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spk01: Ladies and gentlemen, thank you for standing by and welcome to the Sierra Wireless Incorporated's fourth quarter 2020 conference column webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker today, David Kleine, Vice President of Investor Relations. Thank you. Please go ahead, sir.
spk04: Thanks, and good afternoon, everybody. Thank you for joining today's conference call and webcast. On the call today are Ken Thexton, President and CEO, and Sam Cochran, 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. Ken will provide his corporate update, and Sam will provide a detailed review of our Q4 and year-end 2020 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 securities laws. These statements include our strategy, goals, objectives, expectations and commentary regarding the outlook for our business. Our forward-looking statements are based on a number of material assumptions, including those listed on page two of the webcast presentation, which could prove to be significantly incorrect. Additionally, forward-looking statements are based on our management's current expectations, and we caution investors 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 our forward-looking statements. I draw your attention to a longer discussion of our risk factors in our AIF and management's discussion and analysis, which can be found on CDAR and EDGAR, as well as 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.
spk11: Thanks, David. I'll start my prepared remarks today with some highlights from the fourth quarter. as well as some brief comments on full year 2020. We will be discussing our continuing operations on today's call with the automotive business line under discontinued operations. As you are aware, we completed the sale of the automotive product line in November, and as a result, our balance sheet has been significantly strengthened. Sam will review this in more detail in a summary of the fourth quarter results and balance sheet. So let's turn to some of the highlights in Q4. Total revenue in the fourth quarter was $120.5 million, up sequentially 6.3% from Q3 and ahead of street consensus. Our business transformation is proceeding well, with three quarters of sequential revenue growth. I am pleased to see this improvement, despite the tight component supply situation in the industry and the impact of the COVID-19 pandemic globally. Q4 recurring and other service revenue was $32.6 million, up 25.1% year-over-year, and up 9.4% sequentially, as our continued focus on IoT solutions is showing improving results. Looking at service wins in Q4, as measured by LTAR, or long-term annual recurring revenue, we achieved record LTAR wins, totaling 46.3 million, up 40% sequentially. For full year 2020, we secured 140 million in LTAR wins, an increase of 54% compared to 2019. This result shows the success of our transformation efforts to win in the market with bundled solutions, delivering faster time to market for our customers and sticky high margin recurring revenue for Sierra Wireless. In Q4, our global sales team continued to secure IoT solutions wins with new and existing customers. So I'd like to share a few examples from Q4. The first win is with a leading US-based designer and manufacturer of gateway systems for the commercial and residential markets. They needed an IoT solution that enabled them to do remote monitoring and control both the entry and exit points on commercial properties. They also required cellular communications to support audio video access for their gate openers and overhead doors used in apartment buildings and on campuses. We are providing them with a device to cloud solution using our ready to connect embedded modules that is bundled with the connectivity services package. The hardware value of this design win with this global leader is expected to be $1.4 million, and the service's LTAR is expected to be approximately $700,000. Another new customer we signed up in Q4 is a global power systems company focused on improving the efficiencies of electrical motors for the industrial energy market. This customer is gathering real-time data, 24 by 7, from their machines so that they could monitor their equipment, improve system performance, and provide preventative maintenance. The solution required a single vendor with an end-to-end solution. So we're providing our LX40 gateway, cloud platform, and global connectivity service. The LTAR associated with this design win is expected to be $2.9 million and the hardware value of approximately $1.6 million. And the last example in Q4 is a design win that we signed with the help of Microsoft and a good example of our partnership work with both Microsoft and Azure. The customer, who came to us through the Azure IoT team, is a global industrial company that is looking to monitor its assets 24 by 7 for predictive maintenance services. The initial project includes our Octave Data Orchestration software solution with deployment to about 10,000 industrial assets and scaling to significantly more devices and recurring revenue in time. We see the industrial IoT sector really picking up, and we are pleased to partner with Microsoft on securing this design win and working our strong industrial IoT pipeline together. Now let's quickly look at some company highlights in 2020. Recurring and other service revenue increased 18% year-over-year in 2020, and we ended the year with more than 4 million connected devices. The acquisition of MDEM in Australia has been successful, and our recurring revenue is growing strongly in the ANZ markets. Globally, our focus on selling solutions and growing recurring and other services revenue has made great progress. and we are winning in the competitive market. I'm very pleased with the 140 million in LTAR that was generated last year, on top of the 91 million in LTAR from the previous year. This sets up the company well, as we remain very focused on our targets of achieving 200 million run rates of recurring and other services by the end of Q2 2022, and 400 million by the end of Q2 2024. In terms of new product offerings in 2020, we successfully launched our 5G embedded module during Q4. We are certifying our 5G gateways and routers globally, and our 5G MG90 router was recently certified on T-Mobile's U.S. network and will be launching soon. Our global sales teams have secured numerous design wins for 5G modules last year with key long-term enterprise customers. I'm very excited about the growth path for 5G low-latency applications in areas including enterprise networking, public transit, asset monitoring, healthcare, and public safety. I'm also pleased that we strengthened our executive management team in 2020 by hiring Sam Cochran, Steve Harmon, our senior vice president of Americas, and most recently James Armstrong, who is now running our enterprise solutions business as senior vice president. James has great experience from Spirit Communications and a strong wireless experience with a PhD in electrical engineering from Purdue. So we're glad to have him on the team as well. Before I turn the call over to Sam, I would like to point out that starting in the first quarter of 2021, we'll be moving to two new reporting segments. With the sale of our automotive product line in mid-November last year, it's an opportune time for us to have two strong colors of growth. One focused on IoT solutions and the other focused on enterprise solutions. The enterprise solutions reporting segment will include AirLink, cellular routers and gateways, our IoT applications business for monitoring and asset tracking, and our enterprise connectivity solutions and software. Together, this segment generated $142 million in revenue in 2020, with gross margins of 50.5%. We doubled our enterprise pipeline in 2020, and we are well positioned for growth in this attractive and growing market. The IoT solutions reporting segment will include our portfolio of cellular modules, from LPWA through to our high-speed embedded 5G broadband modules, as well as our IoT connectivity solutions, services, and software. This segment generated $307 million in 2020, and we are highly differentiated with our complete device-to-cloud offering. The total addressable market for IoT solutions is $10 to $20 billion, and we are seeing success with the industrial IoT market as industrial leaders start to connect and digitize their machines and assets. We are well positioned for solid growth as our customers deploy cellular modules bundled with connectivity services for simple and scalable IoT solutions. Overall, we remain very focused on delivering our innovative device-to-cloud solutions that are generating higher-margin subscription-based recurring revenue. With that, I will now pass it over to Sam for his review and comments on the fourth quarter and year-end results.
