Sandvine Corp's (SNVNF) CEO Dave Caputo on Q2 2016 Results - Earnings Call Transcript

| About: Sandvine Corp. (SNVNF)

Sandvine Corp. (OTC:SNVNF) Q2 2016 Results Earnings Conference Call July 7, 2016 8:30 AM ET

Executives

Richard Wadsworth - Director, Corporate Communications

Dave Caputo - Co Founder, President, Chief Executive Officer, Director

Scott Hamilton - Chief Financial Officer & Director

Analysts

Daniel Chan - TD Securities

Robert Young - Canaccord Genuity

Maher Yaghi - Desjardins

Paul Steep - Scotia Capital

Gus Papageorgiou - Macquarie

Richard Tse - Cormark Securities

Deepak Kaushal - GMP Securities

Kris Thompson - National Bank Financial

Todd Coupland - CIBC

Operator

Welcome to Sandvine's Investor Conference Call. My name is Paulette and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

Certain information presented in this presentation by management of Sandvine that is not historical factual information may constitute forward-looking information within the meaning of securities laws. Actual results could differ materially from the conclusion, forecast, or projection contained in such forward-looking information. Certain material factors or assumptions were also applied in drawing a conclusion or making a forecast or projection as reflected in such forward-looking information.

Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecasts, or projections in the forward-looking information and details regarding the material factors or assumptions that were applied in drawing such conclusion or making such forecasts or projections are contained in the company's Annual Information Form and in other filings made by the company with applicable securities regulators from time to time, all of which are available through SEDAR at www.sedar.com.

I will now turn the call over to Rick Wadsworth. Mr. Wadsworth, you may begin.

Richard Wadsworth

Thanks, operator. Hello and welcome to Sandvine's second quarter 2016 results conference call. During the call, we will walk through a slide presentation that you can download from the Investor Relations section of our website sandvine.com. For those of you following along, we're currently on slide 2. We'll let you know when to change slides. On the call today are Dave Caputo, President and Chief Executive Officer; and Scott Hamilton, our Chief Financial Officer.

Sandvine reports financial results under International Financial Reporting Standards or IFRS. During the call, Sandvine will refer to certain non-IFRS financial measures such as EBITDA and EBITDA per share which represent net income and related per share amounts excluding interest, taxes, depreciation, and amortization. A reconciliation of IFRS to non-IFRS results is included in today's news release, the presentation accompanying today's call, and in the company's management discussion and analysis which we had filed on SEDAR.

Management uses these non-IFRS measures to evaluate the performance of Sandvine's business, and accordingly believes that they may be useful to investors. I'll now turn the call over to Dave for some introductory remarks.

Dave Caputo

Thanks, Rick. We’re on slide 3. Sandvine achieved record second quarter revenue of $33.5 million, representing an increase of 17% compared to the same quarter last year. We achieved this strong result without any customers representing 10% or more of revenue, despite that we announced two significant deals in the quarter, a $3 million in expansion orders from a wireless operator in CALA, Caribbean and Latin America and a $4 million from a North American Satellite data services operator. Both orders included our market leading 100 gigabit ethernet policy traffic switch, our PTS 32000 so we are pleased to see that momentum continue.

As we have highlighted previously the PTS 32000 remains far and away the best performing 100 gigabit ethernet network policy control platform available in terms of throughput per watt and per rack units, metrics that matter in the real world.

EBITDA was $7 million in the quarter or 21% of revenue and grew 60% compared to $4.4 million in Q2 last year. Revenue growth outpaced increase in operating expenses related to our investment in our sales team made largely in the second half of 2015. We are pleased to have been profitable for 15 consecutive quarters, a significant differentiator between Sandvine and some of our competition.

We won an impressive 20 new customers during Q2, the vast majority of which were wireless or converged network operators. We’ve already won more new customers in 2016 than we did for all of last year.

I’ll now ask Scott to review Q2 results in more detail.

Scott Hamilton

Thanks, Dave. I'll remind investors that Sandvine reports its financial results in U.S. dollars. Slide 4. Revenue for the second quarter was $33.5 million, up 17% compared to Q2 of 2015. Product revenue was 66% of revenue and service revenue was 34% of the total.

30% of our revenue came from North America, 29% from EMEA, 21% from CALA and 20% from AsiaPac. The wireless market contributed 68% of revenue. The DSL market 16% and the cable market contributed 15%. Our reseller partners fulfilled 51% of total revenue for the quarter and 49% came through the direct sales channel.

Slide 5. As Dave mentioned despite some significant orders in the quarter no customer represented 10% or more other revenue for the period. We remain pleased by the diversification of our customer base.

Slide 6. Our blended gross margin in the quarter was 74%, slightly below 75% reported in Q2 of 2015. The margin in the quarter would have been 2% higher for an -- one time inventory provision related to an older hardware platform. We continue to target a 70% plus blended gross margin.

