TESSCO Technologies Inc (TESS) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2021 TESSCO Technologies Inc. Earnings Conference Call. (Operator Instructions).

I would now like to hand the conference over to your speaker today, David Calusdian from Sharon Merrill. Thank you. Please go ahead.

Good morning, everyone, and thank you for joining TESSCO's Q2 2021 conference call. Joining me today are Sandip Mukerjee, TESSCO's President and Chief Executive Officer; and Aric Spitulnik, the company's CFO.

Please note that management's 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. Forward-looking statements involve a number of risks and uncertainties, and TESSCO's results may differ materially from those discussed today. Information concerning factors that may cause such a difference can be found in TESSCO's public disclosures, including the company's most recent Form 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 Sandip Mukerjee, TESSCO's President and CEO. Sandip?

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 TESSCO 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 offices.

For several quarters, I've been sharing with you my vision of a TESSCO 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 Voice Comm, effectively divesting TESSCO 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 band, 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 Ventev infrastructure brand and tessco.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 3-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: #1, growing our value-added distribution business and ensuring that we are the easiest company to do business with; #2, industrializing our Ventev 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. And we'll talk about the significant progress we have made on this 3-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 Ventev 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 TESSCO'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 Ventev 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 Voice Comm.

Within our Commercial segment, our VAR and Integrator business is extremely diverse and includes all wireless infrastructure business outside the carrier ecosystem. TESSCO 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 Ventev custom power solutions. We saw good growth in this area in Q2 and have generated revenue growth in the utilities sector in 3 of the past 4 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 tessco.com website, and a higher percentage of Ventev's 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 tessco.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 tessco.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 tessco.com grew 14% sequentially.

We are continuing to improve tessco.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 tessco.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 higher tessco.com spend had on revenue and margin, we also increased the percentage of our higher-margin Ventev infrastructure products sold to our VAR customers. We generated 16% year-over-year revenue growth of Ventev infrastructure products and that, combined with the higher tessco.com revenue, contributed to the 100-basis point increase in gross margin in our VAR and Integrator market.

Some notable Ventev wins in our VAR customer market include: networking VARs continuing to utilize Ventev solutions for WiFi 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 TESSCO's Rajant partnership for an installation in South America; a purchase order for a Rajant solution installed in Australia; a Ventev 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 Ventev has resulted in greater interest and more requests for Ventev products from a broader range of our customers. This is leading to greater utilization of Ventev solutions. Customers tell us that they select Ventev 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, Ventev 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, Ventev 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 TESSCO. 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 IoT 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 TESSCO. We expect more opportunities in this area, giving us the ability to introduce Ventev 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. coast line. TESSCO was selected by this contractor to supply a number of components, including proprietary solutions from our Ventev 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 TESSCO to supply an array of products for a monitoring and telemetry solution for their tower sites. And it, too, includes a proprietary Ventev component. This sole source position will result in deployments across several thousand of this customer's towers.

These are 2 prime examples of the strategy we detailed 2 quarters ago where I committed to a transition of our Ventev organization from a custom engineering focus to an industrialized organization capable of innovative design and large volume production. I had also shared my belief that the value provided by Ventev 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, TESSCO is well positioned in 3 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 with completing the necessary IT transformation to securely position TESSCO 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 3-pillar strategy that I mentioned earlier in the call. We are executing on this strategy in an effort to transform TESSCO, improve our top line and margins and to ensure TESSCO 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, TESSCO 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 cost 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 Ventev operations, scaling our capabilities and driving innovation. We have done the following: rationalize SKUs and reduce 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 Ventev 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 TESSCO customer base, and our efforts to grow this business have been on 3 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 engagement; and focus on engaging tower 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 have also established beta customers to provide us with feedback to help maximize the value and the salability of the final product. These capabilities will help TESSCO 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 Aric for the financial review. Aric?

Thank you, Sandip, and good morning, everyone. As Sandip 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 grew 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 a result of favorable product mix, including higher Ventev 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 Voice Comm 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 million to $12 million in net cash flow in the second half of fiscal 2021 and another $4 million to $8 million in the aggregate over the next 4 years. We will sell most of our retail inventory at the closing of the sales transaction, but we will continue to sell some Ventev 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 join Sandip in thanking our Retail team for their contributions to TESSCO, and we look forward to continuing to work with Voice Comm 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, Sandip and I will be happy to take your questions.

