Q3 2021 Sierra Wireless Inc Earnings Call
Brian Maclean is reporting to me as senior Vice President of operations, overseeing manufacturing procurement and quality.
The <unk> team will be a new vice president of supply chain, who comes to us with more than 25 years of supply chain experience in silicon valley, including momentum in Seagate.
I've asked Jim Ryan to take on the role of senior Vice President product partnerships and marketing.
The product management team I'll submit that Sierra will now be consolidated under his leadership.
Steve Harmon is moving to a new role as senior Vice President of global sales Steve.
Steve will be adding the European and Asian regions together with his Americas sales team, so that will streamline and improve our go to market efforts worldwide.
As a result of these changes the new leadership of tiara is smaller more efficient and with clear roles and responsibilities.
I would like to take the opportunity to thank those leaving the company for their contributions and service.
In conclusion.
Our demand remains very strong across our product lines and.
And we expect again to be supply constrained in 2022.
We have made significant progress getting the manufacturing lines back up and running with increased geographic diversity, including a new facility in North America.
We have a new leaner management structure with clearly defined roles and responsibilities that enables a clear focus on profitable growth in 2022.
I would once again like to thank our employees our customers our suppliers as we collectively work through the challenges of the COVID-19, pandemic and the type of global supply chain.
Together, we will Friday.
With that I will turn the call over to Sam for his review of the third quarter results.
Okay.
Thank you Bill good afternoon, everyone.
Note that we report our financial results in U S dollars and on a U S GAAP basis.
We also present non-GAAP results to provide a better understanding of our operating performance.
A full reconciliation between our GAAP and non-GAAP results is available on our website.
Total revenue in the third quarter was $82 5 million compared to $113 4 million in the same period last year.
Connectivity software and services revenue was $35 2 million in Q3.
$5 4 million or 18, 2% year over year.
Gross profit in the third quarter was $24 1 million or 29, 3%.
Sequentially by approximately five five percentage points.
Our performance in the third quarter was primarily impacted by our manufacturing capacity being significantly reduced in Q3 due to the COVID-19 related production interruptions in Vietnam.
And this significantly impacted our revenue and gross profit in the quarter.
Gross profit margin was lower due to the absorption of fixed costs spread across lower production volume due to the production interruptions.
And higher component costs as a result of continuing supply chain constraints.
Our non-GAAP operating expenses in the third quarter were $44 7 million.
Down $6 2 million or negative 12, 2% year over year.
This reflects our cost efficiency initiatives that we've been undertaking.
Sequentially Opex decreased $1 6 million or negative three 5% as we have been tightly managing expenses in several areas this past quarter.
Also note our GAAP Opex in Q3 reflects an $11 5 million impairment charge related to the intangible assets. The main gate that was acquired in 2015 in Sweden.
Yeah.
In the third quarter, our adjusted EBITDA was negative $15 million compared to an adjusted EBITDA of negative $7 1 million a year ago.
Moving to the balance sheet, we ended the third quarter with $75 5 million of cash.
Including $9 $9 million in attractive long term debt that we obtained during the quarter.
Cash flow from operations was negative $48 4 million and capital spending was $4 3 million, which was expected in Q3.
During the quarter, we continued our strategy of investing in inventory to be cleared the supply of components.
We can see that inventory increased to $71 2 million from $46 9 million at the end of Q2 this year.
Over the next two quarters, we expect working capital to normalize as we experienced improved production in Q4, and we will be shipping more products to our customers.
Regarding guidance for the fourth quarter the impact of the COVID-19 pandemic and on our global business continues to remain uncertain.
While we continue to experience and evaluate the effects in our business. The overall severity and duration of adverse impacts related to COVID-19 on our business financial condition cash flows and operating results for the remainder of 2021 and beyond cannot be reasonably estimated at this time.
As Phil mentioned global demand for our products remains very strong.
Given this landscape, we are providing revenue guidance for Q4 of $120 million to $135 million with a midpoint of $127 5 million.
We are experiencing very strong customer demand and orders for our products and solutions and we believe the macro trends of Iot private networks and <unk> are accelerating.
With that I will now turn the call over to questions. Operator, Please open the lines.
