U.S. Markets closed

Edited Transcript of VCM.TO earnings conference call or presentation 6-Feb-20 6:00pm GMT

Q2 2020 Vecima Networks Inc Earnings Call

Victoria Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Vecima Networks Inc earnings conference call or presentation Thursday, February 6, 2020 at 6:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Dale Booth

Vecima Networks Inc. - CFO

* Sumit Kumar

Vecima Networks Inc. - CEO, President & Non Independent Director

================================================================================

Conference Call Participants

================================================================================

* David Kwan

PI Financial Corp., Research Division - Technology Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello. This is the Chorus Call conference operator. Welcome to Vecima Networks Second Quarter Fiscal Year 2020 Results Conference Call and Webcast. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

Presenting today on behalf of Vecima Networks are Sumit Kumar, President and Chief Executive Officer; and Dale Booth, Chief Financial Officer.

Today's call will begin with executive commentary on Vecima's financial and operational performance for the second quarter fiscal year 2020 results. Lastly, the call will finish with a question-and-answer period for analysts and institutional investors.

The press release announcing the company's second quarter fiscal year 2020 results as well as detailed supplemental investor information are posted on Vecima's website at www.vecima.com under the Investors heading. The highlights provided in this call should be understood in conjunction with the company's unaudited interim condensed consolidated financial statements and accompanying notes for the 3 and 6 months ended December 31, 2019.

Certain statements in this conference call and webcast 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, beliefs or current expectations with respect to market and general economic conditions, future sales and revenue expectations, 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 and customer demand 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 26, 2019, a copy of which is available at www.sedar.com.

In addition, although the forward-looking statements in these earnings calls are based on what management believes are reasonable assumptions, such assumptions may provide -- may prove to be incorrect. Consequently, attendees 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 as a result of new information, future events or otherwise, except as required by law.

At this time, I would like to turn the conference over to Mr. Kumar to proceed with his remarks. Please go ahead.

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [2]

--------------------------------------------------------------------------------

Thank you, and good morning, everyone. Second quarter was a pivotal one for Vecima, both operationally and financially. I'm very pleased to report that we achieved our first meaningful revenue from our new Entra family of Distributed Access Architecture products, a major milestone for Vecima as we kick off in the DAA market, a foundational pillar of our vision for the company and our role in the connected world. We also expanded sales of our industry-leading IPTV products, securing a number of strategically important wins.

And financially, we delivered our best quarterly financial performance in the last 3 years. We'll talk more about all of this on today's call, but I'd like to start with a look at our second quarter financial highlights.

On the top line, we generated quarterly revenue of $25.1 million, anchored by deployments of next-generation products at new and existing customers alike. Sales were up 11% year-over-year and 25% quarter-over-quarter. Gross margin was also exceptional at 64% and adjusted EBITDA climbed to $7 million, up 27% year-over-year. This is our best performance in 12 quarters. Earnings per share also increased in turn, climbing to $0.16 from $0.09 a year ago.

So financially, a very strong quarter, where we benefited from a notably favorable product mix. Looking more closely at the operating achievements that help drive these results, in our Video and Broadband segment, our new Entra family of products contributed notable revenue as operators began to purchase our new DAA platforms and products. Our first DAA solution win with a Tier 1 North American customer led the way. During the second quarter, we sold volume licenses of the Entra Remote PHY Monitor, which the customer is using as a critical management platform for the DAA network rollout and ongoing operations.

Subsequent to quarter end, we also received our first order for Entra Remote PHY nodes, also with this Tier 1 customer. As anticipated, this initial node order in Q3 wasn't a large one, but it puts us firmly on the path towards volume, commercial deployment, and we're now in lockstep with the operator's timing to transition to scale in DAA. In other Entra developments, initial orders for our new Entra Video QAM Manager and Entra Interactive Video Controller also flowed in the second quarter, and we advanced forward in field trials of our Remote PHY nodes of the Canadian MSO.

There's no question that it's quite satisfying to see our Entra family of products starting to scale up. As you know, we've come through a very long period of development and investment in DAA and the industry transition has been markedly slow and protracted, but we've been highly patient, agile and strategic in our approach, which we believe will continue to pay dividends for our customers. I want to take a moment to acknowledge the Vecima team that has played such a critical role in building and marketing our deep, diverse and innovative new family of venture products.

