Q2 2021 Sierra Wireless Inc Earnings Call
[music].
Good day and thank you for standing by welcome to the Sierra Wireless second quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telly.
Phone if you require any further assistance. Please press star zero. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Mr. David claiming vice President of Investor Relations. Please go ahead.
Thanks, and good afternoon, everybody. Thank you for joining today's conference call and webcast on the call today are Phil brace President and CEO, 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 Phil will provide his introductory comment.
Chad will provide a detailed review of our second quarter results followed by Q&A before we get started I will reference the company's cautionary note regarding forward looking statements a summary of our cautionary note can be found on page two of the webcast and is now being displayed 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 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 incorrect additional.
Forward looking statements are based on 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 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.
Draw your attention to a longer discussion of our risk factors in the Aif and MD&A, which can be found on SEDAR and Edgar as well as other regulatory filings. This presentation should also be viewed in conjunction with our quarterly earnings release with that I will now turn the call over to Phil for his corporate update.
Thanks, David and thank you for everyone for <unk>.
Joining us on the call today.
We are pleased to report results for the second quarter 2021.
Total revenue in Q2 was $113.8 million, an increase of 19% compared to the same period of 2020.
Revenue from Iot solutions increased by 16% year over year to $93 million and revenue from enterprise solutions grew by 25% to $42.5 million.
Revenue from connectivity software and services increased 31% at $35.2 million, reflecting our continued success in generating recurring revenue.
Non-GAAP Opex was flat sequentially from Q1 and down 13, 6% from Q2.2020.
Our adjusted EBITDA improved from negative $8.7 million in Q2 last year to positive $4.3 million in the second quarter.
Before I hand, the call over to Sam to review the Q2 financials in more detail I thought it would be helpful to provide some background on why I joined Sierra wireless and to discuss some of the actions that I'm driving in the short term.
For more than 25 years I've been working in high tech across all areas of hardware software and services.
Most recently I was the EVP of field operations at Veritas Carlyle private equity company.
While at Caritas I made significant changes to streamlining and improving operations and the integrated appliance business software defined storage and finally all of the go to market activities.
He has significant profitability improvements.
Across multiple companies, including income LSI, Seagate and Veritas I have an established track record of business performance improvement across a range of industry.
When the opportunity of Sierra Wireless was presented to me. It was quickly apparent that there is much potential to be unlocked.
The macro trends of Iot and <unk> are accelerating and Sierra is well positioned to capitalize on these trends.
CRE has a broad portfolio of leading wireless modules gateways routers and a rapidly growing connectivity solutions business that leads to strong recurring revenue growth.
The worldwide Global pandemic has also accelerated the needs for our customers to be able to remotely connect and manage a wide range of devices in the field.
Yeah as the trusted western Iot supplier is seen as a preferred partner with its global reach and coverage.
As the new President and CEO I see myself as a steward of shareholder capital and I take that responsibility seriously.
I recognize that investors have other places they can invest their money.
You'll find me to be direct results oriented and with a clear focus on building a profitably growing business.
In the past two weeks I've been spending time meeting with as many customers suppliers partners and employees as possible in both Vancouver and Atlanta.
And while I expect to continue to do more of that going forward. My immediate short term focus is on the operating performance of the business.
We are currently facing an unprecedented operating environment with the global impact of COVID-19, and a tight component supply chain.
Our tier one contract manufacturer builds a significant majority of our cellular modules and gateways.
Facility located in Vietnam, which has been impacted by an increase in COVID-19 cases in the last two months.
This has led to widespread disruptions across the country significantly impacting our ability to manufacture and ship our products.
We are taking five immediate actions to mitigate the situation.
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Working with our contract manufacturer to subsidize the cost of isolation hotels for their workers with the goal of resuming full production as fast as possible.
Number two ramping up two additional manufacturing sites, including one in Mexico to diversify our geographic production and increase our manufacturing resiliency.
Number three investing in parts and components to enable us to fulfill our customers orders as soon as possible. We are using our strong balance sheet to play offense.
