Q3 2020 Sierra Wireless Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the Sierra Wireless third quarter Conference call.
I will now turn the call over to David Climie VP of Investor Relations you may begin.
[music], Thanks, and good afternoon, everybody. Thank you for joining today.
Conference call and webcast on the call today are Ken Sexton, President and CEO and Sam Cochrane, Our CFO as a reminder, today's presentation is being webcast and will be available on our website. Following the call. Today's agenda is as follows Ken will provide his corporate update and Sam will provide a detailed review of our third quarter 2020.
Results, followed by Q and eight before we get started I will reference the company's cautionary note regarding forward looking statements a summary of our cautionary note can be found on page two of the webcast and is now being displayed todays presentation contains certain statements and information that are not based on historical facts and constitute forward looking statements within.
Within the meaning of Securities laws. These statements include our strategy goals objectives expectations and commentary regarding the outlook for our business. Our forward looking statements are based on a number of material assumptions, including those listed on page two of the webcast presentation, which could prove to be significantly incorrect. Additionally forward looking statements are based on demand.
Management's current expectations and we caution investors of forward looking statements, particularly those that relate to longer periods of time or subject to substantially known and unknown material risks and uncertainties that could cause actual events or results to differ significantly from those expressed or implied by our forward looking statements I draw your attention to a longer to Scott.
A question of our risk factors in our staff and management discussion and analysis, which can be found on SEDAR and Edgar as well as other regulatory filings. This presentation should also be viewed in conjunction with our quarterly earnings release with that I will now turn the call over to Ken for his corporate update.
Thanks, David I will start.
My prepared remarks today with an update on the divestiture of our automotive product line, followed by some comments and highlights from our third quarter.
Regarding the sale of our automotive product line for $165 million, which we announced in July things continue to remain on track and we expected to close in the coming weeks.
The purchaser rolling.
This has received the regulatory approvals it requires to proceed and the tier one automotive customers have also provided their approval and are moving ahead with the transition.
Given this progress we are not expecting any impediment to completing the transaction.
The divestiture of the automotive business enabled us to accelerate.
Laminates in our device to cloud solution to generate higher value recurring revenue.
And also allows our R&D teams to focus on market, leading fiveg programs, including new embedded modules for mobile broadband and new Fiveg gateways, our enterprise networking customers.
With the transaction on trust.
We are reporting continuing operations in the third quarter with automotive product line under discontinued operations in the income statement.
And in our earnings release and during our webcast today, we will be providing GAAP and non-GAAP financial information on the continuing business on a standalone basis as well as combined with the discontinued automobile.
Wrap product line.
Sandler view that in more detail in his summary of the third quarter. So.
So now turning to some highlights and the continuing business in Q3.
Total revenue, excluding auto was $113.4 million in Q3 up sequentially from the second quarter.
Our business transformation is proceeding well with two quarters.
<unk> motor sequential growth in Q2, and Q3, and we are expecting sequential growth again here in the fourth quarter.
Recurring other service revenue was $29.8 million in Q3 up 22% year over year, and 11% sequentially as our focus on I O T solutions continues to generate positive results.
He is looking at service wins in Q3 as measured by L. tire.
Our long term annual recurring revenue.
We achieved wins totaling 34.4 million.
Higher sequentially and year over year.
In the first nine months of this year, we've secured $95 million in L. tar wins, which is 62% higher.
Than the first nine months of 2019.
And this year's win rate with achieved during the pandemic. So credit goes to our global sales team on that achievement.
Our hardware design wins also had been strong year to date up over 20% compared to last year.
And as you can see from our notes in the queue.
I agree earnings release related to discontinued operations.
The automotive business had an exceptionally strong Q3 as the automotive industry ramped up quickly following the shutdowns in Q2 as a result of the pandemic.
If we combine the revenue from discontinued operations with revenue from continuing operations in Q3.
Within total revenue was 180.3 million ahead of our expectations Sam will provide some more commentary on this in his review.
As I mentioned previously I will turn the third quarter was $34.4 million up 76% sequentially and up 62% year to date versus 2019.
We continue to secure strong aiotv solutions wins and I'd like to share three examples from the third quarter.
One of our new global customers in energy solutions company focused on distributed power electrical efficiency and mobile charging stations they.
They required an Io te connectivity solution.
That would allow them to quickly deploy their solution globally.
Our first project with them is focused on enabling their electric vehicle charging stations in Europe and North America.
The differentiator in this deployment was our end to end solutions, where we provide them with our LP W.A. module, our Sierra Smart Sim and cloud platform.
So they have a single source solution, that's immediately scalable and reliable.
The services LTR associated with this design win is expected to be 3.2 million and the hardware value is about a $1.4 million.
Another new customers, a global provider of remote diagnostic medical solutions.
This customer needed an Io t. solution that can gather real time data 24 by seven so physicians can provide patients with continuous care.
The solution required reliable aiotv edge connectivity for their medical gateways to provide both secure video and data links we.
We were able to provide a lead.
Inc. management platform and a fourg connectivity solution for them in Europe, and North America.