spk08: Thank you, Kent. Good afternoon, everyone. As a reminder, our fourth quarter financial results are reported in U.S. dollars and on a U.S. GAAP basis. We also present non-GAAP results to provide a better understanding of our operating performance. A full reconciliation between our GAAP and non-GAAP results is available on the IR page of our website. Before I begin with a review of our quarterly results, I'd like to point out that our fourth quarter 2020 financial statements are based on continuing operations, and we have segregated the automotive business with the sale competing on November 18th as discontinued. We have included in the notes to our Q4 financial statements information on a gap basis regarding the automotive business. And we will provide additional information in our MD&A. So now let me turn to our continuing operations and comment on the fourth quarter and full year 2020. Total revenue in Q4 from continuing operations was $120.5 million, a decrease of 3.7% compared to the same period last year. Non-GAAP gross margin in the fourth quarter was 36.1%, up compared to 35.8% in the fourth quarter last year. In Q4, we continued our focus on right-sizing the business and reducing off-backs. As a result, our non-GAAP operating expenses were $50.1 million in the quarter. We expect this OpEx run rate to continue to decrease into 2021. Non-GAAP adjusted EBITDA in Q4 was negative $2.9 million compared to negative $3.2 million the prior year. For the full year 2020, total revenue from continuing operations was $448.6 million compared to $547.3 million. The lower revenue in 2020 is primarily attributable to the impact of the COVID-19 pandemic, the tight component supply environment, and the decline in mobile computing revenues with the loss of Dell and Lenovo design wins two years ago. Adjusted EBITDA in 2020 was negative 34.9 million compared to 9.8 million in 2019. Now let's take a quick look at Q4 2020 on a year-over-year basis. Revenue in the IoT solution segment was 87.6 million, down slightly by 3.6% year-over-year. Within our IoT solution segment, recurring and other services revenue was $32.6 million, up 25.1% year-over-year, driven by increased customer usage and growth in the number of connected devices. Recurring and other services revenue represented 27.1% of our total revenue in Q4. The growth in recurring revenue was offset by lower hardware revenue, primarily due to the impact of the global pandemic and some supply-related constraints in the quarter. Revenue in the embedded broadband segment was $32.9 million, lower by 3.8% year-over-year, primarily due to the decline in mobile computing revenues with the loss of Dell and Lenovo design wins two years ago. This is the last quarter of the Dell Lenovo design loss impact, so there is no impact related to that going forward. Total gross margin was $43.5 million, or 36.1% in Q4, compared to 35.8% the prior year. The increase year-over-year was due to improved margins in IoT solutions, up 1.6% to 38.6%, due to mixed partially offset by a decline in embedded broadband gross margin at 29.5% due to lower mobile computing gross margins from the previously discussed design losses. Taking a look at Q4 on a sequential basis, revenue in IoT solution segment increased 8.5 million, or 10.7%, compared to the prior quarter, with enterprise networking gateway and routers showing improvement as we are converting more of our increased pipeline from the last quarter. Additionally, recurring and other services revenue increased 9.4% sequentially in Q4. Revenue in the embedded broadband segment decreased 1.4 million, or 4.1% sequentially, primarily due to lower mobile computing revenue. Total gross margin was up 4.1 million in Q4, The sequential increase was due to mixed improvement in both IoT solutions and embedded broadband. Operating expenses declined 2.1% sequentially to $50.1 million in Q4, and adjusted EBITDA was negative $2.9 million, an improvement compared to negative $7.1 million in Q3. Moving to our cash position, Cash flow from operations in Q4 was $0.7 million, and CapEx was $7.9 million. The quarterly CapEx was higher than normal in Q4 due to equipment replacement for 5G development that was required in Asia following the divestiture of the automotive business. Net proceeds from the sale of the automotive business was $144.2 million, and during the quarter, we paid down our credit facility of $34.4 million. We also spent $3.5 million acquiring the M2M business that is based in New Zealand, extending our IoT services business into that new market. As a result of these activities, we had an increase of $99.4 million in cash at the end of the quarter, finishing the year with $171.4 million of cash on the balance sheet. As you look to the first quarter of 2021, we will be consuming approximately 20 million in cash due to three main factors. One, we need to increase capacity and inventory to combat the current shortage in components. Two, we have restructuring outflows. We are incurring as we improve our operating efficiency. And three, we also have some one-time working capital adjustments associated with the auto sale occurring in the first quarter of this year. Before I move on to guidance for the first quarter, I would just like to say a few words about the new segmentation we'll be reporting on in Q1. In today's release, we have included a table that shows the revenue and gross margin for the two new segments. The enterprise solution segment includes gateways and routers, IoT applications such as offender