Total Operating expenses in the quarter were $19.6 million, up 8% compared to Q2 of 2015 largely as a result of higher sales and marketing expenses, which is consistent with the additions to our sales team that we made in 2015, which was largely in the second half of the year. We expect these investments and the sales team to translate to higher revenue and earnings in future periods as we have experienced in 2016.

EBITDA in Q2 2016 was $7 million or $4.08 per diluted share and grew 60% from $4.4 million or $2.08 per share in Q2 of 2015.

Cash and investments at the end of Q2 was $151.3 million, up $6 million from $145.3 million at the end of fiscal 2015. The increase is primarily due to $28.2 million generated by operating activities, partially offset by $12 million used for common share repurchases, $3.8 million used for the payment of the first and second quarter dividends, $3.5 million used to acquire Teclo, $2.2 million used for purchasing capital assets and $1.2 million used to purchase shares under the company share unit plan.

During the three and six months ended May 31, 2016 the company repurchased 3.9 million and 5.4 million shares respectively under NCIB. Since quarter end, we have purchased an additional 1 million shares for a total cost of $2.1 million or CAD 2.7 million. Our current NCIB expires in October 2016.

Bookings in the quarter were slightly below revenue for the period. Year-to-date we have grown revenue 11% and EBITDA decreased by 1% due to a one time gain on the sale of an investment in a private company in Q1 of 2015 for $2.8 million. Absent this, EBITDA in 2016 would have grown 19%.

Slide 7. Sandvine announced today a quarterly dividend of CAD 0.0175 per common share. The dividend is payable on August 8th to shareholders of record as of the close of business on July 20th.

With respect to the Patent Infringement Claim, on June 29th, we filed an amended answer to the Packet Intelligence complaint. Our amended answer focuses on two key areas arising from the due diligence we have completed over the last two months. First we believe we have uncovered evidence that supports the technology in question was embedded or included within a product called Meterflow that was on sale in the United States more than a year before the provisional applications for the patents were filed. If proven, the implication of this is that the patents were improperly granted and should be revoked.

Surprisingly, during our due diligence we have come across evidence to suggest that during the course of the patent application process, there were steps taken to mislead or deceive the patent office with respect to the timing of when the technology was commercially available in the U.S. As such we have requested an equitable conduct remedy that if granted would potentially resolve and award fees against the Plaintiff and possibly their attorneys. If you’d like a copy of our amended answer please reach out to Rick.

Lastly, the Plaintiff is due to file the specifics around their infringement contentions by July 14th. As on all of our previous calls we caution investors that due to the nature of our business we continue to expect significant variability in quarterly results. This variability may manifest itself in many ways including but not limited to the product mix, geographical concentration, market segment concentration, sales channel mix and customer concentration that we may report in any given quarter, most notably it may result in significant variation and reported revenue in gross margin on a quarter to quarter basis.

I'll now return the call to Dave.

Dave Caputo

Thanks, Scott. Slide 8. We outlined six growth strategies for you at the beginning of the year. They were: one, to continue to extend our lead in our traditional areas of strength, subscriber services, business intelligence and traffic optimization; two, to take advantage of the leadership position of our PTS 32000 in the 100-gigabit Ethernet upgrade cycle; three, to further enhance our cyber security offerings; four, to gain traction in business services with our fully virtualized cloud services policy controller; five, to take advantage of the current PCRF, or policy server upgrade cycle; and six, to look at acquisitions that could accelerate growth.

I'm pleased that we made progress on all of these strategies so far this year. During Q2 alone, we announced innovative deployments around the globe that together take advantage of Sandvine’s PCRF, our subscriber services business intelligence and traffic optimization solution sets in both traditional and virtual models.

Some of those announcements are that Eastlink, Canada’s largest family owned and operated telecommunications provider deployed Sandvine’s PCRF to guarantee a high quality of experience for its voice-over-LTE deployment, TextNow is an innovative Waterloo based mobile, virtual network operator that is using our virtual series products to enable new, low cost subscriber services in the U.S. market, GTT is a mobile operator that is using Sandvine to enable three basic internet services including more than 20 essential websites to the people of Guyana, SITAONAIR is a satellite services operator in Switzerland that is using Sandvine to manage traffic for dozens of airlines, thousands of planes and their passengers, TWT is a DSL operator in Italy that is using Sanvine’s fair share traffic management solution to deliver high quality network services and improve the internet quality of experience for their wholesale and business internet customer, Paratus Telecom is a mobile operator in Namibia that selected Sanvine’s PCRF to enable a diverse set of subscriber services on their newly launched LTE network.

I like to thank all of our public reference customers for letting us discuss these types of successes. We are very fortunate to have their support. As these deployments demonstrate, we continue to advance our global lead in enabling service innovation for subscribers. On a related note, in Q2 we published our Best Practises White paper for implementing innovative subscriber services plans using zero rating and sponsored data for markets that have rules around network neutrality. From Sandvine’s standpoint network neutrality and service innovation are highly compatible and we discuss how to achieve both in this new White paper.

