Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to this year, a wireless first quarter earnings conference call. At this time, all participants Arnold listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session still need depressed star one on your telephone.
Please be advised to things conference is being recorded if you require any further assistance. Please press stars zero I would now like the hand the conference over to your Speaker today, David climbing Vice President Investor Relations. Please go ahead.
Thanks in good afternoon, everybody. Thank you for joining today's conference call. It a web cast on the call today or can Texan date, Mcclennan and Sam Cochran, our new Chief Financial Officer.
As a reminder, today's presentation is being webcast. It will be available on our website. Following the call. Today's agenda is as follows Ken will provide is corporate update.
Provided detailed review of our first quarter 2020 results in Kent will provide you a summary comments followed by Q. and eight.
Before we get started a reference the company's cautionary note regarding forward looking statements.
Summary of our cautionary note can be found a page to the web cast and 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 securities laws. You statements include our financial guidance statements about her strategy goals objectives and expectations and commentary regarding yogurt for our business are forward looking statements are based on a number of them.
Serial assumptions, including those listed on page to the web cast presentation and could prove to be significantly incorrect. Additionally forward looking statements are based on our management's current expectations. We caution investors that forward looking statements, particularly those that relate to longer periods of time are subject to substantial known and I know.
Material risks and uncertainties that could cause actual events or results to differ significantly from those expressed or implied by forward looking statements I draw your attention to a longer discussion of our risk factors in R.E.I.F. and management's discussion or analysis, which can be found on C.D.R. and Edgar as well as other regulatory filings.
This presentation should be viewed in conjunction with our quarterly earnings release was that I will now turn the call over to can't force corporate update.
Thanks, David I would like to start my comments today by saying I'm very pleased with how well the global team at Sierra has responded to the cold at 19 endemic.
And how we work together quickly to adjust to this new in challenging environment.
I'll always focusing on delivering leading I.O.T. solutions to our customers.
Well I cope with 19 is impacted revenue in certain parts of our business and delayed some new introduction.
Many of our bio T. solutions are providing important cellular connectivity services for emergency responders healthcare providers and those requiring remote access.
Time of increasing automation asset monitoring and robotics, our customers are increasingly looking for simple scalable integrated I.M.T. solutions from Sierra did they can deploy quickly.
As you know we operate in three major regions of the World and our team in Asia with the first team can move quickly to work from safe shelter at home, starting with our R. and D. and operations team in Hong Kong <unk> in early March.
They navigating quickly through this difficult environment and are now fully operational from our facilities.
Or north American and European teams also moved to save Homeworking environments, and we are now starting to see a slow in terror opening up a business in various jurisdictions.
Thus seamless moved to remote working with facilitated by our own products to ensure both better connectivity and performance.
Our overall productivity through this period hasn't been strong and a recurring revenue when an activity has been robust in the first quarter, which I'll be talking about more internet.
And also proud that we have been working very closely with our customers partners suppliers and manufacturers around the world as we collectively managed through this period.
Even the very dynamic environment, our first quarter revenue was in line with our internal expectations Despite supply chain challenge.
No plan will walk through the financial results in the first quarter in more detail.
I don't recall today I would like to comment on our achievements in the first quarter and some external factors related to cope with 19.
In Q1, our sales team delivered a record quarter of recurring revenue wins totalling 41.2 million in Alkar.
As we the explained previously L. car is based on the estimated annual recurring revenue year three from the time a customer's program is activated and include those service when we have secured in acquired.
To put this in perspective, the 41 million and L. tolerant you one was more than the total l. Tar we reported than 2018.
Approximately 45% of the total L. Tar T., then all of last year.
These windows on the fly wheel of future bickering high margin revenue growth.
We are seeing more industrial enterprises t. customers adopting are fully integrated.
Nuisance, because near scale and improve customers time to market and have a low total cost of ownership.
And the same time when conversions in our deployment schedules had been improving.
Sierra we had the advantage of working with our customers early in the design cycle, starting with their modules in gateways and then within this discussion immediately expands to our connectivity solutions.
The cloud data orchestration and comprehensive insecure management platform.
This is fully integrated solution with the combination of hardware plus connectivity services.
Key differentiator when we are going up against our competition, but ticket area, a low cost hardware only players.
Illustrate this point.
Fully I'd like to quickly summarize a series of five wins that we are secured in the first quarter.
That are highly indicative of our strategy.
First a large h. back manufacturing division of the number one air conditioning company in the World wanted the quickly transition from its unstable lifeline networking solution to reliable cellular conductivity for real time monitoring if it's equipment.
Are solution was based on the L.P.W.A. cat and one technology for long reach and low power bonded with our Sierra Smart <unk> services.