monitoring, security, and asset tracking, as well as enterprise connectivity services, our cloud management platform, software and services that are all related to our gateway and router business. In 2020, this business generated 141.7 million in revenue at a gross margin of 50.5%. In Q4, it had 38.9 million in revenue and a gross margin of 51.5%. The IoT solution segment includes our IoT cellular modules and embedded broadband modules, as well as our IoT connectivity services, cloud management platform, software and services that are all related to our IoT module business. In 2020, this business generated $306.9 million in revenue at a gross margin of 28.4%. In Q4, it had $81.6 million in revenue and a gross margin of 28.6%. We'll be providing more information on each segment at the end of the first quarter. Now for our outlook. The impact of the COVID-19 pandemic on our global business continues to remain uncertain, especially as it relates to the current tight supply chain environment. While we continue to evaluate the effects of COVID-19 on our business, the overall severity and duration of adverse impacts related to COVID-19 on our business financial condition, cash flows, and operating results for the first quarter of 2021 and beyond cannot be reasonably estimated at this time. The ultimate size of the impact of the COVID-19 pandemic on our business will depend on future developments, which cannot be currently predicted. Regarding the first quarter of 2021, we expect our revenue to be in line with street consensus of $109.9 million. There is strong demand for our products and services in the first quarter, and we have secured hardware orders and recurring revenue that's approximately 15% above current street consensus for Q1 2021. However, we are facing a very tight global supply chain environment that's constraining our ability to source components and fully deliver to this level of demand. Kent and I continue working closely with all our suppliers and manufacturing partners to close the gap. We appreciate all the hard work being done across our supply chain from our staff, suppliers, and manufacturing partners who are working with us tirelessly to support our customers' orders, which serve as critical applications. That ends my prepared remarks today. Operator, I would now like to open the call for questions.
spk01: Certainly, at this time, if you would like to ask a question, as a reminder, please press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Josh Nichols from B Rally. Your line is open.
spk05: Yeah, thanks for taking my question, and good to see the continued sequential improvement on the top line as well as the bottom line improvement that we're seeing here. I want to ask, you talked a little bit about the first quarter, but looking more at the OPEX and the cost savings initiatives, could you talk about where we stand for the $25 to $30 million and any kind of outlook you could provide as far as the anticipated turn to kind of sustainable profitability from like a cash burn or EBITDA perspective?
spk11: Sure, Josh, thanks for the question. It's Kent Thuxton here. I'll ask Sam to talk about the OPEX levels. But yes, we're making the overall business model progress is good. And both growing the top line and then making sure our cost structures lined up. So Sam, do you want to talk to the 25 to $30 million cost reductions?
spk08: Yeah, thank you for your question. So headcount is down to levels around 1040, so 1,040. That's down about 20% from where we came into the year. So very good progress is being made there. And we're on track for those targets.
spk05: Thanks. And then if you could provide a little bit more color. I know getting the timing of the 5G RAM has been a little bit difficult. It seems like you're making good progress on there. How are you doing as far as shipments and any type of targets as far as what you could do on that front and kind of margin accretion potential as that ramps up a little bit?
spk11: Yeah, it's Kent here. So we are very excited about 5G, as I said in my comments. We've done very well in securing design wins with customers looking to be early in 5G. We're in that early stage where um the demand levels are not fully certain we will be starting to ship product um to to many customers what we've seen in other iterations 3g and 4g and i'll speak to 4g is you know the uh you start to get deployments uh and then as it uh as it starts to mature you really start to see the volumes ramp and we expect that to happen similarly with 5g um we've been um you know Early with the technology, we've got a lot of very positive feedback from the market, both from customers and carriers. And those design slots are highly valuable. When you win a design slot, you're in with those customers for multiple years. So we don't expect that 2021 is going to be a significant volume of 5G. It's going to be early stages of the ramp. And we'll continue to accelerate as we move into 2022. So an important long-term value step for us, but not great clarity on the volume of 5G yet in 2021.
spk05: Thanks. And then last question for me, then I'll pass the baton here. Clearly, it looks like 1Q demand is coming in materially stronger than what kind of the streets I thought, obviously, there's some near-term component shortage issues, but how long do you think it'll take to resolve those? And if you are able to get those resolved over the next quarter or two, fair to assume that that may imply a stronger second half than maybe the street is anticipating in the numbers today?
