Vistance Networks 3Q26 Earnings Conference Call - VISTANCE NETWORKS INC

Good day and thank you for standing by. Welcome to the VISTED Network's third quarter 2026 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Jenny Thompson. Ma'am, please go ahead. Good morning, and thank you for joining us today to discuss Vistance Network's 2026 third quarter results. I'm Jenny Thompson, Vice President of Investor Relations for Vistence Networks, and with me on today's call are Chuck Treadway, President and CEO, and Kyle Lorenzen, Executive Vice President and CFO. You can find the slides that accompany this report on our investor relations website. Please note that some of our comments today will contain forward-looking statements based on the current view of our business, and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Chuck, I have a few housekeeping items to review. Today we will discuss certain adjusted or non-GAAP financial measures which are described in more detail in this morning's earning materials. Reconciliations of non-GAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. All references during today's discussion will be to our adjusted results. All quarterly growth rates described during today presentation are on a year-over-year basis unless otherwise noted. I'll now turn the call over to our President and CEO, Chuck Treadway. Thank you, Jenny, and good morning, everyone. Thank you for joining our third quarter 2026 earnings call. Before we discuss our results, I'd like to briefly address the announcement made this morning. After six years as CEO of Comscope and Business Networks, I will be stepping down as President and CEOs on February 1st. When I joined Comscore, we had $9 billion of revenue four large business segments and 30,000 employees around the world. Today we are a much smaller and much more focused company. It has been a privilege to lead CommScope and business networks through such an important moment of transformation. We set out to unlock value for our shareholders and our team delivered. We completed a series of strategic divestitures, repaid all of our debt and redeemed all of our preferred equity. I am proud of what this team has accomplished and believe now is the right time to initiate this succession plan to identify a leader for the company's next chapter. My focus is unchanged. I remain committed to executing our plan, serving our customers, and delivering on our commitments, and I will work closely with the board to ensure a smooth transition. Now turning to slide three. Before discussing our third quarter results, I'd like to discuss our recent activity around our use of excess cash resulting from the ruckus transaction. As indicated on our second quarter earnings call, we expected to have between 700 and 750 million dollars of cash at year-end. This cash balance reflected the payment of our special distribution of five dollars per share in August. Subsequent to the end of last quarter and payment of the five dollar per share special distribution we have implemented two additional actions to utilize a significant portion of our excess cash the first was our recently announced additional special distribution of a dollar fifty per share this distribution will result in a cash outlay of approximately three hundred million dollars and will be paid on November 6th. This special distribution, along with the $10 per share distribution in April and the $5 per share special distribution in August, will result in total cash distributions to shareholders of $16.50 per share. As indicated, following the sale of our CCS business, a key objective was to return cash to shareholders and we believe the $16 and 50 cents per share achieves that objective in addition to the special cash distributions during the quarter the company also announced the board of directors authorized the share repurchase of 250 million dollars i'm pleased to report that through october 30th we have utilized approximately 225 million dollars of that program resulting in 28.9 million shares repurchased this is a reduction of of approximately 13% of the outstanding shares at the end of the second quarter of 2026, including any shares vested as part of the ruckus transaction. In addition to the $250 million previously authorized, the Board of Directors has authorized an additional $100 million buyback program, bringing the total authorization to $350 million. We believe this is a balanced use of our excess cash, INCLUDING THE NOVEMBER DISTRIBUTION AND BUYBACKS COMPLETED TO DATE, WE WILL HAVE RETURNED APPROXIMATELY $4 BILLION TO SHAREHOLDERS IN 2026. BEFORE ANY REPURCHASES UNDER THE NEW $100 MILLION AUTHORIZATION, WE EXPECT TO END THE YEAR WITH $275 TO $300 MILLION OF CASH. THIS CASH BALANCE AND STRONG BALANCESHEET ALONG WITH EXPECTIVE CASH GENERATION IN FUTURE years positions the company for continued investment in the business and a hedge against future volatility now on to the third quarter results on slide four Aurora Networks delivered net sales of 320 million dollars and adjusted EBITDA of 57 million dollars revenue was down 5% year-over-year and adjusted EBITD was up 5% adjusted EBIT that was slightly higher than our expectations as a result of lower variable compensation in the quarter. Overall, it was a solid quarter as we continue to see DOCSIS 4.0 upgrades and the adoption of our next-generation intelligent amplifiers. The business continues to be impacted by two major items, memory chips and timing of upgrades for our largest customers. On memory chips, the annual impact is approximately 40 million dollars of which a portion will roll out next year. We continue to deal with availability and pricing associated with memory chips. In the third quarter, we experienced another memory price increase. Despite the challenges, we continue to work with our suppliers and customers to improve availability and manage cost. In addition, we are also working on alternative designs to minimize the impact of memory supply and demand challenges we are also seeing some large customers managing inventory and adjusting the timing of their amplifier orders as they evaluate deployment schedules and inventory positions given our customer concentration