Vecima Networks Inc

TSX:VCM

Earnings Call Transcript 2023-Q2

[Operator]

Hello. This is the Chorus Call Conference operator. Welcome to Vecima Networks Second Quarter Fiscal 2023 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 of fiscal 2023 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 2023 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, 2022 and 2021. Certain statements in this conference call and webcast may constitute forward-looking statements within the meaning of applicable securities laws. All statements other than statements of historical fact are forward-looking statements. These statements include, but are not limited to, statements regarding management's intentions, belief or current expectations with respect to market and general economic conditions, future sales and revenue expectations, future costs and operating performance. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict and/or are beyond our control. A number of important factors could cause actual outcomes and results to differ materially from those expressed in these forward-looking statements. These factors include, but are not limited to, the current significant general economic uncertainty and credit and financial market volatility and including the impact of COVID-19 and the distinctive characteristics of ESMA operations and industry and customer demand that may have a material impact on or constitute risk factors in respect of ESMA's future financial performance as set forth under the Risk Factors in the company's annual information form dated September 22, 2022, 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. All obligation to update [Technical difficulty] 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, executive]

Thank you. Good morning, and welcome, everyone, to our second quarter conference call. I want to start today by telling you that our second quarter performance exceeded our expectations. You'll recall that we entered Q2, expecting revenues to level out as we rebalanced Entra orders after a particularly strong first quarter. Instead, Entra sales continue to ramp up to a new record, led by our EntraOptical Fiber access solutions. Combined with solid results from the Content Delivery and Storage segment, we achieved another quarterly revenue record and Q2 consolidated sales climbed to $76.2 million. That was up 75% year-over-year and represented yet another 4% sequential growth after the 22.5% quarter-over-quarter growth that we delivered in our record Q1 and we once again paired these record revenues with excellent bottom line performance, demonstrating the leverage in our model. Q2 adjusted EBITDA of $50.8 million add earnings per share of $0.35 were up 2x at 6x, respectively, compared to the same period last year. Vecima has now achieved more EBITDA and EPS in the first 6 months of fiscal 2023 than we did in all of fiscal 2022. These are significant achievements, especially when you consider our ability to navigate the current supply chain environment while continuously increasing product output at existing and new customers alike. In our view, there's even -- there's opportunity for even stronger performance ahead. Our Q2 results were once again anchored by our Video Broadband Solutions segment and the tremendous success of our next-generation Entra DAA solutions. Entra sales climbed to $55.7 million during the quarter, more than triple what we achieved in the same period last year. As I mentioned, fiber access is a big part of the story with demand driven in part by the wide rural broadband rollout underway in the U.S. We were successful in leveraging our supply chain strengths to help our customers expand their fiber networks to more people into more places. And in the process, we reached a major milestone with one of our U.S. Tier 1 customers. That operator has now deployed a total of more than 20,000 Tejon fiber-to-the-home ports using our solution. Our record Q2 Entra results were further supported by solid demand for our cable access products, including Remote PHY and Remote [Inaudible] and Entra video and by the ongoing shift to scale deployment by an ever-widening base of customers across both cable and fiber access. We're now actively selling Entra solutions to 50 operators, including some of the biggest cable and fiber network operators of the world, and our global engagements have widened to 101 customers from 80 a year ago. Entra continues to deliver on the vision we've had for the broadband networks of the future. Looking out other factors in our Q2 results. In our commercial video product family, sales were lower year-over-year as customers wind up their network densification programs and prepared to shift to next-generation platforms like Terrace IQ. This is a transition we've been working towards for some time. Additionally, a portion of our commercial video solutions have become DAA driven and are now within our Entra Family solutions. Turning to our content delivery storage idled. We achieved 13% sequential quarterly sales growth at CDS in Q2 as we start to see a resurgence in IPTV momentum and more particularly expansion activity. Those network expansions have always been a part of our model within the many new customers and IPTV network launches we've conducted in recent years. Three of our existing U.S. customers undertook significant expansions of their IPTV networks using our media scale solutions during the quarter, and we expect more to follow. Operators are starting to shift their focus back to IPTV expansion following pandemic-related priority on broadband, we see significant subscriber uptake, licensing capacity increases on those nascent IPTV networks we help build in recent years. And I'm pleased to report we also initiated sales of our new dynamic ad insertion solution during the quarter. This is an important capability for operators wanting to improve monetization of their IPTV linear services, which is most of them, of course. And we advanced technology and market development on our Open Cache architecture, which we believe can become a significant growth driver for the CDS segment. During the quarter, we completed the world's first successful multi-tenant test of an SPTA-Open Caching standards compliance system with Vestas media scale. Before I move on, I want to touch on what additional CDS achieved with this past quarter, which involve demonstrating the robustness and reliability of our stream solutions at scale. During the FIFA World Cup, a major Tier 1 MSO in Latin America achieved both record streaming viewership and record performance using our platform to stream the tournament. This was achieved amid the explosive and record streaming magnitude that occurred during the World Cup and the customer networks performed as designed to meet this exceptional demand. So an important quarter with many achievements for our CES segment. Our Telematics segment also turned in a meaningful quarter with the win of a new municipal contract in British Columbia, covering about 100 vehicle subscriptions. It was also our best quarter-to-date removable asset customer wins. We added 12 new customers in all [Indiscernible] assets, which combined represent over 200 subscriptions. And we significantly increased the number of movable assets being moderated to over 35,000 units. This represents a 200% increase over a period of just 7 quarters. Telematics continues to be a highly profitable part of our business, with the segment achieving a gross margin percentage of 67.6% for the quarter. Another major highlight in Q2 was a highly successful common share offering we closed in December to provide further growth capital with gross proceeds of $17 million. On the day of closing, the company's share price closed at a market capitalization of approximately $464 million. Response to the offering was very strong, with subscription demand far exceeding our initial $10 million deal size to which we responded with a $7 million upsizing while still not filling the overall subscription in that. We're very pleased that even at a time of challenging equity markets that investors have a clear thesis on our growth strategy, the trends in our business and industry and our responses to strong customer demand and the supply chain factors. Overall, it was a highly busy and very successful quarter, and it sets the stage for an even stronger performance in the second half. I'll come back to tell you more about what we see in our outlook in just a few minutes. But first, I'll ask Dale to provide more detail on Q2 and first half financial performance. Dale?

