Deep Dive Fundamental Series: CASA Systems
CASA is an “emerging growth” business that sells software-centric solutions for broadband service providers to allow them to expand their bandwidth, speed, and services offered, over cable, and wireless, as these structures and architectures are all combining, with increasing density demanded of service access with time. The company started with cable work, but their Axyom software they have expanded to wireless and is 5G compatible, and that’s where growth is going to be. The company has debt, and between stock buybacks and purchases of cash of other companies, has burnt through some of the cash, and is engaged in quarterly losses right now which they predicted in their annual report. They always knew that their global customer base may cancel cable solutions as they move to wireless products. That is indeed what has happened. The company doesn’t have significant backlog in terms of long term contracts, but there is some small amount of backlog where customers have ordered ahead of delivery. CASA has predicted its sales expenses to track revenue and to grow, and its stock has a history of run up before crashing down to the same performance as telecom index indicators tracked annually. With the latest quarterly results, the company is struggling in its stock price, but we see insiders as of the last annual report own 60%+ of the shares, and so we would think recent activity is more based downward momentum generated by short sellers. Short interest has been declining as a percentage of daily volume as a trend for the last six months.
The question is whether this company has lost its footing because customers have cancelled cable services solutions quicker than expected, but they haven’t been ready for the wireless network to open up. This is nearly impossible in view, this negative thesis, which in any case could be self fulfilling even if it begins with impossible. But I don’t think an emerging growth company based on the market opportunity of the transition between cable to wireless, will fall because the market opportunity moves faster than them. This is because see here in their last annual report:”
Our revenue growth is driven by technology upgrade cycles in our target markets and has been characterized by periods of rapid growth followed by periods of more moderate growth in between these upgrade cycles. As an example, during 2014 to 2017 our revenue grew at a compound annual growth rate of 18% while customers were purchasing both hardware (or integrated converged cable access platform, or CCAP) and software-based capacity from us and upgrading their networks to DOCSIS 3.1. In 2018, however, which we believe was a transition year prior to a new upgrade cycle, our revenue decreased by 15.5% to $297.1 million. We have been able to maintain strong levels of profitability throughout these upgrade cycles. Our income from operations in 2016, 2017 and 2018 has been $114.8 million, $136.2 million and $79.0 million, respectively. Our solutions are commercially deployed in more than 70 countries by more than 475 customers, including regional service providers as well as some of the world’s largest Tier 1 broadband service providers, serving millions of subscribers.”
The majority of revenues come from direct sales, but some for sales agents. Geographically revenue comes from around the world from big name cable broad band providers and wireless operators including China Mobile. There is economic fireworks going off around Huawei and 5G and the US Government in the United States and Canada moreover with their executive detained, and moreover the China USA trade war is ruminating and may flare to bigger flames. However, just because this company trades with China Mobile as one of its customers doesn’t mean it will be affected. Remember that original conflict initially between USA and China over Korea ended in stalemate.
Annual Report (Part One)
Business of CASA
– offer products that solve problems for architectures of networks, whether centralized, distributed or virtualized, for cable/fixed-line broadband or wireless
– an architecture can be cost-effectively improved by solutions that improve speed of network, add capacity for bandwidth, and create new services for both consumers and enterprises, and reduce complexity and expenditures in operations and capital investments
– history of innovative and first to market with new product at every generational shift in network technology
– pioneered software-centric approach to program (1) field programmable gate arrays (FPGAs) and (2) general-purpose processors for the cable industry
– solution for cable service providers to deliver Internet Protocol (IP) voice, digital video, and data over a single port
– solution for cable service providers to deliver multi-gigabit speeds to subscribers
– remote node solution to enable broadband cable access at gigabit speeds that is distributed
– recent wireless products including (1) APEX ™ Strand and Small Cell Management System, (2) mobile edge computing (MEC) solution, (3) Axyom Small Cell Core, make the claim CASA is ahead of the market in enabling mobile network service providers deliver increased bandwidth and new services to their subscribers
-the stated wireless related Axyom software has been base of creation of software-centric, multi-service portfolio to enable a broad range network functions, that are either core or access, for fixed and wireless networks
-this common set of core and access network functions, shared by fixed and wireless networks, enable network services such as subscriber management, session management, transport security, and radio frequency (RF) management.
