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spk02: Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2021 Tesco Technologies, Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star then 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, David Kalustyan from Sharon Merrill. Thank you. Please go ahead.
spk04: Good morning, everyone, and thank you for joining Tesco's Q2 2021 conference call. Joining me today are Sandeep Mukherjee, Tesco's President and Chief Executive Officer, and Eric Sputulnik, the company CFO. Please note that management discussions today will contain forward-looking statements about anticipated results and future prospects. Please also note that during today's Q&A session, management will not be taking questions related to the recent proxy solicitation filings. Fuller-looking statements involve a number of risks and uncertainties, and Tesco's results may differ materially from those discussed today. Information concerning factors that may cause such a difference can be found in Tesco's public disclosures, including the company's most recent foreign 10-K and other periodic reports filed with the Securities and Exchange Commission. With that introduction, I'd like to turn the call over to Sandeep Mukherjee, Tesco's President and CEO. Sandeep?
spk03: Thank you, David. Good morning. And thank you all for joining us. I hope you and your families are staying safe during the ongoing pandemic. I continue to be extremely proud of the commitment and dedication of the Tesco team during this protracted health crisis. They have worked tirelessly to provide customers with vital communication services to fill the urgent needs of our clients, including first responders and public safety officers. For several quarters, I've been sharing with you my vision of a Tesco that is focused on our commercial infrastructure business, which offers the opportunity to drive revenue growth and shareholder value. To realize this vision, we made the decision to exit the retail business. Earlier this morning, we announced our plan to sell certain retail assets to VoiceCom, effectively divesting Tesco of that business. This milestone transaction enables us to focus on our higher margin, higher growth commercial business. We will now be solely dedicated to servicing customers in the wireless infrastructure construction space. We will deploy all of our assets to take advantage of a once-in-a-generation opportunity in the wireless industry, resulting from the unprecedented and concurrent rollout of new technologies. including 5G, private LTE in the CBRS brand, and IoT. And we intend to use some of the proceeds from the retail transaction to help us further capitalize on this opportunity. During the second fiscal quarter, we made excellent progress on our near-term performance improvement initiatives. We achieved the best quarterly bottom line performance in a year and improved gross margins sequentially despite flat revenues resulting from the economic downturn. We were able to report such strong bottom line results due to our ability to, first, drive higher margin sales through both our Ventive infrastructure brand and Tesco.com, second, Manage retail and commercial inventory effectively while lowering E&O expense. Third, reduce costs and implement additional operational efficiencies. Fourth, navigate pandemic-related challenges such that we were able to lower our reserves. And finally, effectively manage the decline of our retail business. During our call today, I'll report on the excellent progress we've made during the second quarter on our three-pillar strategy to drive growth and profitability. We have been pursuing this strategy since early in the year when it was approved by the board unanimously. This strategy includes, number one, growing our value-added distribution business and ensuring that we are the easiest company to do business with. Number two, industrializing our vent of operations, scaling our capabilities, and being an industry innovator. And third, investing in value-added and managed services offerings to resolve complexity and pain points for our customers. I'm going to talk about the significant progress we have made on this three-pillar strategy in a moment. But before I do that, I want to walk you through our performance in each of our reported segments. Let me start with the retail business. As we shared last quarter, our retail segment has been heavily impacted by COVID. Despite this ongoing challenge, we were able to sequentially increase revenue by 32% and significantly improve gross margin. In the quarter, revenue drivers included strong performance in key national accounts and continued momentum and success with new business development efforts. Margin improvement was primarily due to more proprietary ventive product sold into national partners and channel diversification that resulted in the sale of more high margin products. Additionally, we achieved cost efficiencies through team realignment and resource allocation to support the most critical needs of the business and enhanced operational and fulfillment discipline. Finally, we managed our mobile device accessory inventory through reduction of excess and obsolete inventory, more rigorous review and execution of inventory purchases, and vendor and SKU rationalization to focus on the highest-running, most profitable brands. Despite our improved performance in Q2, with the changing retail environment, this business no longer generates sufficient returns on capital to warrant continued investment. While we recognize that the retail business is part of Tesco's legacy, the sale of this business