Vistance Networks, Inc. (VISN) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Vistance Networks Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jenny Thompson. Ma'am, please go ahead.

Good morning, and thank you for joining us today to discuss Vistance Networks 2026 Second Quarter Results. I'm Jenny Thompson, Vice President of Investor Relations for Vistance Networks. And with me on today's call are Chuck Treadway, President and CEO; and Kyle Lorentzen, Executive Vice President and CFO. You can find the slides that accompany this report on our Investor Relations website. Please note that some of our comments today will contain forward-looking statements based on the current view of our business and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Chuck, I have a few housekeeping items to review. Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of our non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. All references during today's discussion will be to our adjusted results. All quarterly growth rates described during today's presentation are on a year-over-year basis, unless otherwise noted. I'll now turn the call over to our President and CEO, Chuck Treadway.

Thank you, Jenny. Good morning, everyone. I'll begin on Slide 3. Before discussing our second quarter results, I'd like to discuss the recent Ruckus transaction. On July 1, 2026, we announced the closing of the previously announced sale of Ruckus to Belden for $1.846 billion. Net proceeds resulting from this transaction were approximately $1.75 billion. There was considerable interest in Ruckus over the years. We feel this transaction provides our shareholders with significant value being an all-cash transaction. We want to thank all of our Ruckus employees for their dedication in driving value in the Ruckus business and wish them continued success under Belden leadership. As a result of this transaction, this morning, we announced the Board of Directors has approved a special distribution of $5 per share. The special distribution will be paid by the end of August 2026. We expect that the special distribution will be treated as a return of capital for tax purposes. The cash associated with the special distribution will be supported by the proceeds from the Ruckus sale. In total, between the special distribution after both the CCS and Ruckus divestitures, we will have distributed $15 per share back to our shareholders while paying off all of our debt and redeeming all of our preferred equity. We are very pleased with this result as the sale of these 2 businesses have unlocked significant equity value. As we evaluated the amount of special distribution, we considered the cash on hand, expected cash flows as well as future investment opportunities and strategies. We would expect to end the year with between $700 million and $750 million of cash on the balance sheet. In addition, we expect a tax refund of approximately $160 million in the second half of 2027 as a result of our divestiture tax strategy. The strong cash balance and unlevered balance sheet allows us to evaluate investments, both organic and inorganic, including expanding outside of the cable market. In addition to business investments, we will evaluate stock buyback opportunities, including taking advantage of the $100 million buyback program the Board approved in the second quarter. As we continue to work on our go-forward strategy, we will provide updates as appropriate. Now that we've completed the Ruckus transaction, we will focus on growing Aurora, including taking advantage of the current DOCSIS 4.0 upgrade cycle that we believe will last for several years. We are well positioned in the amplifier space, which will be the largest segment of the market over the next few years. In addition to our focus on the DOCSIS 4.0 upgrade cycle, we are working closely with our customers on next-generation cable architecture. We will evaluate growth opportunities, including organic and inorganic investments. These investments could range from investing more aggressively in existing or new technology to evaluating potential acquisitions to broaden the markets we participate in, our technology portfolio and our customer base. As we evaluate acquisitions, we will be disciplined on valuations, including understanding long-term return opportunity. In addition to the core DOCSIS and DAA cable business, we are evaluating investments that allow us to participate in large markets outside cable in technology that we already own like PON, vBNG and security solutions. In PON, we have a commercial agreement with Altice Labs. This agreement allows us to bring best-of-breed technology, including providing a robust portfolio of PON solutions for next-generation fiber-to-the-home networks. Together, we can cover traditional GPON, XGS-PON and 50G-PON technologies, providing scalable ultra-high-speed broadband services while optimizing network density and energy efficiency. Our vBNG, or virtual Broadband Network Gateway, products were acquired as part of our Casa acquisition in 2024. Our vBNG is a cloud-native software solution that separates routing and subscriber management functions from physical hardware. It allows service providers to dynamically scale and control user planes on standard servers to manage multiple access networks such as fixed, wireless and fiber with low latency. One specific use case is mobile data offload, where using our virtualized system helps enable wireless gateways. In the second quarter, we signed an arm's length agreement