Q1 2020 Earnings Call
[music].
Well ask a question during this session, we'll need to press star one on your telephone. Please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I would now like behind the conference over to your Speaker today, David Climie, Vice President Investor Relations. Please.
Go ahead.
Thanks, and good afternoon, everybody. Thank you for joining today's conference call and webcast on the call today are confection, Dave Mclennan and Sam Cochran, Our new Chief Financial Officer. As reminder, today's presentation is being webcast will be available on our website. Following the call. Today's agenda is as follows Ken will provide his corporate update.
Steve will provide a 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 I will reference the company's cautionary note regarding forward looking statements.
Summary of our cautionary note can be found on page two of the webcast 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. 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 a number of much.
The real assumptions, including those listed on page two the webcast presentation and could prove to be significantly incorrect. Additionally forward looking statements are based on our managements current expectations. We caution investors that forward looking statements, 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 forward looking statements I draw your attention to a longer discussion of our risk factors in our area and management's discussion and analysis, which can be found on SEDAR and Edgar as well as other regulatory filings.
This presentation should be viewed in conjunction with our quarterly earnings release with that ill now turn the call over to can force corporate update.
Thanks, David I'd like to start my comments today by saying I'm very pleased with how well the global team at Tiara has responded to the coldest 19 endemic.
And how we have worked together quickly to adjusted this new in challenging environment.
While always focusing on delivering leading I O T solutions to our customers.
While cobot 19 has impacted revenue in certain parts of our business and delayed some new introductions.
Many of our I O T solutions are providing important cellular connectivity services for emergency responders health care providers and those requiring remote access.
And in time of increasing automation asset monitoring and robotics, our customers are increasingly looking for simple scalable integrated.
Solutions from Sierra did they can deploy quickly.
As you know we operated three major regions of the World and our team in Asia was the first team to move quickly to work from safe shelter at home, starting with our R&D and operations team in Hong Kong and Chen then in early March.
The navigated quickly through this difficult environment and are now fully operational from our facilities.
Our North American and European teams also moved to save Homeworking environments, and we are now starting to see a slow in care opening up a business in various jurisdictions.
This seamless move 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 in a minute.
And also proud that we have been working very closely with our customers partners suppliers and manufacturers around the world as we collectively manage through this period.
Given the very dynamic environment, our first quarter revenue was inline with our internal expectations. Despite supply chain challenges, Dave Mclennan will walk through the financial results in the first quarter in more detail.
On our call today, I'd like to comment our and 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 occur in revenue wins totaling 41.2 million in Elkhart.
As we've explained previously held Paris based on the estimated annual recurring revenue year three from the time. The customers program is activated and include those service wins that we have secured and acquired.
To put this in perspective, the 41 million an LCR in Q1 was more than the total LTR, we reported in 2018 and approximately 45% of the total L. Tar achieved an all of last year.
These wins or the flywheel, a future of recurring high margin revenue growth.
We're seeing more industrial and enterprise I O T customers adopting our fully integrated solutions, because they are scalable and improved customers time to market and have a low total cost of ownership.
And the same time, when conversions and our deployment schedules have been improving.
At Sierra we have the advantage of working with their customers early in the design cycle, starting with their modules and gateways and then within this discussion immediately expands to our connectivity solutions hedged to cloud data orchestration and comprehensive and secure management platform.
This fully integrated solution with the combination of hardware plus connectivity services is the key differentiator when we are going up against our competition, but ticket area at the low cost hardware only players.
To illustrate this point.
More fully I'd like to quickly summarize a series of five wins that we have secured in the first quarter that are highly indicative of our strategy.
First a large H. fact manufacturer division of the number one air conditioning company in the World one of the quickly transition from its unstable lifeline networking solution to reliable cellular connectivity for real time monitoring of its equipment.
Our solution was based on the L. PW, a cat M technology for long reach and low power armed with our Sierra Smart Sim connectivity services.
The alkar associated with this service when it was $2 million in addition to $2 million of hardware.
Second a leading U.S. defense contractors. It operates monitoring towers ground control stations is deploying our RV 50 acts and RV 55, gateways and a customized bundled data plan for its high speed data requirement.
She has also provided never in a single platform to manage the gateways and sand and the LTR associated with this win is 4.4 million plus an additional $1 million in hardware value.
