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Hello. This is the Chorus Call conference operator. Welcome to the Vecima Networks Third Quarter Fiscal Year 2019 Results Conference Call and Webcast. [Operator Instructions] Presenting today on behalf of Vecima Networks are Sumit Kumar, President and CEO; and John Hanna, CFO.Today's call will begin with executive commentary on Vecima's financial and operational performance for the third quarter fiscal year 2019 results. Lastly, the call will finish with a question-and-answer period for analysts and institutional investors.The press release announcing the company's third quarter fiscal year 2019 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 condensed interim consolidated financial statements and accompanying notes for the 3 and 9 months ended March 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, belief 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 had 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 27, 2018, a copy of which is available at www.sedar.com.In addition, although the forward-looking statements in this earnings call are based on what management believes are reasonable assumptions, such assumptions 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 remarks. Please go ahead.
Thank you, and good morning, everyone. We've made significant progress in the third quarter as we continue to position Vecima for leadership in the DOCSIS 3.1 distributed access architecture market and IP video content delivery and storage space. In our Video and Broadband Solutions segment, our Entra DAA products continue to remain on track for field trials in calendar 2019. While in our Content Delivery and Storage segment, our solutions continue to resonate in the industry.I'll provide more detail on our progress on our call today. First though, a comment on our third quarter financial performance.Overall, it was a mixed quarter. We achieved stronger-than-expected results in our Video and Broadband Solutions business. Third quarter revenue from this segment improved over last year and on a quarter-over-quarter basis, sales were up nearly 78% as compared to the second quarter of this year. These improvements were driven by increased demand for our TC600E products as a Tier 1 customer launched an MPEG-4 densification program that increased their platform volume requirements. We were able to capture that business by very quickly delivering a unique technical solution that made our approach the best option for this customer.However, those gains were offset by a significant quarterly revenue variance in our Content Delivery and Storage segment. As we've said previously, revenue fluctuations are typical for this part of our business. This reflect the project-driven nature of the business and the impact of order timing. We do, however, expect revenue momentum to resume in the fourth quarter and continue to anticipate strong contribution from this segment on a full year basis. While the lumpiness in Content Delivery and Storage sales impacted both our top and bottom line results on a consolidated basis, our margins for the third quarter remain strong at 52.6%. We also ended the quarter with a very strong balance sheet and cash position.So a mixed quarter financially, and John will provide more detail in just a few moments on that.In terms of developments in our core markets, the third quarter brought continued strides in development of our Entra products, which address the cable industry's evolution to DOCSIS 3.1 Distributed Access Architecture. Our DAA nodes are progressing through lab trials with multiple MSOs, including a mix of Tier 1, 2 and 3 operators. And recently our Entra Remote PHY Access Node and Remote PHY Monitor entered the next series of formal lab evaluations with a major Tier 1 MSO. So things are continuing to move forward well on that end.As you know, the transition to DAA has been a slow one and some of the major Tier 1s have been delayed, but we're now seeing definitive plans among a number of MSOs, and we anticipate field trials in the coming months with some of the Tier 1s and 2s on our list. Our tactical priority now is to capture the first product revenue opportunities that flow through, and we've aligned our R&D spending and our sales efforts with that objective.In our Content Delivery and Storage segment, we're closely focused on the opportunities in the emerging market for IPTV. We've created an innovative lineup of platforms that support our customers' shift to IPTV and enable them to provide highly sought after services like live linear broadcast, cloud DVR, streaming on demand and time-shift TV. During the third quarter, we continued to work with MSOs that are among the early movers in a large-scale transition to IPTV that is underway. I mentioned last quarter that there are a growing number of service providers that are using Vecima platforms as they make the transition to IPTV video services. As before, we're very well positioned with innovative and differentiated IPTV products, which we expect to lead to ongoing design wins and growth and scale as IP market continues to mature overall for video.In our Telematics segment, I'm pleased to report that we completed installation of PathView, our winter operations tracking interphase. This is part of our fleet management solutions for the City of Victoria and other municipalities.Overall, it was another productive quarter for Vecima, and we're encouraged by the progress we're making in all 3 of our business segments.At this time, I'll ask John to review our third quarter results with you. John?
