Q4 2020 Sierra Wireless Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Sierra Wireless incorporated fourth quarter, 2000, and 'twenty conference call and webcast. At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
And I ask a question during the session you will need to press Star then one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your Speaker today, David Khani, Vice President of Investor Relations. Thank you. Please go ahead Sir.
Thanks, and good afternoon, everybody. Thank you for joining today's conference call and webcast on the call today are Ken Sexton, and 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 Kent will provide his corporate update and Sam will provide.
A detailed review of our Q4 and year end 2020 results volume by Q&A before we get started and 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.
Today's 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 and objectives expectations and commentary regarding the outlook for our business are 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 and correct. Additionally forward looking statements are based on our management's current expectations and we caution investors and forward looking statements, particularly those that relate to longer periods of time are subject to substantial known and unknown material risks and uncertainties that could cause actual events or results.
To differ significantly from those expressed or implied by our forward looking statements I draw your attention to a longer discussion of our risk factors and our Aif and management's 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.
That I will now turn the call over to Kent for his corporate update.
Thanks, David I'll start my prepared remarks today with some highlights from the fourth quarter as well as some brief comments on full year 2020.
We will be discussing our continuing operations on today's call with the automotive business line under discontinued operations.
As you are aware, we completed the sale on the automotive product line and November and as a result, our balance sheet has been strengthened.
Sam will review this in more detail and a summary, and the fourth quarter results and balance sheet.
So, let's turn to some of the highlights in Q4.
Total revenue and the fourth quarter was $125 million up sequentially six 3% from Q3 and ahead of street consensus.
Our business transformation is proceeding well with three quarters of sequential revenue growth.
I am pleased to see this improvement despite the tight component supply situation and the industry and the impact of the COVID-19 pandemic globally.
Q4 recurring and other service revenue was $32 6 million up 25, 1% and year over year and up nine 4% sequentially as our continued focus on Iot solutions, it's showing improving results.
Looking at service wins in Q4 as measured by <unk>, our long term annual recurring revenue, we achieved record altair wins totaling $46 3 million up 40% sequentially.
For full year, 'twenty and 'twenty, we secured a $140 million and LTR wins and increase of 54 per cent compared to 2019.
This result shows and success of our transformation efforts to win and the market with a bundled solution.
And faster time to market for our customers and sticky high margin recurring revenue per Sierra wireless.
And Q4, our global sales team continued to secure Iot solutions wins with new and existing customers.
Like to share a few examples from Q4.
The first win is with a leading U S based designer and manufacturer of Gateway systems for the commercial and residential markets.
Need it and Iot solution that enables them to do remote monitoring and control both the entry and exit points on commercial properties.
They also required cellular communications to support audio video access for their gate openers and overhead doors, and you've seen and apartment buildings and on campuses.
And we're providing them with the device to cloud solution using our ready to connect embedded modules bundled with the connectivity services package.
The hardware value and this design win with this global leader is expected to be $1 4 million and the services L. Tower is expected to be approximately 700000.
Another new customer, we signed up and Q4 and the global power systems company focused on improving the efficiencies and electrical motors for the industrial energy market. This.
Customers gathering and real time data 24 by seven from their machines. So that they can monitor their equipment improved system performance and provide preventative maintenance and the solution required a single vendor and then solution. So we're providing our Alex 40 gateway cloud platform and global connectivity service.
And the Altair associated with this design win is expected to be $2 9 million and the hardware value of approximately 1.69.
And the last example, and Q4 is a design win that we signed with the help with Microsoft and and Good example, and our partnership work with both Microsoft and this year the cash.
Customer who came to us through the Azure Iot team is a global industrial company and is looking to monitor its assets 24 by seven for predictive maintenance services and.
The initial project includes our octave and orchestration software solution with deployment to about 10000, industrial assets and scaling to significantly more devices and recurring revenue and time.
We see the industrial Iot sector really picking up and we are pleased to partner with Microsoft on securing this design win and working our strong industrial Iot pipeline together.
Now lets quickly look at some company highlights and 2020.
Recurring and other service revenue increased 18% year over year, and 'twenty and 'twenty and we ended the year with more than 4 million connected devices.
The acquisition of MTI administrative has been successful and our recurring revenue is growing strongly and the ANZ market.
Globally, our focus on selling solutions and growing recurring and other services revenue has made great progress and we are winning and the competitive market.
And I'm very pleased with the 140 million and al car that was generated last year and.
Top of the $91 million and ill talk from the previous year.
And this setup and company well as we remained very focused on our target of achieving $200 million run rate of recurring and other services by the end of Q2, 'twenty and 'twenty, two and $400 million by the end of Q2, 'twenty and 'twenty four.
In terms of new product offerings, and 'twenty and 'twenty, we successfully launched our five G embedded module during Q4.
We are certifying our five day gateways and routers globally and our five G. M. G. 90 router was recently certified on T Mobile U S network and will be launching soon.
Our global sales teams have secured numerous design wins for a five day module with last year with key long term enterprise customers.
And I'm very excited about the growth path for five G low latency applications and areas, including enterprise networking.
Public transit.
Asset monitoring health care and public safety.
I'm also pleased and we strengthened our executive management team and 2020 by hiring Sam Cochrane.
Steve Hartman, our senior Vice President of Americas, and most recently James Armstrong, who is now running our enterprise solutions business as senior Vice President and <unk>.