ensures we have enhanced financial flexibility and operational simplicity to drive profitable growth. The sale includes most of our retail inventory and the Ventiv brand as it relates to mobile device accessory products, as well as certain other retail-related assets. We will continue to fulfill orders and support the retail business customers and suppliers until the closing of the transaction. We expect the closing to take place later this quarter, and we'll work closely with our customers and our supplier partners until then to ensure a smooth transition. I'm grateful to our retail team who have worked hard to serve our customers and our suppliers. Their work and their reputation have made this transaction possible, and I wish them the best of success as they join VoiceCom. Within our commercial segment, our VAR and integrator business is extremely diverse and includes all wireless infrastructure business outside the carrier ecosystem. Tesco sells to VARs and integrators that service numerous industries and markets. Within this business, we also directly support private system operators and other end users. In fiscal Q1, we noted that we had seen a moderate COVID-related impact to this business. In Q2, it became clear that there was greater COVID-related impact than was first apparent. As with the last quarter, the greatest impact from COVID was primarily with venues and projects that required in-building access. As an example, one of our integrator customers was prepared to install an advanced wireless network in a facility, and due to COVID, the entire project was put on hold. However, other markets that we serve, such as the utility vertical, have continued their capital investments in wireless infrastructure. For example, we are working with utility market customers on advanced metering infrastructure, or AMI. Smart meters enabled by AMI let consumers see more comprehensive energy consumption data. In addition to AMI, we continue to receive orders from utility customers for fleet upgrades, providing mounting solutions for their new trucks and fleet vehicles. We have also seen demand from our utility customers for ventive custom power solutions. We saw good growth in this area in Q2 and have generated revenue growth in the utility sector in three of the past four quarters. The progress we are seeing in the utility vertical is a result of our sales strategy to renew focus on specific industry verticals. Recent actions we have taken include First, investing in a market executive to drive the offer, specific marketing efforts, and the overlay for our sales teams servicing regulated industries. And second, developing solutions for the numerous utilities that have won CBRS spectrum at the recent FCC auction. Looking at this business overall, we saw a 13% decline in revenue year over year and 2% decrease sequentially. At the same time, gross margins in this segment improved almost 100 basis points, primarily due to higher percentage of VAR and integrator sales being handled through our tesco.com website and a higher percentage of vendors' product sales. I shared in our Q2 earnings call a year ago that a key factor in the success of our VAR business was making improvements to our e-commerce website. In the past year, we have done just that, resulting in real financial contribution to the VAR business. Our total Tesco.com commercial revenue was up 9.5% sequentially, marking the first quarter of sequential growth in a year. This was also the highest revenue quarter for Tesco.com in the past year, with margins over 31%. VAR revenue realized through our website grew by 9.4% sequentially, and direct industry business revenue through Tesco.com grew 14% sequentially. We are continuing to improve Tesco.com, making it easier for customers to find information and place orders without having to consult a salesperson. In recent surveys, customers have rated our website's ease of use as either the best or among the best in the industry. In past calls, I've mentioned our investment in search engine optimization and paid search to attract more eyeballs to Tesco.com. While this is an ongoing effort, we have made significant improvement during the past several quarters, including doubling our average monthly visitors to the site. In addition to the positive impact that HigherTesco.com's spend had on revenue and margin, we also increased the percentage of our higher margin vented infrastructure products sold to our VAR customers. We generated 16% year-over-year revenue growth of vented infrastructure products, and that, combined with the HigherTesco.com revenue, contributed to the 100 basis point increase in gross margin in our VAR and integrator market. Some notable Ventiv wins in our VAR customer market include networking VARs continuing to utilize Ventiv solutions for Wi-Fi 6 upgrades in warehouses and offices. Purchase orders received for our Cisco machine builder solution, which provides a turnkey integrated wireless power system. Purchase orders received for our mining solution, which utilizes Tesco's Regen partnership for an installation in South America. a purchase order for a Ray-Jank solution installed in Australia, a vented floor panel solution for a multinational technology company, a ceiling tile solution sold to a U.S. military installation in Europe, and an enclosure to optimize the operations of a major fast food chain, making customer pickups more efficient. Our strategy to industrialize Ventiv has resulted in greater interest and more requests for Ventiv products from a broader range of our customers. This is leading to greater utilization of Ventiv solutions. Customers tell us that