Vecima Reports Fiscal 2011 Q3 Results

VICTORIA, BRITISH COLUMBIA--(Marketwire - May 13, 2011) - Vecima Networks Inc. ("Vecima" or "the Company") (TSX:VCM), today reported its fiscal 2011 third quarter and nine-month financial results for the period ended March 31, 2011. (All dollar amounts are in Canadian funds unless otherwise stated.)

"In the third quarter, Vecima was in a transition phase where legacy revenue declined and new product revenue had not yet ramped-up. As we announced in April, we have cut expenses and reduced our staff by 18% to facilitate the Company's return to operational profitability. This was the first time in Vecima's 23 year history that the Company was forced to lay-off a significant proportion of its staff. Since June 30, 2010, our headcount has been reduced by 28%. A number of one-time items occurred in the third quarter that adversely affected net income, including a severance charge of $1.5 million and an inventory write down of $1.6 million," said Dr. Surinder Kumar, President and CEO of Vecima.

"We have invested heavily in the research and development of four new products and have clearly been affected by the launch delays. Orders for three of these new products will ship in the fourth quarter. Despite Q3 falling short of our expectations, we continue to expect fiscal 2011 revenue to be in the low end of the $85 – $95 million range," Kumar continued.

Fiscal 2011 financial highlights:

• Revenue decreased 27% to $63.4 million in the first nine months of fiscal 2011 compared to $86.4 million in the same period a year earlier. Revenue from YourLink grew by 12% while Converged Wired Solutions and Broadband Wireless sales declined 27% and 51%, respectively. Revenue in the third quarter decreased 43% to $17.0 million compared with $30.0 million in the same period last year. YourLink revenue increased 12%, while Converged Wired Solutions and Broadband Wireless revenue decreased 39% and 76% respectively.

• Gross margin fell to 29%, providing a gross profit of $18.3 million in the first nine months of fiscal 2011, compared with a gross margin of 36% for the same period last year that provided a gross profit of $30.9 million. Gross margin was impacted by 3% due to a $1.6 million write-down of inventory and excess capacity also had a 2% impact. Gross margin decreased to 13% for the third quarter, providing a gross profit of $2.3 million, compared with a gross margin of 34% for the same period last year that provided a gross profit of $10.3 million. Gross margin in the quarter was impacted by 9% due to a $1.6 million write-down of inventory and excess capacity also had a 7% impact. The Company has taken steps to significantly reduce its production workforce. Management expects that cost reductions and increased sales in the following quarters will return the company to a gross margin of 30%-40%. However if the Canadian dollar continues to strengthen beyond $1.05 US it will result in downward pressure on margins.

• Net income in the first nine months of fiscal 2011 decreased 60% to $2.6 million, compared with $4.7 million in the same period last year. Net margin was 4% for the nine months ended March 31, 2011, compared with 5% for the first three quarters of last fiscal year. Net loss in the third quarter was $6.3 million, compared with a net income of $0.7 million in the three months ended March 31, 2010. Net loss was negative 37% for the three months ended March 31, 2011, compared with net margin of 2% for the third quarter last fiscal year.

Our strategy to recover sales in the presence of declining revenue from legacy products is based on the successful introduction and launch of our new products. Our ability to make this transition has clearly been affected by the timing of those launches:

• The final approval of TerraceQAM for deployment was delayed at our major MSO customer and this impacted the start of associated revenues in the third quarter. Late in the third quarter, the first phase of TerraceQAM was successfully approved by the MSO and initial, early stage deployments and field trials are under way currently. The second phase, which adds new features intended to enhance positioning in the hospitality HD market for the MSO's service offering is currently under approval testing by the MSO. Evaluation by our new OEM customer for TerraceQAM is progressing well and the channel partner is now engaged with other MSOs who are expressing interest in deployment. Vecima continues to receive indication from both customers that the demand for TerraceQAM remains strong.
  
• The response to Concierge has been positive. As announced last quarter, we completed development and began demonstrations of a second variant of the product that addresses a larger segment of the satellite network hospitality market. During the third quarter, we continued demonstrations of both variants of our Concierge product with prospective customers. We continue to believe and have received feedback that we are well positioned to complete technical evaluations which will yield future revenue as these customers deploy. The timing of these deployments is hard to predict but is expected to begin at a small scale within fiscal 2011.

• In our Q1 highlights, we announced that Vecima had shipped deployment volumes of digital video and internet over cable modules to one of our two OEM partners for these products and were in the final stages of certification testing at the other OEM partner. The first customer has continued to purchase run-rate volumes of these modules and forecasts show continued demand with slight increases in upcoming quarters. In the second quarter, we successfully completed certification testing by the second OEM customer. As indicated in our previous quarterly reports, the market for our OEM partner's end product which utilizes this module is served by numerous Edge QAM competitors. We are shipping small quantities of these modules in the fourth quarter and subsequent increases will be contingent on the ability of Vecima and our OEM to successfully capture customers in the highly competitive target markets.

