Vecima Networks Inc

TSX:VCM

Earnings Call Transcript 2018-Q4

[Operator]

Hello. This is Chorus Call operator. Welcome to Vecima Networks Fourth Quarter and Year-End Fiscal 2018 Results Conference Call and Webcast. [Operator Instructions] And the conference is being recorded. [Operator Instructions]Presenting today on behalf of Vecima Networks are Sumit Kumar, President and CEO; and John Hanna, CFO. Today's call will begin with executive commentary on Vecima's financial and operational performance for the fourth quarter and year-end fiscal 2018 results. Lastly, the call will finish with a question-and-answer period for analysts and institutional investors. The press release announcing the company's fourth quarter and year-end fiscal 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 audited consolidated financial statements and accompanying notes for the 3 and 12 months ended June 30, 2018, which are available on Vecima's website at www.vecima.com.Certain statements in this conference call and webcast may constitute forward-looking statements within the company of applicable securities law. 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 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 27, 2018. A copy of which will be available at www.sedar.com.In addition, although the forward-looking statements in this earnings call are based on what management believes are reasonable assumptions, such assumptions may prove to be incorrect. Consequently, attendees should not place undue reliance on such forward-looking statements. In addition, these forward-looking statements relate to the date on which they are made. Vecima disclaims any intention or obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. At this time, I would like to turn the conference over to Mr. Kumar to proceed with his remarks. Please go ahead.