spk11: Well, I think, you know, the supply challenges you will have seen across the board, and I think that those are going to be with us for most of the year, the silicon shortages. are challenging. So I think that's going to be one of the elements that we deal with. We are pleased to see our work is increasing orders. Our demand signals are strong. Some of our existing customers increasing what they're looking to get from us. And at the same time, we talked last year about our increasing win rates and our overall increase in design wins and some of those starting to flow through. So, you know, we're not providing guidance. And so, you know, I wouldn't work to change the view at this point in time with those levels of uncertainties. But, you know, the 15% above consensus of orders that we presented shows that, yes, we're, you know, we're pleased with the demand side that we're seeing both for hardware and for our recurring revenue business.
spk05: Great. Thanks, guys. Thank you. Thank you. You're welcome.
spk01: Your next question comes from the line of Thanos Moskopoulos from BMO Capital Markets. Your line is open.
spk03: Hi, good afternoon. Ken, can we drill in a bit more on the demand environment? So in terms of the strengthening demand that you're seeing, is it primarily macro-driven recovery or are there any specific verticals or segments that especially stand out as you look at the demand recovery?
spk11: Hi, Thanos. Good to speak with you. We've talked about a few things. I'll talk about our two segments now. We've had a big focus on what we're doing in the enterprise market. We're seeing good progress in our enterprise business, our overall gateway sales, inclusive of our software. That is something that we have been investing in. We've been growing partnerships with and we expected that part of that market will continue. I think there is elements of that that are not as related to the economy, but we're in areas of public safety and industrial areas that are just requiring this high-end connectivity, our ruggedized gateways that are suiting the needs of that market. Secondly, on the IoT solution side of the market, I think that there is a big macro trend of industrial IoT is increasing. The one example I talked about with Microsoft is an example of a very large $19 billion company that's working to digitize their assets out in the marketplace. So as we start to see those, those are sort of long-term growth trends. On the economic recovery side or recovering from impacts of COVID, some of our customers in spaces like smart metering are seeing increased deployments overall and part of that can be driven by look to be able to automate everything and not have to have as many humans touch products so that you know those demand uh requirements are great um you know in the current environment of parts uh shortages it's challenging to uh to ramp up further and you know as a matter of fact just even even committed products um you know our hard work to to hang on to in this environment but our team's been working exceptionally hard I've been making good progress with our suppliers to continue to get, you know, maximum visibility so we can communicate with our customers on what and when we can deliver. But we see, you know, we see a good market as we move forward. Great. That's helpful.
spk03: And you provided a revenue outlook for the upcoming quarter, but not an earnings outlook. Is that a function of the fact there's a lot of moving parts with supply constraints and restructuring and so forth, or – what would you say as far as how the street's thinking about earnings relative to revenues for different quarter?
spk11: Yeah, I'll ask Sam to comment in a minute, but we basically decided to not provide guidance because of the great uncertainty in the supply chain side. So, you know, we wanted to share that we're comfortable, we're in line with the consensus number, and our demand exceeds that. How much product we can get through the factory and ship will then directly affect our profitability levels. As Sam said, we're on track for the OpEx savings that we talked about. And so the profitability side can be pieced together. It's really about the volume that we're going to be able to ship due to the parts constraints. But Sam, do you want to comment on that?
spk08: Yeah, Kent, that's correct. We got a great line of sight into the OpEx number. The big uncertainty is in revenue and then margin on mix. There's still some uncertainty about which parts come in. And as you know, there's a big gross margin difference between enterprise products and modules. So until we get better visibility into our supply chain, quite honestly, it's hard to give more granular guidance.
spk03: Okay. Makes sense. And finally, you mentioned the deal went through with the Microsoft channel, which I thought was interesting. More broadly, can you speak about, I guess, how that's been shaping up as a channel for you and the pipeline that they bring to the table?
spk11: Yeah, we announced the Microsoft partnership some time back, and it takes a while in big organizations, I think, to get engagement. This deal is important because it's a next tier up customer And a good proof point as we work to drive more strongly was recently talking with the Microsoft head of partnerships. And we reviewed this as a good catalyst for more business together. So our pipeline with Microsoft has been growing. And as the sales force has become more familiar with the opportunity and the product and the ability to get more edge data into Azure, we'll see continued progress with that. So it was a good step forward and more to come. Great. I'll pass the line. Thanks. Thanks, Thanos.
spk01: Your next question comes from the line of Scott Searle from Roth Capital. Your line is open.
spk07: Hey, good afternoon. Thanks for taking my questions. Hey, Kent, first off, I wanted to wish you best of luck and congratulations on your retirement. I know we're a quarter out from that, but I just wanted to publicly throw that out. Thank you. Hey, Ian, just to clarify, on the upside demand of 15%, that is for the entire business. Is that correct? So in a normalized environment where we're not component constrained, you're looking at $125 million versus $109, $110 million. Is that correct? Or is there one segment of the business or two segments of the business that are being excluded from that upside number?
spk11: No, you have that correct in terms of the order volume that we have seen. In many quarters, we might have small amounts of supply constraints that would fit into there. It's just exceptionally large this quarter. We wanted to share the demand view so that while we're saying we're in line with consensus, we wanted to reflect what's going on from the sales side progress with our business.
