Vecima Networks Inc

TSX:VCM

Earnings Call Transcript 2021-Q2

[Operator]

Hello. This is the Chorus Call conference operator. Welcome to Vecima Networks Second Quarter Fiscal 2021 Earnings 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 second quarter fiscal 2021 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 2021 results, as well as detailed supplemental investor information, are posted on Vecima's website at www.vecima.com under the Investor Relations heading. The highlights provided in this call should be understood in conjunction with the company's interim condensed consolidated financial statements and accompanying notes for the 3 and 6 months ended December 31, 2020, and 2019. Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable securities laws. All statements, other than statements of historical fact are forward-looking statements. These statements include, but are not limited to, statements regarding management's intentions, beliefs or current expectations with respect to market and general economic conditions, future sales and revenue expectations, future costs and operating performance. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict and/or are beyond our control. A number of important factors could cause actual outcomes and results to differ materially from those expressed in these forward-looking statements. These factors include, but are not limited to, the current significant general economic uncertainty and credit and financial market volatility, including the impact of COVID-19 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 24, 2020, 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. Good morning, and welcome, everyone. Thank you for joining us today. Vecima has now reached the midpoint of fiscal 2021. And without question, this is the breakthrough year we predicted. We'll talk about all that we achieved in the second quarter, and we'll also take a look at what we see ahead for the balance of this pivotal year. Starting with an overview of second quarter results. We ramped up top line sales to $30.4 million as our newest next-generation products quickly gained momentum. Sales were 21% higher than 1 year ago. And this represents our highest quarter in nearly 5 years. We also generated adjusted EBITDA of $2.5 million, which we see as a very solid performance given the foreign exchange headwinds created by rapidly strengthening Canadian dollar over this period. In addition, the cable access business we acquired from Nokia in Q1 was close to EBITDA neutral in Q2. As you know, this is in line with our expectations through our first year of operations of the acquisition. Looking at how our business units performed, our Video and Broadband solutions segment had another big quarter with revenues doubling year-over-year. Entra products led the way again with growing demand for our next-generation distributed access architecture products, driving interest sales to $8 million more than 6x what we achieved in Q2 last year. To give you a sense of the momentum we're building with Entra, in Q4 FY '20, only 6-months ago, we had 2 customers actively buying Entra DAA products. In Q1, we increased this to 13 customers. And by the end of Q2, it was 20 customers. And as we speak today, 24 customers have purchased Entra products for deployment, including multiple Tier-1 MSOs. This speaks volumes about the strength of Vecima's industry-leading DAA portfolio. Not only are the number of active customers increasing, but their order sizes are growing as well. As an example, our lead Tier-1 customer has now started scale deployment. Meaning a shift to thousands of nodes from hundreds previously. Thinking about what that represents, each 1,000 nodes purchased may cover 250,000 homes with speeds of up to 10-gigabits per second. Vecima is shaping the connected world. And I want to add that the orders we're receiving track broadly across the Entra portfolio, including our Remote PHY Monitoring and video DAA products as well as our newly acquired Remote MAC-PHY and 10G-EPON fiber-to-the-home products. The acquired portfolio accounted for $3.4 million of the $8 million of Entra sales we generated during the quarter. Combined, our Entra portfolio is now powered by multiple growth engines. And with a total of 58 customers at various stages of engagement, including the 24 that have already placed orders, we anticipate all the momentum to continue. I'll talk more about this when we provide some outlook a little later on the call, but let me summarize by saying that the era of Entra has arrived. Our commercial video products also added to the rapid growth in the second quarter VBS sales. Demand for our Terrace TC600E was particularly robust as customers continue to build out their MPEG4 networks and an additional Tier-1 began its associated TC600E densification program. Also on the hospitality side, we generated another $2.5 million of Terrace QAM sales in Q2, following on the very strong revenue performance of the first quarter. And I'm delighted to report that we also secured our first order for our next-generation Terrace IQ platform. An order that came from a Tier 1 -- a new Tier-1 customer. That's an important milestone and one that will eventually spur a new investment cycle across the vastly deployed populations of Vecima's platforms that are at operators. All of the existing Terrace QAM units can be upgraded to Terrace IQ, when an operator is ready. So we have a widely deployed base of units that can be upgraded over time to the new platforms. Much like when networks move to all digital video, that's for this first multiyear market cycle for Vecima commercial video platforms as networks now evolve to all IP video, we have the commercial video solution required, and we have a captive audience. Turning to our Content Delivery and Storage segment. We continue to consolidate the record new business wins of last year and generated all-time high service revenues in the process. While overall segment revenues were lower than the record results of a year ago, more pronounced quarterly revenue fluctuation is typical for the CDS segment and usually reflects the timing of large project-oriented orders. Which is the nature of the business. Meanwhile, we continue to grow customer engagements for our MediaScalex solutions during the quarter. Included adding an additional IPTV customer win deploying across our full line of IP linear, IP video-on-demand and cloud DVR solutions and MediaScaleX. We also won 3-new broadcast customers for our ContentAgent post-production management system in Q2. At the same time, we continue to advance our leading MediaScaleX portfolio introducing new functionality in the areas of visual trick play, multi-tenancy, dynamic ad insertion, integration with additional ecosystem partners and support for new content formats. The close of the second quarter, our CDS segment remained exceptionally well positioned for the eventual industry-wide migration to IPTV with a customer base, well over 100 customers and a leading portfolio of IPTV solutions. In the Telematics segment, we had another solid quarter with continued subscription expansion among our growing base of municipal government customers. We also made further headway into the movable assets market, where we're marketing our bluetooth asset tracking tags, associated vehicle telemetry collectors and the software subscription that leverage that data to customers in the restoration and emergency medical services industries. Overall, it was a significant quarter of growth for Vecima with strong momentum on the DAA side, and much more to come as both DAA and IPTV continue to ramp-up in the interrelated way that fuels Vecima strategy. And at this point, I'll turn the call over to Dale to provide more detail on our financial results. Dale?