they select Ventiv due to enclosures that are able to withstand harsh environments such as weather, moisture, heat, and seismic activity, ease of installation, attractive aesthetics for our enclosure designs and power systems, and efficient small form factor antennas. Moreover, Ventiv is at the forefront of our sustainability efforts because so many wireless infrastructure projects are specifying environmentally friendly and aesthetically pleasing installations. In fact, as our customers say, Ventiv is really good at hiding things in plain sight. Turning to the public carrier market, I'd like to begin with some observations about the current status of the carrier ecosystem, including its impact on our customers and on Tesco. The carrier ecosystem is currently in a unique situation. On one hand, 5G technology represents the future of wireless communications. On the other hand, we have a near-term reality imposed by the current pandemic. We know from our customers, including significant construction partners of some of the major carriers, that our market share remains constant or is growing. This bodes extremely well for our business when carriers begin to increase the intensity of 5G infrastructure construction. For our part, we remain laser-focused on continuing to increase the breadth and depth of our relationships with customers in the carrier ecosystem through a combination of our technical and supply chain logistics capabilities. This positions us well to quickly grow revenue and gain share as the build-out of 5G infrastructure accelerates. Last quarter, we shared that the impact of the pandemic on our carrier business was related primarily to restricted access in certain venues for DAS installations and delays caused by the closure of government and municipal permitting offices. Much of this continues to be the case in Q2. On the positive side, we see increasing interest in edge data centers. designed to deliver on the latency requirements for emerging technologies like 5G and the AR, VR, and massive IOD applications that will follow. We are working closely with our customers and suppliers, and I'm pleased to say that we have received purchase orders this quarter for such deployments. This is a new area for DESCO. We expect more opportunities in this area, giving us the ability to introduce ventive enclosures and power solutions in the carrier ecosystem. We had significant wins with our customers, as well with CBRS applications in Q2. The government conducted a significant auction of CBRS spectrum around the country, resulting in hundreds of successful awards. Here again, the build-out has not yet ramped up. The process is in motion with a number of companies now in a position to invest in building out the necessary infrastructure needed to capitalize on their acquired spectrum. One of our largest customers was awarded a contract by the Defense Department to deploy sensors along the U.S. coastline. Tesco was selected by this contractor to supply a number of components, including proprietary solutions from our rental division. This provides us with a high margin, sole source piece of business that we expect to deliver on throughout the remainder of this fiscal year and into fiscal 2022. Another carrier ecosystem customer selected Tesco to supply an array of products for a monitoring and telemetry solution for their tower sites. And it, too, includes a proprietary Ventiv component. This sole source position will result in deployments across several thousand of this customer's towers. These are two prime examples of the strategy we detailed two quarters ago, where I committed to a transition of our Ventiv organization from a custom engineering focus to an industrialized organization capable of innovative design and large volume production. I'd also shared my belief that the value provided by Ventiv could be utilized across all customer markets, not just VARs and integrators. These carrier wins demonstrate early proof that our strategy is working. All of this gives me great confidence that as the inevitable steep ramp of the carrier ecosystem infrastructure commences, Tesco is well positioned in three key areas. proven logistics management capabilities that are so important in the carrier space. Second, proprietary engineering and production capabilities to respond to needs unmet by other manufacturers. And third, outstanding relationships with numerous companies most critical to the construction of the nation's wireless infrastructure. Last quarter, I shared that one of the immediate initiatives to improve our performance was completing the necessary IT transformation to securely position Tesco to capitalize on our future growth opportunities. We have made excellent progress by modernizing our systems, enhancing our digital platforms. We continue to enhance our core systems and updating our demand planning tools. I would now like to give you a brief update on our three pillar strategy that I mentioned earlier in the call. We are executing on this strategy in an effort to transform Tesco, improve our top line and margins, and to ensure Tesco remains well positioned to compete in the industry. First, we are growing our value added distribution business and ensuring that we are the easiest company to do business with. Over the last few quarters, Tesco has taken steps to become more intimate with our customers. We have redesigned our sales support operations to have smaller teams focused on specific sets of customers. This has led to stronger relationships and a deeper understanding of our customers' specific processes and needs. We are providing more sophisticated materials