[Dale Booth, executive]

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen our second quarter fiscal 2023 news release, MD&A 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. Starting with consolidated sales for the 3 months ended December 31, 2022, we generated record sales of $76.2 million. This was an increase of 75% over the $43.6 million in Q2 last year and an increase of 4% from the $73.4 million in Q1 fiscal 2023. The significant year-over-year increase reflects a sharp increase in video and broadband solutions sales and the positive foreign exchange impact of a weaker Canadian dollar, partially offset by lower content delivery and storage sales year-over-year. Within the Video and Broadband Solutions segment, we generated sales of $62.3 million. This was up 129% from the $27.2 million in Q2 last year and 2% higher than the $61 million last quarter as customers continued their transition to next-generation networks using Vecima Solutions as well as our success in meeting the needs of Tier 1 customers undertaking larger scale DAA fiber access deployments during the quarter. Our Entra next-generation DAA products contributed second quarter sales of $55.7 million, up a significant 202% from the $18.5 million in Q2 fiscal 2022 and up 5% from the $53 million in Q1 fiscal 2023. Second quarter sales for commercial video, which include Terrace QAM and Terrace family products were $6.5 million, down 25% from $8.7 million in Q2 fiscal 2022 and down 10% from $7.3 million in Q1 last quarter. As expected, commercial video sales are moderately lower year-over-year as customers transition to next-generation solutions. And as a portion of our commercial video solutions become DAA driven and are accounted for as part of the Entra family sales. In the Content Delivery and Storage segment, second quarter revenues were $12.4 million or 17% lower than the $15 million in the exceptionally strong Q2 last year, but 13% higher than the $11 million in Q1 fiscal 2023. Segment sales for the Q2 fiscal 2023 period included $7.3 million of product sales and $5.1 million of services revenue. CDS sales reflect IPTV expansions with 3 existing customers during the period. As always, we note that quarterly sales variances are typical for the CDS segment. The demand for Vecima's IPTV and open cashing solutions continues to increase as IPTV customers initiate network expansions, and we expect moderate sales growth for the Content Delivery and Storage segment in fiscal 2023. Turning to the Telematics segment as expected, sales of $1.5 million in the quarter were slightly higher than the $1.4 million achieved in both Q1 last quarter and Q2 of fiscal 2022. Consolidated gross margin for the second quarter was 47.3%, up from 45.9% in Q1 2023, but down from the 50.1% in Q2 of fiscal 2022. This primarily reflects supply chain constraints, which resulted in higher exit costs. We target a gross margin percentage of 48% to 52%. Video and Broadband Solutions gross margin was 46% in the current year quarter. This was slightly lower than the 47% in Q2 of last year, but higher than the 44% in Q1 last quarter. The VBS gross margin primarily reflects significant stronger sales and product mix, partially offset by higher expedite costs. Gross margin in the Content Delivery and Storage segment decreased to 51% from 55% in Q1 last quarter and from 54% in Q2 last year. The year-over-year change reflects a change in customer and product mix. In the Telematics segment, gross margin of 68% in the second quarter was slightly lower than the 69% in Q2 fiscal 2022, but higher than the 66% in Q1 fiscal 2023, reflecting the increase in sales in the current quarter. Turning to second quarter operating expenses. The notable changes year-over-year were as follows: R&D expenses increased to $10.3 million in the second quarter from $8.4 million in Q2 fiscal '22 as we continue to invest in research and development to support the