Q1 2021 Sierra Wireless Inc Earnings Call
Good afternoon, and welcome to the Sierra Wireless first quarter earnings call I would like to turn the call over to David Crane, <unk>, Vice President Investor Relations.
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 Cochrane and our CFO. As a reminder, today's presentation is being webcast 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 first quarter results followed by Q&A before we get started I'll reference the company's cautionary note regarding forward looking statements and <unk>.
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 the securities laws. These statements include our strategy goals objectives and expectations and commentary regarding the outlook for our business.
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 management's current expectations and we caution investors that forward looking statements, particularly those that relate to longer periods of time are subject to substantial new.
Known and unknown material risks and uncertainties that could cause actual events or results to differ significantly from those expressed or implied by forward looking statements I draw your attention to a longer discussion of our risk factors and our AI.
And M DNA, which can be found on SEDAR and Edgar as well as our other regulatory filings. This presentation should also be viewed in conjunction with our quarterly earnings release with that I'll now turn the call over to Kent for his corporate update.
Thanks, David.
I expect initially my last quarterly update before my planned retirement and.
I'm happy to report that the Sierra wireless transformation continues to gain momentum with strengthening demand being offset in the near term by global supply chain environment.
I will start my comments and our first quarter results and highlights.
Total revenue in Q1 was $108 1 million up four 9% year over year.
As we announced on March 23rd the Ransomware incident shut down our production facilities for one week and as such we were slightly behind the consensus and $109 8 million.
We also noted during our Q4 results from Port and their demand was running at about 15% higher than our expected revenue due to global supply chain challenges during the quarter orders continued to materialize increasing its stake to 20 per cent.
And the first quarter, our connectivity software and services revenue was $33 7 million up 26, 1% year over year.
We are seeing this revenue grow is one our existing customers increase their Iot deployments with us too we have new customers starting to ramp their deployment based on design wins, we secured over the last two to three years and three some customer usage rates are recovering as economies open up as we get through what we hope what is hopefully.
The worst of the global pandemic.
Clearly the need for both real time monitoring of remote assets and improve processing at the Iot edge is growing in importance in fact, Iot analytics research just reported that they expect the predictive maintenance marketplace will quadruple by 2026.
And my conversations with Ceos of industrial and enterprise companies, it's clear that day urgently want to digitize their assets. So they can gather data from their equipment and factories control and points and run insightful data analytics and.
Many of these customers are looking for a trusted supplier. They can securely provide them with Iot devices connectivity and edge to cloud tools for two way data orchestration and all of these trends and Iot are certainly playing right and to see our strength.
And Q1, we are introducing a new metric to measure our performance and growth and our recurring revenue and.
And our our or monthly recurring revenue indicates the recurring revenue and the last month of each quarter and is defined as the monthly subscription revenue, including usage fees from current subscribers.
And our earnings release, we've included historical data for MRI and a graph for the last two years.
You can see that our recurring revenue has grown nicely from $7 1 million and MRI and Q1, and 2019 up to $11 5 million and this past quarter generating a CAGR of 27% over the two year period.
Over the last 12 months MRI from March 'twenty, and 'twenty to March 2021 increased by 37 per cent.
Going forward, we will be providing you with MRI update each quarter and stepping back from providing quarterly Altai design win information.
And was certainly important to show L car when we we're transforming and building the services business over the last two years as design wins take several years until starting to show and our revenue results with.
With the continued maturity of our connectivity software and services business and are strongly growing recurring revenue. We are moving to report monthly recurring revenue as a more common and easily understood and metrics.
With regards to our hardware devices, we continued to see improving demand for our modules and gateways and the first quarter and our backlog and pipeline continue to grow we are facing a very tight supply chain environment, which we spoke during our last conference call and it's being reported widely.
Our operations team is working diligently to secure components. So we can build and ship products for our customers and we're using our balance sheet to make advanced purchases of component inventory.