While unannounced in the quarter I am happy to report that we have a number of initial customers for our enhance cyber security offering which integrated Symantec’s threat feeds. We have also received initial orders for our TCP Accelerator product which we acquired from Teclo and we are seeing a good pipeline developing there.

We recently released a global internet phenomena report focussing on Latin America and North America highlighting the slight decline in Netflix's traffic on North American fixed network due to Netflix’s new and coding optimizations. It also showed how Facebook and Google now account for over 70% of total mobile traffic in Latin America. Many observers have noted how the current discussion of network neutrality largely ignores the influence that major content and application providers have on networks and data like this could help inform that aspect of the debate.

Finally and significantly at our AGM in April, we added two new Directors to its Board, Gemma Toner, a former Senior Vice President at Cablevision, and Osama Arafat, the former CEO of Q9 Networks. We welcome their considerable experience to the Sandvine team. I’d like to thank everybody on team Sandvine for their efforts in the second quarter.

Operator, we’ll now take questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. [Operator Instructions] And our first question comes from Daniel Chan from TD Securities. Please go ahead.

Daniel Chan

Great, good morning guys.

Dave Caputo

Hi, Daniel.

Daniel Chan

About a third -- revenue comes from EMEA, can you tell us how much of that is Europe and U.K. specifically and what impact do you think Brexit will have on your sales?

Scott Hamilton

So we haven’t broken it out by each of the various jurisdictions, but that would be the Europe, Middle East and Africa. From a U.K. perspective not a great deal of our revenue is and it comes from the U.K. we have maybe four or five customers in the U.K. there certainly there no customer in the U.K. has ever been a 10% plus customer of ours. Sorry, the U.K. as a whole has never represented more than 10% of our revenue, that’s one of the disclosures that we would provide in our financial statements and the U.K. just never been a geography that has contributed that much.

Dave Caputo

And maybe I’ll just add. Although they might be separating from the EU, I don’t think they will disconnect from the Internet.

Daniel Chan

Okay. Fair enough. And then just to build on that, what is the FX impact from the British Pound and Euro?

Scott Hamilton

Very minimum, roughly single digit percentages of our cash OpEx is in GBP, so the decline that we have seen against the U.S. dollar over the last couple of weeks, I don’t expect that to have a material impact on our OpEx.

Daniel Chan

Okay, great. Thank you.

Dave Caputo

Thanks, Dan.

Operator

Our next question comes from Robert Young from Canaccord Genuity. Please go ahead.

Robert Young

Hi, good morning. Can you hear me, okay.

Dave Caputo

Hey, Rob.

Robert Young

Great. I want to dig in -- I’d like to dig into the source of these new customer wins, 20 this quarter, 22 last quarter, a lot of wireless in there. And that’s a sizeable percentage of the total customer base, the way I understand it and so I really like to understand why you are getting so many new customers all of a sudden are these smaller customers, is there a particular driver behind that in enterprise services or the security offering, any color you can provide would be very helpful.

Dave Caputo

Yes, thanks Rob. One of the things I am quite happy about is the velocity of new customer wins and I think it really plays into the concept that we've -- as we spoke about last year, about we increased our investment in our customer facing sales team and just seen the number of opportunities grow and I think it’s just simple as that. There is more people focussed on closing more deals in any given quarter because of it.

Certainly, wireless is a major access technology and become more and more important everyday. And so, it doesn't completely surprised me that we're wining more and more mobile operators, and we've got a pretty dominant position in the North America and even global cable market. So, we still win new cable operators, but there is a lot more open space with the number of mobile operators that are out there.

Robert Young

Okay. And the expansion of the sales team, my understanding was that, that was focused on EMEA, maybe I'm wrong there, and that hasn't been an area of strength recently, and so those two things appeared to be at odds. The new customer wins and then EMEA been little weaker, so maybe talk about that?

Dave Caputo

Yes. I would just start by saying, the increase of the sales team wasn't exclusively EMEA. It was across the organization. I think what we had previously said along those lines is that there were certain geographies within EMEA that we had invested in earlier than others and we had seen some positive outcomes associated with that mainly focused on Africa. But I would say that investment was made throughout the organization not just EMEA.

Robert Young

Okay, great. So just to wrap that up, is there any reason to believe that these 42 customers over the last quarter are lower value than previous customers you have won in the past?

Dave Caputo

I think, while the objective evidence that you have is I believe this is the first quarter in our history that we haven't had a 10% customer. And so, they are smaller deals, but there are more of them and the business is a little bit more diverse and little bit more transactional.

Scott Hamilton

Yes. I would say, it's diversified, Rob, like the customer announcement we made on May that would have been a new customer and that was material. And then, obviously there were smaller customers as well.