[noise] 30 examples the U.S. based company, requiring a robust I O T solution for outdoor monitoring in remote areas.
Selected our integrated solution with that included device and connectivity and cloud management.
Get the customer and unified system had a lower total cost of ownership and the L. tire with this when it was $1.5 million.
$3 million of expected hardware value.
Fourth examples a fast growing industrial customer that needed to secure communications platform for its ground systems and unmanned aerial vehicles. So we've provided the customer with a cellular embedded module bundled with a smart Sim package that provided stable ubiquitous network access.
I'll start with this win was 1.2 million along with it can they expected $2 million hardware value.
And my 50 example, as a specialized glass manufacturer in the U.S. They selected our managed connectivity service to have a highly reliable aiotv monitoring system for their large commercial glass installations, they're using our gateways plus connectivity service to provide a premium service to their end customers. The Altair on is managed connectivity service.
Contract was 2.2 million.
To summarize these five design wins represent approximately $11 million and Alkar and there is an additional 9 million in expected hardware value associated with these wins.
So these use cases are good examples of how we bundle our devices with recurring service revenue to win in the competitive market and drive shareholder value.
Moving onto other activities in terms of bringing on new talent. This here a management team I'm pleased to announce it Sam Cochrane has joined US starting yesterday as the new Chief Financial Officer of the company.
Sam was formerly with Motorola solutions individually on and he will be spending the next two months ramping quickly on the company and ensuring a smooth transition from Dave Mclennan, who announced in December last year that he would be retiring in the middle of this year.
I'm also pleased to announce the Steve Harman will be joining our team as senior Vice President of Americas sales.
After a number of successful years ago, Sep and Sybase, Steve served in senior sales rules at Blackberry for the last six years as they went through their critical transformation from a hardware centric to a software and solutions centric company.
Steve will be reporting to me and responsible for all sales and delivery activities in the Americas.
To expand our sales coverage in EMEA region, we've hired a new VP of channel sales, Michael freight who was formerly with Ruckus wireless Michael will be based in Germany, and is bringing with him for college strengthen our channel relationships in Europe, but the key focus on growing their enterprise solutions gateway business in the region.
This investment will immediately add experience and strong customer relationships in key industrial European markets and in the E M EA enterprise business.
We continue to face some supply chain challenges related to Kogan 19 here in Q2 that are similar to other technology companies, who are manufacturing in Asia.
Lastly, we worked hard to strengthen and expand our component suppliers. However in this current environment, we're seeing some components being placed on allocation that may delay production schedule and.
These 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 Jabil, who are back and now fully operational we've been working diligently with them as source components for the manufacturing locations in Suzhou and Vietnam.
We're all aware of the dramatic impact the Kobin 19 has had on the automotive sector and most of our customers manufacturing facility have been experiencing partial lock down here in the second quarter.
Our customers are seeing a temporary but significant delay in demand has showrooms remain close in most of the major markets.
Well, we're pleased that our automotive manufacturing and sales in China have picked back up and we're seeing a slow reopening in other jurisdictions.
We will see a significant impact our automotive revenue in Q2.
We're also experiencing some delays in our customers deployment schedules and carrier certifications, despite being an environment, where we are often seen stable or sometimes improving demand.
While it is hard to predict when our customers will get back to the regular cadence of delivery. We have seen many customers start to move in this direction as you and North American economies slowly begin to open up for business.
With that I will now hand, the call over to Dave Mclennan for his review of our first quarter financial results.
Thank you can't and good afternoon, everyone note, we report our financial results in us dollars and on a U.S. GAAP basis. We also present non-GAAP results to provide a better understanding of our operating performance a full reconciliation between GAAP and non-GAAP 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 cobot 19 during the quarter. Overall these results were aligned with our internal expectations.
The first quarter is typically a seasonally low quarter the year over year decline reflects a reduction in hardware sales in our I O T solutions segment, which I will elaborate on in a moment.
Non-GAAP gross margin in the first quarter was 27.7% compared to 29.5% in the prior quarter, reflecting unfavorable product mix in both of our reporting segments.
Our non-GAAP operating expenses in Q1 were 57.4 million up 2.6 million year over year from Q1 2019.
It's mainly reflects investments and go to market capability and market initiatives.
