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Edited Transcript of SVC.TO earnings conference call or presentation 6-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Sandvine Corp Earnings Call

WATERLOO Apr 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Sandvine Corp earnings conference call or presentation Thursday, April 6, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Caputo

Sandvine Corporation - Co-Founder, CEO, President and Director

* Rick Wadsworth

* Scott Hamilton

Sandvine Corporation - CFO and Director

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Conference Call Participants

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* Andrew Brice McGee

National Bank Financial, Inc., Research Division - Associate

* Daniel Chan

TD Securities Equity Research - Research Analyst

* Maher Yaghi

Desjardins Securities Inc., Research Division - Analyst

* Paul Steep

Scotiabank Global Banking and Markets, Research Division - Analyst

* Robert Young

Canaccord Genuity Limited, Research Division - Director

* Todd Adair Coupland

CIBC World Markets Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to Sandvine's Investor Conference Call. My name is Paulette, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

Certain information presented in this presentation by management of Sandvine that is not historical factual information may constitute forward-looking information within the meaning of securities laws. Actual results could differ materially from a conclusion, forecast or projection contained in such forward-looking information. Certain material factors or assumptions were also applied in drawing a conclusion or making a forecast or projection as reflected in such forward-looking information.

Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecasts or projections in the forward-looking information and details regarding the material factors or assumptions that were applied in drawing such conclusion or making such forecasts or projections are contained in the company's Annual Information Form and in other filings made by the company with applicable security regulators from time to time, all of which are available through SEDAR at www.sedar.com.

I will now turn the call over to Rick Wadsworth, Director of Corporate Communications. Mr. Wadsworth, you may begin.

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Rick Wadsworth, [2]

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Thank you, operator. Hello, and welcome to Sandvine's First Quarter 2017 Results Conference Call. During the call, we'll walk through a slide presentation that you can download from the Investor Relations section of our website, sandvine.com. For those of you following along, we're currently on Slide 2. We'll let you know when to change slides.

On the call today are Dave Caputo, President and Chief Executive Officer; and Scott Hamilton, our Chief Financial Officer.

Sandvine reports financial results under International Financial Reporting Standards or IFRS. During the call, Sandvine will refer to certain non-IFRS financial measures, such as EBITDA and EBITDA per share, which represent net income and related per share amounts, excluding interests, taxes, depreciation and amortization. A reconciliation of IFRS to non-IFRS results is included in today's news release, the presentation accompanying today's call and in the company's Management's Discussion and Analysis, which we have filed on SEDAR. Management uses these non-IFRS measures to evaluate the performance of Sandvine's business and, accordingly, believes that they may be useful to investors.

I'll now turn the call over to Dave for some introductory remarks.

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [3]

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Thanks, Rick. Hello, everyone. We're on Slide 3. Sandvine's revenue for the first quarter was USD 33.3 million. EBITDA was $7 million or 21% of revenue. We had a strong quarter in the wireless and fixed telco markets, but the cable market continued to be slow. We believe that our cable customers in North America continue to be occupied with the impacts of recent consolidation activity and it remains unclear when more typical activity levels may resume. For the third time in the last 4 quarters, we had no customer or reseller partner that represented at least 10% of revenue. However, we were pleased to win a multimillion-dollar order through the quarter from Globe Telecom, a Tier 1 operator in the Philippines with over 55 million customers. Since quarter end, we have also won orders totaling over $3 million from an existing customer in our Caribbean and Latin America sales region. We won 8 new customers during Q1.

Overall, I'm pleased with the start to the year, particularly given some of the challenging circumstances in certain end markets.

I'll now ask Scott to review Q1 results in more detail.

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Scott Hamilton, Sandvine Corporation - CFO and Director [4]

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Thanks, Dave. I'll remind investors that Sandvine reports its financial reports in US dollars.

Slide 4. Revenue for the first quarter was $33.3 million, down 2% compared to Q1 of last year of $34.2 million. Product revenue is 68% of revenue and service revenue is 32% of the total. 37% of revenue came from Asia Pacific, 34% from EMEA, 20% from North America and 9% from CALA. Contribution from North America was lower than usual due to the issues in the cable market that Dave just described.

