Vecima Networks Inc

TSX:VCM

Earnings Call Transcript 2018-Q3

[Operator]

Hello. This is a Chorus Call conference operator. Welcome to Vecima Networks Third Quarter Fiscal Year 2018 Results Conference Call and Webcast. [Operator Instructions]Presenting today on behalf of Vecima Networks are Sumit Kumar, President and CEO; and John Hanna, CFO. [Operator Instructions]The press release announcing the company's third quarter fiscal year 2018 results as well as detailed supplemental investor information are posted on Vecima's website at www.vecima.com under the Investors heading. The highlights provided in this call should be understood in conjunction with the company's unaudited, condensed, interim consolidated financial statements and accompanying notes for the 3 and 9 months ended March 31, 2018, which are 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 statements of historical fact are forward-looking statements. These statements include, but are not limited to, statements regarding management's intentions, belief or current expectations with respect to market and general economic conditions, future sales and revenue expectations, future costs and operating performance. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict and/or are beyond our control. A number of important factors could cause actual outcomes and results to differ materially from those expressed in these forward-looking statements. These factors include, but are not limited to, the current significant general economic uncertainty and credit and financial market volatility, and the distinctive characteristics of Vecima's operations and industry and customer demand that may have 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 will be available at www.sedar.com. In addition, although the forward-looking statements in these earnings calls are based on what management believes are reasonable assumptions, such assumptions may prove to be incorrect. Consequently, attendees should not place undue reliance on such forward-looking statements. In addition, these forward-looking statements relate to the date on which they are made. Vecima disclaims any intention or obligation to update or revise 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. The third quarter was a period of significant momentum for Vecima, as we continued to lay the foundation for our future growth. We achieved important milestones on our Entra development pathway, and we generated strong results from our new Content Delivery and Storage segment, as we brought the Concurrent acquisition on board. Financially, the third quarter consolidated results were in line with our plan and continue to reflect the transition that's underway in our business and our industry. Revenues grew 54% to $24.1 million year-over-year, with that growth being primarily driven by strong results from our new Concurrent business. We also generated adjusted EBITDA of $3.8 million, which was in line with our plan. I'm pleased to report that even in the midst of a transition year, our cash balance remains strong. In fact, it strengthened quarter-over-quarter to $64.1 million. I'd like to remind investors that in December, we financed the Concurrent acquisition with cash totaling $37.5 million. We continue to have a very strong financial position from which to fund our future growth and development, including continued development of our promising new Entra family of products. Entra is a 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 solutions and provides the modular platform for deployment of multiple access technologies. During the third quarter, our Remote PHY version of the Entra node was shortlisted by another leading Tier 1 U.S. MSO. That now brings to 3, the number of major cable operators that have downselected Entra as they move towards deployment. We also made further progress on interoperability testing with CCAP core vendors. Importantly, we demonstrated this directly to Tier 1 MSOs that are getting closer to the volume phase of deployment and have a strong need for a highly interoperable solution. This was strongly reinforced by having Vecima's Remote PHY access nodes situated at multiple customer labs for integration and vendor qualification. We had existing lab installs exiting Q2 and added more in Q3. Interoperability remains a critical need to the MSOs for the volume-distributed access rollout because it ensures that they're not tied in to a single vendor that may encounter technical challenges or result in unfavorable business terms.Even though interoperability is the ultimate goal, sheerly out of necessity some noninteroperable early deployment will likely occur before the volume deployment phase. Vecima remains focused and is demonstrably progressing towards providing a truly interoperable DAA node. Looking at our progress on other Entra family products, we completed our initial Distributed Access Architecture release of the Entra Access Switch and initiated further customer trials of this product. We also completed additional customer lab demonstrations with a number of MSO customers for our Entra Legacy QAM Adapter. This platform provides a clean, simple and cost-effective solution for providing video services on our customers' existing Edge QAM infrastructure within a Distributed Access Architecture. Overall, we're very pleased with our progress on our Entra platforms. And all indicators continue to confirm the size and scope of the market opportunity that DOCSIS 3.1 represents. They also confirm Vecima's own position as a highly regarded vendor in this large and upcoming (sic) [ up-and-coming ] new market. This is a major opportunity for Vecima, and we are very well-positioned. The other major highlight for Vecima this past quarter was completing the integration and first full quarter of operations of Concurrent. Concurrent is our new IP video Content Delivery and Storage business. We also -- we closed that transaction on December 31, and results from our first 3 months of operations demonstrated the strong momentum the business is achieving. Our new operations from the acquisition generated strong sales in Q3, up 14.3% from what Concurrent achieved in the same period last year and 4.5% higher on a sequential quarterly basis. A number of deployments to large MSOs helped drive this growth. We initiated sales of Concurrent platforms to large U.S. Tier 2 MSO for end-to-end IPTV services during the quarter. This is highly significant in that it incorporates all of main screen and mobile device viewing for broadcast, on-demand and cloud DVR video services using our IPTV platforms. In other words, it's exactly the type of forward-looking IPTV deployment at a significant service provider that represents a large growth market for Vecima. Capturing that market is key to our strategy in acquiring Concurrent. Also in Q3, a Tier 1 MSO in the APAC region stepped up orders of the Zephyr Transcode and Laguna Cache CDM platforms along with corresponding software upgrades. We see this momentum in the Concurrent business continuing, and I'll tell you more about that in our outlook. But the point I want to emphasize is that the cable industry needs to deliver increasing content over an IP framework and Concurrent's IP-oriented video technologies are addressing this need right now. This is driving strong results for our new Content Delivery and Storage segment. In summary, Q3 was a good quarter for Vecima where we made significant progress on our long-term strategy tied to 2 very important markets.And at this point, I'll ask John to review our financial results with you in more detail. John?

