Casa Systems Inc (CASA) 2017 Q4 法說會逐字稿

Greetings and welcome to the Casa Systems, Inc. fourth-quarter and full-year 2017 results conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Monica Gould, Investor Relations for Casa Systems. Please go ahead.

Thank you, Hector, and good afternoon, everyone. Casa released results for the fourth quarter and full-year 2017 ended December 31, 2017, this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at investors.casa-systems.com.

With me on today's call are Jerry Guo, Chief Executive Officer, and Gary Hall, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

Before I turn the call over to Jerry I'd like to note that today's discussion will contain various remarks about the Company's future expectations, plans, and prospects that constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

We have based these forward-looking statements on the business environment as we currently see it and, as such, they are subject to risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could calls our actual results to differ materially from the projections described in today's discussion.

In addition, any forward-looking statements they we make on this call represent our views as of today, and we undertake no obligation to update these statements as a result of new information or future events.

During this call we will also be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our earnings press release, which is posted in the Investor Relations section of our website at investors.casa-systems.com. And with that, I'd like to turn the call over to Jerry.

Good afternoon, everyone, and thank you for joining us for Casa Systems' first earnings conference call as a public Company. I would like to start out with a brief overview of the Company, the markets we serve, and our key growth drivers. I will then discuss our recent achievements and then turn the call over to Gary Hall, our CFO, who will provide a more detailed review of our financial performance and outlook.

Casa offers software-centric end-to-end solutions that help cable, fixed, and the wireless providers meet the growing demand for actual broadband services. Our broadband solutions include core and access components. We are focused on helping service providers generate new revenue with virtualized and the physical network functions.

We have been in the broadband business for 15 years and have built a strong reputation for innovation. We have a track record of anticipating technology shifts and being first to deploy disruptive solutions. Our products have been deployed with over 450 service providers around the globe, including Tier 1 operators in every region.

In the cable broadband market, our innovation drives customer success. Casa's Integrated CCAP platform was first to market delivering voice, video, and data over a single port and first to deploy DOCSIS 3.1 in large-scale 4 gigabit services. These innovations have enabled us to rapidly gain market share from 6% of channel shipment when we first introduced our CCAP solution in 2012 to 27% in 2016.

The increasing demand for higher broadband speeds is driving the ongoing ramp of DOCSIS 3.1 and initial rollout of distributed access architecture, or DAA. Casa Has been a leader in DOCSIS 3.1 with full spectrum support since 2015. Our DAA solutions consist of our CCAP core and node components including Remote PHY and Remote MAC PHY. These allow service providers to push capacity to the edge, leverage current investments, and to densify access networks.

Our DAA solutions are commercially proven and support large-scale deployments. According to SNMP Global Market Intelligence, cable operators are expected to begin their multiyear transition toward DAA this year and to ramp quickly in 2019 and beyond. Spending on DAA optical nodes is expected to reach more than $850 million in 2021.

Additionally, we are seeing an acceleration in the rollout of DOCSIS 3.1 with channel shipments growing from 6% to 34% of overall DOCSIS channel shipments during the first nine months of 2017 according to IHS.

We are very excited about the opportunities for continued growth in our core cable market and believe we are well-positioned to take advantage of this growth potential. We also expect our customers to converge their fixed and wireless networks. We support this trend with our Axyom multi-services core, which enables fixed and mobile core network functions from a common software framework.

This software architecture delivers convergence of multiple services on a single software defined platform and new revenue-generating services. Our Axyom core also virtualizes broadband network functions to enable programmability, faster time to revenue, greater service agility, and a lower total cost of ownership.

Casa's Axyom platform is key to our solutions for mobile that include our 5G, small cell, and cellular IoT cores. For network densification, customers use our Apex family of small cell access points for indoor, outdoor, [rental], and Pico applications.

At Mobile World Congress last week we introduced our Axyom 5G core, a virtualized software suite that runs on standard servers to enable 5G capabilities that include network slicing with a service-based architecture; control and user plane separation to enable independent scaling and ability to locate functions in a centralized data center or as a distributed network edge; support for multi-access edge computing applications, and multigenerational support for 4G to 5G devices.

The broadband market opportunity that we are targeting is large and growing as the need for new capabilities provided by ultra low latency services architecture is driving increased investment in densification across cable, fixed, and wireless networks. The addressable market we serve today is expected to expand from $9 billion in 2017 to $19 billion by 2021.

