Vecima Networks (TSX:VCM) Q4 2026 Earnings Call

0:00 Hello, this is the Chorus Call conference operator. Welcome to Vesima Networks' fourth quarter and full year fiscal 2026 results conference call and webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Analysts and institutional investors who wish to join the question queue, simply press star and one on your touchstone phone. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up the handset before pressing any keys. Should you need assistance during the conference call, you may signal the operator by pressing star and zero. Presenting today on behalf of Vesima Networks are Sumit Kumar, President and CEO, and Judd Schmid, Chief Financial Officer.

0:52 Today's call will begin with executive commentary on Vesima's financial and operational performance for the fourth quarter and full year fiscal 2026 results. Lastly, the call will finish with a question and answer session period for analysts and institutional investors. The press release announcing the company's fourth quarter and full year fiscal 2026 results, as well as detailed supplemental investor information, are posted on Vesima's website at www.vesima.com under the Investor Relations heading. The highlights provided in this call should be understood in conjunction with the company's audited annual consolidated financial statements and accompanying notes for years ended June 30, 2026 and 2025.

1:41 Thank you for watching. 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.

2:28 Fessima disclaims any intention or obligation to update or revise any forward-looking statements. As a result of new information, future events are otherwise except as required by law. Please review the cautionary language in the company's fourth quarter and full year fiscal 2026 earnings report and press release, as well as its annual information form dated September 24, 2026, regarding the various factors, assumptions, and risks that could cause actual results to differ. These documents are available on Vesima's website at www.vesima.com. Under the Investor Relations heading and on CDAR at www.cdarplus.ca. At this time, I would like to turn the conference over to Mr.

3:15 Kumar to proceed with his remarks. Please go ahead.

3:21 Good morning and welcome, everyone. Thank you for joining us. We closed out Vesma's fiscal 2026 year with a breakthrough fourth quarter that included our best ever quarterly financial results and another increase to our outlook. I'll start today with an overview of our Q4 highlights and of course some of the high-level achievements all through the past year. Judd will provide our fourth quarter financial review and then I'll return to discuss the significant growth we see out ahead before opening the call to your questions. As a result of the divestiture of the telematics business in July, our remarks today are going to focus on the remaining continuing operations of our VBS and CDS segments only. Fourth quarter was the strongest in Vesma's history.

4:09 As wide-scale DAA rollouts gained momentum, our Q4 consolidated revenues climbed 36% year-over-year to a record $91 million and 45% sequentially quarter-over-quarter. Q4 adjusted EBITDA more than tripled year-on-year to an all-time high of $18.9 million, achieving adjusted EBITDA margins of 20.8% in the quarter. These were deeply satisfying results, but I want to emphasize that they reflect just the early returns on Vesma's long-term strategy. As you know, broadband operators worldwide have been preparing for a once-in-a-generation technology transition to distributed access architecture and DOCSIS 4.0 for many years now they've been preparing.

4:56 Vesma has played a key role in this evolution, leveraging our deep experience and technical strengths and partnering closely with customers to provide them the innovative interoperable technologies that underpin these network transformations. It's taken sharp focus, significant investment and an unwavering strategy to build the industry's most comprehensive portfolio of DAA cable broadband and fiber to the home broadband access platforms. And today we've emerged as a leading global force in the next generation broadband access as wide-scale rollouts of these network upgrades. Those wide-scale rollouts translate into a ramp in demand for our solutions. And that's part of a wave that is really just starting to build.

5:44 In our video and broadband solution segment, fourth quarter revenue climbed to a record $80.1 million, up 38% year-over-year, as demand and sales for our next-gen EnterDAA products accelerated. This was driven in part by a significant wrap-up of deliveries to Target Communications as we supported the expansion of their DAA rollout under our multi-year cable and fiber agreement with this leading Tier 1 operator customer. It also reflects our growing relationships with a large and ever-expanding base of operators worldwide. By year-end, we have broadband engagements with 150 customers, an increase of more than 100 customers over just a few short years. The expansion and deepening of our customer base also contributed to very strong sales for our intra-optical products, led by our SF4x optical line terminals for fiber to the home.