[Dale Booth, Chief Financial Officer]

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen our second quarter fiscal 2021 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 results for the second quarter of fiscal 2021 include a full quarter of operating results from our acquisition of the Nokia cable access portfolio we acquired on August 7, 2020. Starting with consolidated sales, for the 3 months ended December 31, 2020, we generated sales of $30.4 million. This was an increase of 21% over the $25.1 million in Q2 last year and an increase of 9% from $27.8 million in Q1 fiscal '21. The year-over-year increase reflects an increase in product sales from the Video and Broadband Solutions segment. Driven by our new Entra family of products and partially offset by lower sales in the Content Delivery and Storage segment. Within the Video and Broadband Solutions segment, for the second quarter of fiscal '21 and we generated sales of $16.5 million. This was up 98% from Q2 last year and 22% higher than last quarter. Further deployments of our next-generation DAA products contributed second quarter enter revenue of $8 million, significantly up from $1.1 million in Q2 fiscal 2020 and up 54% from the $5.2 million in Q1 fiscal '21. Entra sales included $3.4 million from the DAA products acquired from Nokia in Q1 fiscal '21. In all, Entra DAA platforms are now being sold to 24 operators across 5 continents. Second quarter Terrace family sales were up 51% and to $5.9 million from the $3.9 million in Q2 fiscal '20 and up 67% from the $3.5 million in Q1 fiscal '21 and reflecting higher sales of our TC600E products. Terrace QAM sales for the second quarter was $2.5 million, down from $3.1 million in Q2 last year and down from $4.2 million in Q1 fiscal '21. We anticipate healthy demand for our Terrace QAM platform through the second half of fiscal '21 and as operators continue their commercial rollout for the current generation while preparing for the next-generation Terrace IQ platform. Second quarter revenues of $12.5 million for the Content Delivery and Storage segment were down slightly from the $13 million in the first quarter of fiscal '21. As the segment continued to consolidate its record new business wins from 2020. These quarterly sales variances are typical for the CDS segment and reflect the timing of large orders. The total CDS segment sales included $7.5 million in product revenue and a record $5 million in revenue from services. Turning to the Telematics segment, in line with our expectations, sales in the second quarter were at $1.4 million. On par with the $1.4 million in the same period last year and up slightly from the $1.3 million last quarter. Gross margin for the second quarter was at 50% with a gross profit of $15.2 million, up from the 47% in Q1 fiscal '21 but down from the extraordinary 64% in Q2 fiscal 2020. Video and Broadband Solutions gross margin was 43% in Q2, as compared to 58% in Q2 of last year and slightly lower than the 44% in Q1 last quarter. The year-over-year decrease in gross margin reflects different product mixes each quarter, including a lower percentage of high-margin software sales as compared to the prior year quarter. Gross margins in the Content Delivery and Storage segment for Q2 increased to 57% from 48% in Q1 and compared to 67% in Q2 last year. Reflecting a lower percentage of high-margin software sales in the current quarter as compared to the prior year quarter. In the Telematics segment, gross margin in the second quarter increased to 70% from 65% in Q1 fiscal '20 and from 63% in Q2 fiscal '20. A year-over-year improvement reflecting lower product costs in the current quarter. Turning to second quarter operating expenses. The notable changes year-over-year were as follows: R&D expenses increased to $7.2 million from $4.5 million in Q2 fiscal '20. Primarily reflecting the addition of product lines acquired from Nokia, higher amortization of deferred development costs and lower deferred development expense as a percentage of total expenditure. 