Aug 2, 2020
Operator
Greetings and welcome to the Casa Systems Second Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.
It is now my pleasure to introduce your host, Jackie Marcus. Please go ahead.
Jackie Marcus IR
Thank you, operator and good afternoon everyone. Casa Systems released results for the second quarter of 2020 ended June 30, 2020, this afternoon after the market closed.
If you did not receive a copy of our earnings press release, you may obtain it from our Investor Relations section of our website at investors.casa-systems.com. With me on today’s call are Jerry Guo, Chief Executive Officer and Scott Bruckner, Interim Chief Financial Officer and Senior Vice President.
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 we may make on this call or in the earnings release are based upon the 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 US 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 useful to investors or believe it will help investors better understand our performance or business trends.
And with that, I’d like to turn the call over to Jerry. Jerry?
Jerry Guo
Good afternoon everyone and thanks for joining us today as we discuss our second quarter results. Before I discuss our financial and operational results, I would like to take a moment to extend my sincerest thanks to the tremendous team we have at Casa Systems for their unwavering dedication and belief in our business.
We are in unprecedented times and I am proud to say that our organization remains focused on its commitment to provide the technology infrastructure necessary to keep people connected. I hope all of you and your families are staying safe and healthy.
Let’s turn to our performance in the second quarter. In our first full quarter under the global pandemic, we once again delivered strong results.
This came from executing on our strategy of driving revenue in our growth products, continuing to diversify our revenue and customer base and focusing on improving our profitability and free cash flow. Before providing details on the quarter, I would like to outline several highlights from Q2.
We delivered strong top line performance at $83.4 million, which was driven by an expanded product footprint and higher demand for our wireless and the fixed telco products. As well as continued stability in our cable segment which represented approximately $42.6 million or 51%.
Notably, during Q2 almost 50% of our revenue came from products that we did not offer during the comparable period of 2019. We continue to make progress on our wireless initiatives.
Wireless comprised 20% of our Q2 revenue or $16.6 million and our wireless backlog grew to $84.8 million, up from $26 million at the end of Q1. We had significant wins in our wireless and its telco segments during the quarter, with the two wins in wireless Packet Cores, two wins in virtual BNG and multiservice routers and two wins in access devices.
We also made progress on reducing our customer concentration. We only had two 10% or greater customers in the quarter, which accounted for 39% of our revenue.
This compares to four 10% or greater customers in Q2 2019, which accounted for 51% of our revenue. And finally, we ended the quarter with a GAAP operating profit of $1.3 million and EBITDA margin of 11.2% and free cash flow of $15.5 million.
In short, we are very pleased with our progress and results from a financial, operational and strategic perspective as we navigate the near-term environment without losing sight of our longer-term objectives. Let’s now turn to our product areas.
Wireless revenue for the second quarter was $16.6 million. Our wireless backlog of almost $85 million included our 4G and 5G fixed wireless access devices, enterprise small sales cores and 4G, 5G Packet Cores.
Even though the timing of the deployments of our 5G infrastructure products depends on our customers’ timing and industry readiness, we are particularly pleased with the progress we are making with our 5G core solutions. For example, we announced last week that we collaborated with HPE and Orange to demonstrate a cloud native 5G core network that can recognize degraded quality of service for our mission critical service or application on a common network slice and automatically self-correct.
It does this by creating a new dedicated network slides on demand. We collaborated with a major network operator to successfully demonstrate the world’s first delivery of a long-distance multi-Gigabit 5G fixed wireless service using millimeter wave and we are in the process of deploying a large scale 5G fixed wireless access project for Tier 1 customer to deploy broadband customer service that will launch later this fall.
Turning to Cable, revenue including both products and services was $42.6 million, almost flat sequentially and a relatively flat year-to-date compared to the same period in 2019. First, cable sales over the past several quarters have been holding relatively steady between $40 million and $50 million per quarter.
This is encouraging following several consecutive quarters of spending reduction by cable operators, beginning in the second quarter of 2018. Second, for the fourth consecutive quarter as we continue to diversify our business with the increased sales of wireless and fixed telco products, cable revenue has shifted from almost 100% of our revenue to now around 50% of our total revenue.
This represents a positive shift in our business consistent with one of our key strategic objectives. Third, similar to what we saw in Q1, Q2 was marked by higher demand for our cable hardware including increased shipments of our integrated CCAP chassis and DAA nodes, including our Gen 2 nodes in order to meet growing demand for both downstream and upstream bandwidth.