Our teams are also working very closely with our contract manufacturers to ensure we have the necessary production capacity.
We are talking to our major suppliers constantly to facilitate any extra supply possible and we're working closely with our valued customers to get them as much product as possible.
But we will continue to have demand run ahead of our ability to supply and Q2.
And the first quarter, we announced and we had a ransomware incident, which was discovered and March 20th we immediately engaged and external team of expert advisors to help identify isolate and implement measures to mitigate this incident.
Our factory production was halted but has since been fully restored we worked very quickly to minimize the impact of the incident and we have been providing customers with updates and communications throughout the process.
While the investigation of the incident is ongoing we believe at this time that the incident was limited to our internal systems and website only as we maintain and clear separation between their internal it systems and our customer facing products and services.
We are aware of the threat actor that attacked our system was Ragnar locker.
Our I T team with the help of external experts have enhanced our security and monitoring tools with an added layer of protection to detect and identify malicious activity.
We've also enhanced security and corporate endpoints per improve detection and 24 by seven monitoring.
I would like to thank all our staff and advisors for working tirelessly to return to business as usual.
Now back to discussing business growth.
Our five Jeep programs and embedded modules are now certified with all major carriers in North America, and leading carriers globally. We are shipping five G products to customers globally on both sub six and millimeter wave OEM deployments are five G. Knowledgeable are primarily going into networking devices laptops video applications such as secure.
<unk> and broadcast video and the public safety market and our design wins continue to grow and five gene as many of our OEM customers are seeing higher demand from their end customers per five G products. So we're off to a good start and five G and the first half of 2020, one and we expect activity to pick up and the second half of this year with growth really.
Coming in 2022.
And the first quarter, our global sales team continued to secure new Iot solutions wins I'd like to share a few examples.
The first win is with a leading U S based industrial technology company. They needed a sole source supplier for and Iot solution that enabled them to do remote monitoring and industrial products.
They had been struggling with disparate pieces of hardware multiple sim providers and various management tools.
As a single provider, we have a bundled solution for them with first class support, allowing them to digitize their assets quickly and scale globally and we are now doing test with them using our octave data orchestration to further improve their Iot solution.
The hardware value of this first design with this new customer is expected to be $4 $5 million and recurring service revenue and year, three and is expected to be approximately $1 5 million.
And the other customer we signed up and Q1 is and EV EV charging station company and is expanding its U S charging infrastructure, given the rapid growth and the electrical vehicle market.
This customer wanted a long term relationship with and Iot partner that had high quality cellular gateways and package with Iot connectivity services.
Alex 60, and gateways together with our ready to connect them with the right fit for this customer.
The hardware value. This initial design wins and is expected to be $1 million and recurring revenue and three years' time and is expected to be approximately $300000 per year.
And this is just the start with this new EBIT customer.
And the last example, I'll provide today is the services design win.
We signed this customer and Europe, a leading provider of event and ticketing online registration and cashless payments.
And the customer has a number of point of sale devices being used throughout Europe and international locations, but we're struggling with various carriers contracts and restrictions the solution was having Sierra wireless with a global Sam and strong commercial and technical support be it sole supplier and the services side. The recurring revenue and three years' time is expected to be approximately.
And the $1 million.
And Q1, we also announced the launch of Oculus and cargo and new managed Iot asset tracking solution that companies can quickly and easily deploy detract.
And the location and condition of high value and sensitive assets and <unk>.
Average is our expertise and Iot device hardware cloud management and global connectivity.
And a unified solution is based on a single monthly fee.
We built the solution around three key needs for our customers real time visibility product level tracking and exception based monitoring so they can constantly track their high value sensitive assets at all times.
And this managed cargo tracking solution enables manufacturers freight carriers and third party logistics firms to avoid shipping delays and reduce dwell time and prevent theft.
And Q1, and we also announced a new L. P. W. A module that supports the 450 megahertz spectrum. So to meet the specific requirements of our smart metering and utility customers and Europe, some countries, such as Germany, The Netherlands, and Austria, a reserve and 450 megahertz spectrum for LTE M networks. So they can provide kind of.