6:39 Vecima was already the number one global market leader for remote OLT terminals, so this further builds on our position. And it underscores Vecima's increasingly important role as a critical supplier in the fiber to the home space, supported by our 10 gig plus fiber broadband capabilities. Shipments of our new ERM3 remote PHY modules also rose sharply in the quarter as we supported our customers' ongoing network upgrades, and demand continued to grow for our highly successful EN9000 gap notes. As we've discussed previously, the EN9000 provides operators with a flexible foundation that supports evolving DOCSIS and fiber-to-the-home technologies while reducing the need for future hardware replacements.

7:26 So this underscores a significant network incumbency advantage that our very broad footprint of deployed access platforms is now established. Combined, Entra platforms are now providing multi-gigabit broadband connections to tens of millions of homes. And we expect this increasingly deep footprint to evolve through multiple generations of further broadband investment, allowing Vesma to monetize our widely deployed base of Entra platforms for years to come. Keep in mind that while achieving all-time record results from our existing enterprise portfolio in Q4, we're also advancing new technologies that we expect will become a major new growth series of growth engines for Vesma. We made significant progress with our VCMTS solution in Q4, progressing trials with our lead Tier 1 customer, while also signing new agreements with additional major customers, including Videotron, a large Tier 1 operator in Canada.

8:23 We now count seven VCMTS wins, including two Tier 1s so far, with many new customers engaged, including several more Tier 1s, 2s, and 3s. In our commercial video portfolio, our next-gen TerraceIQ solution has also been gaining broad traction. Subsequent to year end, a major North American Tier 1 operator selected TerraceIQ for a broad commercial video network modernization spanning thousands of locations and properties. In just the last year, we secured multiple new design wins for TerraceIQ and other customers as well, including three Tier 1s and an additional Tier 2. Taken together, these achievements are setting the stage for sustained growth in the VBS segment, both in the near and the long term, and we fully expect to build further on the all-time highs we just produced. I'll talk more about that a little later in the call.

9:18 Turning to content delivery and storage, The segment generated double-digit Q4 revenue growth, both year-over-year and quarter-over-quarter, as uptake of managed IPTV installations expanded. We also made excellent progress with our targeted dynamic ad insertion solution as we continued to deploy Phase 2 with our lead customer, Hotwire Communications. DAI enables operators to deliver targeted personalized advertising experiences, increasing video ARPUs without having to increase the rates to customers. Overall, it was an outstanding quarter for Vesima, one that marked a major milestone as we now embark on a significant new phase of growth. To ensure that we're positioned to take advantage of the exciting opportunities ahead, we've also undertaken some important strategic initiatives in recent months.

10:09 In July, we divested our telematics business, enabling us to sharpen our focus on the fast-growing broadband access and streaming video businesses, while also boosting our balance sheet. and in August, we announced two executive leadership appointments that will help support us on our path forward. While I'll remain, of course, the CEO of Vesma, we've elevated Clay McCreery to President and Chief Operating Officer, focused on Vesma's strategic performance and long-term growth. And Ryan Nicometo, who previously led our VBS segment as GM, has been promoted to the newly created Chief Product Officer role, where he's focused on executing the unified product strategy all across our platforms. So these appointments not only strengthen our leadership structure, they also recognize the important contributions Clay and Ryan have made to Vesma for many years now.

10:57 Now I'll turn the call over to Judd to discuss our fourth quarter results, financials in more detail. Judd.

11:04 Thanks, Sumit. Good morning, everyone. I'll walk through our fourth quarter financial performance in more detail. For the purposes of this call, I'll assume that everyone has seen our key four fiscal 26, News release, MD&A, and financial statements posted on VESMA's website. Please refer to today's news release and our MD&A for definitions and reconciliations of the non-IFRS financial measures I'll be referencing. As we've said over the past few months, we expected the fourth quarter of fiscal 26 to mark the start of an accelerated growth period for VESMA, and that's exactly what played out. This quarter's results came in as we anticipated. and, as Sumit noted, the results I'll be discussing today reflect the continuing operations of our BBS and CDS segments. Results from our telematics segment, which we sold in July 2026, are reported as discontinued operations and are not part of my commentary today.