Ames has great experience from spirit, and communications and a strong wireless experience with a ph D and electrical engineering from Purdue. So we're glad to have him on the team as well.
Before I turn the call over to Sam I would like to point out that starting on the first quarter of 2021 would be moving to two new reporting segments with the sale of our automotive product line and mid November last year, It's an opportune time for us to have two strong colors and growth.
One focused on Iot solutions and the other focused on enterprise solutions.
The enterprise solutions reporting segment will include early cellular routers and gateways are Iot applications business from monitoring and asset tracking and.
And our enterprise connectivity solutions and software.
Together this segment generated 142 million and revenue in 'twenty and 'twenty.
And with gross margins of 55 per cent.
We doubled our enterprise pipeline and 2020, and we're well positioned for growth and it's attractive and growing market.
The Iot solutions reporting segment will include our portfolio of cellular module from L. P. W. Eight through to our high speed and battery five G broadband modules as.
And as well as our Iot connectivity solutions services and software.
This segment generated $307 million and 2020, and we are highly differentiated with a complete device to cloud offering and.
And total addressable market for Iot solutions with $10 billion to $20 billion and we are seeing success with the industrial Iot market and the industrial leader start to connect and digitize their machines and assets.
We are well positioned for solid growth as our customers deploy cellular modules bundled with connectivity services for simple and scalable Iot solutions.
Overall, we remain very focused on delivering our innovative device to cloud solutions that are generating higher margins and subscription based recurring revenue.
With that I will now pass it over to Sam for his review and comments on the fourth quarter and year end results.
Thank you Ken Good afternoon, everyone. As a reminder, our fourth quarter financial results are reported in U S dollars and on a U S GAAP basis.
We also present non-GAAP results to provide a better understanding of our operating performance.
A full reconciliation between our GAAP and non-GAAP results is available on the IR page of our website.
Before I begin with a review of our quarterly results I'd like to point out that our fourth quarter 2000, Twenty's and financial statements.
Are based on continuing operations.
And we have segregated the automotive business with the sales competing on November 18th as discontinued.
They are included in the notes to our Q4 financial statements information on a GAAP basis with garden and the automotive business.
And we will provide additional information in our MD&A.
So now let me turn to our continuing operations and comment on the fourth quarter and full year 2020.
Total revenue in Q4 from continuing operations was $125 million.
A decrease of three seven per cent compared to the same period last year.
Non-GAAP gross margin and the fourth quarter was 36, 1%.
Compared to 35, 8% in the fourth quarter last year.
And Q4, we continued our focus on right sizing the business and reducing opex.
As a result, our non-GAAP operating expense.
Were $50 1 million and the quarter. We expect this opex run rate to continue to decrease into 'twenty and 'twenty one.
Non-GAAP adjusted EBITDA, and Q4 was negative $2 9 million compared to negative $3 2 million the prior year.
Yeah.
For the full year 'twenty and 'twenty total revenue from continuing operations was $448 6 million.
Compared to $547 3 million.
The lower revenue in 2020 is primarily attributable to the impact of the COVID-19 pandemic.
The tight component supply environment, and the decline and mobile computing revenues with the loss of gallons and novel design win two years ago.
Adjusted EBITDA in 2020 was negative $34 9 million compared to $9 8.002 million 19.
Now, let's take a quick look at Q4 2020 on a year over year basis.
Revenue in the Iot solutions segment was $87 6 million.
Down slightly by three six per cent year over year.
It's in our Iot solutions segment recurring and other services revenue was $32 6 million.
Up 25, 1% year over year, driven by increased customer usage and growth and the number of connected devices.
With current and other services revenue represented 27, 1% of our total revenue in Q4.
The growth and recurring revenue was offset by lower hardware revenue, primarily due to the impact of the global pandemic and.
From.
Supply related constraints and the quarter.
Revenue and the embedded broadband segment was $32 9 million.
Lower by three 8% year over year, primarily due to the decline and mobile computing revenues with the loss of Dell and Lenovo design win two years ago.
This is the last quarter of the Dell and Lenovo design loss impact. So there was no impact related to that going forward.
Total gross margin was $43 5 million or $36, one per cent and Q4 compared to 35, 8% the prior year.
The increase year over year was due to improved margins and Iot solutions up one 6% to 38, 6% due to mix.
Partially offset by a decline and embedded broadband gross margin at 29, 5% due to lower mobile computing gross margins from the previously discussed and line losses.
Taking a look at Q4 on a sequential basis.
Revenue and Iot solutions segment increased $8 5 million or 10, 7% compared to the prior quarter.
Enterprise networking gateway and router showing improvement as we are converting more of our increased pipeline from the last quarter.
Additionally, recurring and other services revenue increased nine 4% sequentially in Q4.
Revenue and the embedded broadband segment decreased $1 4 million or $4 one per cent sequentially, primarily due to lower mobile computing revenue.
Total gross margin was up $4 1 million and Q4, the sequential increase was due to mix improvement and both Iot solutions and embedded broadband.
Operating expenses declined two 1% sequentially to $50 1 million and Q4.
And adjusted EBITDA was negative $2 9 million and improvement compared to negative $7 1 million and Q3.
Moving to our cash position cash flow from operations and Q4 was zero point $7 million.