Those efforts are positioning Vecima at the forefront of the DAA industry transition with a host of high-potential opportunities ahead of us.

Now, looking at other contributors to our Q2 performance, I should note that Entra wasn't alone in driving strong quarter for our Video and Broadband Solutions segment. We also saw a significant uptake of Terrace QAM, as our lead Tier 1 customer continued to expand its hospitality footprint while preparing for a migration to the next-generation Terrace IQ platform. This helped to drive the year-over-year and quarter-over-quarter segment growth we achieved.

Turning to our Content Delivery and Storage segment, we set a new revenue record with sales of $15.4 million in Q2. Many factors drove that noteworthy performance. We once again deepened our penetration in the burgeoning IPTV market as we responded to growing demand from existing customers, while at the same time, attracting new customers. This included a new Tier 1 MSO customer in Latin America that's deploying our MediaScaleX IPTV solutions across multiple affiliates. This win furthered our momentum in Caribbean and Latin America and helped us achieve over $1 million in sales from this region. That's our best result to date from the CALA region in CDS. Our CDS business also realized a significant expansion of sales with a world top 5 MSO during the second quarter. As we discussed on our last call, we recently launched a major software upgrade for this customer that's being rolled out across Vecima's footprint, which is over 75% of their video-on-demand network.

Turning to another important milestone, I also want to highlight our first ever IPTV conversion in the broadcaster sector. During the second quarter, we were selected by a Tier 1 broadcaster in the CALA region to start converting archived libraries built with tape to online storage using our MediaScaleX storage product. This is significant and it's a strategic win, representing major potential of this and other broadcast customers globally. The world's libraries of video content are largely stored on off-line tape today, driven by brute force, robotic retrieval systems. Vecima's leading the charge to bring these vaults online, reducing costs and increasing monetization velocity.

The worldwide broadcaster market is massive and has a potential to become a major growth area for our IPTV products in CDS. In our Telematics segment, the second quarter brought an important win for our Fleet Management business. We began a fleet-wide rollout with the City of Saskatoon in December, which includes monitoring about 1,000 municipal vehicles and movable assets. We also continue to build out the new market for our Nero GPS Asset Tracking products, and I'm pleased to report we added 5 new customers during the period, including assets and fleet. Overall, it was a strategically eventful and exciting quarter for Vecima, with new products and deployments contributing significantly to our performance. And at this point, I'll turn the call over to Dale to provide more detail on our financial results. Dale?

--------------------------------------------------------------------------------

Dale Booth, Vecima Networks Inc. - CFO [3]

--------------------------------------------------------------------------------

Thank you, Sumit. For the purpose of this call, we assume that everyone has seen our second quarter fiscal 2020 news release and financial statements that are posted on Vecima's website.

I will present the relevant numbers and discussions around overall results, market segments, operational expenses and the balance sheet. Please note, the results for the second quarter of fiscal 2020 include 3 full months of operating results from our acquisition of ContentAgent. That business is now part of the Content Delivery and Storage segment. We also adopted IFRS 16 leases on July 1, 2019. The impact to the income statement as a result of the adoption of IFRS 16 was insignificant. The adoption of IFRS 16 does not have an impact on cash flows.

Starting with consolidated sales for the 3 months ended December 31, 2019, we increased sales to $25.1 million. This was up 11% year-over-year and 20% higher than $20.1 million in Q1 of this year. The increase in revenue reflects higher revenue from our Video and Broadband segment and record sales performance from our Content Delivery and Storage segment. Within the Video and Broadband Solutions segment, we generated sales of $8.4 million. This was up 20% from a year ago and 12% from Q1 of this year.

Our new Entra DAA products contributed revenue of $1.1 million. This compares to just $0.3 million in sales a year ago and $0.3 million in the first quarter of this year. Our Terrace QAM products also had an excellent quarter with sales climbing to $3.1 million. That was up 168% year-over-year and 65% quarter-over-quarter as our lead customer advanced its extensive hospitality footprint, while preparing to migrate to the next-generation Terrace IQ platform. These gains fully offset the slowdown in demand for our other legacy Terrace family products.