In fixed telco revenue for the fourth quarter was around $24 million or approximately 29% of sales representing quarter-over-quarter growth of 32%. Growth in our fixed telco segment was driven largely by continued strong demand for our fiber to the distribution point and fixed broadband products as employees worldwide continue to work from home in the second quarter.
I would now like to update you on how COVID-19 is affecting our business. As I noted already, we saw increased demand for our products, some of which we believe is COVID related.
This was particularly evident in our access device segment, which includes our 4G and 5G fixed wireless, fixed broadband and fiber to the distribution point products. Second, our operations remain uninterrupted which enabled us to meet demand during the quarter.
However, as order volumes for our access device products increased significantly, we are taking measures to minimize the potential impact of COVID-19 on our supply chain to meet delivery schedules. Finally, as Scott will discuss in more detail the increased demand due to improved gross profit dollars and liquidity in the quarter.
I’m very pleased with our performance during the second quarter and particularly pleased with how quickly we have been able to leverage our expanded range of products across our entire customer base to meet their needs during the COVID pandemic. We are continuing to execute on our strategy, which is evident in our results.
While the current macro environment creates additional risks for our business, given our strong first half performance, I remain optimistic about our ability to show strong performance in the second half of 2020. Finally, I do want to say that we believe we are well positioned for long-term profitable growth through greater predictability in our results advancement and development of higher margin products and ultimately the expansion of our customer base.
There is more work to be done and we are well on our way to achieving these goals. With that, I will ask Scott to comment on our financial results in more detail.
Scott Bruckner
Thank you, Jerry, and good afternoon everyone. As Jerry mentioned, this was a strong quarter for Casa.
We drove profitability and we generated meaningful free cash flow as we delivered a diverse suite of products to meet the growing demand for connectivity during the COVID 19 pandemic. Revenue exceeded our expectations and we delivered a GAAP operating profit and strong EBITDA.
And as Jerry mentioned, we also grew our wireless backlog as a result of strong wireless product demand. We entered the second half of 2020 with greater financial flexibility and an improved cost structure which we believe will continue to enable us to deliver profitable growth.
Okay. Let’s turn to our second quarter results.
Total revenue was above our internal expectation at $83.4 million and compares to $52.1 million in the second quarter of 2019 and $83.6 million in the first quarter of 2020. Revenue from the acquired NetComm business during the second quarter was approximately $37.5 million, which was up 25% sequentially.
Excluding the contribution from NetComm, our second quarter revenue decreased 12% year-over-year and this was largely as a result of lower spending by our cable customers in Q2 2020 as compared to the prior year quarter when we saw a catch-up spending after a very anemic Q1 of 2019. Now if we exclude the contribution from NetComm on a year-to-date basis, cable revenue was flat year-over-year and total revenue was up around 14% due to the contribution of wireless.
And regarding cable as Jerry noted average quarterly revenue has been very stable in the range of $40 million to $50 million for the past several quarters. To provide additional detail, total product revenue excluding services was $72.1 million in the second quarter of which $58 million or 80% was from hardware and $14.1 million or 20% was from software and this compares to $42.2 million of total product revenue in the second quarter of last year with $19.2 million or 45% from hardware and $23.1 million or 55% from software.
In terms of total revenue hardware sales during the first quarter accounted for 70% compared to 37% in the prior year quarter. The increase in hardware revenue which is similar to what we saw last quarter is accounted for by two primary factors.
First, because of the transition to work from home, we saw strong demand for our access device products which enabled quick connectivity all of which are hardware. And second, during the quarter we saw a high volume of chassis and DAA node shipments as Jerry mentioned in our cable segment.
Cable accounted for approximately 51% of total revenue, which is a decrease from 97% in the second quarter of 2019 while wireless and fixed telco revenue increased to 20% and 29% respectively from 3% and 0% in the prior comparable period. As Jerry mentioned, we increased our wireless backlog by almost 225% to $84.8 million and we expect to work through this backlog over the course of the next few quarters.
Consolidated gross profit for the quarter was $43 million at a 52% gross margin compared to 51% in Q1 of this year and 75% in the second quarter of 2019. The year-over-year decrease in our gross margin was primarily driven by the higher mix of hardware revenue during the quarter, and this was largely from the acquisition of NetComm.