changes in purchasing patterns can have a significant impact on near-term results as certain customers have pushed some spending into 2027 we have We have revised our full-year adjusted EBITDA guidance to between $180 and $200 million. We remain confident in the underlying demand for our products, although the timing of certain customer deployments remains uncertain. The market for DOCSIS 4.0 products continues to expand as we deploy our suite of products, including intelligent amplifiers, nodes, and virtual CMTS. Our FDX deployment with Comcast continues to go well. Also, we continue to make headway with our suite of next-generation ESD amplifiers and are now shipping to multiple large North American MSOs. We expect ESD shipments to ramp up in 2027. At the SCTE Tech Expo last month, we showcased our entire suite of products and solutions that help customers upgrade their networks in the most agile ways possible. On display were DOCSIS 4.0 unified solutions, including the RPDs and intelligent amplifiers. Prior to the show, we jointly announced with Ziggo the first large-scale deployment of unified DOCSis 4. 0 nodes in a live network. The full solution combines Aurora's optical node platform, its unified DAA module configured for remote PHY operation, VC-CAP EVO, Virtualized Core Platform, and ServiceShore NXT Domain Manager. This architecture allows operators to deploy flexible network infrastructure that supports evolving DOCSIS standards while simplifying network upgrades. While Ziggo's deployment is based on DOCSis 4.0 ESD, the unified module supports both ESD and FDX configurations, providing flexibility for different operator network architectures and future requirements. For Ziggo, this architecture provides a flexible and scalable foundation to evolve its existing HFC network, supporting greater capacity, reliability, and future customer needs while making use of its existing infrastructure. ServerShare NXT Domain Manager enhances and simplifies management of both remote buy and virtual CCAP and introduces network automation capability. The deployment highlights Aurora Network's leadership in next-generation broadband infrastructure and demonstrates the readiness of its DOCSIS 4.0 ecosystem for large-scale commercial operation. In addition, we were awarded another VC-CAP EVO win at O2. This deployment will modernize and upgrade their network to remote PHY. It will roll out over the next three years. As stated before, we believe Aurora is well-positioned with decades of knowledge of our customers' ecosystems and a broad array of new products for service providers to continue to take advantage of the latest DOCSIS 4.0 upgrade cycle as well as expanding their current DOCSis 3.1 networks. We feel our amplifier position, with millions of installed amplifiers requiring upgrades, is valuable as MSOs require upgrades to stay competitive. In addition, with each intelligent amplifier supporting an average of approximately 20 homes passed, we are well positioned to drive edge compute as our current intelligent amplifier has built-in AI machine learning capabilities. With the Ruckus transaction complete, we're focused on executing in our core cable business and investing organically in select product lines. Our strategy takes advantage of our position in the HFC network and the need for MSOs to continue to upgrade their networks to stay competitive. While cable is under pressure, our customers have large installed bases that have significant value and will require upgrades well into the future. We believe our products are well positioned to be at the leading edge of current and existing upgrades. In particular, our intelligent amplifiers will be at forefront of upgrade cycles as as cable moves towards 25 gigabits. Our intelligent amplifier portfolio includes the only amplifier in the market with AI machine learning capabilities. In the current and future upgrade cycles, we believe amplifiers will be the largest part of the market, and we are the leader in amplifiers. Although we may see some cyclicality, we're confident in the long-term demand for our products. In addition to continuing to support the required cable upgrades well into the future, we will continue to develop our PON portfolio of products, including Telco PON. Although it's a competitive market, we believe that our product range, including 50G PON and our technology partnerships, will allow us to win market share. We're also finalizing an investment strategy to take advantage of our industry-leading security solution products, specifically PKI. The PKI products provide end-to-end device security, visual certificate provisioning, and software licensing for IoT devices, smart networks, and digital video systems. Our current PKI business has been internally focused as we have used PKI in our own products. It only represents approximately $10 million of our overall revenue in 2026. However, we have provisioned over 7 billion device credentials and have more than 40 years of security experience. Based on strategic work we have done, our PKI technology is very competitive, and we believe we can grow this business with focused go-to-market investment. Our estimate of addressable market for our products is approximately $700 million, growing at roughly 15% per year. We see this as an attractive opportunity to create long-term value. We look forward to socializing more of our strategy over the next few quarters as our strategic plans are finalized. And with that, I'd like to turn things over to Kyle to talk more about our third quarter results. Thank you, Chuck, and good morning, everyone. I'll start with an overview of our third-quarter results on slide five. For Vistins Network's continuing operations, net sales ended at $320 million, down $18 million, dollars or five percent year-over-year and adjusted EBITDA was up 32 million dollars or 128 percent to 57 million dollars adjusted EPS for the third quarter was up 283 percent to 23 cents per share versus six cents in the third quarter of 2025 it should be noted that the continuing operations presentation reflects the required u.s. gap treatment of shared costs we believe Aurora segment results provide a better insight into the underlying