– Axyom software is an architecture for networks – and allows these network functions to be in a building block fashion, controlled, integrated or combined together, with the building blocks being software responsible for each network functioning
– thus, CASA can offer network architectures that can be efficiently and rapidly tailored to meet each customer’s specific requirements at the time of initial implementation and as the requirements evolve over time
– CASA initially focused on providing solutions for cable service providers because founders had experience in the industry, but the commonalities between new fixed and wireless network architectures have allowed CASA to leverage existing cable-related Axyom software while expanding into wireless and fixed communications markets
– CASA offers a scalable solution that can meet the evolving bandwidth needs of customers who have their own subscribers
-first installation in a customer service provider’s network frequently involves deploying broadband products in only a portion of the network, and with only a fraction of the capacity of the products in turn enabled at time of initial installation
-thus over time, customers generally expand use of the solutions to other areas of network to increase network capacity
-capacity expansions are accomplished upon demand by additional systems, line cards, or additional channels through use of software; software-based capacity expansions generate higher gross margins than hardware based deployments
– Solutions are commercially deployed in over 70 countries by more than 475 customers, including regional service providers and some of world’s largest Tier 1 broadband providers, serving millions of subscribers. Customers include Charter/Time Warner Cable, Rogers, Sprint, and Mediacom in Nroth America; Televisa/IZZI Mexico, Megacable Mexico, Claro Colombia in Latin America; Liberty Global, Vodafone, and DNA Oyj in Europe; and Jupiter Communications, Beijing Gehua CATV Networks and China Mobile in Asia-Pacific
Net income on revenue from years ended Dec 31 in 2016, 2017, and 2018 was $88.7 mm / $316.1 mm , $88.5 mm/ $351.6mm and $73.0 mm / $297.1 mm. Total assets as of years ended Dec 31 have gone from $583mm 2016, $469.7mm 2017, and $474.7mm 2018.
Industry Background and Customers (Broadband Service Provider) Challenges
– must service demand of consumers and enterprises
– rapidly increasing bandwidth demand; key drivers are:
– more users with more connected devices and applications
– more time spent online
– increased used of bandwidth-intensive streaming media services such as Amazon Prime Video, Netflix and Youtube; cloud applications such as iCloud and Dropbox; and augmented and virtual reality applications
– Internet of Things (IoT) solutions, as already seen in connected homes, businesses and industries; connected devices such as Amazon Alexa, or Google Assistant; machine-to-machine connectivity; car connectivity and smart cities
– backhaul requirements of wireless service providers
– rise of data consumption by enterprises with strict latency requirements on mission-critical and public-safety related applications
According to the 2018 Cisco Systems Visual Networking Index report, global IP traffic per month is forecasted to grow from 122 exabytes in 2017 (1 exabyte = 1,000,000,000 GB) to 396 exabytes in 2022, representing a 26% compound annual growth rate in global IP traffic;
– global IP traffic per capita is expected to increase from 16GB in 2017 to 50GB in 2023
– the number of connected devices is forecast to be 3.6 times the global population by 2022
Competition Fueled by Increasing Convergence of Service Offerings
Cable service providers such as Charter and Comcast offer triple-play and quadruple-play service offerings; so do diversified telecommunications companies such as AT&T and Verizon; Mobile-online network operators such as Sprint and T-Mobile are offering higher bandwidth wireless connectivity and as a result subscribers are opting for mobile only voice and broadband services and cable and fixed communication services are experiencing the “cord-cutting.” To respond to increased competition, broadband service providers are facing increasing pressure to maintain high bandwidth availability while developing differentiated service offerings with higher levels of performance at lower cost to consumers and enterprises
Increasing Network Complexity
Historically broadband service providers deployed separate systems within their fixed broadband networks for video and data services and have operated separate networks for fied, wi-Fi, and mobile services. This traditional model has to maintain separate network infrastructure and personnel for each service. As network capacity and coverage increased and the diversity of service offerings has grown, the need for network infrastructure convergence with reduced operating and capital expenses is increasing
Need to Control Operating and Capital Expenditures
Operating hardware-centric network infrastructure is costly with material space, power, and personnel. Requirements. Moreover, hardware-centric networks can be expensive to update or replace. Frequent technology shifts and network upgrade requirements are increasing demand for more cost-efficient and agile network architectures.
Opportunity to Transform Broadband Networks
Broadband service providers are undertaking three key technology initiatives to help build next-generation networks
Network densification: increasing bandwidth and user expectations for ubiquitous and seamless connectivity require the addition of more access points to connect to broadband networks, so broadband service providers are shifting from centralized to more distributed architectures; densification requires extending network connectivity and distributing access aggregation solutions closer to end users. For cable operators this entails deploying more access aggregation nodes and reducing the size of service groups per node. For wireless operators, this will lead to an emphasis on small, versus traditional macro, cells in new network deployments
Today service providers use separate networks to deliver both fixed (cable, fiber or copper) and on the other hand, mobile broadband to their subscribers. To meet the demands of next generation networks, service providers are focused on converging siloed, fixed and mobile core networks into a single converged 5G Core. CASA’s Axyom Software Platform is a single software framework that supports network convergence across different virtual network functions (VNFs) by implementing common micro-services.
Service providers are rethinking traditional network architectures and moving towards virtualized, disaggregated, and automated network architectures. The introduction of network virtualization is a fundamental change in the way broadband service providers deliver ceritical network functions. Software-enabled architectures are decoupled from underlying server hardware for increased efficiency, upgradability, configuration flexibility, service agility and scalability not feasible with proprietary hardware-based solutions. Once the networks have been virtualized, a service-based architecture that supports scalable network slicing will be launched.
CASA’s Solutions (to be continued)
Add critical bandwidth capacity: software-centric expansion of network capacity to enable rapid bandwidth and service provisioning; helping broadband service providers respond flexibly to increased customer demands
Flexibility to add new and expand existing services
Ability to Upgrade Networks remotely
Reduced Network Complexity, Operating Costs, and Capital Expenditures
Ability to Densify Networks
Common Platform to Address Needs of Both Fixed and Wireless Networks