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

Thank you, and good morning, everyone. Fiscal 2018 was a year of broad strategic development for Vecima as we continue to lay the foundation for our future growth. We achieved important milestones on our Entra development pathway. We also completed the Concurrent acquisition, which positioned us in the fast-growing IP video universe and generated strong performance in the second half.Financially, we achieved full year consolidated revenue of $78.1 million. That was 9% higher than a year ago and reflects the positive impact of the Content Delivery business. Our gross margin increased to 54% from 52%, reflecting a higher margin product mix. We also generated strong adjusted EBITDA of $14.5 million, which is right in line with our expectations. And I'm pleased to report that our cash balance remained strong at $57.7 million. This is after financing the Concurrent acquisition with cash totaling $37.4 million and continue to invest heavily in new product development.In our Video and Broadband Solutions segment, we remain tightly focused on bringing our new Entra products to market. As most of you are aware, the cable industry is preparing for the seismic shift to DOCSIS 3.1 Distributed Access Architecture. It's an essential transformation that will enable cable operators to compete in the new gigabit Internet speed environment. Our distributed access node is the heart of our solution and provides the modular platform for deployment of multiple access technologies. By year's end, our Remote PHY version of this node have entered numerous customer labs, was shortlisted by 2 Tier 1s and inter-preliminary evaluation of a third Tier 1 MSO.Our strategy has been to provide a truly interoperable Distributed Access Architecture node to our customers, and we're succeeding. We have achieved interoperability with several of the top tier CCAP core vendors, and we've also demonstrated this to our customers. This is important because interoperability for these customers from being tied to a single vendor that may encounter technical challenges or resulting on unfavorable business terms. We've also continued to demonstrate our technical agility as we keep pace with our customers' evolving needs. I believe we're positioned very strategically for this large and emerging market.Looking at our progress on other Entra family of products. We completed our initial release over Entra Access Switch for both DAA, distributed access aggregation; and business services use cases. And trials have been initiated at multiple locations by a large cable operator.We've also made progress with our Entra Legacy QAM Adapter, which provides video services on customers' existing Edge QAM infrastructure within a Distributed Access Architecture, and we completed additional customer lab demos of this product with a number of MSO customers during the year. 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 the DAA phase of DOCSIS 3.1 represents.In our new Content Delivery and Storage segment, the highlight of the year was acquiring the asset with the Concurrent business and following up with a smooth integration and ramp-up. Our Content Delivery solutions allow service providers and content owners to build and manage private, hybrid or public cloud CDNs to store, transform, secure and deliver their content. Importantly, our portfolio addresses those needs right now, and that's creating a lot of momentum. Sales in Q3 and Q4 were 11% and 14% higher than what the Concurrent operations achieved in the same period last year. And by year-end, we were deploying IPTV and OTT or Internet services at numerous customers worldwide. During the same period, we released 3 new version upgrades for Aquari Storage, Laguna Cache and Zephyr Origin aimed at enhancing the viewer experience and increasing revenue for our customers. We also completed a significant feature enhancement to Laguna Cache for one of our Tier 1 MSO customers. We expect the deployment of this upgrade to have a positive impact this fiscal year. Overall, it was a great start for our new operations, and we see continued momentum for our Content Delivery and Storage business heading into fiscal 2019.I'll come back to tell you more about that in just a few minutes, but first, I'm going to ask John to review our fourth quarter results with you. 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 fourth 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 our results include the addition of the Concurrent business, which we brought onboard midway through the year. As a result, all comparisons will reflect Content Delivery and Storage numbers in the current quarter and current year and not in prior year.Starting with consolidated sales. For the 3 months ended June 30, 2018, we generated sales of $24.3 million. This was up 66% from $14.6 million in the same quarter last year and a 1% increase from the $24.1 million in Q3 fiscal 2018. The addition of the Content Delivery and Storage operations accounted for most of this increase.In the Video and Broadband Solutions segment, we generated fourth quarter sales of $11.1 million. This was down 18% from $13.5 million in the same period last year and 9% as compared to $12.2 million in Q3 fiscal 2018.In our Terrace product family, sales increased 24% to $7.9 million in the fourth quarter, 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 $2.2 million decreased in line with our expectations.In our Content Delivery and Storage business, momentum continue to build with sales growing to $12.0 million in the fourth quarter. This was up 14% from sales of $10.5 million in the third quarter of fiscal 2018. Revenues in the segment were split with $8.9 million in product sales and $3.1 million in services.Turning to our Telematics segment. Sales in the first quarter increased to $1.3 million, up 13% from $1.2 million last year but down just lightly from $1.4 million in Q3 fiscal 2018. Looking at Vecima's business as a whole, which achieved a consolidated gross margin of 54.5% in the fourth quarter, which compares favorably to 51% in both the same period last year and in Q3 fiscal 2018. Our strong gross margin performance in the quarter was aided by the 60% contribution from the Content Delivery and Storage segment but was partially offset by a lower margin in the Video and Broadband Solutions segment.The various components of operating expenses, namely R&D, sales and marketing and G&A, were all higher in the period due to our acquisition. Excluding the Content Delivery and Storage expenses, the notable year-over-year changes in Q4 OpEx were as follows: R&D was down $0.5 million, due largely to higher deferrals and lower prototyping costs offset by increased subcontracting costs as we continue to invest in the development of our new products; sales and marketing was up by $0.2 million due to -- largely to higher allowances for obsolete finished goods inventory; and G&A was up $0.1 million due to acquisition costs related to Concurrent.Total OpEx on a sequential quarterly basis from Q3 to Q4 in this fiscal year was essentially flat at $12.6 million. Operating income increased to $0.7 million in the fourth quarter of fiscal 2018 from an operating loss of $0.7 million last year. This increase was due to the operating results of our acquisition of Concurrent. Our net income from continuing operations also increased for Q4 of fiscal 2018 to $0.7 million or $0.03 per share. This compares to a net loss of $0.1 million or $0.01 per share in Q4 last year.Turning to our balance sheet. We ended the quarter with cash and short-term investments of $57.7 million. Our working capital decreased to $77.4 million at quarter-end from $110.5 million at June 30, 2017, reflecting the decrease in cash related to the acquisition of the assets of Concurrent.Finally, cash flow from operations, excluding noncash working capital, was $2.3 million compared to $0.9 million in the same period last year. Overall, we're very pleased with the continued positive outcomes from our Concurrent acquisition, and the Q4 results were consistent with our expectations.Now back to Sumit.