The wireless market contributed 55% of revenue, the fixed telco market contributed 32% and the cable market contributed 12%. 34% of our revenue came in -- in Q1 came from the direct sales channel, while our reseller partners fulfilled 66% of revenue. This mix is consistent with the higher-than-usual contribution from markets outside of North America, where we more frequently sell through partners.

Slide 5. As Dave mentioned, no partner or end customer represented more than 10% of revenue during the quarter. We remain pleased by the diversification of our customer base.

Slide 6. Our blended gross margin in the quarter was 74% or 2 percentage points lower than in Q1 of '16. The product margin was almost identical to Q1 of last year, but the service margin declined due to lower arrears, maintenance revenue and increased costs to support our larger customer base. We continue to target a 70%-plus blended gross margin.

Expenses in Q1 were $19.3 million compared to $18.7 million in the same quarter last year. The increase is attributable to higher G&A expenses due in part to legal costs related to the ongoing intellectual property claim. EBITDA in Q1 was $7 million or $0.053 per diluted share, down from $8.8 million or $0.06 per diluted share in Q1 of '16. The decrease is largely due to the slightly lower revenue and gross margin levels and an increase in G&A expenses as just discussed.

Cash and investments at the end of Q1 was $117.2 million, down 12% from $133 million at the end of fiscal '16. We continued to generate cash from operating activities, but we used $13.2 million to buy back our stock and $2 million to pay the quarterly dividend we announced in January.

During the 3 months ended February 28, '17, the company repurchased 6.3 million shares for CAD 17.4 million or USD 13.2 million. Since quarter end, we have purchased an additional 3 million shares for a total cost of CAD 19.2 million -- or sorry, my apologies, CAD 9.2 million or USD 6.9 million.

At the current rate of share buybacks, we will have purchased the maximum amount allowed under the plan as early as the end of May which would eliminate this use of cash. Bookings in the quarter were greater than revenue for the period.

Slide 7. Today, Sandvine announced our quarterly dividend of CAD 0.02 per share which is payable on May 8 to shareholders of record as of the close of business on April 20.

The Packet Intelligence claim. With respect to the ongoing legal claims on taxes, the claims construction or Markman hearing occurred on March 2. During such hearings, the Judge examines evidence from all parties on the appropriate meanings of relevant keywords used in the patent claim. We were pleased with the outcome and believe that it will be useful in supporting our case.

We've also filed inter partes reviews with the U.S. Patent and Trademark Office for the patents in question. The IPR process is outside the normal court proceedings and allows us to challenge the validity of the patents based on prior art that existed at the time of their application. We expect a decision on whether the U.S. PTO will institute or review the patents by the July or August time frame.

In Germany, a hearing date has been scheduled for July 4 -- July 14. As a reminder, the same plaintiff sued Huawei and HP over the same patent and with similar assertions of infringement. Huawei and HP won, which is encouraging.

As on all of our previous calls, we caution investors that due to the nature of our business, we continue to expect significant variability in our quarterly results. This variability may manifest itself in many ways, including but not limited to the product mix, geographical concentration, market segment concentration, sales channel mix and customer concentration that we may report in any given quarter. Most notably, it may result in a significant variation in reported revenue and gross margin on a quarter-to-quarter basis.

I'll now return the call to Dave.

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [5]

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Thanks, Scott. Slide 8. Our growth strategy for 2017 remains largely consistent with last year with some slight modifications. One, to continue to extend our lead in our traditional areas of strength, subscriber services, business intelligence and traffic optimization. Two, to accelerate sales within existing customers, particularly for our new or recently-enhanced offerings, including cybersecurity, subscriber engagement through our OutReach product and our Cloud Services Policy Controller for business users. Three, to take advantage of the 100-gigabit Ethernet and PCRF upgrade cycles to accelerate sales of our PTS 32000 and our Service Delivery Engine. Four, to demonstrate ongoing market leadership in the transition to virtualized network policy control solutions. And five, to look at acquisitions that could accelerate growth.

Slide 9. We've made some progress on the strategy in the first quarter. We announced that the company just received orders totaling over $3 million from a Tier 1 multinational communications service provider headquartered in Sandvine's CALA sales region. The orders covered subscriber services, business intelligence and traffic optimization use cases.

As I said earlier, we announced Globe Telecom as a new Tier 1 customer, largely for business intelligence and subscriber services. The PTS 32000 was also integral to the order. Globe serves more than 55 million customers and operates one of the largest, most technologically advanced and robust mobile fixed line and broadband networks in the Philippines.