So to segment and the addition of the acquired Mtwom group's operating expense.
Our non-GAAP net loss was 14.7 million and adjusted EBITDA was negative 9.2 million compared to a non-GAAP loss of point 9 million and adjusted EBITDA of 4.5 billion a year ago.
The impact of Cobot 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 our shenzen R&D facility after the Chinese new year holidays and in line with local government directions, our employees working in Hong Kong Soul and Tokyo work from home.
As much as possible.
The locked down restrictions resulted in factory closures of our manufacturing and component suppliers in China.
The operations gradually reopened beginning in 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 it continuing impact of the covert 19 pandemic.
In addition, logistics supporting the transportation of goods remains a challenge to the dramatic reduction of passenger flights globally and the insufficient capacity of cargo specialized flights. These factors combined with the macroeconomic slowdown from coal to 19 in certain of our markets, resulting in a weaker than expected projection of revenue for the.
Second quarter of 2020.
As I mentioned earlier overall, our revenue in Q1, 2020 was down 9.3% compared to Q1 2019 and was generally aligned with our internal expectations.
Revenue in our OTI 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% year over year driven by growth in connected devices and the addition of the acquired Mtwom groups Rep revenue.
However, the solid growth was offset by lower year over year hardware revenue as result of entering the first quarter 2020 with higher than normal inventory into distribution channel continuing pressure from low price competitors in hardware only segments. It transition to lower cost LP WD technologies, and some modest supply concerns.
It's related to covert 19.
Revenue in our embedded broadband segment, it was relatively flat year over year with higher automotive module sales and in the quarter offset by the anticipated decline in mobile computing module sales to both Delon Lenovo and some last time buys by certain networking customers, which occurred in Q1 29 team.
Looking at non-GAAP gross margin in Q1 compared to a year ago total gross margin was 43.6 million or 27.7% in the first quarter compared to 54.7 million were 31.5% in Q1 2019.
Sequentially compared to Q4 2019 gross margin declined by 180 basis points. This reflects lower gross margin in our Aiotv solutions segment as a result of lower sales of higher margin gateways and embedded broadband reporting segment higher sales of lower margin automotive more modules combined with lower.
Our sales of higher margin mobile computing modules.
Moving onto the balance sheet.
We ended the first quarter 2020 was $72.8 billion or cash specifically in the quarter operating activities consumed 6.4 million of cash. This reflects the impact negative EBITDA in the quarter capital expenditures during the quarter were $4.7 million resulted in negative free cash flow of $11.1 million.
Early in the quarter, we completed the acquisition of the Mtwom group in Australia. This consumed $18.2 million of cash net of cash required in the business and you extinguishment of certain assumed liabilities.
During the quarter, we drew down $25 million on our existing revolving line of credit was JBC in order to bridge the use of funds to acquire the Mtwom group and also to strengthen our balance sheet in light of the challenging Kobin 19 environment.
Overall these activities resulted in 6.3 million decrease in our cash balance from year end 2019.
Regarding our revolving credit line was she IVC on April Thirtyth, we amended the credit agreement to increase the credit limit to $50 million up from the previous 30 million limit.
And extend the 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 Koeppen 19 pandemic on our global business remains uncertain.
Well, we continue to evaluate the effects of koby 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 and impact of Coca 19, we are unable to provide a reliable outlook for the balance of 2020 and as it and as a result were withdrawing our previous guidance for full year 2020 revenue and adjusted EBITDA presented on February 13 2020.
We continue to believe that our products and solutions make is well positioned to drive strong long term growth in an expanding I OTI industry when the global economy commences recovery from the ongoing covert 19 pandemic.
With that I will now turn the call back to test to provide some concluding remarks.
Thanks, Dave in closing all signed lead me to believed that our competitive position in providing leading edge fully integrated solutions with hardware devices and connectivity services is strengthening.
Given our strong when activity and drilling LTR, we believe that we remain on track as we drive towards our goal of 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're seeing a growing number of our industrial Iot and enterprise customers slowly and carefully opening up their businesses and manufacturing facilities and in certain locations starting to ramp backup production levels, such as Volkswagen Peugeot Citroen NFC AG.