Sure Sir as a reminder, if you have a question at this time. Please press star one on your telephone keypad and wait for your name to be announced if your question has been answered or you wish to remove yourself from the queue press the pound key.
Your first question comes from the line of Josh Nichols with B Riley Securities. Please go ahead.
Hey, guys. This is actually a mind jumping in for Josh, but congratulations on the better than expected quarter here.
My first question is what type of ramp in demand for hi.
High margin <unk> products is an accompanying experiencing and when do you think will that will that have a favorable impact on gross margin.
Okay.
Hi, there this is Phil.
Are you actually seeing very strong demand for our <unk> products I think what we said historically is we expect to see that really ramped and have an impact probably towards the second half of 2022 into 2023, I mean, we're ramping very strong but in terms of percentage of our overall volume, it's still not a big enough percentage, but suffice to say they are ramping and we're getting very good.
Traction at our customers.
That's helpful and then.
With the strong end market demand do you anticipate that.
<unk> growth would that potentially flushing out in 2022 as production improves.
Yeah, I mean, right now our backlog frankly isn't as strong as we've ever seen it.
From that side and I think we're going to continue to work. It as I mentioned, we expect to continue to be have more demand than we can fulfill.
Certainly well into 2022, if not all of 2022 and that's a function of our strong demand, but also a function of our supply chain constraints on the semiconductor side.
Got it and last question for me, So I know you've been ramping up your production facility in Mexico could you can you talk about how thats progressing and where you are getting that close to <unk>.
Max capacity.
Yeah, we've actually started.
Ramping up production for our enterprise products. Some of the first products came off the line earlier this month so into the fourth quarter.
And I.
I think that that we're continuing to.
A ramp that so I think we've been pleased with that ramp up.
And at this point now we are in fact shipping production level units of various sorts out of three different facilities around the globe.
Thank you I'll pass it on.
Okay.
Thank you. Your next question comes from the line of tennis must shop list with BMO capital markets. Please go ahead.
Hi, good afternoon.
Should we think about gross margins. So for example, if Q4 revenue were to kind of rebound to Q2 levels, which I guess would be at the upper end with the gross margin profile look similar or.
Are there some dynamic associated with supply constraints that would lead to a different gross margin profile, even if the revenue recovers.
Yeah, Hi, Thanos this is Phil.
Look I think that our we do expect gross margin to recover some into the fourth quarter.
Really two factors one we expect volume to increase and second is we'll start to see some of the effect of the price increases we made so we do expect to see some of that.
Offsetting that it'll be a little bit of mix related issues, because we're we're farthest behind us on the module side. So you might expect us to try and recover from the module backlog and then.
So additional continued cost increases so I would expect gross margins to improve in the fourth quarter. We're not we're not guiding that but we've got some headwinds and <unk> that kind of offsetting a little bit there, but net we should see some improvement into the fourth quarter.
Okay and.
Maybe a bit early to ask this but just as far as seasonality normally you have a seasonal dip in Q1, but just given the dynamic here if it's life insurance in the backlog.
Might be different this time around or what would be your thoughts on that.
Yes, that's a good question I mean, historically, we do see some seasonality into into Q1 from Q4, I mean, obviously, we're not guiding Q1 at this point.
So it's a little bit premature, but I will say I mean, I think we expect to be component constrained again here.
Here fairly soon before long so I think that.
I think Q4 here is probably going to be a bit of a bounce back quarter, just not burning through some of the component inventory that we had on the balance sheet and we're going to likely be supply constrained again here in the first quarter.
Okay, and then finally as far as Opex and given some of the cost actions would be fair to think of Opex being down a little bit sequentially in Q4 versus Q3 or how do we think about that.
Yeah, I think it may be it may be slightly up I mean, we're doing everything we can to control. It I mean I think in the Q3 time frame, we really worked hard to make sure that obviously that was that was.
Pretty challenging situations, we delayed some stuff that we actually need to get done from a certification perspective, I'm not expecting them to get them.
A lot of movement, but it may be up a little bit, but we're not really guiding on it's kind of in and around there.
Okay.
Great. Thanks.
Okay.
And your next question comes from the line of Todd Coupland with CIBC. Please go ahead.
Good evening everyone.
