Vecima Networks Inc

TSX:VCM

Earnings Call Transcript 2018-Q2

[Operator]

Hello. This is the Chorus Call conference operator. Welcome to the Vecima Networks Second Quarter Fiscal Year 2018 Earnings 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 operating performance for the second quarter of fiscal year 2018 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 2018 results as well as detailed supplemental investor information are posted on Vecima's website at vecima.com under the Investor heading. The highlights provided in this call should be understood in conjunction with the company's unaudited, condensed, consolidated financial statements and accompanying notes for the 3 and 6 months ended December 31, 2017, which will be available on SEDAR or www.vecima.com. Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable securities laws. All statements other than the 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 and general economic uncertainty and financial market volatility and the distinctive characteristics of Vecima's operations and the 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 25, 2017, 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 his remarks. Please go ahead.

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

Thank you, and good morning, everyone. We continue to lay the foundation for Vecima's future growth this past quarter with strong progress on our Entra products and the completion of an acquisition that gives us entry into the rapidly growing IP video storage, delivery and streaming market. I'm going to begin today with a brief overview of Q2 financial highlights and some of our key achievements. John will follow with our second quarter financial review. And then I'll return to talk about our outlook going forward. Financially, the second quarter played out largely as we expected during this transition year. We achieved revenues of $14.8 million and adjusted EBITDA of $3.6 million. We also ended the quarter with cash balances of $61 million, even after closing the Concurrent acquisition, which is funded entirely with cash. That means we continue to have a very strong financial position from which to fund our future growth and development, including continued development of our promising Entra family of products. Entra is a new DOCSIS 3.1 Distributed Access Architecture product line we're developing in response to the major industry shift towards gigabit-speed broadband access. Our distributed access node is the heart of our solution and provides a modular platform for deployment of multiple access technologies. We've come a long way with the Remote PHY access node in just a few short quarters, and we're very pleased with our state of progress, technically and with customers. During Q2, we demonstrated further interoperability of our Remote PHY access node at industry events, along with additional features such as video traffic generation that are required for deployment-ready distributed access nodes. Customer interest in this solution is very strong, and we're now working on several RFPs for Entra Remote PHY and related products. Looking at our progress and some of the other products in the Entra family, we initiated lab testing for our Entra Legacy QAM Adapter in Q2 at various MSOs. The Legacy QAM Adapter allows operators to leverage their existing installed edge QAM infrastructure to allow for the new Remote PHY and remote MAC-PHY deployments. This minimizes new head and equipment requirements for video services in Distributed Access Architecture environments, and it overcomes several of the interoperability risks. It also easily supports mixed deployments of centralized and Distributed Access Architectures. Overall, our Entra LQA platform provides a clean, simple and cost-effective solution for providing video services. Also during the quarter, we shipped the first set of our Entra Access Switch for lab testing to potential customers. Capable of supporting multiple services, including carrier Ethernet and distributed access traffic aggregation, our award-winning Entra Access Switch is getting noticed as a strong solution in the broadband access space. As the first-of-its-kind outdoor Ethernet switch, it's also highly suitable for any type of deployment environment and designed to significantly extend network capacity. Overall, we're very pleased with the our progress with Entra. We're working closely with a wide base of Tier 1 to Tier 3 MSOs under our upcoming plans for DOCSIS 3.1, and we're continuing to attract entrants from a broad range of customers, including some of the largest Tier 1 MSOs globally. We're taking the right steps to position Vecima at the forefront of this major industry evolution. Another major Q2 achievement I want to talk about today is our acquisition of the IP video content delivery and storage business of Concurrent Computer Corporation. We closed that transaction on December 31, and with it, we've now gained a strong position in the large and rapidly growing market for IP video. Let me comment briefly on the importance and relevance of this market to us. Global demand for video content delivery and storage is growing rapidly, driven by a huge increase in consumption as consumers turn to streaming services and cable operators make vast arrays of new IP video available to subscribers. The cable MSOs are also pursuing new DVR opportunities that shift delivery and storage away from traditional set-top storage models to cloud-based models. We believe the transition to IP video is one of the 2 most important evolutions taking place in the industry today. The other, of course, is gigabit broadband access, which we're tackling with Entra, and these 2 opportunities are closely interrelated. Vecima's award-winning gigabit access platforms, combined with Concurrent's leading-edge IP CDN and storage, is an ideal pairing. It positions us as a leading solution provider for both of these key markets. Once again, IP video is the underlying pressure point behind the scaleup in Internet access taking place today. And with increases in broadband Internet access speeds, more and more IP video services will flow over the network. So far, we've had just a little over a month of working with the Concurrent team, but we're already very impressed with their people, their products and their R&D engine, along with their focus on customer service, a core value of Vecima's. On the product side, the transaction has brought us 4 excellent new product families that will begin contributing to our results in Q3. These include: Aquari Storage, a software-defined storage platform that dramatically improves the manageability, performance and total cost of ownership of software-defined storage; Laguna Cache, a comprehensive multi-tier caching solution that enables MSOs to deliver content quickly and easily, regardless of their customer's device or location; Zephyr Origin, which is a feature-rich origin platform for ingesting, hosting and distributing IP video content to any device, any time over any network; and Zephyr Transcode, software which enables service providers, broadcasters and content owners to encode video content with unsurpassed quality and scale across the multiple formats that are required for any stream. You'll hear me talking more about these industry-leading products in the coming quarters. In the future, we'll be exploring the synergies and opportunities that exist between Vecima and Concurrent's operations, technologies and customer relationships. It's early days, but we're already very excited about the potential we see. Overall, it's been a productive and promising second quarter and first half of the fiscal 2018 year. And at this point, I'll ask John to review our first quarter results with you -- our second quarter results with you in more detail.