[John Hanna, Chief Financial Officer]

Thank you, Sumit. For the purposes of this call, we assume that everyone has seen the news release and financial statements for the fiscal 2018 third quarter that are posted on Vecima's website. I'll present the relevant numbers in discussions around overall results, market segments, operational expenses and the balance sheet. I'll start by reminding everyone that this is the first quarter that we're reporting with the addition of the Concurrent business. As a result, all comparisons will reflect Concurrent numbers in the current quarter and current year and not in the prior year. Starting with consolidated sales. For the 3 months ended March 31, 2018, we generated sales of $24.1 million. This was up 54% from $15.7 million in the same quarter last year and a 64% increase from the $14.8 million in Q2 fiscal 2018. In the Video and Broadband Solutions segment, third quarter sales of $12.2 million were down 14% from $14.3 million in the same period last year, and down 9% as compared to the $13.4 million achieved in Q2 fiscal 2018. In our Terrace product family, sales increased almost 80% to $8.7 million from the third quarter of fiscal 2017 and increased 2% on a sequential quarterly basis, reflecting continued strong purchasing activity for the TC600E by a Tier 1 MSO as part of their continued network-wide all-digital conversion.Terrace QAM sales of $2.7 million decreased in line with our expectations, as the lead MSO customer has been drawing down inventory since its significant purchases of new platforms in the first half of fiscal 2017. In our Content Delivery and Storage business, we achieved sales of $10.5 million for the third quarter of fiscal 2018. This is the first quarter of operations for this segment. Revenues in the segment were split, with $7.2 million in product sales and $3.3 million in services. Turning to our Telematics segment. Sales in the third quarter remained steady at $1.4 million, on par with $1.4 million achieved a year ago and in Q2 fiscal 2018. Looking at Vecima's business as a whole, we achieved a consolidated gross margin of 51% in the third quarter, down slightly from the 52% for the same period last year and in Q2 fiscal 2018. In the quarter, the overall gross margin was aided by the 57% contribution from Content Delivery and Storage, which was offset by a lower margin in the Video and Broadband Solutions. Overall, we expect gross margin to remain in the 50% to 54% range in Q4. The various components of operating expenses -- R&D, sales and marketing and G&A -- were all higher in the period due to our acquisition. Excluding the Concurrent expenses, the notable changes in OpEx from Q3 in the prior year were in R&D, up by $0.5 million due largely to increased subcontracting costs as we continue to invest in the development of our new products; sales and marketing, up by $0.3 million due to higher allowances for obsolete finished goods inventory; and G&A was up $0.1 million due to acquisition costs related to the Concurrent acquisition. Again, excluding the Concurrent expenses, the notable changes in OpEx from Q2 to Q3 in this fiscal year were R&D, up by $0.1 million due largely to increase subcontracting costs; sales and marketing, up by $0.6 million due primarily to higher allowances for obsolete finished goods inventory; and G&A was flat to Q2 fiscal 2018. Operating loss for the third quarter of fiscal 2018 was $0.2 million as compared to operating income of $1.4 million last year, a decrease driven by lower sales and gross profit in the current year quarter and increased operating expenses. Our net income from continuing operations for Q3 fiscal 2018 was $0.7 million, or $0.03 per share. This compares to $1.0 million or $0.05 per share in Q3 last year. Turning to our balance sheet, we ended the quarter with cash and short-term investments of $64.1 million. Our working capital decreased to $80.0 million at quarter-end from $83.7 million at December 31, 2017, largely reflecting higher deferred revenue and accounts payable balances at March 31. Finally, cash flow from operations excluding noncash working capital was down slightly this quarter at $3.7 million, compared to $3.8 million in the same period last year. Overall, we're very pleased with the outcomes from our Concurrent acquisition, and Q3 results were consistent with our expectations. Now back to Sumit.