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 for the second quarter increased slightly to $3.6 million from $3.4 million in the same period last year. This increase was due to higher staffing costs from the Nokia portfolio acquisition, partially offset by lower travel, entertainment and trade show expenses year-over-year as a result of COVID-19. G&A expenses increased to $4.6 million in Q2 fiscal '21 from $4.1 million in Q2 fiscal '20 primarily reflecting the additional costs associated with the newly acquired operations. Total OpEx in Q1 increased to $16.6 million from $12 million during the same period last year. This reflects higher operating expenses in the Video and Broadband Solutions segment, reflecting the addition of operating expenses related to the newly acquired Nokia cable access technology portfolio and the share-based compensation expense increase related to the vesting of the first tranche of our performance-based share units. 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 product commercialization. Adjusting for deferrals, amortization of deferred development costs and income tax credits, actual R&D investment for the quarter increased to $9.1 million or 30% of sales from $6.2 million or 25% of sales in the same period last year. The increase reflects higher expenditure from the Nokia portfolio, higher staffing costs, subcontracting costs and prototyping costs as our next-generation product families move closer to full-scale commercial deployment. We reported an operating loss of $1.5 million in Q2 fiscal '21 and as compared to operating income of $4 million in Q2 fiscal '20. The $5.5 million decrease was due to a decrease in contribution in both the Video and Broadband solutions and in the Content Delivery and Storage segments for $2.6 million and $3.2 million, respectively, partially offset by a slight increase of $0.3 million in contribution from the Telematics segment year-over-year. The current year loss was impacted by the foreign exchange loss of $1.2 million and the share-based compensation expense of $1.2 million related to the vesting of performance-based share units. Net loss for the quarter was $3.1 million or $0.14 per share from a net income of $3.6 million or $0.16 per share in Q2 fiscal '20. Turning to the balance sheet. We ended the first quarter with $20.8 million in cash and short-term investments. Working capital decreased to $46.2 million from $55.3 million in Q4 fiscal '20, mainly reflecting the Nokia portfolio acquisition. We note that working capital balances can also be subject to significant swings quarter-to-quarter. Our product shipments are lumpy, reflecting the requirement of our major customers. Other timing issues like contracts with greater than 30-day payment terms also affect working capital, particularly if shipments are back-end weighted for a quarter. Finally, cash flow used in operations for the second quarter was $5.5 million from cash flow provided by operations of $4.3 million during the same period last year. The $4.8 million decrease reflects a $0.4 million increase in cash flow from noncash working capital and $5.2 million decrease in operating cash flow. Now back to Sumit.