[John Hanna, Chief Financial Officer]

Thank you, Sumit. And for the purposes of this call, we assume that everyone has seen the news release and financial statements for the fiscal 2018 second quarter that are posted on Vecima's website. I will present the relevant numbers in discussions around overall results, market segments, operational expenses and the balance sheet. I'll start with consolidated sales. For the 3 months ended December 31, 2017, we generated sales of $14.8 million. This was 27% lower than in the same quarter last year and 1% lower than compared to Q1 of fiscal 2018. In the Video and Broadband Solutions segment, second quarter sales of $13.4 million were down 29% year-over-year, but fairly similar to the $13.6 million achieved in Q1 2018. Looking at specific product families within this segment. Terrace family sales of $8.5 million were down about 3% year-over-year. This reflects lower demand as some customers neared the end of their digital network conversions and sales of our TC1200 and TC600 slowed. However, on a sequential quarterly basis, Terrace family sales increased by 16% as one of our Tier 1 customers increased purchases of the TC600E. Terrace QAM sales of $4.2 million decreased by 33% year-over-year, in line with our expectations. The lead MSO customer for Terrace QAM purchased significant quantities of new platforms in the first half of fiscal 2017 and has been drawing down inventory since then. However, our platform enhancement for new video compression to Terrace QAM bolstered sales on a sequential quarterly basis. Q2 sales were up 24% quarter-over-quarter, and we expect further upgrade-related sales going forward. As expected, DVAP sales were 0 for the second quarter, which is consistent with last year's results. However, that was down from sales of $1.6 million in the first quarter of fiscal '18, when we rolled out the new DVAP software upgrade to our lead customer. With that order complete, we don't expect any further significant activity for this upgrade in the near term. Over time, however, we expect it will help to increase the pace of DVAP deployment among MSOs as they prepare for Distributed Access Architecture, which cannot be supported by legacy devices. Turning to our telematics segment. Sales in the second quarter remain 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 in Q1 fiscal 2018. Looking at Vecima's business as a whole, we achieved a consolidated gross margin of 52% in the second quarter, consistent with last year's results, but down from 57% in Q1. Keep in mind that our Q1 margins were stronger than normal due to high-margin DVAP software sales recorded during that period. Second quarter R&D expenses increased slightly to $3.0 million from $2.9 million last year. As always, I note that reported R&D expense in a period is typically different than the actual expenditure. That's because certain R&D expenditures are deferred until products are in commercial development. Adjusting for deferrals, amortization of deferred development costs and income tax credits, actual R&D investment for the second quarter increased to $5.7 million from $5.3 million a year ago. This increase reflects the ramp-up of investment to support the launch of new products, including our new Entra platform and related products and is primarily associated with the increased use of subcontractors. Turning to sales and marketing expenses. These decreased to $1.1 million year-over-year, primarily reflecting finished goods, inventory allowances and warranty expenses last year. On a sequential quarterly basis, sales and marketing expenses were unchanged from Q1 to Q2. G&A expenses increased slightly year-over-year to $2.5 million from $2.4 million. However, on a quarter-over-quarter basis, G&A was down by $0.1 million. This reflects higher acquisition-related costs in the first quarter as we were working on the Concurrent transaction. Operating income for the second quarter was $1.1 million as compared to $4.0 million a year ago. Lower sales and gross profit, together with the slight increase in operating expenses, were the key factors here. On a sequential quarterly basis, operating income was down $0.6 million from Q1 of this year for the same reasons. We achieved second quarter net income from continuing operations of $1.3 million or $0.06 per share. This compares to $3.4 million or $0.15 per share in Q2 last year and is driven primarily from lower sales and gross profit in the current period. On a quarter-over-quarter basis, net income from continuing operations was up $0.4 million sequentially from Q1 to Q2 of this year. Turning to the balance sheet. We ended the second quarter with cash and short-term investments of $61 million. This was after completing the acquisition of Concurrent for USD 29.0 million, plus an estimated working capital adjustment of $0.7 million, and the previous estimate on that adjustment had been $1.5 million. This working capital adjustment will be finalized according to the asset purchase agreement over the next couple of months. Our own working capital had decreased to $83.7 million at quarter end, largely reflecting our acquisition of the Concurrent assets. The acquisition also drove up the balances for intangible assets and goodwill that are results of allocating the purchase price of the transaction. Finally, second quarter cash flow from continuing operations, excluding noncash working capital, was $3.4 million. Overall, our results were largely consistent with our expectations for the second quarter of the fiscal 2018 transition year. Following our investments in the second quarter, we're moving forward as a larger company with a broader range of products while still continuing to benefit from a very strong financial position. Now back to Sumit.

