment using our next-gen cable and fiber access technologies. These are major multiyear upgrade programs encompassing our Entra Remote-PHY products, including our EN9000 GAP node and ERM RPD platforms and our Entra Optical fiber access portfolio centered around fiber-to-the-home remote OLT nodes. As of Q3, this rollout is fully underway, and it's driving significant long-term waves of demand. At the same time, we're building on our revenue base with the launch of several new Entra products across multiple customers. Those include the EN3400, a new smaller version of the EN9000 GAP node, the EEM210 stand-alone 2.10 Gig GPON module and our power holdover modules. On the commercial video side of the portfolio, we're also preparing to roll out our next-generation TerraceIQ platform as our lead Tier 1 customer undertakes the wholesale upgrade of its national commercial video network. This multi-year program includes upgrades to thousands of existing commercial property accounts and supports new commercial video properties and accounts added by the operator on an ongoing basis. I want to emphasize that while our outlook currently focuses on calendar 2026, the growth trajectory we see for Vecima extends well beyond that. During the third quarter, we signed a major multi-year DOCSIS 4.0 agreement with Charter for its spectrum operations. That's in addition to the major network upgrade program we're already working on. The new agreement again expands our collaborative partnership with Charter and covers deployment of our high-value next-gen Entra ERM422, which is the world's first DOCSIS 4.0 dual downstream service group RPD. The announcement also included continued nationwide fiber-to-the-home deployment for our global market-leading Entra SF-4X Remote OLT. As our relationship with Charter grows and deepens, we're also continuing to work with a wide array of other operators globally for preparing for their own DAA rollouts using Vecima solutions. At the end of Q3, we were engaged with 147 MSOs worldwide. And keep in mind that our outlook only includes a minimal contribution from our new vCMTS cloud solutions, which are advancing steadily. We view vCMTS as a major incremental growth opportunity, supporting an addressable market that's estimated to be worth USD 350 million by 2029. After achieving our highest quarterly revenue for Entra Optical products in over 3 years, we see rapidly growing demand for Vecima's fiber-to-the-home access solutions, including 10-gig GPON and XGS-PON. And keep in mind that Vecima has been the market share leader in fiber-to-the-home remote OLT nodes for 5 years running now. With our Entra Optical portfolio now addressing a much larger ITU standards-driven PON market, our fiber-to-the-home access business is positioned to expand significantly in the long term. We see this enriching our comprehensive scope in global broadband networks and providing major new growth pathways for the company. As well, we see additional opportunities with IPTV and dynamic ad insertion in our Content Delivery and Storage segment. Taken together, this adds up to a clear long-term growth trajectory for Vecima. Our outlook for calendar 2026 is just the start of what we see ahead. Turning now to our third quarter financial performance. Our results were fully in line with our expectations. We anticipate a temporary modest pullback in sequential revenue related to industry consolidation activity and the normal initiation phase that happens just prior to major customer program acceleration. Our consolidated revenue of $64.8 million was below what we achieved in Q2 of this year, but slightly higher than Q3 last year. Still, we achieved an impressive gross margin of 47.3%, representing the third consecutive quarter of gross margin improvement. That reflects a favorable product mix in the quarter with a strong contribution from our high-value fiber access solutions, together with continued operating improvements. Notably, adjusted EBITDA climbed to $11.3 million, up both year-over-year and quarter-over-quarter and represented a strong adjusted EBITDA margin of 17.4%. In our Video and Broadband Solutions segment, the third quarter included a 9.6% year-over-year revenue increase, a strong gross margin and continued major product and customer advances. The key highlight of the quarter was a multi-year DOCSIS 4.0 agreement signed with Charter, that I referenced earlier. That was a big win for both our cable and fiber access broadband portfolios and represented just one of several highlights in the quarter. We also achieved our highest Entra Optical sales in over 3 years, led by our industry-leading SF-4X optical line terminals for fiber-to-the-home. Further underscoring our leadership in fiber, we were once again named the global market share leader for PON remote optical line terminals in Dell'Oro Group's 2025 market share report. And again, that was the fifth consecutive year we've earned that honor. Fiber-to-the-home solutions have grown to become a material and high-value part of Vecima's broadband product sales. And I want to emphasize that this growth is driven by more than just subsidized rural programs. With a global value exceeding $6 billion, the fiber-to-the-home market is growing rapidly. Vecima is a critical supplier in this space, supported by strong 10-gig plus and DAA capabilities. Looking at some other highlights in