Number four we're implementing strategic pricing increases to help offset some of the additional costs and investments while balancing the need to remain competitive in the market.
And number five we are controlling our opex and capex spend in the second half of this year to ensure we are controlling what we can control.
I already have Sam and the team working on those initiatives.
We do believe that the significant challenges we are experiencing in Q3 are temporary.
Our demand remains very strong and I believe we're taking the right actions and initiatives to navigate through them.
Orders that don't ship in Q3, and we expect to ship in the fourth quarter and in some cases into Q1 of 2022, resulting in a solid recovery.
Subject to COVID-19 externalities.
Going forward I'll be focused on strategy alignment and execution, along with prudent allocation of capital.
Im excited and humbled to be working with such a highly qualified and experienced board of directors to unlock the potential of Sierra wireless.
Finally, I would like to thank our employees, our customers and our suppliers as we collectively work through the COVID-19, interruptions and tightness in the supply chain.
Together, we will thrive.
With that I will turn the call over to Sam for his review of the second quarter results.
Thank you Phil good afternoon, everyone.
Note that we report our financial results in U S dollars.
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 second quarter was $132.8 million up $21.1 million or 18, 9% compared to Q2.2020.
We were able to achieve higher than expected revenue in Q2, despite the tight supply chain as we secured additional parts during the quarter.
Connectivity software and services revenue was $35.2 million in Q2 up $8.3 million or 38% year over year.
Non-GAAP gross margin in the second quarter was 34, 9% similar to the prior quarter as higher component costs were offset by our higher margin gateways sales as well as connectivity software and services revenue.
Our non-GAAP operating expenses in Q2 were $46.4 million down $7.3 million or 13, 6% year over year. This reflects.
Cost efficiency initiatives that we've been undertaking over the last 12 months.
Sequentially Opex to remain flat with the prior quarter.
Our adjusted EBITDA was positive $4.3 million compared to an adjusted EBITDA of negative $8.7 million a year ago.
The improvement in adjusted EBITDA reflects the year over year growth gateway revenue and the increase in our higher margin connectivity software and service offering as well as tight Opex control.
Revenue in the Iot solutions segment.
It was up $12.7 million or 16, 3% year over year.
This increase is primarily due to growth in our hardware revenue and Iot connectivity business.
Mentioned, we were able to purchase additional parts and components in the quarter that allowed us to build and ship product to our customers.
Revenue in the enterprise solutions segment increased $8.4 million or 24, 6% year over year.
The increase was primarily due to improved sales and delivery of our gateways and routers, despite tightening some manufacturing capacity and component.
Looking at non-GAAP gross profit in the second quarter compared to a year ago total gross gross profit was $46.3 million or 34, 9% in the second quarter comps.
Compared to $41 million or 36, 7% in Q2.2020.
The improvement in gross profit dollars is primarily due to a growing connectivity software and services revenue and improved gateway sale.
Moving to the balance of it.
We ended the second quarter, 'twenty, 'twenty, one with $185 million of cash.
Cash flow from operations in Q2 was $15.3 million, which included approximately $20 million in factoring of receivables during the quarter.
Capex in the second quarter was $6.5 million, which included purchases of five G New test equipment and software licenses.
As a result free cash flow in Q2 was $8.8 million.
During the quarter, we continued our strategy of investing in inventory to secure the supply of components, we purchased $3.5 million worth of shares in the open market under our RSV program.
As a result, our cash balance at the end of the second quarter was $118.5 million, an increase of $6.3 million sequentially.
In Q3, our manufacturing capacity has been significantly reduced due to the COVID-19 related production interruptions in Vietnam.
In turn is expected to have a significant impact on revenue gross margin dollars gross margin percentage profit and cash.
The impact to gross margin percentage is due to having less absorption of fixed costs spread across the world where expected unit volumes as a result of the factory interruption in Vietnam.
The expected reduction in cash in the quarter is approximately $60 million due to our strategic investment in inventory to ensure a strong recovery from the production interruption and reduced our factoring program arising from reduced sale.