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

Thank you, John. Before I provide our business outlook, I want to note that as of Q3, we have changed the organization of Vecima from 2 business segments into 3. The new segment is called content delivery and storage and includes our new Concurrent operations. I'll provide our outlook for the second half of fiscal 2018 within the context of these 3 segments. In our Video and Broadband Solutions segment, we continue to view fiscal 2018 as a transition year as the North American cable industry prepares to deploy DOCSIS 3.1 Distributed Access Architecture. Our investment in Entra is yielding the industry-leading ecosystem of distributed access platforms that's attracted strong engagements with MSOs, including the Tier 1s. We are well on our way in the sequence of RFIs, RFPs, trials and deployment tied to customer plans. With that said, it's always the case that the timing of the volume phase of the market remains subject to changes and many MSOs have already adjusted their upgrade rollout plans. Accordingly, while volumes sales during calendar 2018 remain possible, our current view of the industry state is that volume rollout won't start until late in the year. At the same time, we expect demand for some of our legacy products will continue to taper off as market saturation is reached and customers prepare for next-generation products and technologies. Helping to offset this impact will be the contribution from our new Concurrent operations, while the full quarter of revenue and EBITDA contribution in Q3 and the outlook for the segment is positive. Near-term demand is robust as we respond to the cable industry's need to deliver increasing content over an IP framework. And the mid- to longer-term outlook is also promising. Like Vecima, the Concurrent operations are actively engaged in new product development to fuel longer-term growth. In our telematics segment, demand is expected to remain solid to the balance of fiscal 2018. We also see some new opportunities associated with asset tracking, winter operations and compliance with the U.S. trucking industry's adoption of new hours of service requirements. Overall, we expect fiscal 2018 will be a year of continued investment and development as we position Vecima for industry leadership in each of our 3 broad markets. We're making excellent progress with our new technologies. The Concurrent acquisition has opened up important new markets and opportunities. We believe we are very well-positioned, our momentum is building, and we look forward to updating you on our progress over the coming quarters. That concludes our formal comments for today. We'd now be happy to take questions. Operator?