12:02 Starting with consolidated sales, fourth quarter revenue grew sharply to a record $91 million, an increase of 36% year-over-year and 45% quarter-over-quarter. Our video and broadband solutions segment contributed a record $80.1 million of this revenue, up 38% year-over-year and 53% higher than in Q3. Our next-generation Entra DAA products remain the key revenue driver in our VBS segment, with Entra sales record entry sales of $77.3 million, growing 42% year-over-year and 57% on a sequential quarterly basis. Commercial video sales added another $2.8 million to our VBS results in the quarter, reflecting the continued transition to next-generation platforms, as well as some of our newer DAA-driven commercial video products now included in our entry family revenues.

13:03 In our content delivery and storage segment, Fourth quarter revenues came in at $10.8 million, up 26% from the same period last year, and 1% higher than in Q3. Fourth quarter CDS revenue included $4.9 million in product sales and $5.9 million in service revenues. As we typically note, quarterly fluctuations are typical for the CDS segment. Gross margin improved significantly in the fourth quarter to 45.4%, up from 26.3% in the fourth quarter last year. And adjusted gross margin rose to 45% in Q4, up from 36.7% in the fourth quarter of fiscal 25. That strong year-over-year improvement largely reflects the absence of last year's significant inventory write-down and unfavorable product mix. along with a greater proportion of higher margin intra-optical at software sales in this year's mix. Sequentially, both gross margin and adjusted gross margin were somewhat lower than in Q3, reflecting a modestly less favorable product mix.

14:20 Turning now to fourth quarter operating expenses, on a year-over-year basis, OpEx of $29 million was down $5.7 million year-over-year, and on a sequential basis increased slightly by $600,000 from Q3. R&D expenses for the fourth quarter increased to $12.6 million or 14% of sales from $11.7 million or 18% of sales last year. This was primarily a result of higher amortization of deferred development costs as more of our development investments moved into commercial production. This is offset by higher capitalized development costs related to our future product offerings. As we mention each quarter, we defer some of our R&D expenditures to future periods until our products begin commercialization.

15:13 And so reported R&D expense in a period is typically different than the actual cash outlay. Adjusting for this, our actual cash R&D investment was $16.9 million, or 19% of revenues in the fourth quarter, up from $15.3 million or 23% of revenues a year ago as we continue to prioritize our investment in future product development and our innovation pipeline. Sales and marketing expenses decreased slightly to $9.2 million or 10% of sales from $9.4 million or 14% of sales last year, reflecting operating leverage in our sales and marketing cost base and continued discipline in variable selling costs.

15:59 And G&A expenses of $6.7 million or 7% of sales were up from $6.2 million or 9% of sales in the same period last year. We remain focused on closely monitoring our operating expenses and we don't anticipate significant OPEX increases in the near term. continue discipline on our OpEx is a key part of how we get to our bottom line financial goals. We continue to incur interest expense related to our revolving line of credit, other debt, and accounts receivable factoring programs. With debt levels expected to come down and cash flow continuing to improve, we anticipate lower interest expense in 2027.

16:46 A quick note on taxes. Our effective tax rate of 41% is higher than usual, primarily due to the write-offs of the BC generated investment tax credits in Canada related to our telematics business and provision to return adjustments in both Canada and the US. That being said, we pay virtually no cash taxes in fiscal 26, thanks to our substantial bank of tax attributes in Canada. and also changes to the U.S. tax laws regarding the deductibility of R&D expenses. We may see some cash taxes in the U.S. in fiscal 27, depending upon how results come in, but we expect our effective tax rate to be much lower than this past quarter.

17:35 Turning to the bottom line, we significantly strengthened fourth quarter operating income to $12.3 million compared with a loss of $17.1 million in the same period last year. The $29.4 million improvement primarily reflects higher VBS segment sales combined with lower impairment expense and inventory allowances as compared with a year ago. Net income also improved this quarter coming in at $5.4 million or 22 cents a share from a net loss of $13.3 million or 55 cents loss per share in the fourth quarter of fiscal 25, a huge improvement. Adjusted earnings per share for the fourth quarter grew to 21 cents per share from a loss of 6 cents per share last year.

