Q4 2019 Earnings Call
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I would now like to turn the conference over to your Speaker today, David Climie.
VP of Investor Relations. Thank you. Please go ahead Sir.
Thanks, and good afternoon, everybody. Thank you for joining today's conference call and webcast on the call today is can thaxton, president and CEO and Dave Mclennan, Our Chief Financial Officer. As a reminder, today's presentation is being webcast will be available on our website. Following the call. Today's agenda is as follows Dave will provide a detailed overview of our.
A year ended 2019 results Ken will provide his corporate update and then Dave will review our full year guidance for 2020.
Before we get started I will reference the Companys cautionary note regarding forward looking statements.
In summary of our cautionary note can be found on page two of the webcast is now being displayed today's presentation contains certain statements and information that are not based on historical facts and constitute forward looking statements within the meaning of applicable security laws. These statements include our financial guidance statements about our strategy goals objectives.
And expectations and commentary regarding the outlook for our business are forward looking statements are based on the number of material assumptions, including those listed on page two of the webcast presentation, which could prove to be significantly incorrect. Additionally forward looking statements are based on her managements current expectations and we caution investors the forward looking steep.
Lets, particularly those that relate to longer periods of time are subject to substantial known and unknown material risks and uncertainties that could cause actual events or results to differ significantly from those expressed or implied by are forward looking statements I draw your attention to a longer discussion of a risk factors in our area and manage.
Lets discussion and analysis, which can be found on SEDAR and Edgar as well as our other regulatory filings. This presentation should also be viewed in conjunction with our quarterly earnings release with that I'll now turn the call over to Dave Mclennan for his review of the year end 2019 results.
Thank you David and good afternoon, everyone knows that we report our financial results in us dollars and all the U.S. GAAP basis. We also present non-GAAP results to provide a better understanding of our operating performance a full reconciliation between our GAAP and non-GAAP results is available on our website.
Q4 revenue was $174.3 million slightly above expectations and consensus estimates of $171.1 million.
Non-GAAP gross margin in Q4 was 29.5%.
Below our expectations, primarily due to two factors firstly the impact of product mix, which resulted in lower sales of higher margin enterprise gateways offset by higher sales of lower margin automotive modules compared to expectations.
And secondly, the impact of unusual warranty and inventory expenses in the quarter that were mainly related to defective third party printed circuit boards. This has now been remedy these expenses negative negatively impacted gross margin by approximately $1.7 million well one percentage point.
During the quarter, we continue to manage operating expenses carefully well at the same time investing to grow the business.
Adjusted EBITDA in the fourth quarter was $2.3 million and loss per share was eight cents. If we adjust for the unusual warranty and inventory expenses incurred in the quarter. Adjusted EBITDA would have been $4 million and non-GAAP loss per share would have been three cents slightly better than the Q4 consensus estimates.
Full year 2019 revenue was $713.5 million slightly above our guidance range of $708 million to $712 million.
Full year, adjusted EBITDA was $21.1 million and the non-GAAP loss per share was one set adjusting for the unusual warranty and inventory expenses incurred in Q4, adjusted EBITDA would've been 22.8 million and earnings per share wouldn't that four cents inline with our guidance and consensus.
Yes.
Looking at our segmented results for the full year overall revenue was down 10% year over year with the expected decline in our embedded broadband segment offset impart by modest growth in I O T solutions.
Within embedded broadband growth in automotive module sales was offset by lower module sales to piece you and customers as a result of several design win losses that we reported on this time last year and lower networking module revenue as well.
This resulted in embedded broadband revenue being down 20% year over year.
Within OTI solutions, we delivered solid recurring and other services revenue growth of 7.4% for the full year, excluding items, which was sold at the end of 2018.
We're very pleased with the momentum building in our services business as we exited the year with Q4 year over year recurring and other services revenue growth of 16.3% again, excluding the high tech revenue in 2018.
We also experienced strong growth in enterprise gateway sales in 2019 up 12% year over year.
The growth in these two revenue streams was offset by a decline in to GE Threeg biotech module sales as these technologies are preparing to sunset.
Gross profit dollar declined year over year with the decline in revenue on a percentage basis gross margin overall was lower by approximately 2.5 percentage points.
On a segmented basis gross margin in our I O T solutions reporting segment was stable year over year at 37.1%.
Gross margin in our embedded broadband reporting segment decreased due to unfavorable product mix, specifically lower sales and higher margin piece, you and networking modules and higher sales of lower margin automotive modules. This change in mix negatively impacted gross margin in the embedded broadband segment by six percentage points.
Adjusted EBITDA in 2019 was 21.1 million.
Down year over year as the reduction in total revenue associated lower gross margin dollars was somewhat Christian by lower operating expenses in 2019.
Moving to the balance sheet for the year ending December 31st 2018 cash flow from operations was $6.9 billion and capital expenditures were 20.3 million, resulting in negative free cash flow of 13.4 million.
This was partially offset by 3.2 million generated from investing and financing activities.
As a result, we had a net decrease in our cash balance of 10.2 million in 2019, ending the year was 79.1 million of cash.