Regarding 2020, we're seeing good demand signals for our team devices and solutions and we are working to adapt rapidly to the needs of our customers end markets. However, given the unknown timing and potential impacts of economies reopening our visibility has been reduced and therefore as Dave mentioned earlier, we have the drawn our outlook regard.
Full year financial performance.
From a board perspective, we announced on April 16, the board is appointed two new directors, Jim Anderson increase in the Bala.
Jim as the President and CEO of lattice semiconductor has worked at senior levels of international technology companies, including Amdy, Intel and broad call.
Karim is active on several boards and was the formal general counsel and Chief legal officer at Blackberry for 12 years.
We are pleased to have these experienced individuals joined this year aboard.
With our new strategic shareholder Lion point capital.
We have agreed to include especially resolution in the proxy this year to expand the board size at Sierra from nine to 12.
With that resolution is passed by shareholders on May 20, Onest than the board will appoint new independent directors, which I'm very excited about.
Red Lion point capital as a long term investor we now have the majority of the company shares held by institutional investors and our top three investors collectively own about one third of Crs shares.
And 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, Dave Mclennan per serving as Chief Financial Officer The company since 2004.
Dave has been instrumental in growing the company over the years and was involved in many significant M&A transactions, along the way, including the acquisition and financing a wavecom the divestiture of the U.S. be modem and mobile hotspot business to next year and securing acquisition to both main gate and Numerex.
Dave you want to thank you for your valued contribution over the last 16 years and your financial stewardship over that time.
We wish you the best in your retirement.
And our new CFO, Sam Cochran who's on the call today, we'll be taking over the role immediately and working closely with myself and Dave over the next two months to ensure theres, a smooth transition and finance Sam will also be joining me for our analyst and Investor call backs following today's conference call.
Moderator I would now like to open the call for questions.
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 keypad.
Our first question comes from Paul Treiber from RBC capital markets. Your line is open.
Okay. Thanks, so much and good evening.
Yes, I understand the potential impact of the.
Automotive production shutdowns.
Typically in a typical year, what's the size of automotive against other verticals and then can you speak to the cadence of the rate of change typically in that that revenue stream you know, what's a good visibility or leg do you have on two new orders and changes in orders.
Hi, Paul It it's Dave speaking here.
Just to just to roughly size the automotive business for you you referring to our submitted.
Reporting same as 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 sizable business.
With respect to the the ordering patterns that we've seen since the commencement of of Cobot, we had substantial ramp expectations based on customer platform.
Designs that sort of customer platform launching plans in Q2, they've obviously been interrupted with with plant closures. The OEM manufacturing plant closures and we're working with our customers as they reached schedule those orders, but without a doubt you know we will be down fairly significantly.
Our automotive business in in Q2 and.
You know 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 in our automotive business and these are pretty high volume customers. So it will be it will be noticeable to the extent that will be down sequentially from from Q1 is where we currently see your expectations.
And Paul is cantel, instead, a little bit more color to that I think that.
You will have seen most of the major auto manufacturers.
How shut their plans during Q2, we are seeing most of those reopening at this point in time so.
The impact was is it.
Strongly felt in Q2, the rest of our business.
As continued along quite well.
Q1 is normally seasonally low and we expect to see the rest of our business continuing to expand in Q2, the big impact and.
Major product line for us is automotive and that will be that will that will that will reduce in Q2 and then we.
I believe start to pick back up for the balance of the here.
Yes, Hello, how are you thinking about.
Yes.
New go to market capabilities here I mean, it seems like United has mentioned this number of.
Design wins, and you're seeing on the end to end Biden services.
Are you looking to keep all those investments or.
Are you considering pulling back some just in light of.
The sharp only just seeing on the automotive side in the near term.
Why would I think theres, probably two questions. There so on automotive, it's our lowest margin products segment. So.
While that affects the topline.
More than it does the bottom line on the design win side, we have built.
A strong position in the marketplace and we're building a strong funnel of design wins for both hardware and recurring revenue.
I am very strong quarter in Q1.
He will lead to significant revenue down downstream.
We're not seeing significant yen slowdown in that part of the business in terms of me 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 are being a very conscious of of every expense, but we're staying on our strategy of.
Being the leading player in I O T solutions, we have not only a strong design win quarter, our pipeline of opportunities grow and significantly and so we're going to be continuing to progress those and we'll see we'll see those.