And Capex was $7 9 million.
The quarterly Capex was higher than normal and Q4 due to equipment replacement for five G development that was required and Asia. Following the divestiture of the automotive business.
Net proceeds from the sales the automotive business was $144 2 million and during the quarter, we paid down our credit facility of $34 4 million.
We also spent $3 5 million acquire and the M to M business that is based on New Zealand.
Extending our Iot services business into that new market.
As a result of these activities, we had an increase of $99 4 million and cash at the end of the quarter, finishing the year with $171 4 million of cash on the balance sheet.
As you look to the first quarter of 2021 will be consuming approximately $20 million and cash due to three main factors.
One we need to increase capacity and inventory to combat the current shortage and components.
Two we have the structurally outflows.
We are incurring as we improve our operating efficiency and three we also have some one time working capital adjustments associated with the auto sales occurring in the first quarter of this year.
Before I move on to guidance from the first quarter I would just like to say a few words about the new segmentation will be reporting on and Q1.
And today's release, we have included a table that shows the revenue and gross margin for the two new segments.
The enterprise solutions segment includes gateways and routers.
Iot applications, such as offender monitoring security and asset tracking.
As well as enterprise connectivity services, our cloud management platform software and services that are all related to our gateway and router business.
And 2020, this business generated $141 7 million in revenue and.
On a gross margin of 55 per cent.
And Q4, it had $38 9 million and revenue.
And a gross margin of 51 five per cent.
The Iot solutions segment includes our Iot cellular modules and embedded broadband modules as well as our Iot connectivity services.
Cloud management platform software and services that are all related to our Iot module.
And 2020 this business generated $306 9 billion and revenue at a gross margin of 28, 4%.
And Q4, they had $81 6 million and revenue and gross margin of 26 per cent.
And then providing more information on each segment at the end of the first quarter.
Now for our outlook the.
And the impact of the COVID-19 pandemic.
On our global business continues to remain uncertain, especially as it relates to the current tight supply chain environment.
While we continue to evaluate the effects of COVID-19 on our business. The overall severity and duration of adverse impacts related to COVID-19 on our business financial condition.
Cash flows and operating results for the first quarter of 2021 and beyond and cannot be reasonably estimated at this time.
The ultimate and size of the impact of the COVID-19 pandemic on our business will depend on future developments, which cannot be currently predicted.
Regarding the first quarter of 2021, we expect our revenue to be in line with street consensus of one O $9 9 million.
There is strong demand for our products and services and the first quarter and we have secured hardware orders and recurring revenue does approximately 15% above current street consensus for Q1, 'twenty and 'twenty one.
However, we are facing a very tight global supply chain environment, that's constraining our ability to source components and fully delivered to this level of demand.
Kent and I continue working closely with all our suppliers and manufacturing partners to close the gap.
We appreciate all the hard work being done across our supply chain from our staff suppliers and manufacturing partners, who are working with us tirelessly to support our customers' orders, which service critical application.
That ends my prepared remarks today, operator, I would now like to open the call for questions.
Certainly at this time, if you would like to ask a question.
And are please press star then the number one on your telephone keypad to withdraw your question press the pound key.
For just a moment chicken and barbecue and their upstream.
Okay.
Your first question comes from the line of Josh Nichols from B Riley Your line is open.
Yeah. Thanks for taking my question and good to see the continued sequential improvement on the top line as well as the bottom line improvement that we're seeing here I wanted to ask you talked a little bit about about the first quarter.
But looking more on the Opex and the cost savings initiatives.
You're talking about where we stand for the $25 million to $30 million and any kind of outlook you provided as far as the anticipated turn to kind of sustainable profitability from like a cash burn or EBITDA perspective.
Sure Josh Thanks for the question its context and here I'll ask Sam to talk about the opex levels, but yes from making the overall business model progress is good and both growing the top line and then making sure our cost structure signed up so Sam do you want to talk about $25 million to $30 million cost reduction.
Yeah. Thank you for your question so.
And so head count is down to levels around 10, 40, Oh, So 1040, that's down about 20%.
From where we came into the year. So very good progress is being made there and we're on track for those targets.
Yeah.
And then if you could provide a little bit more color.
I know getting the timing of the <unk> ramp right. There has been a little bit difficult, but it seems like youre, making good progress on there how are you doing as far as shipments and and any type of targets as far as what you could do.
Do on that front and kind of margin accretion potential as that ramps up a little bit.
Yeah, It's Kent here. So what we are very excited about <unk> as I said and my comments we've.
And done very well and securing design wins with AR and with customers looking to be early and five were in that early stage where the.
The demand levels are not fully certain we will be starting to ship product.
To too many customers, what we've seen and other iterations and <unk> and <unk> and I'll speak to <unk>.
You start to get deployment, and then as it and it.
Starts to mature used to really start to see the volumes ramp and we expect that to happen similarity with <unk>.
We've been.
Early with the technology, we've got a lot of very positive feedback from the market both from customers and carriers and those design slots are highly valuable and when you win and design slot are you in with those customers from multiple years. So we.
We don't expect that 'twenty 'twenty, one is gonna be a significant volume of five G is gonna be early stages of the ramp.
And we'll continue to accelerate as we move into 2022, so and important long term value step for us.
But not great clarity on the volume on five G. Yet in 2021.