In the Content Delivery and Storage segment, second quarter revenues set a new record at $15.4 million. This was up 8% from the very strong results of Q2 last year, which was our previous best ever quarter for CDS revenue, and was 36% higher than the $11.3 million we generated in the Q1 period of this year. The revenue growth was driven by the factors Sumit discussed, including growing demand for our IPTV solutions from new and existing customers, continued expansion in the Caribbean and Latin American region, and robust sales uptake of a major new software release by a world top 5 MSO.

In our Telematics segment, sales in the second quarter were stable at $1.4 million in line with the $1.4 million we achieved, both in Q2 a year ago and in Q1 of this year. Gross margin for the second quarter was a very strong 64%, up significantly from 57% in Q2 2019 and 52% in Q1 2020. In the Video and Broadband Solutions segment, gross margin increased to 58% from 49% a year ago. Higher-margin software and license sales in our revenue mix were the main factors in this improvement. Gross margin in the Content Delivery and Storage segment also increased significantly to 67% from 59%. Again, this reflects an increased percentage of higher-margin software sales in the revenue mix. In the Telematics segment, gross margin for the quarter was lower at 63% as compared to 71% in Q2 2019, mostly due to higher product costs in the current period.

Turning to the second quarter operating expenses. The notable changes year-over-year were as follows: R&D expenses decreased slightly to $4.5 million from $4.6 million in Q2 fiscal 2019. However, until our new products are commercialized, development costs are deferred to future periods. Sales and marketing expenses increased slightly to $3.4 million from $3.3 million last year as we supported sales growth and factored in the addition of expenses from our newly acquired ContentAgent business. And G&A expenses slightly increased by $0.1 million to $4.1 million. This reflects the addition of ContentAgent expenses, partially offset by lower amortization expenses year-over-year. In total, OpEx increased to $12 million in Q2 from $11.6 million last year. The increase reflects higher operating expenses in the Content Delivery segment, partially offset by lower costs in Video and Broadband Solutions. I noted that reported R&D expense in the period is typically different than the actual expenditure. That's because certain R&D expenditures are deferred until product commercialization. Adjusting for deferrals, amortization of deferred development costs and income tax credits, actual R&D investment for the quarter decreased to $6.2 million or 25% of sales. That was down from $7.8 million or 35% of sales in the same period last year. The year-over-year change primarily reflects that we're getting closer to commercial deployment with a number of our next-generation products.

Turning to our bottom line results. We note that that we tripled second quarter operating income to $4 million from $1.3 million in Q2 fiscal 2019. This was mainly driven by a $2.3 million higher contribution from the Video and Broadband Solutions segment, and a $0.7 million increase in contribution from Content Delivery and Storage. Adjusted EBITDA increased to $7 million, up an impressive 20% year-over-year and 295% quarter-over-quarter. And net income for the quarter increased to $3.6 million or $0.16 per share from $2.1 million or $0.09 per share last year. Overall, it was a very strong quarter, both on the top and bottom lines.

Turning to the balance sheet. We ended the second quarter with $40.2 million in cash and short-term investments. Working capital was slightly lower at $58.1 million as compared to $58.3 million at the end of fiscal 2019. Finally, cash flow from operations for the second quarter increased to $4.3 million from cash used of $0.7 million in the same period last year. This significant $5 million increase reflects a $3 million increase in cash flow from noncash working capital and a $2 million increase in operating cash flow.

Now back to Sumit.

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [4]

--------------------------------------------------------------------------------

Thank you, Dale. We're very happy with our second quarter results, and we're moving into the second half, ready to build on our progress while maintaining our agility as the industry's wide-scale infrastructure upgrades unfold. In our Video and Broadband Solutions segment, initial sales of several of our new Entra products are underway, and we're moving closer to scale deployment. As it's always been in cable, the timing will depend on the industry's pace, given that moving to the DAA access network is a sea change, which has already encountered significant delay. Accordingly, we're being cautious in our expectations for Entra sales in the second half, even as our confidence in our broader DAA prospects continues to build. The scope and breadth of our engagements with customers is growing, and we're strengthening our presence in the DAA space with industry-leading new offerings. During the second quarter, we launched our new double density Remote PHY access node. This innovative solution combines 2 Remote PHY devices into a single node to double both downstream and upstream capacity. We're already seeing a great deal of interest from operators that want to leverage their network designs with a higher density node. We believe this new node will ramp up the velocity of our deployments. On a different front, we're also pursuing opportunities for comprehensive DAA and IPTV solutions, in keeping with our aim to be an overall strategic vendor to our customers. In fact, we're currently progressing lab qualifications for both Entra and MediaScaleX with the Tier 1 MSO.

