Q1 2021 Sierra Wireless Inc Earnings Call
Yeah.
Good afternoon, and welcome to this year of 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, Our CFO as a reminder of 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 first quarter results followed by Q&A before we get started I'll reference the company's cautionary note regarding forward looking statements of 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 constant.
<unk> 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 of 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.
<unk> are based on our management's current expectations and we caution investors of forward looking statements, particularly those that relate to longer periods of time are subject to substantial known and unknown material risks and uncertainties that could cause actual events or results to differ significantly from those expressed or implied by forward looking statements I'd draw your attention to.
Longer discussion of our risk factors in our Aif and MD&A, 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 the necessarily by last quarterly update before my planned retirement.
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'll start my comments on 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 of shut down our production facilities for one week and as such we were slightly behind the consensus of $109 8 million.
We also noted during our Q4 results from Port and the demand was running about 15% higher than our expected revenue due to global supply chain challenges during the quarter orders continued to materialize increasing this thing of the 20 per cent.
In 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 as one of the 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 on recovering as economies open up as we get through what we hope when it hopefully.
On the worst of the global pandemic.
Clearly the need for both real time monitoring of the remote assets and improved processing of 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.
In my conversations with Ceos of industrial and enterprise companies, it's clear that the urgently want to digitize their assets. So they can gather data from their equipment in factories control endpoints and run insightful data analytics.
Many of these customers are looking for a trusted supplier that can securely provide them with Iot devices connectivity and edge to cloud tools for two way data orchestration all of these trends and Iot are certainly playing right into the sea our strength.
In Q1, we are introducing a new metric to measure our performance and growth in our recurring revenue am.
M R R or monthly recurring revenue indicates the recurring revenue in the last month of each quarter and is defined as the monthly subscription revenue, including usage fees from the current subscribers.
In our earnings release, we've included historical data for MRI and the graph for the last two years.
You can see that our recurring revenue has grown nicely from $7 1 million of MRI in Q1, 2019 up to $11 5 million in this past quarter generating a CAGR of 27% over the two year period.
Over the last 12 months MRI from March 2020 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.
It 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 on our revenue results.
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 the more common and easily understood metric.
With regards to our hardware devices, we continue to see improving demand for our modules and gateways in the first quarter and our backlog and pipeline continue to grow we're 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 in Q2.
In the first quarter, we announced that we had of ransomware incident, which was discovered on March 20th we immediately engaged an 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 on communications throughout the process.
While the investigation of the incident is ongoing we believe at this time the the incident was limited to our internal systems and the website only as we maintain a clear separation between our 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 health of the 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 improved detection and 24 by seven monitoring.
I would like to thank all of our staff and advisors, who are working tirelessly to return to business as usual.
Now back to discussing business growth.
Our five <unk> programs and embedded modules are now certified with all major carriers in North America, and leading carriers globally. We are shipping <unk> products to customers globally on both sub six and millimeter wave OEM deployments are five G. Knowledgeable as 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 on five G. As many of our OEM customers are seeing higher demand from their end customers per <unk> products. So we're off to a good start in <unk> in the first half of 2021, and we expect activity to pick up in the second half of this year with growth really.
Coming in 2022.
In 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 of source source supplier for an Iot solution that enabled them to do remote monitoring of 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 the Iot solution.
The hardware value of this first design with this new customer is expected to be $4 $5 million and the recurring service revenue in year three is expected to be approximately $1 5 million.
Another customer we signed up in Q1 is the EV EV charging station company that is expanding at the U S charging infrastructure given the rapid growth in the electrical vehicle market. This customer one of the long term relationship with an Iot partner that had high quality cellular gateways packaged with Iot connectivity services.
Our L. F 16, gateways together with our ready to connect Finn was the right fit for this customer.
The hardware value of the initial design wins are expected to be $1 million and recurring revenue in three years' time is expected to be approximately $300000 per year.
And this is just the start with this new EV customer.
On the last example, I'll provide today is the services design win.
We signed this customer in Europe, a leading provider of event ticketing online registration on cashless payments.
The customer has a number of point of sale of devices being used throughout Europe and international locations. The was struggling with various carriers contracts and restrictions.
The solution was having Sierra wireless with the global Sam on strong commercial and technical support be it the sole supplier on the services side of it.
Current revenue in three Years' time is expected to be approximately $1 million.
In Q1, we also announced the launch of Accu linked cargo of new managed Iot asset tracking solution. The companies can quickly and easily deploy the track.
On the location and condition of high value of insensitive assets.