Revenue was also affected by reductions in legacy product orders:

• Broadband wireless sales declined by 76% in Q3 of fiscal 2011 as compared to the same period last year. This was caused by a slowdown in government procurement contracts for our software defined radio product line which had an unusually strong third quarter last year. We expect wireless sales in ISP markets to gain momentum going forward.

We made progress on the following new opportunities:

• Numerous milestones related to the software and hardware development of Vecima's new custom wireless modem for vehicle fleet management were completed during the third quarter. Some issues were uncovered during cellular certification testing which Vecima has now resolved. The retesting for certification is now underway and our lead customer has adjusted its launch schedule accordingly. The forecast continues to remain positive as the product addresses a substantial new market for vehicle tracking, fleet performance management and logistics optimization, yielding fuel savings and reduced operating costs for all manner of vehicular fleets. Feedback from the customer indicates that the product and associated service are key elements of its strategic plan for upcoming periods. This new customized modem works on multiple cellular and WiFi networks and is a logical extension of our wireless strategy moving from fixed and nomadic solutions and into mobile solutions with GPS information.
  
• Sales for the Terrace product declined in Q3. Our lead MSO customer continued to deploy at the same pace as Q2 while other customers delayed capital expenditures to future periods due to budget considerations. Derivative products and orders from other customers are expected to generate additional revenue going forward. We are seeing some renewed interest by large MSOs who are now moving towards a network wide all-digital transition, similar to the program conducted by our lead MSO customer.

Managing Expenses

We will continue to pursue exciting new product opportunities while also monitoring and containing expenses. Vecima's current headcount is 647, representing a decrease of 28% from June 30, 2010. While quarterly revenue can be lumpy, we plan to continue to match our expenses to our revenue moving forward.

Outlook

Our growth strategy is to remain focused on the introduction of new products as well as accessing new markets and new customers for our existing products. Vecima expects revenue for fiscal 2011 to be in the low end of the $85 - $95 million range. Management has initiated cost reductions that it believes will lead to a return to profitability from operations.

The Company's full consolidated financial statements and management's discussion and analysis for the three months and nine months ended March 31, 2011 are available under the Company's profile at www.SEDAR.com, and at http://www.vecima.com/financials_ir.php.

A conference call and live audio webcast will be held on May 13, 2011 at 1 p.m. ET to discuss the Company's third quarter results. To participate in the teleconference, dial 800-319-4610 or 604-638-5340. The webcast will be available at http://www.vecima.com/events_ir.php.

About Vecima Networks

Vecima Networks Inc. (TSX:VCM) designs, manufactures and sells products that enable broadband access to cable, wireless and telephony networks. Vecima's hardware products incorporate original embedded software to meet the complex requirements of next-generation, high-speed digital networks. Service providers use Vecima's solutions to deliver services to a converging worldwide broadband market, including what are commonly known as "triple play" (voice, video and data) and "quadruple play" (voice, video, data and wireless) services. Vecima's solutions allow service providers to rapidly and cost-effectively bridge the final network segment that connects the system directly to end users, commonly referred to as "the last mile", by overcoming the bottleneck resulting from insufficient carrying capacity in legacy, last mile infrastructures. Vecima's products are directed at two principal markets: Converged Wired Solutions and Broadband Wireless. The Company has also developed and continues to focus on developing products to address emerging markets such as Voice over Internet Protocol, fibre to the home and IP video. More information is available at our website at www.vecima.com.

Forward-Looking Statements

Certain statements in this press release may constitute forward-looking statements within the meaning of applicable securities laws. All statements other than statements of historical fact are forward-looking statements. These statements include but are not limited to statements regarding management's intentions, belief or current expectations with respect to market and general economic conditions, future costs and operating performance. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict, and/or are beyond our control. A number of important factors could cause actual outcomes and results to differ materially from those expressed in these forward-looking statements. These factors include, but are not limited to, the current significant general economic uncertainty and credit and financial market volatility and the distinctive characteristics of Vecima's operations and industry that may have a material impact on, or constitute risk factors in respect of Vecima's future financial performance, as set forth under the heading "Risk Factors" in the Company's Annual Information Form dated September 28, 2010, a copy of which is available at www.sedar.com. In addition, although the forward-looking statements in this press release are based on what management believes are reasonable assumptions, such assumptions may prove to be incorrect. Consequently, readers should not place undue reliance on such forward-looking statements. In addition, these forward-looking statements relate to the date on which they are made. Vecima disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.