our VBS segment, we made significant advances with our vCMTS cloud solution during the quarter. In addition to further progressing trials with our lead Tier 1 customer, we secured a paid proof-of-concept agreement with an additional international Tier 1 customer. And we continue to deepen lab trials and secured initial orders, adding 3 new operators in Europe. We also introduced another new Cable Access solution in Q3 with our launch of the ERM312, a new contact RPD model for our EN9000 and EN3400 platforms. Taken together, these achievements laid the groundwork for continued profitable growth in VBS segment, both in the near and the long term. Looking at our other business segments in our Content Delivery and Storage segment, we generated revenue of $10.7 million, which was lower year-over-year and quarter-over-quarter, but paired that with a very strong 68% gross margin. As we've always reminded investors, quarterly revenue fluctuations are typical in that segment and relate to project and order timing. That was the case in Q3, and we expect to return to higher revenues in Q4. During the quarter, we made excellent progress with our targeted dynamic ad insertion solution as we deployed Phase 2 with our lead customer, Hotwire Communications. Dynamic Advertising, or DAI is providing a compelling use case for operators seeking to increase video ARPUs without having to increase their rates to customers. And as such, it's a highly effective way for customers to increase their monetization of video while retaining and building their subscriber bases, and we view it as an important growth driver for CDS. Turning to Telematics, which given another profitable quarter with an exceptionally strong gross margin of nearly 73% on sales of $1.9 million. Telematics added 12 new customers during the quarter and booked 137 new subscriptions for our NERO asset tracking platform. This brought the number of asset tags under management to almost 125,000. Overall, it was a strategically important and solid quarter for Vecima, as we operate on the precipice of significant growth immediately ahead of us. I'll now ask Judd, to discuss our Q3 results in more detail. Judd?

Thanks, Sumit. Good morning to everyone with us on the call today. I'll be reviewing our third quarter financial performance in more detail. And for the purposes of this call, I'll assume that everyone has seen our Q3 fiscal 2026 news release, MD&A and financial statements posted on our website. Please refer to today's news release and our MD&A for definitions and reconciliations of our non-IFRS financial measures. Starting with consolidated sales. Third quarter revenue grew to $64.8 million, an increase of 1.3% year-over-year and 12.1% lower quarter-over-quarter, as Sumit noted, in line with our expectations. Our Video and Broadband Solutions segment contributed $52.2 million towards our revenues with VBS segment sales increasing 9.6% from Q3 of last year. As compared to Q2 of this year, they were 12.3% lower sequentially. Next-generation Entra DAA products continue to be the key revenue driver in our VBS segment. Entra sales of $49.3 million were up 13.3% year-over-year and 12.6% lower on a sequential quarterly basis. Commercial Video sales contributed $2.9 million to our VBS segment. This was 29.5% lower year-over-year and 9% lower quarter-over-quarter, reflecting the continued transition to next-generation platforms and some of our newer DAA-driven commercial video products that are now being included in our Entra family revenues. In our Content Delivery and Storage segment, third quarter revenues of $10.7 million included $4.7 million in product sales and $5.9 million in services revenue. This was a lumpy quarter for CDS with sales decreasing 24.1% year-over-year and 13.2% quarter-over-quarter as we continue to reiterate, quarterly fluctuations are typical for the CDS segment. In our Telematics segment, second quarter sales of $1.9 million were 15.8% lower year-over-year, reflecting a onetime $200,000 accounting adjustment for certain mobile asset tracking products in the prior year period. Sequentially, though, Telematics sales increased 2.7% quarter-over-quarter. As we anticipated, third quarter gross margin was much improved at 47.3%. That was similar to the 47.7% we generated in the same period last year and up sharply from the 44.9% last quarter. Adjusted gross margin was an even stronger 50.7% in the third quarter, up from 47.4% in Q3 of fiscal 2025 and 46.4% in Q2 of fiscal 2026. The improvements in gross margin and adjusted gross margin primarily reflect the return to a higher-margin product mix in our VBS segment as well as our focus throughout the year on lowering our manufacturing costs and improving efficiencies. Turning now to third quarter operating expenses. On a year-over-year basis, these were $2.3 million higher and on a sequential basis, Q3 operating expenses decreased slightly to $29.5 million from $29.8 million in Q2. R&D expenses for the third quarter increased to $13.5 million or 21% of sales from $11.5 million or 18% of sales last year. This was primarily a result of higher amortization of deferred development costs and increased salary wages and benefits, offset by higher capitalized labor development costs related to our future product offerings. As we note each quarter, we defer some of our R&D expenditures to future periods until our products