Average is our expertise in Iot device hardware cloud management and global connectivity all on 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 of tracking and exception based monitoring so they can constantly track the high value sensitive assets at all times.
This managed cargo tracking solution enables manufacturers freight carriers and third party logistics firms to avoid shipping delays reduce dwell time and prevent theft.
In Q1, we also announced the new L. P. W. A module that supports the 450 megahertz spectrum. So it meets the specific requirements of our smart metering of utility customers in Europe, some countries, such as Germany, The Netherlands, and Austria, a reserve of 450 megahertz spectrum for LTE M networks. So they can provide kind of.
The 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 of smart meters can be extended the more than 10 years, reducing the number of utility truck rules needed for battery replacements.
And lastly, I'm pleased that this week, we launched our new XR 90, and XR 80, multi network <unk> routers. The XR series provides five G high speed connectivity of real time video streaming in mission critical environments and high performance business critical applications.
The new routers to live with the full performance of five G across any network, whether its being used for mobile applications.
Primary temporary or backup fixed wireless connectivity.
Both of the XR aiding in 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, the accelerates the data path.
So we're excited about taking this high speed rubber series to market.
In summary, our business transformation to Iot solutions leader is proceeding strongly with growing design wins strong growth in 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 the Sam for his review in common.
On the first quarter.
Thank you cant give afternoon everyone.
Note that we report our financial results in the U S dollars and on the 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 in 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 the other services revenue was $33 7 million in Q1.
The 7 million or <unk> 26 per cent year over year.
Our total revenue in the first quarter was constrained by two main factors.
Continued constraints on the supply chain for semiconductors and other component.
And the impact of the ransomware incident at the end of the quarter, which affected our ability to manufacture products.
Non-GAAP gross margin in 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 in 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 in 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 was primarily due to growth in our Iot connectivity business, which was partially offset by lower hardware revenue that was constrained by tightness on the supply chain and the ransomware incident at the end of the quarter.
Revenue in the Enterprise solutions segment was down $1 1 million or negative three 3% of year over year. The decrease was primarily due to tightness of components and manufacturing capacity.
The strained our ability to build and ship all of the gateways and routers, we had on order.
And the ransomware incident at the end of the quarter.
Looking at non-GAAP gross margin in the first quarter compared to a year ago total gross margin was $37 8 million or <unk> 35 per cent in the first quarter.
Compared to $34 9 million or 34% in Q1 'twenty 'twenty.
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 in 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 in cash in Q1 2021 due to the three factors that we had referenced during the call.
One the need to increase capacity and inventory to come back the current global shortage of components to it.
The restructuring outflows as we improve our operating efficiency.
And three some one time working capital adjustments associated with the automotive sales.
At the end of Q1.
First position was approximately $35 million below our original forecast of two to three primary factors.
One of.
Approximately 12 million in additional working capital to build component supply to support increased demand for Q2 on the second half of the year and during the quarter. We also paid 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.
The 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 as we had no access to our systems at the end of the quarter.
We are unable to factor of our receivables.
In the second quarter, we continued to invest in working capital to come back of the current supply constraints. However, we expect the second quarter ending cash balance to remain flat to Q1, 2020 one as we recover from the ransomware incident.
The impact of the COVID-19 pandemic on our global business continues to remain uncertain.
We continue to evaluate the effects on 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 2021 on beyond cannot be reasonably estimated at this time.
Due to continued strong demands on the investment in working capital to combat the industry wide tightness in supply we.
We expect our revenue on the second quarter of 2021 to be in the range of 118 million to $122 million.
Demand remains strong in the second quarter of 2021, and we have secured hardware orders in recurring revenue that is approximately 20% above the midpoint of our Q2 2021 revenue guidance.
However, we continue the face of tight global supply chain environment. That's the stream of our ability to source all of the necessary components from fully delivered 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 again Thats star one on your telephone keypad, we'll pause for just a moment of 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, a lot of lots of positive developments, but wanted to focus on the.
Supply area with the nice sequential revenue growth of indications of demand 20 million of above this.
Any idea of the demand goes away if you can fill it.
The any double ordering going on from your customers given the tight supply and then how is your ability maybe to meet that supply of improving in the second half of the year.
Sure. Thanks, Mike. Good question. This is a I think consuming.
On the executive suites of almost every product manufacturing globally, right now where we've been working very closely with our customers overall. So on your first part of the question the lift demand go away for the most part no. Most of our customers are single sourced with us and we take on.
Our responsibility to get product to them very seriously. So I'm on frequent customer calls on them on a frequent supplier of calls to make sure that we are getting those parts of their.
