Casa Systems Inc (CASA) 2018 Q1 法說會逐字稿

Ladies and gentlemen, greetings, and welcome to the Casa Systems, Inc. First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Monica Gould, Investor Relations for Casa Systems. Thank you. You may begin.

Thank you, Adam, and good afternoon, everyone. Casa released results for the first quarter of 2018 ended March 31, 2018, 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 forward-looking statements based on the business environment as we currently see it and as such does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion.

Any forward-looking statements that we make on this call or in the earnings release are based upon information that we believe as of today, and we undertake no obligation to update these statements as a result of new information or future events.

In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. During the call, we may use non-GAAP measures if we believe it is useful to investors or we believe we will have investors better understand our performance or business trends.

And with that, I'd like to turn the call over to Jerry.

Good afternoon, everyone, and thanks for joining us today. I am pleased to report that we had another strong quarter. In the first quarter of 2018, total revenue rose 23% year-over-year to $89 million, driven primarily by increased sales of our software-centric broadband products and software-based capacity expansions. In addition, our adjusted EBITDA increased 12% year-over-year to $30 million, while our non-GAAP net income rose 8% to $22 million.

Our first quarter growth was driven by cable MSO network upgrades and the software capacity expansions across the globe in support of gigabit services with DOCSIS 3.1. In fact, software license capacity expansions were up significantly relative to the first quarter of 2017.

During the quarter, we won both new customers and new geographies with existing customers, including with a Tier 1 customer in Europe who is also in the process of aggressively upgrading their network to DOCSIS 3.1. As part of our land and expand business model, we believe these deployments will lead to a long tail of capacity expansions in the future.

We remain focused on continued DOCSIS 3.1 growth in all geographic regions. We are in the very early innings of DOCSIS 3.1 deployments. In Europe, Asia, and Latin America, service providers are still deploying DOCSIS 3.1-ready hardware, while in North America, service providers are beginning to ramp purchases of DOCSIS 3.1 licenses. We expect these customers to expand their DOCSIS 3.1 channels much further with additional software licenses over the coming years.

Overall, we see a strong runway of growth for Casa in our cable business. This is consistent with the industry forecasts. IHS Markit predicts a 40% to 50% compound annual growth rate of DOCSIS 3.1 channel shipments through 2022.

Also in our cable business, we see the adoption of Distributed Access Architecture, or DAA, as the next near-term technology inflection point. As we mentioned before, we now have numerous trials in progress with operators in every region. Several of these trials have already transitioned into commercial deployments. Specifically, we have closed multiple deals with cable operators in the U.S. and have begun initial shipments to them in the first quarter. We expect DAA to continue to gain traction over the course of 2018.

In our mobile business, we continue to see commercial success. As we noted on our last quarter's call, we signed 3 Tier 1 mobile operators for our Axyom Small Cell Core and associated Small Cell management software as well as Apex 4G Small Cells. These customers include China Mobile, Sprint and Telefonica. We have begun deployments with all these customers and are already in discussions with them about expanding into new geographies and new product areas. We have also recently signed another Tier 1 customer in Latin America for our Axyom Small Cell Core and security solutions.

Given these and other substantial Tier 1 mobile customer engagements, we believe that our mobile shipments will begin to ramp in the second half of 2018. Our Axiom 5G, 4G Core solution, which we introduced in Mobile World Congress in February, has generated significant interest. In fact, we are participating in multiple Tier 1 mobile service providers, 5G/4G core RFI/RFP and evaluation processes.

On the fixed broadband side of our business, we recently introduced a new cloud-native Virtual Broadband Network Gateway, or virtual BNG router solutions, as part of our Axyom software platform. The Axyom virtual BNG virtualizes and disaggregates fixed network subscriber management and routing, enabling multidimensional scaling and ability to distribute processing out to the edge of the network. Customer reception and engagement for our Axyom virtual BNG has been very strong. We are already in trials with the multiple Tier 1 fixed broadband providers globally, and we expect commercial success as early as Q2 2018.

As you may have seen earlier today, we announced a new radio access solution. Our Apex outdoor pico cell designed to help mobile and other service providers, such as MSOs, to accelerate deployments of outdoor pico cells in their networks. This particular solution is strand mounted and solves key challenges associated with the backhaul, siting and power. Our Apex pico cell has had a strong customer interest from both the mobile service providers and MSOs, and multiple Tier 1 operators are evaluating this solution.