The near-term opportunities for our next-generation products are growing. And as our customers move closer to deployment, our momentum will start to build. Now, as we've said previously, as the cable industry moves closer to DAA, we're expecting the demand for a number of our legacy cable products will taper further. In commercial video, demand for Terrace QAM was solid in the first half, and we're anticipating further ordering activity in the second half. But longer term, we're preparing for our lead customers' migration to the next-generation Terrace IQ platform, and we're working closely with them to orchestrate this upgrade. We furthered development of Terrace IQ in the first half and recently provided a well-received functional proof-of-concept demo to the customer. Development will continue as we define the intercept point of the Terrace QAM to Terrace IQ transition with the customer.

In our Content Delivery and Storage segment, we expect that product enhancements, new customers and higher capital spending on IPTV will all underpin ongoing strong demand for our MediaScaleX solutions. As before, we see potential for the CDS segment to grow in the 20% range in fiscal 2020. This is based on the increasing pipeline of opportunities for migration to IP video networks including linear broadcast, cloud DVR and time-shift TV. We want to remind everyone again, however, that the CDS segment can see pronounced quarterly swings related to the timing of large customer orders.

In our Telematics business, we expect consistent incremental growth from the fleet tracking market, and we anticipate increasing demand for our newer movable asset-tracking services.

In summary, Vecima's poised for growth across the organization. DAA scale deployment is nearing, and we're ready with an excellent portfolio of highly differentiated Entra DAA solutions. At the same time, we're making rapid headway in the global march to IPTV with our powerful MediaScaleX family of products. We're excited about Vecima's forward momentum as we take our place leading the industry's evolution. I look forward to telling you more about our progress in the coming quarters.

That concludes our formal comments for today. We'd now be happy to take questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from David Kwan with PI Financial.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [2]

--------------------------------------------------------------------------------

Good work. A solid quarter for you guys. Jumping, I guess, straight into the Entra, it seems like there's obviously some pretty good progress there. I'm especially kind of looking out probably over the next few quarters. You talked about -- on the first, I guess, post Q2, purchase of the Remote PHY node by that Tier 1 MSO and you mentioned, I guess, it was fairly modest. Can you maybe provide some more color as to how you -- I'm guessing the customer may have shared some information on how they see that rollout playing out? Any color you can provide from that standpoint? And to the extent, like you've seen with -- maybe in the Terrace family of products, where the -- certain customers have kind of built up inventory. Do you see that as a potential? Or do you see more kind of buy as they need it?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [3]

--------------------------------------------------------------------------------

Yes. So that customer, like I said, you're right, the initial order in Q3 that we've talked about so far is very modest, and that's getting them started. The timing cadence, we're working with them, like I said, in lockstep to look at their calendar '20 plan, which, as we've said, envisions a scale rollout going across their network. And in terms of inventory, it certainly depends on the volume of activity that they may anticipate that they're going to pursue within the calendar year across the number of markets and regions that they plan within their CapEx budgets to roll out this year, and that will kind of get them to a place where they position their warehousing and inventory accordingly. So that has the potential to kind of, if you will, lead the actual deployment. But as we've been saying, time and time again and remains the case in DAA overall, we're talking about major infrastructure here, and that implies, as always, construction, labors, [stringing] fiber in the field and all of these very challenging infrastructure rollout activities. So that's where we maintain our view that timing has been variable, subject to change, and we're being cautious.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [4]

--------------------------------------------------------------------------------

Okay. That's good. On the Entra, I guess, the EN8124, the higher access density node. So is that in the market right now?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [5]

--------------------------------------------------------------------------------

That is in the market in the sense that we've launched a product. Of course, I don't go too precise on in terms of DAA. When I have a new product launch, which I've done just recently with 8124. So I'm not going to speak to that. But we feel pretty good about where we stand with that configuration, and how that ties to our opportunities at the Tier 1 and other customers.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [6]

--------------------------------------------------------------------------------

And do you see that [having] more demand than, I guess, the lower density node that you got, that's been out for the last few quarters?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [7]

--------------------------------------------------------------------------------

It has a potential to do that, and we're seeing whether it's in the sense that it's a segmentable node with 2 RPD modules. So like I've said, double density as operators are looking to roll out DAA, and -- I've talked about this before and the strategy there is to look at amplifier locations today and optical node locations today, and deploy RPD nodes in those locations.