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

Thank you, Dale. As we move into the second half of fiscal 2021, Vecima's products are directly addressing 2 of the biggest market opportunities in the global cable industry, DAA and IPTV. The transition to these newer technologies is always expected to happen, but high levels of utilization across our customers' networks have put tremendous pressure on them to expand capacity sooner rather than later. The culmination of these factors, a step-up demand for networks of the world copes with virtualization on top of an underlying continuous trend of bandwidth growth is driving strong demand for our products. And we're anticipating robust growth for our Entra DAA products in the second half. As I mentioned earlier, our lead Tier 1 customer has begun their transition to scale deployment. By year-end, we anticipate that several other operators at multiple tiers will be into scale deployment as well. Again, I want to emphasize that many of these customers are engaged across all parts of the Entra DAA portfolio, Remote PHY, Remote MAC-PHY, 10G-EPON, fiber-to-the-home optical management and video solutions. Our strategy of building the industry's foremost DAA offering has positioned us to engage with customers no matter what flavor of DAA they're pursuing. This is providing many pathways to growth, both the differing and unique needs from one customer to the next are covered. As is the road map of evolution and enhancement to the network, we can show and provide to each and every customer. On the IPTV front, we continue to see fiscal 2021 as a consolidation year for our content delivery and storage segment. The work of onboarding and scaling the many new customer wins from last year will carry on through the second half. Accordingly, and as before, we're anticipating measured growth for our MediaScaleX sales through the balance of this year. But as I indicated earlier, IPTV is nearing its own shift to scale deployment, and we're positioned to capitalize on it going forward. Put the market opportunities DAA and IPTV together and Vecima is embarking on a period of significant growth and evolution of our corporation to the next level. We've had just a hint of it in the first half, and we expect to see more of it in the second half. Vecima has also worked diligently to manage the ramp-up in terms of building strong working capital even as the pandemic continues to create some macro uncertainty in the global technology supply chain. We are well positioned today to respond to customers' growing needs through our anticipation and forecasting. Deployment is expanding. And as our top line builds, we see leverage building translating to strong EBITDA performance and increased cash flow. We see highly profitable growth ahead. I'll quickly add that in addition to DAA and IPTV growth, we're expecting continued demand for our Terrace QAM solution and the emerging opportunities for our next-generation Terrace IQ platform in the second half. So commercial video as part of VBS is also expected to grow year-over-year, too. We anticipate continued incremental growth in our Telematics segment as well. So across the company, our strategies are coming to fruition and fiscal 2021 is shaping up to be the breakthrough year we've been preparing for. I want to close today with a thank you to the entire Vecima team. We've reached this exciting place in our history, in large part because of our people's ingenuity and drive. I also want to acknowledge our shareholders, whose commitment has played its own important role in helping us reach this point. We're tremendously excited about Vecima's future, and we look forward to telling you about more progress and wins in the quarters ahead. That concludes our formal comments for today. We'd now be happy to take questions. Operator?

[Operator]

[Operator Instructions]. Our first question comes from Chris Thompson of PI Financial.

[Chris Thompson, Head of Research & Precious Metals Analyst]

Great. Can you give us -- it's been a long time. Sumit, can you just give us a sense of the dollar value opportunity that exists in the 58 MSO accounts that you're currently engaged with?

