Q3 2020 Sierra Wireless Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to D.C. or wireless.
Third quarter Conference call I would now turn the call over to David Climie VP of Investor Relations you may begin.
Thanks, and good afternoon, everybody. Thank you for joining today's conference call and webcast on the call today are Ken Sexton, President and CEO and Sam car.
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 Jim will provide a detailed review of our third quarter 2020 results followed by Q and a.
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 the meaning of securities laws. These statements include our strategy goals objectives expectations.
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 our managements current expectations and we caution investors are 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 discussion 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.
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 wireless has received the regulatory approvals it requires to proceed and the team.
Automotive customers have also provided their approval and are moving ahead with the transition.
Given this progress we are not expecting any impede meant to completing the transaction.
The divestiture of the automotive business enabled us to accelerate our efforts in our device to cloud solution to generate higher value recurring revenue.
Here with also allows our R&D teams to focus on market, leading fiveg programs, including new embedded modules for mobile broadband a new fiveg gateways for our enterprise networking customers.
With that transaction on track, we're reporting continuing operations in the third quarter with automotive product line under discontinued ops.
Races 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 automotive product line Sandler view that in more detail in his summary of the third quarter.
So now turning to.
Highlights of 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 of sequential growth in Q2, and Q3, and we are expecting sequential growth again here in the fourth.
Disorder Rick.
Recurring other service revenue was $29.8 million in Q3.
22% year over year, and 11% sequentially as our focus on Io T solutions continues to generate positive results.
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 have 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 achieve.
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 into Q3 earnings release related to discontinued operations.
Automotive business had an except.
Usually strong Q3 as the automotive industry ramped up quickly calling the shutdowns in Q2 as result of the pandemic.
If we combine the revenue from discontinued operations with revenue from continuing operations in Q3 than total revenue was 180.3 million.
Ahead of our expectations.
John will provide some more commentary on this in his review.
As I mentioned previously alternate 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.
Third quarter.
One of our new global customers as an 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.
This customer needed an Io t. solution that can gather real time data 24.
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 were able to provide a leading management platform and a fourg connectivity solutions for them in Europe and north.
Bye.
This is primarily a services win what else are expected to be $2.9 million and a small hardware component from a 100000.
A third examples with a leading manufacturer of video surveillance and fleet management solutions.
One of their key end market is school and transit buses, where they are providing clinics.
Where they can get hardware connectivity and cloud management and not have to deal with three or four years and vendors.
Our single solution met that requirement.
The services LTR associated with this win is expected to be $4.6 million and the 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 against the competition.
Increased 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 giggly.
The land Rovers.
Fiveg is the most technically challenging evolution on wireless history, because of the introduction of micro millimeter wave technology across.
Our customers rely on us to get them to market on time with 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 for Fiveg application 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 Trent.
Recent applications.
Our new Mgninety Fiveg gateway allows customers to leverage existing fourg infrastructure and automatically connect to fiveg networks as they roll those regions.
Our patented switching algorithm for multi network routing moves traffic between different cellular network instantly to provide high speed.
Low latency coverage for moving vehicles.
To drive our rollout we are partnering with carriers on Fiveg certifications and working to expand the new Fiveg ecosystem in North America.
To accelerate our efforts, Steve Harmon Senior Vice President of Americas, who joined US in May is working.
And hard to build out our go to market programs in North America.
He 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 and we've also added new distributor Synnex in North America.
Look at are pleased with the progress we are making with our partners as we 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.
We are seeing more industrial and enterprise customers adopting our.
Come to end IC 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 and working with customers early in the design cycle, starting with our devices and our ability to bundle hardware integrated connectivity solutions.
And 24 by seven network operating support is a key differentiator when we're up against the competition.
Globally. Our team is here remains very focused on delivering innovative solutions that generate a higher margin subscription based recurring revenue as well as delivering our Fiveg program I just mentioned.
With.
With that I will now pass over to Sam for his review of third quarter results.
Thank you Kent.
Good afternoon, everyone as a reminder.
Our third quarter financial results are reported in us dollars and on a us GAAP basis.
We also for non-GAAP results to provide a better.