We expect this to be a one time impact to Q3 related to the production interruptions in Vietnam, and we expect to recover over the coming quarters as working capital normalizes as we increase production.
To minimize the impact on cash and profit the company has delayed or canceled noncritical capital expenditures.
We've reduced travel expenses.
The later canceled noncritical operating expenses implemented a hiring freeze and reduced its marketing spend.
The impact of the COVID-19 pandemic on our global business continues to remain uncertain.
While we continue to.
You're used to evaluate the effects on our business the overall severity and duration of adverse impacts related to COVID-19 on our business.
Angela conditions cash flows and operating results for 2021 and beyond cannot be reasonably estimated at this time.
Demand for our products remains very strong however, as he mentioned we are experiencing production interruptions due.
Due to COVID-19 cases at a contract manufacturing facility in Vietnam.
Impacting our ability to build and ship cellular embedded modules gateways to our customers in the third quarter of 2021.
While limited production has assumed that the Vietnam facility and we are currently building our resiliency by ramping up multiple locations, including our new Mexico site for gateways and routers.
The ongoing impact of these interruptions is highly uncertain.
This is expected to have a material negative impact on our financial condition and results of operations, including production capacity revenue gross margin percentage gross margin dollars profit and cash in the third quarter of 2021.
Given these uncertain conditions, we will not be providing guidance for the third quarter of 2021.
We believe we are taking appropriate steps to navigate through the impact of COVID-19. This quarter, we are benefiting from very strong customer demand and backlog for our products and solutions and believe the macro trends of Iot and <unk> are accelerating.
We are also using our strong balance sheet to strategically invest now secure components and capacity to ensure a strong Q4 recovery coming out of the COVID-19 related production interruptions in Vietnam.
That I will now turn the call over to questions. Operator, Please open the lines.
As a reminder to ask a question you will need to press star one on your telephone so do I get a question press the pound key please standby, while we compile the Q&A roster.
We have my first question from the line of Mike Walkley from Canaccord Genuity. Your line is now open.
Great Congratulations on the strong results given the tough supply environment and.
And Phil Congratulations on taking over as CEO I've heard good things about you from my industry trends.
Got it thank you.
Yeah.
So most importantly, best wishes to your partners and Vietnam dealing with the Covid surge Wow. This is impacting your ability to meet the growing demand in the entire industry is struggling to meet demand, but can you help us just think or at all the impact to Q3, while it's obviously tough to predict given the alpha.
And then they can watch what's going on in each week, but can you help us just think about the impact to Q3.
Yeah. Thanks for thanks for opening remarks, and thanks for the question.
The impact of COVID-19 disruptions in Vietnam will be significant for us in Q3 are the primary reason, we can't provide guidance is really related to the uncertainty around the pandemic and the continued potential disruptions.
Our revenue in Q3, it's really going to be highly dependent on our manufacturing capacity output. How many products. We can actually build the availability of the components and to get them in and out of the country and then the ability just the mix of the products. They give you a little more color.
The disruptions started in early July.
And as a result, theres been very little minimal output from the manufacturing side that produces the substantial majority of our products.
The facility is located in Ho Chi Minh City.
Where along with other companies in other industries that are affected there.
And it's important to note that in addition to the manufacturing disruptions. We've also seen disruptions in things like.
Logistics shipping and customs.
It gives you a little bit color, we're working very closely with our contract manufacturer to ramp up their production as soon as we can and we're aiming to get normal production levels back as soon as possible, obviously subject to further COVID-19 outbreaks and component availability our plan. Our five point plan. We're talking about is working with our contract manufacturer to bring.
Production back up as fast as we can including isolating our workers as possible ramping two additional facilities to increase our geographic resilience continuing to invest and component supply to make sure that we can build the products and when we can start manufacturing them again.
Implementing strategic price increases to help make sure we can absorb and where possible pass along some of the cost increases that we're experiencing and we're controlling our expenses, including allocating every dollar we can too.
