Video-on-demand vendor Arroyo Video Solutions announced today that it has completed a series B funding round totaling $12 million. Additionally, the company announced that Kim Kelly has stepped down as CEO, and that Arroyo's Co-Founder and CTO Paul Sherer has been named CEO on an interim basis.

The funding round, led by Matrix Partners, brings Arroy's total venture capital investment to more than $25 million. All of the company's existing investors including Doll Capital Management, Foundation Capital, Time Warner Investments and Comcast Interactive Capital, participated in the round.

The new financing will be used to push Pleasanton, Calif.-based Arroyo into new markets. Among the potential targets are telcos. The company recently announced a 10 Gigabit Ethernet solution for VOD, which is expected to garner some attention among carriers moving into the video market. The platform also has been bulked up to allow carriers to send 5000 3.75Mbps streams per 3RU server.

The company initially will stick to its bread and butter cable and satellite market but sees telcos as a rich expansion market, said David Yates, vice president of marketing and business development

"The view of the company is to look at the largest markets first," he said.

With telcos, the company sees playing a role where carriers would use the server as part of a larger video-oriented application, Yates said.

"We'll allow third-parties to put their applications on top of this," he said. "We are thinking of applications that have a video component to them."

The company, however, is currently lacking a large traditional telco vendor partnership. At the same time, Yates believes the server platform would fit just fine into the Microsoft TV ecosystem since it works with both MPEG-2 and Windows Media encoding.

"We're excited that the telcos are moving forward," he said. "We strongly believe that the scalability and resiliency will give it a place in MS TV."