Thank you, Sumit. For the purpose of this call, we assume that everyone has seen the news release and financial statements for the fiscal 2019 third quarter that are posted on Vecima's website. I'll present the relevant numbers and discussions around overall results, market segments, operational expenses and the balance sheet.Turning to our Q3 results. Starting with consolidated sales for the 3 months ended March 31, 2019, we generated sales of $20.3 million. This was a 16% decrease from the same quarter last year and an 11% decrease from Q2 fiscal '19 as we again saw some lumpiness in our Content Delivery and Storage segment.In our Video and Broadband Solutions segment, we generated third quarter sales of $12.4 million, a slight increase of 1% from the same period last year, but a 78% increase from the $7.0 million in Q2.Our third quarter Terrace product family sales were down slightly to $8.5 million from $8.7 million in Q3 fiscal '18, but up 102% from the $4.2 million in last quarter.As Sumit mentioned, this strong sequential growth reflects significant deployment of TC600E at one of our customers.Terrace QAM sales declined 44% in the third quarter to $1.5 million from the $2.7 million in Q3 last year as our customers rollout MPEG-4 upgrade kits neared completion.Terrace QAM sales were up 26% from the $1.2 million in sales in Q2 fiscal 2019. We expect sales will remain at reduced levels until we launch a next-generation product.Our Content Delivery and Storage business brought in sales of $6.5 million compared to $10.5 million during the same period last year, and down from $14.3 million last quarter, the decrease primarily reflecting the timing of customer projects and associated orders. As we have mentioned previously, the sales in this segment can swing significantly from quarter-to-quarter. We continue to remain confident in the long-term view.Turning to our Telematics segment. Sales were up 3% this quarter to $1.4 million from $1.36 million in Q3 fiscal '18 and level with Q2 results. In Q3, we achieved a gross margin of 53%, up from 51% in Q3 last year, but lower than the 57% last quarter. Gross margin in the current quarter was favorably impacted by a weakening Canadian dollar and product mix offset by sales commissions now being classified in cost of sales as a result of the adoption of IFRS 15 as well as lower sales overall quarter-over-quarter.Video and Broadband Solutions gross margin improved to 50% in the current quarter from 44% in the prior year quarter. The weakening Canadian dollar product mix in the current quarter and the restructuring in Q1 fiscal 2019 were the main factors.Content Delivery and Storage gross margin decreased to 54% from 58% last year, lower sales as well as product mix were the main factors. The various components of operating expenses, namely research and development, sales and marketing and general and administrative, were all higher in the current period compared to the prior year. The notable changes year-over-year in Q3 operating expenses were as follows: R&D expenses increased to $4.8 million in the current quarter from $4.5 million in Q3 fiscal '18 as a result of less development being capitalized; an increase in staffing costs and amortization, all of which were offset by lower subcontracting costs and higher government assistance in the current quarter.Sales and marketing expenses were flat at $4.0 million due to higher inventory allowances quarter-over-quarter offset by sales commissions now being reclassified in cost of sales as a result of the adoption of IFRS 15.G&A expenses increased slightly to $4.2 million from $4.1 million in Q3 fiscal '18, reflecting increased staffing costs in the Content Delivery and Storage operations.Total OpEx in Q3 increased to $13.0 million from $12.6 million during the same period last year due to higher operating expenses in the Video and Broadband segment as a result of an increase in slow-moving finished goods inventory allowances, lower research and development deferrals and higher amortization of deferred development costs.I note that reported R&D expense in a period is typically different than the actual expenditures, that's because certain R&D expenditures are deferred or capitalized until products are in commercial development. Adjusting for deferrals, amortization of deferred development costs and income tax credits, actual R&D investment for the quarter decreased to $7.5 million from $7.9 million in the same period last year. This was primarily the result of lower subcontracting costs and an increase in government assistance in the current period, partially offset by higher staffing costs in the current year quarter.We are reporting an operating loss of $2.3 million in Q3 fiscal '19 as compared to an operating loss of $0.2 million in Q3 fiscal '18. The $2.1 million change was primarily driven by the decrease in contribution from the Content Delivery and Storage segment that was partially offset by an increase in contribution from Telematics segment.Net loss from continuing operations was $1.5 million or $0.07 per share compared to net income from continuing operations of $0.7 million or $0.03 per share in Q3 fiscal '18.Turning to the balance sheet. We ended the quarter with $47.2 million in cash and short-term investments, up $2.7 million from March 31, 2019. Working capital remain strong at $65.9 million. Cash flow from operations, excluding noncash working capital, was $8.6 million, down from $10.6 million during the same period last year. The $2.1 million change reflects $1.4 million decrease in cash flow from noncash working capital and a $0.7 million decrease in operating cash flow.I would note that subsequent to quarter end, we were notified by the Canada Revenue Agency that they ruled in favor of our notice of objection to the reassessment of our 2012 to 2014 tax filings. In April, we received $2.0 million in cash and interest as a result of the favorable ruling.Now back to Sumit.