with Ruckus to partner with them on specific mobile data offload products being sold to major U.S. wireless carriers. Finally, I would like to touch on our Security Solutions business that includes our PKI, or public key infrastructure, products. Our PKI products provide end-to-end device security, digital certificate provisioning and software licensing for IoT devices, smart networks and digital video systems. This is a business that we've been in for some time and have agreements with Motorola and Texas Instruments, among others. We have a unique broad offering that we feel has significant potential for investment and growth. The 3 examples above show the diversity of our business product offerings. In many cases, over the last few years, due to the need to focus on deleveraging and managing our balance sheet, we have not focused on these product lines and limited investment. Now that we have a strong balance sheet with substantial cash flow and available cash, we have the funds to make investments in these product lines. These investments may be organic or inorganic and may broaden our product portfolio through research and development funding or additional resources supporting go-to-market. Our Security Solutions business alone has the opportunity to create substantial value with investment in PKI as a Service and further product offerings. The Security Solutions business will allow us to diversify beyond our traditional cable markets at very attractive valuation multiples. I'm very excited about the opportunity we have in our non-DOCSIS product lines. We will continue to keep you posted as we continue to define our strategies. Now on the second quarter results on Slide 4. Aurora Networks delivered net sales of $319 million and adjusted EBITDA of $46 million. Revenue was down 1% year-over-year and adjusted EBITDA was down 43%. Adjusted EBITDA was in line with our expectations. As indicated in our first quarter earnings call, the second quarter was going to be a challenging quarter-over-quarter comparative due to very strong legacy product and license sales in the second quarter of 2025. Our Aurora adjusted EBITDA guidance for the full year is now $200 million to $225 million. As indicated on our last call, the business continues to be impacted by 2 major items in 2026, memory chip issues and stranded G&A costs. On the memory chip issue, the impact on our forecast is approximately $40 million. This is higher than our previous forecast. In addition, we are experiencing some customer upgrade delays. We continue to deal with memory availability and pricing issues associated with memory chips. Our visibility is limited. However, we successfully managed the first half of the year with multiyear forecasted demand as well as passing on a portion of the increased cost to our customers. We continue to be focused on alternatives to minimize the impact of memory cost and availability. Our stranded cost impact in 2026 is approximately $20 million. We expect the majority of stranded costs associated with CCS and Ruckus divestitures to be eliminated by 2027 with all stranded costs eliminated by 2028. The market for DOCSIS 4.0 products continues to be strong as we deploy our suite of products, including amplifiers and nodes. Our FDX deployment with Comcast continues to go well. We continue to make headway with our suite of next-generation ESD amplifiers and are now shipping to multiple large North American MSOs. We expect shipments to ramp up over the next couple of quarters, and these products will continue to ship over multiple years. We continue making progress on the unified products. We shipped and deployed the unified node in the second quarter. The unified node allows our customers to choose between either the ESD or FDX technology within a single device. The unified amplifiers have started lab testing, and we expect to start shipping at the beginning of 2027. In the second quarter, cable operators continued upgrading their E6000 and C100G CCAP deployments to help them deliver low-latency Internet without requiring major infrastructure replacement. Also, during the quarter, we continued our development of our vCCAP with a Remote PHY solution to key customers in Europe with a significant win and deployment program, which will span 3 years. During the quarter, Aurora continued to solidify its relationship with DvSum. As announced last year, Aurora began partnering with DvSum to offer an AI version of Aurora's ServAssure NXT platform. The solution combines DvSum's self-service analytics technology for call center and network operations with Aurora's ServAssure network monitoring solution. This AI-based tool allows for advanced triage and proactive analytics, network optimization and fault management. The recently signed agreement allows Aurora to participate in DvSum's growth through a warrant. Although initially modest, DvSum's AI product offering has an opportunity to be used in a multitude of applications beyond Aurora's ServAssure. We had our first win with the platform in Latin America to monitor both HFC and PON networks. As stated before, we believe Aurora is well positioned with decades of knowledge of our customers' ecosystem and a broad array of new products for service providers to take advantage of the latest DOCSIS 4.0 upgrade cycle as well as expanding their current DOCSIS 3.1 networks. The new products position Aurora Networks to maintain performance. And with that, I'd like to turn things over to Kyle to talk more about our second quarter results.

