Casa Systems Sees Bottom Fall Out in Q1

Mama said there'd be quarters like this.

Suffering through a nightmarish start to 2019, Casa Systems reported nearly a 60% drop in revenues for the first quarter on a year-over-year basis as sales of its cable, telco and wireless network access products and services collapsed across the board. Overall company revenues plunged to just $35.5 million in the winter quarter, down from $89.1 million a year earlier, leading to the company to post its first quarterly loss in a decade.

"The first quarter was one of our toughest quarters," said Casa President & CEO Jerry Guo in a bit of an understatement on a sober earnings call with analysts Wednesday evening. "We are extremely disappointed with the results."

Caught off-guard by such a steep drop in revenues, which came in well below Wall Street's consensus estimate, analysts questioned why the company didn't issue a warning about its results before announcing them. "A miss of this magnitude warrants a pre-announcement," wrote Simon Leopold, an analyst with Raymond James & Associates, in a note to investors on Wednesday night.

Attempting to do some damage control on the call, Casa executives argued that they had warned investors and analysts on their fourth quarter earnings call in March that the first half of the year would be slow, with the first quarter being the slowest. But they admitted that the first quarter results came in even lower than they had expected.

Casa officials also insisted that the company would still meet the revenue targets spelled out in their previous financial guidance for the calendar year, namely between $250 million and $300 million. Pointing to a bulging pipeline of field trials, RFPs and RFIs in the works, especially in the cable and wireless sectors, they maintained that sales should pick up each quarter through the rest of the year, with the third and fourth quarters especially strong.

"Based on what we have... in the pipeline, Q2 is probably much better than Q1," said Casa CFO Maurizio Nicolelli, who noted that traditionally the company's first and last quarters are the strongest of the year. "So what you'll see is sequential increases quarter by quarter, which is different from what you've seen from us in the past."

On the call, however, analysts seemed dubious at best. As Leopold wrote in his note to investors, "given the weak start to the year, we find it hard to accept even the low end of management's forecast, and based on the tone of questions on its conference call, we suspect we are not alone. We imagine the stock comes under pressure in the short term."

It certainly has so far. Casa's share price sank more than 18% in early morning trading on the Nasdaq Exchange today, falling as low as $7.80 before starting to recover somewhat.

What went wrong
Simply put, just about everything went wrong for Casa in Q1. Its big cable customers cut back sharply on orders for Distributed Access Architecture (DAA), virtual Converged Cable Access Platform (vCCAP) equipment and software products, as well as integrated CCAP gear, while the market demand for its newer lines of wireless and telco access products and services didn't materialize as quickly as hoped.

In particular, Casa officials blamed unexpectedly sharp capex cutbacks by their top cable customers for their predicament. "We believe the MSOs are cutting spending to the bone," Guo said, terming it "an industry-wide slowdown" following years of heavy spending by cable operators on DOCSIS 3.1, CCAP, DAA, fiber-deepp, digital video and other network upgrades. "It's hard to imagine that can continue much longer."

Despite such capex reductions by their prime MSO customers -- which include Charter Communications, Liberty Global, Altice USA, J:COM, Rogers Communications and Mediacom Communications -- Casa executives insisted that they have maintained, or even increased, their market share in the cable access network space. As proof, they cited S&P Global stats indicating that their share of CCAP channel shipments rose from 22% in 2017 to 27% in 2018.

"We don't believe they're awarding licenses to the competition," Guo said. He disputed suggestions by Harmonic CEO Patrick Harshman earlier this week that Harmonic is taking away share in the cable access market from incumbent players like Casa.

Like Harshman did on Harmonic's Q1 call, Casa officials also boasted that they have more field trials of their cable and other products occurring this year, fueling their confidence in a revenue rebound. In the cable sector alone, they cited 45 DAA and vCCAP trials in the first quarter, up from 33 in the previous quarter.

"For the remainder of the year we will be focused on the large number of opportunities that have come our way," Guo said. "We believe we are at an important juncture in the development of our business and I remain confident that our recent results are not indicative of the company’s large future opportunity."

Wall Street doesn't appear to be buying that bullish message right now, though. In his note to investors, for example, Leopold lowered his Q2 sales estimate for Casa from $58.1 million to $42.6 million, his full-year sales estimate from $284 million to $237 million, and his 2020 sales estimate from $351 million to $271 million.

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— Alan Breznick, Cable/Video Practice Leader, Light Reading

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