When you have a segmentable node, you can afford a road map to the long-term capacity in that location. So that affords us an opportunity there to be differentiated in a sense in RPD.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [8]

--------------------------------------------------------------------------------

Can you talk about maybe the price point for the 8124 versus, I guess, the lower density node?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [9]

--------------------------------------------------------------------------------

I can't do that, dude. Of course, as you can imagine, it's going to drive things upward. But it's going to come in lower than buying to the half density nodes.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [10]

--------------------------------------------------------------------------------

Yes. I'd assume it was kind of less than twice what the lower density would be?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [11]

--------------------------------------------------------------------------------

Yes, that's as much as I'm going to say today.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [12]

--------------------------------------------------------------------------------

That's fine. You've, I guess, in the past, talked about the number of operators you guys have been engaged with, I think it was 19 last quarter. And I think 6 of those were Tier 1. Can you provide an update on those metrics?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [13]

--------------------------------------------------------------------------------

Yes. I mean, in terms of that count, for the time being, I'm not committing in terms of the cadence of updating that number. It's evolving and growing overall. And as we see it's appropriate, we'll update the market on where we stand overall. But you can -- I can say that it remains the case that there's the 6 Tier 1s in that group and over 13 other tiers of operators, they're all progressing at various stages of the sales cycle. We've talked quite a bit about the lead Tier 1. That's, of course, the most important factor this fiscal year. And then other Tier 1s are progressing along at various stages. And we mentioned a Canadian field trial also getting going in that other group of customers. So overall, a lot of momentum in that engagement list is the RPM, the Remote PHY Monitor. We talked about the sale in Q2 that's proving to be relevant in terms of our overall engagement with the market that -- it's a very unique and DAA-tuned solution for orchestration, and service assurance is proving to become very important to customers generally. And that's as we strategize, kind of creating pull-through opportunity for us as an overall solutions vendor. And we have that whole ecosystem, including the video side of DAA with VQM, LQA, of course, the nodes, the Remote PHY Monitor, the switch. So that activity is working in a good way for us.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [14]

--------------------------------------------------------------------------------

Great. And I guess, with Canadian MSO, it sounds like it's near the start of that field trial. When do you think they could, assuming things go well, move into kind of more commercial deployments? And then can you maybe talk about the potential revenue opportunity I assume would be materially smaller than your other one that is ramping out right now?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [15]

--------------------------------------------------------------------------------

And like we anticipate overall for the market, there's a wide range of sizes of operators but the aggregation of these smaller operators globally is a very good opportunity overall, and remains the case. So for the Canadian, we highlighted that we've gone into field trial. It has a potentially faster sales cycle, of course, than a Tier 1, and we've also thought that there may be just a one-vendor selection there rather than a 2-vendor split. And field trials has kicked off. Winter was an important thing to demonstrate with that customer. So once we get through that, everything is performing very nicely. So we can see them moving in the right direction in the next few quarters.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [16]

--------------------------------------------------------------------------------

Or maybe early fiscal '21, where you might -- early to mid-fiscal '21, I guess, the second half of this calendar year, we could possibly see some more material orders out of them?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [17]

--------------------------------------------------------------------------------

Yes, yes, yes. We could see some ordering activity in first half of fiscal '21. And overall, it's a small amount of potential there. But like I said, our view is to add together many of those types of customers, and we're seeing our integrated sales teams as being powerful doing that, in that 19 customer list we have.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [18]

--------------------------------------------------------------------------------

Okay. And can you maybe comment just on the field trials? Like, are there any other field trials? Or is the rest of the stuff in the labs right now?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [19]

--------------------------------------------------------------------------------

I don't want to get very specific beyond the ones I've talked about with the Tier 1 and the Canadian. What I can say is across the overall group, there's more than a few field trials, several lab trials. And some that are, of course, commercial engagements at early stage. So we've got a wide set there, but I'm not going to get a field trial number out today.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [20]

--------------------------------------------------------------------------------

And then just the last one on Entra. Just any update on kind of the progress in working on FDX and Extended Spectrum DOCSIS on, et cetera, et cetera?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [21]

--------------------------------------------------------------------------------

Yes. And as we've talked about the last few quarters, dude, I think the way we've seen that kind of progresses that the industry had gone through churn on standards competition and whatnot. And as I last kind of harmonized to DOCSIS 4.0 that incorporates both Extended Spectrum and FDX in the standard itself, but we're seeing that by and large, the operators are having a leaning to go to Extended Spectrum as a long-term evolution.