Gross profit however was higher year-over-year and exceeded our expectations due to higher revenue in Q2 and lower operating expenses. As we manage our diverse mix of higher and lower margin products, one of my objectives as the Interim CFO of Casa has been to focus on increasing our overall profit dollars and our free cash flow and during the second quarter, we achieved this with operating leverage that was driven by higher revenue and operating expense management, all while keeping our R&D and sales costs aligned with our near and medium term growth opportunities.
Total GAAP operating expenses in the second quarter were $41.8 million compared to $35.6 million in the second quarter of 2019 and $46.2 million in Q1. The year-over-year increase in total operating expenses was due to the inclusion of operating expenses from the acquired NetComm business.
However, on a sequential basis, operating expenses were lower by around 10% largely due to reduced costs that include lower professional services event and travel costs from COVID-19, the Australian dollar hedge we put into place in March for our Australian operating expenses. Our fourth quarter 2019 headcount reduction as part of implementing synergies from our acquisition of NetComm.
And finally, our fourth quarter 2019 headcount rebalancing to ensure that our R&D and sales resources are appropriately aligned with our gross product areas and we expect to maintain this lower level of operating expenses throughout the remainder of 2020. Our adjusted EBITDA in the second quarter of 2020 was $9.4 million compared to $9.5 million in the second quarter of 2019.
Additionally, on a GAAP basis, we posted an operating profit of approximately $1.3 million. GAAP net income for the quarter was a negative $3 million or on a fully diluted basis, negative $0.04 per share and this compares to GAAP net income of $1.2 million or $0.01 per diluted share in the prior year quarter.
Non-GAAP net income for the quarter was positive $0.7 million or $0.01 per diluted share. Turning now to some balance and liquidity items, free cash flow for the quarter was $15.5 million, compared to negative $15.7 million in the second quarter of 2019 and we ended the second quarter with cash and cash equivalents of $149.1 million, which is up from $113.6 million as of December 31.
Total debt was $292.2 million, which does not mature until the end of 2023. As of June 30, inventory declined to $86 million from $93.6 million at year end 2019 but was up from $81 million at the end of Q1 due largely to increased order volumes in our access device business.
Accounts receivable declined to $53.1 million from $93.7 million at year end 2019 and from $55 million at the end of Q1 and this was due to strong collections in the first half of the year. In the current environment, while we have continued to offer extended payment terms to a very small number of customers in Latin America and Asia, the aging of our receivables remains very good with fewer than 1% greater than 90 days.
Okay, now turning to our outlook for the year as Jerry noted, we are off to a strong start as we begin the second half of 2020. We’re entering the third quarter with a robust backlog, which as I mentioned, we will be working through during the next few quarters.
Additionally, we are deeply embedded with the largest global broadband service provider for wireless, fixed and cable with many of our new product initiatives across multiple geographies, and we remain confident that several of these initiatives will contribute to our growth into our profitability. Finally, our more diverse product portfolio has strategically positioned Casa to benefit from the various phases of our customers’ procurement cycles and this should help us to mitigate certain volatility in our business.
So based on this and from where we stand now, we do believe that we will end 2020 in a strong position and that our full year top line guidance could be conservative. Having said that, we like all companies are navigating the challenges associated with the pandemic and these challenges could have an impact on the timing of trial completion as we’re seeing in 5G, component procurement, shipping schedules and product or solution deployment by our customers.
So while we are currently very optimistic about a strong second half, we believe that any update to our guidance should wait until before or during our third quarter earnings call. I do want to repeat however, what I said in our previous call.
This higher demand for access device products, gross margin, not gross profit will likely be at the lower end of our guidance range. Before turning the call back to the operator to start the Q&A session, I would like to echo Jerry’s words of appreciation and I want to express our deep gratitude to our staff, suppliers and manufacturers around the world who’ve continued to work under unprecedented conditions to help us meet the increased demand from customers for our products.
Thank you. Operator, we’re now ready to take some questions.
Operator
[Operator Instructions] Thank you. Our first question comes from Meta Marshall with Morgan Stanley.
Please go ahead.
Erik Lapinski
Hi team. This is Erik on for Meta.
Thanks for taking our question. Maybe just to start from us.
Can you give us an update on what progress you’ve had with distributed architecture projects and maybe on that if you feel there is an architecture MSOs are coalescing around or if they’re all still different?