Going forward, we expect our growth will be driven by large broadband market opportunities centered on five key drivers: continued upgrades of cable networks to DOCSIS 3.1 to enable gigabit speed; software-based capacity expansions in existing wireless and cable networks; densification of cable and fixed networks, including passive optical networks, to enable service providers to move fiber closer to the network edge; densification of wireless networks through small cell deployment; and service provider upgrades to 5G.

Moving to our fourth-quarter performance, total revenue rose 19% year-over-year to $118 million driven primarily by software-based capacity expansion. In addition, our adjusted EBITDA rose 10% to $60 million while our non-GAAP net income rose 29% year-over-year to $53.7 million.

During the fourth quarter our growth was driven by cable MSO network upgrades and capacity expansions across the globe in support of gigabit services with DOCSIS 3.1. We expect these deployments to occur over the course of 2018 and expand into 2019.

In addition, we are pleased to announce that we signed three Tier 1 mobile operators for our Axyom Small Cell Core and Apex 4G small cell solution during the fourth quarter, specifically China Mobile, Sprint, and Telefonica.

We believe that our customers select our solutions to densify their macro cellular networks based on our vendor agnostic architecture which enables our customers to manage any vendor's radio access network products; ability to deliver a commercially available highly scalable solution today; ease-of-use due to the plug and play nature of our solution and its self optimizing and self-healing feature; and secure backhaul capability.

In summary, we are very pleased with our strong financial performance and our ability to execute on our growth strategy while delivering strong profitability. Our success is a testament to the strength of our software centric solution and execution by our very talented employees.

I would also like to thank our customers for making 2017 another successful year. We are very excited about the large market opportunity ahead of us and are looking forward to another great year in 2018. With that, I will turn the call over to Gary for a more detailed review of our financial performance and our outlook for 2018.

Thank you, Jerry, and good afternoon, everyone. I will briefly touch on some highlights for our full-year 2017, then review our financial results for the fourth quarter, followed by our outlook for the full year of 2018.

2017 was another exciting year for Casa with continued year-over-year revenue growth and record revenue of $351.6 million, an increase of 11.2% compared to 2016. Our gross margin improved year-over-year to 73.4% from 69.1% in 2016, reflecting the continued growth in the proportion of our revenue from software enabled capacity expansions.

And our adjusted EBITDA increased 18.6% year-over-year to $153.1 million, primarily driven by higher revenue and gross margin. Our operating expenses increased 17.7% as we continue to scale the Company and invest in research and development and sales to support our new products.

Non-GAAP net income increased 24.2% year-over-year to $118 million in 2017. Moreover the business continues to generate strong cash flow with cash flow from operations of $95 million and free cash flow of $88 million for 2017. We also strengthened our balance sheet with the completion of our initial public offering in December.

Turning to the fourth quarter, we are pleased to report strong results for our first quarter as a public Company. Total revenue for the fourth quarter of 2017 was $118 million, an increase of 18.9% from $99.2 million in the fourth quarter of 2016.

The increase in revenue was driven by continued demand for our software centric broadband products to support DOCSIS 3.1 and an increase in the sales of our software-based capacity expansions as customers continue to increase the bandwidth provided to their customers using our software centric broadband products.

Gross margin for the fourth quarter of 2017 increased to 77.1%, up from 76.8% in the fourth quarter of 2016, and reflects customer yearend purchases of our software enabled capacity expansions.

As a reminder, our gross margin fluctuates from quarter to quarter based on the mix of our sales of our software centric broadband products and software enabled capacity expansions. We expect our gross margins to be in the range of the high 60%s to low 70%s during 2018.

Turning to expenses, total expenses in the fourth quarter of 2017 were $36.6 million or 31% of revenue compared to $25.5 million or 25.7% of revenue in the fourth quarter of 2016. The increase in total expenses was primarily related to the increase in personnel and related salary and benefit costs to support the growth of our business and the development of and sales of our new products.

Adjusted EBITDA for the fourth quarter of 2017 was $59.8 million, an increase of 9.6% from $54.6 million in the fourth quarter 2016, primarily driven by higher revenue in 2017.

Our provision for income taxes for the fourth quarter and for 2017 reflects the impact of the Tax Cuts and Jobs Act that was passed in December 2017 and includes an estimated one time tax charge of approximately $14.1 million. This charge primarily relates to the tax on the accumulated earnings and profit of our foreign subsidiaries and the reduction in the value of our deferred tax assets due to the reduction in the US tax rate under the Tax Cuts and Jobs Act.