Helping solve some of this production related issues in manufacturing constraints them and I think as David talked about the thing we feel great about as demand remains incredibly strong.
We are anticipating many of the orders to be able to be fulfilled and in the next quarter and certainly in the subsequent quarters after that.
And you know I do think it's important to know we are we are still seeing a fairly tight component supply chain.
That we have in front of us as well so hopefully that gives a little color on in terms of where we are.
Yeah.
Very helpful and maybe just a follow up it.
It sounds like you think the disruption could be under control by Q4, I know, it's hard hard to predict but do you think your any risk of losing share I know the whole industry supply constrained, but any risk of your customers having to go to other other areas or any feedback from your customers that they're willing to wait for the issue to resolve.
We've had Ah you think everybody in the industry is dealing with these these things in fact, many of them and all of the customers I've talked to of course, they've been anxious to get as many parts as we can we've been working to try and make sure. We are satisfying their most critical needs as possible to make sure. They don't go into any sort of.
Supply continuity problem with their own and many of them had been very understanding is they've been dealing with their own supply situations not just from us, but other vendors as well and so.
I think to the extent that we don't see anything moving away, but obviously if customers have multiple sources of supply they're going to they're going to look to that but in general the feedback I've had from customers is they have been very understanding they're working with US collaboratively. We're trying to do so in a transparent straightforward manner.
And really we're trying to work collaboratively with customers. Many customers. We've had for a long time, they're kind of hard to replace so we're not seeing any you know any movement along that area right now, but you know we're just something we're just continuing to do day in and day out working with customers.
Last question for me and I'll pass it on just as you look at the competitive environment in the cellular router Gateway business. Yes, there has been a leader in this business for a while a lot a lot of.
Change of your new CEO create a point to is now part of a big big operation within Ericsson and <unk> on their last earnings call. They just announced that they've hired a new industry veterans to try to change the leadership within their cellular router and gateway business. So how do you look at Sirius position that business once you get through the supply issues.
The longer term growth drivers.
Yeah, It's a great question honestly been or whatever.
Three weeks or three weeks not even quite full three weeks yet. So I think it's still early days for me, but I've been really impressed with that particular portion of the business I think it's it's got a great very attractive market to be and that's going to continue to grow and I'm encouraged by some of the focus on the sub segments public safety and the like I like the private radio bands that are happening.
There tends to have higher software attach rates. So I generally like the business and are going to be continued focus on that you know of course, when we have the five G drivers there as well we've got very strong product reviews for our five <unk> product and I think the customer reception to that has been great. So.
I'm initially very positively inclined with that.
Great I'll pass the line and best wishes to your partners in Vietnam.
Thank you.
Okay.
We have our next question from from Anthony Anthony.
From Craig Hallum. Your line is now open.
Thank you Phil welcome aboard also.
A question for you.
I know, you're saying that the majority of our large portion of your production is done in the Vietnam facility can you give us a.
More approximation is at 75% or higher.
And also it.
If you're trying to bring up Mexico on another facility have these facilities ever produce parts for you before how long before their lives.
And then I had a couple of other follow ups after that.
Yeah, we're not giving specific numbers out on what they are but suffice to say the significant majority of our parts were built out of there. It answered your question the move to to diversify our geographic based manufacturing base actually was started before we've seen some of the latest disruption. So some of this transition is is.
Well underway one of the facilities has in fact built products for us before.
And the second one the new one we are undergoing a qual now and have been working on that for quite some time, which is why we're able to bring it up faster than you might you might think so.
Okay hypothetically if your.
I'm, just gonna make up a number $50 million of revenue is getting impacted in Q3, how much of that impact would probably hit or you'd be able to ship in Q4, an additive or maybe give us a sense of kind of Q3 and Q4 combined if you could.
Yeah. That's a good question, it's probably early for us to do that I mean, and the reason is it's just difficult to predict when we're going to get back up to full capacity I think our goal really is to be back up as close to we can in the fourth quarter and then start burning through some of the snowplow. If you will of our orders and then I think you know frankly, we could probably.