Activity per smart energy and smart grid solutions.
Our new embedded module has best in class power consumption and advanced firmware over the air capabilities, the battery life and smart meters can be extended to more than 10 years, reducing the number of utility truck rolls needed for battery replacements.
And lastly, I am pleased that this week, we launched our new XR 90, and XR 80, multi network five day routers. The XR series provides five G high speed connectivity for real time video streaming and mission critical environments and high performance business critical applications, the new browsers to live with the full performance of <unk>.
<unk> across any networks, whether it's being used for mobile applications or primary temporary or backup fixed wireless connectivity.
Both the XR 80, and the XR 90 allow customers to maximize five G data speeds across Wi Fi six.
And multi gigabit Ethernet interfaces, using quad core processing and our internal O S architecture and accelerates the data path.
So we're excited about taking this high speed router series to market.
In summary, our business transformation to Iot solutions leader is proceeding strongly with growing design wins strong growth and our higher margin recurring revenue areas and a strong pipeline of demand and orders throughout 2021, so with that I will now pass it over to Sam for his review and Comed.
On the first quarter.
Thank you cant give afternoon everyone.
Note that we report our financial results and 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 our website.
Total revenue and the first quarter was $108 1 million up four 9% compared to Q1, 2020.
Connectivity software and services revenue, which we had previously called recurring and other services revenue was $33 7 million and Q1.
$7 million or 26% year over year.
Our total revenue and the first quarter was constrained by two main factors.
Can you and constraints and the supply chain for semiconductors and other components.
And the impact of the ransomware incident at the end of the quarter, which affected our ability to manufacture products.
Non-GAAP gross margin and the first quarter was 35 per cent compared to 34% from the prior quarter.
Reflecting increased higher margin connectivity software and services revenue.
Our non-GAAP operating expenses, and Q1 were $46 4 million down $8 6 million or 15, 6% year over year.
This reflects our cost reduction initiatives that we've been undertaking over the last two quarters.
Our adjusted EBITDA was negative $4 4 million compared to an adjusted EBITDA of negative $16 2 million a year ago.
The improvement and adjusted EBITDA reflects our growing high margin connectivity software and services offerings and the impact from our cost reduction initiatives.
Revenue in the Iot solutions segment was up $6 2 million or nine 1% year over year.
This increase is primarily due to growth and our Iot connectivity business, which was partially offset by lower hardware revenue that was constrained by tightness and the supply chain and the ransomware incident at the end of the quarter.
Revenue and the enterprise solutions segment was down $1 1 million or negative three three per cent year over year. The decrease was primarily due to tightened and components and manufacturing capacity.
And strained our ability to build and ship all the gateways and routers, we had on order.
And the ransomware incident at the end of the quarter.
Looking at non-GAAP gross margin and the first quarter compared to a year ago total gross margin was $37 8 million or 35% and the first quarter.
Compared to $34 9 million or 34% and in Q1, 2020.
The improvement was primarily due to our growing connectivity software and services offerings.
Sequentially gross margin declined by 1%, primarily due to increased costs associated with the continued tightness and the supply chain.
Moving to the balance sheet. We ended the first quarter 2021, with $112 2 million of cash.
Q4, 'twenty earnings call on February 23rd we stated that we expected to consume approximately approximately $20 million and cash in Q1, 2020 one due to three factors that we had referenced during the call.
One the need to increase capacity and inventory to combat the current global shortage of components to restructuring outflows as we improve our operating efficiency.
And three some one time working capital adjustments associated with the automotive sales.
And at the end of Q1.
First position was approximately 35 million below our original forecast due to three primary factors.
One <unk>.
Approximately 12 million and additional working capital to build component supply to support increased demand for Q2, and the second half of the year and during the quarter. We also paid and many of our key component suppliers faster than previously expected to improve our allocations during the industry wide supply tightness.