This is primarily a services win what else are expected to be $2.9 million and a small hardware component of about a 100000.
A third example is with a leading manufacturer of video surveillance and fleet management solutions.
One of their key end market in school and transit buses, where they're providing connectivity for mobile classrooms.
We are providing them with a bundled solution with our MP 70 cellular gateway that also enables Wi Fi and Bluetooth connectivity.
The customer wanted a one stop shop, where they can get hardware connectivity and.
And cloud management and not have to deal with three or four different vendors.
Our single solution met the requirements the services LTR associated with this win is expected to be 4.6 million and hardware value is about 5.6 million.
These three design wins are solid use case examples of how we bundle our devices with recurring services to win.
Yes, the competition incur.
Increase our subscription based revenue, while simplifying the IOTV journey for our customers and driving shareholder value for Sierra wireless.
As we look ahead into next year I am excited about the market opportunities with our new fiveg embedded modules on our Fiveg gateways and routers.
Fiveg is most.
Winning technically challenging evolution on wireless history, because of the introduction of micro millimeter wave technology a.
Our customers rely on us to get them to market on time will secure fiveg connectivity and they trust us to navigate the complexity the fiveg, new radio and dynamic spectrum sharing.
Some of the key end markets.
As Fiveg applications include enterprise networking public safety public transit and asset monitoring.
In enterprise networking, we recently announced the availability of the Industrys first multi network Fiveg gateway solution for first responders.
Field services and transit applications.
Our new Mgninety Fiveg gateway allows customers to leverage existing fourg infrastructure and automatically connect fiveg networks as they roll the region.
Our patented switching algorithm for multi network routing moose traffic between different cellular network instantly to provide high speed ultra low latency coverage.
CRE moving vehicles.
To drive our rollout, we're partnering with carriers on Fiveg certifications and working to expand the new Fiveg ecosystem in North America and Europe.
To accelerate our efforts, Steve Harmon Senior Vice President of Americas, who joined US in May is working hard to build out our go to.
In programs in North America.
Has been fine tuning his sales team and we are seeing positive bookings coming in with the pipeline improving 50% year over year.
We recently held a successful launch with Motorola solutions to strengthen our partnership with them.
We've also added a new distributor Synnex in North America.
We're pleased with the pro.
Them Rs, we are making with our partners as we do see this as a big part of our growth strategy going forward.
Overall, we remain focused on delivering devices.
Connectivity solutions and cloud management for our customers.
We are seeing more industrial and enterprise customers adopting our end to end ceased.
He solutions because they have a faster time to market the scalable easily and globally and have a lower total cost of ownership.
We continue to leverage our advantage of working with customers early in the design cycle, starting with our devices and our ability to bundle hardware with integrated connectivity solutions and 24.
So by seven network operating support to the key differentiator when we're up against the competition.
Globally, our team at Sierra remains very focused on delivering innovative solutions that generate or higher margin subscription based recurring revenue as well as delivering our fiveg programs that I just mentioned.
With that I will now.
Now pass over to Sam for his review of third quarter results.
Thank you Kent.
Good afternoon, everyone as a reminder, our.
Our third quarter financial results are reported in us dollars and on a us GAAP basis.
We also present non-GAAP results to provide a better understood.
The standing of our operating performance.
A full reconciliation between our GAAP and non-GAAP results is available on the IR page of our website.
Before I begin with a review of the quarterly results I'd like to point out the sale of our automotive product line is near completion as Ken described.
In his comments.
Given the transaction is expected to close in the next few weeks, we have prepared our third quarter financial statements in compliance with Us GAAP.
And segregated the automotive product line from continuing operations.
The assets and liabilities.
At our associated with the automotive business, our held for sale on the balance sheet.
We are also providing some GAAP and non-GAAP information regarding the discontinued automotive business in the notes to the third quarter financial statements and in our webcast present presentation today.
Total revenue for continuing operations in Q3, excluding the automotive product line was 113.4 million.
A decrease of 17.1% compared to the same period last year.
In Q3 revenue from continuing operations grew sequentially.
That was in line with our expectations as we saw some business improvements compared to Q2, which was a challenging environment due to the pandemic.
Non-GAAP gross margin in the third quarter, excluding the automotive business was 34.7% compared to 36.3% in the third.
Winter last year.
In Q3, we initiated some actions to begin rightsizing the business and as a result, opex was down $2.6 million.
Or 4.8% sequentially.
Our non-GAAP adjusted EBITDA was negative $7.4 million compared to adjusted EBITDA.
$3.5 million in the prior year.
Operationally, we experienced tight component supply issues in Q3.
It is an industry wide situation and a continued to remain tight here in the fourth quarter.
Revenue in our I O T solutions segment was lower.
By 15.4% year over year.
Within our Ironkey solution segment recurring and other services revenue was $29.8 million up.
Up 22% year over year, driven primarily by growth in a number of connected devices.
Recurring and other services.
Our revenue represent represented 26% of our total revenue in Q3.
The growth in recurring revenue was offset by lower hardware revenue primarily due to.