management services for telecom general contractors. We also provide scalable services from timely fulfillment of products to design and engineering for our value-added resellers. Our VARs are servicing a wide variety of end customers, and our value-added services enable them to fill gaps in their own capabilities and extend their reach. We have developed a keen understanding of the vertical markets we serve. Our long heritage in utility, public safety, and other industries have been a long-standing strength and differentiator for us, and we have been making investments to ensure that we continue to lead the market. For example, we have added vertical market executives to cover regulated industries, such as utilities, intermodal transportation, and natural resources, such as forestry, mining, oil, and gas, and public sector, including federal, state, and local government, education, and public safety. The addition of these resources have been well received by our customers, suppliers, and internal departments to enhance collaboration and solve complex problems for our customers. Second, we are industrializing our rental operations, scaling our capabilities, and driving innovation. We have done the following. Rationalized SKUs and reduced inventory to focus on products with significant demand. Instituted modular, flexible, and agile product designs. Added engineering resources, both internally and through third parties. Added product management and manufacturing resources. Created an advisory council, working with key customers and industry influencers. And invested in an innovation process receiving information from internal and external teams to vet innovative ideas to bring to market, and taking existing products with market acceptance and enhancing them to be applicable to a larger number of customers. The new process will allow the innovation team to more quickly move products through ideation, acceptance, and testing phases, and then into production. This industrialization and innovation has already led to increased sales in the VAR channel. And for the first time, we have successfully sold ventive enclosure products into the carrier ecosystem. Third, we are investing in value-added and managed services offerings to resolve complexity and pain points for our customers. Capitalizing on our unique place in the industry, where we stand at the confluence of a multi-vendor, multi-technology industry, combined with advanced logistics management and engineering and design capabilities, we are building out an array of services which will ultimately provide a source of high margin revenue. Our design services are utilized throughout the Tesco customer base, and our efforts to grow this business have been on three fronts. Maximizing the monetization of these services, or in other words, sell the true value of the services to the customers rather than effectively giving them away to help secure lower margin product revenue. Accelerating our efforts to productize and promote design services to increase the number of engagements and focus on engaging our customers in the use of our design services. In certain areas, we can bring new service offerings to the market more quickly by using technology partners. The design of our first such new offering is in proof of concept stage, and we will share more details next quarter. We've also established beta customers to provide us with feedback to help maximize the value and the saleability of the final product. These capabilities will help Tesco provide our VAR customers with additional capabilities to sell and differentiate themselves with their end customers. With that, I will turn the call over to Eric for the financial review. Eric?
spk05: Thank you, Sandeep, and good morning, everyone. As Sandeep discussed, despite the headwinds we're facing in the current economic environment, Our solid bottom line improvement demonstrates the success of our strategic actions to drive improvement across the business. Revenues totaled $119.7 million compared with $141.8 million in the second quarter of fiscal 2020, and essentially flat to the sequential first quarter. Gross profit for the quarter was $22.7 million compared with $26.3 million for the same quarter of fiscal 2020. Gross margin drew 30 basis points to 18.9% for the second quarter of fiscal 2021 from 18.6% in the second quarter of last year. The increase was due to product mix in the commercial segments, reduced trade-in costs, and improved inventory management. Gross profit and gross margin both improved significantly from the sequential first quarter, despite flat sales. This was the result of favorable product mix, including higher event of infrastructure sales and a reduction of charges related to inventory, primarily in the retail segment. SG&A expenses were down 11% from a year ago to $22.8 million, reflecting the success of our aggressive cost reduction initiatives, as well as lower sales volume. In addition, we recorded a benefit from bad debt expense of $800,000 as a result of strong collection efforts allowing us to reduce reserves put in place in fiscal year 2020. In the second quarter of fiscal 2021, the loss before income taxes was $246,000 compared with income before income tax of $239,000 a year ago. We continue to maintain a healthy balance sheet. Effectively managing inventory and lowering our E&O has been key elements of our near-term improvement initiative. and we performed very well in that regard in the second quarter. Inventory came down $7 million from the first quarter. Due mostly to the reduction in accounts payable, we ended the quarter with a balance on our line of