The L. tower associated with this service when with $2 million in addition to $2 million of hardware.
Second leading us defense contractor that operates monitoring towers ground control station is deploying R.R.B. 50, X., an RV 55 gateways and it customizing bundled data plan for its high speed data requirements.
Sears also provided number the single platform to manage the gateways into him and the L. tar associated with its when it was 4.4 million plus an additional $1 million in hardware values.
[noise] third examples the U.S. based company, requiring or a bus I.T. solution for outdoor monitoring in remote areas.
Selected are integrated solution with that included device and connectivity and cloud management.
You get the customer unified system at a lower total cost of ownership and the L. Tar with this winter was $1.5 million plus $3 million that expected hardware value.
Fourth examples of fast growing industrial customer that needed to secure communications platform for his ground systems and unmanned aerial vehicles. So we've provided the customer with the cellular embedded module bundled with a smart sent package that provided stable you take this network access.
Elkhart with this when was 1.2 million along with it they expected $2 million hardware value.
And my 50 example, as a specialized glass manufacturer in the U.S. They selected are managed connectivity service to have a highly reliable IOTV monitoring system for their large commercial glass installations, they're using our gateways plus conductivity service to provide a premium service to their in customers.
I'll tear on his manage connectivity service contract was 2.2 million.
To summarize these five design when did represent approximately 11 million and Melkar and there's an additional ninemillion unexpected hardware value associated with these winds. So these use cases are good examples of how we bundle our devices with referring service revenue to win a competitive market and drive shareholder value.
Moving on to other activities in terms of bringing on new talent. This year management team I'm pleased to announce that Sam Cochrane is joined US starting yesterday as the new Chief Financial Officer, If the company.
Sam was formerly what Motorola solutions individual on and he will be spending the next two months wrapping quickly on the company and ensuring there's a smooth transition from Dave Mcclennan. When asked in December last year that he would be retiring in the middle of this year.
I'm also pleased to announce to Steve harmony will be joining our team a senior Vice President of America sales.
After numbers successful years, <unk> S.C.P. and Sybase, Steve served in senior sales roles at Blackberry for the last six years as they went through their critics from transformation from a hardware centric to a software and solution Central company.
Steagle there according to me and responsible for all sales and delivery activities in the Americas.
To expand our sales coverage in the region, we've hired a new V.P. of channels sales, Michael freight who was for many bit of Ruckus wireless.
<unk> will be based in Germany, and is bringing with them for calling strengthen our channel relationships in Europe.
Focus on growing their enterprise solutions gateway dish in the region.
This investment will immediately at experience and strong customer relationships in key industrial European markets and N.E.M.T.A. enterprise business.
We continue to face them supply chain challenges relating to cope in 19 hearing Q2 that are similar to other technology companies, who are manufacturing in Asia.
Last year, we worked hard to strengthen to expand our component suppliers. However in this current environment, we're seeing some components being placed on allocation that made delayed production scheduling.
The supply chain issues are constraining some demand in the second quarter.
On the positive side, we have been very pleased with the performance of our manufacturing partners flexing <unk>, who are back and now fully operational we've been working diligently with them the source components for the manufacturing locations and shoe Joe and Vietnam.
We're all aware of the dramatic impact the corporate 19 has had on the automotive sector and most of our customers manufacturing facilities have been experiencing partial locked down here in the second quarter.
Customers are seeing a temporary but significant delay in demand showrooms remained close in most of the major markets.
Well, we are pleased that are automotive manufacturing in sales in time to have picked back up and we are getting a slow reopening in other jurisdictions.
We will see a significant impact on our automotive revenue akeem too.
We are also is experiencing some delays in our customers deployment schedules and carrier certifications, despite being an environment, where we are often seeing stable or sometimes improving demand.
It is hard to predict when our customers will get back to the regular came from delivery. We've seen many customer start to move in this direction as you and North American economies slowly begin to open up for business.
With that I will now have to call over to Dave and Clinton for his review of our first quarter financial results.
Thank you can't and good afternoon, everyone note. We report our financial results in U.S. dollars and on a U.S. gap basis. We also present non gap results to provide a better understanding of are operating performance a full reconciliation between our gap and non gap results is available on our website.
Total revenue in the first quarter was 157.6 million down 9.3% compared to the first quarter 2019.
Despite a modest impact from covert 19 during the quarter. Overall these results were aligned with our internal expectations.
The first quarter is typically a seasonally low quarter.
You over your decline reflects a reduction hardware sales in R.O.T. solutions segment, which I will elaborate on in a moment.
Gross margin the first quarter was 27.7% compared to 29.5% and the prior quarter, reflecting unfavorable product mix in both of our reporting segments.
Or non gap operating expenses in Q1 were 57.4 million 2.6 million you over a year from Q1 2019.