The impact of the pandemic in some related supply constraints flow.
Slower activity in transportation public safety and oil and gas.
Directors, which also impacted some of our gateway business and continuing pressure from low priced competitors in hardware only segments.
Revenue in the embedded broadband segment, excluding the automotive business was lower by 21% year over year, primarily.
Primarily.
Due to lower mobile computing revenue. The result of prior design win losses that we referred to in 2019.
Total gross margin was $39.4 million or 34.7% in Q3.
Compared to 36.3% the prior year.
The year over year decline in gross margin.
<unk> was primarily due to embedded broadband gross margin of 20.5% coming.
Compared to 33.4% in 2019 due.
Due to lower mobile computing margins. The result of design win losses, we referred to in 2019.
If we look at Q3.
On a combined basis with our continuing operations and the discontinued automotive business than the total combined revenue in Q3 was $180.3 million.
The year over year increase of 3.6% in Q3 was primarily the result of automotive revenue being up significantly as the supply chain improve.
Real quickly following the Q2 manufacturing pandemic related shutdowns.
Total gross margin on a combined basis in Q3 was 49.2 million or 27.3% compared to 31.7% the prior year.
This decline in Q3 was primarily due.
Due to higher automotive unit volumes at lower growth.
Adjusted EBITDA on a combined basis in the third quarter was close to breakeven at minus 400000.
At the end of the third quarter, we had 72 million of cash.
Specifically during the quarter cash.
Flow from operations was negative 7.7 million.
Which was negatively impacted by the unwinding of our receivables factoring program related to the automotive business prior to the completion of the divestiture.
If we had not undertaken this pre closing step than our receivable factoring program would have generated approximately 10.
$10 million in additional cash flow.
And our Q3 cash flow from operations would have been positive by approximately $2.3 million.
During the quarter, our capital expenditures were $2.9 million.
And in Q3 borrowing increased by $19.4 million with $10 million from our existing line of credit.
And a term loan agreement of $9.4 million with CDC backed by a Canadian government financing program.
These activities resulted in a $9.5 million increase in our cash balance from the second quarter.
Regarding full year 2020, the impact of the.
Endemics on our global business continues to remain uncertain.
Given these conditions, we are continuing to not provide guidance.
Although we do see continued improvements in our continuing operations.
In conjunction with the recently announced divestiture of the automotive business and our focus to grow the business.
Pet profitably weve initiated actions to reduce our operating expenses by approximately $25 million to $30 million on an annualized basis.
The cost reduction program includes the divestiture of the Shenzhen based automotive team and some additional resources there as well as other broad initiatives underway across the company, including the risks.
Restructuring of our R&D team located in Hong Kong.
It has already taken place.
That ends my prepared remarks today, operator, I would now like to open the call for questions.
Okay, ladies and gentlemen, as a reminder to ask a question you need to press star one of your telephone keypad to withdraw.
Your question you can press the pound a heskey, please standby well be compared to Q and a roster.
Our first question comes from the line of Mike Walkley from Canaccord.
Great. Thanks for taking my question hope everybody is doing well doing well and staying healthy on the call.
I guess Ken.
Question for me is just on the enterprise Gateway sales I'm just wanted to maybe get your thoughts on the weakness in that business are there certain end markets or verticals are doing quarterly as you know some of your competitors in that business have seen some better year over year trends. So I'm, just curious, maybe where you're seeing some areas of weakness and is it more.
Some clients maybe waiting for the new Fiveg products and then lastly within that area. Just what are your thoughts on the Cradlepoint sale to Ericsson how might that change the competitive environment and also.
How can that maybe show that this business of yours might be undervalued locked into your stock price. Thank you.
Yes, thanks, Mike Thanks for that question so in.
For the enterprise Gateway market, we have a couple areas that.
We lead in in public safety in Ruggedized mobile commercial environments in the commercial side.
Markets like oil and gas have traditionally been large for us.
And and other markets like that have been more disrupt.
We didnt buy by Covanta oil and gas is weak in other areas, where there needs to be a lot of human enrollment for installations. We've seen some slowness there public safety is a has kept along pretty well in.
In areas like transport.
That whole sectors being.
Impact and so in buses.
The trains in other markets, where our gateways get installed.
They are either slowing their plans or they are not doing implementations right now, but I'm quite bullish about where things are going with our enterprise business as I mentioned in my remarks, we'll put a focus on this rebuilt that team we've grown our pipeline of deals.
This and working on by 50% so far this year and so I expect to see a as as as we work through and everyone gets more even without an end to copel, but I've been working through the challenges to see that progress.
We're seeing that through our distribution partners, where where their businesses are picking up and.
You mentioned also it's an important new relationships working strongly with with Motorola. They are a strong leader in public safety and we enable a number of things they do such as their body worn cameras and other aspects of public safety and Synnex is a large large distributor. So we've had some areas where.
And I may have slowed.
Forward looking for us is tracking pipeline and the and the strength that we have there and you know that the deal.
Deal activity in flight.
I think as an encouraging.