18:23 Turning to the balance sheet, working capital continues to improve with working capital being $62.9 million at June 30th, 2026, which increased from $51.2 million at June 30th, 2025, reflecting our efforts to pay down our debt. Cash flow provided by operations for the fourth quarter increased to $24.8 million from $18.9 million during the same period last year, driven mainly by current period results rather than changes in working capital. Finally, our net debt position, defined as total debt, less cash, and lease liabilities, continues to improve. At year end, our total net debt stood at $40.7 million, which is down from 54.4 million at the end of Q3. Going forward, we'll keep focusing on strengthening our balance sheet to further debt reductions.

19:24 On a final note, the board of directors approved a quarterly dividend of five and a half cents per common share payable on November 9th to shareholders of record as of October 16th, 2026. It's important to note that this dividend will be designated as an eligible dividend for Canadian income tax purposes. And back to Sumit.

19:52 Thank you, Judd. Our long-term strategy of positioning Vesma at the forefront of our transforming industry is translating into the strong and profitable growth we saw in the fourth quarter. And we're confident this is just the beginning of the growth ahead. You'll recall that in our last outlook, we raised our projection for calendar 26 revenue growth to 22 and a half, 30%. Today, we increase that further with calendar 26 revenue expectations now rising to 27 to 32% growth versus calendar 2025. Looking further ahead, we expect our momentum to keep building through fiscal 27 with the revenue growth outlook of 30 to 35% versus fiscal 2026. Based on our projected demand profile, we're also anticipating a very strong adjusted EBITDA margin of approximately 20% in both calendar 26 and fiscal 27.

20:48 We expect, of course, our growth to be led by our video and broadband solution segment as we continue to support both our Lead Tier 1 and 76 other customers in their wide-scale DAA network deployments. These are major multi-year upgrade programs. encompassing our ENTRA Remote PHY products, including our EN9000 and ERM RPD platforms, and our ENTRA Optical Fiber Access Platform centered around fiber-to-the-home remote OLT nodes. And we're building on our revenue base as we increase deployment of newer ENTRA products across multiple customers. Those include, for example, the EN3400, a new, smaller version of the EN9000 GAP node. the EEM-210 standalone 10-gig E-PON module, and our power all-over modules.

21:37 So as we move forward, our fiber access products are playing an increasingly important role as operators expand fiber-to-home deployments and invest in next-gen architectures. As a recognized leader in remote OLT technology and with support for standards like XCS PON and the emerging 50-gig PON and all-PON architectures, were ideally positioned to be a major player in the global expansion of fiber to the home networks. In our content delivery and storage segment, we're anticipating steady overall operating performance as we continue to focus on driving revenue growth through both managed IPTV expansions and our rollout of DAI. and beginning next quarter, results in this segment will encompass our commercial video portfolio, including Taras IQ, which is expected to start providing meaningful contribution as the 2027 fiscal year progresses.

22:31 That change in the segments aligns with our, aligns our reporting segments going forward with the sales, execution and the market characteristics that are common between our media scale IP video platforms and the Taras portfolio. while also providing some more direct visibility into results for our cable and fiber broadband platforms. So as of next quarter, the two operating segments we report under will be content delivery solutions and broadband access solutions. As we enter fiscal 27, fresh off all-time highs in revenue and adjusted EBITDA, we see a broad and compelling growth runway ahead. Bessema's continued expansion across new platforms, design wins, and customer relationships together with a network footprint that's underpinning broadband access for millions of homes and businesses worldwide positions us for continued momentum for years to come.

23:25 Notably, our 30% to 35% growth outlook for fiscal year 27 contemplates only the early stages of contribution from InterVC MTS and DOCSIS 4.0 RPDs, XGS PON, and several other platforms now entering the market, which we expect will be increasingly meaningful drivers of performance in fiscal 28 and beyond. Our broad and innovative portfolio of interoperable cable and fiber broadband access products and IPTV solutions gives us multiple engines for growth, with Vesma at the forefront of the technology shaping future network architectures. And against that backdrop of accelerating wide-scale, multi-gig broadband adoption, Investments are really ideally positioned to remain a leader in a multi-year infrastructure investment pipeline as it grows to greater scale.