Meanwhile, silicon's kind of been part awaiting that churn to clear in that harmonization to occur, which has occurred, so silicon will potentially start to come this calendar year. We've been preparing development accordingly. But the more important thing that we've talked about with respect to DOCSIS 4.0 for us is that, now that the road map and evolution plan has been ratified, if you will, by the industry, operators are turning their focus entirely back to Gen 1 and getting going in DAA generally in the first place, and they see the long-term view to get to 10-gig speeds with Extended Spectrum. But we're focusing on Gen 1 now, and that ties to our opportunity list.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [22]

--------------------------------------------------------------------------------

Helpful. On the TQ, noted the stronger demand in the first half of this year and hopefully, rolling over to the second half. So would you expect to see kind of the revenues we've seen in the first half kind of equaling the second half? So you kind of come in the full year number around $10 million? Or do you expect it to deviate from that?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [23]

--------------------------------------------------------------------------------

Yes, I think that's a very good way to think about things, David, as you just stated. We've had some good flow in from the lead MSO customer. And what happened there is that some time ago, sales pulled back significantly, and what they were up to at that time was still going on this, we've called it, in some cases, all-digital conversion. Another way to look at it is that they came out with a solution, and we're tackling market share versus other hospitality service providers at a rapid pace back then. But they reached a point where they tackled the majority of that market share expansion and made a transition to network fill in, park them with some inventory, and they've been kind of consuming out of the inventory for some time. But in network fill in, the footprint expansion and new property capture has continued at a consistent pace this whole time.

So what's happened recently is that the inventory position is wound down, and we're accessing that network fill in volume that we saw a bit of that happen in Q2. We could see some continuity going forward in the second half. And then we're, of course, thinking about when to make the changeover to Terrace IQ, which tackles both the network fill in, run rate volume as well as the opportunity to upgrade and replace the deployed base.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [24]

--------------------------------------------------------------------------------

So I guess, where is Terrace IQ right now? Like is it -- is there any -- is it allowed with them right now? Just trying to get a sense on timing for that product line.

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [25]

--------------------------------------------------------------------------------

Yes. And as we've talked about on Terrace IQ, the vision there, just to step back for a second, ties to the migration of the overall residential video network moving from QAM to IP and once you do that, it in turn -- your line up availability of content for your hospitality sector changes and you need a platform like a Terrace IQ to do what we've always done in the hospitality sector with Terrace QAM. So we've done proof-of-concept demo, which was quite successful with the lead in Q2. Development is ongoing, and they're also looking at when they perceive this impact to the input lineups as they roll off QAM and move to IPTV. And that's, of course, generally a very long game type of story. So everything's in a way that as we get through calendar '20, calendar '21, in that time frame, we can see them starting to think about making the changeover.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [26]

--------------------------------------------------------------------------------

So calendar -- late this calendar year, early next year is when we could see some material Terrace IQ revenue?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [27]

--------------------------------------------------------------------------------

That's when we could possibly see Terrace IQ start to sell -- get uptake, yes.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [28]

--------------------------------------------------------------------------------

Okay, okay. And you talked about the revenue opportunity, probably mirroring the Terrace IQ revenue profile, I guess?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [29]

--------------------------------------------------------------------------------

Yes. So of course, it's at this point, I've lost count, probably fourth-generation platform, Terrace IQ, and we've been a little over a decade in the commercial video MSO space. So it's, of course, taking advantage of state-of-the-art in terms of the technology that's now accessible to us in this design. So we're going to see a little improvement in the ASPs, which will, of course, be attractive to the operators in terms of their flow-out volume in hospitality. But with that said, we have -- largely in the U.S., but let's say, our global number for now, we have, give or take, 25,000 hotels running Terrace, Terrace QAM, various members of the family that are addressable market for us with Terrace IQ.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [30]