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

Thank you, John. Looking ahead to fiscal 2019. In our Video and Broadband Solution segment, we expect to see a continuation of transition dynamics as the industry prepares for DOCSIS 3.1 Distributed Access Architecture. While we could see some initial revenue from Entra sales as early as end of calendar '18, any amount will likely be modest.The volume phase isn't here yet, and until the MSOs finalize their rollout plans, it remains difficult to predict timing. In the meantime, we're continuing the lab trials and expect these to lead the formal trials in calendar 2019.Looking at some of our other product lines in the Video and Broadband Solutions segment. We're anticipating continued deployment of our TC600E products as one of our Tier 1 customers completes their all-digital conversion, and we're making excellent progress in development of our new Terrace IQ products, which we're working on with 2 Tier 1 customers. Terrace IQ is the next generation of our Terrace and Terrace QAM families and provides an entirely new suite of commercial video platforms that work within an IPTV framework. Field trials have also been underway on our Terrace DVB platform with a European MSO, with whom we have completed the supply agreement. These are promising new opportunities that, over time, should help to offset the decline in legacy product sales.Turning to our Content Delivery and Storage segment. Our outlook remains very positive. We're seeing a real buildup to a wide IPTV market that can support services like time-shift TV, streaming and cloud DVR. Our products broadly address this market, and we intend to capitalize on our strong customer relationships in this sector. Over the coming year, we'll continue to deploy our Content Delivery and Storage systems to customers in the U.S., Europe and APAC to meet the growing demand. A significant feature enhancement to the Laguna Cache is also expected to continue driving strong order flow. So we're looking at a year of continued growth for our Content Delivery and Storage operations.And as we move into fiscal 2019, I want to mention again that Vecima is now strongly positioned at the forefront of the 2 most significant market developments driving the cable industry, the move to gigabit Internet and the rapid growth of IP video. Our focus will be on pursuing the significant opportunities in both sectors while also leveraging the complementary nature of these 2 businesses to provide benefits to our shared customers. We have the technical and financial strength to continue pursuing our technology road map, and we have both the customer relationships and the track record to translate those technologies into profitable growth. We're very excited about our future.That concludes our formal comments for today. We'd now be happy to take questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Todd Coupland with CIBC.

[Todd Adair Coupland]

I just wanted to get set up for thinking about the model. So I'm going to ask you a couple of margin and OpEx questions, and then I'll talk about the trials. So just firstly, on gross margin. It's been taking up a little bit better mix. I guess the acquisition, et cetera. What -- how should we think about that into 2019?

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

Sure. So we did in the fourth quarter, as you saw, the higher Content Delivery segment revenues and higher margins thereof. And that created an opportunity for some uplift, as we saw. Where we're seeing the trends overall in the business for this coming fiscal year considering the mix, what we've done in operations and whatnot in terms of headcount, our best view right now is that we could plan to average in that 50% to 54% range during the year. And that accounts for all of those factors, the top line product mix, FX and where we situate our headcount.

[Todd Adair Coupland]

Okay. And when you think about gross margin once some of these new products start to ramp up, if I'm not mistaken, it's a little bit more competitive. I think you've thought that it might be maybe not as favorable from gross margin, but the dollars will be higher. Is that still the thinking on that? So what might that look like in a year or 2 if you're successful in converting trials to commercial ramps?

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

So I think there's a bit of a divide between Content Delivery and Video and Broadband. That's going to be something to note there as we scale up into distributed access within Video and Broadband. We may very well expect that earlier margins could be consistent with current levels but with the volume that's being looked at for the large-scale distributed access deployment, particularly with Entra-like node. We do anticipate that growth on that line is going to drift downwards. But as we've stated, our OpEx relative to that business is already at a peak level. So we'd anticipate contribution margin to the -- EBITDA margin to the bottom line to be very healthy thereof. In Content Delivery, very software-focused market with various components of software, so we do anticipate continuation of these higher margins as part of the mix there.

[Todd Adair Coupland]

Okay. And when you say drift down, do they -- does it stay in the 50s? Or does it get into -- deep into the 40s?

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

No, I think that once we're in volume with distributed access, then we're going to move quickly to the 40s and potentially lower with some asset scale going on there. So that's a spot of comfort for us, and it is consistent with how we see the market playing out. There are opportunities within the overall market when we consider variance between Remote PHY and MAC-PHY access switch and some of the related products we have now in our portfolio to have higher margin mix within that. But this scale market of millions of Remote PHY node. It is going to drift quickly to 40 and potentially lower.