launch of new products. The increase reflects hiring of additional R&D employees and higher licensing and prototyping costs, partially offset by an increase in capitalized development costs. Until these new products are commercialized, development costs are deferred to future periods. Sales and marketing expenses increased to $6.6 million from $4.6 million in the same period last year. This increase primarily reflects higher staffing costs as well as an increase in travel and entertainment as COVID-19 travel restrictions have lifted.G&A expenses increased to $7.5 million in the quarter from the $5.5 million in Q2 fiscal 2022, primarily reflecting additional staffing, ERP implementation costs, software licensing costs and professional fees. -- onetime costs of approximately $0.6 million will not reoccur. Total OpEx in Q2 fiscal 2023 increased to $25.3 million from $18.5 million during the same period last year. This reflects additional operating expenses tied to higher sales in the video and broadband solutions combined with a $0.7 million increase in stock-based compensation and $0.6 million in general and administrative onetime items. 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 $13.2 million or 17% of sales from $9.7 million or 22% of sales in the same period last year. The increase reflects higher staffing costs and increased costs for software licensing and prototyping in the current year quarter as our next-generation products move closer to commercial development. We reported an operating income of $10.7 million in Q2 fiscal 2023 as compared to operating income of $3.3 million in Q2 fiscal 2022. The significant increase was primarily due to higher BBS sales, partially offset by higher expedite costs resulting from supply chain constraints and increased operating expenses to manage the year-over-year increase in sales. Net income for the second quarter increased to $8.1 million or $0.35 per share from $1.5 million or $0.06 per share in Q2 fiscal 2022. Turning to the balance sheet. We ended the second quarter with $8.1 million in net bank overdraft. The decrease in cash in the quarter mainly reflects the buildup of inventory by $26.3 million in the quarter; other working capital increases of $0.4 million, capital expenditures of $0.4 million deferred development costs of $5.2 million, dividends paid of $2.5 million withholding taxes on PSUs of $1.4 million and other debt interest and cash taxes of $1.8 million, partially offset by adjusted EBITDA of $15.8 million and net proceeds from common share issuances of $15.9 million. Just to expand on the common share issuances in the quarter, which we completed at a pivotal point in our growth story. The net proceeds from the issuance of the $15.9 million were used to support our working capital requirements in response to the anticipated high demand for our next-generation solutions and to navigate supply chain constraints while minimizing debt service costs. It's important to note that the common share offerings are oversubscribed, demonstrating the belief in our path forward and ability to grow revenue and capture market share. Moving on, working capital increased to $89.1 million from $58.6 million as at June 30, 2022. We note that working capital balances can be subject to significant swings from quarter-to-quarter. Our product shipments are lumpy, reflecting the requirements of our major customers. Finally, cash flow used in operations for the first quarter was $12.2 million as compared to cash flow from operations of $1.4 million during the same period last year. The $13.6 million increase in cash used in operations reflects a $21.5 million decrease in cash flow from noncash working capital, driven primarily by the buildup of the inventory to support growth and minimize the impact of supply chain constraints, partially offset by a $7.9 million improvement in operating cash flow year-over-year. Now back to Sumit.