In terms of over ordering we have we have strong visibility and I can tell you from the dozens of customer calls it's it it's a real customer need it's not a it's not building buffers ex not a it's not the COVID-19 toilet paper shortage. This our ease of 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 parts 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 the in some parts of our business as we are significantly work to expand our visit.
The LD so the weekend 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 in many areas.
I feel the where are you know we're doing well in this difficult environment, but debt you know, it's going to remain tight for the foreseeable future.
Great. Thanks, Ken.
I think it's great that you can read of the have the balance sheet to use to your advantage because of certain of your competitors certainly might have that balance sheet to the buildup of as.
As needed per customers I guess my follow up question and I'll I'll pass the line of yeah. Thanks for sharing of the new monthly recurring revenue data that's pretty straightforward just just your thoughts longer term debt to get out of the supply issues. You know the 27% CAGR is that sustainable too low given the initiatives you have.
Of in place or too high given you're now growing off of a larger base on the law of large numbers just your thoughts on that and for a pack line just your best wishes to you on 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 the where 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, we had 25% growth in Q4, we had in the comps there we added M to M. A into our business in the early part of 2020. So this growth, which is even stronger than Q4 of them you know theres no theres no.
Hum benefit of that acquisition. It 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 the reporting MRI helps give a good view and and and shape to the CAGR, we do have some seasonality in <unk>.
But I think the the trend data is is clear.
We said in that we had a 27% over the past two years, 30% on the past year. So we are seeing that continue to improve.
Great. Thank you.
Yeah.
Yeah.
Your next question comes from the line of paying as much help of this from BMO capital markets. Your line is open.
Hi, good afternoon.
How should we think about the margins 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 of bad margins kind of going back to kind of the Q.
Q4 levels of what would your expectation there.
Hi, Santos things without all the I'll ask Sam to jump in here in the second but we're getting benefits of mix. So we're seeing increasing recurring revenue and our enterprise revenue, which has high margin was held back by supply and late quarter issues with the ransomware, where we had.
A lot of of our enterprise AR build plan for the last part of the quarter. So those those mixed elements helped 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 in the enterprise business, specifically, we had some increased cost due to some parts that we had to procure on the gray market.
So that's going to be a headwind for the next little while we're not giving.
The guidance on margins, but with 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 the went away.
In the future youre going to see improvement of but the in the short term, it's going to be about where it is.
Okay, and then as far as the Opex was there anything meaningful associated with the rents more talk from an op ex perspective, and then should we think about keep on being indicative of the run rate or the bandwidth there.
So cyber event. The 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 in the other expenses so not on 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 on the flip side, though or is there I mean I guess the critical.
Maybe travel expense is coming back or.
I don't think you had much benefit from the 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 on but we were non-GAAP it out.
Okay.
Okay.
And then finally, Kent in terms of.
I guess you mentioned some of the applications driving the five G and sorry, I don't think kind of caught as far as geographic area is that primarily a north American dynamic or what are you seeing that.
No we're seeing five G interest and demand globally. So we have significant activity going on in Europe.
With the demand for our <unk> products, we're selling to many of them routing customers globally that are looking to deliver and take our fiber modules and deliver five G. Connectivity, we have a number of customers and are in Asia, particularly in Japan with interest and then of course North America is.
Strong with the significant activity that.
You have seen from the carriers and the out and we've made announcements with the work with the T mobile and with AT&T and with Verizon who are all very active on the five G space.
And actually I mean, given the rapid departure of that should be a positive for our margins all else equal should it not I mean.
You've got some of the contraction edmunds going on but all else equal hire five team ex strike margins 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 the percentage basis because of the bigger ticket items and those prices will come down over time, and I think we will give us more opportunities, but we're still on the very very.
Early innings of <unk> as I said in 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 the number of people that are relying on us for their five G products, but theyre just of the early stages of those rollouts. So we will see that growth throughout the year and we think that the 'twenty 'twenty, two and as we get to.
Per the maturity of the standard will see a significant growth.
Great.
Makes sense of and that's where the spirit of retirement of that point.
Thanks Alastair.
Your next question comes from the line of Josh Nichols from B Riley Your line is open.
Yeah. Thanks for taking my question I'm really good to see the demand outlook for two Q.
Given some of the headwinds of the company faced in the first quarter could you provide a little bit more color on on what the expectation of is I know of gross margins were impacted by around the 100 bps quarter over quarter do you think you're able to maintain the current level or the expectations going forward with the supply chain.