Thank you, John. Turning to our outlook. In our Video and Broadband Solutions segment, we expect to see a continuation of transition dynamics as the industry continues to prepare for DOCSIS 3.1 Distributed Access Architecture.Some MSOs are now moving closer to deployment, while others, including some of the major Tier 1 MSOs, have been delayed. In terms of own product development, we've completed or are nearing completion of a number of differentiated DAA solutions within our new Entra family products. Our execution plan focuses on the most compelling near-term opportunities for these products, and we've narrowed our R&D priorities and resources accordingly.At the same time, we anticipate the demand for our prior generation cable products will continue to taper as the industry evolves to the new technologies in all of distributed access, IPTV and commercial video.In our Content Delivery and Storage segment, our outlook remains very positive. Demand is expected to continue growing with the build up to wide IPTV market. And despite the volatility we've experienced in our quarterly results this year, we continue to anticipate the segment's 2019 fiscal results will be higher than in 2018. We also see big opportunity going forward. Our MediaScaleX products are ideally suited to this market and we see sizable pipeline of market opportunities in the U.S., Europe, Latin America and Asia Pacific. Finally, in our Telematics segment, we anticipate incremental growth in demand for our fleet tracking products to the balance of fiscal 2019. We'll also be pursuing the new opportunities in asset tracking.Across all of our product families, we're creating unique must-have features that are advancing our competitive position, and our positioning is very strong as the industry starts to move towards 2 of the most significant market developments driving its future, getting the gigabit Internet access and moving to IP video with all the powerful features associated.We're focused on keeping investments in innovative solutions at the forefront as these markets mature. We'll also continue to assess attractive acquisition opportunities in emerging technology that can complement and augment our existing product lines, helping to drive our growth and success.That concludes our formal comments for today. We'd now be happy to take questions. Operator?
[Operator Instructions] Our first question comes from Todd Coupland of CIBC.
Just wanted to drill into timetable for Entra if I could. So lab trials continue, sounds like you're expanding, it's good to hear, field trials, I guess, with a few of those pilots at some point in this calendar year is a way to think about that?
Yes. Correct. We've been making successful progress in more formal [indiscernible] stage lab qualifications, including likes of Tier 1s, 2s and 3s as we've talked about. And so we do see some of those emerge into pilots into field trials and field trials have their own embedded scale to get started with friendlies and then moving outward from there. So in calendar year, we're marching towards that.
So from a scale point of view when the field trials start, is that actually material to you?
It could be. I think, in past years we've seen that field trials -- one model, for example, is to take a specific regional market or footprint and deploy into that and call that a field trial, and that can be for -- coming from where we're at today, it can be meaningful. I don't think we have our best sense yet of when that will take place, and that kind of division between a volume field trial like that and deployment revenues gets pretty narrow and once you're into that phase, you're marching towards deployment.
Okay. And for your planning purposes, are you expecting commercial deployment with any of these MSOs in calendar '19?
I think that's still one of the earlier things that can happen here where we're going through all the evolving processes and rolling things out. And we're seeing, like we said, definitive plans emerging. So the timing, as we've seen, with a market like this that's shifted years, in a truest sense, from initial anticipation, I think it's hard to call like a quarter at this point where we're overall seeing definitive signals.
Does 5G on the telco side, does that matter at all or are the MSOs just doing this for their own reasons?
MSOs are looking at broadband access of course as their primary revenue service today and they need to evolve and stay ahead of the competitors and there's puts and takes, ebbs and flows in fiber-to-the-home at 5G that always occur. With that said, we've been a long buildup phase to DOCSIS 3.1 DAA gigabit access and it's been in planning for half a decade at this point. So the operators are looking to take it and leverage their advantages in having that cable plan to the home. We are seeing some 5G testing going on and things like that and people are still trying to learn how 5G can work economically. So I think the operators are moving ahead.
And then I just wanted to make sure I understood your comment. You talked about narrowing the product portfolio. So what did you mean by that? Did -- like you -- were you getting too stretched for customized expectations from the various MSOs from Entra and you've just said, "No, this is all we're going to do?" What actually did you mean by that comment?
So I wouldn't say we're necessarily going too stretched. What we've -- what I have been saying and said today is that we see a clear order of opportunities in terms of which are nearest in. So we are narrowing our focus in the road map development to those opportunities, things like full duplex, extended spectrum DOCSIS, given what we see from the industry and the customers when that might happen, we have our priorities aligned with the deployments ready to go first for us.
Okay. Last question for me. Just for John, so -- or whoever wants to answer. But OpEx is around $13 million with all the puts and takes. Is that still about the right number? Or with revenue bouncing up next quarter, will it move up some? Just a little color on that.
