TD QUICK TAKE: COMPANY UPDATE
LUMINE PREVAILS IN CASA 5G CLOUD/RAN AUCTION
THE TD COWEN INSIGHT
Last Friday, the bankruptcy court judge approved Lumine's revised bid of $32.25mm for Casa's 5G Cloud/RAN assets (up from $15mm initially), with the deal expected to close today. Although the final price is more than double its initial bid, we believe Lumine's disciplined M&A approach and Verizon's support of its bid should still likely allow it to generate a solid return on this acquisition.
Impact: NEUTRAL
Intense auction process. According to commentary from the sale hearing last Friday, the auction for Casa's 5G Cloud/RAN assets lasted almost three hours, with ~12 rounds of bidding, and >20 individual bids by Lumine and Skyvera combined. Ultimately, Lumine won with a bid of $32.25mm. The sale is expected to close today.
Plenty in the tank left with the Verizon contract. In April 2022, Casa announced a six-year software licensing and development agreement with Verizon, whereby Casa would provide its 5G Core software to help power Verizon's public Mobile Edge Computing (MEC) service offering. MEC pushes computing resources to cloud servers at the network edge, reducing latency and enabling real-time applications. The potential value of the contract was up to $140mm and Verizon also acquired a 9.9% stake in Casa for $40mm.
On its Q3/F23 conference call, Casa indicated that there was $96mm remaining of future billings for 2024 and beyond from the Verizon contract (average of ~$20mm-$25mm/year). Casa also stated that is had 10 customers generating >$100k in F2023 revenue that use components of its cloud portfolio with over half in production.
Casa forecasted ~$25mm in cloud software revenue in F2023, up ~50% y/y, with an additional ~$35mm of billings. Cloud software revenue was expected to grow another ~50% in F2024, aided by its growing pipeline and continued growth with existing customers.
We think the total revenue of the Cloud/RAN assets could be significantly higher, as we understand there is material hardware sales. The cloud revenue also appears to be lumpy, likely influenced by (large) purchase orders
Business is burning cash. During the sale hearing, a Casa advisor indicated that the Cloud/ RAN business had used ~$1mm to date (we assume since the initial bankruptcy filing on April 3) with additional outlays ahead from accrued payroll, and that closing the Cloud/RAN deal now would save Casa ~$4.5mm in cash outflows over the next five weeks.
Although there could be significant initial cost savings from reduced headcount, we believe it may take Lumine more than a year to get the Cloud/RAN margins at/near its current level in the low-30% range.