Robert Young

Okay, great. And then my one last question and then I'll pass the line. OpEx this quarter was lighter than I was expecting. And part of the reasons for that, I think last quarter you said that Q4 roughly, the $19.9 million, $20 million level was the baseline going forward. So, we're below that level this quarter. And that seems given the strengthening in the Canadian dollar and the addition of Teclo in there. So, if you could talk about OpEx going forward, that would great? And then I will pass line.

Dave Caputo

Yes. So my comment on OpEx going forward is the cost structure will remain relatively consistent throughout the rest of the year. From an FX impact, we hedged a good portion of our expenses going into a quarter, so when you see the Canadian dollars strengthen or weaken against the U.S. dollar, it takes a bit of time for that to catch up into our statements.

Right now, if I work at our hedge position versus the spot rate, we're relatively close on an average basis. So, I think that there isn't any tailwind left in the foreign exchange into the extent that the Canadian dollar strengthens, it will be a headwind. And, yes, for sure Teclo wasn't there this quarter. It will be in there the rest of the year. It just 19.9 versus 19.6, I don't see that being all of much different.

Robert Young

Okay. Thanks. I'll pass the line.

Operator

Our next question comes from Maher Yaghi from Desjardins. Please go ahead.

Maher Yaghi

Yes. Thank you for taking my question. I wanted to get a little bit more detail about your recent wins on the wireless side, more than 60% of your revenues now coming from wireless. How sustainable is that?

We've seen a lot of new customer wins on the wireless side. Are these customers, lot of them are repeat customers coming from different geographies or when we're looking at the revenues are these repeat customers or they are the reflection of the new business lines that you had recently in wireless?

And this transition 4G and eventually to 5G as you increase your exposure to wireless, shouldn't it lead to an improved revenue growth profile for the company when looked at versus let's say your past exposure to wireline?

Dave Caputo

Thanks Maher. So, our results measured in every aspect will move around quarter-to-quarter with different splits. However wireless has been our biggest market for a number of years now. So, our success in any given quarter on wireless is not really a surprise to us. Much of our success in service innovation, selling bandwidth different has been in the wireless market where consumers are more incline to buy differentiated service plans.

And what we're seeing from a trend is, there's a bigger movement to Voice-over-LTE that type of infrastructure which is basically VoIP-over-LTE, Voice-over-IP, over LTE and so as the voice network switches over to that capability on Voice-over-LTE you need a lot more control in that network to ensure a high quality phone call, nobody wants to go backwards, in fact people want to rollout high definition Voice-over-LTE type phone, voice quality.

And so, I think that the idea of that wireless customer's will be a big part of our future and wireline customers have been big part of our past, but will be a part of future here as well is a truism here. But what driving new revenues through service creation is more a mobile phenomenon than it is a wireline phenomenon.

Maher Yaghi

Great. And that what I was trying to get to and basically when you look at CapEx spending, revenues and wireless are growing much faster than they are in the wireline for Teclos and the propensity for them to continue to spend on their wireless investments is probably better than on the wireline side, as wireline is transitioning more and more through optical network. So, improving exposure to wireless should by definition or corollary improve your revenue growth profile. Is that true?

Dave Caputo

It's true. But I would also say, optical networks are wireline networks as well, and we are seeing a bit of research and investment on the wireline side of networks. DSLs getting a little bit long on the tooth and then you could argue manifest destiny is fiber-to-the-home for many of those networks. And cable operators are seeing significant differentiation particularly if they could converged their offering with a mobile offering, as well as their high-speed cable offering which we see in some converged operators.

And so, I wouldn't –while there still growth and there is more subscribers to be get to have on the mobile data side, people are still connecting to wireline networks and there'll be investments there as well, but there's still more subscribers on planet earth that don't have a mobile data plan and more and more will get that for sure.

Maher Yaghi

Okay. And one last question on legal side, you in your prepared remarks you made references to new items that you uncovered as you worked on this litigation, for people like me who have no legal training. Can you maybe re-discuss what your talked about in a more easier format for me understand what the implication of your what you discovered means for the patent litigation itself and its outcome potential?

Scott Hamilton

Yes. Obviously, we're being quite careful on what we say, because we don't want to prejudice our position. I think the prepared remarks is about the extent that we're wiling to comment on you know the onus is still on us to prove that the two allegations that we've made, one being that the patents weren't probably granted and that the patent office was mislead during the process of those patents being applied for and/or granted.

The end of the day if we were to successfully demonstrate that, and the court accepted that enrolled in our favour than the impact of that is, that the case would likely be dismiss or that we would win the case. So, beyond that I don't think we have any additional comments to add.

Operator

And our next question comes from Paul Steep from Scotia Capital. Please go ahead.