Was just curious on what is the expected cash burn in the fourth quarter.
And if you're going to unwind the inventory will you not have to make further inventory investments as you go into 2022, so the burn rate picks up again, so some color on that would be helpful. Thanks a lot.
Yeah. Thanks, Sam.
Sam I'll try a little bit and then maybe you dig in with the details I mean.
I do expect our inventory to go down in the fourth quarter as we continue to burn.
Kind of make our finished excuse me our component inventory into finished goods.
Cash on the balance sheet, it really depend on.
A number of other factors in terms of working capital and timing of AP, AR and a bunch of things like that and we expect the working capital as a result of that to normalize over the next couple of quarters.
But we do expect inventory to go down here in the fourth quarter and the Sam do you want to make any any additional color on that.
Yeah sure. If you look at the revenue guidance we provided.
It's kind of going to be flattish cash from operations. So then you have really working capital.
It should improve a little bit offset by some restructuring costs you saw the announcement of management changes.
Yesterday.
Also offset by a little bit of Capex. So I think cash will be flattish to plus or minus 5 million would be a good range.
Okay, but then if you if you burn the components and.
You're supply constrained in 2022 do you have to start to get back in and drive inventory up throughout 2022, how should we think about that thanks a lot.
Well Todd I mean, we're at a elevated level right now with the factory been interrupted with what was happening in Vietnam, which we previously disclosed.
So I think we've seen a high in our inventory levels, given our given our relative size that being said, obviously, we will continue to invest into the supply constraints throughout 2022, I just don't think you'll see it quite at these levels, because we'll be turning that quicker with our factories on so that investment will continue in <unk>.
All will have to make those investments in working capital, but I see this close closer to the ceiling on the inventory side.
Great I appreciate it thanks a lot.
Yeah.
Thank you. Your next question comes from the line of Anthony Stoss with Craig Hallum. Please go ahead.
Hey, guys. Thanks for all the Sam.
Couple of a couple of questions here so.
So I understand the component shortages, but from a production standpoint, if you've got two additional facilities coming online and in the December quarter.
Are you capable in Q1 from a production basis to handle the influx of orders I know you probably won't with component, but in terms of production and then secondly, Joe you were brought in to really make some pretty significant operational changes and I know you've got hit right out of the gate with Covid issues in Vietnam.
Yeah.
With the new management team can now hit the ground running and start to focus on those operation initial issues and maybe.
Give us a sense of what Opex might look like say a year from now.
Yeah.
Yeah, Hi, Tony Yeah. Thanks, So I mean.
Just a couple of a couple of quick quick comments on that in terms of the manufacturing output and things like that one of the things to keep in mind, we've what we've tried to do with our manufacturing has actually increased resiliency.
We knew we're going to be relatively component constrained.
We didn't want to bring on enough capacity and have it stranded so what we've been doing is actually moving text fixtures moving component supply doing things like that so while we may end up with some a little bit extra capacity in general what we've been trying to do is just increase our our ability to manufacture at different sites and give us some more resiliency. So it's not like I've got triple or triple the capacity online.
So that's one thing to keep in mind, you know in terms of some of the operational changes that you've seen.
<unk> taken a pretty big change in terms of clarifying the staff in terms of the organization their roles responsibilities.
You see us kind of turning around and getting the manufacturing recovered youre going to start to see a recovery in gross margins.
And where it goes into 2022 I would expect to you know where.
Got them out at this point, but I certainly think that.
The backlog in the business conditions continued to be strong and you should expect to see <unk>.
Difficultly improved financial results from this company in 2022.
Okay, and then if I could just ask one more and I think you commented about this in the last quarterly conference call just increasing visibility from your customers everybody wants to get ahead of continuing catone and component shortages are you into kind of 2023, yet with your customers and you have a good sense of what they're willing to pay and what your asps might look like and hopefully.
Gross margins are improving.
Yes.
We are not into 2023, yet I would say, we're probably out into Q3 of 2022.
And.
I think.
Yeah. The gross margin question is obviously, we're going to try and do what we can to improve that across the board that's going to be multiple factors that drive that right mix component increase price increases all the rest of it so.
I think that what I would say is rest assured that myself and my management team are keenly focused on improving all elements of the P&L.