[Todd Adair Coupland]

I mean that -- given where the trials are, that's unlikely in fiscal '19. Is that the right way to think about that?

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

That's correct.

[Todd Adair Coupland]

Okay. Okay. Sounds good. And then what -- you mentioned OpEx at peak. So should we hold OpEx at that current quarterly run rate as we think about '19?

[John Hanna, Chief Financial Officer]

Yes, Todd, I think would be looking at the Q3, Q4 with Content Delivery and Storage folded in as being pretty representative of the next couple of quarters. And perhaps, in the second half of the year, we may say -- see in the small hundreds of thousands increase each quarter in the sales and marketing expense as we're pushing further into the market with DAA.

[Todd Adair Coupland]

Okay. Sounds good. And is there anything else to note as we think about '19 in terms of other items, tax rate, et cetera? Should that change at all? Or should it be in the current zone?

[John Hanna, Chief Financial Officer]

So I'd start maybe with total R&D expenditure. I would say both that and the levels of deferrals should be consistent with what we've seen recently in Q3, Q4. So that kind of carries forward for the next few quarters. On the...

[Todd Adair Coupland]

Capitalized items, you mean?

[John Hanna, Chief Financial Officer]

Yes, both the total expenditure and the amounts that are hitting the P&L and capitalized items should be reflective of what we've seen in the last 2 quarters. Wouldn't have you change that too much. And then in terms of an effective tax rate on a blended basis with Concurrent for the full year, we'd be looking somewhere about 27.9%, so up a couple of points from what we have been.

[Todd Adair Coupland]

Okay. That sounds good. And then I noticed in your press release, you talked about Entra being still in lab trials. So I guess it's got to move into the field before commercial ramps. So how are you thinking about timing field trials before commercial? How are you thinking about timing now?

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

Yes. So again, talking about some of the things I've spoken about before, look at the cadence with any operator, Tier 1 or 3 alike, there's that sequence of events leading up to that formal field trial, where, first, you have this marketing and architectural type conversation. You plan to intercept their specific requirements with your road map, and then you go ahead and do software development and any hardware variance to align with what the requirements are. Hardware submitted into informal lab testing in the middle of that development process, and that carries on for some time. New software drops were delivered along the way. So there could be some iteration through that process. But once that narrows, you move to this formal lab call, qualification cycle, we're headed in that direction. And after that's approved, you anticipate that operators are going to formal kind of voluminous field trials with their chosen set of shortlist of vendors as they're building up towards a near end deployment. So in our view, we're in the midst of that various points of that cycle with many different MSOs. Field trials are being put on the drawing board, and we anticipate that of these 3 kind of big Tier 1s that we're very focused on that we want to get into the field, with one of them within fiscal '19.

[Todd Adair Coupland]

Okay. Sorry, one into field trial in fiscal '19 or one into deployment?

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

It's potentially both. The field trial, that mid-year point would be our target spot there and then deployment later in the fiscal year. Like I said, we view the formal field trial as on a path towards deployment at a given operator, and that the deployment is going to flow shortly after that. And it's -- our target is at least one of those big 3. We need to remain nimble with all 3, and there is still potential to go to the field with more than that one.

[Todd Adair Coupland]

And have you been shortlisted at any of those 3 up until now? Or do you still have to go through that?

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

So we have been shortlisted in formal RFP processes with 2 of those 3. The third has been somewhat unique in how they're approaching the market. I would say they're a bit earlier in that cadence I laid out of informal to formal, still looking at different options and where things may land for their actual access network upgrade. And so that, in our view, places it a bit of further outward in time. But the other 2 have been quite formal with things, and we are shortlisted with those 2.

[Todd Adair Coupland]

And does the shortlist mean you'll be a supplier? Or just a question of are you first, second or third? Or do you still need to actually get selected for field and deployment?

