Casa Systems Stock: A Massive Vote Of Confidence From Verizon

5G Sunset Cell Tower: Cellular communications tower for mobile phone and video data transmission

bjdlzx/E+ via Getty Images

Monday, April 18th, was a fantastic day to be a shareholder in Casa Systems (NASDAQ:CASA). Shares of the company soared for the day, closing up 82.5% compared to where they were just one day earlier. This development, as is often the case with firms that experience significant upside in the course of a single day, was not without cause. Instead, The move was driven by a major development involving one of its largest customers, Verizon Communications (VZ). In addition to landing a multi-year contract with Verizon, Casa Systems received a guaranteed investment from the company as well. Add on to this the attractive growth the business has seen in recent years, and consider just how affordable shares are, and it’s likely that this return is only the beginning of long-term upside for shareholders.

Casa Systems – A play on 5G

One of the biggest technological shifts taking place right now is the move from 4G to 5G. This transition is costly and time-consuming, but the end result will ultimately prove beneficial for every stakeholder involved, including the average everyday individual. As with any major initiative, there are many working parts to 5G rollout, and one company dedicated to helping this is Casa Systems. According to the company, it acts as a provider of both physical and virtual cloud-native 5G infrastructure, as well as networking equipment solutions, to help their customers expand their high-speed data and multi-service communications networks in order to meet the growing demand for bandwidth and new services. Their customers, invariably, are CSPs, or communications service providers. As of the end of its latest fiscal year, the company boasted over 475 of these customers spread across 70 different countries. However, the most notable names are companies like Verizon, AT&T (T), Charter Communications (CHTR), Windstream (OTCPK:WINMQ), and T-Mobile USA (TMUS).

As populations grow and data needs expand, the demand for bandwidth, as well as flexible solutions that help to address high traffic areas, is certain to grow. To address these issues, the company has built a multi-service broadband platform called Axyom. The company describes this as a web-scale solution based on a distributed microservice framework. The platform includes the company’s virtual software workloads, as well as software that manages its microservices. It also includes virtual network functions, or what the company calls VNFs. These are developed using cloud-native principles so that the company can ensure both scalability and flexibility for its customers. Its platform also provides countless ultra-broadband services, while its Axyom Virtual Management Controller provides lifecycle VNF management and other services.

Today, the company offers a variety of solutions and technologies aimed at addressing challenges in different fragments of the telecommunications market. For instance, it offers solutions and technologies aimed at the wireless market that includes small cell technologies, a 5G core, and more. The company also offers solutions for cable service providers that involve facilitating a centralized, distributed virtual environment. Service offerings also include optical access solutions, virtualized broadband network gateway router and multi-service router offerings, and more for the fixed-line broadband category. And it also offers routers that are specialized for machine-to-machine and industrial IoT end uses.

These differentiated product offerings are highly valuable for any customer in this space. That is why, on April 18th, the management team at Casa Systems announced that it entered into a multiyear agreement with Verizon whereby it will provide its 5G Core Network Functions to the behemoth in order to help power its public Mobile Edge Compute service offering. This is a niche in any telecommunications market that I find to be particularly interesting. In short, traditional data processing will collect data, send it over to the appropriate server for analysis, analyze that data, and then send the results back. But with Mobile Edge Compute, the data is often analyzed nearer to the point of origin in order to reduce the amount of data that has to be sent long distances and to fragment the overarching architecture dedicated to such activities. The end result is reduced latency for customers and, in the long run, lower costs for the companies that offer it.

According to the management team at Casa Systems, this contract signed with Verizon could be worth up to $140 million over a period of multiple years. That includes $20 million that could be generated this year alone. In addition to this, and perhaps as an even larger driver for the company’s share price, Verizon agreed to acquire 9.9% of the company’s stock in a deal valued at $39.53 million. That represents a 9% premium over the company’s closing share price on April 4th of this year. And with the significant ramping up in share price, it marks a huge payday for all parties involved. When you consider that the effective share price of the deal is $4.24, Verizon has already made a profit of 67.5% on the transaction, which translates to $26.7 million in the course of just one day.

Casa Systems Historical Financials

Author – SEC EDGAR Data

All of this should help Casa Systems fundamentally, but it was not needed in order for the company to make for an interesting investment prospect. Over the past three years, for instance, Casa Systems has experienced attractive upside on both its top and bottom lines. Revenue increased during this time frame from $282.3 million to $401.3 million. The company’s net profit went from a negative $48.2 million to a positive $3.2 million. Though it is worth mentioning that the profit of $24.8 million generated in 2020 was larger than last year’s profit. A similar trend can be seen when looking at operating cash flow. This went from a negative $39 million in 2019 to a positive $33.6 million last year, but not before hitting $53.6 million one year earlier. Even if we adjust for changes in working capital, we would have seen that bump in 2020, rising from $24 million in 2019 to $55.3 million in 2020 before dipping to $48.8 million last year. And that the same kind of relationship can be seen when looking at EBITDA, a metric that rose from negative $2.9 million in 2019 to $55.2 million in 2020 before dropping to $34.9 million last year.

When it comes to the company’s 2022 fiscal year, the expectation is for revenue of between $425 million and $445 million. Management anticipates a loss per share of between $0.05 and $0.14, with the adjusted profits ranging from a low of $0.23 to a high of $0.32 per share. Instead of focusing on net profits, however, I do think we should be paying more attention to cash flow. The company did not give any guidance when it came to operating cash flow. They did, however, say that EBITDA should be between $60 million and $70 million for the year. If we assume that operating cash flow will improve at the same rate that EBITDA is expected to, then operating cash flow should be around $46.5 million for the year.

CASA stock Trading Multiples

Author – SEC EDGAR Data

Taking these figures, we can effectively price the business. Using our 2021 results, the price to adjusted operating cash flow multiple for the firm should be 19.1. This should drop to 14.3 if we rely on 2022 estimates. Meanwhile, the EV to EBITDA multiple should drop from 15.3 if we use the 2021 figures to just 11.5 if we use the estimates for 2022. To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 10.9 to a high of 409.5. Only one of the five companies was cheaper than our prospect. Using the EV to EBITDA approach, we are left with just three of the five companies. The range here was from 11.8 to 21.4. In this scenario, two of the three companies were cheaper than Casa Systems.

Company Price / Operating Cash Flow EV / EBITDA
Casa Systems 19.1 15.3
DZS Inc. (DZSI) 409.5 N/A
Aviat Networks (AVNW) 84.0 11.8
Inseego (INSG) 197.8 N/A
Clearfield (CLFD) 99.5 21.4
Extreme Networks (EXTR) 10.9 14.4

Takeaway

Based on all the data provided, I can say with high confidence that Casa Systems looks like an interesting prospect. If the company were drastically overpriced, I would make the case that further upside it would be limited or unlikely. However, shares don’t look unreasonably priced by any means and the catalyst involving Verizon could create a lot of value for the company’s investors. Added that the firm is operating in an attractive market and that ain’t potential buyout could create significant immediate upside, and I just don’t see much to dislike about the firm at this moment.

Be the first to comment

Leave a Reply

Your email address will not be published.


*