credit of $32.1 million. Also in the second quarter, we filed our fiscal year 2020 tax return, which we expect to generate a $4 million cash refund later this fiscal year. Before I wrap up, I have a few comments on our recent announcement to divest and exit the retail business. As a result of the retail transaction with VoiceCom, as well as the monetization of the remaining items on the balance sheet, we expect the exit from our retail operations to generate a range of $8 to $12 million in net cash flow in the second half of fiscal 2021, and another $4 to $8 million in the aggregate over the next four years. We will sell most of our retail inventory at the closing of the sales transaction, but we will continue to sell some vented products to a small group of customers for a short period of time. We are not selling accounts receivable or accounts payable, so we will continue to collect on and pay those amounts during the third and fourth quarters. We expect the transaction will close in the latter half of the third quarter of fiscal 2021, subject to various conditions. I joined Sandeep in thanking our retail team for their contributions to Tesco, and we look forward to continuing to work with VoiceCom to make this a successful transition. In closing, we are encouraged by our solid bottom line performance in the second quarter, and we will continue to aggressively implement our improvement initiatives. As we look to the second half of the year, we expect sequential revenue growth in the commercial segment in the third quarter, but with a return to more historical public carrier market gross margins due to product mix. During the second quarter, we recognized benefits associated with changes in estimates related to accounts receivable and inventory reserves that we would not expect to recur. Additionally, we expect to incur incremental legal and other costs associated with responses to the recently initiated consent solicitation. Looking beyond fiscal 2021, we will continue to make meaningful investments as we put a heavier focus on the commercial side of the business to capitalize on the incredible opportunities ahead. With that, Sandeep and I will be happy to take your questions.
spk02: Thank you. And as a reminder, to ask a question, please press star then 1 on the telephone keypad. And to withdraw your question, press the pounder hash key. The first question is from Maggie Nolan with William Blair. Your line is open.
spk06: I wanted to ask about the margin profile considering the sale of pieces of the retail segment. So, you know, that's historically had a higher margin profile, and I'm wondering what your thoughts are around future profitability and specifically managing some of the volatility that comes with the public carrier segment in that margin profile now that retail is no longer part of the equation.
spk05: Hey, Maggie. It's Eric. You know, if we look at the commercial gross margins, as have been the case for the past few quarters, you know, that's going to be the ongoing operations. The retail business will essentially go to zero fairly quickly. So I think that's kind of your baseline for that. If we dig a little deeper into those two, The carrier market, as we said today, will probably see some decline here in the next quarter as it was a little higher than it was in the first quarter. I think the first quarter is probably a little bit more representative as the carrier business picks up here hopefully over the second half of the year that we fully expect to happen. On the VAR business, I think there's a lot of moving pieces, including Ventive, which is clearly a big growth opportunity for us and something we've invested heavily in. And we're very excited about the results that we saw this quarter out of the Ventive infrastructure business. And we think that's going to continue to grow and be a bigger piece of that business, which will help margins there. We also mentioned Tesco.com as a significant growth driver for margins on the VAR business. So, Those two things should certainly have a positive impact. So, you know, I think the long and the short of it is that the margins that we're seeing today are probably still going to continue in the carrier space, probably see a small decline in the carrier business, but the bar business we think will either stay strong or even potentially go up if the vented business continues to grow.
spk03: Yeah, Eric, thanks. And, Maggie, Hi, good morning. Just from a strategy perspective, just to highlight a few things I said during the call. On the public carrier side, I mean, we are focused very exclusively on market share growth. We don't believe, as Eric said, you know, we will improve margin points, but our strategy is to grow revenue and improve the absolute margin contribution to the business. So that's point one. On the VAR and industry side, As Eric said, it's a product mix. Getting that to be more favorable with Ventive, with services, we believe we will grow margins there. And then finally, getting Tesco.com to be more contributing than it has been in the recent past. We have higher margins when we sell through that channel.
spk06: Understood. Thank you. And then, you know, there's a lot of different dynamics related to COVID, you know, some things starting to open up in September, but maybe some hints of things starting to close back down again now as we are approaching November. I'm wondering, you know, what you're anticipating in the way of the timing of projects, how you can kind of manage that in the public carrier, in the bar markets, you know, in the midst of all the other changes that you're making in the business.