Sure. And so at Q2, we guided that in the remainder of the year, Q3, Q4, we were expecting some additional allowances for obsolete inventory. We took about $800,000 of that in Q3. So there's a little more of that to come in Q4. Aside from that, the more normalized run rate that we're headed back towards with the exception as I say of Q4, it is closer to about $12.2 million on the quarter, so down from the bit of a peak that we saw here in Q3.
Okay. So there is $800,000 of -- it's not that it's not recurring, but it will recover once more and then that will be pretty much dealt with?
Yes. So it's a bit of a peak we have some on a regular quarterly basis, but we're just -- have flushed through some older inventory and -- so of the $800,000 that we took, it will be a step down from there in Q4 and then back to sort of typical levels that are reflected in past quarters.
Our next question comes from David Kwan of PI Financial.
The -- that OpEx guidance that you guys were just talking about, I assume that reflects the cost savings from the reorg?
Yes.
Okay. And how do you expect that to play out? Is it mostly going to be kind of fully recognized in Q4 and not -- again the kind of the run rate we should be forecasting?
That's correct. Yes. And if you think of some of those cost savings, a heavy proportion of them will be related to things that would have been deferred or capitalized.
Yes. I was trying to figure out. The other -- the next question was the breakdown between what might be in R&D versus capitalized R&D?
Yes. And so the bulk of those operational savings will be savings that would otherwise haven't been capitalized in the past. So as a result that guidance I'm giving on the P&L for the OpEx is kind of similar to what we've seen in the past because most of the savings you'll see will run through the capitalized amounts.
Okay. So what do you expect then for capitalized R&D on a kind of quarterly run rate basis because it's been around $4.5 million-ish a quarter? So where should we expect that to go to then?
I think there are a variety of savings in addition to the restructuring that would see us with a total of ballpark $1 million a quarter reduction in the capitalized amount.
Okay. So about $3.5 million a quarter then.
Yes.
Okay. Perfect. Getting back to Entra, can you talk about, I guess, you're -- it sounds like you're focusing more on FDX and extended spectrum DOCSIS. Can you talk about potential time lines when you guys could see products, at least, being able to get into the labs where silicon access has been an issue?
Yes. I think, Dave, I didn't -- I wasn't clarifying that as an answer to Todd there, too. Well, I -- FDX and extended spectrum line, I'd color as some of the items that have naturally shifted outward in priority because of the industry and customer anticipated need for those solutions. So our actual priority is on Gen 1 Remote PHY today. So I think, I'll just correct that view of it. And like you said, the silicon is a major factor there. And we can do our kind of architectural design preparation as we await the silicon. Silicon stuff is variable in both timing and how much full FDX versus extended spectrum and when that is going to come along and even from some of the flagship chip providers that's flowing around right now. So I think that's strong evidence of what we're seeing is that we view FDX as now moving a bit outward in time and that aligns with what we're seeing from our customer base to focus on Gen 1.
Got it. So it sounds like there -- like just the delays of the silicon, that's probably something, I guess, second half of this year-type story as to when you can get access to it. So probably guessing when you guys could get -- essentially get something to your customers and the labs end of this year probably at the earliest, but maybe more likely early 2020?
Yes. I think that's a good sense. You know a lot of those kind of assumptions baked in there about when silicon comes. And like I said, we are very much tying our road map to the customer opportunities. So even with the respect to the silicon timing, we're going to focus our efforts along with the market side on what we want to develop, when, future evolution and localization, things like that, that will come into play in the market that's happening.
And are you seeing -- is it because, I guess, the time lines for FDX and extended spectrum DOCSIS and even the decision to which one to go with, I know I think one Tier 1 MSOs has already made the decision. But is that what's, I guess, driving a greater focus on the Gen 1 solutions? Should I think based on what you guys talked and in my conversations that we've seen kind of a lot of these Tier 1s, in particular, looking to wait for FDX as opposed to kind of going full bore with the Gen 1 solution? Are you seeing a change in that dynamic?
I could say a little bit of change there. I mean, you're very right that there's definitely a Tier 1 in that category, but overall they've looked at their timing and they've got all sorts of priorities around some of the consolidation activity they've been undertaking and they've kind of aligned around FDX. So it doesn't necessarily say that they're going to be in FDX in the near term. And then I would say there's, what we've been observing is, given the overall DAA rollout that hasn't happened yet at scale, at this point, you know, there's this bifurcation going on where the observations from the rest of the operators seem to be that they rate a roll with Gen 1 and they'll look at Gen 2 FDX extended spectrum organically as a road map for them.