Continue to build at the time, though so you know summary answer your question managing cost exceptionally tightly continuing the strategy of driving complete t. solutions to win and expanding Aiotv and industrial Iot markets.
And that.
Automotive well have a impact on on Q2.
But more from the topline.
And this dovetails into one of your last comment on the on the pipeline growing significantly but broadly speaking do you see this shift to work from home.
Accelerating the deployment.
T.
And he have you seen signs of that occurring yet at least in the feedback you're getting.
Through our piece and whatnot.
I think it's too early for RFP, but.
We are we're closely looking at the changing the work from home educate from home.
Have less humans involved to.
Manage assets to track.
Track products devices do.
Predictive 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 reinforce that 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 kobin related items and.
And so that that is.
Increased demand.
Some areas about increases band supply chain challenge. So we can't ship all the demand that we're seeing in some of those areas and our Sierra wireless gateways are providing some reach and there were more of a industrial and.
Public safety leader in that versus the lower end type of.
Just a Wi Fi hotspot.
But we are seeing demand for that we moved our.
Our key operations team managing our network to have a Sierra wireless routers in their homes. So that in addition to their home broadband they had a wireless fail over and Thats worked exceptionally well.
I am more running this conference call from my router and we deployed that to number of key executives were continuing to be to be rolling that out.
With respond to any number for this call with a major carrier looking for more backup solutions and so I think there are there are spots when we get to play in Paul.
Hey, Thanks open insulin.
Your next question comes from panels Moschopoulos from BMO capital markets. Your line is open.
Hi, good afternoon.
Yes, good bookings in Q1, and you're seeing good pipeline, but can you speak to sales cycles in the current environments.
Are they extending where the progressing as is normal for the most part and verticals outside of auto.
Yes, Hi, Santos accounts here. Thanks for that question. So as we look at our I'm going to talk about a couple of segments of our business, but we look at Ti solutions.
And that design win cycle of getting modules embedded in products.
As we've discussed before the reason we use alkar because we we have a cycle if we get the products out there and then getting those products deployed give us a reasonable run rate in year three.
We've had quite a bit of efforts and we've seen significant improvement in in a time to revenue. So we record from when we get the design win to when we get a thousand using units active and we have metrics and focus on that we've almost half the time to revenue from once we started tracking this and so that cohort of our 2019.
Design wins is.
Hello has made significant progress and I expect further progress with the cohort of 2020 design wins.
Okay. That's helpful.
And then just in terms of getting but I was referring also to just signing the wins in the first place to what extent I mean March was was the March quarter with strong but in terms of the past month or so.
What you're seeing as far as customer behavior are guilty longer to close or is that progressing Marlins normal yeah of course, there's some impacts and really is getting they're getting things signed off there is being impacted somewhat.
We.
Continued have great customer discussions and engagements are not saying any slowdown in the demand I think that there could be some are LTR signings in Q2.
Some of those wouldn't get delayed into Q3 potentially but from a from what we're looking to do in the year with from a design win perspective, we still feel good.
Okay.
With respect to Opex, how should we think about opex in the short term given some of the cost actions you're taking.
[noise] eight that as its Dave here, you I think.
We are we are managing our expenses very carefully here.
So to decrease the exact team we've delayed salary increases were were really clamping down on on.
Do you any discretionary spending capex.
We are making some selected investments, though so we are and thats really to feed the longer term growth, particularly in Aiotv solutions. So you are the Opex that you saw in Q1 I think.
You will see a level similar and in Q2.
And.
There are some some lumpy expenditures coming up in Q2 from a product development perspective, So expect expect a similar number here in the short term.
Okay, and then finally can you expand a little bit on terms of performance the gateway business during the quarter and also to what extent as you look forward to Q2 is that being said supply constraints.
As we said we entered the quarter bit heavy on some inventory we at we talked about in our Q4 results that the delay of the TG Threeg Sunset had slowed some gateway business and so we.
We were a bit heavy on inventory not affected Q1, I think that that we for the year see that to that business rebounding there are areas, where coal good providing opportunities and there's areas, whereas providing slowdown so for some customers with a need for installs of equipment some of the.
Facilities are closed and so those installs aren't happening.
But when we're into transit buses and a public safety vehicles.