Manually reflects investments and go to market capability in market and it shows you know how to segment and the addition of D. acquired MTM groups operating expense.
Or non gap net loss was 14.7 million and adjusted you bit dog was negative 9.2 million compared to a non gap loss of point 9 million and adjusted D., but 4.5 million a year ago.
The impact of covert 19 in Q1 was mostly operational and while we did see some negative impact on revenue in the quarter. It was not significant we reopened or shins and r. and D. facility. After the Chinese new year holidays and in line with local government directions or employees work in Hong Kong Soul in Tokyo work from home.
As much as possible.
The lockdown restrictions resulted in factory closures of our manufacturing component suppliers in China.
Operations gradually reopen beginning of late February well the work from home situation did not directly impact our manufacturing partner in Vietnam. They were affected by dependencies on component suppliers in China.
We continue to experience supply chain disruptions relating to our component suppliers located in Malaysia, The Philippines in Mexico as a result of the continuing impact of the covert 19 pandemic.
In addition, logistics supporting the transportation of goods remains a challenge to the dramatic reduction passenger flights globally Indian sufficient capacity of cargo specialize flights. These factors combined with the macro economic slowdown from cold in 19 in a certain number markets, resulting in a weaker than expected projection of revenue for the.
A second quarter of 2020.
As I mentioned earlier overall or revenue in two 120, 20 was down 9.3% compared to Q1 2019.
Generally aligned with our internal expectations.
Revenue in R.O.T. solutions segment was down 16.4% year over year.
On a positive note recurring and other services revenue of 26.8 million was up 3.9 million or 17% you every year driven by growth in connected devices and the addition of your acquired M. M. groups Rep revenue.
However, the solid growth was offset by lower you over your hardware revenue as a result of entering the first quarter 2020 with higher than normal inventory of the distribution channel continuing pressure from low price competitors in hardware only segments, they transition to lower costs to L.P.W.A. technologies, and some must supply concern.
It's related to covert 19.
Revenue in our embedded broadband segment was relatively flat you over a year with higher automotive modules salesman into quarter offset by the anticipated decline in mobile computing module sales to both <unk> and some last time buys by certain networking customers, which occurred in Q1 29 team.
Look at it non gap gross margin in Q1 compared to a year ago total gross margin was 43.6 million for 27.7% and the first quarter compared to 54.7 million, we're 31.5% in Q1 2019.
Sequentially compared to queue for 2019 gross margin decline by 180 basis points. This reflects lower gross margin in Ohio, T. solutions segment as a result of lower sales of higher margin gateways and you'd better broadband reporting segment higher sales of lower margin automotive <unk> modules combined with low.
Sales up higher margin mobile computing modules.
Moving onto the balance sheet.
Ended the first quarter 2020, $72.8 million or cash specifically in the quarter operated activities consume 6.4 million of cash.
Reflects the impact of negative you bid dog and a quarter capital expenditures during the quarter or $4.7 million resulted in negative free cash flow of $11.1 million.
30 in the quarter, we completed the acquisition of U.M.T.M. group in Australia. This consumed $18.2 million cash instead of cash acquired into business, India extinguishment of certain assumed liabilities.
During the quarter, we drew down $25 million on or existing revolving line of credit was U.I.V.C. in order to bridge the use of funds to acquire the M. M. group and also to strengthen our balance sheet in light of the challenging covert 19 environment.
Overall, he's activities resulted in 6.3 million decrease in our cash balance from your in 2019.
Regarding a revolving credit line with <unk> on April 30th we amended the credit agreement to increase the credit limit to $50 million up from the previous 30 million limit.
And extend to maturity date to April 2023 from the previous maturity date of July 2021.
We're very pleased with this amendment to our credit agreement with the increase in credit limit and the extension of term. It provides us additional liquidity in these uncertain times.
Regarding our financial guidance the impact of the coping 19 pandemic on our global business remains uncertain.
We continue to evaluate the effects of covert 19 or business. The overall severity and duration of the adverse impacts related to covert 19 cannot be reasonably estimated at this time.
As a result of the uncertainty surrounding the duration an impact of covert 19, we are unable to provide a reliable outlook for the balance of 2020.
And as a result, we were withdrawing our previous guidance for full year 2020 revenue and adjusted either dog presented on February 13th 2020.
We continue to believe that our products are solutions make as well positioned to drive strong long term growth in an expanding I.O.T. industry when the global economy commences recovery from the ongoing cope with 19 pandemic.
With that I will know turn to call back to cat to provide some concluding remarks.
Thanks, Dave in closing all signed lead me to believe that are competitive position and providing leading edge fully integrated I.S.T. solutions.
