Vecima Networks Inc

TSX:VCM

Earnings Call Transcript 2020-Q1

[Operator]

Hello, this is the Chorus Call conference operator. Welcome to Vecima Networks First Quarter Fiscal Year 2020 Results Conference Call and Webcast. [Operator Instructions] Presenting today on behalf of Vecima Networks are Sumit Kumar, President and CEO; and Dale Booth, Chief Financial Officer. Today's call will begin with executive commentary on Vecima's financial and operational performance for the first 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 first 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 months ended September 30, 2019 and 2018.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 facts 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 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, the forward-looking statements in these earnings calls 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 now like to turn the conference over to Mr. Kumar to proceed with his remarks. Please go ahead, sir.

[Sumit Kumar, CEO, President & Non Independent Director]

Thank you, and good morning, everyone. As you know, our industry is on the cusp of 2 seismic technological evolutions: one is the cable industry's move to gigabit broadband speeds via distributed access architecture, or DAA; the other is global media shift from traditional video to IPTV technologies. As is always the case with these kinds of shifts, there's a lengthy period of major R&D and standards work that needs to be tackled by the industry and vendors alike. Then activity accelerates as the transition nears reality, and we move closer to commercialization of our new technologies. It's been just 7 weeks since we held our year-end conference call. And in that short time, we've made further advances, and our recent progress reinforces that we are now moving into this next phase with both DAA and IPTV. On the DAA front, we've widened the already significant number of MSOs engaged in lab or field trials with our new Entra products, with even more engagements in Q1. There are now 19, up from the 16, when we talked to you last, with field trials getting underway for a set of these already. As we discussed on our last call, 1 Tier 1 MSO has already signed a master purchase agreement for our Entra Remote PHY nodes and Monitor. We significantly deepened our engagement with this customer, progressing through approvals, initial field trial and moving into deployment into third deployment project planning phase. Meanwhile, in another development, we've received our first order for the Entra Video QAM Manager. This happened subsequent to the quarter end with order coming from U.S. Tier 2 MSO. Video QAM Manager is a new addition to the Entra family. It integrates video in a DAA environment by leveraging existing infrastructure and maximizing the efficiency of fiber usage, essentially it brings an open approach to DAA deployments by providing operators choice as to how video services are deployed while significantly reducing operational costs. I'm pleased to report that its unique features in Video QAM Manager 4 diamonds at the recent Broadband Technology Report 2019 Diamond Technology Awards. This is a significant honor. And Video QAM Manager is just one of a growing ecosystem of new Entra products that are creating DAA revenue opportunities for Vecima. During the first quarter, we also launched the Entra Interactive Video Controller. This is a head-end device that provides legacy set-top boxes with two-way interactive capabilities required for video on demand, switch digital video, management and other functionalities both for pre-DAA and DAA networks. There are millions of these set-top boxes currently deployed in U.S. cable networks that are central to MSO residential video revenue. As DAA rolls out, our Interactive Video Controller will be essential to operators. Yet another new Entra development and one that puts us in a further differentiated position