There's a there's been more opportunity and garage is to get installs completed so we're continuing to move along there's some you know some some impacts we've been very active on on working to add to manage through.
Our sales into the oil and gas sector have been challenged obviously with what's going on and in in that area, but.
Public safety and other areas.
I have had the opposite effect.
In terms of a supply chain.
There has been while our contract manufacturers in flex and Jay will have remained open and I think than an exceptional job flexes close for a short time and worked to catch up quickly a number of our component providers producing factories in Malaysia, and Mexico and shutdowns there have heard it heard some.
Supply so there will be some likely supply constraints of volume on a particular models. It can.
Get delayed, but we're working very closely with our suppliers on that so that's some of the unpredictability that so that we do we talked about.
But now the teams our teams are working hard and effectively in managing those supply constraints.
Great.
Thats It for me, Dave Congrats on your retirements and that's why.
Oh, Thanks Fellows.
Okay.
Your next question comes from Scott Ceryl from Roth Capital. Your line is open.
Hey, good afternoon, thank for taking my questions, Dave <unk>, all the best in your retirement.
Scott.
Hey, just to follow up quickly on the Gateway front I thought you said the gateways were down sequentially I just wanted to confirm that it sounds like certainly from a vertical market standpoint, some of your verticals like like oil and gas or little bit challenge, but is that correct did that include Emta EM.
But it sounds like that's starting to come back so should we sequentially expect gateway Slash enterprise solutions routers to be growing sequentially into the June quarter.
Yes got its Dave is sort of that's certainly our our expectation as Ken mentioned, there's there's sectors that are challenged and you mentioned oil and gas, but theres also your demand.
Your strength in other areas. So we do have expectations of growing the gateway sales sequentially and were you'll managing the supply chain too.
To be ready to two to meet that demand.
Gotcha Scott.
Thank you Sir I, just can't I'll, just I'll just add to that as well you know we've continued to add to focus on strengthening our sales capability in some areas. There. So I mentioned keep harmans come on as a senior Vice President for Americas, and will be a driving sales there and the addition of Michael Fray and a group of his sales colleagues from Russia.
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.
Gotcha, 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 pull ins from auto and sounds like there were some end of life as it related to networking could you kind of quantify for us what those 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.
Slide.
Declining sequential and better quarter related to auto, but it sounds like the gross margins in that business, you're going to be up sequentially.
Yes, so just on package that a bit Scott. So the end of life comment it was really a comment on the comparable quarter a year ago and that was in our network modules business, where we had some into light products will be the large customers took it into life by and then and then work through that in the in that.
Following quarters, so that was a yo kind of a reference to a tough coffee year ago. It on the network side.
The other with respect to to automotive Yeah, we had a pretty good quarter and a in Q1 and automotive.
Thats you know nothing.
Nothing to size there, but it was a demand was strong and despite the.
You have to supply situation, we were able to do a bit of a hurry up in March and and meet that demand. So we.
We did conclude with a strong quarter in automotive in Q1.
Okay very helpful. And then in terms of so the cloud and connectivity side to recurring revenue business continues to grow but can you.
Give us some idea of what it takes to start to improve and see some leverage on the gross margin front. There maybe maybe as part of that help us understand how much of that mix is airtime or traffic.
We're devices under management, maybe a little bit of color and where is active in terms of the deployment cycle.
Yeah, So oh God its cancer I think did the.
You know, we're starting to see the gross that than we've expected to to come about so our overall service revenue was up sequentially by 17% and there was about half organic half from MTM. 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 a that growth in our recurring revenue side is a is definitely happening weve been talking about this growth in the design wins the flywheel effect that comes in there. So that will continue to have a increasing impact as we move through the quarters, we move through the years.
Move towards the 200 million at 400 million recurring revenue of that we talked about.
As far as often do we launch that product in Q4.
And we had.
A number of great design wins in the in the first quarter and we expect to increase that design win cadence quite a bit this year.
It's moving along well, but because of the time to revenue on those and the L. tar wins it won't be having immediate impact the increases were seeing right now are from design wins in 2018 in the early part of 2019 that started to come to fruition and so the 94 million of L. tire that we are.
Shared with you from 2019.
Let's start to be getting more of that as this year Progressive and then the strong Q1 and design win you'll start to see those.