Okay Best of luck guys. Thank you.
Thank you.
Thank you. Your next question comes from the line of Derek Soderberg with coal your Securities. Please go ahead.
Hey, guys. Thanks for taking my questions I wanted to start with monthly recurring revenue.
Sort of flat again quarter over quarter I understand you guys have some month to month fluctuations I was hoping if you can sort of explain that a bit more why that why that's the case.
Maybe explain it as it relates to attach rates of connectivity and software on your devices, how thats trending that'd be great.
Yes, that's a good that's a good question. Thanks, as Phil I mean, I do think that the.
We kind of got it that could be relatively flattish.
Flattish I guess, when we kind of came in there I think the delay in production of both modules and routers.
Has caused a bit of delay in terms of deployment.
Which in turn has affected effective that growth that has grown nicely year over year.
And I would expect that to grow into 2022.
From that side, so I think that you know.
That's why we're looking at that point I think your question on the attach rate is in fact, a good one.
I'm not prepared to frankly answer that today, because I think there's a lot of moving parts in and out of that and we've been just.
Frankly, I'm trying to figure out how to make sure we get the manufacturing up and running but I think what you should walk away with is that the key part of the business. We do expect it to grow into 2022.
And I am focused on growing the entire company as well.
Got it got it and then you guys have been sort of go into the great market for components, you're still in a component constrained environment broadly.
Has your ability to sort of use the great market for additional components, how has that changed at all your sort of navigated the supply constraints pretty well throughout COVID-19.
Has that market deteriorated or.
Ken the gray market sort of serves as a decent level of support.
<unk> side in 2022.
Yeah.
Uh huh.
As you might imagine the grey market at spot market changes daily.
And so in some cases the price premiums that we see out there for certain constraint components are frankly way out or each.
And we.
We have not been able to get all of our components satisfied on the gray market. So I don't expect that to be the case in 2022. So what we try and do is is work as best we can with our partners we.
We are trying to build all the various different kits that we can and when it comes down to the very last minute. Then we look to see what's available in the gray market and if we can get enough at a reasonable price and depending on the situations, we'll do it and depending on the situations. We bought so I would say, it's a case by case basis.
We manage daily and will likely be in that situation through 2022.
Got it very helpful. Thanks, guys.
Thank you. Your next question comes from the line of Paul Taper with RBC capital markets. Please go ahead.
Thanks, very much and good afternoon, just following up on the supply chain constraints that youre, saying, what's your like with the with the changes in your manufacturing footprint is there an opportunity or or what timeframe do you see as an opportunity to make changes to try to mitigate some of the supply constraints in.
Ms of reengineering your products.
Over what timeframe do you think that that's possible.
You know most of 2021, a lot of 2021 from an engineering capacity perspective has been actually spent doing.
Redesign of components and we are actually continuing to do that on that front.
What's interesting there is I mean, we really are.
Taken approach to try and increase the diversity of our components that we use versus what has historically been engineering dogma to try and use the same components and increase reuse for actually going out and trying to.
Get multiple different products to make sure we've got diversity in place. So we're continuing to do that I expect that a certain percentage of the engineering capacity, we have will be.
Focus on doing that kind of development certainly through the first half of 2022.
And yeah, I mean, if you can throw out some rough numbers would be helpful. But like the environment is likely to be challenging to what extent like proportionate plenty I don't know if its 50% or whatnot.
Do you think you can mitigate those challenges through improved engineering of products.
Just diversifying component supplies.
Okay.
Yeah, I mean, we definitely are trying that in some cases right. Obviously, it's easier for example, you can it's easier to swap out memories or it's easier.
Passive components into a small things when you've got some more complicated logic that require software and firmware changes we want to be really careful because that involves a recall of some of our some of our network operators right, which is which was obviously a painful situation. So.
It's hard to it's hard to give a blanket answer to that obviously, we try and minimize.
The amount of downstream impact that we can oftentimes these replacements or not.
Incompatible.
And so it takes a little more work to do so.
And then just one last one for me just in terms of the cash and the cash flow.
On the balance sheet do you have a reasonable amount of cash I mean, how much of that is either.
Either stranded in certain geographies or some sort of restrictions on it or you need it for the operations of the business.