in the vendor landscape is our announcement of the new Entra EN8124 node, which supports 2 Remote PHY devices in a single node. We announced this product early in October, and we will prove -- and we believe it will prove to be a major advantage for MSOs who want to deploy higher-density configuration in order to leverage the cost of pulling fiber and installing nodes. With this solution, customers pay for housings and power supply once but get double the density in the node, both upstream and downstream. So a considerable number of achievements on the DAA front as we built out our Entra portfolio, deepened our engagement with a growing number of MSOs and attracted initial orders. And for our IPTV platforms, the momentum is also building. We said on our last call that we anticipate over 20% revenue growth from our Content Delivery and Storage segment in fiscal 2020 as more customers escalate the move to IPTV. We got off to a great start in the first quarter, with segment sales climbing 31% year-over-year. This upswing is particularly significant because it's a reflection of the growing demand for our IPTV solutions during what is typically a seasonally slow quarter for the Content Delivery and Storage segment in Q1. Some of the demand came from 3 new IPTV customers that we attracted during the period. This included a Tier 1 in Latin America of supplying our CDN and storage solutions for IPTV deployment in its footprint. We also secured IPTV network wins and orders from 2 new North American MSO customers. This now brings to 20 the number of operators using Vecima platforms to deliver IP video. In addition, we furthered our relationship with a Tier 1 MSO in Europe to expand our IP linear and on-demand platform with them, and we initiated sales of a major software release upgrade with a world top 5 MSO, where our platform is providing on-demand video across 75% of their footprint. Sales of this upgrade are expected to be robust with this operator in fiscal 2020. I should mention that our Content Delivery and Storage segment was also the recipient of a 4 Diamond honor at this year's BTR Diamond Technology Review Awards. The award recognized our MediaScaleX storage solution, a video-optimized software-defined storage platform that is differentiated for massive scale IPTV. The judge has highlighted both the scalability and the ingenuity of our solution. So a very busy and productive first quarter. This is also true for our Telematics segment, where we continue to build market for our new Nero GPS Asset Tracking products. I'm pleased to report, we've added 6 new customers and now have over 2,000 movable assets being tracked with our solution tying to roughly 250 commercial lead vehicles. Financially, our results for the first quarter were in line with our expectations. We anticipated modest revenues from our Video and Broadband Solutions segment with our legacy products tapering off in advance of initial sales for our next-generation products. But our strong Q1 Content Delivery and Storage segment sales provided a boost year-over-year. Combined, we delivered first quarter sales of $20.1 million and adjusted EBITDA of $1.8 million, and we closed the quarter with a healthy cash balance of $41.3 million in keeping with our continued focus on maintaining financial flexibility and strength. Turning to some recent corporate developments. I'm very pleased to announce again that we've added to our top executive team with Dale Booth, our new CFO; and Dean Rockwell, our new Executive VP. Vecima recently promoted these 2 seasoned and talented members of our leadership team, and we're delighted that our succession planning process allowed us to groom and ultimately elevate strong internal executives to senior leadership roles. Overall, it's been a great start to what we expect to be a pivotal year for Vecima. And I'll now turn the call over to Dale to provide more detail on our first quarter financial results. Dale?