In in 2021 start to start to play through and continue to accelerate that flywheel.
Great and lastly, if I could just maybe a quick update on the competitive landscape. Some of the Chinese manufacturer started to show up I think more in North America as those go into trade shows and whatnot and before.
Certainly the rhetoric as has been amped up a little bit in the current code environment and with current administration. So I'm wondering what that competitive permanent landscape looks like or the Chinese becoming less competitive detect pills and otherwise in the world with some of the OEM design wins that you're going after if you could just kinda 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 then Sierra wireless was to expand into value chain and have a more differentiated solution with a combination of our meeting hardware and complete to service in cloud solution and that strategy is playing a well.
On the hardware only side you know there is margin pressure there is.
It's an commoditization aspects and that's what we've been working to build a more comprehensive solution for customers.
We we shared previously the Gardner study, which showed that we were able to increase customers time to market to significantly and reduce their total costs and deployment by having a completely.
End to end solution that we were able to 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 win a lot of deals the the five design wins I talked about had.
Many low cost competitors competing for those significant pieces of business and you heard me talk about the not just significant recurring revenue that will come from those design wins, but also significant hardware.
Values that they were winning so our strategy is playing a well there in some parts of the market, where it's a a simpler hardware only a component.
Those parts of the markets can be can be more challenged we've defined but we want to win and we are and we work to retain our customers that we've had long standing relationships with and so in this changing environment and I think it specially with LBW way where module cost.
Get lower but volumes get higher where our strategy is playing a well.
Great. Thank you.
Your next question comes from Harry Poppel from Poptech LP. Your line is open.
Thank you, it's a Harvey pop Phil.
Two short questions one's a follow up to the previous discussion, which is well talk about supply change obviously you are.
You appear to have quite a large dependence on China.
Even though you have the Vietnam and the picture and other sources.
What are you doing if anything to reduce your depends.
You know in China.
Hi, Harvey can't Xtant here. So we have two major contract manufacturing locations, we have flex in China, and we have Jay both in Vietnam. So most all of our gateway products and and most of our non automotive.
Products are in Vietnam.
And so we we made that move, especially with the tariff situation a year ago to have all of our end user products had gateways and built in Vietnam. So that trend fission has been completed.
And so I think the dot dot has us less exposed to.
To any issues with China that said.
But to China.
Economy has opened up more quickly than the rest of the world. So there's sort of less component issue some anything coming from China. The component supply chain challenges, we've had has been with.
Disruptions in a in Malaysia, and Mexico, and we work to keep.
Ahead of these as best as possible, but inland have been very a working closely with jabil on on the on the Vietnam situation and they've been doing a very good job managing that so it's a it's a moving faced.
Myself and our supply chain chain executives around.
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 it's fluid, but but the team's doing a good job.
Good Thanks, and second question was I know Youve talked about recurring revenue effect you've emphasized in your opening remarks.
[music].
I didn't maybe I missed it but what is the actual level of recurring revenue or what you would classify as recurring revenue in the first quarter.
Dollar amount.
Sure. So we've talked to services and recurring EM and the vast majority of our service revenue is recurring so in the first quarter are a total service revenue was 26.8 million and of that does occur in revenue was 25.9.
Okay, and then that's the sum total of recurring revenue and the company too.
That's correct me. Okay. So you have up I mean, a big Big Hill to climb to get to your hundreds and millions of dollars a target over the next to 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 had a customer that 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 client.
Activity and that was a million dollars or the hardware across the whole deployment, but then as 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 and map through to see where our 200, a 400 million targets are being produced so there's it's the at the Q1 design win of a of LTR was ahead of our LNG.
And so we continue to progress towards that plan, we have in place to win more business because we have a differentiating comprehensive solution is better for customers and those wins drive both hardware revenue and long term recurring revenue which is.
Valuable because its repeating revenue most than devices, we deploy like in an industry a light or a HVAC system that we talked about are there for the life of the assets. So 810 years would be typical and we get the recurring revenue for out for that period of time and our recurring revenue is a is higher gross margin and we're seeing a.
Gross margin trends improve.
As we continue to scale our connectivity business.
Alright, Thank you very much.
Your last question comes from Todd Copeland from C.I.B.C. Your line is open.
Yes, good evening everyone.