Understanding of our operating performance.
A full reconciliation between our GAAP and non-GAAP results is available on the IR page of our website.
Before I begin with a review of the quarterly results I would like to point out the sale of our automotive product line is near completion as Kent.
Better either those 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.
And segregated the automotive product line from continuing operations.
The assets and liabilities.
With that are 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.
Which 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.
For last year.
In Q3, we initiated some actions to begin right sizing 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.
This 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.
Or 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 the number of connected devices.
Recurring and other services.
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 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 primary.
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% compare.
Compared to 33.4% in 2019.
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.
Proved to higher automotive unit volumes at lower gross margins.
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 receivables factoring program, we've 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.
In a term loan agreement of $9.4 million with VC 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.
Pandemic 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.
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.
That 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 it were.
Minded to ask a question you need to press star, one or your telephone keypad to withdraw.
No question you can press the pound ASCII, please standby well be compiled acuity roster.
Our first question comes from the line of Mike Walkley from Canaccord.
Great. Thanks for taking my question hope everybody's doing well doing well and staying healthy on the call.
I guess Ken.
First 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 so.
Hi, It's me waiting for the new Fiveg products.
And then lastly within that area just what are your thoughts on the Cradlepoint sales the Ericsson how might that change the competitive environment and also.
Maybe show that this business the years might be undervalued locked into your stock price. Thank you.
Yes, thanks, Mike Thanks for that question so in.
Some kind of the enterprise gateway market, we have a couple of areas that you know we we lead in a in a in public safety in Ruggedized mobile commercial environment in the commercial side markets like oil and gas have traditionally been large for us.
And and and other markets like that have been more disrupt.
Bye Bye Colgate oil and gas is weak and other areas where that needs to be a lot of human enrollment for installations. We've seen some slowness there public safety is has kept along pretty well in.
In areas like transport.
Whole sectors being impact.
Impacted so in Boston.
Up to train in other markets, where our gateways get installed they're either slowing their plans or they're not doing implementations right now, but I'm quite bullish about where things are going with our enterprise business is as I mentioned in my remarks, we put a focus on this rebuilt that team we grow in our pipeline of deals.
This is working on by 50% so far this year and so I expect to see as as as we work through and everyone gets more even without an end to kobin, 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.
I will watch and also as an important new relationships working strongly with with Motorola a they're a strong leader in public safety and we enable a number of things that they do such as their body worn cameras and other aspects of public safety and Phoenix is a large large distributor. So we've had some areas where.
Then it slowed.
Forward looking for us is tracking pipeline and and the strength that we have there and you know that the deal.
Deal activity in flight.
I think is encouraging.
And the second part of your question with regards to Cradlepoint I think we've seen a few transactions in this space now that.
Thanks, Craig appoint acquisition was that about six times revenue and other transactions have been around three times revenue. So so clearly our enterprise business is now being valued at those multiples within their space I think what Ericsson talked about is you know driving.
Driving their acquisition was strong overall growth in the interim.
Reprice 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.
Meant stock during 2021 as well so lots lots going on in the enterprise sector and expect that to be a good growth area for us in 2021 and certainly.
Certainly think that we are.
We're not getting.
Get recognized in our share price you had strong.
Current position we have in enterprise.
Great. Thanks, that's very helpful.
Good question I mean, 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 is 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 a to provide some more data as well.
So we've yeah, 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 we put out there the split between continuing operations and auto the accounting rules.
Are there any.
Sort of shared resources get allocated to the main business. So I would say it flat or some 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 produced and aren't.
R&D Center.
We will have an entire R&D center.
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 animal occur over Q4. So I think you can see a lot of 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.
Yes, Thank you Ken.
Thanks for the question. So as you look into Q4 for revenue.
The majority 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 it is not going to be late year. If that help also in Q4, we have some lumpiness expenses.
On certification so ill.
To help you on them all building, you're 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 from comes.
Comes from the line of Daniel bought more stock <unk> from BMO capital.
Looking at the services revenue there was nice.
Nice up tick.
From the June quarter.