Before I turn the call over to Gary to discuss our financial performance, I'd like to briefly address what we see as important drivers of our growth going forward.

As we have been highlighting, Casa has built a strong reputation for innovation. We have a track record of anticipating technology transitions and being first to market ahead of competitors. We have positioned the company and our product development efforts to benefit from several trends underway that will require service providers to fundamentally transform their networks, including convergence of networks under services, virtualization and function of disaggregation, and densification of broadband networks. Our Axyom platform is a cloud-native micro services-based software architecture for cable, mobile, fixed and the converged core networks that has been designed specifically to address these trends. Moreover, we believe that our focus on all broadband networks and portfolio breadth uniquely positions us to capture market share in all these broadband segments. As we have proven repeatedly, we are in the right place at the right time with the right products.

In summary, Casa is at the forefront of broadband network transformation. Casa's innovations and the proven track record of delivering those innovations ahead of competitors has captured the attention of service providers globally. We're very excited about our future as we expect to continue to deliver superior financial results for our shareholders and exceed customer expectations.

With that, I'll turn the call over to Gary for a detailed review of our financial performance and our outlook for 2018.

Thank you, Jerry, and good afternoon, everyone. We're pleased to report strong financial results for the first quarter of 2018.

Total revenue for the first quarter of 2018 was $89.1 million, an increase of 22.5% from $72.7 million in the first quarter of 2017. This growth was primarily driven by higher sales of our software-centric broadband products to support DOCSIS 3.1 in North America and Europe and an increase in the sales of our software-based capacity expansions as customers provide additional bandwidth and services to their subscribers.

Gross margin for the first quarter of 2018 was 69.6% compared to 72% in the first quarter of 2017.

During the first quarter of 2018, several of our existing customers upgraded their networks with new equipment to support DOCSIS 3.1, resulting in higher cost of sales.

During the first quarter 2017, we recognized revenue related to the expiration of a customer trading credit for which there was no cost of sales. As a reminder, our gross margin fluctuates from quarter-to-quarter based on the mix of sales of our software-centric broadband products and software-enabled capacity expansion. We continue to expect our gross margins to be in the range of the high 60s to low 70s during 2018.

Turning to expenses. Total operating expenses in the first quarter of 2018 were $39 million or 43.8% of revenue compared to $29.5 million or 40.6% of revenue in the first quarter of 2017. The increase in total operating expenses was due to an increase in personnel and related costs to support the growth of our business and the development in sales of our new products. Higher stock-based compensation due to the increase in the valuation of our stock appreciation rights and an increase in research and development spending to address our customers' accelerated deployment time lines.

Adjusted EBITDA for the first quarter of 2018 was $29.5 million, an increase of 11.6% from $26.4 million in the first quarter of 2017, primarily driven by higher revenue in the first quarter of 2018 and partially offset by the increase in operating expenses in the first quarter of 2018.

Our effective tax rate in the first quarter of 2018 was 9.2% and includes discrete tax items for the quarter related to certain stock-based compensation transactions.

We continue to evaluate the impact of the Tax Cuts and Jobs Act that was passed in December of 2017. And based on our current assessment, we estimate that our effective tax rate will be approximately 15% for 2018 as previously discussed during our Q4 2017 earnings call.

Non-GAAP net income for the first quarter of 2018 was $21.6 million, an increase of 8.4% over the first quarter of 2017, primarily driven by higher revenue in the first quarter of 2018, partially offset by the increase in operating expenses in the first quarter of 2018. Non-GAAP diluted net income per share was $0.23 for the first quarter of 2018.

Free cash flow was $48.6 million. And we ended the first quarter of 2018 in a net cash position, with cash and cash equivalents of $307.1 million and total debt of $297.1 million.

I would now like to turn to our guidance for fiscal year 2018. 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 timing and size of specific customer projects. Accordingly, we tend to focus on and forecast our revenue and profitability based on annual fiscal periods.

For the full year of 2018, we continue to 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 in the range of $1.08 to $1.19. Stock-based compensation is estimated to be approximately $12 million to $13 million for 2018. And average diluted shares outstanding for the full year are estimated to be approximately 94 million to 95 million shares.