--------------------------------------------------------------------------------

And I think you mentioned previously, there was one other Tier 1 MSO, I think that might have been kind of kicking the tires, but still early stage and another one that didn't have much interest at this point. Is that -- anything changed from that standpoint?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [31]

--------------------------------------------------------------------------------

I think we're seeing more MSOs getting -- that are thinking around Terrace IQ. So we've talked about the 3 Tier 1s on the lead and 2 other Tier 1s. I have both of those other 2 Tier 1s, of course, still working away on 600E MPEG4 densification for now. But Terrace IQ certainly entered their thinking about long-term evolution.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [32]

--------------------------------------------------------------------------------

That's great. On to the Content Delivery and Storage business, it was obviously a very strong quarter you had. I think, a year ago, there was some benefit from some deal that got pushed out from Q1. I was just curious to the extent for this quarter that whether there were some deal that pushed out from Q1 or maybe pulled in from Q3? And possibly budget [flash like]. Is this kind of a new level for this business? Obviously, they are subject to quarterly variability.

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [33]

--------------------------------------------------------------------------------

Yes. In terms of our kind of communication around -- on new level and whatnot the best kind of -- kinds I can suggest there so think about our overall stance, we're positioned for over 20% growth compared to fiscal '19, so that can give you a sense of our view on keeping going at these -- at this pace. And with respect to the causes, there's a little bit of all they've got stuff going here in Q2. We did have a calendar year-end budget tailwind, that's always the case in this and the entire MSO industry. So that was helpful. And there was some CapEx pause in fiscal '19 and the first part of fiscal '20, pretty much calendar '19, early calendar '19 at one of our very important Tier 1 customers where we have that 75% footprint of MediaScaleX cash, and they kind of unleashed in Q2 with a major software release upgrade purchase that we were anticipating. So that was a strong contributor to both the top line and the margin profile, which was quite excellent with the software we drove into that Tier 1 customer. But at the same time, our overall list of new customers and new design wins at existing customers for IPTV has been accelerating. So you can superimpose that on some of the variability that led to a great Q2, but having an overall trend that we -- where we really like where the segment is performing and situated going forward.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [34]

--------------------------------------------------------------------------------

Perfect. I guess, a couple of more questions, and I'll pass the line. On the gross margins, obviously, exceptionally strong this quarter, driven by the software mix, I guess. Can you comment, I guess, on how the software mix varied from this quarter versus what we've seen over the last couple of quarters or even years? And how we should be looking at gross margins going forward? Should we be expecting a higher mix of software sales, maybe particularly from the MediaScaleX platform with the software upgrade?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [35]

--------------------------------------------------------------------------------

Okay. So I'll let Dale come back to the kind of guidance side of that, but I'll talk about more on the color side to start. So in terms of whether it's kind of secular on software mix or not, I would say that it certainly demonstrates the capacity for mix to go very favorable for us in CDS, in particular, and I talked about the Tier 1 operator rolling software. But kind of stepping back to the overall cadence of some of these things, when we get a new design win for IPTV, you can imagine that we would have some hardware concentration in the early days as we start the rollout.

From there, as you kind of increase capacity and licenses and take-up of the services, cloud DVR capacity, all of those things and you get effects like the need for these software feature updates like we did in Q2, you can have these periodic bursts of software concentration in a given design win. So it sets you up for that opportunity from time to time, but I wouldn't call it a consistent nature of the business. So we do expect a pullback from, honestly, an outstanding margin profile in Q2 that we saw there. And in VBS, Remote PHY Monitor sale to the Tier 1 was certainly a driver of healthy mix for us in Q2 that also took that segment to a nice spot. Remote PHY Monitor, as I said before, is becoming relevant in more and more customers. So we could see that effect. But at the same time, as we enter the nodes, in the early days of volume, that's a bit of a headwind on growth until we really get the volume. And Dale, you can...