Subsequent to year end, we deployed approximately 20 million for the purchase of the M. M Group in Australia.
I will note. The 2019 was a heavy year for cash restructuring expenses with this mostly behind US we continue to having strong cash balance and access to additional capital if required to our 30 million committed bank facility.
Regarding our cost saving initiatives in both cost of goods sold and operating expenses. We ended the year with approximately 32 million in total estimated annualized savings. Once these initiatives have been fully implemented.
In 2020, you'll be focusing on additional sales effectiveness initiatives further optimization initiatives and cost of sales reductions we remain on track to meet our stated target reducing our cost of sales and operating expenses by approximately 40 to 50 million as we exit 2020.
In support of our transformational strategy, we plan to continue to invest the majority of our opex cost savings into targeted reinvestments in both R&D and go to market programs in order to continue driving growth in recurring revenue gateways, Fiveg and LP WH.
With that I will now turn the call over to kit to provide a corporate update.
Thanks, Dave in 2019, we made tremendous progress in transforming Sierra wireless into the global leader in I O T solutions.
We delivered our plan of 99.1 million of recurring other service revenue in 2019, and we're projecting this to grow by over 25% in 2020 to 125 million, which includes our acquisition of the MGM group in Australia.
In 2019, we secure valuable design wins with future annual recurring revenue more than $90 million.
The energy that we put into the flywheel of solutions design wins is starting to deliver and we expect this will continue to accelerate.
I'm very pleased with our progress.
Another leading indicator of our I O T solutions transformation is it we increased our net new aiotv connected devices in 2019 by over 400000 devices growing our base by 13% to end the year with more than 3.6 million in global connections to.
The key contributor to that growth was a strong uptake in our smart Sims, which accelerated during the year and reflected our higher value wins with devices combined with subscription based recurring revenue.
In 2019, we strengthened our portfolio to support strong solution winds in the market.
We successfully launched our octave all in one edge to cloud I have a t. platform with advanced data orchestration and we had our first doesn't design wins as customers benefit from the reduce development cost and faster time to market.
We rolled out rate to connect technology with our the box conductivity and cloud platform across all our HL and W.P. series embedded modules.
We started to ramp up sales of our LP WH low power wide area modules bundled with our subscription based connectivity services.
We continued to invest in leading edge embedded module with gateways and routers, including cellular embedded Fiveg technology.
We secured new ecosystem partners, including a preferred partnership with Microsoft is your to collaborate on Aiotv solutions.
These initiatives are focused on allowing us to win more industrial LT customers and increase our success in this 10 to 20 billion dollar total addressable market.
Industrial I O T customers, a foundry complex to connect their machines devices or assets with light duty and our bundles and octave solutions are solving the problems at cost 75% of I T projects to fail or get delayed.
Forrester report that our octave solution helps companies get their solutions to market, 75% faster and with 40% lower overall costs.
Capitalizing on these strengths we are accelerating our efforts in 2020.
To fund our transformation to achieve our stated goals of doubling our recurring another service revenue to 200 million by mid 2022.
And double again to 400 million by mid 2024, we've been continuing our efficiency efforts to say between 40 to 50 million of combined Opex in Cogs as previously announced.
During 2019, we centralized our R&D groups closed five development centers combined our go to market teams outsourced a variety of functions and completed several major restructuring initiatives in the first phase of our plan to your transformation program.
To give visibility into our occur in revenue and other service design wins, we shared at our June 2019, Investor Day, do we expected to secure over 400 million in lifetime value of wins in 2019.
With accelerating momentum throughout the year, we achieved this school on LTV of design wins.
Well LTV is a useful metric it lacks the element of a timeframe following feedback from analysts and shareholders. We're adopting a design win metric which includes timeframe. No. One is long term annual recurring revenue or L. TARP.
L. tire is based on estimated annual recurring revenue in year three from the time of customers program is activated.
With the wins that we secured last year, our total L. tar was in excess of 90 million approximately two and a half times greater than the L. TARP 2018.
These wins are the flywheel, a future recurring revenue growth and habits on track for our goal of 200 million an annualized recurring another service revenue by the middle of 2022, and doubling to 400 million by the middle of 2024.
With record recurring revenue ends in 2019, and a strong opportunities pipeline in place. We remained focused on delivering high margin subscription based service revenue in 2020.
To help accomplish this we've been adding new talent to our I O T solutions team.
Driving better region alignment and our go to market teams and investing in tools and processes to boost sales optimization and efficiency.
On the regional front.
I pointed mark Overton, our Chief solutions officer to lead our team in EMEA, where our device and network offerings are exceptionally strong and where most advanced in offering complete solution bundles.
Jim Ryan our SVP partnerships and M&A led the acquisition of the MDM group and will lead our APAC region and will help lead the continued expansion of the strong mtwom recurring revenue model in southeast Asia.
In North America, we are very strong in both enterprise with our airlink networking solutions as well as in our I O T solutions offerings.
Recruiting a strong new SPP Americas, and the interim I'm enjoying leading this group myself.
For 2020, I've set aggressive design win targets for our sales team as we continued to build momentum by adding new customers to our occur in revenue flywheel.