JerryGuo
Let me answer that. In the cable space, many MSOs are still thinking about the right architecture moving forward.
There is no single architecture everybody is going after at this point. So we do think it’s going to take some time for them to figure out what the right architecture is going to be and this process could be longer than the traditional generational change.
Erik Lapinski
Thanks. That’s helpful and then maybe just if I can ask another one.
As you are now having more quarters and just with the NetComm and core Casa business, can you maybe give us an update if you’re seeing any success cross-selling products between those customers?
Jerry Guo
Definitely, we are cross-selling into a much larger customer base and we are seeing quite a bit success at this point. I cannot name the particular customers because of the confidentiality with the customers, but we are seeing multiple instances of success at this point.
Scott Bruckner
It’s Scott here, maybe if I could just add one other comment to that. It’s very interesting that since we acquired NetComm we are actually having success as Jerry noted out talking about our products rather than discrete products, but as solutions.
And that has created openings for us to solve key problems with our customers that we weren’t able to do before we had solutions or products that extended from the core of the network all the way inside customer premise including for enterprises. So in fact, some of the stuff that we are working on with some of our customers and I think we mentioned on the last call is helping our customers create private networks for enterprises both large and small and that creates a lot of cross-selling opportunities.
Erik Lapinski
Got it. That’s helpful.
Thank you. And then if I could just ask one more, maybe on the gross margin front.
I understand coming in at the lower end of the range from mix to hardware, but I am wondering if you’ve seen any margin pressure across the wireless portfolio.
Scott Bruckner
No, we haven’t and in fact, again, let me start off by saying that with the wireless portfolio. A lot of these are brand new products.
I mean a lot of what we’re doing in wireless is in 5G, so it’s very early to even be talking about price compression or margin pressure. So the 50% to 60% range that we’ve been guiding on and then in fact what I said in my remarks that we would likely come in at the low end of the range is really a function of two things.
One, it’s the fact that we are selling more hardware. In this environment, just because it enables very, very quick connectivity, a lot of what we’re selling in wireless happens to be on the access device side of the business.
But also the other comment that I would make is that, and we’ve talked about this before, we did say that in earlier stages of build out we could see more hardware sales than software sales. As our customers work to densify [ph] their networks by deploying radios, by deploying equipment inside customer premises and then some of the longer-term stuff as they then move to build out and deploy their consumer cores and then in a 5G environment separate cores for enterprise environments as well.
So I think what you will see in the near term is the gross margin being at the lower end of our guidance range. But what helps us over the long-term it’s a couple of things.
That we have a diverse portfolio of products like our cable hardware and licenses that continue to deliver strong gross profit dollars in the near term while we’re growing our higher gross margin products and services in both wireless and fixed telco and Jerry talked about several of the software wins we saw there and that should get reflected in revenue within the next year. But additionally, even on our access device products, we are working as we’ve noted on higher margin add-ons to the access devices that are software that should help to increase those margins as well.
Erik Lapinski
Got it. That’s really helpful.
Thank you. Congrats on the quarter guys.
Operator
Our next question comes from Samik Chatterjee with JP Morgan. Please go ahead.
Bharat Daryani
Hi, guys thanks for taking my question. This is Bharat on for Samik.
If I could just talk to the wireless segment and the backlog that you highlighted. Can you give us a sense of how much of backlog is to be realized over the second half of 2020 and how much is more long-term considering, I think you made a comment there that some of the 5G trial activity with some customer seems to be slowing in the second half?
So just wanted to get a sense of how much is one-year term versus more longer term.
Scott Bruckner
Yes, I can answer that and then maybe Jerry wants to chime in on some of the 5G activities. As we noted, a good portion of the backlog was comprised of some of our access device products.
That’s both a function of the current environment so our customers are trying to get connectivity very, very quickly to their customers, but also the phase in build out with 5G. As a result of that, those things could get deployed relatively quickly, which is why I said that we would be working through the backlog over the next several quarters.
So we anticipate working through a lot of the backlog, 80% to 90% of it within the next three to four quarters.
Bharat Daryani
Okay, got it. That’s helpful.
If I could just ask on the fixed telco segment. I think it was 30% of the revenues in the quarter so much stronger than what we were expecting and I understand is a near term core benefit.
But can you walk through maybe the sustainability of that revenue for the second half and if you could just also give us a sense of how does the mix overall look between cable, wireless and fixed telco for the full year. Thanks.