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

So I think in the truer sense of the world, shortlist means a 12 to potentially 14 vendors having various options or product that you have emerged as a smaller set that have been down selected as going into the formal process towards trials and potential deployment. I'd still anticipate the larger operators are going to divide the market amongst 2 to 3, potentially 4 vendors. But it's not a foregone conclusion when you're shortlisted that you are going to emerge as in the deployment. It's just that you are moving forward in the process and are still vying for the opportunity to be one of those top 2 or 3.

[Todd Adair Coupland]

Okay. And then just sort of last question. So you've have gone through these iterations with the software. You're now showing off the hardware in a formal way. What is your competitive edge? How do you think about your competitive edge? And how has that emerged relative to the other players?

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

Yes. I think one thing that I've highlighted time and time again is that we're interoperability first focused, and we view that as a very important need in the marketplace. We are in the core vendor today, and we are very responsive in the sense that we tackle several different interops with CCAP cores. That plays into the whole model that's being sought by the operators to decouple the core from the node. And we, in some ways, stand apart and having that node independence and our proven interoperability with several different vendors' cores. And then in pursuing that advantage, the node has been designed with software in terms of its modularity and whatnot that we're very flexible in terms of iteration and whatnot, and we've demonstrated that rapid refinement that's allowed us toward this wide-reaching interoperability. I think that, that overall gives us a good standing in terms of the view of how flexible that node ends up being. I think coming also from where we are as a smaller player and a new entrant that we also speak to the kind of price point dynamics, cost versus benefit ratio. We think we have a good opportunity to come at it from where we are and hit the targets very well for that. There's all of these things, and those 2 stand out, and yes.

[Todd Adair Coupland]

Does -- fixed 5G by Verizon, does it pressure the MSOs that you're going faster here at all? Or is this independent?

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

I think there's a very loose coupling there. It does add a new fixed broadband wireless alternative that starts to have some merit from the subscriber level. I don't think that in the foreseeable future, we're going to see it arrive at a place where you can start to match some of the capacity and connectivity speeds and what broadband speeds at even first generation DOCSIS 3.1 will offer, let alone full duplex with 10 down, 5 up gig per second-type speeds. And there's a lot of work to be done likewise for 5G to get deployed and scaled.

[Todd Adair Coupland]

And that's fair. I mean Verizon is competitively pressured to try and come up with an offering, so like I understand what they're doing, and I take your point as well in terms of the speeds. Okay. That's all I had. That's really helpful. Appreciate the color.

[Operator]

Our next question comes from David Kwan with PI Financial.

[David Kwan, Technology Analyst]

Just to clarify, I guess, Sumit, on the trial, field trials and the like and the RFP process. Just given full duplex, which has, I think, come into the radar screen a lot quicker than many had expected. I think the RFP processes you said in the past were, I guess, related kind to kind of the first generation products. But with full duplex, I think you've talked about needing to requalify potentially, I guess, with some of these customers. Can you talk about where you are at this point, I guess, with the full duplex and then also where you guys are in terms of your own offering?

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

Sure. So in terms of those 3 Tier 1s that we've been highlighting, what we're observing is that one of them in particular is highly focused on the transition to full duplex and driving the time line as expeditiously as they can given the view that they're going to have one of the largest global-wide deployments of distributed access, and it only makes good economic sense to deploy the final hardware solution moving towards full duplex. With that said, the original Gen 1 deployment scenario with that operator and many others is much further delayed in time than initially anticipated, so that's going to pressure down to move in some way on Generation 1 irrespective of full duplex. Other 2 operators have somewhat of a different view. I think there's consensus that, that full duplex will be very important in the long term at every operator, but they're being a bit more pragmatic in the sense that they need to move now and are comfortable with potentially generation 1 in the short term non-full duplex. We've also enabled various upgrade paths. I think we spoke about this last quarter between board upgrade in the first instance, going from Gen 1 to full duplex and then very quickly going to -- once the chips arrive a full duplex-ready hardware variant, that would be kind of flick of a switch on software upgrade from non- to full duplex. It's -- the -- one of the key elements is availability of the silicon. I've talked about that, on the most advanced time lines being within calendar '18. We think that's a little bit optimistic at this point. We think first chips in early calendar '19 is more likely. We've been progressing development in the sense of -- as far as we can before having the chips and doing architectural and design work for the boards, but we need to take a fast path to adopting those chips. And then with respect to software, there's a significant amount of the work that we've already done improvement in the first generation that it cruise to the full-duplex generation, so there's only incremental in the sense of software. In terms of RFP, our view is that of the operator, the Tier 1, that is highly focused on full duplex. It's true that we will be entering another re-up on the fall process, but our understanding is that the current set of vendors are being -- it's not as freshly open as the original RFP was. They've done and netted a lot of investment in the original set of vendors in terms of qualifying them, so that gives you an advantage in terms of the full duplex generation RFP there.