--------------------------------------------------------------------------------

Dale Booth, Vecima Networks Inc. - CFO [36]

--------------------------------------------------------------------------------

Sure. So I think you highlighted that perfectly, Sumit. And ramping up our Entra nodes going forward as well at lower margins, I think that we'll be looking at that 49% to 53% guidance that we provided in the last couple of quarters.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [37]

--------------------------------------------------------------------------------

Okay, that's helpful. And then just one last question. Obviously, hearing across the globe, the impact on the coronavirus and the impact on supply chains and whatnot. Understanding that, I think it's still kind of the tail end of Chinese New Year, whatnot. To what extent do you have any color that what's going on there? It may have an impact on your supply chain as it relates to components and whatnot?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [38]

--------------------------------------------------------------------------------

Yes, of course, we've been monitoring it as much as anyone else has in terms of things evolving very rapidly there. And coincidental, as you said, with Chinese New Year and extending that, we feel like we were in a good spot in considering Chinese New Year in the first place, and situating ourselves in a good place, certainly, at least for Q3, in that sense. We don't have any direct supply chain in Hubei, but there may be an influence of subcontractors down the line there that we could ultimately play out. And then if the broader region kind of continues to experience impact, we'll have to monitor it closely. But for now, we're relatively comfortable. If it continues and escalates, leading into our Q4, Q1, then we need to be mindful of what we do to mitigate.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from [Oli Pradal] with -- private investor.

--------------------------------------------------------------------------------

Unidentified Participant, [40]

--------------------------------------------------------------------------------

Yes. Congratulations. Great quarter.

I understand, like, as countries now -- both Canada and the U.S., want to expand into -- get high-speed internet into rural areas. Now is just IPTV, like that's basically streaming service, right? And these streaming services ramp up. Is that possible to get that out in rural area and to become an added feature? Or...

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [41]

--------------------------------------------------------------------------------

So yes, like you said, Canadian and U.S. governments are putting some emphasis on making available some funding for rural Internet expansion, broadband expansion. And as we've said, in a macro sense, IP video is kind of the very driver of the push on bandwidth, overall. And that applies to rural broadband capacity all the same. So for our set of products, MediaScaleX and our customer base, which tends to be the service providers, that can very well be a factor. As you know, we get more expansion of rural broadband to the extent that it's being -- the funding is being accessed by our types of customers, MSOs, service providers. We can flow through to that in our products in the first place, IPTV products that are applicable, generally, to these service providers' evolution to IPTV. So I think that's the connection I want to draw there that in the sense of our customers expanding via rural and us kind of matching to their evolution to IPTV, generally, that can -- we participate that way.

--------------------------------------------------------------------------------

Unidentified Participant, [42]

--------------------------------------------------------------------------------

Recently, there's a big drive on putting satellites -- communication satellites into low-Earth orbit. And is opportunity there for -- I mean you don't have to worry too -- in the streaming things, they -- you don't have to worry too much about latency, right? So...

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [43]

--------------------------------------------------------------------------------

Actually we do. No, actually, latency, [Oli,] if I -- maybe we haven't had a chance to speak on this yet in too much detail. But with respect to linear that's broadcast video over IPTV, latency is a -- frankly, a huge issue. And that's one of the areas that we've made some product differentiation to try to make latency -- bring latency at parity with what you have with set-top box-based video. So to the extent that latency's impacted by low-Earth orbit satellite, that is a factor.

--------------------------------------------------------------------------------

Unidentified Participant, [44]

--------------------------------------------------------------------------------

Okay. Yes, I had the impression that you could download in packets and that way you could just pile it up...

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [45]

--------------------------------------------------------------------------------

You could. If you're viewing at a...

--------------------------------------------------------------------------------

Unidentified Participant, [46]

--------------------------------------------------------------------------------

When they're sitting there -- and people could download it to their PVR or whatever, and then watch things that way, right?

--------------------------------------------------------------------------------

Sumit Kumar, Vecima Networks Inc. - CEO, President & Non Independent Director [47]

--------------------------------------------------------------------------------

Yes. Sure. I mean if you're time shifting in the first place, which we think is -- generally, we could call that viewing on demand. You could have your schedule set and download and avoid the latency thing. But when it comes to live TV, sports, news, et cetera, which is still core service today for pay-TV, latency is a huge, huge concern.

--------------------------------------------------------------------------------

Unidentified Participant, [48]

--------------------------------------------------------------------------------

Yes, of course. Yes, all right. I didn't get -- yes, you're right. Okay and great quarter.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

There are no more questions at this time. This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.