We strongly believe this differentiated strategy under 10 underpins, both successful growth and long term shareholder value creation.
A good example of this differentiation is a recent customer win on our often edge to cloud solution that we secured last quarter with a division of a leading international energy company.
They needed real time monitoring for their industrial batteries to increase performance and improved preventative maintenance.
Our winning proposal was to deploy our FX 30, programmable Aiotv gateway using our global smart Sim conductivity and to enable to weigh data orchestration between their batteries at the edge the network and cloud based management platform.
Customer is currently planning for global deployment and with our NVNO capability and 24 by seven network operating center. It makes it easy for them to deploy edge intelligence as they scale the real time monitoring program.
Another key customer win in Q4 was with the Northern European company, providing air quality control and monitoring services.
The customers expanding their presence in Europe and also growing its operations in North America, the middle East and Japan.
To gain a competitive advantage in their marketplace. The company is deploying their services using our adoptive edge to cloud solution with a global smart Sim to reach new geography as quickly.
After evaluating a large number of aiotv vendors the data orchestration capability of octave with our fully integrated solution with the key differentiator in their decision dyslexia wireless.
And our Microsoft partnership we achieved a major launch gate late in 2019 and Optum is now part of the Microsoft is your Aiotv solution set and featured in their marketplace.
We are actively engage with their sales teams and system integration partners and we'd be participating in various co marketing activities. This year, including Webinars, the Microsoft I OTN action events being held in the U.S. in Germany and various other conferences.
I'm pleased to see that we have a number of joint occupant is your customers who are coming to market and it had growing funnel of joint prospects is in development.
As we continue to focus on recurring revenue opportunities. We're also investing in a leading edge portfolio of cellular embedded modules gateways and routers.
As a leader in embedded modules, we've been investing to expand and refresh our portfolio.
In L., PW way and lower category LTE E technologies, we have launched new devices that expand our device to cloud offerings and accelerate recurring subscription based revenue.
In Fiveg and gigabit Fourg LTE, our high speed solutions, our powering next generation devices for applications in enterprise networking edge processing smart factories robotics, VR video systems and machine learning.
Our first to market Fiveg embedded modules are now sampling with Oems and system integrators in mobile computing enterprise networking and industry loyalty platforms.
Following our discussions with carriers and chipset suppliers, we're fully supporting the Fiveg New radio standard in both millimeter wave and sub six gigahertz frequencies.
In addition, we are focused on expanding our rate to connect series of embedded modules that allow customers to simplify their aiotv deployments and accelerate their time to revenue.
Differentiated from competitors, our recently announced our C series has all of the key elements our customers need in a single integrated bundle.
And embedded module with integrated smart Sim this pre connected to global networks.
And I O T management platform.
And an end to end integrated security.
Fully bundled solution reduces our customers total cost of ownership.
So in conclusion, while we're only one year into our transformation program. We've made tremendous progress we're on track with our initiatives and we're seeing solid improvements in key areas such as our sales opportunities pipeline.
Customer design wins, net new connections and device plus service bundles.
We are facing some softness in parts of our embedded broadband business as expected.
Specifically mobile computing.
We are offsetting that with a growth in our high value I O T solutions business as we focus on increasing our subscription based recurring revenue.
With that I will now hand, the call back to Dave for the outlook for 2020.
Thanks, Ken moving on to guidance for full year 2021, 2019 was overall a financially challenging year, we made significant progress in transforming our company as we reorganized the business and reduce costs.
We also realized solid growth from our current and other services revenue as well as an enterprise gateways, both of which represent high value differentiated parts or a business that underpin long term value creation.
In 2019, the progress we made in these areas was as expected offset by pressures in certain areas of our hardware business, particularly embedded modules, so PC OEM and networking customers and to a lesser extent legacy to GE Threeg key module sales.
In 2020, we expect these transitional dynamics to continue more specifically a recurring and other services revenue, which is comprised of more than 90% recurring revenue.
Expected to grow approximately 25% year over year, including the contribution from recently acquired Mtwom group.
Excluding the end to end group, we expect organic services revenue to grow by approximately 15%.
We also expect or high value enterprise gateways revenue to grow by approximately 12% year over year.
And as we saw in 2019, we expect to growth in these areas as well as growth in our automotive modules revenue will be offset by continued pressure in certain areas of our embedded module business, maybe PC OEM and parts of our I O T modules business.
Given these factors, we expect 2020 revenue to be between 690 710 million had adjusted EBITDA to be between 10 and 15 million.
On reporting segment basis, our expectation is that our I O T solutions segment revenue will grow 7% to 10% year over year at our embedded brought that segment will decline by 12% to 15% year over year, resulting in total revenue being slightly down in 2020 compared with the prior year.
Please note there is significant uncertainty around the impact of the kroner virus or the industry supply chain and potentially certain operational activities. We're actively monitoring the situation at this time have not factored into the potential impact on our operations or financial performance in our 2020 guidance.
This concludes our formal remarks. Thank you very much operator, we can now open the call for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby, while we compile the Q and a roster.
Your first question comes from the line, Mike Walkley with Canaccord Genuity. Your line is open.