[Operator]

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

[David Christopher Kwan, Technology Analyst]

I was wondering just as it relates to the legacy video business, I saw a nice pickup here on the Terrace, Terrace QAM sales quarter-over-quarter. I just want to get your expectations for how you see that -- those, I guess, product lines in particular, playing out for the second half of this year and what kind of visibility you guys might have on that.

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

Sure, sure. So David, I'll start with the Terrace to kind of break it down a little bit. So we have seen incremental pickup as of Q2 and break that down into the key kind of customer engagements we're tracking. So with respect to the lead U.S. MSO customer first, again have been in network fill in mode for several years at this point, and we are continuing to see them graduating out of their built-up inventory they built on the TC1200 with very aggressive purchasing activity. And for the TC600, on the other hand, that product has continued to roll out in network fill in type volumes, and their inventory and that SKU is substantially lower. So that's a good trend to see and reflects evidence on their feedback to us, that the entire lineup of our commercial video platforms are quarterly -- a blueprint for commercial video. And they're rolling out additional properties all the time in network fill-ins. So that's good. But on the other hand, given that, that particular MSO has been deploying in network fill in for a long period of time, upwards of 7 or 8 years, we're being mindful that the saturation of that is taking place, again, given that there are only so many commercial properties within a footprint of a given MSO. So their inventory-related slowdown on the TC1200 has been persistent for quite some time now, and the forecast suggests that it will continue to be that way for some time. But the TC600 is continuing to roll. So for the time being then on the lead MSO, things are running fairly lean on the family overall. But looking outward, as we approach calendar 2019, there are signs of a new market cycle that we've talked about in commercial video solutions. So I'm taking them towards an IPTV-oriented feed, and what's exciting for us about that is not only are we looking at sustaining the new product -- new property sign-on with network fill in, but we're also looking at the potential for a swap-out scenario of the existing deploy base. So that's quite exciting, but it's in the future. 2 other Tier 1 MSOs we've been talking about rolling out network-wide scale for the last period of time, the first of those did transition to network fill in a few quarters ago, and their purchases correspondingly fold back quite a bit from -- all just from the rollout phase, which, as you know, is the volume conversion phase. But starting as early as this fiscal year though, there's a potential uplift coming from that MSO as they look to increase channel counts at the existing properties. So we expect that could lead to a nice resurgence in some of the strong scale deployment that they drove before during their all-digital conversion. And the second Tier 1 has been lumpy as of few quarters ago in the midst of being in the middle of their all-digital conversion, with some of the merger-type influences we've talked about. But as of Q1 and Q2, their conversion started to come into focus, again, strong rollout heading into calendar '18, and our best estimate of their percent completion of all-digital conversion is somewhere in the range of 65%, 70%. So we're ongoing there as we get into calendar '18. So taking that all into aggregate, that was very long-winded, but I wanted to work through the 3 key customers there. So fiscal '18, we're looking strong overall for Terrace family. Second half of calendar '18, also showed some continued activity, and we may see a bit of fallback from the 2 Tier 1s as we start to approach the end of the conversion phase at one of them. And then beyond that, as we get into calendar '19, the best prospects for us around the IPTV-centric cycle that we see coming from the market cycle. On Terrace QAM, again comparing fiscal '18 to '17, we were expecting quite a bit of a rebound in fiscal '17 because we started that MPEG4 upgrade program with the lead U.S. MSO, went into wide deployment with that, and we went region-by-region in fiscal '17. So the results that year were basically a parody of fiscal '16. But backdropping this, although the upgrades were driving us into a good spot for TQ through fiscal '17, new system sales of that lead MSO came down quite a bit with having inventory in place. So now looking back at fiscal '18 this year, indications from that lead MSOs indicate that they're fairly good penetration rate for the MPEG4 upgrade kits. By the end of calendar '17, they'd hit that. And as we know, that revolves around allowing TVs to support newer compression, which saves a bunch of network capacity. So very important, but they're at a good penetration right now. So we've had a scenario where the upgrades have kept things relatively level, just the '16, '17 lumpiness aside, and maintained for the first half of fiscal '18. But our second half visibility on TQ with that customer is getting a bit more opaque. We're starting to see those upgrades potentially winding down and continued influence of that inventory in the systems. We did do a new software release for another upgrade cycle around audio compression, again unlocking more network capacity. But the timing of the MSO to launch that network program is still not cemented. So although we view that as driving the penetration rate for the upgrade kits up, its timing is unknown at this point.