[Dale Booth, Chief Financial Officer]

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen our first 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 that the results for the first 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 adopted IFRS 16 leases on July 1, 2019. The adoption has resulted in the reporting of right-of-use assets of $5.1 million and long-term debt of $5.7 million. The net impact to the income statement as a consequence of the adoption of IFRS 16 was insignificant. The implementation of IFRS 16 does not have an impact on cash flows. Starting with consolidated sales. For the 3 months ended September 30, 2019, we generated sales of $20.1 million. This was a slight decrease of 3% from $20.7 million in Q4 and 6% lower than $21.3 million in Q1 last year. The year-over-year decrease reflects the expected decline in legacy product sales in our Video and Broadband segment, largely offset by increased Content Delivery and Storage sales. Within the Video and Broadband Solutions segment, we generated sales of $7.5 million. This was up 8% from Q4 but 34% lower than in the same period last year. First quarter Terrace family sales of $4.7 million were up 16% as compared to Q4 fiscal 2019, primarily due to the timing of customer orders. But year-over-year, they were 33% lower as customers near the end of their digital network conversions and sales of the TC600E decreased. Terrace QAM sales of $1.9 million were up from $1.7 million in both Q4 fiscal 2019 and the same period last year. While we believe demand for Terrace QAM is nearing saturation, we're currently seeing an uptick in ordering activity prior to our lead customer moving to the next-generation platform. This could continue into the second quarter. In the Content Delivery and Storage segment, first quarter revenues increased 31% year-over-year to $11.3 million. This primarily reflects the expansion of our customer base and strong demand for our IPTV solutions as well as the timing of large orders. While Content Delivery and Storage Solutions sales were a little lower than the $12.5 million generated in Q4, this was still a very strong result for the seasonally slower Q1 period. Turning to the Telematics segment. Sales in the first quarter were solid at $1.4 million. This was on par with the $1.4 million we achieved a year ago and a little higher than the $1.3 million generated in Q4 fiscal 2019, in line with our expectations. Gross margin for the first quarter was 52%, up from 49% in Q4 2019 and slightly lower than 53% in Q1 of fiscal 2019. Video and Broadband Solutions gross margin was 40% in the current year quarter. This was a little lower than 48% a year ago which reflects a slightly lower sales, partially offset by a weakening Canadian dollar relative to the U.S. dollar. Gross margin in the Content Delivery and Storage segment decreased to 53% from 55% in Q1 last year due to a higher percentage of product sales with a lower gross margin. In the Telematics segment, gross margin in the quarter increased to 72% from 68% during Q1 fiscal '19, reflecting lower beacon amortization. Turning to first quarter operating expenses. The notable changes year-over-year were as follows: R&D expenses increased to $5.1 million from $4.6 million in Q1 fiscal 2019 as we continue to invest in research and development to support the launch of new products. Until these new products are commercialized, development costs are deferred to future periods. Sales and marketing expenses increased by $500,000 to $3.7 million due to increased staffing costs and the addition of ContentAgent expenses. G&A expenses remained stable at $4 million. The addition of expenses from our newly acquired ContentAgent business was offset by lower amortization expenses year-over-year. Total OpEx in Q1 increased slightly to $12.8 million from $12.5 million during the same period last year. This reflects higher operating expenses in the Content Delivery segment, partially offset by a reduction of costs in Video and Broadband Solutions. I note 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 $6.1 million or 30% of sales from $7.8 million or 37% of sales in the same period last year. They were also down slightly from the $6.2 million in Q4 fiscal 2019. The year-over-year change was primarily the result of lower staffing and subcontracting costs in the current year quarter. We reported an operating loss of $2.3 million in Q1 as compared to an operating loss of $1.3 million in Q1 fiscal 2019. This was due to lower contribution from the Video and Broadband Solutions segment and, to a lesser degree, from the Content Delivery and Storage segment. Net loss for the quarter was $1.4 million or $0.06 per share. This compares to net loss of $1.1 million or $0.05 per share in Q1 of fiscal '19. Turning to the balance sheet. We ended the first quarter with $41.3 million in cash and short-term investments. Working capital decreased to $54.8 million from $58.3 million in Q4 of fiscal 2019, reflecting the dividend payable in Q1 fiscal 2020 and an increase in current portion of long-term debt as a result of the adoption of IFRS 16. Finally, cash flow from operations for the first quarter, excluding noncash working capital, decreased to $0.5 million from $0.7 million during the same period last year. The $0.2 million decrease reflects a $0.8 million decrease in cash flow from noncash working capital and a $0.6 million increase in operating cash flow. Now back to Sumit.

[Sumit Kumar, CEO, President & Non Independent Director]