Okay.
Yeah, I'll, let Sam elaborate on that.
Yeah like like I said earlier on with that of his question.
You know as we have better mix in the heart and growing high margin connectivity software and services revenue.
That mixed with the improvement in the supply environment will get more gateways and routers out which are higher margin. So that mix will improve our margin and then also having to buy more expensive parts on the gray market and the extra engineering costs to rework.
<unk> Oh, well in Peru, so in the short term I think it's a good level of where were at in 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 Companys enterprise pipeline and kind of doubled last year I know it was down a little bit of in the first quarter because of the ransomware attack.
How's the pipeline looking as we kind of moving until like the back half of this year. Its obviously higher margin fairly accretive to the business from what are your expectations on that from.
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 in the first half of 2020. So of the demand continues to be robust challenge to ship all of that product.
So it's not about it's not about the demand side too are the work we've been doing with the customers' products partners has been going very well and we see that continuing as we move forward. We think we're gonna be able to catch up on a lot of product in Q2, one particular supply shortage.
Part in Q1, we were.
Able to alleviate a lot of that late in the quarter. The bandwidth 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 of our customers that of the definitely need it.
And then last question from me I don't know, if you could or how easy would be able to do but if you could try and quantify the revenue impact regarding like the the cyber attack and also some of the component shortages I'm just trying to get a ballpark figure for you know how of much of an impact that had to the revenue for this quarter.
As I think about longer term opportunities.
Well I think that as you as you look at the I released the we'd played out we said that we had talked before that we thought that the impact of supply chain shortages of who's going to mean there'd be 15% orders above what we had on revenue 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 that you know are our midpoint of guidance is $1 20 for Q2, but we have the orders 20% higher than that number that will will have to ER.
Walk through the supply chain and get those shipped as soon as possible, but most of the sliding into Q3. So so that's sort of the the the nature of the world right now where we are we're working to get orders with as much lead time as possible anything that comes in a short meantime, this is likely going to be unable to get shipped as we as we work to.
You've got the component parts to be able to build those products.
Thanks for the.
Okay.
Yeah.
Go ahead Sam.
Oh, it's going to just mention that for the ransomware incident, we recovered quite quickly.
From that as you can tell from the you know.
The discovery to when we resume production. So you know you can kind of estimate from that a brief periods of what the impact would have been from the quarter and I think a few of analysts day.
Yeah.
Does that give the.
Answer your questions Josh yes, thanks for the clarification of appreciate it that's it.
Thanks.
Your next question comes from the line of Scott Searle from Roth Capital. Your line is open.
Hey, good afternoon, thanks for taking my questions.
The and the enterprise end markets, Ken I was wondering if you could provide a little bit of color in terms of where you're seeing the demand from an end market perspective of things like she births are starting to play in and then also the opportunity for recurring services in and around the enterprise router opportunity of kind of like Cradle point.
The type of services. So have you seen 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 you know we're seeing enterprise demand in a in a number of areas. So the S. C. B you're asked to specifically of your question that is driving demand were seeing quite of few quite of bit of interest in the in those deployment working with the number of of partners like Motorola and others on.
On on C. B R S deployment.
And so that's the that's a nice growth area of public safety remains very strong until we're.
We're winning a lot of business as of needs and are in public safety happen were also in our commercial area and with the utility and smart grid applications.
King of good growth in those areas, so where are the areas that we focus on are are all performing well and Oh, where we're focusing on.
Delivering product into that 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 of I think Ive mentioned previously, but a couple of years in 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.
Attach and the more sophisticated cloud support for our gateways to our customers. So we continue to drive recurring revenue. There are also in some instances, we will attack attach connectivity to our gateways, but for the most part of it's around our our cloud and the in support of gateways.
Great. Thank you very helpful 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.
The revenue line did 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. You know is this going to be a 25 per cent gross margin business in 'twenty, two assuming a normalized component environment or is this something where you could get the 30% plus and 10 of best of luck on your retirement.
Thanks, so much.
Okay. Thanks, Scott.
I think that if you know we we worked to pivot to solution. So we're not just selling a module we built in our ready to connect.
The built in Sim technology into a module so that we can drive the connectivity and so sometimes the gross margin on the module, maybe very low, but we're adding a high margin recurring revenue streams of that so as the slight timing differences, you'll sell the module and recognize that you know low 'twenty gross margin, but then you're seeing 40 to 50 per cent per <unk>.
On 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 deployment is increasing as we increase our attach rates on the competitive environment remains very tight on the module side and that's why we came up with our strategy of being the complete and trusted Iot solution leader is being able to prove.