Thank you, Chuck, and good morning, everyone. I'll start with an overview of our second quarter results on Slide 5. For Vistance Networks continuing operations, net sales ended at $320 million, down $4 million or 1% year-over-year. The stranded costs associated with the Ruckus business, memory chips and reduction in legacy license sales drove EBITDA down $17 million or 32% to $36 million. Adjusted EPS for the second quarter was down 8% to $0.12 per share versus $0.13 in the second quarter of 2025. It should be noted the continuing operations presentation is the required U.S. GAAP presentation and does not reflect true performance of the business due to allocation methodology of shared costs. Vistance Networks, including Ruckus, adjusted EBITDA for the second quarter was $76 million, down 40% versus prior year as a result of memory chip pricing, reduction in legacy license sales, stranded costs associated with the divestitures and pull-ahead Ruckus revenue from pending second quarter 2025 tariffs. As indicated in our first quarter earnings call, we expected a year-over-year decline in the second quarter of Vistance Networks, including Ruckus, adjusted EBITDA. Turning now to our second quarter segment highlights on Slide 6. Aurora Networks segment second quarter net sales of $319 million was down 1% from the prior year as increased shipments of our DOCSIS 4.0 products were slightly offset by a decline in our legacy product sales. As we have mentioned, the second quarter of 2025 was an unusually strong quarter for our legacy license sales. As we have discussed in the past, Aurora Networks is a project-driven business with timing of projects driving some volatility in quarterly results, both from a revenue and EBITDA perspective. The second quarter comparative is an example of the volatility. Aurora Networks adjusted EBITDA of $46 million was down $34 million or 43% from the prior year, driven by lower margins due to decreased high-margin legacy license sales, memory chip pricing and stranded costs. The second quarter impact of memory pricing and stranded costs year-over-year is approximately $15 million. The $46 million of adjusted EBITDA was in line with our expectations provided on our first quarter earnings call. Aurora order rates were down 55% in the second quarter of 2026 versus prior year, primarily due to timing of orders. Subsequent to quarter end, we received approximately $200 million of orders in July. Aurora backlog ended the second quarter at $470 million, down $82 million or 15% versus the end of the second quarter 2025. Aurora remains well positioned to take advantage of upgrade cycles while offsetting declines in the legacy business. Turning to Slide 7 for an update on cash flow. We ended the quarter with $152 million of cash on hand. This was above our projection of $125 million. As expected in the quarter, cash flow from operations was a use of $73 million and free cash flow was a use of $75 million due to working capital needs and Ruckus transaction costs. Subsequently, after the end of the second quarter, the Board approved a special distribution of $5 per share or $1.15 billion. The distribution will be paid before the end of August and is expected to be treated as a return of capital for tax purposes. The distribution will be paid without putting any leverage on the company. With no leverage and ample cash on hand, we are well positioned to take advantage of strategic opportunities. As Chuck mentioned earlier, we are excited about the Ruckus transaction as it further unlocks shareholder value and provides an opportunity to return additional cash to shareholders. Turning to Slide 8 for an update on our liquidity and capital structure. During the second quarter, our cash and liquidity remained strong. As indicated, we ended the quarter with $152 million in cash on hand. As of the end of July, post Ruckus transaction, we have $1.9 billion of cash, approximately $1.15 billion of this cash will be distributed through the special distribution. In the quarter, we did not purchase any equity on the open market. However, we will continue to evaluate opportunities to buy back stock. And as we mentioned on the earnings call in April, in Q2, the Board of Directors approved the buyback of up to $100 million. Our ample liquidity gives us opportunity to potentially increase our buyback program if warranted. The company ended the quarter with no outstanding debt. In the second quarter, the company entered into a new revolving credit agreement with Citibank in an aggregate amount up to $300 million, subject to borrowing base availability. Post the Ruckus divestiture, the ABL commitment was lowered to $247 million with a borrowing base of $177 million. At the end of the second quarter, our current availability was $137 million. Based on our cash on hand, cash flow expectations and leverage capability, we have ample opportunity to invest in growth and value creation, either organically or inorganically. Based on our projections after the special distribution, we expect to end 2026 with cash on hand between $700 million and $750 million. In addition to our significant projected cash at year-end 2026, we expect to receive $160 million refund from the IRS in the second half of 2027 related to our tax planning divestiture strategy. In total, with 2026 year-end cash and the 2027 refund, we would expect to have approximately $850 million to $900 million of cash at the end of 2027 before taking into account cash generation during 2027. This provides us with significant cash for investment. I will conclude my prepared remarks with commentary around our expectations for the remainder of 2026. As we look to the remainder of the year, we delivered solid execution in the first half, but the memory pricing and availability environment has deteriorated faster and further than we expected at the end of the first quarter. As a result, we are lowering our full year adjusted EBITDA guidepost down $25 million to $200 million to $225 million. This revised range reflects the memory cost increases we can currently quantify, memory availability and customer willingness to invest at elevated price levels. Given the uncertainty of memory price increases and continued supply tightness, we caution that results could fall to the lower end of or below this range if conditions worsen. We remain confident in the underlying demand for our products. We look forward to continuing to develop and implement the Vistance strategy focused on taking advantage of the DOCSIS 4.0 upgrade cycle, managing our legacy business and investing in future technologies and new markets. And with that, I'd like to give the floor back to Chuck for some closing remarks.