We're continuing to evaluate the impact of the Tax Cuts and Jobs Act. Based on our initial assessment, we currently estimate that our effective tax rate will be approximately 15% for 2018.

Non-GAAP net income for the fourth quarter 2017 was $53.7 million, an increase of 28.7% over the fourth quarter of 2016. We ended the fourth quarter of 2017 with cash and cash equivalents of $260.8 million, which includes $79.3 million in net proceeds from our initial public offering and total debt of $304.3 million.

I would now like to turn to our guidance for fiscal 2018. We continue to see strong tailwinds to our business, driven by the continued demand for bandwidth and service providers' desire to offer new revenue-generating services, which requires service providers to optimize and densify their networks. We believe that our portfolio of cable broadband, fixed broadband, and wireless products positions us well for 2018.

Due to the nature of the customers we serve our revenue and profitability will vary from quarter to quarter depending on the products sold to and deployed by our customers and the nature and size of specific customer projects. Accordingly, we tend to focus on and forecast our revenue and profitability based on annual physical period.

For the full year of 2018 we expect total revenue to be between $380 million and $395 million, non-GAAP net income to be in the range of $100 million to $111 million, and non-GAAP diluted earnings per share to be the range of $1.08 to $1.19.

Stock based compensation is estimated to be $10.5 million for 2018. And average diluted shares outstanding for the full year of 2018 are estimated to be approximately 93 million shares. I will now turn the call back to the operator to open the call for questions. Thank you.

(Operator Instructions). Patrick Newton, Stifel.

Good afternoon, Jerry and Gary, and congratulations on the quarter. Jumping in, I wanted to talk a little bit on the wireless side and the announcement of the wins with Telefonica, China Mobile, and Sprint. And I'm curious if you could help us understand just how material these wins are today from a revenue perspective and how we should think about the contribution over the next several quarters.

And previously you had spoken to 30 plus wireless trials ongoing. Can you update us on where that metric stands currently and the number of wireless customers that are generating revenue currently?

Thanks for the compliment. On the wireless wins, first, I'd like to emphasize that these Tier 1 wins are very important to us and provide validation for the strength of our wireless technology. These customers are at initial stages of deployment and as a result we expect them to ramp gradually throughout the year. So we believe that we will continue to grow the business but at this point we are not ready to break out that revenue yet.

And the number of trials ongoing, any update there? Or on the number of customers you're generating revenue from?

We are continuing to grow the number of customers doing wireless trials and they are from North America to Europe and Latin America. And we believe we will be able to convert some of them into paying customers in 2018.

Great. And then I guess shifting gears, Jerry, and looking at DAA, you did cite some third-party research stats in your prepared remarks. But I'm more interested in the trends that you are seeing given the trials and customer interest.

So, should we think of revenue from DAA ramping for Casa in the second half of 2018? And as DAA ramps, should investors think of this as an opportunity for you to disrupt the industry, further expanding your customer list and gaining share?

Our view on the pace of deployment has not changed since we met with many of you during our road show. Based on discussions we are having with our customers, we believe that deployment of DAA will begin in the second half of 2018 and continue into 2019.

We are currently having multiple network running light traffic on our DAA products throughout the globe. And we believe multiple of them will turn into revenue-generating opportunities.

Thank you for taking my questions. Good luck.

Simon Leopold, Raymond James.

Thanks for taking my questions. I also wanted to follow-up on the wireless announcement from last week. I think it might be helpful if you could give us a little bit more color in terms of how the wireless business could eventually impact your model.

In particular there's obviously a software element in the packet core functionality that should be, I assume, margin accretive but also access points that might be margin dilutive. Could you help us think about the longer-term prospects of how we should envision the wireless contributions?

I would like to answer your question in two parts. One is that in 2018 we are sticking to our forecast. We believe our forecast of revenue growth and profitability reflect our view on wireless. And in the long term we believe that we are going to continue to have a mixture of virtual network functions and physical network functions. We will have a mixed margin and we believe that our current margin profile is adequate.

And I appreciate the rationale of providing annual guidance and not quarterly guidance. But I also worry that there might be some investors that are less familiar with the patterns that historically occur in your marketplace.

Particularly around products like your capacity addition software licenses that I think historically have had strong fourth quarters and weaker first quarters; the seasonal patterns may not be well appreciated. So, even if you are not prepared to give us quarterly guidance, could you help folks understand seasonality within your business?

Thanks for understanding, Simon. Gary, do you want to answer the question?

Yes, I mean, I think generally Q4 tends to be our strongest quarter. For the other quarters, they do vary from period to period depending on the nature and size of customer deployments.