spk03: It's a very dynamic situation, as you might expect, Maggie, and not one answer for every geography in the country. Early during the pandemic, it was the Northeast and New York where we saw most of the impact. That has shifted, much like the pandemic has. So in terms of our preparation, We are obviously improving Tesco.com to catch the long tail of carriers, and that is showing results. We have focused on the product mix to bolster our margins. And then from a sales perspective, you know, we have segmented our customers across the country, and specifically in the bar and industries. and are attacking based on market intelligence and other data that we have. We're beginning to see success, which is what gives us confidence in saying we will grow the combined carrier and VAR revenue sequentially. From a public carrier space, we expect the awards of new 5G construction, and this is mostly outdoor construction on tower sites, et cetera. We expect that to pick up. in the latter half of our fiscal year going into early calendar 2021. We still expect that to happen, and that will boost the intensity of our carrier business.
spk06: Thank you. And then you've obviously been adapting to the environment, refining your strategy.
spk03: how often do you intend to kind of more formally revisit that strategy for growth and the three pillars that you've put forward in the recent past year maggie as you might imagine we have you know routine checkpoints in place both within the management team you know through internal operations reviews qbrs etc we have regular checkpoints in place with our board of directors. So it's something we manage, watch, measure very, very carefully. And we will continue to do that.
spk06: Thank you. That's all for me.
spk01: Thank you, Maggie.
spk02: As a reminder, please press star 1 to ask a question. Our next question is from Bill Buzone with Titan Capital. The line is open.
spk01: Would you discuss what led to the VAR gross margin increasing? And if you mentioned it in your opening remarks, I missed it.
spk05: Yeah, Bill, it's Eric. Really the two things I just mentioned there, the growth in the Venture business, which had a very strong quarter primarily in that VAR space. And then the second thing would be the increase in the revenues from Tesco.com, which tend to have a higher gross margin increase. than our normal assigned customer portfolio, if you will. So those two things were primarily the reasons that the bar of gross profit was higher.
spk01: And continuing on that, Eric, the event of success has been mentioned a couple times throughout this call this morning. Is that something that there were a number of one-off items, or is there some degree of – recurring success factor that you all see there?
spk03: Hey, good morning, Bill. This is Sandeep. I will take that one. So first, it is a matter of strategy for us to fully double down on the ventive business. I've talked about that, you know, on the last few quarters. We continue to do that. We're at a point where we are seeing the results of that strategy. It's small proof points, but we are definitively seeing that. So first, from a public carrier perspective, with the recent CBRS deployments and across tower companies, we have some innovative solutions that I described earlier in the call, which gets Ventiv to participate in the overall carrier product mix for us. This is new for Tesco. I expect this to continue. In fact, some of the purchase orders and projects that I talked about earlier in the call has multipliers you know, across many, many towers that exist in the country today. So that's initial proof points, and I expect to grow that in the carrier space. For VAR and industries, we are doing a better job now with the industrialization of Ventus to influence the mix of products. We are adding enclosures. So some of the things that draw back on earlier calls we had talked about our partnership with cisco the cisco machine builder program last quarter this is the second quarter of fiscal 2021 we saw the first purchase orders as a result of that partnership i expect that to continue to multiply we had talked about a partnership with rage ant where we partner with rage ant and provide Ventiv enclosures. We saw the first couple of purchase orders from that partnership. I expect that to multiply. Beyond that, just the industrialization of Ventiv gives us a platform to basically wrap Ventiv around other product sales, giving us a more favorable mix, and therefore result in margin performance. These are not one-offs. We expect to double down on this, and we expect to drive this going forward.
spk01: Great. Thank you. And then this is a question that may be difficult to really wrap one's arms around given the number of VARs that represent that category. What are you hearing from them relative to the level of economic activity and just their view of the business environment out there?
spk03: So at the top level, everybody is cutting the cord. bill. So there's excitement around wireless. There's excitement around the new CDRS spectrum. There's new technologies like private LTE coming into the mix. So the mood is very favorable, if you will. So that's point one. Point two, COVID has impacted construction. No doubt about it. It's been difficult to predict. I mean, I won't belabor it. This is what Maggie asked about. And it's different intensity based on the day or the month across the country. Very difficult to predict. However, if you look at the vertical industries that our VARs serve, all of them benefit significantly and economically through automation, through cutting the cord. So that intensity of innovation is continuing. We're not seeing a dip in that.