<unk> be back in a situation, where we're capacity constrained by component supply again so.
It's a whack a mole situation right now we're just trying to deal with with one one situation at a time and.
Try and fulfill as many orders as we can.
Okay I'm curious in terms of the inventory you do have in hand, how much of that will we'll be able to you know for you guys to use in Q3 or are you still missing some raw materials that you're not being able to turn into finished goods in Q3.
And I'll, let Sam go into the specific details, but I would suggest with respect to inventory I mean, most of the inventory youre going to see.
On the balance sheet that we're accumulating most of it is raw materials in terms of component supply that's the vast majority of it.
Obviously, we are in production.
In Vietnam. So we are continuing to burn through it but the vast majority of the inventory build would be components.
Hey, Tony It's Sam here. Thanks for the question. So, yes, we will build up some inventory because our capacity is.
We'll do it because of the COVID-19 related shutdowns and interruptions, but that will normalize that working capital over the coming quarters and bring that down so that will be converted to cash over the next two or three quarters.
And it's all new purchases et cetera, So I'm.
Ready to go to the film products for our customers.
Got it good to hear your voice and I guess the last question for me probably for both of you guys.
Your order book or your visibility into 2022.
I know this is a tough period, you're reaching out to customers give a sense of guys are giving you more.
Visibility because of this into 2022 I'm curious your thoughts on your ability to produce everything that you get orders for 2022.
Yeah. That's a good that's a good question I would say in general we have seen increased lead times, our customers are giving us orders further out in time. So we have seen increased increase.
Increased backlog for the outer quarters more than we've seen before so I would say customers are recognizing that and theyre starting to give us longer lead time orders. So I would say the answer to your question is yes, we're starting to see more of that.
Okay. Thanks for all the color I'll jump back in line. Thanks.
Thank you.
We have our next question from Los Angeles is Michelle Pole Lewis from BMO capital markets. Your line is now okay.
Hi, Good afternoon, Phil welcome as well.
Regarding so when the recovery does happen would you expect gross margins to I guess recover kind of inline with revenue as revenues pick up or might there be some kind of a lag there associated with you know some dishes ramping up new facilities and so forth.
Yeah. That's a good question I mean, I mean, I think as Sam mentioned.
We're going to see a gross margin impact of result of fixed cost amortization offers a smaller unit volume I do expect to see that we would have a recovery.
In gross margins as we do ramp up so I think the short answer to your question is yes.
Whether there's particular timing of that it's.
Probably too early to tell but I think the general answer. Your question is yes, and Furthermore, I commented that we are pursuing strategic price increases to help offset some of the incremental costs. We are seeing we should see some benefit of that in the Q4 period.
And as far as the Q3 disruption.
If you look at modules versus gateways should the impact would be sort of similar or is there. Some dynamic there are recognizing that module gateways, but.
Prioritizing gateway shipments or what's the dynamic.
No I think.
We're not right now we're just trying to build every every product we can and.
You know certainly we have some strategic module customers who've been with us for a long time that we need to supply we're trying to build their own some of the gateways as well so.
There is no no additional color we're going to provide on that I think it's fair to say that the supply disruptions have been uniform across our product lines.
Okay, and then on the components I mean, I guess, maybe less relevant for Q3 since that's not as much of the constraints, but over the past quarter and how is the situation to Bob would you say, they're relatively consistent or has the component.
It's gotten any better or worse.
Oh, well you know I don't I don't have the benefit of of history, but I do have the benefit of lots of experience in the space.
So it's hard for me to say, whether it's worse than prior I would I would probably say it would be relatively consistent from what I've seen I havent seen anything dramatically worse or otherwise I mean, I think as you go through I mean, we're seeing tightness in supply across a wide range of components and even when you go down even into the sub components wafer supply 40 nanometer 65 nanometer wafer.
Hi, <unk>.
Straights or tied packages are tied memory, it's tight.
Just across the board, we're seeing tightness.
The spot or spot changes here and there sometimes we'll pick up some more availability on certain parts of our others and <unk>.