And the second part of your question with regards to Cradlepoint I think we've seen a few transactions in this space now the.
I think the Cradlepoint acquisition was at about six times revenue and other transactions have been around three times revenue. So so clearly.
Our enterprise business is not being valued at those multiples within our space I think what Ericsson talked about is.
Driving their acquisition was strong overall growth in the interim.
By sector, we believe in that as well and we think that it's going to be an important part of growth.
We compete well in that sector we.
Our products are highly valued I don't think the market is waiting overly for Fiveg, we have launched our high end fiveg gateways with more product coming in Q1.
Our fiveg products.
Not only connect to fiveg, but they they support the highest fastest speed fourg LTE, he called Catwenty and so as as companies start to future proof I think that's a good upgrade cycle that that is coming and we're launching an entirely new cloud manner.
Management stack during 2021 as well so lots lots going on in the enterprise sector.
And we expect that to be a good growth area for us in 2021 and.
I, certainly think that where we're not getting.
Recognizing our share price yet strong.
Strong position, we have an enterprise.
Great. Thanks, that's very helpful.
Second question for me and I'll pass the line just on the 25 to 30 million in cost savings.
Any help you guys could give us just in terms of how much of that comes out right away in Q4 with the divestiture or maybe you can help us with maybe a non-GAAP run.
Run rate for the business post the divestiture and then how much more of that 25 30 comes out over the course of time as it maybe a year or so to take out that 25 to 30, just trying to help us build out our models. Thanks.
Yeah sure Mike, Let me make a few comments and Alaska Sam to to provide some.
More data as well.
Well, so we've and we're really looking at our continuing operation without auto so they we expect the auto transaction to close in the next few weeks, obviously that creates a very strong balance sheet for us.
You will see in the current results that we put out there the split between continuing operations and auto.
The accounting rules.
Sales are that.
Any.
Our shared resources get allocated to the main business. So I would say it flatters the profitability from auto and equally is it's less flattering to the ongoing business profitability.
We've been making a number of changes already so we've we've.
We produced in our.
R&D Center.
We will have a an entire R&D center going.
Going out as part of the transaction, we are doing both auto and other work. So those are some of the activities that are that are happening and will occur over Q4. So I think you can see a lot of the the run rate will have occurred so that we have.
Cleaner year in 2021, but but Sam I could ask you to comment as well.
Thank you Ken.
Thanks for the question. So as you look into Q4 total revenue.
It's already of the decrease from the automotive Divesture closing and Rightsizing. The business most of that will show up in 2021, you'll start to see it earlier.
In the first half of 2021, so a big chunk of its not can be late year. If that help also in Q4, we had some lumpiness expenses.
On a certification so.
To help you on the mall building Youre thinking of Opex is sort of flattish to down a bit from from the quarter Q3 is probably the right way to think about it.
Great. Thanks for taking my questions I hope everybody stays healthy.
Thanks, Mike.
Our next question comes.
Comes from the line of Daniel <unk> more samples from BMO capital.
Looking at the services revenue there was nice.
Nice up tick.
From the June quarter, No. If you look at the preceding quarters Park that was kind of mid 26 million range for three quarters and they kind of have a nice 3 million bump up sequentially any dynamic there was there maybe a a backlog of things that you are deploying during the lockdowns or was there some other dynamic.
Drove that that uptick just from the June quarter.
Thanks, Dinos good to hear from you. So you know we're expecting used to continued growth in our services revenue and talking about the leading indicators with our design wins were starting to see more of those play through and.
And anything that just an ongoing trend Q2 was held back I think hurt the curve just because of a number.
A number of our customers that had pay per use sort of activity that were much lower in revenue in Q2, so while while we still showed sequential growth in Q2.
This strong and has the underlying trends.
And so there was some of that catch up in Q3.
We've had a we did $93 million of L. tower in a in 2019 were already at 95 million. This year. That's all future revenue value of is working through the system right now so as those design wins go into production.
That will continue to.
To pick up on that on a quarterly basis. So I suggest you know what I've been talking about now for.
Almost two years just in terms of rate in Q1 or 2019, we started to get back to our business and our resources to be able to drive full aiotv solutions with both of them with both devices and conductivity.
The you know what I'm excited.
Excited about that.
Santos is you are seeing is this continued growth this is turning of the corner.
From from winning new business, so while it's been a competitive market and some low cost competitors out there. Our overall design wins, both on services and on hardware have have ticked up nicely.
Year to date and so are our offers out there to the market are being well received where we're winning more business. We've seen our win rate increase and the answer that that will that will drive through on the hardware side you have some things like L., Pwc, which are lower asps. So those don't help the overall revenue growth.
But when they when they carry service activity with them then.
Then you can see that come in our higher margin and.
More predictable recurring revenue kicks in I think that the design wins that I talked about the three examples here are reflective of what we see going on in the market. So a lots of.
Road.
Lots of good value being created.
By delivering a complete solution for customers it helps with their speed to market, it's helping customers get their aiotv solutions and getting new value that they need from that edge data.