[Sumit Kumar, executive]

Thank you, Dale. Turning now to our outlook. In our Video and Broadband Solutions segment, we anticipate continued acceleration of the heavy demand we're experiencing for our Entra products. Competition in the broadband space remains fierce and it's driving significant network investments to increase capacity and speeds. Our broad portfolio of DAA products gives customers a great deal of flexibility to dial in between cable and fiber access, whichever fits their needs and empower them to compete with leading offerings on both download and upload broadband speeds. We're now seeing scale deployment of our solutions ramping up among multiple customers and translating into a broad pipeline of customer purchase orders and forecasts. This gives us excellent visibility going forward, and we expect interim momentum will continue building in the second half and beyond. I do want to caution that ongoing global supply chain disruptions continue to have the potential to interfere with timely order delivery while also increasing expedited costs and putting pressure on margins. But we also continue to manage these challenges effectively. Heading into Q3, we've increased our investment in working capital to support the inventories will need to meet this anticipated demand. Turning to our commercial video family of products. We anticipate moderately lower sales in fiscal '23 that customers complete the densification of their networks using our legacy products and prepare to transition to next-generation platforms like Terrace IQ. And as I mentioned earlier, as we go forward, we also expect a portion of our commercial video solutions to become DAA focused and accounted for as part of intra-family sales versus commercial video. Looking at the Content Delivery and Storage segment, we expect demand for our IPTV and open caching solutions will continue to build. While we're anticipating moderate growth for this segment in fiscal '23, we see this making a way for higher growth potential over the mid to longer term. Our large base of IPTV customers is providing an in-built growth platform as operators began to initiate IPTV network expansion and our newer open caching and dynamic ad insertion solutions are expected to become an important driver of CES performance over time. Finally, in our Telematics business, we expect consistent incremental growth from the fleet tracking market and increasing demand for our new removable asset tracking services. Overall, we remain highly confident in our market position and Vecima's ability to capture major multiyear opportunities in the fast-growing DAA and IPTV markets. Our futures never look more compelling, and we're very excited about what we can achieve not just in fiscal '23, but in the years ahead. That concludes our formal comments for today. We'd now be happy to take questions. Operator?

[Operator]

Thank you. We will now begin the question-and-answer session for analysts and institutional investors. [Operator Instructions] Our first question is from Steven Li with Raymond James.

[Steven Li, analyst]

I have a couple of questions for you. Your 48% to 52% target range for gross margin, do you just need more revenues to get you there? Or do you need an actual easing on supply chain and component inflation?

[Sumit Kumar, executive]

I think those are both good points to reflect on when we think about moving back towards our targeted range that the supply chain remains a factor. We anticipated going into the beginning of the constraints like a little over a year ago that we could expect upwards of 2% to 3% influence on our margins from both the supply chain and the airfreight and things like that, so the expedites and there free. We still have that -- the presence of that, as Bill outlined in our second quarter. And we, like others, are optimistic about improvements in calendar '23 and seeing some signs of that, but that is a factor. And then when we think about the top line ongoing growth, that likewise is a factory, when we have our manufacturing facility as an example, the building costs, the fixed costs of support staff, supply chain procurement, operations, we also get to spread those costs thinner as our output continues to grow. And we do think that can be a meaningful improvement to margin. And as always, mix is effect is the third major factor, and we'll continue to develop that as we go forward.