Hardware devices and connectivity services.
Strengthening.
Given our strong when activity and growing L. car. We believe that we remain on track has to be drive towards our goal doubling our recurring other service revenue to 200 million in the middle of 2022, and then doubling again to 400 million by the middle of 2024.
In addition, I'm pleased that we were seeing growing number of our industrial I.T., an enterprise custard slowly and carefully opening up their businesses in manufacturing facilities and at certain location starting to ramp backup production levels, such as Volkswagen to Joe syndrome and F.C.A.
Regarding 2020, we were saying good demands take NASCAR I emptied devices in solutions and we are working to adapt rapidly to the needs of our customers and markets. However, give any I know when timing potential impacts economies reopening are visibility has been reduced and therefore is Dave mentioned earlier, we have to draw on our <unk>.
Full year financial performance.
My Board perspective, we announced on April 16th aboard an appointed to new Directors, Jimmy Anderson increase in the <unk>.
Jim is the president and sealed lattice semiconductor has worked a senior levels of international technology companies, including M.D., Intel and broad com.
Cream is active on several boards and was the formal general counsel and she think a lot sort of Blackberry for 12 years.
We are pleased to have these experience individuals join this year aboard.
With our new strategic shareholder.
Endpoint capital.
We have agreed to include especially of resolution in the proxy this year to expand the board side at Sierra from nine to 12.
That resolution is passed by shareholders on May 21st then the board will appoint three new independent directors, which I'm very excited about.
Midline point capital is a long term investor we now have the majority of the company shares held by institutional investors.
Top three investors collectively only about one third of Sierra shares.
These top investors are focused on long term shareholder value creation.
Before we open up the call for questions I would like to say a special thank you to Dave Mcclennan per serving as chief financial officers of the company since 2004.
Davis been instrumental in growing the company over the years and was involved in many significant emanate transactions, along the way, including the acquisition and financing a wave com investiture of the U.S.B. modem and mobile hot spot business said to next year and securing the acquisition to both main gate and Numerex.
They didn't want to thank you for your valued contribution over the last 16 years and your financial stewardship over that time.
We wished you the best and your retirement.
And our new C.F., Sam Cochran who's on the call today will be taking over the role immediately and working closely with myself and Dave over the next two months to make sure there's a smooth transition and finance.
Will also be joining me for our analysts and investors call backs falling today's conference call.
Moderator.
Now like to open the call professions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone key pad.
Our first question comes from Paul <unk> from RBC capital markets. Your line is open.
Oh, thanks, so much and get even just the hope I understand the potential impact of the automotive production shut down.
<unk> you know what's it the size of automotive against other vertical and then you speak to the Kate into like the rate of change, particularly in that that revenue stream and went to the visibility your leg, yeah, two new orders and changes in orders.
Hi, Paul It's a it's Dave speaking here you know just to just to roughly side the automotive business for you you're referring to our segmented.
According to segments last year. It was about half of the embedded broadband segment to give you a sense of the the size of the automotive business. So it's a pretty sizeable business.
Yeah with respect to the the ordering patterns that we've seen since the commencement of of of covert we had no substantial ramp expectations based on customer platform.
Designs that sorted customer platform launching plans in Q2, they've all just see been interrupted with with plant closures.
Manufacturing plant closures and yeah, we're working with our customers is they re schedule those orders, but without a doubt you know we will be down 30 significantly in our automotive business.
18, Q. too and.
That will be somewhat cushion by what we expect to be growth in some of our other businesses. Because we are seeing some some decent demand in other areas, but it will be overshadowed by a decline sequentially from from Q1, you know automotive business and these are pretty high volume customers. So it will be.
It will be noticeable to the extent that will be you know down sequentially from from Q1 is where we currently sure expectations.
<unk> can't hear understand a little bit more color to that I think that you know you will have seen most of the major auto manufacturers how shut their plans cheering cute too we're seeing most of those reopening at this point in time. So you know the impact was is is strongly felt in q. to the rest of our <unk>.
<unk> is continued along quite well Q1 is normally seasonally low when we expect to see the rest of our business continuing to expanding cue to the big impact and you know major product line crosses automotive and that will be that will that will that will reduce and Q2 and then we.
Believed start to pick back up to the balance Whittier.
Yeah, well how are you thinking about your investment.
You go to market capabilities here.
You know just mentioned this <unk> design wins that you're seeing on the end to end Seidman services.
No are you looking to keep all those investments or <unk> are you considering pulling back some no just in light of at a short while you're sitting on the automotive side in the near term.
Why would you know I think there's probably two questions. There so an automotive into our lowest margin product segment, so well while that affects the top line.