To approximately $5 million of direct costs related to the ransomware incident and.
And three approximately $18 million of indirect impact related to the ransomware incident with the majority of that being the temporary unwinding of our accounts receivable factoring program and we had no access to our systems at the end of the corner and we are unable to factor receivables.
And the second quarter, we continued to invest and working capital to come back. The current supply constraints. However, we expect the second quarter ending cash balance to remain flat to Q1, 2021 as we recover from the ransomware incident.
The impact of the COVID-19 pandemic on our global business continues to remain uncertain, but.
While we continue to evaluate the effects and our business.
The overall severity and duration of adverse impacts related to COVID-19 COVID-19 on our business financial condition cash flows and operating results for 2020, one and beyond cannot be reasonably estimated at this time.
Due to continued strong demand and the investment and working capital to combat the industry wide tightness in supply.
We expect our revenue and the second quarter of 2021 to be and the range of $118 million to $122 million.
Demand remains strong and the second quarter of 2021, and we have secured hardware orders and recurring revenue that is approximately 20% above the midpoint of our Q2 2021 revenue guide.
However, we continue to face a tight global supply chain environment, plus the stream and our ability to source all the necessary components and fully deliver and so this level of demand.
With that I will now turn the call over to questions. Operator, Please open the lines.
Thank you. The floor is now opened for questions I would like to inform everyone. In order to ask a question you May press star one on your telephone keypad.
And again Thats star one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Mike Walkley. Your line is open. Please go ahead.
Great. Thanks for taking my questions.
Yeah.
Lots of positive developments, but wanted to focus on the.
Supply area, you know with the nice sequential revenue growth and indications demand 20 million above this.
Any idea if this demand goes away if you can fill it.
And any double ordering going on from your customers given the tight supply and then how is your ability maybe to meet that supply improving and the second half of the year.
Sure. Thanks, Mike.
Good question. This is a I think consuming.
And the executive suites of almost every product manufacturer and globally right now.
Where we've been working very closely with our customers overall, so and your first part of the question the lift demand go away.
Most part no most of our customers are single sourced with us and we take our responsibility to get product to them very seriously so I'm on frequent.
Customer calls and I'm more frequent supplier calls to make sure that we are and getting those parts there and secondly in terms of over ordering we have we have strong visibility and I can tell you from the dozens of customer calls, it's and <unk>.
It's real customer need it's not a it's not building buffers and it's not a it's not the COVID-19 toilet paper shortage and these are he's a real needs for our customers.
And what we've been doing is we've been pushing out our order lead time to all of our partners suppliers and we've been requesting enhanced lead time from our customers and we've been we've been doing that and we have orders into Q1, 'twenty two and in some parts of our business as we are significantly work to expand our.
Visibility so that we can order more parks earlier and ensure that we can supply to customers. So it's been a than had been a significant amount of work continues to move along our suppliers have been tremendous we have got a lot of support we've been able to increase our allocations and many areas.
And I feel that we are a we're doing well in this difficult environment, but at and you're always going to remain tight for the foreseeable future.
Great. Thanks, Kent, and yes, I think it's great that you were able to have the balance sheet to use to your advantage because certain your competitors certainly might not have that balance sheet too and built up for.
As needed per customers.
My follow up question and I'll pass the line is yeah. Thanks for sharing the new monthly recurring revenue data that's pretty straightforward just just your thoughts longer term as you get out of supply issues. You know the 27% CAGR is that sustainable too low given the initiatives you have in place are too high given.
And you're now growing off a larger base and the law of large numbers just your thoughts on that and before I pass. The line just your best wishes to you and your retirement.
Great. Thanks, Mike well as you know we've been talking about the transformation and we've been talking about al car to show the design wins that we're getting so I think they were you know we remain on trajectory towards the 200 million recurring revenue by mid 2022 that we've talked about and we are I mean, we see continued growth moving forward.