And it's certainly a positive business model for us so yes, the good quarter more to come.
Correct.
Looking at the end of the broadband gross margins.
I know there are down versus last year because of mobile.
Mobile computing, but if I look at the last couple of quarters is this volatility there there was a spike in margins in Q2.
Just just to clarify what drove that Q2 Spike and then as far.
The run rate should we think about a Q3 as being more representative for what the gross margin trajectory looks like there with the current mix.
Sure assembling all our key a key you opt for that one I just want to go to and in Q2, you know auto was low Q3 auto was high stripping at auto I think you'd see some more stability, but but Sam already.
No exactly right Kent and also in Q2, our automotive margins were particularly high because of the low volumes, we were able to take advantage of some better pricing that the lower volumes. So automotive was lower plus at better margins in Q2, now Q3 since embedded broadband.
Yes. It has the remaining business in there and autos carved out that's more indicative of margins going forward.
But I'm, sorry, I was looking to grow at.
The re segmented so the 45% margin ex auto unlimited broadband.
In Q2.
Assisted oriented.
Yeah.
So to clarify the question, you're saying you're looking at just the embedded broadband margin without auto in Q2.
As stated yeah. There were sales numbers there has been a spike in Q2.
Got it yeah.
Yes understood Yeah, no I think it's in that.
If you're looking at just that number a blend of the two would be a blend of those two margins will be a better one going forward.
Okay. So sort our final look at Q2, and Q3 and blend them and that would be more indicative of going forward, but.
Yes, we can chat more about it later, but that that would be a good way to model.
Okay, great and.
Quick question for me is just on the supply constraints can you comment on I guess the.
Are you seeing some improvement as essential dressing and any way to quantify you have to have this quarter.
Well.
No Crystal ball, so we we're working with our supply.
Ladies and and we've.
We've we've we've worked very well with them of our supplier solved a lot of the problems not all of them and then then you get new pinch points that a that come up so it's a it's a it's constant work I would say in the <unk> in the in the current environment. Some of the big impacts in Q2 were shut.
Shutdowns and.
Like areas affected components more clearly you know those are less of the case today, but whenever.
Whenever you cause a disruption in a system. There's you know there's there's still some ongoing activity. So we're still working through.
Some were working.
With with our suppliers.
And where were working.
Working with our customers as well to increase lead times to ensure that we can get the components that are required so where we're solving the problems in many ways, but it remains tight.
Great. Thanks.
One.
Our next question comes from the line of poetry, <unk> from RBC capital markets.
Oh, thanks, so much and good evening. They eat you mentioned your services win rate has been strong and favorable can you elaborate on how your services.
Right or attach rate has been trending this.
This year have you seen any meaningful change versus previous years.
Thanks, Paul good to hear from you. So I think in terms of our attach rate. Yes. We are we are seeing that trend up.
We.
When you know up 61% on our design wins of services I think is reflective of that.
So we I think the other pieces you know, we we really we're building out our capability discount to sell whole solutions in 2019, we built.
Brought in more talent on a solutions basis to our sales force that's had time to embed in.
Existing sales people that we've.
Had involved in the services side and are now able to sell so we have we have a full global sales force I'm able to offer but.
Hardware and full solutions and so thats definitely helping our overall win rate. So yes, I'm very happy with that you know we had we had our LCR wins in Q2 with Cobrand were down we bounced back and that 95 million year to date. Despite cobot being ahead of our entire design win from from 2019 I think.
Both very positive and expect to end the year strong.
Could you delve a bit further into the competitive dynamics for services.
I think when you look at your competitive bands is the biggest one the fact that you're an integrated or end to end provider.
Or maybe looking at it another way is you know how successful is there.
Services business or how did the attach rate or the win rate without leads coming from your hardware business. So on top of third party or competitor hardware.
Sure Yes, no insightful question. So first of all it's a big competitive advantage for a customer that's looking to get out into global markets and I talked about some in my.
Just examples in my script, we're able to provide that complete solutions, so with embedded conductivity in our devices as their shipping there, they're charging stations or their medical solutions to multiple countries, they're not having to worry about the logistics of different Sim cards in different countries.
Different partners, if they have conductivity.
He was different people to call we handle that globally, we manage all issues proactively through our through our global Mark and are with multiple carriers per country. It means that we're able to offer better overall quality of service. So when we're selling into an industrial I T and you're in factory when we have multi.
Sheeple carriers and can choose to stronger signal when.
When you're in a constrained or.
An environment that is not going to have great coverage because you're indoors.
That's a big advantage for customers, that's our competitive advantage and then on your on your question of it is it just come about from.
From having hardware leading to conductivity well the big.
Got to manage for us because most customers start designing their hardware before they get around to thinking about the how they're going to attach that so when we are in there working on the hardware design and we can build in our services. It gives us earlier in the customers design cycle the ability to share what we can do for them on the connectivity side. However, we all.
I guess a win deals where their customers are just looking to take advantage of our global conductivity being able to have our smart Sam that works seamlessly across 200 countries globally and able to have that multiple multiple carrier access.