Great. Thanks for taking my questions [laughter], Dave just following up on the 2020 guidance can help us think about a gross margin trends by the segments as you have.
Stronger mix, the recurring revenue and the gateway business and it sounds like in your guidance.
Should we see margins trend up an IP solutions and then on the embedded broadband side to the can continue to fall or even stay at these low 20 levels given the heavier mix likely to automotive in the short term.
Hi, Mike It's Dave. Thanks, So you want to on a consolidated basis.
Yes, I think you're thinking is correct, we are expecting a youre modest uptick on a consolidated basis in gross margin percentage, it's exactly as you described.
Driven by mix growth in our energy solutions, which is higher margin and.
And decline in our.
You know embedded Bart broadband.
Gross margins as well so those are the dynamics within Aiotv solutions as we continue to get scale. The gross margin that we saw coming out of 20 2019 of 37.1% should your should continue to blend up.
As we as we improve our recurring revenue mix and our gateway mix, both of which are higher higher margin.
Hi, Mike its can't I, just made to add to that that to the mix within embedded broadband also is reflective of our PC OEM business being down.
As we mentioned before we had large programs with Lenovo and Dalat have completed so we'll have about 55 million less revenue in our PC OEM segment.
Partially offset by automotive, which is a much lower gross margin business. Overall, however, that's a really bottoming of the embedded broadband segment as we.
As we move forward, we don't have another event like the.
Decline in those two design win losses in the game PC OEM segment, So I think that from.
From a go forward basis and that can help with the modeling.
Hi, Thanks, Kent and just building on that how do you feel about your five key development relative to competitors.
And it would to five Gee, you hope to get back into PC Oems.
[laughter] timing and what that might due to the mix on the margins also is that up.
Get back design wins, and 21 to restrict it one of the model in 22 largest kind of hit the model. Even later in 21 for Fiveg. Thank you.
Thanks, Mike yet were very active in Fiveg.
Brett the forefront of the Fiveg module.
Deliveries.
Lots of dependencies on.
Chip suppliers and others to act to complete those programs.
We have samples with customers were running tests calls.
And.
On current schedules would expect to have Fiveg products launched this year I think the early segment movers are going to be more in the the gateway router parts of the market a number of customer commitments in the in that part of the market, where they're looking to take advantage of what fiveg has to offer on the on the piece.
See side, we will see some programs, but the.
Think that as you as you model into 21 and 22.
Five years can be very important in our airlink gateway business into other companies that are working in that part of the market.
Looking fairly closely with carriers on on their programs in designed we don't have that so in 2020 of the impact of Fiveg is quite small and I will provide an update as we get closer to 2021 on the longer term impacts of that program.
Okay, Great I'll pass the line and thanks for sharing idea the new El Toro metrics.
Thank you.
Your next question comes from the line of Banjos most choose will.
Hello, with BMO capital markets. Your line is open hi, good afternoon, well just have you already mentioned this the 1.7 billion warranty charge did that come out of a aiotv gross margins are better gross margins.
That was it was a bit of a mix Santos that was spread across automotive customers as well as to a lesser degree some semi OTI module customers.
Okay.
And tend to think I heard you see that PC OEM will be a 50 million revenue headwind in 2020, and so thats. The case does that imply that embedded broadband revenues are expected to be relatively flat to up a little excluding that impact.
Hi, thousands Dave here, I think actually PC OEM will be.
We'll be down by a by about $55 million in 2020 over 2019 and.
Yes, we are expecting overall that segment to be down between 12, and 15% compared to 19 overall.
Okay.
And can you comment on how we should think about linearity throughout the course of the here should we think about the year being a second half we did as you see ramps in number of your businesses.
For as any other dynamic that we should think about from a from worthy prospective.
Well, let me add lets cantel start here and they might add some color I think that Theres a few things going on here thousand. One is you know as I mentioned, our over 90 million of new design wins.
And they are the ongoing focus on our recurring revenue.
Thats been been increasing and as the a wins we have in the flywheel start to deliver you'll see our recurring revenue continue to increase each quarter and the overall, 25% increase that Dave mentioned this year.
Well, a little will play through the year I think that from a a from the other business trends that you are the PC OEM part we talked about it out for for the whole period, and then we're sort of more into standard.
Seasonality Q1's, typically our lightest quarter and ER and then we'll continue to build is that the year moves on.
Thank you Dave doing I'd add to that is that yes, we are expecting some lift in the back half of this year from from.
Threeg sunsetting and in the United States, So you'll see that that should give a little bit of a boost relative to the first half, particularly in gateways as we work through that technology replacement.
Okay. That's great last question for me can you just comment on the performance of get leased in the quarter.
But anything to call out there.
Yes gateways.
The first half second half was it was definitely lighter than the first half in terms of performance I mean, we had we had modest year over year growth in gateways.
For the full year, we grew approximately 12%.
But that that was more driven by first half for top performance.
Okay.
Everything for bustling.
Thank you.
Your next question comes from the line of Todd Copeland, Let's see I VC capital. Your line is open.