And we had 25% growth and Q4, we had and the comps there and we added M to M into our business and the early part of 2020. So this growth, which is even stronger than Q4, I'm you know theres no theres, no and benefit of that acquisition and it's in the Q1.
2020 numbers. So this is this is this is organic and so very strong number and we'll continue to to drive.
From here and I think that day reporting MRI helps give a good view and and and shaped to the CAGR. We do have some seasonality and quarters, but I think that the trend data is as clear as we said and that we had a 27% over the past two years, 30% and the past year. So we are seeing that continue to improve.
Great. Thank you.
Yeah.
Your next question comes from the line of famous much hopeless from BMO capital markets. Your line is open.
Hi, good afternoon.
How should we think about margin for the next little while I mean in light of the supply constraints.
And obviously there was some noise in Q1 with the with the ransomware attack, but I mean should we think about margins kind of going back to kind of.
Q4 levels or what would your expectation day.
Hoist and those things without and I'll I'll I'll ask Sam to jump in here and a second but we're getting benefits of mix. So we're seeing increasing our recurring revenue and our enterprise revenue, which has high margin was held back by supply and late quarter issues with ransomware, where we had.
And a lot of of our enterprise build plan for the last part of the quarter. So those those mix element help us, but there are headwinds with the some extra costs from our supply chain. So Sam do you want to talk to that.
Yeah. Thank you so and the enterprise business, specifically, we had some increased cost due to some parts that we had to procure and the gray market.
So that's going to be a headwind for the next little while we're not giving.
Guidance on margin, but.
Better mix and growing high margin recurring revenue and the connectivity software and services space.
And then the the headwinds from the component parts are constrained environment going away.
And the future.
Going to see improvement, but in the short term.
And to be about awareness.
Okay, and then as far as Opex was there anything meaningful associated with the rents and where talk from an Opex perspective, and then should we think about Q1 being indicative of the run rate or two back there.
So and then cyber event, if you look into the financials I believe there was about 500 K of net cost and that was about the insurance deductible. So.
And and that was disclosed and other expenses, so not and the run rate of Opex. The Opex reflects the cost initiatives that we put in place. So again about at the at the level we expected.
Okay, and the flip side, though is there anything I guess things like maybe travel expenses coming back or I.
I don't think you had much benefited from COVID-19 wage subsidies that you.
Not much but again, if you look at the non-GAAP rackets and there I think it was about 2 million for the quarter, but we were non-GAAP it out.
Okay.
Okay.
And then finally can in terms of.
Yes, you mentioned from the applications driving a five G and sorry, I don't think and call. It as far as geographic area is that primarily a north American dynamic or what are you seeing that.
No we're seeing five G M interest and demand globally. So we have.
Hum significant activity going on in Europe.
With the demand for our <unk> products, we're selling to many.
And routing customers globally that are looking to deliver and take our <unk> modules and deliver five G connectivity.
Have a number of customers and are in Asia, particularly in Japan with interest and.
And of course, North America is very strong with the significant activity.
<unk> seen from the carriers and and and we've made announcements with the work with the T mobile and with AT&T and with Verizon who are all very active and the <unk> space.
And actually I mean, given the rapid deposits that should be a positive for our margins all else equal.
Should it not I mean, I appreciate and that you have some other constraints and headwinds going on but all else equal higher five team ex strike margin right.
Well you know five G products are still quite expensive and so are our margins are are good on a dollar basis, you won't see a big impact on a percentage basis, because it's a bigger ticket item and and those prices will come down over time, and I think will give us more opportunities, but we're still in the very very early.
Early innings of <unk> as I said and my comments, we were off to a good start we have and I couldnt I couldnt be happy with our design win space in terms of number of people that are relying on us for their <unk> products.
But they're just in the early stages of those rollouts. So we will see that growth throughout the year, and we think that 2022 and as we get to.
For the maturity of the standard will see a significant growth.
Great.
And that's what the spring and retirement and I'll ask one.