I wanted to see if I could not get an idea.
About the impact of the auto business.
So Dave I first of all Dave Yes, congratulations on your retirement I, Oh, you get to do something fun.
Well, we'll Miss you on these conference calls.
Okay. Thanks, Thanks, Todd and just for just for the record this is fun.
[laughter] every day.
Automotive down the I'm on the automotive side, Yeah, I think you said, hey look back embedded broadband last year. So.
Is the number we should look at the 335 million. So auto is roughly half of that.
That's what I was referring to yes, just to give you a rough sizing.
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So 167 million 42 million a quarter.
So.
You too.
Should we assume that that is essentially zero and then come back comes back overtime is aimed at that dramatic impact in terms of these shutdowns.
No no it's not it's not zero Todd you'll be the the OEM factories are beginning to ramp up now. So we you know we we have we have orders booked in the quarter for Q2 is just sit there are dramatically down from what we saw in in.
In Q1.
These are these are high volume customers so that could.
That could be a video it's a no it's a noticeable number but it certainly isn't zero.
Okay.
That's a that's helpful.
And is think about that the pace of how automotive might come back over time, how are you guys thinking about.
Well certainly you know we've given given the work we've done with you know rescheduling with our customers we have expectations of a.
A return to two decent levels in Q3, but I do want a caveat that covert as a daily moving piece here. So that's our that's our current expectation and we've been working closely with our customers as we reschedule orders to.
Build the build the booked for Q3, but that's a that's a caveated by the overall covance situation.
Okay.
And then we haven't really talked about this but.
There's been a lot lot lot of detailed questions on the business ex 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 to you.
What's the chances of some of the you did mentioned briefly some of the orders are taking a bit longer to close.
Have you actually seen sort of new decision environments actually show off yet or is it does that silica play out given whatever the economic backdrop isn't that what would be just sensitivity those various scenarios just qualitatively give us your thought on that thank you.
Yeah, Hi, Todd cancer.
I mean, I think that if we could put the right alphabet letter with the recovery we.
I would have been able to give guidance I think that the challenges that nobody really knows exactly what recovery is going to look like we are you know we've done a significant improvements to our forecasting process. So the weekend or be much more deck stress in the EMEA capturing of customer demand and.
Playing that through our operations. So we have good demand signals from our customers but.
The world can continue to change so we see things opening up right now we see customer orders.
You know in areas like automotive in particular are starting to come back, but there's a you know potential that we have further cycles with with cobot 19 neck and neck and set US back we see lots of a government stimulus to get business is going.
You know, where we're lucky in that we play a large part into.
We're not in the consumer market I'd say, our on the real consumer exposure is in automotive.
We provide.
Io Te connectivity into a industrial processes, we are lots of times involved in helping companies save money.
And and that's going to be very important things roll forward. So I think that the the recovery is the ability for our customers to be able to.
You know on new product introductions being able to test the network certify and get those deployed.
And for our end customers continuing to sell products, whether that HVAC systems or industrial lighting or it's a it's pumps.
It's a it's it's measuring in electrical utilities in all of the sectors that we play and so we're of course caught up in the overall economy, but we are as a as a business to business provider that it's helping provide automate automation seed companies money.
You know where it where in that way in a good place to it to deal with it the exact shape of the recovery and the exact impact our numbers is something that we're obviously doing scenario planning around and ensuring that we will.
Manage our expenses to the right level in all scenarios, but also being ready to.
To grow and take advantage of the opportunities the market presents as things start to come back I come back up so.
That's a.
General view that you know, we see things coming back we have a projection we run scenarios and we are ready to react as the as the market firms up what's happened.
Great really appreciate the color how good evening everyone.
Thanks, Don Thanks, Todd.
And there no further questions I'll turn the call back over to context in for closing remarks.
Okay, well. Thank you everybody first and foremost I hope everyone stays a stays healthy and is managing well through this challenging situation.
Getting very used to multiple hours of video calls every day as I'm sure you aren't thank you for joining us today glad to share our outlook I'm glad to share. Our continued building success in our transformation to leading Aiotv solutions business and.
Yeah. Thank Dave again for service welcome Sam onboard and a and new key players that have the team as such as SD for the Americas. So thank you very much and we'll be talking you may be shortly cheers.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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