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

Thank you, John. Let me reiterate why we're so confident about Vecima's future opportunities. Vecima is positioned at the forefront of 2 of the most significant evolutions driving the service provider industry, the move to gigabit internet and the rapid growth of IP video. These 2 opportunities are closely interrelated in that IP video is the underlying pressure point that's forcing the scale-up in internet access speeds we're seeing today. And as broadband internet access speeds up even more, IP video services will flow over the network. Vecima and Concurrent's products combine to address these needs. In fact, we're positioned to be a leading solution provider for both markets. So what's our outlook going forward? In our Video Broadband Solutions segment, we continue to view fiscal 2018 as a transition year, as the North American cable industry prepares for the new DOCSIS 3.1 standard. While we could see initial deployments of Entra platforms beginning as early as the end of calendar 2018, most MSOs are still continuing to refine their upgrade rollout plans and exact timing remains difficult to predict. At the same time, we expect demand from legacy products will continue to taper off as market saturation is reached and customers prepare for next-generation products and technology. That said, I should note that there are some near-term opportunities within our legacy portfolio. As John noted, demand for our TC600E product was strong in Q3 with one of our Tier 1 MSOs, and we expect continued deployment with that operator with an all-digital conversion. We also see further sales potential at a second Tier 1 MSO for the TC600E as part of an upcoming new deployment to increase channel density. We're also making good progress on our Terrace DVB platform in Europe where field trials are underway with a Tier 1 MSO. Meanwhile, we're working through a new master purchase agreement with this European Tier 1. There are also 2 significant opportunities in commercial and residential cable video that we progressed in Q3. First is the potential deal with a large Tier 1 U.S. MSO to provide a virtualized version of DVAP, which if closed, represents a potential for greater than $10 million in license revenue within fiscal '19 subject to contract timing. Next, and I've spoken of this before, we're also working with a major Tier 1 U.S. MSO to crystallize an entirely new suite of commercial video platforms that work within an IPTV framework. This could lead to both new incremental commercial property deployments together with upgrades of our large deployed base of Terrace and Terrace QAM platforms at this Tier 1.Turning to our Content Delivery and Storage segment, our outlook for Concurrent remains very positive. We expect sales momentum to continue to build in Q4 as we deploy our content delivery network and storage systems to customers in the U.S., Europe and APAC. We've also recently completed significant feature enhancements to the Laguna Cache solution for a large U.S. Tier 1 MSO customer. This is expected to add to the strong order flow in Q4. To tell you just a little more about Laguna Cache, this is a software-defined content delivery platform that enables service providers to deliver content quickly, easily and seamlessly regardless of their customer's device or location. We recently showcased Laguna Cache at the 2018 NAB Show a few weeks ago, and it was honored with NewBay Media's Best of Show Award. We were evaluated by a panel of engineers and industry experts and selected as the winner based on criteria including innovation, feature set, cost efficiency and performance. In summary, 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. Our new Concurrent operations are performing strongly, and our momentum is continuing to build. That concludes our formal comments for today.We'd now be happy to take questions. Operator?