Good evening, everyone I wanted to talk to you about the recurring revenue and a few questions there.
Did you think about sort of the biggest.
Types of projects that you added in 2019 can you just give us an idea on some of the larger and larger applications.
Sure it's can't here so.
One of our primary focus has been an industrial Aiotv weve.
Who shared a number of customer examples where we're providing that a complete platform solution. So when we look at our LTR a lot of a lot of programs come a there.
In our LTM number there was.
Almost 2000 customer additions.
About 100 of them in the a larger snack bracket and those would be weighted towards industrial aiotv.
We have other.
Variety of programs in there we have programs like our managed connectivity service.
Which will fit in those programs and those folks maybe more in a our retail backup or or other sorts of Ah application like that that would be a more minority type position and then as we grow our enterprise business. You know, we're also adding software platform revenue our or connectivity.
The revenue that to that fits into that so I would put it in those sorts of orders from a where the waiting as.
Okay.
And it would not be similar Q.
The growth that you're expecting in 2020 in a in recurring revenue.
10% more or less in these categories.
Well I think that.
On the the big.
The Big design wins, and you know when I when I reflect on our Alto R.L. tower is a reflecting of what the recurring revenue will be in year three of the design win and that's not a static point that number continues to increase as customers add more products to their network. So.
That.
What's happening is I call. It the energy we have loaded into the flywheel and is more of those products get to market with our customers is more devices get deployed then that recurring revenue increases so.
I have targets internally for.
Good increase in L. Tar wins in 2020 over 2019, I really started focusing on this program as I took over as CEO about a year ago. In Q1, we were rolling out the program to our Salesforce Q2, we were training we saw al Tar increases every quarter of the year as we continued to focus on that so we're in.
Pretty good state of.
Both pipeline on those wins.
But the activity that we win in 2020 really starts to show up in revenue in 2021 2022 in 2023, so what you'll see in.
2020 is design wins from 2018, and 2019 that are coming to fruition plus some things like our Mcs managed connectivity services that are a rapid time to revenue that start producing revenue very shortly after after the design win so you'll see a you know, we're getting a better and better.
Our visibility into our and recurring revenue growth I reiterate our.
Our view that we'll be at 200 million of annual recurring revenue by the middle of 2022, and and as you continue to deliver from these design wins to 400 million by the Middle of 2020 2024. So yes, it's continuing to get an increasing number of design wins to market and.
Alive. These are typically products that are shipping with our embedded smart Sim capability, our full suite octave solution and so as those products shipped to market. They.
Start delivering data and our bundle includes data software and security.
Platforms that to that we monetized on a monthly basis okay.
And I think you said 99 at the end of the year.
So would that be comparable to that I thought you said it was roughly 95 last quarter. So was it was it up roughly 4 million quarter on quarter the rig recurring revenue.
To start here Dave.
In the in from a pure recurrent perspective.
We we redid.
26.5 million of service revenue in Q4 that was up from 24.6 million in Q3.
Sorry could you repeat those numbers please.
Services revenue recurring another service revenue was 26.5 in Q4.
And 20 at it was 24.6 in Q3.
Okay.
And then the LTM it at the end of 19, that's to 99 that you're referring to 999.1.
Right.
And then that's the baseline Florida.
For the.
The growth targets that you you called out for 2020 to 99.1.
Correct correct. So we're looking at.
15% on organic and then layered in the acquired M. M group, taking that that category revenue up by about 25% for the year.
And.
The Mtwom revenue is that all is that essentially all of that business is going into this group as well.
They also there are a hardware distributor. So it is weighted more than half of the revenue is is recurring services revenue, but there are some gateway module sales as well, but I.
I thought that that was in the 16 million range by if my numbers are right. So so there's been a hardware and not that you're exiting out.
Would you add to piece to the recurring revenue.
Correct when I speak to root recurring revenue, that's just pure services, yes, Okay. That's no harkins appreciate the color guys. Thanks a lot.
Your next question comes from the line of Paul Treiber with RBC capital markets. Your line is open.
Okay. Thanks, very much and good afternoon, just hoping that you can elaborate in your comment about the krona virus are you seeing any tightness in your supply chain, yet either upstream or maybe among downstream buyers.
Well on the I think it's just very early Paul to make a lot of calls factory.
Started to reopen this week there was an extended shutdown as you know from the Chinese new year that the government imposed.
And getting workers back to the factory has been.
Somewhat slow so it's it's hard to tell you had exactly what the impact we have to contract manufacturing locations, one in China and a one in Vietnam.
The Chinese one will be slower to get up to speed, our Vietnam factory.
Well have potential implications from components like Pcbs et cetera, they come from China, So the impacts of.
How things start to move.
During this time is very fluid.
We've talked to many other companies that are experiencing the same thing. So it's it's a bit hard to predict at this point in time things are starting to move the factories in China are back open, but it's not like after a typical Chinese new year, you get back to full production within a day that that's not the case this year.
And then related to that mobile World Congress is canceled do you anticipate any cost recovery related to that and I'm. Also is would it have I wouldn't think it would appear to have any impact on near term design win momentum.