More than it does the bottom line I'm on the design went inside you know we have built a strong position the marketplace and we're building a strong funnel of design wins for both hardware and recurring revenue very strong a quarter in Q1.
Significant revenue down down screen, we're not seeing a significant slow down into that part of the business in terms of being able to bring on that future value. So we're going to be washing their dollars very closely during these times as you would expect we're being you know very conscious of a of every <unk>.
Sense, but we're staying on our strategy of being the leading player in Iowa T. solutions, we have not only a a strong design when quarter are a pipeline of opportunities and scrolling significantly and so we're going to be continuing to progress those and we'll see we'll see those you know continue.
To build with the time ago. So you know summary answer your question managing cost a exceptionally tightly continuing the strategy of driving complete I.T. solutions to win and many expanding I.T. and industrial I.O.T. markets and that automotive, we'll have impact on on cue to Ah, but more from the top.
<unk>.
And there's a dump tells them to one of your lungs comments on the on the pipeline growing significantly but.
Speaking do you see the shift to work from home.
Celebrating the deployment my own tea <unk> have you seen signs of that occurring yet at least in the feedback you're getting in and went through our peas and whatnot.
You know I think it's too early for R.F.T.'s, but you know we are we are closely looking at the changing the work from home educate from home have less humans involved too manage assets to track.
You know track products devices do predicted maintenance et cetera. So I think that the long-term trends were positive and I think that the changes in the world. If if they do anything they accelerate those the ability to deploy in the short short term is more challenge.
But the it's reinforced that it's not the trends that we were playing into overall I think that on some of the you know immediate impacts we have seen increased demand from some of our customers that are providing connectivity for cobin related items and so that that is increased demand.
Summaries about increases band supply chain a challenge. So we we can't ship all the demand that we're seeing in some of those areas a and R.C.R. a wire to skate winds are providing some reaching their we're more of industrial and public safety leader in not versus the.
Lower end type of just a a white by hot spot, but we are seeing demand for that we moved our <unk> key operations T. managing our network to have a C.R. a wireless routers in their homes. So that in addition to their home broadband they had a wireless fail over and that's worked exceptionally well.
I am a running this conference call from my router and we played that to number of of key executives were continuing to be to be rolling <unk> I just was responding to an email before this call with a major carry you're looking for more backup solutions and so I I think there are there are spots when we get to play in Paul.
He thinks something that's one.
Your next question comes from panels Moschopoulos from B.M.O. capital markets airline is open.
Hi, good afternoon.
<unk>.
Cycles and the current environments are the extending ready progressing as normal for the most parties and vertical since I've had a motto.
Yeah, I can't hear thanks for that question. So as we look at our in in talk about a couple of segments of our business, but we look at I.O.T. solutions and that design when cycle of getting modules embedded in in products as as we discussed before the reason to use l. car because we we have.
Psycho to get the products out there and then getting those products deployed give us a reasonable run rate in your three we've had quite a bit of efforts and we seem to significant improvement in in <unk>. So we record from when we get the design winter when we get a thousand using units active and we have metrics and focus on that we've almost have.
The time to revenue from once we started tracking this and so the cohort of our 2019 design wins his.
Sufficient progress and I expect further progress with a cohort of 2020 design then.
Okay.
And then just in terms of getting but.
Just signing the when the first place to what extent I mean March was was the marks Porter was strong but in terms of the past month or so.
You're seeing as far as customer behavior are guilty can longer to close or is that progressing Marlon horrible.
Of course, there's some impacts and released you know getting getting things signed offers being impacted somewhat we continued have great customer discussions engagements or not seeing any slow down in the demand I think that it could be some are held tar signings in Q2, some of those wouldn't get delay.
[noise] into two three potentially but from you know from what we're looking to do in the year, we <unk> from a a design when perspective, we still feel good.
Okay.
With respect to <unk> do you think about the objects in the short term given some of the cost much is you're taking.
Pay thousands Dave here you I think we are we are manager expenses very carefully here.
You know salary decrease the exact team we've.
Salary increases, we're we're really clamping down on on you any discretionary spending cutbacks.
We are making some selected investments, though so we are and that's really to feed the longer term growth particular, you in Iowa T. solution. So.
The the off X.B. you saw into one I think you know you'll see oh level similar in a in cute too.
And you know there are some some lumpy expenditures coming up into two from a product development perspective, So expect a expect a similar number here in the short term.
Okay, and then finally can you spend all that aren't interested in performance the gateway business during the quarter and also to what extent as you look forward to teach you is that being affected by the supply constraints.
We said, we entered the the quarter bit heavy on some inventory, we we talked about in our two four results that the delay of the two g. three g. Sunset had slowed some gateway business. So we we were a bit heavy on inventory not affected Q1, I think that that we for the year see that that business rubber.