Thanks, Dan upstairs.
Your next question comes from the line of Josh Nichols from B Riley Your line is open.
Yeah. Thanks for taking my question and really good to see the demand outlook for <unk>.
Given some of the headwinds that the company faced and the first quarter could you provide a little bit more color on what the expectation is I know gross margins were impacted by around 100 bps quarter over quarter do you think you're able to maintain the current level or do your expectations going forward with the supply chain.
Okay.
Yeah, I'll, let Sam elaborate on that.
Yeah like like I said earlier, our with analyst's question.
So as we have better mix and and growing high margin connectivity and software and services revenue.
That mixed with the improvement in the supply environment, and we'll get more gateways and routers out which are higher margin. So that mix will improve our margin and then I'll also having to buy more expensive parts and the gray market and extra engineering cost to rework prop.
Products, Oh, well and Peru so.
In the short term.
It's a good level of where we're at and Q1 here.
But a lot of tailwind for the future.
Thanks, and then just kind of.
Tangentially on that point that you just made I know you mentioned before that the company's enterprise pipeline and kind of doubled last year I know it was down a little bit and in first quarter because of this ransomware attack, but how is that pipeline looking as we kind of moving to like the back half of this year, its obviously higher margin and and fairly accretive to the business and what are your expectations.
Patients on that front.
Sure.
Our our Q1 was strong from an orders perspective, and our orders for the first half of the year are up over 50% from our orders and the first half of 2020. So the demand continues to be robust.
Challenge to ship all of that product so.
And so it's not about it's not about a demand side and so are the work we've been doing with our customers products partners.
And has been going very well and and we see that continuing as we move forward.
We're gonna be able to catch up on a lot of product in Q2.
One particular supply shortage.
And part in Q1, we were able.
Able to alleviate a lot of that late in the quarter, but then with the ransomware, we weren't able to get those products ship. So hence the slight down year over year, which is a it's disappointing because it's not reflective of where our orders were at and were working tirelessly right now to get.
More product into the hands about customers and they definitely need it.
And then last question from me I don't know, if you could or how easily be able to do but if you could try and quantify the revenue impact regarding like the cyber attack and also some of the component shortages and I'm just trying to get a ballpark figure for how much of an impact that had to the revenue from this quarter.
And as I think about longer term opportunities.
Well I think that as you as you look at the are released and we put out we said that we had talked before that we thought that the impact of supply chain shortages and there's going to mean there'd be 15% orders above what we had and revenue and and said now in Q1 that looks like 20% above.
Our borders that we weren't able to ship and then Sam Adams and his guidance and you know our our midpoint of guidance is $1 20 for Q2, but we have orders and 20% higher than that number that will will have to.
Walk through the supply chain and get those shipped as soon as possible, but mostly sliding into Q3. So so that's sort of the nature of the world right now, where we're a we're working to and to.
Get orders with as much lead time as possible and that comes in a short lead time is likely going to be unable to get them shipped.
As we work to get the component parts to be able to build those products.
Thanks and for the.
Okay.
Yeah.
Go ahead Sam.
Oh, it's gonna just mentioned that for the ransomware incident, we recovered quite quickly.
From that as you can tell from there.
The discovery to when we resumed production. So you know you.
You can kind of estimate from that.
Free period, what the impact would have been from the quarter and I think a few analysts did.
Does that give them.
Answer your questions Josh Yep, Thanks for the clarification I appreciate it and that's it.
Thanks.
Your next question comes from the line of Scott Searle from Roth Capital. Your line is open.
Hey, good afternoon, and thanks for taking my questions.
And the enterprise and markets and I was wondering if you could provide a little bit of color in terms of where you're seeing the demand from it and market perspective things like she births are starting to play and and then also.
The opportunity for recurring services and and around the enterprise router opportunity kind of like Cradle point.
Light type of services. So if you are seeing that opportunity out there and if that would stay within that business segment, when you're reporting enterprise going forward.