[David Christopher Kwan, Technology Analyst]

Great color. On the IPTV side, it sounds like it's a kind of calendar '19 opportunity for you guys. Can you talk about kind of when we can get some more news as to what's -- you guys have from a product standpoint, but also how you see that -- those revenues ramping up and serves as the overall opportunities. Is it something similar that we've seen in the past with Terrace and TQ?

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

On the positive front, it does have some good scale associated with it that we've seen potential for -- with what we're talking about with, a conversion, if you will, again from the current base of commercial video platforms that we've deployed. We deploy 25,000 properties, domestic Tier 1 MSOs of our Terrace and Terrace QAM platforms. As you go to an IPTV network and feed fiber to these properties, the concept that we've effectively built this market of bulk commercial video without requiring set-top boxes on the TV sets, and that's been very successful for the MSOs. So we're able to re-up on that and create a new set of platforms that can take IPTV on the ingest side, still output a bulk service for them, the property, however, again eliminating the set-top boxes. And that gives you all those usual advantages of Terrace and Terrace QAM, the deployment velocity turn on the set-top boxes, the sheer economics. So that's all coming into play. It is a development program. It's based off the Terrace QAM platform, with several new boards and soft -- of course, a large software project. So it's going to take some time to develop, and we're still progressing on the customer engagement side. Yes, calendar '19, things going well, we could swing early in that year. And collectively, lifetime market size of that could be as big as Terrace, Terrace QAM.

[David Christopher Kwan, Technology Analyst]

And on the Terrace DVB side, can you provide an update there? It looks like there wasn't much going on, at least in terms of sales to the international market this quarter. Curious to see how that's rolling out or the pilot program, I guess, is going.

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

Yes, so again, you're correct that we're not through with sales as of Q2 in Terrace DVB. I mentioned that we're engaged there with effectively a local footprint of a very large Tier 1 European MSO, and we're going to trial there. We are in the final stages of that trial. We want to take it one step at a time, get the technical side through and then work at that local footprint and get the deployment that they envision through, and then we'll have that hunting license aspect to go spread it out into that Tier 1 MSO. Plus we'll have the case study that we can take throughout Europe. Again, with Terrace QAM, domestically, we had a very strong lead U.S. MSO that caught on to the model, deployed it very heavily and was very successful in providing a HD service over that platform. That, we believe, can continue to be the case in the European market with this platform. And we want to start and get that initial case study, get through the technical side and have it fully fleshed out and then over to broadening out from there. So we're quite tuned in to and expect to drive that forward in the next few quarters.

[David Christopher Kwan, Technology Analyst]

And on the Entra side, are you still kind of expecting field trials in the middle of this calendar year and then, I guess, kind of more commercial orders coming in the second half?