Sounding there are areas, where <unk> [noise], providing opportunities and there's areas, where it's providing slowdown so for some customers with a need for a installs of equipment. Some of those facilities are closed in some of those installs aren't hopping, but when we're into transit buses and public safety vehicles.
There's a there's been more opportunities in garage is to get installs completed. So we're we're continuing to move along there are some you know some some impacts we've been very active on on working to to managed through our sales into the oil and gas sector have been challenged obviously with what's going on and in a in that area, but you know public.
Safety in other areas you know have have have the opposite effect in terms of supply chain.
You know there has been while our contract manufacturers inflection j. they'll have remained open and I think done an exceptional job flexes clothes for a short time and and worked to catch up quickly a number of our component providers produced in factories in Malaysia in Mexico and shut down there have heard it hurts.
Supply so there will be some likely supply constraints of volume on particular models that can get delayed but we're working very closely with our suppliers on that so that's some of the unpredictability that that we do we talked about but you know the teams are the teams are working hard and effectively and in managing those supplies.
<unk>.
Right. That's it for me, Dave congratulate retirements and all that fun.
Oh, Thanks Federals.
Your next question comes from Scott Cereal from Ross Capital Your line it's open.
Good afternoon, Thanks for taking my questions, Dave all the best in your retirement, you'll be nice guy.
Just to to to follow up quickly on the Gateway front I thought you said the gateways when down sequential they just want to confirm that it sounds like certainly from a vertical markets standpoint, some your verticals like like going when gas for a little bit challenge, but is is that correct did that include end to end.
But it sounds like that's starting to come back. So should we sequentially expect you know gateway slash enterprise solutions routers to be growing sequentially into the gym quarter.
Yes, <unk>, that's certainly our our expectation is Ken mentioned you know, there's there's sectors that are challenged and you mentioned on gas, but there's also your demand your strength in in other areas. So we do have expectations of of growing the gateways sales sequentially and we're.
You'll managing the supply chain to to be ready to to to meet got demand.
Gotcha skies, thanks, where he's got his can't I'll, just I'll just add to that as well you know we've continued to to focus on strengthening our sales capability in some areas. There. So I mentioned steep harmon's come on his senior Vice President for America's and will be driving sale to there and the addition of Michael spray and.
Sales colleagues from a ruckus in Germany helps us with our enterprise capabilities in the European market as well, so we're making investments to drive sales as well as a as well as market activity.
<unk> and just to clarify on the embedded front it it sounds like in general that that business did a little bit better this quarter, because there were some poland's from auto and sounds like there was some end of life as it related to networking could you kind of qualify for us.
Was Poland's looked like what that end of life kind of looks like for some networking products. So we can be calibrated going into what looks like.
Declining sequential and better quarter related to auto, but it sounds like the gross margins in that business, we're going to be up sequentially.
Yeah. So just started packing at a bit Scott. So the the end of life comment was really a a comment on the comparable quarter a year ago and that was in our network modules business, where we had some into life product. So the you know the large customers took it into life by and then and then work through that in the in that.
Following quarters, so that was eight yo kind of a reference to a tough coffee year ago on on the network side.
You know the other with respect to to automotive Yeah, we had a pretty good quarter in a in Q1 in automotive you are not you know nothing nothing to size there, but it was a demand was strong and and despite the.
The supply a situation we were able to do a bit of a hurry up in March and a and meet that demands. So we we did conclude with a strong quarter in automotive and Q1.
Okay very helpful. And then in terms of the cloud and connectivity side. The recurring revenue business continues to grow but can you give us some idea of what it takes to customer to improve into some leverage on the gross margin front. There may maybe as part of that help us understand how much of that mix is is every time or traffic or devices under me.
Management, maybe a little bit of color and where is octave in in terms of the deployments like.
Yeah. So so I just can't here I think that the [noise] you know, we're starting to see the the gross that that we've expected to to come about so our overall service revenue I was up sequentially by 17% and that was about a half organic half from M. damn when we.
Look at the recurring revenue side of that it was up more strongly was up 21.7%.
A year on year, so that that growth in our recurring revenue side is a is definitely happening we've been talking about this growth in the design when the flywheel effect.
Comes in there so that will continue to have increasing impact as we move through the quarters and we move through the years move towards the 200 million of 400 million recurring revenue of that we talked about.
As far as <unk>, we launched that product and Q. for and we had a a number of great and design wins in the in the first quarter and you know we expect to increase that design when Kate quite a bit this year, it's moving along well because of the time to revenue on those and the.
<unk> wins, it won't be having immediate impact the increases we're seeing right. Now are from you know design wins and 2018 in the early part of 2019, they start to come to fruition and so the 94 million adults are that we are shared with you from 2019, you know we'll start to be getting more.