spk07: Gotcha. And just in terms of the realignment and reporting segments of the business's enterprise solutions, It sounds like is everything within that category now tied to an enterprise gateway or router? It wasn't clear to me because I think you mentioned some asset tracking applications as well, but it sounds like some industrial IoT modules are in the IoT solutions business. So I want to kind of clarify in terms of how that's being reported. Is this basically going to look more like a cradle point type of segment in terms of the router gateway and recurring component that goes along with it?
spk11: Yeah, good question, Scott. So the majority of our enterprise segment is our gateways and the recurring revenue software support and maintenance that goes along with them. We've also included in our enterprise segment what we call our IoT applications business. And those were businesses that we originally acquired from Numerax. It includes asset tracking, prisoner monitoring, and home security. And so those businesses have many similar dimensions to Numerax. Our enterprise business, similar strong gross margin profile and strong recurring revenue dimensions to them. So it's majority gateways and attached software plus our IoT applications business. That's the focus of our enterprise.
spk07: Very helpful. I don't suppose there's any additional color that you could put with that in terms of the number of units that are under management. I think you said overall there were 4 million units, but now that's spread across the two business segments. How many of those are tied to enterprise solutions and Is there a larger recurring revenue component that goes along with it because of what you're talking about enterprise class gateways and routers?
spk11: We are not providing a breakout of our attachment rates by segment at this point in time. However, majority of our connectivity business is in IoT solutions and more of the enterprise side is the attachment of our cloud software device management support and maintenance for our gateways. Gotcha.
spk07: And going forward, are you going to continue to report your total recurring revenue then that's spread across those two segments, or does that kind of go away now or just strictly with those two segments?
spk11: No, we'll be reporting the total services and other recurring revenues as a total of the whole business on a continued basis, and we think that's an important metric.
spk07: Okay. And lastly, if I could, You know, just wondering if you're seeing any sort of uptick in business as we get to the 3G end of life across a couple of networks in North America, if you're seeing any sort of pickup on that front. And maybe as well, any sort of commentary or thoughts that you're seeing related to CBRS that couples, I think, probably pretty well with what's going on in enterprise solutions, but it's still early on that front. Love to get any color and thoughts on that front. Thanks.
spk11: So let me answer the 3G question first. So I think there's been a few false dawns on that. They've been delayed, you know, deadlines and delays. So I think a lot of 3g upgrade activity has happened. We still have some devices that will continue to, uh, to upgrade going forward. Uh, and that's just in the American market in, uh, in Europe. Um, they haven't announced sunset dates and there's still quite a bit of 2g going on in Europe. And we, that, uh, that migration path will, uh, will happen later. So I think that it's more about as customers will start to be, uh, you know, the predominant, um, technology now is 4G and customers are going to look to future-proof themselves by upgrading to 5G, and that will be the trend that we're looking to start happening through the year. And I'm sorry, Scott, what was your second question?
spk07: Related to CBRS, if you're seeing any sort of early interest in demand from that, particularly on the enterprise solutions front. Thanks.
spk11: Yeah, private networks, CBRS. Yeah, we're very keen on CBRS. We have seen... increased demand for that. Our gateways operate on public network frequencies and CBRS frequencies. And so we've seen utilities, municipalities, other customers are interested in CBRS. We've talked about our partnership with Motorola. They're very active in CBRS and we provide gateways to help them with those product areas. And so we think that we're still in the early innings of CBRS rollouts. A lot of frequencies have been acquired. and lots of interest in adding private network capability in addition to public. Our devices have the benefit of a single management platform to allow the user to track that device, whether it's in a public or private domain. And so we're well positioned. It's a trend that we're well positioned to take advantage of.
spk07: Great. Thanks so much.
spk11: Thanks, Scott.
spk01: Your next question comes from the line of Mike Lockley from Canaccord Genuity. Your line is open.
spk02: Great. Thanks. And, um, my best wishes to you also Kent, uh, in the next step of your journey. Um, thank you. Um, questions just for me back to the, uh, 15% higher revenue, just, we know it's a tight supply across the whole industry, but you know, of that call it 15 million, you're not going to be able to ship this quarter. Do you think most of that is, uh, just pushed out to future quarters, or do you think those are potential lost sales as customers may be finding alternate supply?
spk11: Good question, Mike, and good to speak with you. So I think that we expect most of that to roll forward. There's very few instances where it's perishable demand, but we're working very hard for our customers. It's never good when you can't supply to the timelines that they need. So we're just active with a wide range of suppliers to work and have had great success with them, you know, prioritizing some of our especially public safety market products to be able to get us components for that. So, we're expecting that to roll forward as a short answer to your question, but, you know, working hard at it every day.
spk02: Great. That's helpful. Thanks. And then, Sam, a follow-up question for you. You're one with the tight supply. What are the impact, maybe the shorter term gross margins you have to pay more for components in this tight environment on a relative basis? Or can you pass those on to customers? And then second, I think you said you had good line of sight into pro forma operating expenses for the March quarter. Can you help us just think about a run rate for modeling, given it's the first full quarter without any automotive running through it?