And then that often leads to us than working with them on winning the hardware. So we.
Also matter from hardware to services, but we also have.
Quite a number of positive examples are going from services to hardware. So it's it's good.
For our sales people to be able to to sell those solutions in both directions, and we're seeing progress on both fronts.
And last one for me you mentioned the prepared remarks, you are seeing impact from.
Low priced competitors.
You know that being the case for a number of years or long term in this industry.
Hi.
I don't think the tariff environment would have had any impact, but the global move away from wall way has that had any impact in the module space at all.
Okay.
So I wouldn't say, it's been of a substantive impact at this point yet although it is starting to drive more awareness and that has been quite a.
First the U.S. moved on non while we activity and now a number of European countries from that from a Fiveg network infrastructure basis, and I think that there really look what.
Provided.
Both high quality and high security and I think those are are very important what we do and we saw a complete solutions that are both hardware and conductivity I Trust becomes a very major factor and I think thats a great.
Brand strength and position that we have we've seen a couple of examples where.
Weve customers want to ensure that there.
Having that high degree of security with their solution, we it is becoming more.
More prevalent but theyre the it's not a tariff issue 'cause modules when they're built into a product.
Tariffs are built on.
Our our based on.
The whole product entity, not where the module comes from it's just not it's not a it's not a tariff impact part of the business, but it's more a business decision for customers. We are seeing increasing strategic alignment with tier one industrial and T companies, where they're trying to digitize all of their assets I've talked with.
Number of.
Chief product Officer, Ceos, a multibillion dollar companies that this is becoming strategic for them now and they want to digitize their assets in the marketplace and so in those cases I think that.
Our 20.
26 year history in the market and our strong position.
The number of security and dependability give us a big advantage.
And do you think anything a bit further do you think that the move away from wall way and maybe some other China based vendors, giving that alleviate the pricing pressure at least marginally or do you think it's a pretty much a part of life in this industry.
So I think that on.
Some of the first aiotv use cases that.
They came out and as you know would move to L. PW way I think there can be a lot of price pressure in.
And that can be relatively low margin hardware only business, but when we bundle. It in a couple of quarters go like you have.
On the Apple they designed with an industrial lighting customer and so that was.
About a million dollars worth of hardware, but a growing to 1.8 million of recurring revenue per year and so from the margin produced from a design win.
The vast majority of the gross margin comes.
Yes from a recurring revenue versus from hardware, so offering the whole solution allows us to be as competitive as we need to be upfront to to win the total package and our overall recurring revenue business is.
It is very healthy.
So we think that we provide great value to our customers, but also.
Get to get recurring revenue it at higher gross margins, so the low priced LBW a market.
Lastly, Steve demand will drive a lot greater.
Growth in the total I O T market, all those devices need to be connected and so where we're.
We're in a good part of the value chain for.
This significant growth in LP W.A.
Projects that tail that we're seeing out there right now.
Great. Thanks for taking my questions.
Okay.
Our next question comes from the line of Todd Copeland from see RBC.
Yeah. Good good evening, everyone. Good afternoon, everyone.
I had a couple of.
Cleanup questions and then some business questions.
What will the pro forma cash fee.
Post the sale.
Sam you want take that.
So are.
Asking like what the year end balance of cash will be or what the more more more more or less yes.
Yeah, I mean, so you know we will close the sales will be a small amount of taxes and fees, but the vast majority of that will be on our balance sheet and we don't expect to burn.
A lot of cash in Q4 and moving forward Q4, we have we have some capex going into upgrade the network. So maybe approximately about 5 million of cash burn in Q4, but we expect the rest to remain on our balance sheet.
Okay, and when you say minimal taxes, what like 2%, 10% so yes.
So.
Three to $3 million to $5 million.
Okay, so you'll you'll basically be adding post the sale.
Over a 155 million in cash to the well you said you haven't even need 70 seem.
72 million yet yeah, you have to read that at the $19 million of.
Cash is staying with the with the buyer on the on the deal.
19 out of the 165.
Yes.
Yeah Man working capital of one thing.
The five minus the 19 myosin fees for the bank or minus the tax and the rest of cash then we'll burn about $5 million of Capex in the quarter.
In Q4, so and then you'll get your any bounce.
Or a good approximation of it.
Okay.
Okay. Thank you for that and then in terms of the Opex, If I did my math right.
In.
In Q4.
Without I'm sort of like nonrecurring items, it's in the 49 million range or something like that.
In your basic around saying 51, I think yeah.
Yeah, Oh 51, Okay. So 50 down okay. So 51 million in your your you're basically saying.
That that in Q4, that's sort of flat to down with restructuring to date and then that'll.
Sort of trend down.
Over 21 or is that going to go up modestly because you're making other investments.
No no. It will definitely go down in 2021, that's the 25 to 30.
30 on an annualized basis and those actions were taken in Q4, the vast majority of them. So in in Q1 and moving forward you will see a much lower run rate of Opex.
Okay I guess.
Just.
I mean, you can correct me on this point as well see our wireless has had a number of restructuring.