Thank you, Dale. Continue to anticipate a year of growth in fiscal 2020. In our Video and Broadband Solutions segment, our Entra DAA products are in various stages of engagement with 19 MSOs and nearing conversion with several. We continue to anticipate the initial sales of our Remote PHY nodes and our Remote PHY Monitor products will kick off in earnest in fiscal 2020. And as discussed, we've already received our first order for the Entra Video QAM Manager. As I underscored last quarter, initial sales are typically modest, but momentum should start to build as customers move to scale deployment. In our other product families, we're continuing to develop our powerful next-generation Terrace IQ platform, and we see potential for a short-term uptick in demand for Terrace QAM in advance of that migration. Overall, however, we're expecting sales of the legacy products will continue to taper off as our customers evolve to next-generation platforms. In our Content Delivery and Storage segment, the combination of product enhancements, the further buildup of new customers and the expected shift to higher capital spending on IPTV are all underpinning a robust demand. As I noted earlier, we see the potential for over 20% sales growth from this segment in fiscal 2020. This stems from the increasing pipeline of opportunities for migration to IP video networks, including linear broadcast, cloud DVR and time-shift TV. Once again, we note that this segment can be lumpy with pronounced quarterly swings possible based on order timing. Finally, in our Telematics business, we anticipate incremental growth from the fleet-tracking market in fiscal 2020 and expect to see continued growth in demand for our newer movable asset-tracking services. In summary, our momentum is building across the board. We are on the precipice of making DAA a reality and moving forward with an exceptional portfolio of highly differentiated Entra DAA solutions. And we're responding to the fast-growing global IPTV opportunity with our powerful MediaScaleX family of products. I continue to believe Vecima is one of the vendors best able to take advantage of the near-term opportunities in DAA and IPTV. And I look forward to reporting to you on developments in the coming quarters. That concludes our formal comments for today. We'd now be happy to do questions. Operator?

[Operator]

[Operator Instructions] The first question comes from David Kwan of PI Financial.

[David Kwan, Technology Analyst]

First off, I guess, just starting on Entra, given, I think, that's where most of the interest is. I guess it's interesting to seeing, I guess, your relevant optimism in terms of DAA in contrast to kind of some of the more cautious commentary that we're seeing out of some of your competitors, the likes of ARRIS and Casa, in particular, who seem to be talking about kind of more measured rollouts and even freezes in spending. So I was kind of curious to get your thoughts on that. Is that -- your optimism, is it more driven by kind of a stronger competitive position? Or is there something else kind of going on?

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. The way I try to portray that to you a bit better, David, is that some of the competitors that are speaking about their timing cycles and whatnot are in a bit of a different segment than us in certain respects. And we've seen that leading up to where we are today that the operators have started their movement on cores, CCAP cores for DAA. And as we've said before, that activity tends to proceed when the distributed nodes go out, which is our focus, of course, as you know. So in our view, that the timing cycles are slightly offset in that sense. And we've seen this, as we've talked about many years long, bring upcycle to get moving on DAA. In our list of 19 engagements, we're seeing very definitive signs of the planning process happening for calendar '20 and looking at the DAA rollout with Gen 1.

[David Kwan, Technology Analyst]

Yes. I know they've kind of talked about weakness, more of the core with the CMTS' and whatnot. But I didn't know to what extent that might be also translating into kind of the stuff closer to the edge. I know Harmonic seems to be picking up some nice share by itself. I didn't know from your perspective, what you guys were seeing relative to the likes of Casa and ARRIS, in particular?

[Sumit Kumar, CEO, President & Non Independent Director]

Right. Yes. No, that's exactly it. And like you said about Harmonic is making some progress. And we see that kind of feed and digest cycle happen on the CCAP core side, and that positions us nicely in terms of our view of the Edge side, like you say, for DAA.

[David Kwan, Technology Analyst]

Helpful. And then I guess looking at the cable MSOs. Just, in general, kind of talking about lower CapEx intensity going forward, I think some of that at least is due to lower CPE spending. But curious to see commentary that you're getting back from your customers.

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. No, I think what, of course, we're so narrowly focused on DAA for that side of the equation, and the spring upcycle has been 5 or 6 years deep and operator planning for distributed access and this all. Of course, this consensus around Gen 1 and DAA, in general, being the play for the access network, that's what's going to happen. And then there's, of course, the road map, the DOCSIS 4.0, that's down the road. So as it relates to DAA specifically in terms of capital spend, we are seeing signs of allocation, where is the overall spend maybe adjusting for all the different things that the operators are going to spend on, we are seeing focus being placed and priority being placed on DAA, especially with the engagements that we're dealing with. And of course, we've talked about the Tier 1 and them entering CapEx planning cycle for distributed node deployment in calendar '20 and last quarter what we're looking at.