Thank you, Kyle. In closing, we are very excited about the Ruckus transaction and the value it creates and the cash it returns to our shareholders. I want to thank the Ruckus team for all they have done to make this deal possible and position the business for continued success. The transaction positions us with significant cash for investment. We will evaluate growth opportunities, including organic and inorganic investments. These investments could include investing more aggressively in existing or new technology and evaluating potential acquisitions to broaden our technology and the markets we serve. In addition, we will continue to evaluate buying our stock. We look forward to sharing next steps in upcoming quarters. And with that, we'll now open the line for questions.

[Operator Instructions] Our first question is going to come from the line of George Notter with Wolfe Research.

I guess I was hoping to get level set on the existing Aurora business. I'm curious about what customer concentration looks like. I think there's 2 customers here that are probably a pretty significant piece of the revenue. I'm just wondering what that looks like. And I'd be interested in what that looked like in the year ago quarter as well or maybe year-to-date or maybe 2025, whatever metrics you can give us? And then also, I'm just curious on what the revenue mix looks like between legacy, CMTS, virtual CMTS, optical nodes, amplifiers, anything you can say there would be great, too.

Okay. Thanks, George. I'll take the first part of the question, and Kyle could get into the more financial numbers. But first of all, I think of it as the legacy side of our business, which is where we have the E6000 and the C100G plus the licenses and the SLA and some head-end optic equipment. This is the business that we call legacy. And as we indicated, this business will decline as the virtual CMTS and the DOCSIS 4.0 edge products replace that head-end equipment. We did have really strong legacy sales in '25, primarily related to license sales that aren't going to repeat. And moving forward, we'd expect this business to decline year-over-year, but nowhere near the rate we saw from '25 to '26. We should let you know that the margins in this business are higher than the other product lines. And in '26, this represents about 15% of Aurora's total revenue and 25% of adjusted EBITDA. And then the DOCSIS 4.0 products, think about that as the new stuff, that's amplifiers, nodes, modules, virtual CMTS and NMS. And these products are what's linked to the upgrade cycle that's going on right now. And we expect the revenue of these products to grow off the '25 base over the next few years. And then we have a video business that's -- video products that -- where we have infrastructure, programmer advertising. The largest segment of that business is programmer. We have a significant legacy installation there. And as upgrades are done, we're well positioned. We don't -- this is going to be -- think about minimal growth and volatile. And just one example of that is we were expecting that FCC spectrum to happen this year. That auction -- it happened now, but it's not going to really come into effect and relate to our business until '27 and '28. And then I would say we have 2 smaller businesses. PON is the next one I would talk about. Primarily, we're in Remote OLT PON, which is our big part of the business now. But that said, we do have a relationship and partnership with Altice Labs and this is where we have our chassis PON offering. And we do think this has significant growth potential. And then finally, which I would say is PKI, which is a component of our Security Solutions business. In this segment, we have like digital certification provisioning. We have software licensing for IoT devices, smart networks, digital video systems. And think about like competition in this space would be like DigiCert or Keyfactor. And then however, we really think we have -- although this is a small business for us, we think we have really strong technology that can be scaled with some go-to-market investments.

The customer concentration, top 3 customers represent about 70% of our revenue, and it's about the same as last year.

Great. Okay. And then anything more you can tell us on the mix of these different businesses? Chuck, you went through a lot of different pieces there, the legacy, the 4.0, the video infrastructure, PON. Is there a rough cut you could give us in terms of the mix of those pieces?