Sure. Thanks, Scott Thanks for your questions good to hear from you.
So we're seeing enterprise demand and are in a number of areas. So yeah.
Yes, Jamie you're asked to specifically your question that is driving demand were seeing quite a few quite a bit of interest in and those deployments and working with a number of.
Partners like Motorola and others on on CBR S deployments.
And so that's a that's a nice growth area public safety remains very strong and so where we are.
We're winning a lot of business as our needs and and public safety happen were also and our commercial area and with the utility and smart grid applications.
And got good growth in those areas. So we're and areas that we focus on are are all performing well.
And Oh, where we're focusing on delivering.
Delivering product into that and and continuing to build.
Our strong pipeline as we move through that on the recurring revenue side, Yes, we do we do attach.
Our software solutions and support to our gateways with our new five G launch and we've rolled out a I think I've mentioned previously, but a couple of years and development of complete a new support cloud service to attach. So we think that we have opportunities to continue to grow that area of Oh.
And the attach and a more sophisticated cloud support for our gateways to our customers. So we continue to drive recurring revenue there and also in some instances, we will attack attach connectivity to our gateways, but for the most part and surround our our cloud and it and support and with our gateways.
Great. Thank you very helpful and and lastly, if I could I know you're not providing guidance in terms of the immediate gross margin outlook, but backing into the numbers in terms of the new revenue.
Our revenue lines that you provided it seems like the module side is still remains challenged a little bit under 20% gross margins I'm wondering how you're thinking about that business longer term is this going to be a 25% gross margin business and 22, assuming a normalized component environment or is this something where you could get the 30% plus and Ken best of luck and your retirement.
Thanks, so much.
Okay and thanks Scott.
I think that if we worked to pivot to solutions. So we're not just selling a module, we built and are ready to connect and.
Built in Sim technology into a module so that we can drive the connectivity and so sometimes the gross margin and the module may be very low, but we're adding a high margin recurring revenue stream to that so there's a slight timing differences, you'll sell the module and recognize that and a low 20 gross margin, but then you're seeing 40% to 50% per <unk>.
Revenue and gross margin that extends for the length of that asset. So I think that the overall value that we see from each one of our deployments is increasing as we increase our attach rates.
And the competitive environment remains very tight on the module side and that's why we came up with our strategy and being that complete and trusted Iot solution leader and it's being able to provide that complete device to cloud solution to customers and so as we've described with our design wins with our <unk> wins and you can see it now coming and our recurring revenue growth, we're winning out and them.
And placed with that offer and the net we expect the competitive environment on the module only space will remain tight.
But we have the opportunity to grow significant revenue and gross margin from being that complete solution provider.
Great. Thank you.
Cheers.
Your next question comes from the line of Paul Treiber from RBC capital markets. Your line is open.
Hello, and thanks, everyone and good afternoon.
On the cash flow I was hoping you can delve into your comments on next quarter in terms of cash flow being flat. Although you mentioned you. You said you would recover from the ransomware attack was hoping you could just outline for next quarter, whereas some of the moving parts of cash flow.
Sure Hi, Paul and I'll, let Paul and I'll, let Sam jump into that one.
Thanks, Ken Thanks for the question Paul.
Youre going to see.
Revenue improve.
Youre going to see Opex, we've already seen that big improvement in.
In 2021 versus 'twenty 'twenty from our cost reduction initiatives.
So you'll you'll you'll start to see kind of better cash from operations.
You're going to see a little bit of continued investment and working capital.
As we are combating and unprecedented environment and supply.
And you'll see some recovery.
In the from the Ransomware incident in terms of insurance recovery.
Plus being able to do our AR factoring program, which we do at a pretty low cost around 1%. So.
Those are the big moving pieces for the quarter.
So is it is it right to characterize it that the that the the factor and the benefit from factoring and coming back and maybe that recovery of the insurance recovery, a little bit there would be offset by the investment and on the supply side.