[David Kwan, Technology Analyst]

In terms of -- I think, especially with the positive developments with that particular customer, so should we be expecting, I guess, Entra revenues are really kind of start to ramp, I guess, second half of your fiscal '20 or, I guess, first half of calendar '20? And from a fiscal '20 perspective, could we see revenues get close to and maybe even surpass $10 million?

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. So in terms of some color around quantifying FY '20 when it comes to DAA sales, David, I think we're still tracking to drive in modest first half sales across the entire Entra family, which as we talk more about today is really large in terms of the number of different products and that whole ecosystem that we've built up. And that ties to, of course, instead of those 19 customers we're engaged with and the flavors that need to work for their architectures. So we're expecting that between some of the lead Tier 1 field trial activity along with some of their coverage, preparation activity for elements like the Remote PHY Monitor that we're going to be on the board in Q2 with them, along with some smaller operator uptake potential in other products. But just like we said 7 weeks ago in the Q4 call, starting to see that movement towards scale and node deployment, that's, in our view, a calendar '20 event and the lead Tier 1 will be an anchor there.So we have the opportunity pipeline, 19 operators, 6 Tier 1s and there are 13 other tier MSOs. So several potentials turn -- also turn into deployment in calendar '20, along with that lead Tier 1, that's being the anchor. So on the board, Q2, first half, modest, and then the ramp is calendar '20 event.

[David Kwan, Technology Analyst]

Okay. Okay. And on the field trial side for Entra, you obviously got that lead anchor there with the Tier 1 customer. Are you in any of the field trials at this point or is that the only one?

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. Without getting too specific, which I don't want to do on our call here, I would say, yes. The answer is yes. I'm not going to say how many, but there are more than one of it.

[David Kwan, Technology Analyst]

You're in multiple field trials, Sumit?

[Sumit Kumar, CEO, President & Non Independent Director]

Multiple trials, yes.

[David Kwan, Technology Analyst]

Okay, that's good. Okay. And then you alluded to it on the DOCSIS 4.0, already seeing cable MSOs talking about it. Just curious to get your thoughts on it and kind of where you guys are in terms of your product development plan?

[Sumit Kumar, CEO, President & Non Independent Director]

Sure. Sure. So when it comes to DOCSIS 4.0 and the period that we've gone through as the industry has worked towards standardization between FDX and Extended Spectrum DOCSIS. Extended Spectrum DOCSIS is the move to go up to effectively 1.8 gigahertz sometime. Either of those 2 solutions, FDX or ESD, can drive the industry to the 10G dream that we have, and the view for the long-term evolution of the coax HFC network. That's been ongoing. We've gone through a couple of years of churn on that, and we're happy to see that really the industry is, at this point, harmonized on what that standard looks like, and it's looking like both approaches will have an appearance in the standard. And meanwhile, that's creating some stability in terms of getting going now on DAA with Gen 1 with the kind of future narrowing down on how the road map will look long term. So while there is several Tier 1s in the industry that have that consensus view, and we think, by and large, it's associated with Extended Spectrum and FDX in some isolated cases, we're seeing that pragmatic plan emerge to get rolling on Gen 1 first. And then, of course, as a standard matures and finalizes, the chipsets have to come, and we've said that that's relevant to our development very specifically. So that's kind of those providers and suppliers have observed this industry churn around standardization of DOCSIS 4.0, and that's, of course, led to all of that moving to the right. So it's good to see consensus, the future and the road map is getting clearer, and we'll develop as the case may be. But the best part, I think, for us, the whole situation is, that we're looking for the reality of Gen 1 deployments now.

[David Kwan, Technology Analyst]

Can you talk about the timing of when we could see Gen 2 FDX, ESD solutions coming out of you guys? And to why say -- you might know what's going on with some of your competitors. Is that something like it's likely a calendar '20 and maybe second half of calendar '20 type of event?