Right now, we're certainly planning on a tight material supply chain until probably mid 2022 is our current planning horizon right now.
And one thing to remember you know, we made that big investment in Q1, and parts and that helped us generate a very strong Q2 and to really improve on Q1 into Q2, we're doing that same thing in Q3, now with the Covid related interruptions, and making that investment and plan on converting that to a stronger quarter.
As well so.
The supply constraints are consistent but we're getting ahead of it the best we can get products to our customers.
Great. Thanks, guys I'll pass the line.
Okay.
We have our next question from the line of Scott.
Scott Searle from Roth Capital. Your line is now open hey, good afternoon. Thanks for taking my questions, Phil Congratulations and welcome aboard nothing like starting a new role in the middle of a pandemic.
He just I think you've answered this a couple of ways, but it sounds like the Vietnam disruption is uniform it's across the board. It sounds like it's modules. It sounds like it's gateways I assume that extends as well in being able to feed the recurring revenue engine of growth. If you will in terms of being able to supply modules into that and grow the cloud business going forward at least in.
The near term.
Yeah, that's correct I mean clearly the.
As we shipped less units theres less stuff to attached to so I think it's a fair assumption that we will have a corresponding effect on the recurring revenue growth gotcha and to follow up quickly the loss of share or in terms of the competitive landscape are you seeing any loss of share during this environment.
In terms of not being able to supply product to some of your key customers near term.
I don't think we're seeing we're not seeing it every conversation I have with the customers. We're trying to work to fulfill their bare minimum demand and they've been very supportive of working through that honestly. However, if they have multiple sources of supply they're going to exercise that we haven't seen that yet to date.
And we're just working with our customers to make sure that we try our best to do everything we can to share that with them where we are.
To get their help where necessary and to give them as much as much supply as possible gotcha and it sounds like youre expecting normalization at some point maybe by the end of this year as we kind of work through this process, but I just wanted to clarify what normalization means the second quarter results were a lot better than expected in fact, the first quarter results were reported the expectation was.
There was some demand being left on the table because of an inability to supply I think 15% plus upside you guys have done a good job being able to service that in the second quarter and demand I think throughout the industry has really been off the charts and unprecedented at this point is that the base level in the June quarter that we should be thinking about both from a module and a gateway standpoint and to build on that.
Going forward as kind of a normalized number or are there. Some one time events in there end of life sales or something like that.
No I mean, I'll, let Sam comment specifically there were no. There was no. What you saw in Q2, I think was a reflection of strong demand across all of our product lines.
We were constrained.
By our component supply at that point, so I would expect that that trend to continue there wasn't any last time buys one time purchases any of that kind of stuff that that I'm aware of that happened in that time.
So I would you know we're trying to carefully balance where obviously, we're bringing up as much manufacturing capacity as we can but again, we'll probably end up getting back into a component shortage situation right will be tight on the component side.
Probably through the first half of 2022.
Okay and.
And lastly, if I could and this is probably an unfair question given you're about three weeks in but looking at the gross margin profile.
You kind of back into where whether it was embedded or the historic module business. It looks like gross margins are somewhere in the mid teens, certainly being impacted by incremental supply chain costs. Similarly.
On the recurring side of the business gross margins in the 40% range I'm wondering if you gave us some high level thoughts in terms of where you think that could be as we look out.
In a more normalized environment 18 months, what are the targets what are the goals again I understand it's probably not a fair question, but I figured I'd throw it out there. Thank you.
No I appreciate you asking the question in and you'll probably appreciate answer better I, you know I'm not going to give you a specific and I'd say, it's probably too premature for me to say that.
What it might be but suffice to say that I think there is a lots of room for improvement with respect to our overall business model performance, whether it comes to cost efficacy opex spending pricing. There's a lot of things that we're going to be looking at to improve the business performance I didn't I didn't come here to keep the same.
Great. Thanks, so much and welcome aboard.
Thank you.
Next question is from the line of Josh Nichols from B Riley. Your line is now open.
Yeah. Thanks for taking my question, sorry, if I touch on something that was asked before mine connection has been that great but.