[Operator]

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

[David Christopher Kwan, Technology Analyst]

So Sumit, I think you -- when you were talking as it relates to Entra, I think you got 3 Tier 1 MSOs now that you've been shortlisted for? Is that correct?

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

That's correct.

[David Christopher Kwan, Technology Analyst]

And can you comment on the total number then, so including guys that are Tier 2, Tier 3 guys?

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

Yes, as far as that total number again, David, that's not something I'm getting into much further detail at right now, but like I said, across the 5 platforms we're working on, the reach for these trials -- upcoming trials, the new trials, and [ RFPs ] and what not is very broad, and it's beyond these major 3 Tier 1s that we've talked about directly. So our momentum there is building fast. And what else I want to say is that we're very focused on this small number of big and important customers today, rather than looking to spread ourselves too thin, and that's critical to our strategy.

[David Christopher Kwan, Technology Analyst]

Is it fair to say that those Tier 1 MSOs are North America -- in North America?

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

Yes.

[David Christopher Kwan, Technology Analyst]

And can you say I guess how many lab trials you're in right now across all tiers?

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

Again, that's something I'm not quantifying across all tiers. It is more than the 3 Tier 1s.

[David Christopher Kwan, Technology Analyst]

Okay. Okay. Any color on when we could start to see stuff getting out to the -- for field trials?

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

So we've talked quite a bit about the different factors at work here and this buildup to the market between interoperability, looking at the impact of full duplex and thus the share workload of building up towards this deployment and we've been taking these successive steps with each of these 3 Tier 1s, building momentum across the board there. With that said, this timing scenario is still a challenging situation to pinpoint for us. Towards the -- later in the calendar year '18, the recent short list that we announced today is one that's moving relatively fast, and that's one of the targets we have for getting in towards trials this year.

[David Christopher Kwan, Technology Analyst]

Okay. Okay, I guess, moving on to full duplex. Can you comment, I guess, where you guys are on the product development front? Just wondering when you could start to see the first product available to get [ into the lab ].

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

Right. So full duplex as a whole is a very broad development that needs to happen in the industry and Vecima too. What I've talked about before is that part of the reason we're -- operators are looking at targeting full duplex for the volume deployment rollout is that the silicon and the chips are starting to emerge this calendar year '18, and that's very critical also to being able to deliver product. So we see some of those chips starting to come later this calendar year. And Vecima is going to be on a fast path of adoption there for sure. But beyond the chips for full duplex, there's sort of just a few other things to keep in mind. What we've done with the first generation Remote PHY, we talked a lot about demonstrating turn-by-turn successive interoperability with the CCAP core vendors. That software all accrues towards the second generation as well, as well as a lot of the qualification in the labs that we're doing with these MSOs. So that work is banking towards Gen 2. What we need to do is just be on a fast path for the full duplex chips to get hardware design going in parallel, adopt them quickly, and there is of course some incremental software that needs to get done once you have your first full duplex hardware out of the development. So and then there is a -- another layer industrywise that's quite important, in that when you're dealing with full duplex in terms of echo cancellation, that's a very new and important science in terms of getting upstream speeds up to 5 or 10 gigabits per second. There needs to be some characterization work done in parallel in the field, to look at real-world performance within the cable physical network and the TAPs and all that, that's all behind the nodes, looking how the modems self-interfere and whatnot, and that needs to go on in parallel. So generally speaking, if you're looking at chips later this year, adopting those chips for their software, it's a characterization process, then getting to labs, so we tend to view commercial products for both duplex generation 2 nodes from any vendor timing out in about a year away from today.