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. It's not something, David, I'd like to pinpoint right now with the evolution that's happened in the standards and the movement of the chipsets as well as on the jocking for things that are happening amongst the vendor landscape of from up 10 point to get it now. But as the market emerges, especially for our set of customers that we're working with, we have a certain view into the time line of Gen 1 versus Gen 2 transition, and we'll be playing along with that.

[David Kwan, Technology Analyst]

Just a couple of more questions here. Just as you look out as Entra revenues ramp likely, I guess, they've stuck ramp likely in the second half of fiscal '20. How should we be looking at the gross margins? I know in the past, you guys had kind of talked about gross margins likely coming down, and you start to see some larger purchase orders. Is that kind of still the expectation there? And maybe that gross margins might dip down closer to the 50% margin may be and bit below that, as you really start to generate significant revenues from the Entra family?

[Sumit Kumar, CEO, President & Non Independent Director]

Yes, I think in the early days of Entra, we've talked about high-volume drive, creating pricing that the gross margin is going to start off at a certain point, but that's a bit lower than where our consolidated growth sits today. But that, of course, we look at it in terms of the volume equation and dropping to the bottom line as the volume picks up. And then, of course, economies of scale will happen in the cost structure, and that's all anticipated. So while in the early days, it's going to be lower than our traditional model. We're going to be comfortable with that as the top line grows on the Entra family.

[David Kwan, Technology Analyst]

Okay. Just last question. On the deferred development cost side came in a bit lower-than-expected here, I think last quarter you kind of talked about the $2.8 million to $3 million a quarter range. Is that kind of what we should be expecting going forward?

[Dale Booth, Chief Financial Officer]

Yes. We are expecting that $2.8 million to $3 million in the next few quarters, consistent with what we had discussed in Q4.

[Operator]

The next question comes from Todd Coupland of CIBC.

[Todd Adair Coupland]

Let me start out with OpEx. So $12.8 million, seems like you're getting ready to ramp a few new products, so spend rate should start to at least level off, I would have thought, just talk about what that OpEx level should look like. I guess Q2, which not too much revenue growth, but then as revenue picks up, what should our OpEx number look like?

[Dale Booth, Chief Financial Officer]

Yes. I think we're going to see the OpEx uptick as a result of amortization of the commercialization of -- in our R&D, so it's really a noncash event. But we're expecting maybe about $600,000 of additional amortization in our R&D as we commercialize our new products. We are seeing a ramp-up in our sales and marketing as we move forward. And so we would also say that, that would be in that $3.7 million to $3.9 million range. And the same with G&A, probably going to bump up to that $4.3 million to $4.4 million going forward. A bit of that being amortization and a little of that, just costs that didn't occur in Q1, pushing out into the future quarters. So...

[Todd Adair Coupland]

Sorry, could you just repeat the G&A number?

[Dale Booth, Chief Financial Officer]

$4.3 million to $4.4 million

[Todd Adair Coupland]

And sorry, are those -- those are annual increases or quarterly?

[Sumit Kumar, CEO, President & Non Independent Director]

That's a quarterly burn rate...

[Dale Booth, Chief Financial Officer]

Yes, that's quarterly burn.

[Todd Adair Coupland]

Quarterly burn. Okay, okay. So it's not incremental. That's the absolute number.

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. Yes.

[Dale Booth, Chief Financial Officer]

Yes, that's kind of the range we're looking at, as we...

[Todd Adair Coupland]

So incremental quarterly amortization, $600,000 per quarter, and then these ranges for G&A and sales and marketing.

[Dale Booth, Chief Financial Officer]

Yes. And I'd say in G&A, there's probably $100,000 of amortization in that number as well.

[Todd Adair Coupland]

In the number you gave us?

[Dale Booth, Chief Financial Officer]

That's correct.

[Todd Adair Coupland]

And does the tax rate change at all with any of this?