What percentage is the facility in Vietnam currently operating out and how long until you're able to pull back up at that facility and the two new ones until youre at least state.
Where you were in like the <unk> quarter before the Covid impact.
Well we're not.
At.
It's somewhat variable I mean, where we have improved our output since earlier in July so I was saying we're making.
Good progress on that front and our current expectation is what kind of.
B back to what I'll call normal manufacturing output in the fourth quarter some time.
And that includes ramping up new facilities, the new facilities I've talked about so.
Yeah.
And then the cash impact that you're expecting in the third quarter for these like five initiatives right.
To help get things back up to speed on the manufacturing front, if you could kind of help frame.
Frame that.
Yes, I think what Sam that I mentioned is we expect the cash impact in Q3 to be about about $60 million I think it was what you said, Sam and I think that some of that is really due to.
Our inability to factor the accounts receivables due to less product being shipped and that some of it is.
Continued purchase of component inventory and things like that we do expect that to normalize those obviously with.
We turn that inventory into finished goods and sell it so.
Mhm.
And then last question for me I'm, just curious about you you've been at.
Produce some five G products right, but typically are higher margin what are you seeing as far as the demand has that been.
Being pushed out a little bit more and more people are just focused on getting anything whether that'd be legacy products or not or.
How we should think about the <unk> product cycle, given the current supply constraints that we have.
You know it's.
It's.
I don't know, whether we know enough to give you real good data on that particular question because we've got strong demand for all of our products frankly, including some of the legacy products that people have and stuff that theyre not redesigning, but I would say that the five G demand from what we can see.
News to be very strong, we're getting very strong feedback from our customers on the competitive positioning of our products.
And where we sit relative to that so.
That continues to be good both of them that gave me a router side as well as module side. So I don't I don't see any sort of delay.
In the <unk> ramp and I think you're still probably in the 'twenty two 'twenty three time frame before you really start to see some major deployments there.
But that's kind of where we are.
Thanks, I'll hop back in the queue. Thank.
Thank you.
Next question is from the line of Derek Soderberg from Carnegie.
Securities. Your line is now open.
Hey, guys. Thanks for taking my questions my congrats as well on the good quarter in Q, Phil for joining the team. It looks like <unk> is kind of flat quarter over quarter can you quantify at all or provide any color on you know attach rates of software connectivity or both how are those.
Trending.
And then the supply environment. Phil are you guys prioritizing shipments I suppose in the areas that you can based on wins with services attached just how are you planning on allocating that hardware that you have.
Yeah. So the first question I think you add would add was on kind of the MLR. The monthly recurring revenue and kind of the or what's happening with that that's a little bit lumpy really having to do with timing.
Timing of when that product gets gets sold and shipped and stuff like that we've actually grown it really nicely year over year and I expect that growth to continue.
From that side, so I'm not particularly.
No.
There is no particular.
Thing in there that I'm very worried about it I do think that our connectivity is obviously attached mostly to our devices. So less devices you ship the attach youre going to get so I think there is some factor there, but with respect to what was reported in Q2, it's just a little bit lumpy grew really nicely year over year. So that was that was fine and then your other question is on prioritization.
<unk> of of our.
What we're making and what we're selling and are we buying some stuff.
You know really we were just trying our best to we have an algorithm. We certainly have customers that need our neuromodulator that were designed in that they can't design them out of the sand we have a responsibility I think as a trusted supplier to help make sure that we do everything we can to get them there regardless of whether they are.
Higher or lower than our own margin profile and so I think we are just trying to take a very customer oriented view about this.
And really trying to work through situations, where we're balanced so I don't think we're taking a particularly.
Lens on it that goes okay. If.
If we apply more here or not and I.
I think frankly, we're just in such a such an unusual situation. We're trying to take a customer oriented view going back to the the share perspective, and we're just trying to work through revenue, we can on a customer by customer basis.
Got it and then.
Your electric vehicle charging customer no they've got this infrastructure build here in the U S. It looks like the charging stations are sort of part of that.