We launched mobile data management features for our Cloud Services Policy Controller product. These new features helped the business customers of mobile operators better understand, manage and secure their employees' domestic and international mobile data usage.

We announced EANTC or E-A-N-T-C, has independently validated important functional and performance aspects of Sandvine's virtualized network policy control solutions, including the company's new Traffic Steering Engine. While competitors have been working on catching up to a performance benchmark we established and could have exceeded 18 months ago, we have continued to innovate with products like the Traffic Steering Engine and its ability to elastically scale out new service chains as demand dictates.

Also, with respect to our virtualization leadership, we announced that Sandvine Virtual Series products are now certified for use on the Red Hat OpenStack Platform 8.0. In all, Sandvine offers the most proven, open and highest performance virtualized network policy control platform available.

Finally, while not directly tied to any specific growth strategy, but intrinsically tied to the Sandvine way that underpins everything we do, Sandvine was recognized as being one of the Best Workplaces in Canada for Women. To receive this honor, over 90% of our female team had to agree with the statement, I am treated fairly regardless of my gender. The women of Sandvine are critical to our success. Without their involvement throughout all areas of our business, we would not be able to help our customers build a smarter Internet.

I'd like to thank everyone on team Sandvine for that accomplishment and for all their efforts during the first quarter. Operator, we'll now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Daniel Chan from TD Securities.

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Daniel Chan, TD Securities Equity Research - Research Analyst [2]

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Scott, you've been aggressive with share buybacks. So what are your thoughts on capital deployment, especially once you've completed your NCIB?

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Scott Hamilton, Sandvine Corporation - CFO and Director [3]

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Hey, Daniel. I think that we will, as I indicated in the script, certainly it's at the current share price levels, we'll continue to buy back stock aggressively. That will probably take us to the end of our Q2. So from a cap allocation strategy, I suspect that, that will continue, and then our dividend that we increased this year will continue as well. And then we'll just have to revisit with the board once that's been exhausted on the appropriate use. And I would also probably highlight that we continue to look at acquisitions, the 2 that we did last year, may be similar to the types that we would do in the future. But I would say that with the right opportunity, we would put some capital to work in making acquisitions.

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Daniel Chan, TD Securities Equity Research - Research Analyst [4]

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All right. And Dave, for you. Can you talk about how the changing net in your (inaudible) in the U.S. is impacting? Or are you seeing any changes under the jurisdictions such as Europe as well?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [5]

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Well, I guess what we're seeing in the U.S. is that there's a new head of the FCC. He seems to have a view of very light regulation of communications service providers. And I think that will free up U.S. carriers to experiment on how they might sell bandwidth differently, which is sort of the core value proposition of Sandvine. We'll have to see what happens there. If the rules are reversed, it's going to leave more room for experimentation. However, we're comfortable with the rules as they have been interpreted so far. So I think Sandvine can flourish either way. I can't think of any specific new developments in Europe specific to your question, and I'm looking at Rick who's nodding, not really. So I haven't seen any changes there. But it will be exciting to watch this new administration in the U.S.

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Daniel Chan, TD Securities Equity Research - Research Analyst [6]

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Great. That's helpful. And then just one last one for me. As we approach the roll out of 5G, do you see that impacting service providers spending on your solutions at all?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [7]

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It's a good question. The core aspect of 5G is that it's a virtual network, like a cloud-based network that's delivering it. And so I think it will accelerate opportunities that we have for our virtualized offerings. But there's no question, the industry is going there for a reason. There's customer demand for better speeds and better interactivity. But there's also the service providers' requirements to run a lower cost network. And looking at just a new report here from Ovum published in February 2017. CapEx for the fourth quarter for our communications service providers was down 3% for 2016. And the outlook for 2017 is that it's flat to down to most of the world. And Ovum's projection is that the global telco CapEx market will fall 6% in 2017. I do believe that's being driven by, while there's a significantly fewer, newer subscribers that many people, specially in developed countries already have Internet access of 1 sort or another, but I think it's a belief that as virtualized offerings get more rolled out, that there's an expectation that there'll be a lower capital requirement for those.

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Operator [8]

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Our next question comes from Paul Steep from Scotia Capital.