Yes. So you know it is Ed obviously big event for us in the industry. It's I think for all the right reasons. It's been canceled it is a very significant event for us in terms of meeting customers and suppliers and a chance to bring industry together, we're working to make a number of those meetings happen.
Everyone seems to have free calendar time that week. So we'll be the busy in that regard from a cost recovery basis.
Marginal.
You know things like we have a large display booth there that's already built and.
Our exact oh.
Fees with mobile World Congress or not yet clear. So we're obviously working on that because on a call with the teams of six am this morning on figuring out some of those logistics I don't have from answers for you.
Okay and antibody.
So I just can't say on design win activity no won't have any impact.
On design win activity, but you know, we're constantly meeting with a with customers and suppliers and so all those unit relationship and information sharing so well have to work somewhat harder we had a lot of a lot of people interested in selling by our booth. This year was probably gonna be the busiest we've ever been at mobile World Congress. So.
We are working on that with our new regional alignment.
A lot of European customer activity, so mark over 10, and the team are are following up to make sure that we can.
Take advantage of the.
Of the meetings that were planned and we'll continue on.
Driving forward in that we're having tremendous interest in our a bundled solutions and so the chance at mobile World Congress to two demo in display more of that will be missed but it's not something that we can't replicate at customer sites and we'll be working hard to do that.
And just wanted to ship to automotive.
You mentioned that automotive was stronger than expected this past quarter.
You know that comes in a relatively soft environment for automotive what was the reason for the upside that you saw in automotive this quarter and how do you see that spilling through at least into the first couple of quarters like this year.
Well I think that.
One of things been working on Paul is to add I've mentioned this before re vectoring all of our forecasting approach to make sure we're having a more balanced viewpoint.
And so is that come through a across all of our results.
I would expect to have a more equal balance of upside and downside and I think that that's reflective here.
As we as we look at automotive.
We have we have major programs.
Starting to ship like Volkswagen that we talked about previously and some of those programs have.
Look for more product then we had at our medium case in our forecast.
Until we've been working to to ship to ship to those to those customers. So we have a pretty balanced view and our overall forecasting approach and and don't think there's any macro event, it's just that Dave.
They've executed on their product launches and required product product from us for that.
Okay. Thanks for taking my questions.
[noise] pleasure.
Okay. If you would like to ask a question press star one on your telephone.
Next question comes from the line of Scott Zero with Roth Capital. Your line is open.
Good afternoon. Thanks for taking my questions. The first a quick clarification on the enterprise Gateway business was that down sequentially in the December quarter and had a couple of additional questions.
Scott to state, yes, it was down a little bit sequentially from Q3, but up year over year.
Gotcha and year over year at quarter end. It also up 12% for the full year over year.
Okay, and then can you know looking at the embedded business out over the next couple of years, what what is the target gross margin, what what's going to be a portable number I know there are lot of moving parts. There in terms of not only some end market segments, whether its PC OEM or auto, but fiveg coming in as Fiveg, you're going to be positive or negative how does LP w. away.
Impacted as well what do you guys going to be happy with what going out to 2020 120 to 22.
Sure Scott I'm going to start by not answering your question, but I will come back to it I promise.
Our our real focus here is in driving our I O T solutions business and we have.
Too big a big.
And growing streams area and our.
Recurring revenue bucket in in our enterprise bucket.
Both of those were high gross margin streams and both the growing and really as we as we look at the Aiotv market in totality, our opportunity to we and our differentiation.
And our growth vectors are going to be driven by continued acceleration in our overall aiotv solutions. That's gonna be when we have talked at our Investor day that if we see being able to improve the profitability model of this business quite substantially and so I would in that 2024 period you know.
In a in a very strong.
EBITDA position overall with this business and that's all coming from Aiotv solutions.
So back to the embedded broadband side and your question the the PC OEM business that.
You know as.
Declined.
It's not something this long term strategic is not a growth segment.
And but it has hurt margins in that business as I said this will be.
That that decline is concluded.
And our 2020 numbers and so the.
Margin from automotive is is lower and that's a that's what's going to drive the.
Margin lower in that segment. This year, we have decent margins in our networking business and.
We have some tier two PC customers that we continue to support.
Big brands that we do quite a broad range of things for that time, we have good relationships with.
As Fiveg comes in and I said, I think it's going to be more in the in the gateway router part of that market.
They are going to be very expensive modules. So the gross margin dollars will be strong the gross margin percent won't be a wont be large.
But it's a it's too early yet too.
To peg a number on that so I'm not going to.
Putting gas out there of what those will be where we're working through on a on a number of programs with a with customers and.
Exactly how all of the Qualcomm programs because run Qualcomm chipsets here for Fiveg, that's going to evolve overtime. So I think from a gross margin perspective in the embedded broadband side I think that we where in that revenue decline in margin decline, we sort of bottom.
In a in 2020, we expect that to be relatively steady to.
Slight improvement from Fiveg moving forward, but the real story here is the increase proportion of our business. It comes from Aiotv solutions and the stronger gross margins from both our recurring revenue and enterprise.
Gotcha, and if I could just follow up then on the other two solutions and the recurring side of the equation.