Thanks, and then last question from me, then and I'll pass the Baton here.
Clearly it looks like <unk> demand is coming in a materially stronger than what kind of the street.
Obviously, there's some near term component shortage issues, but how long do you think it will take to resolve those and if you are able to get those resolved over the next quarter or two.
Fair to assume that that may imply a stronger second half and maybe the street is anticipating and the numbers today.
Hum.
The supply challenges, you will and I'm seeing across the board and and I think that those are going to be with us for most of the year.
Silicon shorting is or are challenging so I think and that's gonna be one of the elements that we deal with we are pleased to see our work.
And is increasing orders our demand signals are strong.
And our existing customers, increasing what theyre looking to pertain to get from us and at the same time, we talked last year about our increasing win rates and our overall increase and design wins and some of those starting to flow through so.
And we're not providing guidance and so.
Wouldn't it wouldn't work to change the view at this point in time with those levels of uncertainties, but the 15% above consensus on orders that we presented shows that yes. We're pleased.
Pleased with the demand side and that we're seeing both for hardware and for a recurring revenue business.
Great. Thanks, guys.
Thank you.
Sure.
Your next question comes from the line of Thanos, most couples from BMO capital markets. Your line is open.
Hi, good afternoon.
And can we come on and a bit more on the demand environment. So in terms of the strengthening demand that you're seeing.
Is it primarily a macro driven recovery or are there any specific verticals or segments that especially stand out and as you look at the demand recovery.
Heartburn and she had a good to speak with you. So you know we've we've talked about a few things. So we've had a and I'll talk about our two segments now so we've had a big focus on what we're doing and the enterprise market and so we're seeing good.
Progress and.
Enterprise and business are our overall gateway sales inclusive of our software and and so that that.
That is and <unk>.
And that we will we have been investing and we've been growing partnerships and we expect that that part of that market will continue I think there is.
And how much of that theyre not as related to.
On the economy, but we're in areas of public safety and industrial areas and are just requiring this high and connectivity. Our ruggedized gateways that are are suing and needs of that market.
And secondly on the Iot.
<unk> side of the market.
I think there was a big macro trend of industrial Iot is increasing one example, I talked about with Microsoft as an example on very large.
Hum 19 billion dollar company, that's working to digitize their assets out in the marketplace. So as we start to see those those are sort of long term growth trends on the economic recovery side or were coming from impacts of COVID-19 some of our customers and spaces like smart metering are seeing increased deployment overall.
And part of that can be driven by look to be able to automate everything and not have to have as many humans touch products.
And those demand.
<unk> great.
And the current environment of parts shortages, it's challenging to to ramp up further and you know it was a matter of fact, just even even committed products.
Our hard work to and to hang on to in this environment, but our teams have been working exceptionally hard and been making good progress with our suppliers to continue to get and.
Max and visibility so we can communicate with their customers on on what and when we can deliver.
But we see we see we see a good market and as we move forward.
Yeah.
Great that's helpful.
And you provided a revenue outlook for the current quarter, but not on the earnings outlook is that a function of the fact, there's a lot of moving parts with the.
Supply constraints and restructuring and so forth or.
And what would you say as far as how the street and thinking about earnings relative to revenues.
Current quarter.
Yeah, I'll ask Sam to comment in a minute, but we basically decided to not provide guidance because of the great uncertainty and the supply chain side. So we wanted to.
And <unk>.
Share that we are comfortable were in line with the consensus number and there are demand exceeds that how much product we can get through the factory and shipped will then directly affect our profitability levels as Sam said, we have were on.
On track for the Opex savings that we talked about and <unk> and so you know the profitably side can be pieced together, it's really about the volume that we're going to be able to to shift into the parks constraints, but Sam do you want to comment on that.
Yeah, that's correct and we've got great line of sight into the Opex number.
The big uncertainty is and revenue and then margin on mix on theirs.
Still some uncertainty about which parts come in and.
As you know Theres, a big gross margin difference between enterprise products and and module, so until we get better visibility into our supply chain and quite honestly, it's hard to give more granular guidance.
Okay makes sense and if.
And finally, you mentioned the deal went through with the Microsoft Channel with deposits interesting more broadly can you speak about I guess, how that's been shaping up as a channel for you and the pipeline that they bring to the table.
Yeah, you know we announced.
And Microsoft partnership sometime back and it takes a while and in big organizations I think too to get.
And engagement this deal is important because it's.
Our next tier up customer and and good proof point as we worked and drive more strongly and was recently talking with the Microsoft head of partnerships and and we reviewed this as a as a good catalyst for more business together. So our pipeline with Microsoft has been growing and is the sales force has become.
Familiar with the opportunity and the product and the ability to get more edge data into as you will see continued progress with that so it was and it was a good step forward and more to come.
Great I'll pass line. Thanks.
Thanks Anish.
Your next question comes from the line of Scott Searle from Roth Capital. Your line is open.
Good afternoon, and thanks for taking my questions and they can't first off I wanted to wish you best of luck and congratulations on your retirement I know, we're a quarter out from that but just wanted to publicly throw that out.
And he.
And just just to clarify on the upside demand of 15 per cent that is for the entire business is that correct. So in a normalized environment, where we're not component constrained youre looking at $125 million versus a 100 and 910 million and is that correct or is there one segment of the business for two segments and businesses that are being excluded from that upside number.
