May 10, 2018
Executives
Monica Gould - IR Jerry Guo - President and CEO Gary Hall - CFO
Analysts
Simon Leopold - Raymond James Mark Moskowitz - Barclays Meta Marshall - Morgan Stanley John McGrath - Stifel Tim Savageaux - Northland Capital Jason Ader - William Blair Sarah Hindlian - Macquarie Group
Operator
Ladies and gentlemen, greeting and welcome to the Casa Systems Inc. First Quarter 2018 Earnings Conference Call.
At this time all participants are in a listen-only mode [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.
Monica Gould
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 do 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 our 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 will help investors better understand our performance or business trend. And with that I'd like to turn the call over to Jerry.
Jerry Guo
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 our 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 the existing customers, including with a Tier 1 customer in Europe, who was also in the process of aggressively upgrading their network to DOCSIS 3.1. As part of our land 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 forecast. IHS market 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 half already transition 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 three 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 Telefónica.
We have begun deployments with all these customers and are already in discussion 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 Axyom 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 I mobile service providers 5G/4G core RFI/RFP and evaluation processes.
On the fix 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 multi-dimensional 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 provider globally. And we expect commercial success as early as Q2, 2018.
As you may have seen earlier today, we announced a new radio access solutions, 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 source key challenges associated with the backhaul, citing and tower.
Our Apex pico cell has had a strong customer interest from both mobile service providers and MSOs and multiple Tear 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 and services, virtualization and functional disaggregation, and the identification of our broadband network.
Our Axyom platform is a cloud native micro services space 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 a right time with the right products.
In summary, Casa is at the forefront of broadband network transformation. Casa's innovations and proven track record of delivering those innovations ahead of competitors have captured the attention of service providers globally.
We are 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 detail review of our financial performance and our outlook for 2018.
Gary Hall
Thank you, Jerry, and good afternoon everyone. We are 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 million 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 of 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 expansions.
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 and 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 timelines.
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 at 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 product 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
Thank you. Ladies and gentlemen we will now be conducting our Q&A session.
[Operator Instructions] Our first question comes from the line of Simon Leopold from Raymond James. Please go ahead.
Simon Leopold
Great, thanks for taking the question. I wanted to dig a little bit deeper in terms of the wireless opportunities.
So you've got four 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 point.
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? Thank you.
Jerry Guo
Simon, we have one project with both the core side, as well as the access side. So we expect a combination of pure software products, the virtualized network functions and 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 are guiding to pass the same gross margin range at this point, but if we happen to be more successful in one area or the other is outside.
Simon Leopold
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 were they?
Gary Hall
Yes, we had two customers that were 10% or more they were Charter and Liberty.
Simon Leopold
And can you size them or even the combination how big it was?
Gary Hall
Charter was in excess of 20% and Liberty was less than 20%.
Simon Leopold
Great, thank you for taking my questions.
Operator
Thank you. Our next question comes from the line of Mark Moskowitz from Barclays.
Please go ahead.
Mark Moskowitz
Yes, thank you. Good afternoon.
Just want to build off of one of the Simon's questions 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 contemplation then for deceleration in some of the core business?
Jerry Guo
Mark, when you say core business you mean the cable broadband business?
Mark Moskowitz
That's correct.
Jerry Guo
We don't see that. We see the cable broadband business is going strong due to the bolster 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 are - we expect that shipment to ramp.
We are basically still looking at how we account for the revenue.
Mark Moskowitz
Okay. And then a couple of questions for Gary if I could.
Gary, firstly on the gross margin given the strength in the software capacity expansions, why wasn't the gross margin better? And then secondly, for the full year revenue, I get in terms of the guidance you are guiding to, but should investors contemplate quarter-on-quarter growth the next three quarters or could we have one quarter or maybe there is a sequential decline that you maybe prepare for and then a return to growth after that on a quarterly basis?
Gary Hall
Yes, I think again we're trying to focus on annual, right. So, we expect annual growth 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 or equipment to 3.1 ready equipment. So, that yielded a little - slightly lower gross margin in those transactions as we upgraded those customers to position them well for 3.1 going forward.
Mark Moskowitz
Okay, thank you.
Operator
Thank you. Our next question comes from the line of Meta Marshall from Morgan Stanley.
Please go ahead.
Meta Marshall
Great, thanks. 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 customers, was that customers looking at distributed architecture, were they just doing it as part of DOCSIS 3.1 upgrade that would be helpful. I have a second quarter, but you can answer that one first.
Gary Hall
Yes, so the customer that we've had a relationship within the past, but we won a significant amount of business with them going forward as they position a significant 3.1 rollout going forward. So, existing customers for which we had a small portion of network and now we've kind of getting a larger portion of the network to support their gigabit rollout project.