Greetings and often the savings and then reinvested in the business and which is fine, but you're basically saying you're going to get eight ish million near near 8 million off the 51.
So you bring it into the mid mid Fortys at the very least in Q1.
One and then bring it down a little bit.
Below that over a over the course of the areas that is is that the message and.
I think that's the right way to think about or your quote your clothes right. I mean, it means it's a bit high we said 25 to 30, So you know six or seven.
You know, we're not reinvesting those at this time we're.
We're committed to growing the business like like Ken said, we've been growing sequentially over the last few quarters.
And we continue to to grow the business and we're going to do it profitably. So what we'll have key investments in areas that we need to where we see strong growth in that have a strong ROI case, but overall you will see the ROI.
Our opex run rate come down to the two to lower levels.
In 20 Twond Todd.
Todd if I can just comment a bit further on that so when we.
It made some first moves on expense reduction to that to get the company leaner, we were investing in the move to selling services and our network side. So there was some I wouldn't to men, but an example that I made.
Mentioned before is is we reduced our R&D and that was based in Paris about at about 100 R&D staff there.
That were at circa 165000, a year cost and and we've been focusing on a new operating centers like Taipei, Taiwan, where you know where Adam.
Average cost per head of you know just.
Just over 50000, so so some of them some big savings out of getting to lower cost centers with this move we with selling of our auto business. We sell a fairly large center that's based in Shenzhen and we've also announced that we are moving.
Moving.
I would have doing R&D in Hong Kong, and so again reinforcing our major centers in Richmond and in Taipei. So so, but we're we no longer need to make any further reinvest in the services side that part of our strategy is complete and producing results inside sales line here. So.
So that also a big part of selling.
Auto business was being able to get a real focus on the key parts of our business, so driving our industrial business and driving our enterprise business and and with that focus.
And the number of centers that we produce from an RMB R&D perspective, I look for us to be much more efficient going forward and you'll see that show up in our opex in.
In 2021.
Okay perfect.
One sort of last clean up and then I want to ask you about the business. So the gross margin is more or less 35%.
I mean is that is that the right way to to sort of think about the gross margin is it like I mean, you talked about some puts and takes before but.
But as I'd like a reasonable base says with with modest sales growth.
Yeah.
Okay.
Sam do you want to jump in there yes.
Yeah sure.
I do I do think 35% is a good way to think about the business.
Ken just mentioned you know the L. Tara.
Or that we have been winning those.
Those design wins are gonna are indicating that in the future you know as these turn on we will get a good ramp up there you start to see a real improvement of that in a in 2022. So I think 35% as you're looking into into 2021 and Q4 is a good way to think.
Both the business with with some small improvements on that number and in 2022, you start to see even more improvement as you kind of ramp up connected devices.
You get better pricing from scale and the businesses continues to grow but in the near term. That's a good way to think about margins for the consolidated business.
Okay, sorry, one follow up on that so.
Have you guys talked about what the sort of post 2022, L. tar or recurring revenue gross margin might look like I mean is that like to.
Typical SaaS margins, you know 50 60, 70%.
We we talked about Todd previously is that our our overall services revenue was around 40% gross margin.
It's not like Hsas and then it's not all software we have.
Direct cogs associated with the wholesale deals we have are carriers, we do get scale advantage on the network part that we only enter NVNO.
And as we can get more scale, we get we get better leverage on our total cost with the carriers overall, but I think thats more of a.
Modeling points on the on gross margin on the on services, we have some software aspects to be higher gross margin, particularly in our cloud management of enterprise products, but but the service.
Service is part a is a very good for the industry, but not to staff levels yet no.
Okay. Okay, that's certainly fair.
Very good and then and then just on the recurring piece, you're starting to break out details on that which is certainly good to see.
What about.
Retention in churn is that is that something you're you're wanting to talk about at this point is it above 100% of the is it like.
Sometimes people look at that that group of programs when they just wonder whether the enterprises will.
No actually move forward on them so what's your thinking on that.
Yeah, I think it's a bit of a complicated formula, but let me try to to break into a couple of big box Corey I think on the new business that we have going on we're cannot connecting.
You know global machine makers, so pumps compressors h. back lighting and the terms very low we get into.
Product.
There and kind of like for that product. We're shifting data there is almost never a truck roll to go and change the network settings on that and you know.
As we as we provide our global network operating support to customers you know that that's a very positive low.
Churn metric.
We acquired businesses to get in scale and so those were less attached to to some sort of the global machine activity. So.
Our acquisition of main gate in Scandinavia, and Numerex in U.S. I had some some parts of the business that do have some attrition with.
So we're being growing overall.
Despite some attrition on those legacy acquired businesses now I would note that in the where the the assets from Numerexs, our team's been doing a very good job of managing those customers.
Part of the portfolio we've returned.
Turn to growth.
And it's it's.
It is going to continue to grow as we move forward into 2021 and growing at very healthy margins. So you know there is some churn from legacy programs, but.
Our overall growth of new connected devices is.