No you have that correct in terms of the order volume that we have seen.
And in many quarters, we might have small amounts of supply constraints that would wouldn't fit into there. It just exceptionally large this quarter. So but that is that is we wanted to share the demand view so that while we're saying we're in line with consensus we wanted to reflect what's going on from the sales side progress with our business.
Got you and just in terms of the realignment and reporting segments of the business as enterprise solutions. It sounds like if everything within that category now tied to and enterprise gateway or router. It wasn't clear to me because I think you mentioned some asset tracking applications as well, but it sounds like some industrial Iot modules or and the Iot solutions business so on them.
And kind of clarify in terms of how that's being being reported.
Is this basically you're going to look more like a cradle point type of segment in terms of the router gateway and recurring component that goes along with it.
Yeah. Good question Scott.
And so the majority of our enterprise segment is our gateways and the recurring revenue software support and maintenance and goes along with them.
Also included in our enterprise segment, what we call our Iot applications business and those were businesses that we originally acquired from Numerex includes.
Asset tracking prisoner monitoring.
And home security and so those businesses have many similar dimensions to our enterprise business similar strong gross margin profile.
And strong recurring revenue dimensions to them. So it's it's majority gateways and attached software plus our Iot applications business that's.
Our enterprise.
I don't suppose there's any additional color that you could put with that in terms of the number of units that are under management. I think you said overall that were 4 million units, but now that's spread across the two business segments. How many of those are tied to enterprise solutions and is there a larger recurring revenue component that goes along with it because of what Youre talking about enterprise class gateways and routers.
We are not and providing a breakout of our attachment rates by segment at this point and time, However, majority of our connectivity businesses and Iot solutions and.
And more of the enterprise side is the attachment of our.
Cloud software.
Device management and support and maintenance for our gateway.
Gotcha and going forward are you going to continue to report your total recurring revenue then net spread across those two segments or does that kind of go away now and we're just strictly with those two segments.
Now, we'll be we will be reporting the the total services and other recurring revenues as and as a total of the whole business on and continue basis, and we think that's an important metric okay and lastly, if I could just wondering if you're seeing any sort of uptick and business as we get to the three G end of life across a couple of networks in North America have you seen.
And you sort of pick up on that front, and maybe as well any sort of commentary or thoughts that you're seeing and related to <unk>. A couple of I think probably pretty well, what's going on and enterprise solutions, but it's still early on that front wanted to get any color and thoughts on that front. Thanks.
And so on the let me answer the <unk> question first so I think there's been a few false.
False dawns on that and they've been delayed.
Deadlines and delays so I think a lot of three G upgrade activity has happened and we still have some devices and we will continue to depth.
And the upgrade going forward and that's just and the American market and in Europe, They haven't announced sunset dates and there's still quite a bit of a to G going on and Europe and believe that that migration path will happen later.
It's more about us customers will start to be.
Predominant technology.
Technology now is is for G and customers and I look to future proof themselves by upgrading to <unk> and that will be the trend and we're looking to start happening through the year and and I'm sorry, I forgot what was your second question.
Related to <unk>, if youre seeing any sort of early interest and demand from that particularly on the enterprise solutions from thanks, Yeah, Yeah private network C. B R. S. Yeah, where we're very keen on on C. B R. S. We have seen increased.
Increased demand for that our gateways operate on on on public network frequencies and C. B R S frequencies and and so we've seen.
Utilities municipalities and other customers are interested and <unk> and we've talked about our partnership with Motorola, they're very active and <unk> and we provide gateways to help them with that with those product areas and.
And so we think that Oh, you know we're still in the early innings of seed dress rollout a lot of frequencies and had been acquired and.
Lots of interest and and adding private network capability and in addition to public our devices have the benefit of a single management platform to allow the user to track that and device, whether it's in a public or private domain and so we're well positioned and so it's a it's a trend that were.
Well positioned to take advantage of.
Great. Thanks, so much.
Thanks Scott.
Your next question comes from the line of Mike Walkley from Canaccord Genuity. Your line is open.
Great. Thanks, and my best wishes to you also Kent and.
The next step of your journey.
Thank you.
Questions just from me back to the 15% higher revenue just and we know it's a tight supply across the whole industry, but you know of that call. It 15 million and youre not going to be able to ship. This quarter do you think most of that is.
And just pushed out to future quarters or do you think those are potential loss sales as customers maybe find alternate supply.
Good question, Mike and good to speak with you. So I think that and you know.
We expect most of that to roll forward, there's very few instances, where it's perishable demand, but you know where we're working very hard for our customers. It's a it's never good when you can't supply to the to the timelines that they need. So we're we're just active with a wide range of suppliers to to work.
And have had great success with them and you know prioritizing some of our especially.
Public safety market products to be able to get us the components for that so we're expecting that to roll forward is the short answer to your question.
But working hard at it every day.
Great. That's helpful. Thanks, and then Sam a follow up question for you.
One with the tight supply.
And what are the impact maybe the shorter term gross margins and you have to pay more for components and this tight environment on our realm.
Relative basis or can you pass those on to customers and then second I think you said you had good line of sight and to a pro forma operating expenses for the March quarter can you help us just think about a run rate from modeling given it's the first full quarter without any automotive running through it.
Yeah good questions.