If you look at the preceding quarters Park that was kind of in the 26 million range for three quarters and they kind of had a nice 3 million bump up sequentially.
Any dynamic there was there may be a backlog of things that you are deploying during.
The lockdowns or was there some other dynamic better.
Drove that that uptick just from the June quarter.
Thanks, Dennis good to hear from you. So you know we're expecting just a continued growth in our services revenue we've talked about that the leading indicators with our design wins were starting to see more of those play through and.
And so I think that's 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.
The strong and has the underlying trends.
And so there was some of that catch up in Q3.
You know Weve had a we did $93 million of LTR in a in 2019 were already at 95 million. This year. That's all future revenue values is working through the system right now so as those design wins go into production that will continue to act.
To pick up on that on a quarterly basis. So this is just 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 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 Oh, you know what I'm.
Excited about Santos is Youre seeing is just 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.
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 rates increase and the end to that to that will that will drive through on the hardware side, you have something like L. PW way, 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.
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.
Great.
Looking at the embedded broadband gross margins.
I know there are down versus last year because of that.
But 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.
Run rate should we think about 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 say in 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.
Yeah.
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 volume so.
So automotive was lower plus at better margins in Q2, now Q3 since embedded broadband.
Yeah. 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 resegmented sales of 45% margin ex auto unlimited broadband.
In Q2.
It's just an already.
Yeah.
So to clarify the question, you're saying you're looking at just the embedded broadband margin without auto in Q2 there.
The restated yeah. The restated numbers there has been a spike in Q2 ongoing.
Yeah Yeah.
Yes understood, Yes, no I think it's in that case.
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 last.
Good thing for me is just on the supply constraints can you comment on I guess the <unk> are.
Are you seeing some improvement as the country progressing and anyway to quantify the impact.
To have this quarter.
Well no crystal ball. So you know we are we're working with our suppliers.
And.
You know, we've we've we've worked very well with them or supplier solves a lot of the problems not all of them and then you know then you get new pinch points that are 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 shutdowns and some.
[noise] areas affected components more clearly you know those are.
Yeah less of the case today, but whenever you, causing disruption in a system. There's you know there's there's still some ongoing active so we're supposed to working through it.
We are working.
With with our suppliers.
And where we are.
Working with our customers as well to increased 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.
Sure.
Our next question comes from the line of Paul Treiber from RBC capital markets.
Oh, thanks, very much and good evening. They eat you mentioned your services win rate has been strong and favorable can you elaborate on how your services win.
Right or attach rate has been trending odd 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.
<unk> up 61% on our design wins of services I think is reflective of that.
So we I think other pieces you know weve really we're building out our capability discount to sell whole solutions in 2019, we built.
Brought in more talent honest 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 both hardware and.
And full solutions and so that's definitely helping our overall win rate. So yes, I'm very happy with that you know we had we had our LDR wins in Q2 with co bid were down we bounced back and that 95 million year to date. Despite cobrand being ahead of our entire design win from a from 2019 I think very positive.
And they expect to end the year strong.
Could you delve a bit further into the competitive dynamics for services.
Like when you look at your competitive bands as it is the biggest one that frac that you're an integrated or end to end provider or.
Or maybe looking at it another way is how successful these are services.
We have a 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 its a big competitive advantage for a customer that's looking to get out into global markets and I talked about some in my example.
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 connectivity issues different people.
During the call we handle that globally, we manage all issues proactively through our through our global market and our with multiple carriers per country. It means that we're able to offer a better overall quality of service. So when we're selling into an industrial I T and you're in a factory.
When we have multiple carriers.
People and can choose the strongest signal I'm going.
When you're in a constrained or and.
But that's not going to have great coverage, because you're indoors, that's a big advantage for customers. They got started competitive advantage and then on your on your question of it isn't just come about from from having hardware leading to conductivity well the big advantage for us.
Irrs most customers start designing their hardware before they get around to thinking about they how they're going to attach that so when we're in there working on the hardware design and we can build in our services. It gives us a earlier in the customers design cycle the ability to share what we can do for them on like conductivity Psych. However, we also win.
Sales, where their customers are just looking to take advantage of our global conductivity being able to have our smart Sam.