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Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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Dave, could you talk maybe a little bit about the cable market, particularly in North America? Just how the pipeline, how those discussions are evolving as it's been a little bit of time since those mergers have occurred?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [10]

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Sure, Paul. So no substantial updates since our last call. By the nature of the changes, massive mergers and acquisitions and consolidation to that space, those are going to take time to resolve. We've -- We're very happy with the strong quarters we've had recently with wireless, and you can see it's the largest contributor for us. And we're hopeful that the cable market will return to the more typical levels. But I would say it really hasn't changed much from 3 months ago.

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Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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Okay. And could you maybe talk just a little bit about the opportunity around the cybersecurity markets? You launched last year a couple of initiatives around it, where are you at in terms of early discussions with clients?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [12]

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Sure. We're very excited about cybersecurity. We were particularly excited about a feature set that we think we are leading on, and that is the concept of doing decoy and deception in the network against the malicious actors. And it's a product called QuickSand. And we're having very meaningful conversations with service provider security departments and particularly, around critical infrastructure that's in a nation's best interest to make sure that they have abilities to either slow attacks or to potentially have their network fight back against those attacks. That's where we're getting the most traction, where countries are concerned and asking their service providers to help them in that take. And we think we have a really good solution or are part of the many layered solutions that all security offerings will be, that we have a carrier scale solution to help make malicious actors' jobs harder.

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Paul Steep, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Great. And then just one quick follow up for me. Scott, thanks for the update on the legal proceedings. In the U.S., what's the next sort of milepost, I guess, we should be watching for?

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Scott Hamilton, Sandvine Corporation - CFO and Director [14]

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That's a good question. I think that in the July-August time frame, we will learn whether our IPRs have been instituted. So the impact of that is whether the U.S. PTO is going to listen to our argument as to why the patents should be invalidated. We're going through depositions right now that are currently scheduled to wrap up in the next couple of weeks. And then the next natural stage will be -- we'll commence getting ready for trial. It's currently scheduled for September.

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Operator [15]

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Our next question comes from Robert Young from Canaccord Genuity.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [16]

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It looks like that you're starting the year at a decline, and I know Q2 or in the past has been a little bit of a seasonally weaker quarter. So the first half, I guess, you could see a decline year-over-year. And so I was wondering, given that Ovum number you just gave, 6% decline for the space. Is that the number that you're looking at for planning your year? Or do you think there's still opportunity to grow in the full year?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [17]

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Thanks, Rob. I guess there might be -- it depends if you're a glass half-full or a glass half-empty kind of guy. Certainly, compared to Q1 last year, where we had a very strong Q1 start to the year last year, we're down a couple of points. But if you look at our Q3 and Q4 the -- of the end of the last year, those were very weak quarters for us, so we see it as a bounce back. And so I'm relatively happy on the start of the year. The Ovum stuff, I'm not giving that guidance. I'm just giving you that data point from their report. But if I look back in recent years, Q2 revenue has typically declined from Q1. And remember, we have a November year end so our Q1 includes December. So we get -- we picked up a bit of budget flush at the start of the quarter. And the back half has always -- or I should always -- I shouldn't say that, is usually stronger than the first half. We've only had 1 year where that wasn't the case. But that said, every year is slightly different. And as you know, we don't give guidance, but we see ourselves as a company with a growth opportunity ahead of us, despite the past couple of years.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [18]

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Okay, great. And then, I mean, sometimes you've given us a view on where the funnel is. Do you still see an opportunity in the funnel to support that growth? In particular, like, are there any big orders that are close to completion in that funnel that would -- that'll drive some positivity?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [19]

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So certainly, the funnel would support growth. Certainly, there are big opportunities in the funnel throughout the year. Bigger deals generally happen in the second half than they do in the first half. But certainly, the funnel would support growth.