Sam I'll, let you.
In terms of location of the cash.
Yeah, Sam here, Yeah, we don't have a ton of restricted cash.
Obviously as a global company, we do operate in Asia Pacific EMEA, and North America, So a certain amount of cash is needed.
To operate in those regions, but theres, no restricted cash or or any cash stuck in a in an area like for instance, when we had automotive we had cash in China, which is very difficult to move and get out again outright, but we're no longer in any of those jurisdictions. So our cash can move relatively really.
Okay. Thank you I'll pass on.
Thank you as a reminder, if you ask me to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of Scott Searle with Roth Capital. Please go ahead.
Good afternoon, Thanks for taking my questions nice job out of the gate and the outlook into the fourth quarter, Hey, maybe just to quickly dig in on that front filled the guidance of 120 to 135, it doesn't sound like demand and backlog are the problem.
Wondering if you could address what you've got covered from a component supply availability standpoint at the current time into that.
Fourth quarter outlook, and also where at what revenue level do the real supply constraints start to kick in and they've got a couple of follow ups.
Yes, Scott Thanks.
Look I think you.
You might imagine that last quarter, we didn't guide right given the uncertainty for for all that.
And I think it's reasonable to assume that the.
The guidance range that we have.
<unk>.
Certainly a degree of confidence the high degree of confidence that I have the supply to build the range the products in our range we talked about.
Okay.
Maybe sorry, you had you had a second question going forward well well just in terms of where were those supply constraints really start to kick in and you you've talked about this fixing Vietnam you would quickly move from being production constrained to being supply constraint and I'm wondering if you could just kind of help us understand at what revenue level and I know, it's going to vary dipped.
Turning on the mix between modules and gateways et cetera, but kind of roughly where we are today and where do you think we are as we kind of move into the first half of this year and next year.
Yeah, that's kind of a tricky one to answer I guess, what I'd say to the way you want to think about it is I mean, we've kind of ramped up to nominally full production.
This point in the quarter.
In early November we did and probably by the end of the fourth quarter, we will back be back in a supply component constrained environment. So.
So it's kind of a situation, where if we need 20 parts to build something we get 19, and we Miss one of them then you still can't built so.
It's difficult to answer answer that question.
But I would say lead times with semiconductors are not decreasing in fact, they're increasing and.
I think our procurement team is doing as good a job as possible managing all of these situations and so.
I would expect us to be again component supply constrained or sand demand far exceeds supply even into Q1, Okay. That's helpful.
Maybe if I could I know the revenue categories of shifts around a little bit, but looking at connectivity software and services are traditionally that Ted.
Gross margins in the mid to low forty's relative.
Relative to I guess, the rest of the comps out there. It's a low gross margin figure. There's a lot of data traffic I think that goes through that and it's also been an unprofitable business I know, it's early but I'm wondering if you could give us kind of your thoughts on that front in terms of what that business should look like as we start to look out to the second half of next year.
Well I think the I think it's fair to assume that we can do better I think there are multiple comparisons on multiple different businesses, where I'm not satisfied with the results and I would expect us to do better and not just on the gross margin side, but on the overall profitability.
That business and other businesses so.
Hi.
Don't want to get into specific things here, but you might imagine that I'm not I'm not leaving any stone unturned in that area. Okay fair enough and one last one if I could kind of falls into the category of probably premature and unfair, but you know on the enterprise business.
It's been a nice business for you guys. It's been a good business from a gross margin profitability standpoint, there have been some moves within the industry, whether it's Ericsson a cradle point or more recently with Digi and Ventas I'm wondering if you're seeing a push from your customer base to push more to more of a recurring revenue model there and what's your early thoughts are on that front. Thanks.
Yeah, I mean look I think the enterprise business is a very strong part of the portfolio. We've got a very good presence in and first responders public safety industrial oil and gas infrastructure markets are very strong feedback on our product line.
Yes, I think we are looking at different ways that we can attach connectivity business to that including some things like managed connectivity services and the like so I would that would be an area that.
We are definitely.
Focused on growing.
Great. Thanks, so much.
Okay.
Thank you as a reminder, if you need to ask a question. Please press star one on your telephone keypad.
And we have no further question at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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