I will now turn the call back to the operator to open the call for questions. Thank you.

(Operator Instructions) Our first question comes from the line of Simon Leopold from Raymond James.

I wanted to dig a little bit deeper in terms of the wireless opportunities. So you've got 4 substantial carriers that you've identified winning awards with. And I believe you said you expected this to ramp in the second half of the year. What -- I'd like to get a better understanding of a little bit more in terms of what you expect to be selling in these projects, the mix between software like the above packet core and gateway versus hardware like your access points. And in terms of how should we think about this evolving longer term as we think about 2019? I just struggle to really get a good sense of the contribution potential longer term.

Simon, we have won projects with both the core side as well as the access side. So we -- a combination of pure software products that virtualize the network functions and an appliance type of RAN, or radio access network, products in the mix of the revenue for 2018. And in the end, we expect the combined gross margin to be in the range we guided for 2018. In the long term, we see really large opportunities on both the core side as well as on the RAN side. I think we're guiding to pass on the same gross margin range at this point. But if we happen to be more successful in one area or the other, it's upside.

Okay. And just as a housekeeping. Could you give us a little bit of detail regarding 10% customers in the quarter, how many? How big? Maybe who are they?

Yes. We had 2 customers that were 10% and more. They were Charter and Liberty.

And can you size them? Or even the combination, how big it was?

Charter was in excess of 20%, and Liberty was less than 20%.

Our next question comes from the line of Mark Moskowitz from Barclays.

Just want to build off of one of Simon's question here in terms of the full year guidance. How should we think about the core business? If you're expecting to convert some of these wireless wins to revenue, is there a contemplation then for deceleration in some of the core business?

Mark, when you say core business, you mean the cable broadband business?

That's correct.

We don't see that. We see the -- the cable broadband business is going strong due to the bolster of DOCSIS 3.1 rollout as well as the initial stage of distributed architecture rollout. We don't see weakness in cable broadband today. We are positive, and we are confident that our wireless business is going well, and we expect that shipment to ramp. We are basically still looking at how we account for the revenue.

Okay. And then a couple of questions for Gary, if I could. Gary, firstly, on the gross margin, given the strength in the software or the capacity expansions, why wasn't the gross margin better? And then secondly, for the full year revenue, I get in terms of guidance you're guiding to, but should investors contemplate quarter-on-quarter growth the next 3 quarters? Or could we have 1 quarter where maybe there is a sequential decline that they may be prepare for and then a return to growth after that on a quarterly basis?

I think -- again, we tend to focus on annual more, right? So we expect annual growth on top line. There could be variability from quarter-to-quarter. But again, we expect on the top line basis growth year-over-year. On the gross margin side, as I mentioned in my prepared remarks, we upgraded certain of our customers, existing customers, the equipment from 3.0 device equipment to 3.1-readied equipment. So that yielded a little -- a slightly lower gross margin in those transactions because we upgrade those customers to position them well for 3.1 going forward.

Our next question comes from the line of Meta Marshall from Morgan Stanley.

I just wanted to get a little bit more detail on your new Europe win. And just what was the entry point there for kind of new winning additional footprint within that customer? Was that customer looking at distributed architectures? Were they just doing it as part of DOCSIS 3.1 upgrades, that would be helpful? And I have a second question, but you can answer that one first.

Yes. So it's a customer that we've had a relationship within the past, but we won a significant amount of business with them going forward as they positioned a significant 3.1 rollout going forward, so existing customer for which we had a small portion of the network and now we've -- going to be getting a larger portion of the network to support their gigabit rollout project.

Okay. Got it. That's helpful. And then second question. I think we talked about wireless being more material in 2019 and now it seems like you guys are talking about it more in the second half of '18. So are you seeing faster adoption or just kind of what led to a change in tone or bringing forward some of that commentary to the second half versus 2019?

We do see more positive reactions from our mobile network operator customers in the wireless space. We -- actually, we discussed during the follow-on offer we expect the wireless shipment to be better than we expected, no -- during the IPO time frame.

Got it. I mean, is there something that could contribute kind of double-digit millions this year? Or are we still talking kind of single-digit and then becoming more material in 2019? And that's it from me.