[Steven Li, analyst]

Did you say -- so based into your gross margin today, there's like 2 to 3 points of margin from expedite costs and so on?

[Sumit Kumar, executive]

I wouldn't say -- and I don't have a pinpoint number for us for today, but we do have an influence remaining with us in the second quarter. And we do still anticipate that it's going to be a factor in the second half as well. But you could take in order of magnitude, 1.5% to 2.5% is there.

[Steven Li, analyst]

And then my second question is on your G&A actually grew a bit year-over-year. Can you just remind us what's in there? And does it start to plateau?

[Sumit Kumar, executive]

So Dale, if you want to jump in any ties. I think we're -- we saw some onetime aspects in the second quarter, about $500,000 and overhead rate adjustments $400,000 in increased software license expenses. We're doing our big ERP replacement program as we speak here with a new set of tools in our operations, about $200,000 of that was onetime, about $600,000 and increased salaries and bonuses and incremental headcount. We also had our annual pay increases that were effective other September. So we had the first full quarter of that in the second quarter, some winter-related costs on utilities and whatnot that were a factor and some training cost increases reflected the majority of it. Dale, I'll turn it to you on kind of how we think about it going forward.

[Dale Booth, executive]

So the other point, Stephen, is that all amortization other than deferred development cost amortization is lumped into G&A for us. So that's why we don't separate out our amortization on our P&L. So that's one consideration you should have. And then going forward, I would say that we're looking at probably a reduction of -- in the next quarter of that $600,000 of onetime costs we talked about. But we will be increasing our expense probably in Q4, which will relate to some more additional amortization and a bit of head count as we continue -- we're continuing to ramp up. And so we will be adding headcount strategically as we move forward.

[Operator]

Our next question is from Jim Byrne with Acumen Capital Partners.

[Jim Byrne, analyst]

Congrats on a really solid quarter. Sumit, you mentioned in your remarks there, just about the CDS segment and specifically kind of Terrace IQ and the growth to come. Maybe could you help us maybe quantify some of that growth? Are we talking VBS entry growth? Or is it mid-single digits in fiscal '24 and beyond? Where do you think that ultimately falls out?

[Sumit Kumar, executive]

Yes. I mean, so like we said, we're starting to see this transition back to expansion in the IPTV networks, and we've been anticipating that for some time. We had 35-plus new network wins over the last several years in CDS. To some extent, it's in some ways, pandemic related that those operators got very focused on the broadband side of their networks. And in so doing -- there's a little of timing adjustment when they began to have more subscriber uptake into the IPTV networks that expand those systems. Only a portion of the envisioned capacity was purchased upfront by these new IPTV customers. And we've been waiting this and anticipating this expansion as they move more and more subscribers over from legacy set-top driven video services over to the IV TV fabric. And we look at the total base of their video subscribers moving towards IPTV. We've got, like we say, that in-build growth -- but as we stand today, what we're saying is that the culmination, the start of the culmination of that reflects probably a modest growth profile this fiscal year, where we're expecting it to be in the range of maybe 7% to 10% growth annually in the CDS segment. But then we expect that to begin to gain some momentum as we go forward in fiscal '24 and likewise. Entra type growth, the significant ramp we're having VBS, that kind of growth is hard to match. And we do expect to drive up the growth rate in the IPTV-based IPTV expanses, adding in some potential growth material growth drivers like the open cashing solution, the dynamic ad insertion. -- that we can start to drive that growth up upward in a longer-term fiscal '24, fiscal '25, but it gets quite a high bar from the Entra growth to try to match that.

[Jim Byrne, analyst]

Maybe just remind us, like on your productive capacity today of getting product out the door. What are the governors on that growth? Is it inventory? Is it supply chain? Is it people? Is it space, floor space, just maybe just walk us through some of the capacity constraints.