operating performance of the business turning now to our third quarter segment highlights on slide six Aurora Network's third quarter net sales of 320 million dollars were down 5% from the prior year as increased shipments of our DOCSIS 4.0 products were offset by a decline in our legacy product sales aurora networks adjusted ebitda of 57 million dollars was up three million dollars or five percent from the prior year driven by considerably lower variable compensation in the current quarter partially offset by lower legacy product revenues memory chip pricing and higher stranded costs our stranded cost impact in 2026 is approximately 20 million dollars we expect the majority of stranded costs associated with the ccs and ruckus divestitures to be eliminated by 2027 with all stranded costs eliminated by 2008. aurora order rates were up 41 percent in the third quarter of 2026 versus prior year aurora backlog ended the third quarter at 410 million dollars up 11 million dollars or three percent versus the end of the third quarter 2025. aurora remains well positioned to take advantage of upgrade cycles while offsetting declines in the legacy business however timing of upgrades may be cyclical driven by large customer concentration and timing of their purchases turning to slide seven for an update on cash flow we ended the quarter with 683 million dollars of cash on hand as expected in the quarter cash flow from operations was a use of 57 million dollars and free cash flow was a used of 58 million dollars due to working capital needs subsequently after the end of the third quarter the board approved a special distribution of one dollar and fifty cent per share for approximately 300 million dollars the distribution will be paid on november 6th from cash on hand and is expected to be treated as a return of capital for tax purposes with the latest one dollar and fifty cent per share special distribution in total we will have provided special distributions of sixteen dollars and fifty cents per share in two thousand twenty six turning to slide eight for an update on our liquidity and capital structure during the third quarter our cash and liquidity remains strong as indicated we ended the quarter with 683 million dollars in cash on hand the board of directors approved an additional buyback of up to 150 million dollars and august 2026 for a total of 250 million in authorized share repurchases through october 30th we purchased 28.9 million shares totaling 225 million dollars against our buyback authorization the buybacks equated to approximately 13 percent of our outstanding shares at the end of the second quarter including any shares vested as part of the ruckus transaction it should be noted that since repurchases occurred ahead of special distributions the net amount after adjustments for distributions is approximately 140 million dollars including all commissions and excise tax in addition to the previously approved 250 million of buybacks the board of directors has authorized an additional 100 million dollars of buy backs this brings our total authorized buybacks to 350 million dollars the company ended the quarter with no outstanding debt at the end of the third quarter the current availability under our existing line of credit was 159 million dollars based on our cash on hand cash flow expectations and leverage capability we have ample opportunity to invest in growth and value creation and hedge against volatility based on our projections after the 1.50 per share special distribution we expect to end 2026 with cash on hand between 275 and 300 million dollars this does not include any repurchases under the newly authorized 100 million dollar buyback program as a result of making certain tax elections we were able to accelerate 60 million dollars of the previously announced 160 million dollar tax refund into 2026. this 60 million dollars is reflected in the cash estimate for the end of 2026 we still expect to receive the remaining 100 million dollars in 2027. this provides us with a strong balance sheet allowing for incremental investment and a hedge against volatility i will conclude my prepared remarks with commentary around our expectations for the remainder of 2026. we delivered solid execution in the first three quarters however memory pricing and availability continues to pressure the business in addition certain customers are adjusting the timing of amplifier orders as they manage inventory and deployment schedules as a result we are lowering our full year adjusted EVTA guideposts to $180 to $200 million. We remain confident in the long-term demand for our products, although customer concentration and deployment timing may continue to drive variability in the near term. We are very pleased with the return of $16.50 per share in 2026, as well as our buyback program. We feel this represents a proper balance of returning cash to our shareholders, as well as investing in future value creation. We look forward to continuing to develop and implement the Visma Network strategy focused on taking advantage of continued long-term investment in HFC Network, PON, and security solutions. And with that, I'll turn it back to Chuck. Thank you, Kyle. In closing, I'm pleased with our progress this year. We've extinguished all of our long- term debt, redeemed our preferred equity, and returned approximately $4 billion in cash to our shareholders through our special distributions and stock buybacks. Although we are dealing with some short and medium-term challenges with memory chips and volatility of large customer demand, we are well positioned to take advantage of the DOCSIS 4.0 build over the next several years. Beyond DOCSIs 4.00, we believe that the cable infrastructural market will continue to require upgrades, and we are currently working with our key customers to develop new products, including Next Generation Intelligent Amplifiers, PON, and PKI's security solutions. And with that, we'll now open the line up for questions. Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 2-1. And please press start 1-2 again. One moment while we compile our Q&A roster. our first question is going to come from the line of george notter with wolf research your line is open please go ahead hey guys thanks a lot um chuck it's been great working with you good luck in your uh future going forward um again it's been great all right my question is on memory pricing um obviously there's um you know some real pressures here. I guess I'm just curious about the outlook for 2027 memory pricing. What are you guys seeing? Do you have an ability to offset that memory cost incrementally with surcharges or price increases? What does that look like right now? Thanks a lot. Yeah, I would start out by saying I think we're going to see gradual price increases continuing for the next several quarters, but probably not at the same rate as it was probably a little less a little flatter at least that's what we're what we were believing and in terms of passing costs through we are working with our customers to push to push price through there and obviously as prices go higher we're able to push more to them so we did we did call out that the impact would be about 40 million dollars this year to us, with some rolling out next year. Got it. Okay. And then I assume availability is still okay for you guys in terms of memory, or this is just really a pricing impact? I'd agree with that at this point. Okay, cool. And the customer push-out, I assume this is one of your large customers. is it related to capex pressures is it related to component supply is it is it budget related or project timing any more you could tell us on that push out would be great I would say it's really more dependent on their deployment schedules and how fast they install in addition to levels of inventory that that they want to hold right now you know their installation schedules can be impacted by many things you don't think about like how fast are installing their productivity or their crews, weather, such like that. So I don't really see anything causing them not to do work. It's just how fast they can move. Obviously, we're going to listen to Charter's report tomorrow. We'll learn more from them. But I would say we're working with them on schedules and timing and, you know, at least how they're viewing what's going to be installed. Okay. Thanks very much. Good luck. Thank you. And our next question will come from the line of Amit Daryanani with Evercore ISI. Your line is open. Please go ahead. I guess just first off, on the memory pricing, how much are you guys able to buy ahead of some of this price increases. It seems like you guys have been talking about price continuing to rise for a couple of quarters here. I guess you've had some additional cash on hand, just thinking about why not buy a bit more now? Well, we're obviously not going to be speculating on memory. We buy approximately one and a half, two million dollars. I mean, one and A half to two million memory chips a year um which is you know big numbers so we have to work very closely with the suppliers uh very close to the suppliers of that and you know we tie it to the their demand not necessarily looking at hey you know, we don't want to be held holding the bag if the prices go the other way um I would I would say that yeah. Sure. And Chuck, maybe just touch on, you know, why now are you stepping down, given that it seems like Aurora is now in a good spot to keep it operating by itself? Yeah, look, I would say the business is just at a much smaller scale than what I took over in 2020. You know, we delivered on the commitments that we made to the board. I've agreed with the board that this is just the right time to identify, you know, a next leader. You know, it's a more focused business. And, you Know, I'm going to remain in this role until February 1st and committed to a smooth transition. Gotcha. Thank you, guys. Thank you. And our next question will come from the line of Joseph Cardoso with JP Morgan. Your line is open. Please go ahead. Hi, good morning. Thank you for taking my question. This is Mark on for Joseph Cardoso. I guess with regards to the customer push out commentary, it seems like that's mostly being described as a timing factor rather than a demand factor. So should we expect that that business comes back in 27? And I guess, like, with regards to the 27 outlook itself, do you see that potentially improving EBITDA and free cash flow year on year as well? Look, I'd say to your question and your comment, I do believe the demand is real and it's going to stay. It's just pushed out. And in terms of what are we thinking for 27, I would say we see this as, first of all, because of our concentration of customers, there will be some cyclicality there. But we do believe that they're going to move forward with increasing, with redoing and upgrading their networks. What we've seen so far is some delays related to inventory adjustments, but I would say that, you know, it's really too early to be specific for 2027. Got it, got it. And then maybe just to follow up regarding the free cash flow outlook, as we think about the inventory bill that you have going into 2027, should we think about these elevated inventory levels as maybe the new normal given the uncertainty and cost environment? Or do you also like maybe expect some degree of normalization at 27 there? Yeah, I think we're seeing really two impacts on inventory. One is the memory pricing. You know, chuck talked about that i don't think we feel like that's going away anytime soon um so i think you know we'll continue to see elevated levels um to be honest with you the larger driver of the inventory is some of these timing issues right so you know мы build product um that's now being pushed out um we would expect to see some normalization of that inventory in the first half of 27 although you know i don't think this is going back to um you know a completely normalized level but i think we will see um some gain back in inventory in the first half of 27 just based on some inventory that we're holding related to some of these push outs got it thank you thank you and i would now like to hand the conference back over to chuck treadway for closing remarks. Thank you for your time today and I appreciate your interest in our company. Have a great rest of your week. Thank You. This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.