First one there'll be it'll be a margin impact you.
You can think about it is is around 1%, we're having to go out and and by parts and raw materials and the gray market open market paying higher prices.
And as Kent said, you know what.
We are we are very focused on servicing our customers demand. They the products. They use are used and critical applications and so we're doing what we can to get those parts and get those products to our customers, but there'll be a small impact to our gross margin in the short term and.
And to your first question that Kent.
Most of that will roll over but since we expect the tight supply environment to continue in 'twenty and 'twenty, one there'll be new ones that come up in the next quarter and so forth. So.
And while there will be recovery and Q2 there'll be new constraints as we've as we sort of catch up on that backlog if that makes sense.
In terms of Opex I don't want to give any direct guidance, there, but I believe and in the prepared remarks, I said that it would be down again from the 51, a level and and you know $2 million to $3 million in that area would make sense.
Okay, Great that's helpful and.
Question from me and I'll pass it on thanks for all the historical data on the on the new divisions.
And we think about Iot solutions longer term and.
And this gross margin level, a good place to be thinking about or as Eldar gross and you get more and more recurring revenue.
Where could maybe gross margins trend and that that business.
Yeah, Mike Thanks for that question and so I'll, just let me recap a little bit so I think that enterprise is.
And gateway business, it's higher gross margin.
Hardware and then high gross margin.
Recurring software and that part of the business and our Iot solutions modules and global competitive dynamics are and make it a lower gross margin product line, but then we're attaching the higher gross margin, but current revenues. So as that mix continues to grow as our recurring revenue to hardware revenue ratio continues to.
Moving and direction of recurring revenue that will drag along and increase our overall gross margins and that business.
Second thing that we've talked about previously and as we continue to scale our connectivity business, we expect to see the gross margins and that business improve.
So we'll have we'll have improvement in mix and an improvement on the hardware side on the on the module side with the strong global move towards L PWA and lower Asps.
You know that that will continue to have that.
Product areas and has lower lower revenue and continued to be relatively low gross margins.
But that.
That's good for the overall market that elasticity of demand as those lower cost units and look for afford more connection points for Iot data and and then out of that we're in a good position to enjoy good profitability on providing a full device to cloud solution for our customers.
Got you well thanks for taking my questions.
Okay. Thanks, Mike.
Your next question comes from the line of Derek Soderberg from closure Securities. Your line is open.
Hi, everyone. Thanks for taking my questions I want to start with <unk> I guess I'm wondering if there was any impact there from the supply issues I think he said this could be sort of an issue throughout the year, but some of these will sort of roll forward.
So would these supply issues impact the alterra deals, maybe signed and the pass and all I guess I'm just curious as to how these supply issues impacted any of your assumptions that you guys make for getting to that cumulative <unk> bookings number this quarter and then I have a follow up.
Okay, Alright, well thanks for the question Derrick and good to have you on the call.
So I think in terms of the supply issues affect and.
Net of answering for Altair, and I'll say, a recurring revenue. So I think that you know what we saw and this year was in Q2 with Covid and and people working remote it impact their ability to get contract signed for future.
Business of recurring revenue so on El tier wins in Q2 were lower and they rebounded in Q3 and then we had a very strong Q4 as we just highlighted here.
The next step with those design wins to get those into production and the Covid environment has been some slowing of getting projects into production I think that globally, we're all getting better at the remote working by the number of hands on elements of implementations and Theres been some some challenges in that regard.
But we're making a lot of progress on and bringing those on at where we have customers that we have won and Mike gave three new examples today, where we're getting both the hardware revenue and the service revenue. If there is supply shortages and delay being able to get our modules or gateways to those customers.
And delay.
Marginally that type of current revenue side, but I look at as the.
And this building base of customers that are going to be consuming or ongoing connectivity services along with the hardware.
And we'll continue to drive that growth and our recurring revenue part of the business. So if you're a month or a quarter late on the hardware and the and the trend is not going to make a difference.
Yeah.
Got it and then just quickly on your 170 million cash balance now.
And then you have the automotive piece divested.
And I guess, how comfortable would you guys feel going on and acquiring something I mean is the environment good for that and then.
And just generally anything on your focus on and use of cash this year would be great. Thanks.
Sure Yeah. Good question. So you know when we.
Announced the sale of our auto business and.
And I've said and I sort of we're still on the same position as it were just happy to have a strong balance sheet at this point selling and automotive both strengthen our balance sheet, but allowed us to really focus on these two segments that we're now reporting against and so that that's been a big big part of the driver for that.
Opportunities that are afforded to us with a strong balance sheet and and enables us to be opportunistic.
We don't feel we have any big missing parts that we need to go out from an M&A perspective to acquire.
But we'll stay well stay tied to what's going on and the marketplace, but no no present plans to.
That capital, we'll just we'll keep our on balance sheet strength at this time.
Great. Thank you so much.
Okay.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Paul Treiber from RBC capital markets. Your line is open.
Thanks, very much and good afternoon, sorry, and focus on the growth and the services business. Yeah. Obviously it was quite strong this quarter I imagine the bulk of that of that growth is Iot connectivity is that the case and can you speak about the relative growth rates of Iot connectivity versus maybe enterprise connectivity and and I guess it.
Awesome managed Iot services or the legacy and the enterprise side, sorry, the industrial applications.