[David Christopher Kwan, Technology Analyst]

I guess, if we get something available for customers or get it into the labs, like could that happen by year-end or maybe early next year?

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

I think it's -- based on one of the critical gates on the chipset, I think that's a very optimistic target to get stuff into the labs end of the year. It is possible. But we think it's fairly optimistic.

[David Christopher Kwan, Technology Analyst]

For you guys, I guess, are you maybe expecting Q1, maybe Q2 next year?

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

Calendar year, yes.

[David Christopher Kwan, Technology Analyst]

Yes, and stuff that we're just hearing out of the industry. A lot of I guess at least the Tier 1 MSOs are looking for FDX solutions that are easily upgraded through software as opposed to having to replace these boxes out in the field. Is that something that you guys are focused on as well, I guess?

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

Very much so. And we're looking at it in several different ways. Until the silicon comes and you have your first FDX-capable hardware, you're looking at deploying Gen 1 and you want to make -- and we have designed an easy path for effectively a board upgrade from Gen 1 to Gen 2 very seamlessly -- as much as it can be when you touch any hardware. So that's kind of the Phase 1 to this. And then the next step is getting that full duplex-ready hardware qualified as soon as you can, and qualifying it in non-full-duplex operation mode and then, in parallel, proving that full duplex capability will work and then setting up for a later software, flick-of-the-switch over to full duplex.

[David Christopher Kwan, Technology Analyst]

You've been shortlisted for 3 Tier 1 MSOs for kind of Gen 1. Is the release of the full duplex, does that mean that you're going to get shortlisted for that? Or do you have to requalify? Can you talk about that process?

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

Yes, so a bit TBD in some ways for a couple of these Tier 1s. We do believe that depending on timing and when they're issuing new RFPs, if they are, that then we have to re-up. But others are suggesting that it continues based on the set of vendors that they've looked at for Gen 1. So we're going to have to play into that process that they follow. With that said, I think our momentum in pulling through these downselections and shortlists on the Gen 1 should continue in the sense that all of the advantages that we were able to crystallize into been downselected are in play for Gen 2.

[David Christopher Kwan, Technology Analyst]

Back to time line, I guess. [indiscernible] from, I guess, initial RFPs, if that's the way [ these ] MSO go to commercial deployment, should be probably shorter than what we've seen so far for Gen 1?

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

I think that's the hope in the industry, that there's this desire to not do the node touch twice and meanwhile you get -- you're finally getting to the point -- the tail end of calendar '18 where any generation of DAA is deployable. So I don't think they're going to go through this long buildup for full duplex that they have in Gen 1.

[David Christopher Kwan, Technology Analyst]

Moving on to Terrace and TQ. Can you maybe talk about your expectations, maybe looking more out into fiscal '19, it sounds like one of your Tier 1 MSO customers is still continuing to buy and that there's another opportunity in there. But just trying to get an understanding of what the revenue profile could look like.