24:14 We've never been more confident in investments' future. The opportunities before us are substantial, with multiple catalysts across our product portfolio and customer base still in the early stages of realization. And we look forward to executing on them and reporting on our progress in the periods ahead. That concludes our formal comments for today. We'd now be happy to take questions. Operator? We will now begin the question and answer session for analysts and institutional investors. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2.

25:02 We will pause for a moment as callers join the queue. The first question will come from Jim Byrne with Acumen Capital. Please go ahead.

25:15 Good morning, guys. Just thinking about production capacity and your exposure to U.S. tariffs. I know you've moved some manufacturing down there in the past couple of years, kind of pushing here $400 million in sales, annualized. Just thoughts on further requirements to move? manufacturing down there, or maybe just commentary on kind of production capacity today and how that positions you for the tariff situation.

25:46 Yeah, thanks, Jim. So yeah, I think I've said for some time that we've envisioned the growth upcoming here and the production capacity is well situated for that, both in our Canadian operations as well as our international partners in contract manufacturing. So we believe we've set up for the scale that's required Very well there, and there's room to add further shifts into that manufacturing operation. That team's been built up to do so. So from the perspective of the revenue envelope, we've got a lot of growth that we can work towards ahead. So I think on the tariff side, like many other companies, not just those with this large Canadian presence, but all around the world, global companies have faced A bit of this heightened uncertainty since early 25 with how the U.S.

26:38 is shifting their approach to trade. And while the nature of our industry does mean at the moment that a high amount of our sales, of course, are to U.S. customers, I think what I've tried to outline at the beginning of that changing environment is that, you know, Decima has always been very strategically well positioned by design. You know, for almost 40 years now, we've been, this broadband technology here, we've always maintained full control and ownership and in-house designed IP in our manufacturing process. So in addition, of course, to the IP in our design and product designs and software and hardware. So that's a bit of a contrast to other organizations that might completely outsource their manufacturing, but Besson has always owned that process and all the designs that are out.

27:29 So the reasons for that have been many, not just on the trade side, but we have this complete agility in volumes and the production and product mix, quick turns on design changes. and the ability that we have to manage through and pivot around some of the supply chain challenges that we've seen in recent years between the pandemic and the memory stuff that's going on. The integration of acquisitions we've done where we've already exercised that capability to move manufacturing several times and as we've digested and integrated those acquisitions. You know, I think all that is to say is as this heightened trade uncertainty came up in the U.S., you know, we have this very strong inherent capability to manage it as, you know, in the way that we've always built our products. Again, we'll re-own that complete design manufacturing process.

28:16 So the most recent situation of the tariffs that came into effect in the summer, we've already made any needed adjustments, and those are actually quite minor in practice. You know, as unpredictable as that environment may be going forward region by region, how the U.S. is doing trade, you know, given where we're at today, what we've said with our outlook, it encompasses anything that's applicable. It's quite narrow in scope in terms of exposure there. And, you know, our overall sales profile has got that well managed. And, you know, in isolated cases, that there are some tariffs that are in effect. you know our ASPs have handled that well and you know with a small exposure while still being totally competitive and gaining the market share anyway so overall you know we're quite satisfied with our position and this core competency again has allowed us to be agile there.

29:11 Okay that's really helpful and then maybe for you Judd just thinking about With this ramp up in growth and sales, maybe just talk about the working capital here for fiscal 27. I would assume that you probably need some investment maybe just in inventories and change in AR, but maybe just help me understand kind of that working capital situation.

29:33 Yeah, Jim, we see a steady growth over the quarters of the year with... Really not a lot of growth in inventory other than to just make sure we have the goods on hand to get them back out the door. But it's not going to be anything like it was a couple of years ago where things got a little large on that side. AR will naturally grow depending upon timing of when those sales take place. But overall, we should be generating cash, paying down our debts. and using those funds to reinvest in the company. But we do see some working capital improvements throughout the year.