[Sumit Kumar, executive]

And by and large, definitely, it has the supply chain that you see that we've been aggressive in going after that. We've been successful to in driving the kind of growth rates we have year-over-year and quarter-over-quarter even to where we're at this new level at $76.2 million in the second quarter. But we are, like we said, investing in the inventory that's based on great visibility from our customers and to their forecast and keeping great cognition of where the supply chain sits today. Some of our core silica that we use still has very extended lead times as we stand today. So we need to manage for that. And I think that's the major factors that we control the materials flow in the right direction. Labor capacity floor space wise, we feel pretty confident there. We've got the facility in Saskatchewan. I don't think -- we're not going to put out a percentage utilization basis, but suffice it to say that we've got a lot of room to grow in that facility. And on an incremental basis, getting the labor we need there, we've been quite effective with that and we feel like we can linearize that growth in labor as necessary as we continue to grow. And then, of course, we're using some contract manufacturers that are the Tier 1 rural lady type contract manufacturers, and they have, of course, as you might imagine, tremendous scale capacity available to them. So we're just looking at going incremental as we continue to grow there. So outside of the material factors that we're continuing to watch. We feel quite confident our capability to continue growing on a capacity basis.

[Jim Byrne, analyst]

And then maybe just lastly, you mentioned on the interest side, a big driver in this quarter was the fiber access. Maybe just help us understand. Is that 1 or 2 customers kind of placing some large orders, getting success at the door that has been backlogged -- maybe just help us understand some of that fiber drive.

[Sumit Kumar, executive]

[Inaudible] has been a fantastic movement for us. Multiple customers there, multiple Tier 1 customers there. And of course, the catalyst that's happening now is that we're seeing a lot of fiber expansion, fiber-to-the-home expansion activity, particularly in the U.S. There's a lot of government funding at work. There's a lot of emphasis on curing the digital divide and covering underserved areas that weren't covered with broadband before, and we're pleased to see that our set of customers are being very responsive to that and doing a fantastic job of expanding availability of broadband and leveraging fiber and making the most of that funding. So there are some, by their nature. We have some major Tier at customers that are a big factor at our fiber access, but it is distributed across several customers.

[Operator]

Our next question is from Jesse Pytlak with Cormark Securities.

[Jesse Pytlak, analyst]

Just coming back to kind of the major Tier 1s in the cable and fiber access business. Can you just maybe give us a sense on how they're facing their deployments that you signed? Are they all now ramping or some just beginning to ramp? And are they all under expansion? Or just kind of any sense we can give on how they're all progressing.

[Sumit Kumar, executive]

For some of the majors, we have a little bit of a spectrum there that we're seeing. And of course, in calendar '22, we were all contending with supply chain in parallel. So that was a factor that we can ignore. But we have -- as we hit the second half of calendar '22, some of them that were further along in their pipeline of deployed with plans have progressed and will continue to. Others are ramping up as we see today and they haven't gotten to a full kind of quarterly pace of deployment by [Inaudible]. So we see this combined ongoing growth that those that have started earlier and have reached some scale considering that they ramped in the second half of calendar '22, we'll see them continue to go at a fast pace, and we see others wrapping up.

[Jesse Pytlak, analyst]

And then just in terms of backlog, I know you guys are hosting to give a formal figure, but can you maybe just comment on the sequential performance and maybe the level of forward visibility that you're seeing?

[Sumit Kumar, executive]

So we've never directly published that, as you know, and we still don't plan to. And as we know, the conditions do shift, and we've observed that again with the supply chain, the lead times, the macro factors that I'm sure everyone is very familiar with. So again, I won't be getting too specific on it today, but stay more towards some of the color aspects that I've tried to offer before. So suffice it to say that the backlog does remain very significant, substantial, of course, enough to give us some really high confidence in our growth plans. Is that when you couple that further with some more recent customer engagement activity and progress of some of your continued DAA programs, incremental deployments, we think that the fact that we've been so successful with the supply chain management and delivery of the growth and by that token, -- we've also filled lots of orders and strongly supported those customers where other vendors made out a bit able to. So we've naturally had some of the backlog retire, and that's a very great thing for us. So order of magnitude, you continue to think about it as multiple quarters of backlog at the current top line run rate. And another important factor is the services, the support and maintenance, while those may not be on that yet they are very recurring in nature. And on a run rate basis, that also is something that you can say is in a sense backlog, we expect those contracts to continuously renew and that will add to the scope of the backlog. So multiple quarters.