begin 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 $16.2 million or 25% of revenues in the third quarter, up from $15.2 million or 24% of revenues in Q3 of last year as we continue to emphasize our investment in future product development and building our innovation pipeline. Sales and marketing expenses increased slightly to $8.7 million or 13% of sales from $8.2 million or 13% of sales last year, reflecting a modest increase in salary, wages and benefits and travel expenses. G&A expenses of $6.9 million or 11% of sales were level with the same period last year. We continue to closely monitor and control our operating expenses and do not foresee any significant operating expense increases in the near term. Looking now at the bottom line results. We generated third quarter operating income of $1.1 million, which compared to $3.3 million in the same period last year. The $2.2 million decrease primarily reflects the increased amortization of deferred development costs and higher salary, wages and benefits. We reported a net loss for the third quarter of $200,000 or $0.01 per share as opposed to net income of $1.2 million or $0.05 per share in the same period of fiscal '25. Additionally, our adjusted EBITDA margin also improved to 17.4% in the third quarter, up from 14.4% last quarter and 16.1% in the same quarter last year. As Sumit noted, we are approaching our adjusted EBITDA margin goal of at least 20% on a consistent basis. Adjusted earnings per share for the third quarter grew slightly from $0.026 from $0.05 in the same period last year. Now turning to the balance sheet. Working capital of $51.8 million increased slightly from $51.2 million at June 30, 2025, and $49.3 million at December 31, 2025. We expect to see modest improvements in working capital going forward. Lastly, cash flow provided by operations for the third quarter increased significantly to $19.5 million from $4 million used in operating activities during the same period last year. This was primarily related to the favorable changes in the components of working capital for the quarter. Our net debt position, defined as total debt less cash and less lease liabilities, stood at $54.4 million at the end of the third quarter, down from a peak of $92 million 2 years ago in Q3 of fiscal '24. We continue to focus our efforts on paying down our debt in the future and showing improvements in our net debt position. With our inflection point in our results now coming to fruition, we remain committed to providing ever-increasing value to our shareholders. On a final note, the Board of Directors approved a quarterly dividend of $0.055 per common share payable on June 22, 2026, to shareholders of record as of May 29, 2026. 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. To recap our expectations for calendar 2026, we're anticipating a year-over-year revenue gain in the range of 22.5% to 30% as compared to calendar 2025, with adjusted EBITDA margin breaking through 20% and driving adjusted EBITDA gains of 74% to 85% versus last year. We expect this near-term growth to be led by our Video and Broadband Solutions segment and supported by our contracts with major customers, our portfolio strength across both fiber and cable access products and by the DAA-based gigabit network upgrades that are rolling out now globally. It will be hard to overemphasize the importance of network upgrades to operators who want or need to enhance their earnings and competitiveness. Higher speeds, better quality, these are today's necessities, and they're achieved by getting nodes and fiber deeper into the network. Our Entra solutions are essential to our customers' objectives. With our strong global market share and increasing network incumbency, we're poised to benefit not just in the near term, but over the long haul as customers continue to invest in their networks. In our Content Delivery and Storage segment, we're anticipating a stronger fourth quarter as we continue to focus on driving revenue growth through managed IPTV expansions with the new and existing customers and our rollout of DAI Dynamic Advertising. As always, we note, however, that quarter-to-quarter performance in that CDS segment can and has been lumpy. And in our Telematics segment, we're anticipating steady and highly profitable performance from our high-margin recurring software and subscription-based monitoring business for vehicles and assets. Across our operations, we remain sharply focused on meeting our customers' fast ramping near-term demand projections while also positioning Vecima to capture this remarkable longer-term growth opportunity ahead of us. Our broad and innovative portfolio of interoperable cable and fiber access products and IPTV solutions give us multiple engines for growth while also creating important diversification. Our overall market share continues to expand as our customer relationships broaden and deepen. Against the backdrop of accelerating wide-scale DAA adoption, our successful product strategies and decisive execution have positioned Vecima for creating substantial returns and enhanced shareholder value. We look forward to reporting to you on our progress over the coming quarters. That concludes our formal comments for today. We'd now be happy to take questions. Operator?

[Operator Instructions] As there appears 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.