[Dale Booth, Chief Financial Officer]

No. I took a look at our tax rate in the quarter, we are at 24.2%, and I'd probably guide probably around that 25% mark for the year. On a cash taxes basis, we had over installed in our U.S. operation, and you see that on our balance sheet of $400,000, and so we're going to benefit from that. Our cash taxes will be reduced, and that related to an R&D component in our U.S. that we were approved for. So although the tax rate to be about 25%, our cash taxes should not be as high this year, so we'll take the benefit of that $400,000.

[Todd Adair Coupland]

And then, sorry, just one last financial question, and then I have some broader questions. The $5.7 million debt and the $1.6 million short term, that's essentially the change with IRFS 16. So those are just leases? Is that what that is?

[Dale Booth, Chief Financial Officer]

That's exactly right. Yes, that's what that is.

[Todd Adair Coupland]

And so we should assume, you pay the $1.6 million off, and then the $5.7 million, more or less, will remain, assuming you continue in those operations, right?

[Dale Booth, Chief Financial Officer]

Yes. But the leases have a finite term to them. So those costs do get amortized out until we renew again. But they will get...

[Todd Adair Coupland]

You're not going to be out buying land, so presumably, you'd be renewing it as long as the operations are there?

[Dale Booth, Chief Financial Officer]

Correct.

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. Yes. Lease renewals for capacity, we have leased versus owned. We anticipate renewals, yes.

[Dale Booth, Chief Financial Officer]

Yes. But you see the -- on the balance sheet, those would get reduced until you'd renewed, and then you'd have another uptick on...

[Todd Adair Coupland]

Fair enough, fair enough, fair enough. Yes. Okay. Good. So excuse my ignorance on this question, I apologize, if I'm just way off on the technology here. But you talked about -- I think you talked about the video controller for the millions of set-top boxes, two-way now with the head-end device. So -- but the product you're selling is the head-end device. So that's actually not going in people's homes, it's just controlling those set-top boxes. Is that right?

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. You can imagine 1 RU, rack unit, of our product in the head end. It's going to be talking to 5,000 to 15,000 set-top boxes.

[Todd Adair Coupland]

Okay. And your implication there is that's all going to get replaced with this technology upgrade?

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. So our head-end IVC, the video controller. It performs that functionality that's essential for those two-way set-top boxes to stay alive in the network for all the revenue that's being generated out of those QAM set-top boxes. There's about $20 million, give or take, out there in U.S. cable networks today. So both pre-DAA and especially once the DAA transition happens, we can serve the pre-DAA solution. We have about 10x the density of any of the legacy platform. That's kind of the status quo approach, that's placed today. But when DAA happens, the legacy platform is rendered kind of bricked in the sense that it will no longer function, and our solution provides that capability at 10x the density. So as the DAA transition happens, presuming the set-top boxes are still in there generating subscription revenues for the customers, which they are today. We're looking at a full-sourced forced function to move to this platform.

[Todd Adair Coupland]

Okay. And then just -- and I know you don't want to be too precise on fiscal '20 ramp-up revenue and all of that. What do you think the opportunity for Entra product sales is just in the 19 customers you're talking to now?

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. So there's a few different ways of looking at that, I'll provide some color that I'll reiterate now that a sizable or midsized Tier 1 dues that definition is once they're ramped up, we view that type of customers as potential for $40 million to $50 million annually in DAA node spend split across 2 vendors. And as I've said, we have about 6 of those Tier 1s within that group of 19, of course, at multiple various stages: some very long term, some very close in that. And then we have 13 other operators that are of the lower tiers. So in our view, if you're looking at a $45 million annual customer from a Tier 1, 6 of those potential and 13 in aggregate. Of other tiers of customers, you can start to put together your picture for how we start to move forward once scale deployment happens.

[Todd Adair Coupland]

And I know you've talked about this in the past, you're new to this market, where you are now? What's your view of your market positioning, let's say, in a mid-tier, Tier 1, 2 suppliers. Can you call whether you're going to be the primary or secondary vendor? Do you have a view on that yet?