spk08: Yeah, good question. So first one, there'll be a margin impact. You can think about it as, uh, as around a percent we're having to go out and buy, um, parts and raw materials in the gray market, open market paying higher prices. But as Kent said, you know, we are, we are very focused on servicing our customer's demand. They, the products they use are used in critical applications. And so we're, we're doing what we can to, to get those parts and get those products to our customers. But there'll be a small impact to our gross margin in the short term. And to your first question to Kent, most of that will roll over. But since we expect the tight supply environment to continue in 2021, there'll be new ones that come up in the next quarter and so forth. So while there'll be recovery in Q2, there'll be new constraints as we sort of catch up on that backlog, if that makes sense. In terms of op-backs, I don't want to give any direct guidance there, but I believe in the prepared remarks, I said that it would be down again from the 50.1 level and, you know, two, three million in that area would make sense.
spk02: Okay, great. That's helpful. And last question for me, and I'll pass it on. Yeah, thanks for the historical data on the new divisions. Yeah, as we think about IoT solutions longer term, is this gross margin level a good place to be thinking about? Or as LTAR grows and you get more and more recurring revenue, where could maybe gross margins trend in that business?
spk11: Yeah, Mike, thanks for that question. So, you know, I'll just recap a little bit. So I think that, you know, enterprise is, you know, gateway business. It's higher gross margin hardware and then high gross margin recurring software in that part of the business. In our IoT solutions modules and the global competitive dynamics that make it a lower gross margin product line, but then we're attaching the higher gross margin recurring revenues. So as that mix continues to grow, as our recurring revenue to hardware revenue ratio continues to move in a direction of recurring revenue, that will drag along, increase our overall gross margins in that business. The second thing that we've talked about previously is as we continue to scale our connectivity business, We expect to see the gross margins in that business improve. So we'll have improvement in mix and then improvement on the hardware side. On the module side, with the strong global move towards LPWA and lower ASPs, that will continue to have that product area as lower revenue and continue to be relatively low gross margins. But that's good for the overall market. That elasticity of demand is those lower cost units look for, afford more connection points for IoT data. And then out of that, we're in a good position to enjoy good profitability on providing the full device cloud solution for our customers. Gotcha. Well, thanks, Jake. My questions. Okay. Thanks, Mike. Cheers.
spk01: Your next question comes from the line of Derek Sutterberg from Collier Securities. Your line is open.
spk06: Hi, everyone. Thanks for taking my questions. I want to start with LTAR. I guess I'm wondering if there's any impact there from the supply issues. I think you said this could be sort of an issue throughout the year, but some of these will sort of roll forward. So would these supply issues impact the LTAR deals maybe signed in the past at all? I guess I'm just curious as as to how these supply issues impacted any of your assumptions that you guys make for getting to that cumulative LTAR bookings number this quarter. And then I have a follow-up.
spk11: Okay. All right. Well, thanks for the question, Derek, and good to have you on the call. So I think in terms of the supply issues affect, you know, instead of answering for LTAR, I'll say our recurring revenue. So I think that, you know, what we saw in this year was that Q2 with COVID and people working remote, It impacted our ability to get contracts signed for future business of recurring revenue. So our LTAR wins in Q2 were lower. They rebounded in Q3, and then we had a very strong Q4, as we just highlighted here. The next step with those design wins is to get those into production. And the COVID environment has been some slowing of getting projects into production. I think that globally we're all getting better at the remote working, but a number of hands-on elements of implementations I mean, there's been some challenges in that regard, but we're making a lot of progress on bringing those on. Where we have customers that we have won, and I gave three new examples today where we're getting both the hardware revenue and the service revenue, if there is supply shortages that delay being able to get our modules or gateways to those customers, it's going to delay marginally that recurring revenue side. But I look at it as this building base of customers that are going to be consuming our ongoing connectivity services along with the hardware that will continue to drive that growth in our recurring revenue part of the business. So if you're a month or a quarter late on the hardware in the trend, it's not going to make a difference.
spk06: Got it. And then just quickly on your $170 million cash balance, now that you have that automotive piece divested, You know, I guess how comfortable would you guys feel going out and acquiring something? I mean, is the environment good for that? And then just generally anything on your focus on use of cash this year would be great. Thanks.
spk11: Sure. Yeah, good question. So, you know, when we announced the sale of our auto business, and I've said, and I sort of, we're still in the same position, is that we're just happy to have a strong balance sheet at this point. Selling automotive both strengthened our balance sheet, but allowed us to really focus on these two segments that we're now reporting against. And so that's been a big part of the driver for that. The opportunities that are afforded to us with a strong balance sheet, it enables us to be opportunistic. We don't feel we have any big missing parts that we need to go on from an M&A perspective to acquire, but we'll stay tight to what's going on in the marketplace. But no present plans to deploy that capital. We'll keep our balance sheet strength at this time.
spk06: Great. Thank you so much.
spk01: Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Paul Treber from RBC Capital Markets. Your line is open.
spk09: Thanks very much, and good afternoon. I just want to focus on the growth in the services business. Obviously, it was quite strong this quarter. I imagine a bulk of that growth is IoT connectivity. Is that the case? And could you speak about the relative growth rates of IoT connectivity versus maybe enterprise connectivity? And I guess there's also managed IoT services or the enterprise, sorry, the industrial applications.