And just one last one if I might. In terms of some of the initiatives operators are talking about on fiber deep and distributed access, I think I imagine that these might be opportunities for you to break into new customers and we could see some share shifts because of the disruption. Could you talk a little bit about how you envision this opportunity in terms of both opening up new customers for you as well as any risk of competitors entering your markets? Thanks.

Simon, absolutely agreeing with you. We see this DAA as another technology shift we can take advantage of, just like we did in past generational changes and technology shifts, we gained market share. We see the upcoming DAA architecture shift as another opportunity for us to gain footprint to gain market share.

We believe that the opportunity is large and we are very well positioned given our complete solution in both the core side and the access side, the node side -- and the maturity of our DAA solution and the feature completeness of our solution.

Thank you for taking my questions.

Jason Ader, William Blair.

Thank you. Just had a few ones for you. First, did you break out how much software was as a percentage of revenue?

Yes, in the earnings press release in the back, we breakout of revenue from the physical or systems, the software, and also the services.

Great. And I assume that was the big sort of delta in terms of what you had originally expected for the quarter? More software came in than you expected and that drove top-line outperformance and obviously a lot of gross margin and net income outperformance. Is that the right way to think about it?

That's correct, yes.

Okay. And then as we think about the 3.1 cycle here, I guess what inning are we in? Or maybe asked a different way: how much of your base do you think has already upgraded to 3.1 if you had to put out a guess?

We believe we are still at the initial stage of 3.1. Most of our advanced customers are purchasing half a block of OFDM in the downstream direction. And there is definitely differences from region to region. North America is the leading and there are also leading customers in Europe and Asia as well. But I would say it's still at the initial stage. A lot more to come.

Okay, great. And then the last question from me. And I know you don't want to break this out, Gary, but if we had to come out with sort of a -- for modeling purposes, trying to figure out how much of your revenue in the guidance for 2018 is going to come from Remote PHY and mobility, would you say it's above 10%? Any kind of help you can give us there to just give us a sense of magnitude would be helpful.

At this point we're not breaking it out. We are just going to really focus on the broadband system products and the software and services and we'll be reporting accordingly.

All right. Thanks.

Mark Moskowitz, Barclays.

Thanks. Good afternoon. Kind of continuing that thread here, trying to push this wireless topic a little further. The 380 for the outlook, does that include any wireless revenue versus the 395, Gary?

It's basically the same thought and composition we had when we gave the initial guidance. Yes, it includes some portion of wireless and distributed in it, correct.

And then as far as the revenue strength in the quarter reported, can you give us a sense in terms of how that was allocated across some of your larger customers, particularly your largest customer?

Are you talking about -- revenue type you're speaking of? Just to be clear with you.

Yes, just in terms of the revenue outperformance, if we think about the contribution to growth that was reported for the December quarter. Was this a result of a few customers, one customer? In particular, how did your largest customer compare to this revenue trend line? I'm just trying to figure out where the outperformance was and what is sustainable. Thank you.

It was actually -- it was kind of across multiple customers. We had numerous customers around the world that we had system sales and capacity expansions with. So, it was kind of across the board. There's no significant concentration in any one customer.

And then just the last question for me regarding the wireless deployments. Great news last week with respect to the three wins. Just kind of curious in terms of the other opportunities out there with respect to trials.

Are those trials with the other 27 or so, are they going to see similar type of evaluation period, i.e., 12 months? Or could they be less than 12 months or more than 12 months? Just trying to get a sense in terms of the glide path. Could we see actually a greater number harvested as we go through the year or is it going to take longer?

I believe that trial periods are going to vary. We cannot really predict which one will turn into revenue opportunities. But given the large number of trials we have, some of them we believe will turn into revenue opportunities this year.

Okay. Congratulations on the strong results. Thank you.

Meta Marshall, Morgan Stanley.

Good morning, gentlemen. This is James Faucette calling in for Meta. I just had a couple follow-up questions. When you talk about the wireless trials and opportunities, what do you feel like are kind of the key elements that are under your control to win that business versus what are the market factors that may determine the speed at which they move forward and looking for things that we should be sensitive to?

And further, when you look at those trials, what do you think is -- like are these -- do you think -- would you expect these trials to be I guess lead supplier versus second source? Or how are you thinking about the competition I guess within those trials?

We actually have different scenarios for whether the win is going to be under our control or is market factors for certain varied events, network deployment. And it does depend on the market conditions. But we do see a very aggressive push from our potential customers to deploy new generations of services in the wireless domain.