[Sumit Kumar, CEO, President & Non Independent Director]

It's a case-by-case thing, and we -- in a Tier 1 scenario, we've said before that we think, practically speaking, it's looking like a two-way split-type situation. And ballpark 50-50 is a good way to look at that. For lower tiers, it can be as much -- go as far as being a single-node vendor that per operator that's used just because of the scale of those deployments and the qualification investments that need to be made. In terms of our positioning, again, our engagement speaks to that to a certain extent with a pretty nice number of Tier 1s in there. Specifically, we've been a node-first vendor from inception. And that afforded us the ability, as you've seen, with some of the product enhancements we've talked about or expansions we've talked about, the ability to really zone in on how DAAs, the desires that the operators have for all the features and all the architecture approach is. We've talked about a double-density node. The Remote PHY Monitor, which tackles a very important need in the industry for DAA node management, monitoring, orchestration and service assurance. So that's -- all of that coming from the ground up as we have has really positioned us as strong competitively that we've had these clean sheet designs and have broadened our portfolio-wide.

[Todd Adair Coupland]

I mean this seems like -- you've been talking about this for a while, you were -- I would have thought, a bit more cautious about where you could get from a market-share point of view. I mean 50% is, I mean, incremental to me. Would you say that's a fair characterization of what's happened in terms of your confidence in the product and market acceptance and likely take up?

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. I think specific to the engagements that we're very deeply moving forward. And I think that's a fair statement that -- us being the 1 of 2, 50% in those types of deployments is looking like a highly probable scenario. Overall, market is very wide. There's many more than 19 MSOs in the industry worldwide. We're going to grow our list. So in terms of overall market, of course, and then the core-versus-node thing in terms of the split of the overall DOCSIS market is still a facet today with Remote PHY and core versus MAC-PHY, which is more of a long-term evolution for our nodes. So in our customer reach and engagements, we're working in the 50% or more is a viable situation today. And then overall market, that will have to grow.

[Todd Adair Coupland]

Yes. And then just to the earlier question on some of the peers calling out slowdowns, and you're saying that's a core point, and that needed to be done before the Edge activity could happen. So was your point there, the core spending has happened and now they're ready to deploy on the Edge?

[Sumit Kumar, CEO, President & Non Independent Director]

That's our view of how to think about some of the timing cycles in core and what's some of the core-specific or core-focused vendors are saying about the timing of their market cycle. There's been -- leading up to now, we know that operators have been purchasing cores, and Harmonic, for example, is increasing their core purchases. So that is all proceeded at the same time, as DAA is yet-to-come situation. So that cadence of core before node is how we see that.

[Todd Adair Coupland]

Got it. Okay. And then just, sort of, last question for me. So seasonally, and when the cable companies will make these decisions for POS in calendar 2020. Is there any magic timing for that? I mean I guess we get through the beginning of the year and then bringing that -- that's when they start to go...

[Sumit Kumar, CEO, President & Non Independent Director]

Yes. I think lower operators -- sorry.

[Todd Adair Coupland]

No, no. Just how they are thinking about that?

[Sumit Kumar, CEO, President & Non Independent Director]

Yes, I mean a lot of operators are in calendar year fiscal, so they're obviously at their budget cycle leading up to calendar '20, and that's how we best view seasonality in the customer landscape that you need -- you want to get in those CapEx plans for calendar '20 and see some very specific node counts being planned, for which we are in certain cases. So that's the look we have right now that calendar years is there kind of...

[Todd Adair Coupland]

Yes. So presumably, those node-count CapEx commitments are being made now for 2020 and then it's just when do they actually deploy, that's the right way to think about that, right? So it's pretty good visibility on how particularly if that core preplanning has been done, and the budgets are getting committed for the Edge nodes. That's happening now, so...

[Sumit Kumar, CEO, President & Non Independent Director]

Exactly.

[Operator]

[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.