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

Yes, sure. So generally speaking, things are materializing pretty much the way that we have been anticipating for this overall transition underway for us. On the Terrace side, like I've talked about before, we've been tending to break things down by providing color on 3 of these Tier 1 customer engagements for that family. In Q3, we saw a slight sequential increase in total family sales for Terrace due to that combination of those 3 Tier 1s. Starting with the lead, I think they're continuing to progress in network fill-in, once again with both the Terrace and Terrace QAM families being core to the commercial video services today. And they're continuing to use up inventory [ that fits on top of a few of those SKUs ], and then the 1 SKU [indiscernible], it's -- there's an ongoing, rolling forecast for that platform. So the overall today, that lead MSO's driving a relatively small proportion of our Terrace family sales. Plus their deployment activity out at the end customer side is quite strong and a runway -- run rate type of scenario at the commercial property. So that's going to pull that inventory down quarter by quarter. And another one of the good parts about that is, like I have alluded to before, we're working toward this new platform, this new market cycle with these IPTV-oriented commercial video platforms. And that sets us up to transition those ongoing run rate deployments over to the new platform if the timing aligns. But it also -- the upside part of that is that looking towards the [ swapout ] program for this very large deployed base of commercial properties with current generation platforms of Terrace and TQ. So that's very attractive for us and gives us a nice addressable market for that lead. The other 2 Tier 1's active on Terrace family with the TC600E, the first one's carrying out aggressive all-digital conversion using the Terrace, major driver of sales again in Q3 and we think they're approaching in the ballpark of maybe 70%, 75% completion, all digital. So we'll continue to see that activity for some time. But eventually, they'll approach a tail off into network fill in, potentially within calendar '18. Then the final Tier 1, that was an MSO that completed their all-digital conversion some time ago, it's been buying relatively light quantities and network fill-in to this point. But they're working towards an entirely new program to increase channel counts at their deployed base of commercial properties. So you can think about that like another-box-per-site approach that they're going to take, so the timing and budget there is difficult to predict, but the plan is cemented for them with the 600E. So we could see activity as early as within the next 6 months or it could move later in calendar '18 and into calendar '19 depending on when they unlock the capital budget. So I think that gives you a good sense of the broader picture on the Terrace side.

[David Christopher Kwan, Technology Analyst]

That's great, Sumit. So for that last one, like why would they need to add another box?

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

So I think what's happening there is they're continuously making these changes to the lineups on the network feed for the video side, and the capacity for HD is a bit different than it may have been for standard def because -- of the performance in the CPUs and whatnot. So they're both kind of increasing their service offering in terms of number of channels they're offering and tackling that conversion to HD feed at the same time. So it's kind of created this definitive need for them to go and add channels -- add boxes effectively at all of their sites.

[David Christopher Kwan, Technology Analyst]

Do you see the other 2 MSOs possibly looking at this even on a more selective basis?

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

I think with the lead again, they're looking at channel density increases in the context of the next-generation platform. We are working in the requirements there to look at material scale increases and channel counts and of course cost efficiency and whatnot in parallel that has achieved through new technology. So that's how they are looking at it. And at the other one, the other Tier 1 that's still in all digital, so I think -- no thinking has gone behind going higher on density yet.

[David Christopher Kwan, Technology Analyst]

Okay. And when do you -- in terms of, I guess, availability for an IPTV commercial platform. Can you talk about timing of when that could get rolled out and when we could start to see commercial orders and just the overall revenue opportunity that may be relative to what we have for Terrace and Terrace QAM?

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

Yes, Vecima has kind of seen this need to move over to the IP framework in commercial video for quite some time. So to that end, we've been working towards designing this solution in terms of the requirements, and how we would look at the boards and the processors and whatnot, for some time. With customers and the final requirements, all of that activity has been going on for some time. There is of course a significant development to get done, and you got that usual trajectory of contract and lab trials and field trials. So all that said, I think we're getting final conclusion towards a contract and then moving into development, we could start to see somewhere in calendar '19 that we could move over to the trial side on that. In terms of overall opportunity, I've said, at various times at this point, we shipped over 25,000 commercial platforms between Terrace and Terrace QAM. All of those are addressable in the long term, to switch over to this new framework.

[David Christopher Kwan, Technology Analyst]

Would the price points be similar?

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

I think like I said, we're also driving channel density increases, cost efficiency increases so I think there is going to be movement in price points and we'll highlight more as we get closer. It's not going to be orders of magnitude or anything like that, but you have a sense of where Terrace versus Terrace QAM priced out, and we're consistent with that, by and large. More channels, similar pricing.

[David Christopher Kwan, Technology Analyst]

And when you talk about trials in '19 that's calendar '19?

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

Yes.

[David Christopher Kwan, Technology Analyst]

On Concurrent, can you maybe comment about any successes you've had in terms of cross-selling to date and maybe whether you've seen maybe a benefit just from, I guess, more stable ownership, customers having more clarity and certainty as to where the business is going?

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

I didn't quite catch the last point, stable ownership and clarity...