Yeah, Thanks, Paul and thanks for the question. So we saw growth and services across both of our new segments here we saw.
Good growth in connectivity and continued growth and number of connected devices.
And so that was driving our services for it and then as we can how they are driving more and gateways into the market and driving the the software connect to those devices driving the enterprise side as I said, the majority of our connectivity and Iot solutions, and that's really where a lot of our <unk>.
And connected device wins occur.
And as we continue to progress and drive sales of our gateways, which is a very strong progress for us will continue to be able to attach more of our solutions and both are growing.
And.
And that's that's our forward focus for us.
And how do you and I.
Appreciate youre, not giving and it looked like the 'twenty 'twenty, one and outlook for the the 25% growth and services should we expect that growth to.
And to me and sustained accelerate and you reiterated the outlook the long term outlook on services, but how do we think about the the snowball and U L car and how that would translate into revenue growth.
Yeah, I mean generally as we've talked about our models. It is it is something that well continue to accelerate and this accumulation model as customers that if we want that we have won and as they deploy into more of their devices. We get the recurring revenue and so that continues to be additive when we talk about new design wins.
And those come into production and they start selling more devices and those continue to add on so I reiterated that we're on track for hitting our 200 million recurring revenue run rate by the middle of 2022 and $400 million by the middle of 'twenty 'twenty four and so you can see the acceleration there is more of the as those customers continue to deploy and we continue to win new.
Customers with the deployment side, so we will see faster growth on the connectivity side, just by because of the math of that whereas the enterprise recurring revenue off of deploy gateways as more of a linear attached to the gateway with our with our device to cloud module plus attach.
And as those continue to get sold into the marketplace, we get and additive and additive effect and the connectivity revenue.
And then just one last one from me how do we think about the mobile computing segment here on you called out and I guess the design win losses and the past are you actively competing for design win from that segment is the segment that you want to pursue going forward.
Or is it something that you just see is not strategic.
Yeah. Good question Paul. So previously there was some large volume deals you've called up before with Lenovo and Dell and those are as Sam said.
Non to won't be a and reporting on them going forward because of because you know we're not we're not comparing to other years comps with those and the numbers and that's not a segment that we're focused on moving forward with our large scale on PC OEM business, it's it's quite a.
Rapid RFP cycle, and with wins and losses, and I don't think a high degree of differentiation on it.
We have some smaller PC customers that had been longtime customers and we continue to support but where we continue.
Continue to excel at is in overall connectivity into.
And other.
Hi speed Enterprise Railroad type application company, so we've done very well historically there.
The company had some.
Areas, where they didn't have all of the and does it design slots because of some product elements as we brought five G and we really won significant design slots one box slots that we.
And he had foregone and previous cycles, and so you know where we will continue to be highly engaged and what we do and our modules for embedded broadband is the same work. The same R&D work, we're doing and module books for our other businesses. So it's very synergistic.
Most of those enterprise.
And then and broadband type of applications.
Less likely to be able to drive connectivity because the nature and it's sold by a provider like say Cisco and then Cisco sales onto and enterprise the enterprise and makes it on connectivity decisions. So that's why we are less able to bundle our attach into those sort of distribution arrangements, but we're very get go on to support our.
Our customers are in that space and as I said, we've done very well with five G design wins in that area and we will continue to work on and focus on it.
Hey, Thanks for taking my questions.
Thank you.
Your next question comes from a long enough Todd Coupland from CIBC. Your line is open.
Yes, good evening everyone.
And I had I had a couple of questions and I'll just run through them here.
If we think about the cash requirement and Q1 20 million more or less what you called out how much of that would be roughly one time in nature.
And they are saying, yes, and you and talk to that.
Yeah. Good question, so roughly about half of that would be one time and nature going forward as we work our way through the supply constraint issues, we've invested in and increasing our capacity and then manufacturing sites. However, we still may need to add some buffer.
Stock as we sort of on that later in the year and as parts come up and become available, but the restructuring costs and the adjustments related to the auto sales are for share behind us.
And at least the vast majority of that are behind us.
So happy to report that.
Okay.
And just so I'm clear on your statement did you say the 50 million Opex number would go down three or $4 million and Q1 was at or over the course of 2021.
I said I said two to three on the 50.1 would would go down $2 million to $3 million.
And I look heading into Q1.
Yeah, the only offset on that one is a little bit of engineering and we work that we're having to do related to again.
Supply chain tightness, that's causing us to rework new parts and the product and solve problems on the go on that.
Moving to some additional costs, but again, we do expect it to come down and like I mentioned.
And as Ben is that more or less then absorb the restructuring and then it'll be the regular rhythm of the business per opex after Q1.
[noise] after Q1, we should still see some smaller decreases.
And you know, there's still a little bit of a restructuring work happening in the quarter, but the vast majority is done and we work towards that run rate, but going forward, we're going to be very diligent with our opex and ensure we're investing those dollars on the right areas. So.
I hope that answers your question Yeah. It does thank you very much and then on the recurring revenue piece $32 9 million up 25% I think is what you called out what is the 12 month trailing number for that I think he said it and I I might I must have missed and I was looking for it and the DAC and I didn't see it.
Sam do you have that to hand.
Sorry can you repeat the question the trailing 12 months debt.
Just curious what the 2020 recurring revenue number wise.