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

So with respect to Entra, I wanted to set the stage on a couple of different areas thereof. First, we have our state of our engineering development and then talking a bit more about the state of the market. So starting with our development, we have -- we're 5 products deep in the ecosystem now, MAC-PHY, REMOTE PHY, convertible, switch, Legacy QAM Adapter. So everything's been very consistent with the scheduling we've been looking at since the beginning of calendar 2017. And we've been talking about making rapid progress in REMOTE PHY access node. We've been very focused on being interoperable from inception. And I mean, all the successive progress you need to see there from the engineering standpoint, successful, showings at multiple industry interop events, direct demos to multiple Tier 1 MSO customers. So by and large, the depth progress is really well on track and the breadth of our ecosystem there in terms of product from one of the strongest in the market. But I want to head back towards the industry and market side of the equation a bit, and what we've observed in that sense is that MSOs are really continuing to make adjustments when they look at the volume phase of using distributed for gigabit service, DOCSIS. And as you know, distributed is very much the Entra model. And of the 2 key Tier 1 MSO engagements we've talked about so far for Entra, both are incrementally progressing well, but the timing of trials and revenue remain difficult for us to pinpoint. Several moving pieces there: we have evolving standards; fluid MSO deployment plans; the vendor ecosystem and readiness of that; interoperability, I've talked a lot about; practical realities of forklift network upgrade; hundreds of thousands of devices out in the plants; taking fiber deep, closer to homes at scale. And to elaborate a bit on the evolving standards, a key factor now is the move towards full duplex DOCSIS 3.1, which has become more and more relevant to the MSOs, that they look at distributed access, is really the mechanism to go with symmetrical gigabit services. And they're thinking about doing that in a single network upgrade cycle. So the thought process that's naturally coming -- happening here is that we've had these -- all these reasons at Gen 1 distributed deployment, pre-full duplex stuff has not happened yet, and just now, in calendar '18, the new development is that, that the full duplex chipset timing is crystallizing this year. So that gap has narrowed and I mean, we have this natural occurrence where these MSOs are considering shall we go all the way to full duplex for the volume phase. So all that said, there's a relatively low amount of deployment in this calendar year we see because of these -- all these factors layering on top of each other. Trials for us this year, mid-year still in view, we're engaged up and down with Tier 1, 2, 3, so we can expect lots of opportunity to go there. Deployment side, late in the year, about as soon as we could see uptick on one of the earliest to go.

[David Christopher Kwan, Technology Analyst]

It sounds like -- I know full duplex has been something that's been talked about in terms of symmetrical speeds, both download and upload. It seemed like it might have been a little bit further away, but I guess it sounds like your conversations with these potential customers is that they may decide to maybe push out because of this upgrade to DA Architecture and just wait for a full -- for full duplex.

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

Right. So full duplex is gaining a lot of momentum as kind of the ultimate solution, getting on the symmetrical gigabit, 10 5, 10 10, what have you, depending on the set-up, and organically, in many ways, gotten delayed in pushing the button on distributed to begin with. So as that timing has collapsed or narrowed quite a bit, it's very, very organic for them to say let's go to the endgame now for the volume phase. We still think they have to get things moving this calendar year but in a very low quantity respect for the Generation 1. And by and large, the very bulk of the market is flowing beyond this calendar year and looking at the full duplex nodes is driving it.

[David Christopher Kwan, Technology Analyst]

So potentially, that could push out the -- some commercial orders as guys wait for the full duplex products to hit the market, I guess?

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

In some respects, I think it's pushing up the short-term deployment activities. I don't think it's been a long-enough period in development for distributed access in general. But later in this calendar year, the activity has to get going. They only have so much time before they have to maintain their competitive position on providing gigabit. But again, with full duplex, we're seeing that crystallizing, and there could be delays in full duplex itself. New chips are coming this year and whatnot, and so all the vendors have to drive with those. So there's going to be this blending effect and timing effect of these 2 generations. The good side of that for us is that we're already engaged with Gen 1. We're very well-engaged on full duplex design as well. So we're going to play into that, and we're very closely engaged with the number of Tier 1s. So as their plans adjust, we'll be agile to handle that.

[David Christopher Kwan, Technology Analyst]

And you're working on full duplex products that you can get into your customers' labs, I guess?

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

It's a natural continuation of the overall program. This has already been a multiyear development. We've talked about the 5 products, getting a very large ecosystem flowing, and every vendor, including us and others, are going to be looking at full duplex.

[David Christopher Kwan, Technology Analyst]

Getting back to the interoperability, I know that was kind of an issue early on, and you talked about some of the work you've been doing with the some of the other vendors and particularly, the incumbents. Can you talk about, I guess, where that is right now, how much of an issue or -- is it with your MSO customers?