Paul Steep

Great, thanks. Good morning. Dave, could you maybe comment just a little bit on the sale side. Has it just been advanced, more advanced that has been the driver maybe the greater consistency this year? Or is something else fundamentally changed than how you go to market beyond greater account coverage?

Dave Caputo

I'm sorry, Paul, I miss that, are you saying something at best?

Paul Steep

Sorry, you've had more at bats?

Dave Caputo

Oh, at bats, I get it. A baseball reference. Okay. Maybe if there was a hockey reference I would have got it right away. Shots on net. We're getting more shots on net and I think our batting percentage relative to our competitors is higher. And I think that is what's driving it. In terms of if we look at the number of customer wins and we look at the number of opportunities I think it's those things.

Paul Steep

Okay, great. The second one from me would just be, you talked a little bit and gave one client example. Could you talk about the cost differences for your customers in the virtual network function solutions compared to your traditional hardware and software solutions that you rolled out? And maybe some of the benefits that those customers, and that one customer seen so far in the VNS functionality?

Dave Caputo

Sure. The driver of software divine networks and network functions virtualization isn't exclusively about cost savings. As you could imagine, we are building a carrier data center having tons of servers to create your network infrastructure, that's expensive as well. But the real benefit comes from the agility, your network can now exhibit for rolling out new services, and service providers understand increasingly and certainly in the future here that its going to be about how differentiated their service offering is and what other services they could layer on top of that over just access selling your connection to the internet.

And so, while there is certainly some hopes for OpEx savings on the service provides prospective. There is a big CapEx spend for them to build a carrier scale network, a carrier scale data center to run their software defined networking architecture. But for us it's really about enabling the innovating new service plans. And on the cloud services policy controller where the end customer to the service provider becomes branch offices and smaller, medium size businesses, really the only way to effectively rolled that out is in virtualized software defined network architecture.

And so -- but maybe practically what you're asking about the question is hardware is very important to Sandvine and we sell a bunch of hardware. We believe we have the industry's best platform, hardware platform for delivering our solutions. And in those virtualized modes, it's just as selling our software on a per user per month hopefully recurring basis and that's the transition we have to manage for the next five years or so.

Paul Steep

Great, one last one I guess for Scott. Could you talk about the amount of absolute revenue from new clients in the quarter if you could? Thank you.

Scott Hamilton

We haven't disclosed that.

Paul Steep

Okay.

Dave Caputo

Yes. Maybe I'd just say practically speaking, new customer is only new for us ones and its only in that quarter that we think of them as a new customer and the following quarter they become a existing customer. The vast majority of our sales comes from existing customers because we only count them as new ones.

Scott Hamilton

Yes. Its always 80% or 90% plus of our revenues, and the most material one that we announced in the quarter on May 5th was the North American satellite operator and most that wasn't recognized in the quarter.

Paul Steep

Great. Thank you.

Operator

Our next question comes from Gus Papageorgiou from Macquarie. Please go ahead.

Gus Papageorgiou

Hi. Thanks for taking my question. Just on the sales concentration, so actually you kind of touched on this earlier, but can you confirm, is this the first quarter where you never had a 10% plus customer? And if that's true, is this a trend that you think is going establish or is this an anomaly? I just wonder if you could discuss customer concentration going forward?

Dave Caputo

Thanks Gus. So, I've been here from the very beginning, and if I think of back when we were private company, it was not unusual for us that 50%, 60%, 70% of our revenue coming in a quarter coming from one customer. I'm under threat of looking at our general counsel here. I'm almost positive. This is the first quarter for us as a publicly traded company that we have not had a 10% customer or reseller in a quarter. Although I do believe for all of last year, although we had one or two in every quarter last year for the year last year we also didn't have a 10% customer. But I'm pretty confident in saying for this quarter this is the first quarter that we have not had a 10% customer in a quarter.

Scott Hamilton

And from a trend perspective, Gus, I noted I wouldn't expect that we won't ever have a 10% plus customer in the quarter again, to the extent that we have a large customer whether new or existing due to the material follow-on order they are going to be a 10% plus customer. But the trend of decreasing concentration in our business, it probably, I wouldn't characterize it as a new trend, it has been happening over the last couple of years, but it's definitely there.

Gus Papageorgiou

Great. And just one follow-on if I can. Just on the dividend if I calculate, I'm looking at approximately 36% dividend payout ratio for your guys for the year. Scott, when you think about the dividend going forward, I mean, do you tend to maintain roughly that ratio and as your income grows, the divided will grow or are you comfortable of pumping that payout ratio in the future. I'm just wondering how you're thinking about deploying the cash as it is starting to pile up here?

Scott Hamilton

Yes. So, as I think about cash balance, there is three things that we consider and talk about every three months at our board meeting is how much of our capital will we allocate to buying back shares. How much of our capital we allocate to doing M&A. And then lastly, how much is on the dividend. We haven't disclosed or agreed upon a formal capital allocation policy yet to disclose to investors, it something that we discuss and you know we want to take it crawl, run, walk, crawl, walk, run approach to it.