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Scott Hamilton, Sandvine Corporation - CFO and Director [20]

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Yes. I would just add, trying to predict short-term closed dates of larger opportunities, our ability to do that hasn't changed. And in fact, it continues to take a long time. And depending on their buying cycles and deployment cycles, it's just too difficult for us to predict that.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [21]

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Okay. Understood. Last quarter, I think you'd said that 100-gig replacement cycle wasn't going quite as quickly as you'd hoped. But then you did highlight it as a potential growth driver. And then, so I was wondering if you could talk about that opportunity in 2017?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [22]

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Yes. Thanks, Rob. So I certainly will stick to the 100-gigabit Ethernet upgrade cycle has been slower than similar upgrade cycles that I have seen throughout my career. I believe it's still just simply a reflection of this year increase of throughput represented by the upgrade. Not every communications service provider needs that right away. The good news is the upgrade is inevitable ultimately, and the PTS 32000 remains the leading network policy control platform for a 100-gigabit Ethernet. Likely -- and we've made progress on that. Likely, I shouldn't say likely, over 60 of our 300-plus customers have purchased at least 1 PTS 32000, so we have plenty of upgrade opportunities ahead of us.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [23]

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Okay. Last question for me would be on the gross margins. You talked a little bit about it already but I just wanted to get a little more, a little lower than expected, given the high level of product revenue. And so within that product revenue, just talk about what might have happened there that might have led to some gross margin weakness? Or if I'm wrong in assuming that that's gross margin weakness?

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Scott Hamilton, Sandvine Corporation - CFO and Director [24]

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Well, the product margin was basically flat year-on-year. There was a decline in our 7th -- service revenue margins. A couple of things that contributed to that our arrears maintenance levels were down year-on-year, which is just catch-up revenue from people renewing their support maintenance late. And we probably had a little bit of a higher investment on the professional services side on completed contract engagements where we don't recognize the revenue until the end. But the product was relatively stable.

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Robert Young, Canaccord Genuity Limited, Research Division - Director [25]

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Okay. And then, so that arrears in service maintenance payments, is that something you'll catch up on in the next couple of quarters? Or is it something that's indicative of maybe some customer loss or churn or something like that? And then I'll pass the line.

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Scott Hamilton, Sandvine Corporation - CFO and Director [26]

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No. I think it was that Q1 '16 was higher because we had more revenue that was late. So I don't think that there's a catch up to be had in '17. I think it was just '17 was slightly better than '16 in terms of renewals.

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Operator [27]

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Our next question comes from Richard Tse from National Bank Financial.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division - Associate [28]

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It's actually Andrew in place of Richard. I'm just wondering if you could help us understand by product line, what level of traction you're seeing to date. And I know you mentioned the PTS 32000, the traction that you're seeing there, but just hoping you can -- that you could provide a little more detail into the other newer products.

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [29]

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Okay. So -- Well, let me start with the access technology split to say wireless remains and has been for a while here, our largest contributor. Inside of wireless and mobile, I would say it's been around business intelligence and subscriber services. People selling that bandwidth differently, if you will. And subscriber services was probably the primary driver there. The PTS 32000 on the 100-gigabit Ethernet upgrade cycle has been good for us, although we wish it was better. And I would say that's the best I could do. The subscriber communications through our OutReach product has been relatively stable. But that one is a hosted service and is monthly recurring revenue, and so we like that a lot more than onetime sales stuff.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division - Associate [30]

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Okay. And then, just kind of listening to some of your other competitors. They don't seem to be suggesting that they're seeing similar strength that you had in the quarter. I'm wondering if you're seeing any market share gains that you could maybe note of. And then, also maybe just a quick comment on the pricing environment?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [31]

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Well, I'll just say, I like our competitive position. And on the pure play, I think we're the clear leader, with the largest amount of revenue here no doubt. We added a record 67 new customers in 2016, although we only added 8 customers this quarter. I'm relatively happy with that. We -- the value proposition is there for winning new customers. And this increased focus we have of selling more or creating more value with our existing customers, I think is going to pay off over this year. If you're talking about just the greater networking equipment space, in general, for communications service providers, I think the Ovum data shows that quite clearly in that Q4 was down 3% globally and a projection of whether it was 6% or 7%, 6% down in 2017. And so, but we're -- yes, we're a very small part of the $330 billion or so in global CapEx that occurs for communications service providers. Those large guys, Cisco, Ericsson, et cetera, are going to more feel that than we are.

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Andrew Brice McGee, National Bank Financial, Inc., Research Division - Associate [32]

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Okay. And then on the pricing environment, is it still kind of stable?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [33]

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I guess the best objective evidence around that is our gross margin. So I'll say yes. But we see a lot of value in our solution and so do customers. And we try not to win on price, we try to win on being the best strategic partner.

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Operator [34]

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Our next question comes from Maher Yaghi from Desjardins Capital Markets.