Jerry Guo
Let me take that, Samik. The fixed telco side is also showing strong growth as indicated by this quarter and we do see that growth going forward in the future quarters as well for the rest of the year.
We do see that the trend will continue. Scott talked about several quarters, four quarters now.
We have cable roughly around 50% and the wireless and fixed telco around 50%. We continue to see that wireless and fixed telco aren’t growth drivers for us.
We see cable continues to be stable. We don’t see a huge growth in the short-term, we see that to be stable but for us to grow and the wireless and the fixed telcos aren’t the growth drivers in the next few quarters.
Bharat Daryani
Thank you. Thank you so much for taking the question.
Operator
Our next question comes from Tim Savageaux with Northland Capital Markets. Please go ahead.
Tim Savageaux
Hi, good afternoon. And then, congrats on the results.
I wanted to ask a few questions about the backlog increase in wireless which is obviously pretty notable. And Jerry, you mentioned I think half a dozen wins spread across various product categories.
And I guess my questions are, can you characterize those wins maybe 5G versus 4G? Scott, I think you spoke to this a little bit before, but it sounds like there could be a higher margin profile of that backlog given the software element to some of what you mentioned.
And if you can characterize those wins geographically US versus international or Tier 1 carriers or others. In general, just looking for a lot more color on the backlog increase.
Jerry Guo
Hi, Tim. We characterized them as significant wins and we have more wins, but we just mentioned a few more significant wins and they are a mixture of 4G and 5G and except the two cases access devices are hardware.
The others are more software-centric solutions, more pure software solutions. So we do see a continued progress in 5G as well as actually a combo 4G and 5G together.
Tim Savageaux
Okay. So it sounds like for the second half, you would expect some of your fixed wireless access revenues to grow and you’ve already commented on fixed telecom.
So as you look at -- I guess these are at least the historical elements of NetComm. You reported a pretty strong number for NetComm in the quarter.
It sounds like you would expect both of those elements to grow in the second half. Is that accurate?
Jerry Guo
We do expect wireless and fixed telco to grow because these are both the infrastructure side as well as access to devices’ side but as a whole the wireless and fixed telco, we expect them to grow.
Scott Bruckner
Tim, remember what Jerry said in his remarks. In part you’re right, we are seeing a lot of tailwinds in the access device business right now, but we noted that there were several significant wins in virtual BNG, multi service routers and also we talk about access devices, but this is a combination of both our software and certain things that will sit in the customer premise as well.
Jerry did mention some of the 4G and 5G successes, the core successes that we’re having. Over time I think you’re going to start seeing a shift in the balance.
Right now it’s a little bit heavy on access side that starts shifting over the course of the next 12 to 18 months to see both a combination of what we contribute on the infrastructure side and what we pulled in from access.
Jerry Guo
Tim, another question asked was about the geographic distribution, and we do have successes in both North America, with the Tier 1 operators as well as Tier 1 operators in APAC.
Tim Savageaux
Got it, and the last question for me, and I’ll pass it on. You mentioned the stability on the cable side and it sounds like you expect that to continue throughout the year.
I wonder if you could talk about the puts and takes in cable. In the first quarter, you saw strength there, though without contributions from your traditional customers.
Given your comments about concentration here, it seems like some of them may have returned, but I wonder if you can talk about what you might be seeing in terms of capacity demand from work from home which is theoretically a tailwind I guess and what might be offsetting that to drive an overall stable profile.
Jerry Guo
We did notice that the COVID-19 is driving cable operators to place more orders on hardware and primarily driven by the number of subscribers. The subscriber increase they have, as well as the upstream bandwidth demand growth.
More hardware is actually is welcomed news for us in the sense that they increase our footprint and they also increase the capacity we have in the field for future software licenses. But overall and we haven’t seen spend increase you can tell from the operator’s CapEx we haven’t seen real spend increase and we think at least in the short-term, it’s going to be stable.
Tim Savageaux
Great, thanks very much.
Operator
Thank you. I would like to turn the floor over to Jerry for closing comments.
Jerry Guo
Thank you, operator. As Scott and I mentioned in our earlier remarks, we believe we have the right team and a diverse product mix.
These two critical elements will allow us to continue executing our own strategy of growing our business by expanding our footprint, continuing to diversify our revenue and the focus on improving profitability and free cash flow. Thank you to everyone for joining us today.
We look forward to updating you on our progress next quarter.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.