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

Yes. So 58 is engagements and 40 are either into the lab trial stage or beyond. And as we said today, 24 of those customers have already started purchase activity. And there's multiple tiers of operators in multiple products in the portfolio that reach across those engagements all the way from Remote PHY to the fiber-to-the-home optical products of the Nokia portfolio. So we are seeing this pull-through where the revenue profile of Entra has been enhancing. We did $5.3 million in fiscal '20. And we're already somewhere up around $13.2 million. In the first half of fiscal '21 alone with a ramping profile. I'm not going to be able to quantify today exactly how we translate the $48 million and the $24 million and to what that means, where we are seeing this meaningful ramp and soundly growth that we've already observed in the first half and continuing onwards and upwards. And we've provided some guidance as we close the acquisition in terms of what that's bringing in a 12-month period, that being 10% to 15% of our fiscal '20 consolidated sales and we're feeling quite positive about how that's looking and [ broaching ] towards the upper end of that range. And then meanwhile, the organic products within the Entra family are also on this growth curve. And we see ourselves in fiscal '21, definitely breaking to double-digit million on through the teens and into the lower 20s. So those 2 pieces together give you a sense of what's going to happen this year. And that's relatively early stages and early deployment take-up from those set of engagements within fiscal '21 at this point.

[Chris Thompson, Head of Research & Precious Metals Analyst]

Okay. That's helpful. I mean, for somebody new to the sector, trying to understand the envelope that you have in front of you, can you maybe price a node, like how many thousands of dollars on average would you get per node?

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

Now that's a tricky one for a few different reasons because it has a lot of variability depending on the product. And as I've said, we've kind of built up this all singing all dancing distributed access portfolio going all the way from a Remote PHY node to a MAC-PHY node to EPON, 10G-EPON, OLT node, to fiber-to-the-home, and across that very wide spectrum, which may have multiple of these products in play within even a single customer as they go on a region-by-region basis and select from these technologies. Trying to pinpoint ASP at a singular level is tricky. What I will say is that EPON -- when -- as we move from a Remote PHY to a MAC-PHY to EPON platform, we have more and more of the overall access networks content within our platform. And that accrues also other revenue components such as licensing capacity, whereas the Remote PHY node may be a full capacity story. So it's -- as we speak more, Chris, we'll try to give you some more color on how the different pieces play together. But you can imagine a Remote PHY node being on the lower end of the spectrum and then on upward from there, on the MAC-PHY and EPON with upside and licensing capacity, which will occur over time. So as you can tell from what I'm saying, it gets into a very complex story across this very wide ecosystem we've built.

[Chris Thompson, Head of Research & Precious Metals Analyst]

Okay. Understood. And it looks like you're on the bench or in trials now with about 16 operators. Can you just remind us how long the typical trial runs and a number of years it takes for the MSO to migrate to the new generation solution once they start going live?

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

Yes. So 50 engagements and 40 of those are either in lab trial or all the way through purchasing in that kind of category, the sales cycle, lab to purchasing and some of the dynamics, as you engage as a customer, you, of course, first, have your marketing and architectural meetings, you have requirements being refined over time. You're adjusting your development road map to intercept that customer-specific needs for hardware, software and timing. And then you move into a more formalized refinement process. Get your platform into their advanced engineering access labs, and they do this -- put it through the [ phases ] testing, generating feedback and iteration and software drops kind of continuously. And then you get into this more formal lab qualification cycle, which, as we've said before, investments are going at a high number of customers, at least 40, it was 58 or past that stage. And then you get that formal lab approval and the operator will look to move towards a field trial, a customer-facing field trial as they get quite close to field deployment at scale. So once you get to a field trial phase, it's very formalized and you're headed towards deployment in the near term. So that whole sale cycle, it can vary from operator to operator, certainly a customer like a Tier-1 can build for a couple of years through that whole process going from the start to the finish. Of course, as it always is, smaller customers, smaller tiers of operators are more agile and can get through that full pretty quickly. And we've seen that amongst our 24 that we count as customers that we have both large Tier-1s and lower-tier customers alike. And it's pretty organically following this color I'm giving you that the larger customers are going to have a lengthier, more formal process that we've gone through there.

[Chris Thompson, Head of Research & Precious Metals Analyst]

Okay. That's really helpful. And remind us the 58 customers, are they all formerly existing customers? Or did you win some new customers?