Moving forward pretty quick.
Are your conversations going with your EV customer.
Worried that you might lose share at all if this opportunity moves pretty quick any thoughts on that would be great.
Yeah, I think look the that that infrastructure bill that was a that was passed.
I think it has a number of areas that are really benefit us benefit us long term and then you noted the EV charging I think there was some of the electric grid, there as well a lot of the a lot of the segments that we play in.
Do do really really well so.
Again, I don't with respect to share loss.
We're working with every customer we can and we're just trying to ship all of the products. We can we're not aware of any share loss, we have but.
You know obviously, that's dependent on on their own particular supply situations.
Great. Thanks.
Okay.
We have our next question from the line of Paul Treiber from RBC capital markets. Your line is now open.
Thanks, very much and good afternoon.
Welcome aboard Phil.
In terms of the disruption in production.
When you look at demand you know what portion of demand is perishable like in other words I mean do you expect to make up that production shortfall in subsequent quarters and you can fill that demand.
Demand subsequent quarters.
Yeah, we're not we're not seeing any of the demand being perishable, we haven't seen any order cancellations.
We've been working to reschedule as much as we can from that side. So we don't we don't believe it's perishable at this point.
And we've been working to try and reschedule it and work with our customers to figure out their absolute critical needs and what we do and frankly I think they're working through their own every customer that I've talked to that has their own. We are about one person they're talking to in terms of other supply situations right. We are not certainly not the only one.
That have supply situations, even in our own customer base right. So I think they are playing the whack a mole game with their suppliers just like we're playing with our suppliers. So.
The short of it is we're not we don't see it being perishable just pointed out and our customers are giving us longer and longer lead time orders to help compensate for that tour I'll set up give us visibility on what they expect.
Well if you can point they are on the cash impact of 60 million.
You mentioned that should normalize like should we expect all of that is normalized. So is it really just is this a do you see the cash impact of the timing.
It changed and that timing or is there some of that that permanently lost.
Hey, it's Dan here, let me give a bit of detail on that so a part of it they are factoring unwinding.
Did about $20 million this quarter, we're gonna have trouble maintaining that with less unit volume, especially in the geographies, where we can factor the U S mainly.
Part of that is going to be the strategic investment in inventory for a strong recovery, which we've talked about those two things will normalize over time now the decrease in operating performance that would be a onetime hits.
But the majority of it is working capital and will normalize over time.
So where should we think about it.
Two thirds one third.
I'm not going to get too exact but you know 60.42 thirds, one third it's a fluid situation and it's an estimate but.
If I could do you have enough information to update your models.
That's helpful and then just last one bill.
You mentioned you know when you're looking at the operations that you said you you didn't join us at least think that.
He said unchanged.
At a high level view you know what's your view on the company's strategy you know what the product lines. The company has that the services business.
What's your thought on the synergies between them and maybe you know areas, where there may not be synergies between them.
Yeah. It's early days on that so I'm you know I would say look why what am I.
Excited about right I think that the macro trends of <unk>, and Iot and I, particularly like the position in southern Europe I think those are all very good things.
Modules enterprise and the services that go above that I think are also a powerful drivers for US obviously, we have some other other businesses I mean, frankly right now I'm focused on the major.
Situation right in front of me, obviously, we have some other smaller businesses that are now I'll take a look from time to time and see I mean right now they're there.
Not an area, where I'm spending a lot of time on just to be honest with you and so I think that I'm I'm just focused on kind of the main business at hand, but as it goes forward I think we've got lots of different strategic options and.
It will be we'll be looking at.
How we grow shareholder value with all elements of what we have.
Okay, great. Thanks for taking the question.
No further questions at this time I turn the call back over to you presenters.
Thank you Mei and thank everybody for coming and joining us on the second quarter earnings Conference call.
Certainly check our website for or additional materials, our Powerpoint presentation of our earnings release, and we're available please email or call us at any time. So thank you and operator, you can now terminate the call.
This concludes today's conference call you may now disconnect.