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 on our recurring revenue growth of where.
We're winning out in the marketplace with that offer and the debt we expect the competitive environment on the module the only space will remain tight, but 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.
Oh, thanks, very much good afternoon, just the.
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 of is hoping you could sort of outline the for next quarter with some of the moving parts of the cash flow.
Sure Hi, Paul and I'll, let Paul and I'll, let Sam jumping on that one.
Thanks, Ken Thanks.
Thanks for the question Paul.
You're gonna see revs.
The revenue improved they're gonna see Opex, we've already seen that big improvement.
In 2021 versus 2020 from our cost reduction initiatives.
So you'll you'll you'll start to see kind of better cash from operations.
Youre going to see a little bit of continued investment and working capital.
As we are combating the unprecedented the environment in supply.
And you'll see some recovery in the AR from the ransomware incident in terms of insurance recovery plus.
Plus being able to do our AR factoring program, which we'd do it on a pretty low cost around 1%. So.
Those are the the big moving pieces for the quarter.
So is it is it right to characterize it that the debt.
The the factoring the benefit from factoring coming back and maybe that that recovery the of the insurance recovery of little bit there would be offset by the investment and on the supply side.
That's the basically the right way to think about it the other big investment in the quarter I'm not huge numbers, but we're investing in next gen. Five G. So we're we're a big believer in five G M, where we're putting some investment in capex dollars. There so that would be a another sort of the smaller piece, but.
But yeah, that's a good way to think about it.
Okay. That's helpful and then.
Okay.
Can I mean, the good luck in your retirement.
On the you mentioned that would be the last conference call is there an update on the the CEO search of United I noticed some on costs in the quarter.
How is that going and when do you expect that to be completed.
Sure.
Thanks, Thanks for your good wishes of the CEO search is going well and the board's run on a straw.
Strong process the seen many good candidates.
They've converged on a candidate at this point and expect the you'll see us make announcements early in Q3, so I likely I'm gonna be around a little bit longer than my June 30th the target that I had put out there, but expect it will make that transition. So my goal is to deliver a very strong Q2.
And then help our very successful transformation of building off of the momentum that we have and so you'll you'll you'll hear from us in Q3 in that regard.
Okay, Great best of 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 ear of Securities. Your line is open.
Hi, everyone. Thanks for taking my questions.
I wanted to start with five G and sort of the competitive environment there as it relates to the hardware piece alone and then the entire solution now how do you feel about your product differentiation, you know versus what's out there and you know do you guys expect the take share of the market as of this five G rollout accelerates.
I'm sure I'm going to talk to you Derek Thanks for the question. So we've done.
Well on <unk> and Sierra wireless has great history in depth of bringing new air interfaces to market, So where really the trusted partner in the industry and it was three GKN has forged he came and now with five G. So we've been able to deliver the product and <unk>.
Very complex lot of you know on 10 of challenges and you know obviously.
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 router industry 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 of 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.
Of that they had seen from a overall performance and management perspective, So where you know where we're proud of on both aspects of that what we're doing with the.
<unk> technology to provide the high bandwidth and low latency connectivity link and then being able to leverage that into our gateways for customers that are looking to take advantage of that so where are you know where the.
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 in the five day space.
Great and then just a quick question on the two new segments, you know as it relates to recurring revenue I'm wondering how much of that recurring revenue that you report is coming from the separate of Iot.
And enterprise solutions of you can kind of split that out.
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 of you know are in the in the enterprise solutions piece as well so.
No.
The 60 40 ish would be.
Trying to think about.
That's helpful. Thanks, guys.
Thank you.
It does flow right now close the part questions right no questions in the queue I would now like to turn the call back to kind of hockey stick. Please go ahead Sir.
Thank you well. Thank you everybody for participating in our Q on earnings call and the and good questions. I said of the vision in 2018 2019 to transform Sierra wireless to the leading Iot solutions player with the complete in device to cloud offers and so as you can see we've innovated and our solutions offers and rebuilt our go to market to help customers quickly.
At the Iot deployments, delivering valuable edge data and control.
We've been winning valuable design wins over the past two years and the hard work is showing with our strongly growing connectivity software and service revenue of new definition per our recurring revenue.
I'd like to thank the dedicated and hardworking team of Sierra wireless for driving the successful transformation. So thanks to all be speaking to many of you in the coming days.
While our focus on delivering a strong Q2, all the best tiers.
Yeah.
This concludes today's conference call. Thank you all for joining you may now disconnect.