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

Yes, I know. Several wins there. We've been incrementing wins across the last 2, 3 years to build that list. In many cases, of course, when you consider consolidated Vecima, including the IPTV products, the DAA, the commercial video hospitality. We've sold to those customers in the past for decades. And yes, there's certainly some brand-new logos that neither us nor Gainspeed/Nokia before the acquisition had sold to that are picking in. And we've seen this very, very exciting aspect of global pull-in several of the Tier 1s, 2s and 3s in our 58 engagements around the world. And there's certainly some new and exciting logos in that count. But 33 years, Vecima has been in the industry, we've worked with a lot of these customers over the many generations of many different technologies that have gone on in the cable network.

[Chris Thompson, Head of Research & Precious Metals Analyst]

Okay. Yes, I know that for sure. And then when you're winning the new logos, are you winning on technology factors or price?

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

It's very much that we've kind of -- the industry has been building towards this transition from centralized to distributed access network architecture for the past almost 8 to 10 years. And Vecima was a pioneer, the whole way through that the conceptualization of going in this distributed architecture direction. As was Gainspeed. Now the 2 of us are together, are Vecima today after the acquisition. So we have this kind of pioneering DAA, intellectual property and technology under our umbrella. So putting ourselves in a position as the leading DAA vendor in terms of what our capabilities are with the scope of products, if you look relative to the rest of the industry, that alone is a very attractive prospect to customers like Tier-1 customers who have very wide and very network themselves, very large networks. And on a regional or even neighborhood basis, they may elect to have an evolution to Remote PHY that may string some fiber through fiber-to-the-home where they could create that business case. There may be areas where [ they require ] let's say, no quality performance that they need to get higher fidelity with something like a MAC-PHY. So all of this is kind of creating this elevated circle for Vecima when the industry has been working towards distributing the network for many years now, and we put together this resoundingly leading portfolio and also the best talent in the industry is now pooled with us in terms of distributed access architecture. So the types of road maps, we can show them is a lot of scope. We can show them today. We find that, that's bringing us to the table at almost each and every DAA deal on the globe.

[Chris Thompson, Head of Research & Precious Metals Analyst]

Okay. And maybe just a couple of quick ones for Dale. On the gross margin, should we expect the gross margin to improve as you continue to ramp out the new Entra family deployment?

[Dale Booth, Chief Financial Officer]

Yes. So on our gross margin, just let me get my table here. Our expectations are that our target range is 49% to 53%. And it will depend on, as Sumit was saying, what customers select with Entra product line. And it will also -- we're looking at that with our ongoing measured growth in our CDS segment. And our Terrace transition over to our new products. So we're still at that -- that's the same guidance we had provided last quarter, Chris, this 49% to 53%.

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

Yes. So it's all consistent with our own range there, the 49% to 53%. We have as I outlined before, and when we have the conversation around ASPs and whatnot, we've got higher and lower gross margin products within the mix, higher and lower in terms of the network content licenses. So you have very high-volume for margin products that have operating leverage for us to the bottom line and then you have some very healthy gross margin products. Some very exciting gross margin products in the mix, too, once you start thinking about licensing and more of the network content.

[Chris Thompson, Head of Research & Precious Metals Analyst]

Okay. And on the R&D and the deferred development costs, can you talk a little bit about your road map, like whatever you can disclose? And then also, do you have an annual range, like a target range for the deferred development cost?

[Dale Booth, Chief Financial Officer]

Sure. So again, for the consolidated business with Nokia acquisition expenses all in, we're planning for R&D expense to be on an average piece of about $7.4 million to $7.5 million per quarter for the rest -- for the remainder of fiscal '21 and this is driven by ongoing commercialization activity increases in the now combined Entra family as well as CDS. We expect the full year FY '21 average for cash R&D to be in the range of $9 million to $9.1 million per quarter. Increase from $8.2 million in Q1 to $9.1 million in Q2 is largely driven by hitting a full quarter of the acquisition R&D in Q2 and only about half a quarter of it in Q1. And 70% of the expense is coming in from the acquisition, our R&D headcount. And then for the second half, we're taking the combined R&D pool and continuing to go after the accelerated commercialization activity happening for the Entra family and CDS. Again, with Vecima having the world's best portfolio in DAA and IPTV that will drive up the cash R&D a bit to take us to the full year average of $9 million to $9.1 million per quarter. It's a combination of increased prototype activity and modest surgical headcount, and when we model out the growth potential of this incremental R&D growth, it comes at a really attractive percentage of sales going forward.