[David Christopher Kwan, Technology Analyst]

Yes, just I guess -- there was a business -- I don't know to what extent customers knew that it was up for sale, but just having better certainty and clarity as to the longer term viability of the business?

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

Yes, I think customers, some were aware and some kind of became aware after we announced things and we went through a very planned and orchestrated process of communicating with each and every one of those customers at Concurrent and explaining the strategy, explaining the vision, explaining Vecima's commitment. And I think any time there is change involved that is a challenge, but we've worked through it and moved it towards a positive directionality on what the larger entity can offer to them. So that's gone well. We're only again 1 quarter into running things and there are opportunities for [ code ] selling and broadening emerging. Europe is a strong focus area to leverage what we have with Concurrent, between customers that they're engaged with today as well as their presence that we see pulling through towards Terrace DVB and of course Entra. So we're underway there. It's very early.

[Operator]

The next question is from Todd Coupland of CIBC.

[Todd Adair Coupland]

I just want to ask a couple of quick questions here. First on Entra. So it sounds like there is momentum building with the shortlisting that's going on. Can you just characterize whether you've moved into any primary possibilities as a supplier?

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

To become primary supplier?

[Todd Adair Coupland]

Yes.

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

So I think one of the things I've talked about off and on in the past is that most Tier 1s having the experience they have in DOCSIS are looking to have more than 2 vendors, definitely more than 1 vendor into their deployment to allow them to have some choice. And that's I think in part why we've talked about interoperability so much is that we are an independent node by definition. We don't develop a CCAP core and we push interoperability with all manners of CCAP cores from the competitors today and that's been very resonant with the MSOs in terms of what they're after. So moving to primary, that's certainly in our view, but we are happy to get into that context where we're number 2 or number 3.

[Todd Adair Coupland]

Okay. And just remind us, like I know you've talked about it in the past, but just as a bit of an update. So once this gets rolling, roughly how long does it take to deploy? And what do you see the TAM over that 2-, 3-year period or whatever it is?

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

For sure. So yes. I wish I could say it was a 2- to 3-year period, Todd. But I know from experience and from what's being planned here that it's going to be a very long market. And it's going to be a decade-long type of market.

[Todd Adair Coupland]

So you see it as a 10-year upgrade cycle.

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

Yes, I do, particularly once you're considering what full duplex does and all of these things so you have to [ say fiber quite deep ] in that scenario. So that's, by its nature, going to take time. I always throw out the $1-billion-plus annual market, that's true, it's always been true. One other figure in there is looking at the worldwide node counts. We think that's going to exceed 3 million nodes worldwide. Between remote PHY, MAC-PHY, [ bokingside ], all of these different flavors. So very -- ongoing large market, that continues to be the case. And today it's...

[Todd Adair Coupland]

But once it gets rolling, so 10 years up-and-down in terms of the cycle. But what -- how long would it take to sort of peak?

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

I think our peak situation has been adjusting, but I'd say peak would probably be in year 3, 4, 5, in that ballpark. So obviously just in the middle of the full cycle.

[Todd Adair Coupland]

And do you know enough with you getting selected where you basically -- you are now going to be 1 of 1, 2 or 3? And anyone else is sort of like out of the running? Do you have that much information yet, or does that still have to work its way through?

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

I think it still has to be worked through. What I'd say is that our visibility from these Tier 1s is that, of the 12 competitors vying in these processes, that we're certainly one of the top 4. They only have the bandwidth to qualify 3 or 4 vendors. So some vendors are already out of the running. But I can't say today whether we're going to emerge 1, 2 or 3.

[Todd Adair Coupland]

And what has been your edge in the product that puts you in the top 4 out of 12 that are trying?

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

I think our flexibility, agility has been critical. I keep harping on interoperability, that's been very resonant with MSOs, that we're independent in that sense. We are new to the party compared to incumbents. We don't have a core and our dedication to the program in terms of -- when you compare to competitors that are on the surface, are very large. But on the other hand, when you think about engineering, dedication to this program, to the node, we think Vecima is leading in that sense. And that is demonstrated by the velocity that we've shown this interoperability with our remote PHY node that we're -- and this is in the context where software is in flux on the core side, that we've demonstrated we're taking off these cores for interoperability in parallel with the software changing on those cores. So these are things that are working to our advantage.