It works seamlessly across the 200 countries globally and able to have that multiple multiple carrier access and then that often leads to US then working with them on winning the hardware. So we can come at it from heart.
Dealer to services, but we also have a.
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 just 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're seeing impact from.
Hartl price competitors, you know that being the case for a number of years or long term in this industry has he they 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.
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 there's been quite a.
First the U.S. moved on 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 we provide.
Hi, there.
Both high quality and high security and I think those are are very important what we do and we saw a complete solution to double hardware and conductivity I Trust becomes a very major factor and I think that's a great.
Brand strength and position that we have we seen a couple of examples where cost.
Obama is want to ensure that there.
Having that high degree of security with their solution, we it is becoming more and.
More prevalent but there you know the it's not a tariff issue 'cause modules when they're built into a product.
Tariffs are built on.
Our our based on you know the.
Small 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're 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 a number.
Who knows.
Chief product officer is 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 26 year history in the market and our strong position on.
Security and dependability give us a big advantage.
And do you think I mean, taking that 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 fact of life in this industry.
[noise], 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, Eric I think there can be a lot of price pressure.
And that can be relatively low margin hardware only business, but when we bundle. It in a couple of quarters ago I gave an exam.
Hello, 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 no recurring revenue per year and so from the margin produced from a design win you know.
The vast majority of the gross margin comes from other.
Our recurring revenue versus from hardware, so offering the whole solution allows us to be as competitive as we need to be upfront to like to win the total package.
And our overall recurring revenue business is is very healthy.
So we think that we provide great value to our customers, but also get.
Got to get recurring revenue and higher gross margin. So the low priced LBW a market you know elasticity of 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.
In good part of the value chain for this.
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 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 $155 million in cash to the well you got you if you have anything.
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, yeah yeah.
Yeah Man working capital one thing no one mostly 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 [noise].
Okay. Thank you for that.
And then.
In terms of the Opex, if I did my math right.
In Q.
For <unk> without I'm sort of like nonrecurring items, it's in the 49 million range or something like that.
And your basic around saying 51, I think yeah.
Oh 51, Okay. So 50 young okay, So 51 million and you're you're you're basically saying that that.
In Q4, that's sort of flat to down with restructuring to date, and then that'll sort.
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 on.
On annualized basis, and those actions were taking in 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 just I.
I mean, you can correct me on this point as well. So your wireless has had a number of restructurings.
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 and then bring it.
Down a little bit.
Below that over a over the course of the errors that is that is that the messaging.
I think that's the right way to think about or your quote your clothes right. I mean, I mean, it's a bit high we said 25 to 30, So you know six or seven.
And you know we're not reinvesting those at this time, we're we're committed to growing.
Knowing 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 our Opex run rate.
They come down to that to a lower level in 20, Twond Todd Todd.
All right if I could 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 mood to selling services and our network side. So there was some I wouldn't comment, but an example that I mentioned the horrors.
As we reduced our R&D and that was based in Paris, and Voda, but 100 R&D staff. There that were at circa 165000, a year cost and and we've been Ah focusing on a new operating centers like Taipei, Taiwan, where you know were added at a average cost.
Her head of you know just over 50000, so so some of them some big savings out of getting to that 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 out of doing R&D.
India, and Hong Kong, and so again, reinforcing our major centers and enrichment 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 that also.
Part of selling our auto business.
What's being able to get a real focus on the key parts of our business, so driving our industrial aiotv business and driving our enterprise business and and with that focus.
And the number of sensors 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 2020.
You want.
Okay perfect.
What was sort of a last cleanup that I want to ask you about the business. So 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 as I'd like.
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 to you know the L. tower that we have been.
Winning those design wins are going to or you know, indicating that in the future. You know as these turned 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 in Q4 is a good way to think about the business with.
Some small improvements on that number and then 2022 you start to see even more improvement as you kind of ramp up connected devices. A you know you get better pricing from scale and other 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 tips.
Typical SAS margins, you know 50 60, 70%.
[noise].
When we talked about Todd previously is that are you know our overall services revenue was around 40% gross margin it's.