(Operator Instructions). The first question is from Maggie Nolan from William Blair.

I wanted to ask about the margin profile considering the sale of pieces of the Retail segment. So 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 segments in that margin profile now that retail is no longer part of the equation.

It's Aric. If we look at the Commercial gross margins, as have been the case for the past few quarters, that's going to be the ongoing operations. The Retail business will essentially go to 0 fairly quickly. So I think that's kind of your baseline for that. If we dig a little deeper into those 2, 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 Ventev, 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 Ventev 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 tessco.com as a significant growth driver for margins on the VAR business. So those 2 things should certainly have a positive impact. So 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 VAR business we think will either stay strong or even potentially go up if the VAR business -- Ventev business continues to grow.

Yes, Aric, thanks. And Maggie, 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 Aric said, 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 Aric said, it's a product mix. Getting that to be more favorable with Ventev, with services, we believe we will grow margins there. And then finally, getting tessco.com to be more contributing than it has been in the recent past, we have higher margins when we sell through that channel.

Understood. And then there's a lot of different dynamics related to COVID. 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 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 VAR markets in the midst of all the other changes that you're making in the business.

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 tessco.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, we have segmented our customers across the country and specifically in the VAR 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.

And then you've obviously been adapting to the environment, refining your strategy. How often do you intend to kind of more formally revisit that strategy for growth and that's the 3-pillars that you've put forward in the recent past here?

Maggie, as you might imagine, we have routine checkpoints in place, both within the management team, through internal operations, reviews, QBRs, et cetera. 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.

(Operator Instructions) Our next question is from Bill Dezellem with Tieton Capital.

Would you discuss what led to the VAR gross margin increasing? And if you mentioned it in your opening remarks, I missed it.

Yes, Bill, it's Aric. That's really the 2 things I just mentioned there. The growth in the Ventev business, which had a very strong quarter, primarily in the VAR space. And then the second thing would be the increase in the revenues from tessco.com, which tend to have a higher gross margin than our normal assigned customer portfolio, if you will. So those 2 things were primarily the reasons that the VAR gross profit was higher.

And continuing on that, Aric, the Ventev success has been mentioned a couple of 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?

This is Sandip. I will take that one. So first, it is a matter of strategy for us to fully double down on the Ventev business. I've talked about that on our 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 Ventev to participate in the overall carrier product mix for us. This is new for TESSCO. I expect this to continue.

In fact, some of the purchase orders and projects that I talked about earlier in the call has multipliers 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 Ventev to influence the mix of products. We are adding enclosures. So some of the things that -- to 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 Rajant, where we partner with Rajant and provide Ventev enclosures. We saw the first couple of purchase orders from that partnership. I expect that to multiply. Beyond that, just the industrialization of Ventev gives us a platform to basically wrap Ventev around other product sales, giving us a more favorable mix and therefore, result in margin performance. These are not one-offs and we expect to double down on this, and we expect to drive this going forward.

Great. 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. But what are you hearing from them relative to the level of economic activity and just their view of the business environment out there?

So at the top level, everybody is cutting the cord, Bill. So there's excitement around wireless. There's excitement around the new CBRS 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 1.

Point 2, 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 of 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.

Great. 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 TESSCO?

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 if 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 low latency applications. We are seeing the beginnings of this. It's very similar to the rest of the business we do. We are focusing on it and we expect this trend to become real over the coming months.

So that's something then that presumably as more and more of those sort of applications become reality that you're just going to see for not quarters, but years of opportunity there. Is that essentially what you're saying?

That is what I'm saying, Bill.

Okay.

Summarizing.

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 is or is not impacting, 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 over the next 2, 3 quarters. And I'm just differentiating that versus something that might impact them on a weekly level because people are out sick or whatever.

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 1. Point 2, for our business, the COVID 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.

Great. And then lastly, you mentioned this I think on 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?

It has definitely impacted projects. I would say it's lessening, but there are -- the data points are all anecdotal, right? It's lessening, but still there.

We have no further questions at this time. I'll turn the call back to management for any closing remarks.

Thank you, Chris. We are 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 are 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 TESSCO'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 3-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 truly transform TESSCO 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.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.