And there are some others, they just have a clear need. They need to push this to deployment as early as possible and it is our execution which is going to determine how fast we get deployed.

So the question you asked, whether we are the lead or a secondary win. And in some of the -- and in some of them we are basically coexisting with a competitor. In others we are the only supplier for that particular technology. So there is no secondary for that particular technology.

Great. And then wanted to ask a follow-up question on basically software sales versus new equipment sales related to the DOCSIS 3.1 upgrade. I guess we're wondering what is the pace at which you see that funnel or visibility developing and then pipeline developing?

And as we go through this year should we expect a fair amount of volatility on mix there and hence margins? Or are we getting to a point that you may be able to narrow that potential range of outcomes?

I think it's going to be relatively consistent what we have seen in the past, to be honest with you. I think it's going to be continued mix of system sales but also software sales. It kind of goes customers by customer, project by project. So there still be some variability there.

And just as a follow-up on that, typically -- like how close or how far out do you have visibility on that variability? Is that something that tends to happen within a single quarter or does it tend to happen across quarters?

A little bit of both, to be honest with you. It could happen across quarters by more than it would within a quarter.

Well, we have different scenarios. We have multiple year contracts with certain customers and we have more like an annual kind of scenario with certain customers. And we have like quarter-to-quarter deals with certain customers. So they vary quite a bit.

Okay. That's great. Thanks a lot, gentlemen.

(Operator Instructions). Tim Savageaux, Northland Capital Markets.

Good afternoon. I had one sort of market oriented question and then one kind of housekeeping on the numbers. First from a market perspective, some interesting commentary with regard to Remote PHY node addressable market.

I guess I would like to add to that discussion -- or really my question is to what extent is virtualized CCAP Kind of a part of that Remote PHY or distributed access rollout scenario? And to what extent do you see a linkage between the two? And maybe comment on Casa's current position with regard to virtualized CCAP, how you see that rolling out and perhaps the competitive landscape there.

For example, I think one of your peers talked about something on the order of a $1 billion TAM by 2020 for a combined virtualized CCAP optical node solution -- significant in either case. So I'd be interested to what extent you think those two are linked and how Casa is positioned.

Tim, we tend to have a view which is more realistic. We believe that the integracy cap is going to continue to have a very significant role going forward. And on the DAA side, we provide both the core side as well as the node aside, the Remote PHY, Remote MAC PHY side.

On the core side we actually provide two different solutions. One is a chassis-based core and the other one is a virtualized core. So we believe different customers will have different needs. And we are not going to force customers to adopt one solution versus the other. So given the breath of our offerings, we're going to satisfy so many customers' requirements, that puts us in a very good position to win different kinds of deals.

Got it. (Multiple speakers), okay, I'm sorry.

So we believe that the deployment will be mixed. It's not going to be one type versus the other. On the other hand, our wireless solution on the core side are completely virtualized. We of course support virtualization, but we're not forcing customers to go down that path.

Understood. And going back to wireless for a moment, and maybe I missed this, but I wonder if you have kind of a comparable addressable market metric to what you mentioned for say Remote PHY nodes. I think that was -- you quoted to market research about 850 million by 2021 for Remote PHY nodes. I would imagine a small cell TAM could be significantly larger given the traction that some of your competitors have in the marketplace. But I would be interested in your view.

Yes, we do have -- our total addressable market consists of the cable and fixed line and the wireless. On the wireless side we come to the packet core side. We have -- looked at many different types of packet core functions, many different gateways. And on the radio access network we come to the indoor small cells and outdoor Pico cells. That by itself is -- it is a larger market than Remote PHY. It is a multibillion dollar market.

Okay. And finally, I wonder if you could comment on 10% customers for the quarter or the year or the overall customer concentration question. And whether there were any notable movements from a geographic market standpoint in Q4.

Sure. So from a 10% customer perspective, we tend not to focus too much on a quarterly basis. We look at it from a year -- an annual basis. And for the year, similar to what we've had in the prior years, we had two customers that were 10% or more. From a geographical perspective, the mix for 2017 is pretty aligned with what it was for 2016. So, about half of it's always from North America and the rest of it is kind of equally split across the other geographies.

Okay, thanks. And congratulations on a great quarter.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Jerry Guo for closing remarks.

Before we end this call I would like to thank the Casa team for all of their hard work to get Casa to where it is today. Thank you to everyone for joining us today and we look forward to updating you on our progress next quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.