Meta Marshall
Okay. Got it, thanks.
That's helpful. And then second question, I think we've 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 2018.
So are you seeing faster adoption or just kind of what led a change until you are bringing forward some of that commentary to second half versus 2019? Thanks.
Jerry Guo
We do see more positive reactions from our mobile network operator customers in the wireless space. We - as actually we discussed and during the follow on offer we expect the wireless shipment to be better than we expected, now during the IPO timeframe.
Meta Marshall
Got it. I mean, is that something that could contribute kind of double-digit million this year, or are we still talking kind of single-digit and then becoming more material in 2019?
And that's it for me.
Jerry Guo
I don't think we are - we have given a quantitative guidance, but I would think it will be more positive, more material than we guided before.
Meta Marshall
Okay, thanks.
Operator
Thank you. Our next question is comes from the line of John McGrath from Stifel.
Please go ahead.
John McGrath
Hi, Jerry and Gary, thanks for taking my question. So, to start off on the capacity expansion sales had particularly strong growth in the quarter.
Can you go into more detail on the balance of the demand drivers between these? How much of these accelerations coming from these DOCSIS 3.1 upgrades or how much are these software licenses return on channels?
Gary Hall
Whether capacity expansions are totally turning on new channel, additional bandwidth, right via DOCSIS 3.1 or DOCSIS 3.0. And this quarter the mix was around 25%, 35% DOCSIS 3.1 and the difference is really was 3.0.
And it's across the global we are getting more and more request for channel expansions across all the geographies. As Jerry mentioned in his prepared remarks that we're seeing a lot more uptake on 3.1 in the North America region now.
John McGrath
Great. And then revisiting the seasonality question, in 2017 the second half of the year grew above 52% versus the first half.
This compares to an average of about 23% the last three 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 2018 given these incremental drivers should we look for seasonality to be more closer to that 2017 range or there are other factors we need to take into consideration that would make seasonality more look towards that kind of average of 23% growth.
Gary Hall
I think you probably see it trend more towards 2017. I think as Jerry mentioned in his remarks 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 it's probably somewhat similar to what you see from a profile for 2017.
John McGrath
Okay, great. Thanks for taking my questions.
Operator
Thank you. Our next question comes from the line of Tim Savageaux from Northland Capital.
Please go ahead.
Tim Savageaux
Hi, good afternoon. Wanted to follow-up on the Remote PHY space kind of really the similar focus on materiality, you mentioned a number of trials and even some live deployments and I had 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 roll out. 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?
Jerry Guo
I think the number you cited in terms of number of fiber nodes is high in our view. We think that the ramp will start later 2018 and is going to grow very rapidly, but we don't see that kind of number in the whole industry.
Tim Savageaux
Good, appreciate it I'll pass it on thanks.
Operator
Thank you. Our next question comes from the line of Jason Ader from William Blair.
Please go ahead.
Jason Ader
Yes, thanks guys. My question was just on the outlook and clearly you're feeling good about the wireless opportunity you are coming off a very strong Q1, I was wondering you didn't raise full year guidance and I was wondering why not?
Gary Hall
Yes, I think it's still early on in the year, we think we still have the same view of the projects that we are engaged with I think we feel good about the guidance that we gave against early on in the years. So I think the best approach is to stay with our existing guidance until we get a better view of where the year is sizing up.
Jason Ader
Okay, great. And then just on the DAA opportunity, should we expect kind of Q4 where you start to see a material revenue contribution or could this actually start in Q3?
Gary Hall
I don't think we have been very accurate in feedback time, but I would say it is late 2018.
Jason Ader
Alright, that's it from me. Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Sarah Hindlian from Macquarie Group.
Please go ahead.
Sarah Hindlian
Hello.
Jerry Guo
Yes, we're here.
Sarah Hindlian
Hi, sorry about that apologies. Thank you so much for taking my question.
I would love to hear from you guys a little bit of detail - a little bit more around customer concentration in particular really if you're seeing any notable shift among some of your key customers or new customers onboarding? And how you're really dealing with that that customer concentration, because you've been managing very well in first your couple of quarters as a public company.
Would love to hear a little bit more about the visibility you have around the customer concentration side?
Jerry Guo
Well, we have couple of 10% plus customers and they have been providing very steady revenue in the last two 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 the fixed broadband that's going to continue to give us diversification. I think the effect will be felt more in 2019.
Sarah Hindlian
Alright, that's really helpful. So do you think the diversification goes up a little bit in 2019?
Jerry Guo
That's what we believe.
Gary Hall
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.
Operator
Thank you. 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.
Jerry Guo
Thank you everyone for joining us today. And we look forward to updating you on our progress next quarter and see many of you at some of the upcoming investment conferences we'll be attending.
Operator
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.