I don't think we have given a quantitative guidance, but I would think it will be more positive, more material than we've guided before.

Our next question comes from the line of John McGrath from Stifel.

So to start off on the capacity expansion sales, you had a particularly strong growth in the quarter. Can you go into more detail on the balance of the demand drivers between these? How much of this acceleration is coming from these DOCSIS 3.1 upgrades? Or how much are these software licenses to turn on channels?

While there -- capacity expansions are totally turning on new channels, additional bandwidth, right, be it DOCSIS 3.1 or DOCSIS 3.0. In this quarter, the mix was around 25%, 35% DOCSIS 3.1 and the difference really was 3.0, and it's across the globe. We're getting more and more request for channel extensions across all the geographies. As Jerry mentioned in his prepared remarks, we're seeing a lot more uptake on 3.1 in the North America region now.

Good. And then revisiting the seasonality question. In 2017, the second half of the year grew about 52% versus the first half. This compares to an average of about 23% the last 3 years. So looking to 2018, there are some expectations for incremental drivers like DAA and wireless that are new to the model. So looking at seasonality for '18, given these incremental drivers, should we look for seasonality to be more closer to that 2017 range or are there other factors we need to take into consideration that would make seasonality more look towards that kind of average of 23% growth?

I think you should probably see a trend more towards '17. I think as Jerry mentioned in his remarks, if you think about kind of where the business is sizing up for the year, the back half of the year. We expect uptick in both the DAA side, Distributed Architecture, and also on the wireless side. So probably somewhat similar to what you see from a profile for '17.

Our next question comes from the line of Tim Savageaux from Northland Capital.

I wanted to follow up on the remote size space kind of over the similar focus on materiality. You'd mentioned a number of trials and even some live deployments. I'd seen some reporting elsewhere that trial number was as high as 40. So if you look at the opportunity, based on the timing of the rollout and near as I can tell, we're talking of maybe tens of thousands, low tens of thousands from an optical node standpoint. I guess, does that sound right to you? And with regard to Casa's participation in that market, would you have, I guess, equivalent comments that you just made on the wireless side regarding Remote PHY as you look at it now relative to a few quarters ago?

I think the number you cited in terms of number of fiber nodes is high in our view. We think that, that ramp will start late at 2018 and is going to grow very rapidly. But we don't see that kind of number in the whole industry.

Our next question comes from the line of Jason Ader from William Blair.

My question is just on the outlook of -- I mean, clearly, you're going good about the wireless opportunity. You're coming off a very strong Q1. I was wondering you didn't raise full year guidance, and I was wondering why not.

Yes. I think it's -- so it's still early on in the year. We think we still have the same view of the projects that we are engaged with. So I think we feel good about the guidance that we gave against early on in the year. So I think we're -- I think it's the best approach to stay with our existing guidance until we get better view where this year's is sizing up.

Okay, great. And then just on the DAA opportunity. Should we expect kind of Q4 where you start to see material revenue contribution or could it actually start in Q3?

I don't think we have been very accurate in the exact time, but I would say it is late 2018.

(Operator Instructions) Our next question comes from the line of Sarah Hindlian from Macquarie Group.

Hello.

Yes, we're here.

Sorry about that. Apologies. I would love to hear from you guys a little bit of details, a little bit more around customer concentration, in particular, really, if you're seeing any notable shifts among some of your key customers or new customers onboarding? And how you're really dealing with that customer concentration because you've been managing very well in your first couple of quarters as a public company? I would love to hear a little bit more about the visibility you have around the customer concentration side?

Well, we have couple of 10 plus percent customers, and they have been providing very steady revenue in the last few years. And we continue to feel good about those customer relationship. And on the other hand, we are ramping up new Tier 1 operators in mobile and fixed broadband. That's going to continue to give us diversification. I think the effect will be felt more in 2019.

All right. That's really helpful. So that -- do you think the diversification goes up a little bit in 2019?

That's what we believe.

Yes, it's just entrenched. Yes, over the years we've got more and more diversified as time goes on. As Jerry said, introducing the new line of business will further help that problem.

Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to Mr. Jerry Guo for closing.

Thank you, everyone, for joining us today and I will look forward to updating you on our progress next quarter and see many of you at some of the upcoming investment conferences we will be attending.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.