spk01: Great. Thank you. And then jumping to a comment that you made, and I'm sorry, I just don't understand this part of the business well, the edge data centers. Would you please explain what that is and why it's relevant to Tesco?
spk03: Yes, Bill, happy to do that. This is a dynamic that was talked about during the 5G architecture standardization discussions. We are now seeing this being realized in actual projects and POs. So at a very high level, it's around latency. For some of the virtual reality, augmented reality, or massive IoT applications, the response times required by these applications to be real is sub-millisecond. So latency is important. So you need to get the processing as close to the subscriber or as close to the tower as you can. So we see a lot of real estate owners like the tower companies. I've seen articles in the press. not purchase orders or business discussion, articles in the press that the U.S. Postal Service is also looking at this. So anybody with real estate now has an opportunity to deploy data centers. These are containerized small data centers offering high capacity from a compute, storage, processing perspective that application owners can use to provide the low latency applications. We are seeing the beginnings of this. Uh, it's very, very similar to the rest of the business we do. You know, we are focusing on it and we expect this trend, you know, to become real, uh, you know, over the coming months.
spk01: Thank you. So, um, that's, that's something then that presumably as more and more of those sort of, uh, applications, uh, become become reality that you're just going to see for not quarters, but years of opportunity there. Is that essentially what you're saying?
spk03: That is what I'm saying, Bill. Thank you for summarizing.
spk01: All right. Let's shift to Carrier more broadly speaking, if we could. What are you hearing from the carriers in terms of their build-out plans and the commentary around that and how COVID has is or is not impacting, you know, not the day-to-day, but just their big, their longer-term strategic build-out plan. And I ought to be careful here. When I say longer-term, I'm really referring to, you know, over the next two, three quarters, and just differentiating that versus, you know, something that might impact them on a weekly level because people are out sick or whatever.
spk03: So, Bill, from a longer-term excitement around 5g and the resultant build out nothing has changed in terms of what we are hearing so that's point one point two for our business the covet impact is mostly relegated to places venues projects where people need in-building access if the venue is shut down the projects get pushed out. So that is the dynamic we are seeing. It's fairly big. We see this in our DAS business with lots of our customers. That's the primary point of issue. From a 5G build-out perspective, a lot of the build-out that we are seeing now are essentially upgrades from 4G to 5G, 4.5G to 5G. These are not new sites. So we still see 10% to 15% of our revenue coming from 5G. But these are upgrades to 5G, not new site construction. We expect the new site construction to happen, as we have said before, in the second part of our fiscal year and the first half of calendar 2021.
spk01: Great. Thank you. And then lastly, you mentioned this, I think, on the last call and this morning, the permitting aspect. To what degree is that improving with some of the municipalities and permitting decision makers being in the office or at least finding a way to work through the permitting process? Or is that still a very large problematic bottleneck?
spk03: It has definitely impacted projects. I would say it's lessening, but the data points are all anecdotal. It's lessening, but still there.
spk01: Great. Thank you. Thanks, Phil.
spk02: We have no further questions at this time. We're going to call back to Namsan for any closing remarks.
spk03: Thank you, Chris. We're very encouraged by the progress we've made on our strategy and operating results. We have a solid profit improvement plan in place, and our efforts in the second quarter made a meaningful impact on our financial results. We will continue to take bold actions to drive near-term gains. As we look ahead to the second half of the year, We're focused on a smooth exit from retail after having successfully divested off of that business, and we will continue to drive growth and profitability improvement in the ongoing commercial business. Given the current macroeconomic outlook for the remainder of the year, we expect an easing of the project delays in the commercial business in the second half of Tesco's fiscal year and anticipate additional growth coming from 5G in calendar year 2021. We're also making excellent progress on each pillar of our stated three-pillar strategy. The team is doing a remarkable job in improving our near-term performance while at the same time setting us up to capitalize on the growth, technological change, and the resultant complexity that will drive our industry in 2021 and beyond. This is an amazing opportunity, and we have the right strategy in place to realize this opportunity. I would like to thank our people for their dedication and commitment to the course we have set. Their determination to crudely transform Tesco has been inspiring, and it has driven the progress we've made thus far. I look forward to reporting our continued progress with all of you. Thank you.
spk02: Ladies and gentlemen, this concludes today's conference call. Thank you for your time.
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