It's not like Hsas and then it's not all software we have a direct cogs associated with the wholesale deals we have a carrier we do get scale advantage on the network part that we only enter NVNO.
And as we get more scale, we get we get better leverage on our total cost with the carriers overall, but they got that's 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 services.
Part is.
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 know you're starting to break out details on that which is certainly good to see.
What about retiring.
Tension in churn is that is that something you're you're wanting to talk about at this point is it above 100% as it is like you know so.
Sometimes people look at that that group of programs you win and they just wonder whether the enterprise as well.
Actually move forward on them so what's your thinking on that.
Yeah.
Yeah, I think it's a bit of a complicated formula, but let me try to to break into a couple of the big box worry I think on the new business that we went nowhere cannot connecting.
You know global machine makers, so pumps compressors h. back lighting and the terms very low we get into a profit.
Product.
There and kind of like for that product were 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 a little too.
Turn 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 them.
So we're being you know growing overall, despite some attrition on those legacy acquired businesses now I would note that in the you know where the the assets from Umer acts.
Our team has been doing a very good job of managing those customers that part of the portfolio. We've returned.
Turn to growth.
And it's a it's a it is going to continue to grow as we move forward into 2021 and growing at very healthy margin. So you know there is some churn from legacy programs, but.
Our overall growth of new connected devices is as far.
Our 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 for a while 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 in the less the machine is.
We've taken out of service and and so we worked to provide that continuously for our customers.
Okay.
Okay and my last question is on Fiveg I was interested to hear you talk about millimeter wave my impression in the U.S. was that wasn't available in too many places and its now airports and sports state.
Ams, which aren't really getting used [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 five G.'s always all gonna be equipment revenue.
We're 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 modules. 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.
We're working to 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 sub.
Thanks, 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 60 millimeter wave I think it will be years before we know exactly.
We have that goes for the industry to get true massive capacity increase its going to be on millimeter wave.
That.
That those are new frequency 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 benefits 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 you know like Fourg brought the advent of many products and wouldn't have worked with the speed of Fourg Fiveg will do the same so right now for 20% Q for Fiveg.
The revenue is going to be small theres a lot of proof of concepts going on in 2021, there's 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 gateways.
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 but.
The performance and potential of Fiveg is also significantly higher.
Very good okay, I appreciate that color and I agree with you with that on the Fiveg. Thanks a lot.
Thank you.
[noise].
[noise] operator any more questions.
Our last question comes from line of Richard Tse from National Bank.
Hi, guys. Congrats on the Windows corridor that says I'm here, calling in for Richard I'm. Just got a quick question for you regarding the moly walk down there starting in Europe and possibly.
Reed are coming in North America, just wondering.
You're not listening in on the business and how you're thinking about that going into 2021.
Yeah. Good question. Thank you well you know we Asher, we all would like to be able to add things back to normal and fit.
They didn't customers offices, and then be able to.
You know spend more face to face time, but we have gotten pretty used to selling through you know video calls and dialogue, our our field engineers able to can practice the safety protocols when required to live to help with that with steel aspects. So the you know that.
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'm think people have figured out how to do business more so it's not it's not ideal, but it's not a lot you know it's not of that its not about nature overall.
The you know where our sales teams I think have done a great job our product marketing people to be able to get information out and I think that overall the the need for digitization is becoming more and parent with with with the new world.
Live we live in now so people want to have their assets digitize being able to get that information without needing to have humans to go up to that to the machine.
As the speed at which that happens is somewhat constrained by cobot, but oh, we have lots of lots of strong progress going on so you know I I just.
Just sort of reiterate some of the key points you know, we've we've seen our stuff and I'm very strong growth in our design wins for services. So I think that you know despite that you know the Colgate activity.
Being up a 61% we have grown our design wins on the on hardware by over 20% I mean 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're at we're working through this and and maybe a little slower to get all those deals papered and launched but the the velocity what's coming in is a it's been increasing burden.
Sure.
Okay. Thanks for that color all profit one.
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 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 a announcement about that as well and we will wish everyone. The best at health and safety and me, though 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.