That has this year progressive and then the strong Q1 design when you'll start to see those in a in 2021 start to start to play through and and continue to accelerate that's why I will.
Great and and lastly, if I could just maybe a quick update on the competitive landscape.
Yeah. Some of the Chinese manufacturers started to to show up I think more North America as I was going to trade chosen one done before certainly the rhetoric has has been amped up a little bit in the current code environment in with the current administration. So I'm wondering what that competitive toning landscape looks like or the Chinese becoming less.
Competitive detect pills and otherwise the world with some of the <unk> a design wins that you're going after if you could just going to give us an update on what that's looking like in the current environment. Thank you.
Sure sure so.
Part of the strategy that we've embarked on the interior wireless was to expand into value chain and have a more differentiated solution with a combination of our meeting hardware and complete service and cloud solution and that strategy is playing a well on the hardware on the side you know there is margin.
Pressure there is.
Modernization aspects and that's what we've been working to to build a more comprehensive solution for our customers. We we shared previously the Gardner study when showed that we were able to increase customers time to market a significantly and reduce their total costs of deployment by having a completely.
And and solution that we will deploy for the customer and they were having to put all of the components together do the embedded software engineering at the edge et cetera. So that differentiation is helping us when a lot of deals to the five design wins I talked about had many low cost competitors compete.
For those significant pieces of business and you heard me talk about not just significant recurring revenue that will come from those design wins, but also significant hardware values that that were winning so our strategy is playing a well there in some parts of the market wherever it a simpler hardware only component.
Those parts of the market can be can be more challenged we've defined for we want to win and we are and we were up to retain our customers that we've had longstanding relationships with and so in in in this changing environment and I think especially with L.T.W.A., where module will cost you know get lower but volumes get higher.
You know we're we're our strategy is is is playing oh well.
Great. Thank you.
Your next question comes from Harry Topple from Poptech L.P.
Line is open.
<unk> Harvey pop pills too short questions ones will follow up to the previous discussion, which is what we talk about supply chains. Obviously you are.
You appear to have quite a large dependence on China.
Even though you have a Vietnam and the picture in other sources.
What are you doing if anything to reduce your dependency on in China.
High Harvey context in here. So we have two major contract manufacturing locations, we have flex in China, and we have j. both in Vietnam. So most all of our gateway products and and most of my nonautomotive products.
Or in Vietnam, and so you know, we've we've made that move, especially with the tariff situation a year ago to have all of our and use your products gateways built in Vietnam. So that trend fishing has been completed and so I think the dot dot has us less exposed <unk>.
Issues with China.
Sad, though that that China.
Economy has opened up more quickly than the rest of the world. So it's sort of less component issues from anything coming from China. The component supply chain challenges. We've had has been with disruptions in a in Malaysia, and Mexico and you know we work to keep.
The head abuse as best as possible, but you know and have been very working closely with <unk> on a on a on the Vietnam situation and you know they've been doing a very good job of managing that so it's it's a moving feast.
Myself in our supply chain a executive are on the phone three times a week to work through exactly what's going on and staying on top of the situations and making adjustments managing inventory levels, so what's fluid, but but the team's doing a good job.
Good Thanks, and second question was I know you've talked about recurring revenue effective emphasized in in your opening remarks.
I didn't maybe I missed it but what is the actual level of recurring revenue what you would classifies recurring revenue in the first quarter with a dollar amount.
Sharp so we we've talked to services and recurring and and the vast majority of our service revenue is recurring so in the first quarter are a a total service revenue weighs 26.8 million of that the current revenue was 25.9.
Okay, and that's the sum total of recurring revenue of and the company too.
That's correct me. Okay. So you have I mean, a big Big Hill to climb to get to your hundreds of millions of dollars a target over the next four years.
Well you know this is the visibility is quite high because we have the design wins that are fueling the growth. So when we have a customer that you know some of the customers I've talked about previously we had an industrial lighting customer that was lighting up 100000 of our modules with our.
Activity and that was a million dollars of a hardware across the whole deployment, but then it's 1.8 million a year of recurring revenue. So last year, we had approximately 1200 design wins with recurring revenue in them. So as these hardware units get deployed our recurring revenue keeps building. So we have we have many.
Customers with significant scale as they as they build out so we have visibility of those accounts and a and map through to see where our 200, a 400 million targets are being produced so there's it's the the q. when design when you have a l. tar was a head of our aspect.
<unk>. So you know we continue to progress towards the plan we have in place to win more business. Because we have differentiating comprehensive solution is better for customers and those wins drive with hardware revenue and long term recurring revenue, which is you know valuable because it's repeating revenue most of the device.