spk11: Yeah, thanks, Paul. Thanks for the question. So we saw growth in services across both of our new segments here. We saw good growth in connectivity, continued growth in number of connected devices. And so that was driving our services forward. And then as we can have a driving more gateway into the market and driving the software connect to those devices, driving the enterprise side. So I said the majority of our connectivity is in IoT solutions, and that's really where a lot of our Altar and connected device wins occur. And as we continue to progress and drive sales of our gateways, which is a very strong focus for us, we'll continue to be able to attach more of our solutions. So both are growing, and that's a forward focus for us.
spk09: I appreciate you're not giving me an outlook like the 2021 outlook, The 25% growth in services, should we expect that growth to be sustained, accelerate? You reiterated the outlook, the long-term outlook on services, but how do we think about the snowballing of LTAR and how that would translate into revenue growth?
spk11: Yeah, I mean, generally, as we've talked about our models, it is something that will continue to accelerate, and it's the accumulation model of customers that we have wants. And as they deploy into more of their devices, we get the recurring revenue. And so that continues to be additive. When we talk about new design wins, as those come into production and they start selling more devices, those continue to add on. So I reiterated that we're on track for hitting our 200 million recurring revenue run rate by the middle of 2022 and 400 million by the middle of 2024. So you can see the acceleration there is, more of those customers continue to deploy and we continue to win new customers with the deployment side. So we will see faster growth on the connectivity side just because of the math of that. Whereas the enterprise recurring revenue off of deployed gateways is more of a linear attached to the gateway with our device to cloud, module plus attach. As those continue to get sold into the marketplace, we get an additive effect of the connectivity revenue.
spk09: Then just one last one for me. How do we think about the mobile computing segment here? I mean, you called out, I guess, the design win losses in the past. Are you actively competing for design wins in that segment? Is it a segment that you want to pursue going forward, or is it something that you just see as not strategic?
spk11: Yeah, good question, Paul. So previously there was some large volume deals. We've called them before with Lenovo and Dell. And those are, as Sam said, won't be a – a reporting element going forward because uh because you know we're not we're not comparing to other years comps with those in the numbers um and that's not a segment that we are focused on moving forward with the large-scale pcoem business it's um it's quite a uh you know rapid rfp cycle and uh with wins and losses and and i don't think a high degree of differentiation in it we have some um smaller pc customers that have been long-time customers that we continue to support But where we continue to excel at is in overall connectivity into other high-speed enterprise router-type application companies. So we've done very well historically there. The company had some issues. areas where they didn't have all of the design slots because of some product elements. As we brought 5G in, we really won significant design slots, one box slots that the company had foregone in previous cycles. And so we'll continue to be highly engaged. What we do in our modules for embedded broadband is the same R&D work we're doing in modules for our other businesses. So it's very synergistic. Most of those enterprise you know, embedded broadband type of applications, less likely to be able to drive connectivity because the nature it's sold by a provider like, say, Cisco, and then Cisco sells on to an enterprise, the enterprise makes their own connectivity decisions. So that's why we're less able to bundle or attach into those sort of distribution arrangements. But we're very glad to support our our customers in that space. And as I said, we've done very well with 5G design wins in that area and we'll continue to work on and focus on it.
spk09: Okay. Thanks for taking my questions.
spk11: Thank you.
spk01: Your next question comes from the line of Todd Coupland from CIBC. Your line is open.
spk10: Yeah. Good evening, everyone. I had a couple of questions and I'll just run through them here. If we think about the cash requirement in Q1, 20 million more or less is what you called out. How much of that would be roughly one time in nature? Sam, do you want to talk to that?
spk08: Yeah, good question. So roughly about half of that would be one time in nature. Going forward as we work our way through the supply constraint issues. We've invested in increasing our capacity in the manufacturing site. However, we still may need to add some buffer stock as we sort of get later in the year and as parts become available. But the restructuring costs and the adjustments related to the auto sale are for sure behind us. At least the vast majority of that are behind us. So happy to report that.
spk10: And just so I'm clear on your statement, did you say the 50 million OpEx number would go down 3 or 4 million in Q1 or over the course of 2021?
spk08: I said 2 to 3. The 50.1 would go down 2 to 3 million heading into Q1. The only offset on that one is a little bit of engineering rework that we're having to do related to, again, Supply chain tightness is causing us to rework new parts into products and solve problems on the go. That's leading to some additional costs. But again, we do expect it to come down, like I mentioned.
spk10: Okay. And is that more or less then absorb the restructuring and then it'll be the regular rhythm of the business for OpEx after Q1?
spk08: After Q1, we should still see some smaller decreases. You know, there's still a little bit of restructuring work happening in the quarter, but the vast majority is done as we work towards that run rate. But going forward, we're going to be very diligent with our op-backs and ensure we're investing those dollars in the right areas. So I hope that answers your question.
spk10: Yeah, it does. Thank you very much. And then on the recurring revenue piece, $32.9 million up 25%, I think is what you called out. What is the 12-month trailing number for that I think you said it, but I must have missed it. I was looking for it in the deck and I didn't see it.
spk11: Sam, do you have that to hand?
spk08: Sorry, can you repeat that question, the trailing 12 months?
spk10: I was just curious what the 2020 recurring revenue number was.