30:16 Okay, and then maybe just lastly, Sumit, I guess obviously visibility must be good with your revised outlook. What could go wrong? We've had some hiccups in the past with some major customers kind of shifting their plans Would that potentially happen again or you just feel like you've got enough kind of a broad base exposure now that no single customer can really sideline this outlook?

30:48 No, I think it's more on the latter side that we've got this broad base. I think, you know, I mentioned that, you know, we have 77 customers into the entire platforms today. And yeah, I think you're right. It's taken a lot of time for the industry to get to this phase. where we're accelerating the rollout of cable access and fiber access all across the industry. Of course, I think complex programs, a lot of planning, a lot of qualification that the industry has gone through, our customers have gone through over the last several years, so that's behind us and you've seen that show up in our results. You know, we think that the industry is on the move on this transformation. It's mandatory to go to multi-gig. It's mandatory for operators to be competitive with their offerings. AI traffic is, you know, doubling the capacity of the broadband, the capacity need of the broadband access network going forward.

31:44 So, you know, the industry has to move. We're on that now. You know, 77 customers and, you know, we expect things to be more broad-based and Some of those challenges have been overcome that we encountered in the past as an industry.

31:59 Okay. Thanks, guys. Thanks, Jim. The next question will come from Stephen Lee with Raymond James. Please go ahead.

32:13 Hey, thanks. Can I ask you about beads? Like, is there any activity at this point?

32:22 I think VEED has gone through its scenarios in terms of the differing U.S. administrations and their handling of that. Some awards have been made in the last year, year and a half or so. Our customers are also participating. So we do expect some contribution to enter the picture through fiscal 27. I think still predominantly our program is ongoing. That's the primary subsidy program that our customers are are leveraging and doing really well with. But also I want to point out that some of the greenfield fiber build has become a very meaningful component of our intra-optical sales and uptake from customers today. So we're also seeing new subdivisions.

33:09 We're seeing areas where it makes commercial sense for them to have a close drop of fiber all the way to a premise. That's happening at a broader pace today. So, you know, subsidy activity is ongoing. BEAT is, you know, yet to come, but probably, you know, not too consequential for us within the boundary of fiscal 27. But I think, you know, it's reaching the culmination of all this churn in terms of, you know, getting to the point of the U.S. rolling out.

33:38 Can it become consequential, like beyond 27? Or just relative to hard off, it's not going to be the same? for your customers, it's not going to be the same kind of magnitude.

33:51 You know, I think our customers are viewing it as, you know, an incremental piece that, you know, helps for some subsidies. You know, I don't think it's going to be as material for them as our, you know, as a whole, lots of new passages are going to roll out on BEAT. We've got a very, you know, broadly applicable platform, both our 10-gig E-PON and our XGS PON, moving to 50-gig PON solutions. So, you know, the current customer set, you know, maybe a little more focused on Greenfield and Ardoff, but, you know, as the B rollout starts to happen, you know, we're excited about how that plays into the overall TAM for ITU, PON, XGS, PON, and how we can participate there in that much larger TAM.

34:36 Okay, got it. Thanks. and I missed what you said on VCMTS, like how many customers in trials and I guess you have two tier ones generating revenues, is that right?

34:48 Oh yeah, we talked about seven overall customers, design wins you could call them. The tier ones are moving forward and deepening trials through calendar 26, leading to likelihood of some, in fact, customer-impacing market trials in some major markets this year. You know, so I think you need to think about. And then, you know, when I said seven, there's two tier ones. We've talked about the lead. We announced Videotron recently that has selected us as well with an agreement there for BCMTS. That's all in the future. You know, and actually, I think when we talk about the 30-35% growth and below for fiscal 27, you know, actually there's There's not too much contribution from BCMTS or even XGS within those results yet. So that we see as being a more meaningful growth driver in fiscal 28 and beyond. And then the five other customers are some smaller customers. We're racking those up pretty quickly today.

35:51 Some of those are already into deployment. Okay, thank you. Thanks, Stephen. Once again, analysts and institutional investors who would like to ask a question should press star and one on their touchtone phone. We will pause for a moment so any additional callers may join the queue. as there appear to be no further questions this concludes today's conference call you may now disconnect your lines thank you for participating and have a pleasant day