Since we deploy like Internet industrial light or H. facts system that we talked about are there for like the the assets L. eight to 10 years would be typical and we get the recurring revenue for for that period of time and a recurring revenue is a is higher gross margin and we're seeing a gross margin trends improve as we continue to.
Scale or connectivity business.
Good.
Alright, Thank you very much.
And your last question comes from Todd Copeland from C.I.B.C.
Is open.
Yes, good evening everyone.
I wanted to see if I could get an idea.
About the impact of the auto business.
So Dave first of all day, congratulations on your retirement I, Oh, you get to do something fun. So, we'll we'll Miss movies conference call.
Thanks, <unk> taught it just for just for the record this is fun.
[laughter].
<unk>.
Automotive on the automotive side yeah.
I think you said look back to embedded broadband last year or so.
It's been number we should look at 335 million. So auto is roughly half of that.
That's what I was referring to yes, just to give you a rough sizing.
So 167 million 42 million a quarter.
So for you too.
Should we assume that that is essentially zero and then come back comes back over time is a bad to have dramatic impact in in terms of these shut down.
No no it's not it's odd zero Todd you know the the only haven't factories or you'll be getting to ramp up now. So we you know we we have you know we have orders booked in the quarter for cute too. It's just sit there are dramatically down from you or what we saw in in.
Into one and you know these are these are high volume customers. So that could you're that can be <unk>. It's a no. It's a noticeable number but it's certainly isn't zero.
Okay.
That's a that's helpful. And then isn't think about that the pace of how automotive might come back over time, How're you guys thinking about that.
Well certainly you know we've given given the work we've done with you know rescheduling with our customers we have expectations are they.
A return to to decent levels in Q3, but I do want a cabinet that you'll covert as a daily moving piece here. So you're that's our that's our current expectation and we've been you're working closely with our customers as we reschedule orders to you'll build build a a a book for Q3.
But you know that's that's.
By the overall covert situation.
And then we ever really talked about this but there's been a lot lot lot detailed questions on the business that's the auto.
How are you guys thinking about I guess various recovery scenarios. You know is it a v. is it an l. is that he you you.
What's the chances of some of the you know you you didn't mention briefly somebody orders are taking a bit longer to close.
Have you actually seen sort of new decision environments actually show up yet or is that still have to lay out giving whatever the economic backdrop isn't that what would be just sensitivity to those various scenarios just qualitatively give us your thoughts on that thank you.
Yeah High times can't here I mean, I think that if we could put the right alphabet letter with the recovery. We you know would have been able to give guidance I think that the challenges and nobody really knows exactly what recovery is going to look like we are you know we've done a significant improvements to our forecasting protests.
So that we can it'd be much more deck stress in the the capturing of customer demand and and playing that through our operations. So we have you know good demand signals from our customers, but you know the the world can continue to change. So we we see things opening up right now.
We see customer orders, you know when everything automotive and protecting they're starting to come back, but there's a you know potential that we have further cycles with a with coping 19 neck and neck and status back we see lots of you know government stimulus to get businesses going you know, we're we're lucky.
And that we play a large part into you know we are not in the consumer market I tear only real consumer exposures in automotive, we provide I.O.T. conductivity into a industrial processes. We are lots of times involved in helping companies save money and.
And that's going to be you know very important things roll forward. So I think that the the the recovery is the ability for our customers to be able to you know our new product introductions being able to test the network certify and get those deployed and for our and customers continuing to sell products whether that each back systems.
Industrial lighting or it's a it pumps. It's a it's it's measuring in a electric utilities you know all of the sectors that we play and so we are you know of course caught up in the overall economy, but we're as a as a business to business provider that it's helping provide automate automation and change the company's money, you know where it where in a good place.
To to deal with the exact shape of the recovery and the exact impact our numbers.
Something they were obviously doing scenario planning around and ensuring that we will.
Manage our expenses to the right level than all scenarios, but also being ready to to grow and take advantage of the opportunities. The market presents just things start to come back come back up. So you know that's you know general view that you know, we see things coming back we have a projection we run scenario.
And we're ready to react as the as the market firms up what's gonna happen.
Great really appreciate the color have good evening everyone.
[noise] like starting next time.
There are no further questions altering the call back over to <unk> text and for closing remarks.
Okay, well. Thank you everybody first and foremost I hope everyone stays stays healthy and managing well through this challenging situation.
I'm getting a very used to have a multiple hours a video calls every day as I'm sure. You are thank you for joining us today glad to share our outlook glad to share a continued building success and our transformation to leading Iowa, T. solutions business and I think Dave again for a service.
From Sam onboard and a and new key players in the the team such as S.D. for the America's So thank you very much and we'll be talking to you may be shortly chairs.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may not.
Act.
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