And have you seen anything changed? I know there is RFPs that you guys have lined in and also competing in? Have you seen any changes there either additional wins or the others joining the party?
Yes. I mean, they're certainly ongoing and I don't want to highlight anything specific on newer RFPs, there's continuous kind of runs of those coming along. There have been some changes with respect to one of the Tier 1s that had run a Gen 1 RFP and made a transition thinking about Gen 2. They had issued a Gen 2 RFP that we, of course, along with everyone responded to and received feedback that our solution was both technically and commercially leading, but in the end the official kind of decision on that RFP was more that they're not awarding it to any vendor and they're going to reconvene that process down the road when they think they have a real need.
Okay. Makes sense. Can you guys provide any additional color on that Tier 1 MSO that had bought a bunch of the TC600E for that MPEG-4 densification plans? Like is it something that could play out over several quarters, several years, and do you have any sense on size and potential timing?
Yes, sure. So I think just stepping back a bit on kind of overall cadence and what we see in Terrace and Terrace QAM families, we've got these stages of the market, we've had the all-digital conversion with the network fill-in after the conversion is complete. We've seen incremental phases of programs, like MPEG-4, compression conversion, that have driven things at all the operators. And in the long term, we see this all-IP conversion phase that will be a whole new cycle that is going to happen down the road. So with that particular MSO and starting in Q3, we moved into an MPEG-4-related densification program, made some rapid adjustments in our design that suit their specific needs for that. And we're able to turn it around and did a kick off of the MPEG-4 densification. So I'd say that we covered in the ballpark of 30%, 35% of their program need for that densification in Q3. And at this point, over the next 4 or 5 quarters, we expect the balance to transact. Meanwhile, another Tier 1 MSO has already booked at the MPEG-4 densification, that will happen because as with any operator, they have to convert their network to MPEG-4 at some point. For now they're pushing that out in time related to overall capital budget to what suits them, so that's kind of still ahead of us at some point at that other MSO.
Okay. That was -- my next question was, to what extent other Tier 1 MSOs might be looking at doing something similar to this? So you said there's another one, and what about this -- the third other large Tier 1 that you guys have dealt with for the Terrace?
Yes. So kind of the third Tier 1 has moved over to MPEG-4 in the past and they, in fact, have today for our -- for the Terrace side, they've got a simulcast of the MPEG-2, so they're able to run that and that's tied to something they have in the residential homes that make some continue to carry MPEG-2. But for the Terrace QAM HD side, they did make the shift to MPEG-4 for all the HD carriage, and then of course we sold several -- we had that program for the MPEG-4 upgrade kits on Terrace QAM that we captured the entirety of and it's winding down now.So that customer is on their way towards drawing out some TQ inventory. The run rate deployment into the end market has been very consistent at that operator. And about a year out from now, we feel like we're going to see new platform activity in network fill-in. And then that operator, of course, is leading the pack in terms of their thinking on the all-IP conversion and that will be next phase after that with them.
Okay. That's great color, Sumit. I guess, the last question I've got is on the Content Delivery and Storage side. Obviously not a great quarter, this quarter. Can you maybe talk about maybe or quantify the deals that, I guess, slipped into future quarters here? And maybe for Q4, could we see revenues get close to or in the ballpark of what we saw last quarter and Q2, which obviously was a very good quarter?
Yes. I think Q2 certainly was a very good quarter and most definitely as we've said in our opening comments that we are seeing returns from that lumpiness here as in Q2. I think as you mentioned, Q2 being so strong, that was an interesting kind of layer of what took place here for us in Q3. And first of all, I've started talking and tried to educate about how the market is for content delivery, it's a little bit inherently different from what the shareholders are used to from video and broadband in the sense that we have very project-oriented spend that occurs in content delivery. So Q2, very strong. And we converted a lot of pipeline in Q2 and that left Q3 back-end loaded. So yes, this is perfect storm of back-end loading and inherent lumpiness that took place in Q3, but the overall situation is very strong and growing there in terms of IPTV penetration for various applications at our growing list of customers. So we're expecting a nice bounce back in Q4.
Did you talk about some of the deals that you converted, I guess, that slipped into Q4? And where -- I guess, where the pipeline compared, I guess, entering Q4 versus entering Q2?
That's an interesting way of looking at, and I haven't -- I can't say I've compared with entry pipeline Q2 entry versus Q4 entry. The way I'll look at is kind of anticipated forecast for Q4 and relative to Q2, we feel pretty good about that.
[Operator Instructions] 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.