As far as running that and in some areas of legacy. We've also turned back to turn back around to growth as well so.
In our in our plans we've talked about grow recurring revenue growth. We are we have we have a strong view on customer retention I'm all those devices need to continue to be connected unless the machine is.
We've taken out of service and.
And so we work to provide by continuously for our customers.
Okay. Good.
My last question is on Fiveg I was interested to hear you talk about millimeter wave my impression in the US was that wasn't available to many places in its sales airports and sports Stadium.
The Ams, which aren't really getting used to [laughter] davicar much.
So what what's sort of the path to millimeter wave is it like a decent chunk of the L. tar at this point and how significant is that technology that you called out is this is this a material growth driver.
For the company Thanks, a lot.
Sure so.
So thinking about Fiveg most of our early revenue from Fiveg is always all going to be equipment revenue.
We are not.
We're not working to connect many fiveg devices, you have that sort of higher end higher bandwidth, we work with our carrier partners on the on.
That conductivity in the main what we're seeing is a sale of Fiveg module. So we have I mentioned in the previous quarter, a number of design wins that we've had in fiveg. So we've done a very strong jabil.
A winning fiveg module business to connect other network providers equipment.
I will warn you get that certified with carriers around the world and starting to ship product on the other side is in our network gateway business.
We launched our first high end, Mgninety, Fiveg gateway and providing that in.
In both.
Good call the lower speed fiveg or so.
Sub six and then the.
Higher capacity low latency millimeter wave.
Our products do both varieties of of that I think that a lot of times when you're acquiring equipment you want to future proof. It. So the split between some 16 millimeter wave I think it will be years before we know exactly.
Lastly, how that goes for the industry to get true massive capacity increase its going to be on millimeter wave.
That.
Those are new frequencies that bring more capacity.
The nature of high frequency means you need smaller sales, but smaller sales give you much more capacity and it also has the benefit.
Bits of low latency. So I think a lot of applications that are going to rely on the high speed low latency are still in the invention process.
But like like Fourg, probably the advent of many products and wouldn't have worked with a speed of Fourg Fiveg will do the same so right now for 24 hours in Q4 by.
The revenue is going to be small there is a lot of proof of concepts going on in 2021, there is still some variability.
In terms of how rapid the rollouts customers are are working to make sure. They get product out there fiveg is still significantly more expensive as a product than than equivalent.
Fourg.
Devices are gateway.
Yes, I think that that that.
Price premium will fall over time, and the benefit to need for that speed will increase so what we'll see ever increasing fiveg as time move forward at a similar adoption cycle. We saw in the move from Threeg to Fourg. This suggest that this is just a bigger one in terms of the price gap is higher.
By by the performance.
Potential of Fiveg is also significantly higher.
Very good okay. I appreciate that color that I agree with you with that on the Fiveg. Thanks a lot.
Thank you.
Operator any more questions.
Our last question comes from the line of Richard Tse from National Bank.
Hi, guys. Congrats on the win this quarter. This is I'm here, calling in for Richard.
Just had a quick question for you regarding the rolling walk down there starting in Europe and possible.
We are coming in North America, just wondering.
I was wondering on your impact on the business and how you're thinking about that going into 221.
Yes. Good question. Thank you well you know we are sure we all would like to be able to add to head back to normal and city.
Sit in customers offices and be able to.
Spend more face to face time, but we have gotten pretty used to selling through.
True.
Video calls and dialogue.
Our our field engineers able to practice safety protocols when required to actually help with that with field aspects. So the.
The lock down that trend that we've seen that coming across Europe.
Not been an impact to the same degree as we saw in Q2.
I think people have figured out how to do business more.
So it's not it's not ideal, but it's not a it's not of that it's not about nature overall.
We where our sales.
Sales teams I think have done a great job our product marketing people have been able to get information out and I think that overall that will need for digitalization is becoming more and parent.
Okay.
With with with the new World.
Note.
That we live in now so people want to have their assets digitized being able to get that information without needing to have humans to go up to that to the machines.
That the speed at which that happens is somewhat constrained by covance, but we have lots of lots of strong projects going on so you know I just.
Sort of reiterate some of the key points you know, we've we've seen assets.
Very strong.
Growth in our design wins for services, so I think that despite that the corporate activity.
Being up 61%, we've grown our design wins on on hardware by over 20% and this has all been done.
And in this.
Non face to face selling world and we've grown our enterprise pipeline for projects, we're working on in the enterprise business by over 50%. So where we are we're working through this and.
Maybe a little slower to get all those deals papered and launched but the the velocity of what's coming in is it has been increasing burden.
Jason.
Okay. Thanks for that color all profit line.
Thank you.
There are no more questions on the phone line.
Okay, great well I, thank everybody for their for their attention I'm very pleased to share what's going on with the Sierra wireless business.
And.
And we'll be speaking to many people is as follow up and sharing activity as we close the auto business, we'll be putting out an announcement about that as well and.
We will wish everyone. The best of health and safety in the the in these challenging times and we will.
Come back with with updates on our progress so many thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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