I'm not sure if you could remind us your thoughts in terms of long term value of the subscriber how you're kind of thinking about it or what that number could possibly be this year with.
25% growth getting to 125 million is that business, becoming a positive EBITDA contributor and lastly, the competitive landscape. There. There are lot of guys, who are popping up that offer.
Front types of platforms and various you some implementations to accomplish some form of connectivity. So I'm kind of wonder if you could just give us a quick overview or what's going on of the competitive landscape.
And who you're seeing on the short list for a lot of your industrial loyalty implementations. Thanks.
Okay, Yes, good question so.
I think I'm going to start by talking about.
We mentioned in our press release that we added over 400000 net new connections on the year and so thats up the fundamental part of driving the recurring revenue and we call. It net new because we acquired some legacy bases that have some declines main gate and some of the numerex aspects and so our smart Sam RMB.
Technology is growing very strongly and you'll see that we anticipate that that number of net new connections in 2020, well will accelerate.
Very nicely from from 2019, and 2019 is up dramatically from 2018. So we're seeing that's the that's a good leading indicator.
Net new connection has added in December is going to add 12 months of revenue in 2020, when it just added one month in 2019.
In terms of competitively in winning these deals.
Theres other people doing east EMS, there's nobody else with a complete solution, what our customers choices are and.
I talked about in my script, a couple of industrial Aiotv customers one and.
Industrial batteries, so their option was to integrate someone else's hardware.
They would have had dab embedded systems engineers to be looking at how to pull all the sensor data that they want it and then they would have you different carriers Sim cards around the world to be able to get the connectivity. They are they wanted overall and so that.
Then they would need to software platform to manage the devices and they need to be responsible for their own security. So when we put that altogether for the customer are bundled wherever that industrial Battier battery is shipped in the world. It starts working on the Sierra Wireless Global network immediately Theres no separate logistics required for different Sim cards in different regions.
Yeah. It automatically connects to our cloud Pat platform for managing the device they can change what events frequency events and duration of events.
From their cloud instance of our service.
We've embedded security software both in the device and in our connectivity link and we manage every one of those connections 24 by seven in our Atlanta Global Network operating center. So we are highly differentiated in that regard.
The Forrester study that I mentioned showed that we.
We reduce time to market by 75% reduce total cost of ownership by 40%. So it's really a customer that is working to put the whole solution together by piece parts.
And we still see in the market some customers will RFP their hardware and the conductivity separately, we go to them with the benefits of a bundle and we many times turnaround.
How they're acquiring aiotv technology, because they see the benefits of that and that's where at the early stages of that especially new industrial Aiotv Greenfield customers that.
As people move more and more to the cloud they need to be getting that edge data.
This way Microsoft partnered with us to be the preferred edge partner is so more and more of this data can be collected and with our ready to connect solutions with our octave solutions, we simplify that whole journey. So.
We're not seeing any other.
Competitive solution stock when we're out there talking to customers. It's the the paradigm change that we have of being a complete solution versus lets called the traditional way of the customer buying all the parts and putting it together themselves.
Great. Thank you.
Your next question comes from the line of David Gearhart with first analysis. Your line is open.
Hi, Good afternoon. Thank you for taking my questions first question.
400000, or so that new connections or if you want to talk about on a gross basis can you give us some sort of sense for your attach rates on your priorities solution module business I know you've talked about it before some theoretical rates, but if you take a number of devices shipped units per site, there could be really a powerful.
Recurring revenue model as you go forward just want to get a sense of what the attach rates or if you can help with that.
Yes, it's not a it's not a number that we published yet and it's still quite early in the game for us to have sort of stabilize focus we have very different attach rates by product category. So in a bit embedded broadband in zero.
Octave is 100% as we're rolling out in and we.
We launched a new.
Class of products called our our C series. This week that are all optimized for at her ready to connect and conductivity.
So we're we're seeing increased activity.
But it's a it's early for us to to report on that.
In our in our focused on growing the industrial Iot T. side.
We're seeing stronger and stronger full solution stock opportunities when we're into some some legacy customers.
That.
I've already have a carrier agreements in place then it's more difficult to get that attach. So we will work to share more data honored as we have a bigger dataset to to produce results and forecasts on but we're just not at that stage yet.
Okay, and then lastly from me if you could go back to the competitive environment I know you talked about the recurring solution side.
But I wanted to focus a little bit on.
Solution, so I've been hearing a lot about very aggressive.
Ladies module provider and without getting into relationships, especially I mean, you us where where customers are are either moving over from a single sourced or dual sourcing just wondering if you're seeing major impacted your business plumbing solution side on modules.
For that reason.
Well I think that we've talked about that previously is definitely is impactful. The the whole reason that that we as a company invest in acquiring global NVNO assets.
So is so that we could.
Be differentiated not play a only in a commoditizing hardware space. So if it's a hardware only module.
That is a that's a tougher business segment for everybody competing in that space, So where when we sell our bundled solution.
Then we're in a strong position to win if it's a module only we still have leading technology, but we may or may not want to to price at what the market level is so there as I think as Dave went through the numbers and the module side you can see a slight decline there that's a comp.