spk08: Oh, for the whole year? Yes, for the whole year. Give me a second here.
spk11: It's about $118,000, Todd, but I don't have it.
spk08: Yeah, it's $116,000. So the $118,000 number, sorry for the small delay there, the $118,000 number includes about $2 million related to the auto business. So from continuing ops, it's $116,000.
spk10: So when you guys make this statement, you're tracking nicely, and with that growth rate, it would suggest that the $116,000 the one 16 compares to the 200 and the 400 that, that, that is, that's the stated goals, right?
spk08: Well, the stated goals are, are, are run rate basis. So I wouldn't say necessarily that the one 16 relates directly to that, but yeah, that's the trailing 12 months. Yeah.
spk10: Right. Okay. So the way, okay. So I accept that. So the way to think about it is more to run rate of the fourth quarter and then how that progresses towards those two goals. Correct. Yeah. And to the earlier question, you know, 25% plus or minus depending on close rates and because of COVID and sort of getting through all of this. Is there any other dynamics that are sort of noteworthy here, you know, beyond COVID? I mean, you cited a few examples at the beginning of the call, so I guess that's the point. But the takeaway is, like, if you were to think about this versus your expectations, I don't know if you can strip away COVID. Hard to do, I suppose. But, you know, how is it progressing versus your expectations? If you could put some qualitative commentary, let's say around that 32.6 million, 25% increase in the fourth quarter.
spk11: Yeah, I mean, I think at a high level, you know, the strategy is playing out as we were expecting and focused on doing. You know, we started talking about LTAR in 2019 and reported $93 million of LTAR. And then now this year, $140 million of LTAR. And those are the design wins that we've been driving into give a more complete solution to our customers. Many of the new customers coming in the industrial IoT side, shipping their products to multiple countries we simplify the whole time to mark and deliver that connectivity aspect and simplify um the solution for them so faster time to market and good return um so that that you know that part of our strategy has been playing out there's been you know impacts of covert on how quickly some of those projects get approved or implemented but the general trend is there and i think if anything covid's actually helped the general trend um the industrial companies that we're working with are looking to digitize their assets. They want to be able to get preventative maintenance and other benefits from that. One of the large customers, another industrial IT company, not the one mentioned here, was sharing with us that they see a 25% increase in follow-on sales and a 20% reduction in cost to serve as they get their machines hooked up via IoT so that they're getting all the sensor data from the devices they deploy. So the business case is strong for industrial companies. And that's going to be a big macro trend we're going to see over the years to come. And I think that all industrial companies will have to have an IoT strategy to be able to compete. So we're very well positioned. We're highly differentiated to serve that need as that industrial IoT market grows. And I think with the impacts of COVID and people wanting to have things automated and not required to have as much of a human touch, that that's going to accelerate things as we move forward. So, you know, we were expecting this market to be significant. It's playing out that way. And COVID is just increasing the aptitude for industrial companies to want to connect their assets.
spk10: Yeah. Okay. No, that's helpful. I don't know if you're going to provide this, but is there any color you can comment on qualitatively around retention, gross retention, churn, net retention, how that's sort of the expansion into the base once you actually land a project?
spk11: Yeah, once we deploy a project, we are generally there for the life of the asset. And so the churn is very low. Once the customer is getting the IoT from that device, The only turn is if they no longer want that IoT data, we're not seeing that, or that asset goes end of life, and then we're well positioned for the design win, the next generation asset that they'll be shipping out there to replace it. So once we are deployed with customers and providing that device to cloud, so we have the edge connectivity, we're managing it through our device management system, our SIM management interfaces to the customer. We have our global mock that's managing and making sure that those devices are always on the air reporting data. It's very sticky.
spk10: Last question for me. We're obviously aware of the planned CEO transition. Is there any sort of commentary or comments that can be made relative to existing strategy and you know, what sort of adjustments might we anticipate with the CEO transition? Any comments that can be made on that would be helpful. I appreciate it. Thanks very much.
spk11: Yeah, sure. Glad to talk to that. You know, I mean, our board's really lined up with the overall strategy. And so, you know, we're looking for the company to continue on this path and, you know, build further success as we move forward. The ability to offer a complete device to cloud solution is proving very important for winning business in the marketplace. You know, we are well differentiated and we, you know, look to scale both sides of our business, IoT solutions and enterprise solutions. So it's really about continued focus on that execution. It's been a pretty big transformation over the last two years, you know, from our products through to rebuilding what we do in our go to market side. And so that, that heavy lifting is a, has been mostly complete and focused on continued execution into this large and growing market.
spk10: Thanks a lot, Ken. Appreciate the call.
spk11: Yeah, thanks, Dodd.
spk01: There are no further questions. I turn the call back to management for closing remarks.
spk11: Well, thank you very much. Great set of questions today. Glad to share our annual results with you and look forward to continued engagement. We wish everyone best of health in these challenging times. I think there is some good light at the end of the tunnel with what's happening with vaccinations and declining rates. We look forward to more things getting back to normal and especially having product supply getting back to normal. But we'll continue to work that hard for our customers and for our results. So thank you very much, everybody. Have a good rest of your day. Cheers.
spk01: That concludes today's conference call you may now disconnect.
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