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

So we've made successive step-by-step great progress in interoperability in these industry events. They've been happening very regularly, and in each turn, we progress, progress, progress in checking off the checklist on interoperability. What's happening in parallel though is the overall state of development is adjusting. So when you have these core vendors, they're also -- the software releases on these cores are moving and they're building up their features. So you even have this ebb and flow of things that we're working, backing out and then having to get re-restored. So this is a continuous effort that we've done. We feel very well with the list of successful other vendor interops that we've done. It's quite exciting to us. But as MSOs go early, there's always -- when you have a core and a node from the same vendor, that interoperability, of course, is going to be pretty much guaranteed. Whereas we are working very well with this, but there's moving targets in some sense.

[David Christopher Kwan, Technology Analyst]

Okay. Just last question here, just relates to the Concurrent acquisition here. Can you just talk about how the integration is going, how the conversations with customers are going and whether you still believe your target, I think it was USD 5.5 million, adjusted EBITDA, how, I guess, reasonable that is given the run rate in the next couple of quarters?

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

Yes, so let me start with the financials. Revenue-wise, Concurrent in the prior revenue report at Q1, $7.9 million and thereabouts. So they're already on pace towards this growth rate we were anticipating as of the close. So we're seeing that Q3 was headed in the direction that's consistent with our model. In terms of the EBITDA, the synergies are effectively -- the early ones are nailed down very quickly, and opco costs and some of the executive staff. We are seeing, like I said, that revenue and margin growth is already underway, and between that and R&D pearls and whatnot, we're feeling quite good about our call load of driving greater than $5.5 million run rate on U.S. So financially, everything is working well there. On the color side, we spent lots of time in Atlanta collectively. We have an RGM that's been assigned, living down there now. And John and I have spent several days there. So very good, as we anticipated. Through -- we learned through the diligence process, a lot of collective chemistry in a sense that we worked the same industry together as a people for so long. The same set of customers, so that chemistry is very good. And the customer relationships are strong. They've got their own set of targets and opportunities that they're tracking that are very exciting. And everything feels strong there, and it's an exciting time for us.

[Operator]

[Operator Instructions] Our next question comes from [ Oliver Diguera ] of National Bank Financial.

[Unknown Analyst]

So just, excuse me, I just joined the webcast late. So I don't know if you talked about the telematics field, but I just wanted an overview about the telematics and your last investment on AirIQ.

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

Sure. So telematics is performing strongly as anticipated, and as we've built -- as with our acquisition of Contigo, for some time, we haven't been reporting in a lot of details there, but we have somewhere between 17,000 and 20,000 subscribers on the system. That's full and recurring revenue in EBITDA in a good way. Also, there's been a transition from 2G to 3G networks, so we run through now and that was very successful, so -- and a potentially challenging scenarios, so that was completed. And there's some new developments, opportunities for growth based on assets. As you know, IoT, Internet of Things, is quite relevant in today's world, and that's already proving to be very relevant in the telematics space. And we're pursuing some growth opportunities around that and tracking assets and restoration, et cetera. There's new regulation in the U.S. around hours of service compliance. That's built some new revenue opportunities for us. We've done some software to support them and that compliance to that regulation. That's working for the customers for which it's relevant. AirIQ wise, again, that's an organization we've been tracking for some time, a 20-year-old Canadian company, we own 21% now. And we've been following the company for some time and see them do some good work, growing revenue modestly, cash flow. And they even made a recent acquisition, so built up their base a little bit. So we're continuing to observe that and monitor that. We'll engage with management and understand the business at much more depth and take it from there in terms of what the next step may be.

[Unknown Analyst]

Okay. And just regarding the sector in general, so I just want your point of view, what do you think about telematics? Do you see a more cyclical sector or a sector becoming more like a secular, bull market? So I just want comments about that.

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

We still think that the market is in a secular rollout phase. We've seen, on the vehicle side, going from 10%, 20%, 30%, 40% penetration maybe at the top end of all the vehicles rolling out there. We have regulatory issues in the U.S. And on the asset side, it's so untapped on IoT that there's such a large scale happening there. So we're still looking at -- in the secular phase of potential growth, very large market. The penetration rate is not very high at this point, so we're nowhere near saturation. A lot of opportunity for potential scale-out through M&A, and that remains of interest to us to build scale. And it remains an exciting industry in its own right.

[Operator]

This concludes time allotted for questions on today's call. This concludes the conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.