[Todd Adair Coupland]

And when you say dedication to the node, can actually measure -- would you are -- I know you've talked about this in other parts of your product family. But with a lot of equipment vendors basically facing maturity and fighting for, I imagine, development dollars within larger organizations because the market's been going through upheaval. Can you measure it in terms of either dollars you've invested or number of engineers or the scale of your program versus whatever the sizes are internally? So you have the top 2 or 3 in terms of those kinds of numbers? Is that how you've gotten there?

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

I think that data in terms of our competitors is very hard to get there. So that's color commentary you hear off and on from customers. On our end, I -- pretty much -- I really don't want to break out what our resource commitment is. It's very large, very large.

[Todd Adair Coupland]

Right. And you've always had a very collaborative approach to product development, so.

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

Yes.

[Todd Adair Coupland]

[indiscernible] giving you good looks on where to put those considerable resources, is the way I'm reading it.

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

Yes, that's -- as you know, Todd, our kind of core competency is being -- doing agile development together with our customers.

[Todd Adair Coupland]

Okay, that's good. I mean -- so I'll just ask one question on timing. You got asked a few of those already. It still feels like it's a little bit in flux in terms of figuring some of these things out. So over the next several quarters, you hope for it to start, but it's hard to pinpoint at this point.

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

Yes, that remains the case. And what we're frankly most concerned about is making progress at these Tier 1s. That's critical, and we're doing that.

[Todd Adair Coupland]

Fair enough. And then just on the OpEx. So what, 12 8 in the quarter, I guess, is that a reasonable sort of run rate level to live with for the foreseeable future until some of these new products start to kick in?

[John Hanna, Chief Financial Officer]

Yes, I think I'd take it up a little closer to 13, maybe a touch over, a little bit more R&D anticipated. And in the sales and marketing area we have backfilled some vacancies that will appear in next quarter, and in Q4 a little bit of tradeshow and expenses that'll take it up about a couple of hundred thousand, and G&A I would say flattish to where we were in the quarter.

[Todd Adair Coupland]

And then is there -- are there any capitalized items or CapEx levels we should be thinking about now with the new run rate?

[John Hanna, Chief Financial Officer]

Yes, I guess, we're guiding towards the fiscal at around $2 million. Don't have anything too precise for you, but I think what we would expect with Concurrent in, is that range will probably tick up a little bit in fiscal '19 so -- I'd give you a wide range, but it would be sort of $2 million to $3 million. Can guide you going forward as we go through our budgeting, but it's not going to dramatically change it, just may be up a few hundred thousand dollars.

[Todd Adair Coupland]

Sorry, that's total annual CapEx in the $2 million to $3 million range?

[John Hanna, Chief Financial Officer]

Correct.

[Todd Adair Coupland]

And what about sort of capitalized R&D? Or would that be captured there?

[John Hanna, Chief Financial Officer]

No, that would be separate. And so if we look at Q3 of our almost $8 million in R&D expenditures, call it $4.4 million of that was capitalized. That's probably sort of a reasonable run rate estimate at this point.

[Todd Adair Coupland]

Okay. So roughly half the R&D spend is being capitalized?

[John Hanna, Chief Financial Officer]

Correct.

[Todd Adair Coupland]

And does the tax rate change at all with Concurrent now?

[John Hanna, Chief Financial Officer]

It will. You'll see that there are taxes payable of nearly $180,000. That's related to our subsidiary in Asia-Pacific and it -- under IFRS is an estimate for the full year, so we really don't expect to be substantially cash-taxable with the addition of Concurrent, and on kind of the core Vecima business, still have considerable tax assets to offset any taxable -- cash taxes payable. So don't expect anything there.

[Todd Adair Coupland]

For this year. And is that for the foreseeable future?

[John Hanna, Chief Financial Officer]

Yes, multi years, I would say at this point.

[Operator]

There are no more questions at this time. This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.