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Maher Yaghi, Desjardins Securities Inc., Research Division - Analyst [35]

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So I wanted to ask you a question on, you mentioned the cable market with the M&A taking place in North America. Do you have some understanding as to when the capital deployment is going to ramp up again? Because we are, after all, in an upgrade cycle for -- in the cable market right now in North America for DOCSIS 3.1. I just wanted to -- just to get a sense from you, deployment of your product, does it have to be made at the same time as the upgrade on DOCSIS 3.1 is being made? Or it can be done after? I'm just trying to understand the time line here, and if you can?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [36]

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Yes. So it doesn't have to be done at the same time. Although often times, if we're at a place where the upgrade is happening, and they're going from 10-gigabit Ethernet to 100-gigabit Ethernet, and that might be a market that they're doing -- they're looking for insight on what their aggregate subscribers are doing, i.e., business intelligence to figure out new service levels, to figure out the quality of experience people are generating, that might drive it. But if you look at the value proposition for cable, most recently has been around business intelligence and a bit of traffic optimization, Traffic Management, to give people an overall great experience when they're using the Internet. Both of those can be deployed in a non-networkwide basis, i.e., for traffic optimization where only in points of congestion, and that will help you manage that. Or you could also just do business intelligence in certain markets to give you an idea what some, but not all of your customers, are doing from a perspective of -- a sampling perspective. And it's probably worth stating that there are some cable operators or increasingly, there's more cable operators that are looking at mobile offerings as well, to the extent that they're either attacking that VNM -- VNO or they're a converged carrier, and they have a mobile offering on their own. We would count that as mobile sales as opposed to cable sales. And so there are still other opportunities to sell into those customers. But if I look at what I think thematically is driving it, is there's been truly a tectonic shifting of a consolidation that occurred, and people are figuring out what assets they own, figuring out what their strategy is on their network architecture. A lot of these are already Sandvine customers, and we're hopeful to continue to be strategic to that market. And we'll start participating in helping them being more successful in those markets as well.

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Maher Yaghi, Desjardins Securities Inc., Research Division - Analyst [37]

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Dave, do you have a sense as to when these planning sessions or planning will lead to restart of some investment in the network? Just trying to get a -- because it has been a good segment for you after all, and it can definitely help boost sales when it comes back.

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [38]

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Yes, for sure. Now the cable market has been a big contributor to Sandvine's success over the years. And there was a time, perhaps, when we first met, they might have been 100% of our business. And so do I have a sense? I'm very hopeful that it's any day now, but I really can't say that, that I've seen any objective evidence of that, that people are figuring it out. And just in general, there's a lot of planning that happens at the beginning of the year as well, and I'm hopeful that it'll recover by the end of the year.

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Maher Yaghi, Desjardins Securities Inc., Research Division - Analyst [39]

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Okay. And in terms of 5G, definitely an important potential growth curve for you. A lot of investment is actually starting to take place to groom the networks ahead of the 5G deployment of hardware. When do you believe your participation, and not upgrade cycle, will begin or should begin? Is it in the deployment phase on actual infrastructure, antennas and backhaul? Or in ahead of or in advance of that point in terms of when the companies start to groom the network in advance of the deployment?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [40]

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So I'm hesitant to say too much about 5G because if I think back over the years of getting the questions around 2.5G, 3G, 4G and now 5G, that's -- they usually starts like this, and there's a bit -- a bunch of excitement, and probably 2 or 3 quarters from now, we're going to get the question of, hey, how come 5G isn't happening fast enough? And are you guys participating in that or not? But let me just say this, the great thing about 5G is that it's virtual and cloud-based. The ability to turn on Network Functions Virtualization. And us, as a virtual network function, is something that is relatively easy to do in selected areas. And so I think the idea that people will be curious on how they're using 5G differently than 4G, I think gives us an early opportunity in business intelligence, to the extent that it's a simpler network or it's simpler to deploy that capability. I think we're going to be well positioned, where if you look at historically, it's hey, you have to put another piece of equipment in line of that traffic to add the value that we're adding. Now, we're talking about you have to put a piece of software in line of that traffic, and that's something you could test out very quickly on a subset of your network. And so, I am hopeful for the 5G opportunity, but is it driving our business in any way shape or form right now? It is not.