But one thing I would say is we've been aggressively buying back our stock, I think over perhaps 2014 and 2015 NCIB we spent in excess of $30 million buying back our stock at the price that our stock is at I think that that is a very good use of shareholder cash and we will continue be aggressive for that.

Gus Papageorgiou

Great. Thank you very much.

Operator

Our next question comes from Richard Tse from Cormark Securities. Please go ahead.

Richard Tse

Thanks. Dave, I just trying to get a sense or the opportunity with these new customers, like how long does it take to scale to what you consider a full run rate and that's for the full year to do that or maybe give us a sense of that opportunity with new customers?

Dave Caputo

I'd like to say here, Richard is, it’s a long sale cycle with carriers and service providers in general and the plus or minus on that probably around nine months from when we need a customer to when we typically get a purchase order and the two ends of the extreme on that might be 60 or 70 days or 800 days or never, we never close the deal with customers as we're trying to do that.

And what I like about service creation and business intelligence is particularly service creation as its revenue generating. It drives new revenues and it requires integration to adjacent business system, their billing system, their provisioning system, their customer care system. And so, ones we're in the revenue flow of the service provider and we're in their infrastructure for adding new customers for that, that's when I think we'll become strategically more important to that customer.

And so, still like winning new deals, like winning new big deals, but as Scott said the vast majority of our revenue in every quarter comes from our existing customers and so I don't know if I can give you any more color than that.

Richard Tse

Yes. Maybe I can ask you in a different way. So you look at the new customers that you've signed within the current year relative to the addressable opportunity with those respective customers. Are they buying let's say in the first six months 10% of that opportunity or that's early trying to get a size on that opportunity and if that question helps you in anyway to answer it?

Dave Caputo

Yes. So some customers might buy a network build out, some might buy a -- what is called the first office deployment of this solution that they plan to do throughout. So, many of the deals might be 10% for 25% of the opportunity, but there is no question that some of the deals are the equipment that will need for the next year. And they are exhausting their budget cycle on the deployment.

And so, its all over the place other than to say, I do believe with everyone of our customers that we went that we have more opportunity in the future. It's not – we don't have to win a customer and think that's it, we're never going to sell anything more to them.

Richard Tse

Okay. And then you mentioned service creation being a big driver here. Have you look at that, so the use cases of these new customers as it really leaning toward service creation or would you jus say its balance, evenly across all the products?

Dave Caputo

I would say, there is – its probably in order of what's happening is service creation than business intelligence and then traffic optimization, although I'm pretty excited about Teclo acquisitions and the TCP Accelerator and in our lifetime and certainly in our planning horizon, almost everybody will have to be connected to the internet one way or the other and I think when that happens that there'll be a refocus on traffic optimization because consumers and businesses and everybody use of internet is going to greatly outstrip the revenues that are generated by that increase in use of bandwidth.

And so, when that happens, one of the levers is to try to optimize your investment in your network and something like TCP Accelerator which is agnostic to encrypted traffic and just makes the network more zippier, traffic optimization is going to continues to be an important part of our business.

Richard Tse

Okay. And just one last one, if you look at the spending environment currently and perhaps compared to last year, maybe give us a sense of the tone, has it become tighter or unchanged, just your impression on that? Thanks.

Dave Caputo

Sure. So, I would say, overall the funnel is strong and the quantity of opportunities continues to grow. We definitely see adequate opportunities for us to be able to grow in 2016 and we exhibited that so far this year. In the near term I'd say, we're seeing very similar activity levels for Q3 as we've seen in the last past couple of years, purchasing activity slows in the summer months, particularly in EMEA and then typically it picks up again in Q4.

We continue to see new deals entering the funnel all of the time. And I think that the breadth of our products that drive deals in our funnel including all the things that head on the 32,000, the migration to 100 gigabit Ethernets, the TCP Accelerator opportunity and the new opportunities its bringing into our funnel are new enhanced outreach product, thanks to the MoMac acquisition, the enhanced network security product, thanks to our partnership with Symantec.

We think we have the best products for rolling out new services that I have hit to depth here. The upgrade cycle on the PCRFs, spec particularly around Voice-over-LTE, I think is a great opportunity for us.

And finally, the new and emerging business for us is the business service offering powered by a cloud service policy controller. So, we have more sales guys to sell stuff and we have more stuff for them to sell, and so that's what I would – I think our investment in the – expanding our sales team and making these past couple of acquisitions are going to be fruitful for the long term interest of Sandvine

Richard Tse

That's great. Thank you.

Operator

Our next question comes from Deepak Kaushal from GMP Securities. Please go ahead.