[Jesse Pytlak, analyst]

And then maybe just lastly on the CVS business, kind of understanding some of the comments made earlier. Is there anything that you can do to kind of accelerate your customers and kind of shift back to focusing on expanding their IPTV deployment? Or is it just kind of waiting for them to kind of realize that they need to do this? Or are there any technical issues that committee to slow them down? Or can you just help us think through this a bit more?

[Sumit Kumar, executive]

I think -- and it ties a little bit to some of the strategic conversations we've had since ever since we acquired the CDS business for carriers there's this interplay of broadband and IPTV that reflected on it a bit in the sense that we had a lot of focus on broadband during the padded that perhaps delayed some of the IPTV. But one thing we've been saying on the broadband is there's tremendous competition for capacity and speeds amongst our customers and their competitors. And one thing that IPTV, of course, can do is relieve a significant amount of capacity that hasn't been made free and made available for broadband. So there is that interrelationship, and we think as it relates to broadband and freeing up capacity, everything that has always been part and parcel of moving to the IPTV fabric is something that can be a tailwind to the catalyst to their expansion activity. Of course, IPTV services are much better. They're streaming. Everything is on demand, all those recordings are in the cloud. I think investors are going to be very familiar with how streaming IPTV works relative to the old world of legacy set-top box, QAM-based video that is also taking up a lot of capacity. So we just think operators have always recognized this. We just need to see the timing of their focused land back here.

[Operator]

[Operator Instructions] Our next question is from Dave Kang with B. Riley Securities.

[Dave Kang, analyst]

Nice quarter. Just a quick question on the supply chain situation. You've quantified the impact on your margins 2 to 3 points. Just wondering if you can quantify how much of your revenue was unfulfilled because of component shortages?

[Sumit Kumar, executive]

You know that I don't have that number at hand. I will say that certainly, we made a lot of progress in Q1 and Q2. So we felt quite positive about our capability to fulfill orders. And very importantly, when our customers are making these large programs, labor, construction associated with rolling out new access networks. We always want to stay ahead of their requirements at their planting and the labor they have to build out these networks. And we've done that. So I wouldn't say that we've been influenced too much on the top line in our second quarter with the supply chain limitations. We got very well ahead of it and on track, and we feel comfortable with that. And I also would say there weren't any if we get down into customer-by-customer, product-by-product.

[Dave Kang, analyst]

And then your product lead times, are they still straight when they stretched? Or are they starting to compress because if they're still stretched, and I assume that your backlog may not decline as some other companies are reporting.

[Sumit Kumar, executive]

It's a little bit of a mix of both. Certainly, customers have a sense of things and optimism that things will improve. So there -- and they're also in the process of working calendar year budgets and whatnot. So they're in process on providing more long-term visibility to us. So that's a factor. But as we sit today, while some components have pulled back, I would still say that we see an extended state on the majority of them. And as it relates specifically to some of the core silicon, we use the forms of quite a high proportion of our bond. We are seeing still as we sit here today, quite extended lead times. So we need to work in that context. Our customers need to work in that context until things in a material way, improve and particularly improve for that core silicon.

[Dave Kang, analyst]

And my last question is, cohering about this virtual CTS that some of your kind of how will that impact your DAA business?

[Sumit Kumar, executive]

We've always maintained this view that we are going to build any architecture that supports our customers require. But you see that we have more [Indiscernible]. We are more MAC-PHY, of course, contain a software-based MAC that we, of course, invented with virtualized MAC on Gainspeed did, of course, back in the day. So that capability and flexibility has always been built into our products, ecosystem. What's important is that customers are -- have consensus are driving up their DAA deployments in the first place. And we have this agnostic nature in our portfolio where whether it's roof, which some customers continue to prefer or Remote PHY with a B Corp, we can fulfill any of those needs. And as it relates to our capability in B Corp, I'm not going to say where we're at today in terms of specificity on product offering, but that's very, very well within our capability.

[Operator]

As there appear to be no further questions, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.