Nation of Asps as lower cost products like al PW, a come in and some hardware only module accounts that would have been lost in a design win cycle.
But those are being replaced by more bundled solutions as we move forward, we've gone to market and.
In Europe with some very attractive offers for customers, where we bundle our.
Modules together with a year of prepaid card activity.
And so we have no problem competing on price.
With the low cost module only player for customers, who want to get the whole solution. So I'm very happy with how that is unfolding for us and we'll continue to.
To push and grow there.
What you will see as more and more of our design wins are in the solution category, which is ultimately a much much higher lifetime value for Sierra wireless and a hardware only piece of business and so.
So I think it's going to hurt others in the category more than us because of how we've created our differentiation around solutions.
Thank you so much further color that's it for me.
Thank you.
Your next question comes from the line of Richard Tse with National Bank Financial Your line is open.
Yes. Thanks, guys. So just kind of curious are related to the prior two questions like how important or how does embedded help aiotv and I only asked that because.
It seems like the embedded business to me as a bit of a drag.
From a number of different angles are you seeing the margins compressed notwithstanding PC OEM and automotive, but even over past years, it's been under compression. So.
Like why do you guys have that I have asked this before but.
Are there any recent discussions that would have you considering divesting that piece and sort of reinvesting in the growth engines company, which is I would see.
Well, let me let me, let me take that in that in three bites Richard So in our part of our embedded broadband in in our gateway router supply.
You know we're baking the gateway business. So we are building that client activity for our products Anyways, and then we get some some scale and leverage by by selling it into other customers. So cisco's Cisco and others are big customers of our of our modules to be able to provide conductivity into into their router. So.
So thats very synergistic synergistic, we get more return on our R&D as we as we as we proceed there on the PC OEM business.
Thank you heard from my answer that's not an area that we are investing aggressively to to win and replace.
Previous design cycle losses for exactly the reasons that you mentioned the our focus is on Aiotv solutions, we have lots of value with customer relations that.
They trust us than we've been a.
Dependable supplier to them for years, and we continue to leverage the products that we have in our portfolio to serve.
Those customers in the automotive side those are those were previous management decisions and they were quite heavy R&D investment programs and now we're starting to get the.
The benefit of the return on those investments as those programs start to go to scale.
So I think on on an increment our investment dollars are going into Aiotv solutions, not just on the product side, but quite significantly on the go to market side, we added.
While we.
Had cost reduction programs, we reduced the number of sites.
We talked about are reducing a 100 R&D headcount in Paris, we rebuilt capability in Taipei.
We went from 165000 U.S. per engineer in Paris, two sub 50 in Taipei, which saves us about $11 million a year in R&D, but then we reinvested a lot of money into go to market capability solutions experts.
And both the.
Pre sales engineers and delivery as we're bringing those solution services to market. So that is where our investment has been going.
But the the volume in the scale in the leverage off of our R&D into an embedded broadband.
Provides that provides a benefit.
It's a bit noisy because of the.
Over two years 110 million reduction of fairly decent margin PC OEM business that.
Makes the overall topline and and gross margin picture for Sierra Wireless look clouded. If you can look at the whole picture without that you see the the transformation to two identity solutions a lot of the value that we've created in the reason I talk about El tower in 2019 is that significant value this been loaded into.
You are flywheel that will they be released over the coming three years. They will drive a substantially increased recurring revenue substantially increased margins. So that investment that we had to make and go to market and products I will be realized over the next three years, but the first derivative is changed the value of the customers that we're bringing on a substantial.
Actually higher and it's been a.
A focus shift away from embedded broadband T. solutions.
But but that that is historic.
Business that we haven't we're continually working to optimize it and river and deliver.
Scale revenue and gross margin to help our transformation as we move to the strong Aiotv solutions leader globally.
So as we look ahead over the next few years like baseline for the embedded business is that like a $259 business going go ahead here.
Richard as Dave here.
You can expect it to be somewhat flattish going forward I think is the right way to look at it.
Right.
Okay I appreciate that thank you.
Thank you.
There are no further questions at this time I will turn the call back over to can't section.
Well. Thank you very much lot of a lot of good questions today, and I think that to as we work to transform our business from a hardware focused company to a solutions and recurring revenue business. The the nature of of the analysis of our results I think has to change as well.
We have Russ Jones on our board from Shopify as a pure recurring revenue company and I think I looked up today 63 billion market cap. Its it shows the value creation that happens from driving strong margin recurring revenue business.
So thank you for the questions and that nature I hope that we've been able to share the significant progress we made with our I O T solutions and recurring revenue business in 2019, a lot of that value that we create as I said in the flywheel and gets released over the coming years. So we're we're very pleased with the with the.
Progress that we made on that front and and the long term value creation.
We have from Sierra wireless and as you follow through the the growth trends that we're talking about in the 200 and 400 million recurring revenue.
Yeah, we're creating very valuable business overall, so we're going to keep focused on driving that and we'll be updating.
Everybody on a quarterly basis as we continue make progress on that mission. So thank you very much for your questions and we'll be talking to a number of you as a as follow ups. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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