Deepak Kaushal

Hi. Good morning, guys. Thanks for taking my questions. Dave, Scott, Rick, I have a follow-up to Richard's questions and then another question after that if I may. Just going back to your comments on the market and the spending environment, Dave, understanding that there's a growing funnel and growing opportunity out there longer term, what would you say specifically about timing and what Teclos are thinking about in terms of timing particular given the uncertainties in the macro economies whether its Europe or being an election in the U.S. Could timing become an issue again as there was a year ago? What's your outlook for time and closing some of these deals over the next 12 months?

Dave Caputo

Yes. At the sake of I'm probably reiterating here, but if you look back at the past couple of years, I'd say, we're seeing similar activity levels for Q3 as we've seen before and purchasing typically slows in the summer months particularly in EMEA and then picks up again in Q4. There is some seasonality in our business now from the November year end which drives Q4 business and some Q1 business because there's November year end and our customers typically have a December year end. And summer people go on vacation.

Scott Hamilton

Yes. Deepak, I would add timing is always an issue in our business. This quarter is an exception but when you have concentration with large customers, timing of that purchase order can make or break your quarter, which some investors are more focused on than others. I think Dave's generic comment of the funnel is strong, the number of opportunities is high that bodes well from a long term perspective. But on a short term perspective the reality of timing is going to get us or is always going to be a factor for us. And as Dave said, Q3 is always a slower activity quarter just because of EMEA shutting down and people enjoying their summer.

Deepak Kaushal

Okay. Got it. Their seasonality in Q3 and Q4, I get that. What I'm specifically asking about is are you detecting any change from your customers in terms of their certainty levels of spending or caution regarding spending levels in the context of the recent Brexit, risks in the EU or being an election year in the U.S. market, yes or no?

Dave Caputo

Well, I could say, I owe Rick $5 because I didn't think anyone would ask us about Brexit and boy I was wrong. I was also there week or so ago and it certainly felts to me like -- it still felts like Europe to me, but and I met with the regional heads of our European team. And I don't think there was anything Brexit specific that I saw, heard, but I did hear that we better close some business shortly because everybody is going on vacation.

Deepak Kaushal

Okay. Got it. And then just back to the regular business, I did have a question on the Cyber Security side of your business particularly regarding that channel strategy, are you guys for that business using the same channel strategy as you are for CNFV [ph] solutions into the enterprise or are you going more direct or through different set of channel partners to tackle the security market and what kind of new competitors are you up against as you go after this market?

Dave Caputo

So, there is two parts to that question or two angles on that question. The first is, yes, we're using the same channel. Our sale is still to the service provider who wants to protect their network and protect their subscribers from either being participating in attacks or being victims of attacks and our partnership with Symantec is really really incredible partnership for showing them that we have access to the most important threat feed that’s out there that we believe.

On the cloud services policy controller, where protect will also be part of our offering for branch offices and smaller medium businesses we still need the service provider to deploy our offering in a virtualized way when they sell that access. But there is an important part of that of their channel to market called MSPs, Managed Service Providers. I don’t know if that GMP, Deepak, you guys have an IT department or you outsource that to someone who talks to the Bells and Rogers and Telus's [ph] of the world to get your connection and but that person could be a very important decision maker on what access technology that they select.

And so, we have to do some business development around the Managed Service Providers but they are ultimately also reselling the access technology of the carrier. And so, on the small medium business branch office enterprise play there is a slight channel variance there that’s probably all I should say about its here because we could talk at hours -- for hours about it.

Deepak Kaushal

Okay. And in terms of new sets of competitors that you are coming up against its obviously new market and a new opportunity for you guys. Who do you see the most when you're kind of going after some of these deployments or who does the service provider see the most?

Dave Caputo

Yes. So, I think we're doing something quite a bit disruptive to the general appliances that people deploy in a small and medium business to roll out services. They buy best of breed products for their firewall, for their WAN optimization, for their productivity controls and the like. And we're saying no, you could click a box on your service providers, cloud offering that gives you that capability, almost think of it as networking equipment as the service cloud based delivery of it.

And so, the difference we have, there's a lot of those appliance manufacturers are also saying hey, they have an NFV-capable offering. But I think the difference we have is we’re not showing the service provider any channel conflict. Those appliance vendors are going to have channels to market to sell to you, sell to GMP and they are also going to the service provider and say, hey we have this in a NFV Network Functions Virtualization delivery capability or packaging, but they're going to compete with that service provider where we're going to sell directly to the service provider who is going to resell it to there as a service to their business access customers.

And so, it’s all the usual suspects of people who make appliances that sell to enterprises, but we believe our strategy is more pure and more aligned with the carriers.

Operator

And our next question comes from Kris Thompson from National Bank Financial. Please go ahead.

Kris Thompson

Great, thanks. Scott, the four orders that you guys announced in November and December that totalled $27 million last year. Can you tell us if all those have been recognized now or do you still have some of that in your backlog?