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Maher Yaghi, Desjardins Securities Inc., Research Division - Analyst [41]

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Correct me if I'm wrong. But a lot of companies are virtualizing their network, even on 4G, ahead of that 5G cycle, to make it more nimble. In your wireless deployments right now, are you selling into this kind of upgrade -- or not upgrade, but maybe improvements on the 4G networks that are in the market?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [42]

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Yes. The deployment model -- so you have to separate the control plane from the data plane. So the control plane in 4G is becoming more and more virtualized, and we are participating in that in selling our control plane parts of our product into that -- the control plane from a virtualized perspective, we absolutely are. The difference on 5G is the data plane is also virtualized as well.

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Operator [43]

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And your next question comes from Todd Coupland from CIBC.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [44]

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Dave, I just wanted to get your view on overall consolidation in the telco market, and whether or not you think it's going to come to your subset of the market. If you do think that's going to happen, what types of consolidation would make sense in and around Sandvine? Even if you will stay independent with that?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [45]

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So Todd, I expect you've heard me say this before. Although we're a network equipment and software company and solutions and a lot of people want to paint us with the same brush of, say, a Cisco or Ericsson, who do many things as well, I think that there is a real opportunity for a disruption on the OSS and BSS space. And that is the armies of bespoke engineering that are happening to roll out a new service in a communications service provider. And I think the biggest disruptive force that exists out there is the ability to do things simpler and do it easier. And I think that's the, over time will become the overwhelming value proposition for Sandvine, that you could do things in days or weeks relative to months and years. And so I think there is and there will be all kinds of consolidation that's happening in the OSS/BSS space. And I think that there's a disruptive force that's going to happen from just by making it super simple to sell bandwidth differently. And I got a tell you, it's -- very few communications service providers that I talked to right now that aren't adopting an agile methodology for rolling out services. And they're looking for, hey, how can we do a 1 week, 2-week, 3-week sprint here to get something done? And if you think of Sandvine, our user community sandbox, almost 2,700 users, that talk everyday on our community website, folks doing interesting things with our equipment. If you look at SandScript, our very, very powerful scripting language that unlocks millions of lines of codes that we've written to affect and create services in the network, that it really becomes the language of agile or dev ops the way many, many communications service providers want to roll out new services. And so I think there'll be consolidation on the OSS/BSS space. And I think this is going to be this huge disruptive wave that's going to cascade, hopefully catalyzed by Sandvine through that space as well.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [46]

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And Dave, just one follow up on that. So you've seen some of your peers get taken over by private equity. There are larger players in the space that have many different demands within the organizations. Are you seeing less investment as a result of those 2 factors that's an opportunity for you?

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David Caputo, Sandvine Corporation - Co-Founder, CEO, President and Director [47]

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I believe our competitors are definitely investing less than we are, but we're the market leader and we're the largest player, and we could afford to do it. And I think we're doing it significantly more profitably than they are as well. So I think the value is being proven out there as well. I feel very confident we're going to be the winner in this marketplace. And I have a team here that is incredibly talented, who believes it as well. And so I like the hand we're playing right now for sure.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [48]

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One question on OpEx, if I could. With some volatility of revenue expected throughout '17, is the absolute OpEx level we saw in Q1 about the right number, plus or minus?

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Scott Hamilton, Sandvine Corporation - CFO and Director [49]

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Yes. So certainly, that's going to be the cost structure for 2017, similar to every year, there's the normal fluctuations that we have depending on specific activity in the quarter. The only caveat I'll give to that is as we approach trial with our patent lawsuit I would expect our legal expenses to go up. But my ability to predict those right now is difficult. So outside of that, I would say yes, the cost structure you see is what we will have throughout '17.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [50]

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So Scott, just on that. So you'll call that out, I assume as the September file approaches, and we'll be able to ring some set.

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Scott Hamilton, Sandvine Corporation - CFO and Director [51]

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Yes. Certainly, as it gets more meaningful, we will communicate with you guys.

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Operator [52]

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And we have no further questions. I will now turn the call back to Mr. Wadsworth for closing comments.

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Rick Wadsworth, [53]

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Thanks, Paulette. On behalf of Dave and Scott, thank you very much for your questions and for attending Sandvine's Q1 conference call. We look forward to speaking with you again soon. Bye for now.

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Operator [54]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.