Over the for the whole year.
Yeah.
Give me a second here.
Yeah.
Yeah.
Yeah.
Okay.
Yeah.
And about 118, Todd and I don't have enough yeah.
It's 116, so the 118 number sorry for the small delay there. The one key number includes about $2 million related to the auto business. So from continuing ops, It's 116 one.
<unk> so when you guys make the statement.
And nicely and what that growth rate.
Just that.
The one the 116 compares to the 200 and the 400 net debt that is that's the stated goals right.
Well the stated goals are on a run rate basis. So I wouldn't say that the 160 relates directly to that but yeah. That's fair trailing 12 month or yeah right. Yeah. So the way okay I got that so the way to think about it as more the run rate of the fourth quarter and then how that progresses towards those two goals.
Correct Yep Yep Yep.
And.
And because the earlier question.
25%, plus or minus depending on close rates and.
Because of Covid and sort of getting through all of that.
Hum.
Is there is there any other dynamics that are sort of worth noteworthy.
And I'm here.
Beyond the on Covid I mean, you cited a few examples at the beginning of the calls and I guess, that's the point.
But the takeaway is.
Is like if we were to say if you were to think about this versus.
Your expectations and I don't know if you can strip away COVID-19.
Hard to do I suppose but.
How is it how is it progressing versus your expectations. If you can give some qualitative commentary on let's say around that $32 6 million and 25 per cent increase and the fourth quarter.
Yeah, and I think at a high level you know the strategy is playing out as we were expecting and focused on undoing.
We started talking about El car in 2019, and reported and $93 million of Alterra and then now this year and $140 million of Elkhart and those are the design wins that we've been driving into and <unk>.
A more complete solution to our customers many of the new customers coming on the industrial Iot side shipping their products to multiple countries, we simplified the whole time to market and deliver that connectivity aspect and and simplify.
The solution for them, so faster time to market and good return.
And that that part of our strategies and playing out there's been impacts of Covid on how quickly some of those projects get approved or implemented but the general trend is there and I think if anything COVID-19 has actually helped and general trend. The industrial companies that are that we're working with are looking to and did.
<unk> share assets, they want and be able to get a preventative maintenance and and other benefits from that one of the large customer and other industrial Iot company and not the one mentioned here with sharing with us and they see a 25 per cent increase and follow on sales and a 20% reduction and cost to serve as they get their machines hooked up.
Via Iot, so that they're getting all the sensor data from the devices and they deploy so the business case is strong for industrial companies and.
And that's going to be a big macro trend was and I see over.
The years to come and and you know I think that all industrial companies will have to have and Iot strategy and be able to compete so where we're very well positioned and we're highly differentiator to serve that need and that industrial Iot market grows and I think with the impacts of Covid and people wanting to have things automated and not required to have as much of a human touch.
And that's going to accelerate things.
And as we move forward so.
And we're expecting this market to be significant and it's playing out that way and and Covid is just increasing the aptitude for industrial companies too on the connect their assets.
Okay No that's helpful.
I don't know if youre going to provide this but is there any color you can.
Comment on qualitatively around retention.
Growth growth growth retention churn and net retention how that's for sure is on expansion into the base once when she actually Atlanta project.
Yeah, and once we deploy.
On a project we are weird generally there for the life of the assets and so the churn is very low once the customer is getting the Iot from that device and the only churn and yet they no longer want that Iot data and we're not seeing that or that asset goes end of life and then we're well positioned for the design win and Nextgen.
<unk> assets and they'll be shipping out there to replace it so you know what.
It is it is that once we are deployed with customers and providing that and device to cloud and so we have the you know the edge connectivity, we're managing it through our device management and our Sim management and interfaces to the customer we have on global Mark that's managing and making sure that those devices are always on the air and reporting data, it's very sticky.
Okay.
Last question from me.
You know what.
We're obviously aware of the CEO planned CEO transition.
Is there is there any sort of commentary or comments that can be made relative to you know existing strategy and you know.
What sort of adjustments might we anticipate with the with with the with the CEO transition any any any comments. They can debate on that would be helpful. I. Appreciate it thanks very much.
Yeah sure glad to talk to that.
And our board's really lined up with the.
The overall strategy and so we're looking for the company to continue on this path and ER.
And build build further success as we move forward the.
Our ability to offer a complete and device to cloud solution is.
Proving very important per winning business and the marketplace.
We are well differentiated and we look to scale both sides of our business Iot solutions and enterprise solutions. So it's really about continuing to focus on that execution and a pretty big transformation over the last two years.
You know from our products through to rebuilding what we do in our go to market side and so that that heavy lifting is has been mostly complete and our focus on continued execution and to this large and growing market.
And so I can appreciate the color.
Yeah, Thanks, a lot.
There are no further questions and I'll turn the call back to management for closing remarks.
Yeah.
Well. Thank you very much great set of questions today glad to share our annual results with you.
And and look forward to our continued engagement, we hum and I wish everyone and best of health and these are challenging times and I think there is some good light at the end of the tunnel with what's happening with vaccinations and and declining rates and we look forward to more things getting back to normal and especially GAAP.
And product supply getting back to normal, but we'll continue to work that hard for our for our customers and for our results. So thank you very much everybody and.
And have the good rest of your day cheers.
That concludes today's conference call you may now disconnect.
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