[David Kwan, Technology Analyst]

And for the other 2, I guess at this point, it's maybe a little bit too early days to figure out whether they're going to, I guess, rerun the RFP process, or I guess one of them, the other one, I guess, the one or the other 2 that has done RFP process?

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

Yes, yes. The one that has done the RFP is -- full duplex is not in the landscape yet. And the other one has been, like I've said, informal to this point. But we do believe that as they formalize the current view is that they may formalize around the current generation depending on timing. That could lead to some consideration of full duplex as they get to the point where full duplex hardware is the standard, which is, of course, going to be later next calendar year.

[David Kwan, Technology Analyst]

Okay. And just in terms of the work that you're obviously doing ahead of the silicon being available. But assuming it's available early calendar '19, like how long do you think it would take to get it stuffed into the -- available for the labs?

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

I think that we're on a fast-track time line. Like I said, we've done a fairly heavy amount of work preparing for that set of chips. There are significant changes in the technology in full duplex. And it's not only full duplex capability. There's second-generation-type advancements in the silicon even as it relates to non-full duplex mode that are important. So there has to be a fair amount of work done. Once those chips dropped, we'll be ready for them with hardware and boards. We'll have to bring out those boards, and then we'll have to port this off, where we'll then start proving out the feature sets that are unique to generation 2 amongst the full duplex and several other features that are coming. I think that, that's going to be, relatively speaking, the shortest cycle than we had in generation 1, particularly because we have so much software that's accruing to the next generation. However, in it of itself, it is a significant effort. I'm not prepared to get into exactly when that's going to come out as [ asinine ] yet. It's very important competitively to keep that to ourselves. So I'll just give you that color.

[David Kwan, Technology Analyst]

Okay. Moving back on the Terrace side. So I guess one of your -- one of the key customers that's been kind of ramped -- finished up their digital conversion, obviously, soft and good revenues coming in this quarter, I think, primarily from them. Still expectations this quarter probably will be pretty decent and tailing off in, I guess, Q2 of fiscal '19?

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

Yes, I think that overall for Terrace, as we've highlighted on the color side between the lead and the 2 other Tier 1s, we have the lead, and network fill in. They've been absorbing inventory. There might be some resurgence there within the year, but they're on a fast-track towards moving to the next-gen platform in Terrace IQ. The second one, which you just spoke of, the one that's completing their conversion now, we're kind of thinking they're 70%, 85%. They are in the midst of a network format upgrade going towards MPEG4. That creates some opportunity for density so -- and incremental units within property so we think that has an extension effect on the all-digital conversion process with them that will help to keep things flowing for some time. And then the third Tier 1 has been a network fill-in for some time. We talked recently about them moving towards channel density increase by new box on site, each site type of approach. That's gravitating more again towards the next-generation platform, which natively offers a step function in density and feature sets. So that places the timing a bit further out, but the size of the opportunity is more interesting with that other Tier 1 in terms of moving to the IQ.

[David Kwan, Technology Analyst]

And have you seen any of the other, I guess, 2 Tier 1s taking a look at that? Or is that something that's further down the road and it's really just really your lead customer?

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

Yes. So we have the 3 Tier 1s. We're talking about the lead and the 2 others. The lead is definitely on a path towards Terrace IQ, and the third Tier 1 is also now on a path towards Terrace IQ.