Scott Hamilton

Yes. The vast majority of that would have been recognized Kris. The piece that probably hasn’t been will just be the support and maintenance component.

Kris Thompson

Okay. That’s helpful. And Scott, while I have you, the jobs and prosperity funding the 260,000 or 270,000 or so recognized this quarter. Can you just help us model that going forward? Is that going to run steady or will that be a little bit more variable on a quarterly basis?

Scott Hamilton

No, it would be pretty consistent quarter to quarter. That number will be close enough for a short term.

Kris Thompson

Okay. Good stuff. And is that -- have you hired a number of those 75 people already?

Scott Hamilton

Certainly, some of our recent hires will have qualified for that, but most of it, you know it’s an eight-year program, so there's a long time that those hires can be made over, I would say that most of that is still to come at some point in the future.

Kris Thompson

Okay. Got it. And Dave, just on the Symantec partnership can you just remind us when does that product commercialize and how many customers did you say are evaluating it?

Dave Caputo

So, it’s commercialized, in that we're selling it, it’s deployed, we're trialling it with a number of customers, we’ve got, you know it’s a developing business for us. We aren’t sharing financial details but we are pleased to have received initial purchase orders for the -- what we're calling the enhanced cyber security solution which includes the functionality license from Symantec. You know, stay tuned as whether we add splits on that for the year or next year.

Kris Thompson

Okay. So the fact that they are acquiring Blue Coat shouldn’t have any impact on your partnership?

Dave Caputo

No, no Blue Coat is largely enterprise sales where a channel for that feed into service providers.

Kris Thompson

Okay. And just last one from me, Dave, normally I like to suggest that your revenues in half-two are typically greater than half-one. You’ve had a very strong half one this year. I just wondered if you could comment on your feeling about that cadence?

Dave Caputo

Well, it's certainly a fact that that’s been the case. Previous years I think we barely squeaked through last year with that as well. I would just say the funnel is strong and the number of opportunities keeps growing and we're seeing similar activity levels for Q3 this year as we did last year. And we see ourselves as a growth business and we hope to grow our business.

Kris Thompson

Okay. Good luck, guys. Thanks.

Dave Caputo

Thanks, Kris.

Operator

Our next question comes from Todd Coupland from CIBC. Please go ahead.

Todd Coupland

Good morning, everyone. I had a quick follow-up on the patent claim, if I could -- so you talked about it being embedded I guess in the Meterflow product a few years back. So, are you implying that you essentially isolated the exposure regardless of which way this goes?

Dave Caputo

I’d love to say yes, but the answer to that is, no. I mean we believe we’ve uncovered evidence, which suggest that the product was on sale more than a year, that was commercially available in the U.S. more than a year before the provisional applications in respect of the technology were filed. If that is the case and we were to have a court accept that then those patents would be expunged or revoked and there would be no claim or no patent for them to be claiming infringement against us.

So, it’s the crux of our amended answer. We think we have some pretty good evidence, but as you know until these things are done, they would require us to go to court and have a judge decide at trial that we were right.

Todd Coupland

Right. So this is just an example of you using your own IP which you had patents for prior to these patents being granted even if these patents? Go ahead.

Dave Caputo

Sorry, Todd, Meterflow wasn’t that Sandvine product. It was a product. The name of the company escapes me, Heighten or Tech Elite which I think is where these patents were eventually acquired from by Packet Intelligence and that wasn’t a Sandvine product that contained that.

Todd Coupland

Okay. So, the patent just went to the wrong guy then. Okay. And like these things take a long time to wind through the courts and ultimately end up at a trial. Do you have a rough timeline at this point?

Dave Caputo

So we’ve had a case management conference that establishes all of the relevant dates if this was to go to trial we would expect a jury selection would commence in September of 2017.

Todd Coupland

This is fine. It is going to take a long time. Okay. That is great. And if I could just clarify on the OpEx, so it sounds like everything is fully loaded now, and plus or minus $20 million includes all the ramp-up in terms of the investment in the sales and marketing that has gone on at the company and the acquisitions. Did I hear that correctly?

Dave Caputo

Yes. The OpEx that you've seen over the last quarter couple of quarters is consistent with what I expect over the rest of the year. You know its oscillates from quarter-to-quarter depending on things like vacation pay or EI, CPP premiums, timing of trade shows that kind of stuff, but from a structure perspective, what we have is what we’ll finish the year with.

Todd Coupland

Okay. That’s great. Thanks for the color. Appreciate it.

Dave Caputo

Thanks Todd.

Operator

And that was our last question. I will now turn the call back to Rick Wadsworth for closing comments.

Richard Wadsworth

Yes. Thanks everyone. If you have any additional questions, please feel free to reach out to me. We do have a commitment right here at 9:30, we got to get to. But thanks for attending our call and we look forward to speaking with you again next time, okay.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!