That's basically the right way to think about it the other big investment and the quarter not huge numbers, but we're investing and next gen. Five G. So we're a big believer and five G and where we're putting some investment and capex dollars. There so that would be a another a sort of a smaller piece but.
But yeah, that's a good way to think about it.
Okay. That's helpful and then.
And can I mean, good luck and in your retirement.
And so on the you mentioned that would be their last conference call is there and update on the CEO search.
And I noticed some and costs and the core.
How is that going and when do you expect that to be completed.
Sure.
Thanks, and thanks for your good wishes and the CEO search is going well and the board's run a.
Strong process and seeing many good candidates.
They've converged on a candidate at this point and I expect that you'll see us make announcements early in Q3, so I likely I'm going to be around a little bit longer than my June 30th target that I had put out there, but I expect we will make that transition. So my goal is to deliver a very strong Q2.
And then help our very successful transformation building off the momentum and that we have and so you'll you'll you'll hear from us in Q3 in that regard.
Okay great.
Luck.
Thanks.
Again, if you would like to ask a question you May press star one on your telephone keypad.
The next question comes from the line of Derek Soderberg from coal your Securities. Your line is open.
Hi, everyone. Thanks for taking my questions.
Kent I wanted to start with five G and sort of the competitive environment, there and as it relates to the hardware piece alone and then the entire solution and how do you feel about your product differentiation versus what's out there and you know do you guys expect to take share of the market as this <unk> rollout accelerates.
And I'm sure I'm going to talk to you Derek Thanks for the question so.
We've done very well on <unk>, and and Sierra wireless has great and history and depth of bringing new air interfaces to market, So where really the trusted partner and the industry and it was three GKN and as far as you came and now with <unk>. So we've been able to deliver this product.
And very complex lot of.
Turner challenges and.
Obviously, the most complex product never brought to market. So we've been we have picked up share and slots with the many players in the railroad industry and and and working to deliver to them and then the second part is our modules into our own gateways, we launched and just made a press release this.
Week.
On our two new five G gateways that we brought to market, our XR 80, and XR 90, and we're very proud of those one of the leading global carriers and their analysis told US that we were are by far the best Gateway.
And that they had seen from a overall performance and management perspective, So where are we.
We're proud on both aspects of that what we're doing with and <unk>.
<unk> technology to provide the high bandwidth and low latency connectivity link and then being able to leverage that into our gateways from customers that are looking to take advantage of that so where are you now where this is where we're at our best and and I'm very proud of our team in terms of what they've delivered here and the <unk> space.
Great and then just a quick question on the two new segments.
As it relates to recurring revenue.
And I'm wondering how much of that recurring revenue that you report is coming from the separate Iot.
And enterprise solutions, if you can kind of split that out what that looks like.
Sam do you want to talk to that.
Yeah, Yeah sure I mean, we're not we're not sort of providing.
That level of detail, but more of the recurring revenue of the connectivity software and services piece is in the Iot solutions segment.
But there is a decent chunk you know in the in the enterprise solutions piece as well so.
No.
60, 40 ish would be a fine.
And to think about.
That's helpful. Thanks, guys.
Thank you.
And just sorry now close for our questions are no questions in the queue I would now like to turn the call back to Ken and please go ahead Sir.
Thank you well. Thank you everybody for participating in our Q1 earnings call and and good questions.
And I set up and division in 2018, 2019 to transform Sierra wireless to the leading Iot solutions player with a complete and device to cloud offers and so as you can see we've innovated and and our solutions offers and rebuilt our go to market to help customers quickly and get their Iot deployments delivering valuable edge data and control.
We've been winning valuable design wins over the past two years and the hard work and it's showing with our strongly growing connectivity software and service revenue and a new definition for our recurring revenue.
I'd like to thank the dedicated and hard working team of Sierra wireless for driving the successful transformation. So thanks to all be speaking to many of you and the coming days.
Yeah.
This concludes today's conference call. Thank you all for joining you may now disconnect.
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