[David Kwan, Technology Analyst]

Can you talk about maybe the revenue opportunity relative to, I guess, what you've seen maybe with Terrace? Is it stumbling in the ballpark? Or is it larger, smaller?

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

Yes. I think overall, the way we're looking at it, we're at a different point in time. It's been a decade of Terrace family deployments. Some 25,000 properties domestically deployed with -- between Terrace and Terrace QAM. Our view is actually quite positive in the overall landscape that I've been talking a lot about in the context of content delivery that MSO networks are moving to type ETV gradually in several steps. That will mean that it's quite important. Once that happens in the larger network context that the commercial property are likewise outfitted to ingest from that same network. We've also -- given that we're 10 years from the inception of the Terrace program with some of the leading operators, we're at a point where technology has advanced, channel density, I've talked about increasing with the Terrace IQ generation, feature sets, flexibility whether we're going analog, HD, MPEG-4 or MPEG-2. All these things are vastly different in the Terrace IQ generation. So overall, that TAM could look interesting relative to the historical 25,000 properties we've deployed. So it creates a very exciting new kind of market cycle for your commercial video for Vecima once we move over to the new platform.

[David Kwan, Technology Analyst]

And just the last question here. It seems like the integration with Concurrent has gone well. Can you maybe talk about your plans for future acquisitions, especially maybe some larger ones? Do you feel comfortable taking someone like a Concurrent-size acquisition on now? Or is that something you maybe wait for another couple of quarters?

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

That last part, taking someone like Concurrent, where? Oh, taking a Concurrent-size acquisition on. Yes, I think we've had a good integration process. We're very happy with the performance. It's very in line with our view of the overall trends in that business and their penetration into the service providers with newer technologies for IPTV. That's all consistent with our thesis, and we're feeling great about that. We've -- we're kind of 2 quarters deep as we're reporting, 3 quarters in time with Concurrent. We're still of a mind that we're going to continue forward with the 2 very important segments between Content Delivery and Video and Broadband and everything we're doing in Entra. That's going to keep us quite focused. I do think that opportunism in M&A is always a factor for us in terms of scaling up in technology, our customers, our products. It's always something that we would look at. It would probably be more relative to these 2 large segments for us than trying to go in, in any different direction. So it's a bit of a period where we're open, but we're focused on these 2 things, first and foremost.

[David Kwan, Technology Analyst]

Do you feel that you've got a good grasp on Concurrent, you could take on another sizable acquisition in the near term if the opportunity arose?

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

I think we've got a very strong team there. We've got a very strong structure. It's driven by the good performance we've had in the first couple of quarters out of the gate. So that gives us comfort that whenever there's M&A, there's always that risk of integration woes and troubles. And we're certainly on the opposite side from that, and everything is going so smoothly that, that creates more comfort with going further and levering up.

[Operator]

Our next question comes [ Olee Preygau ], a private investor.

[Unknown Shareholder]

I'd like to know about NAFTA. If that does not continue with Canada included, how might it affect Vecima?

[John Hanna, Chief Financial Officer]

Olee, it's John. I would say there are certainly some uncertainties around trade policies, and we've been monitoring them. I'd say as we stand here at this point in time, we're finding that our supply chain are working their locations and routing up supply to try and be able to service the Canadian market without too much impact, and so we are monitoring things week-to-week. But at this point, I think what we know we're comfortable that there is little to no impact, but we have to continue to monitor to things as they arise.

[Unknown Shareholder]

And another thing. Where do you see the growth rate in Concurrent, like revenue growth compared to like DOCSIS 3.1? What is your rate on Vecima?

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

Yes, I think the way we're observing Concurrent is that it's on a path of growth. In the short term, the way we see things playing out with the opportunity is that if you took the trailing 12 months and went after 10% thereof, that would be a reasonable target for us. It is a growth market in its own right, moving to IPTV between the content delivery, the transcoding, the storage, broadcast service providers and whatnot. So we could see that growth rate start to lever up. We're rather focused on the first few years, maintaining a modest growth rate in that 10% sense.

[Operator]

We have time for one more question. [Operator Instructions] There are no more questions at this time. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.