[Chris Thompson, Head of Research & Precious Metals Analyst]

Okay. That's very helpful. And what about acquisitions? Do you have any other opportunities in the pipeline that you're thinking about?

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

Yes. I think we've done a great job. This was a sizable acquisition that we did on the Nokia cable portfolio in Q1. And we've done a lot of integration work since then. There was about 80 to 95 employees overall that were brought in and 4 locations, 2 in the U.S. and 2 in China. So we've been quite active in closing that deal. With that said, there are always opportunistic situations that can flow through, whether it's on the tuck-in side or something more scale given that we've kind of assembled this portfolio, which is very effectual in terms of what -- everything we can do today in terms of DAA with the products we have. I don't foresee anything sitting out in front of us, that's an instinct. We could look at related technologies and whatnot that can enhance us a little bit more it's kind of an eyes open and execution mode at this moment in time.

[Operator]

[Operator Instructions]. Our next question comes from Ole Pragel a Private investor.

[Unknown Attendee]

Now that you've built this new Entra and what you're focusing on now, out of the total market, how much -- how big -- what percentage share does Vecima have in the total market?

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

Yes. So I mean, the total market, we've talked about this before for DOCSIS has been this kind of $1 billion-plus market and growing over time. The DAA component, which I've been talking a lot about is where we're catered. Gaining leadership through what we've done. And the industry, just as I said in the press release and in the very early stages, it's starting to roll out DAA. So you can see that you have this overall market that's very, very large and then DAA is starting to grow as envisioned by the industry that DAA is going to be the future. So along with that trajectory, we feel that within DAA, our market share is very strong. And as DAA becomes a higher proportion of the overall market for DOCSIS, that will translate likewise and to what -- how meaningful that can be for Vecima's corporate growth.

[Unknown Attendee]

Well, so you're saying that you're a leader in that space and the competition -- potential competition will have to catch up?

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

Yes. And then it's early in markets like over DAA tools. So what we are seeing at the customers that are rolling out and when we have the competitors in the mix as well, we're having a very strong track record of design win and there will always be a spread of that market and not the operators have to maintain more than one vendor into their landscape in terms of their risk with a particular vendor. So there are other vendors. But as I said before, when speaking to Chris, when we say any DAA project that's happening worldwide that we're brought into the table, that is a reflection of how we situate ourselves competitively.

[Unknown Attendee]

So now that you build the market and the customers are coming, is there any restrictions in meeting the customer demand as far as whether it's supply chain or manufacturing?

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

Yes. We've built up some great capacity in Saskatoon. As you know, we've got a large manufacturing facility there. And we've, of course, been doing or designed for manufacturing for years now, that has given us a very strong capacity relative to what we see upcoming. We also acquired Nokia products, leverage a contract manufacturer along the global majors in that space. And of course, being a global major contract manufacturer on that side. They've got a lot of capacity for scale. So capacity-wise, we're feeling good about how we can connect to everything we see coming, both in Saskatoon and with the contract manufacturing on the Nokia product side. The supply chain, as we've seen COVID's been around for a long time, and there maybe some lagging effects of that in the global technology supply chain where lead times are broadening out. So we've taking advantage of that. We've gotten crisping forecasts from our customers and use that to drive our forecast to our supply chain. So we've had to be more cognizant of managing against this backdrop of this global expansion of lead times. So that's happening, not just in our industry but in many industries. So we feel comfortable that we're able to stay ahead of it.

[Unknown Attendee]

Okay. Yes. Well, there's an awful lot of information to absorb here. So maybe I can call you some time and I've got lots of questions, but I don't want to take up everybody's time here.

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

Fair enough, Ole. And for sure we can speak.

[Operator]

[Operator Instructions]. As there appears to be no further questions. This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.