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spk01: Good afternoon and welcome to the Sierra Wireless First Quarter Earnings Call. I would like to turn the call over to David Kliney, Vice President, Investor Relations.
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. Kent will provide his corporate update and Sam will provide a detailed review of our first quarter results followed by Q&A. Before we get started, I'll reference the company's cautionary note regarding forward-looking statements. 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 or subject to substantial known and unknown material risks and uncertainties, that could cause actual events or results to differ significantly from those expressed or implied by forward-looking statements. I draw your attention to our longer discussion of our risk factors in our AIF and MD&A, which can be found on CDAR and EDGAR, as well as our other regulatory filings. This presentation should also be viewed in conjunction with our quarterly earnings release. With that, I'll now turn the call over to Kent for his corporate update.
spk10: Thanks, David. I expect this to be my last quarterly update before my planned retirement. I'm happy to report that the Sierra wireless transformation continues to gain momentum, with strengthening demand being offset in the near term by global supply chain environment. I will start my comments on our first quarter results and highlights. Total revenue in Q1 was $108.1 million, up 4.9% year over year. As we announced on March 23rd, the ransomware incident shut down our production facilities for one week, And as such, we were slightly behind the consensus of $109.8 million. We also noted during our Q4 results report that our demand was running about 15% higher than our expected revenue due to global supply chain challenges. During the quarter, orders continued to materialize, increasing this figure to 20%. In the first quarter, our connectivity software and services revenue was $33.7 million, up 26.1% year over year. We are seeing this revenue grow as one, our existing customers increase their IoT deployments with us. Two, we have new customers starting to ramp their deployment based on design wins we secured over the last two to three years. And three, some customer usage rates are recovering as economies open up as we get through what is hopefully the worst of the global pandemic. Clearly, the need for both real-time monitoring of remote assets and improved processing at the IoT edge is growing in importance. In fact, IoT analytics research just reported that they expect the predictive maintenance marketplace will quadruple by 2026. In my conversations with CEOs of industrial and enterprise companies, it's clear that they urgently want to digitize their assets so they can gather data from their equipment and factories, control endpoints, and run insightful data analytics. Many of these customers are looking for a trusted supplier that can securely provide them with IoT devices, connectivity, and edge-to-cloud tools for two-way data orchestration. All of these trends in IoT are certainly playing right into Sierra's strengths. In Q1, we're introducing a new metric to measure our performance and growth in our recurring revenue. MRR, or monthly recurring revenue, indicates the recurring revenue in the last month of each quarter and is defined as the monthly subscription revenue including usage fees from current subscribers. In our earnings release, we've included historical data for MRR in a graph for the last two years. You can see that our recurring revenue has grown nicely from 7.1 million in MRR in Q1 2019, up to 11.5 million in this past quarter, generating a CAGR of 27% over the two-year period. Over the last 12 months, MRR from March 2020 to March 2021 increased by 30.7%. Going forward, we will be providing you with MRR updates each quarter and stepping back from providing quarterly LTAR design win information. It was certainly important to show LTAR when we were transforming and building the services business over the last two years as design wins take several years until starting to show in our revenue results. With the continued maturity of our connectivity software and services business, and are strongly growing recurring revenue, we are moving to report monthly recurring revenue as a more common and easily understood metric. With regards to our hardware devices, we continue to see improving demand for our modules and gateways in the first quarter, and our backlog and pipeline continue to grow. We are facing a very tight supply chain environment, which we spoke during our last conference call and is being reported widely. Our operations team is working diligently to secure components so we can build and ship products for our customers. And we're using our balance sheet to make advanced purchases of component inventory. Our teams are also working very closely with our contract manufacturers to ensure we have the necessary production capacity. We are talking to our major suppliers constantly to facilitate any extra supply possible. And we are working closely with our valued customers to get them as much product as possible. But we will continue to have demand run ahead of our ability to supply in Q2. In the first quarter, we announced that we had a ransomware incident, which was discovered on March 20th. We immediately engaged an external team of expert advisors to help identify, isolate, and implement measures to mitigate this incident. Our factory production was halted, but has since been fully restored. We worked very quickly to minimize the impact of the incident, and we have been providing customers with updates and communications throughout the process. While the investigation of the incident is ongoing, We believe at this time that the incident was limited to our internal systems and website only as we maintain a clear separation between our internal IT systems and our customer facing products and services. We are aware that the threat actor that attacked our system was Ragnar Locker. Our IT team, with the help of external experts, have enhanced our security and monitoring tools with an added layer of protection to detect and identify malicious activity. We've also enhanced security at corporate endpoints for improved detection and 24 by 7 monitoring. I would like to thank all our staff and advisors for working tirelessly to return to business as usual. Now back to discussing business growth. Our 5G programs and embedded modules are now certified with all major carriers in North America and leading carriers globally. We are shipping 5G products to customers globally on both sub-6 and millimeter wave OEM deployments. Our 5G modules are primarily going into networking devices, laptops, video applications such as security and broadcast video, and the public safety markets. And our design wins continue to grow in 5G, as many of our OEM customers are seeing higher demand from their end customers for 5G products. So we're off to a good start in 5G in the first half of 2021, and we expect activity to pick up in the second half of this year with growth really coming in 2022. In the first quarter, our global sales team continued to secure new IoT solutions wins. I'd like to share a few examples. The first win is with a leading U.S.-based industrial technology company. They needed a sole source supplier for an IoT solution that enabled them to do remote monitoring of industrial products. They have been struggling with disparate pieces of hardware, multiple SIM providers, and various management tools. As a single provider, we have a bundled solution for them with first-class support. allowing them to digitize their assets quickly and scale globally and we are now doing tests with them using our octave data orchestration to further improve their iot solution the hardware value of this first design with this new customer is expected to be 4.5 million dollars and the recurring service revenue in year three is expected to be approximately 1.5 million another customer we signed up in q1 is an ev tv charging station company that is expanding its U.S. charging infrastructure given the rapid growth in the electrical vehicle market. This customer wanted a long-term relationship with an IoT partner that had high-quality cellular gateways packaged with IoT connectivity services. Our LX60 gateways, together with a ready-to-connect SIM, was the right fit for this customer. The hardware value of this initial design was expected to be $1 million, and recurring revenue in three years' time is expected to be approximately $300,000 per year. And this is just to start with this new EV customer. And the last example I'll provide today is a services design win. We signed this customer in Europe, a leading provider of event ticketing, online registration, and cashless payments. The customer has a number of point-of-sale devices being used throughout Europe and international locations, but was struggling with various carriers, contracts, and restrictions. The solution was having Sierra Wireless with a global SIM and strong commercial and technical support to be its sole supplier on the services side. The recurring revenue in three years' time is expected to be approximately $1 million. In Q1, we also announced the launch of AccuLink Cargo, a new managed IoT asset tracking solution that companies can quickly and easily deploy to track the location and condition of high-value and sensitive assets. It leverages our expertise in IoT device hardware, cloud management, and global connectivity, all in a unified solution that's based on a single monthly fee. We built this solution around three key needs for our customers, real-time visibility, product-level tracking, and exception-based monitoring, so they can constantly track their high-value, sensitive assets at all times. This managed cargo tracking solution enables manufacturers freight carriers, and third-party logistics firms to avoid shipping delays, reduce dwell time, and prevent theft. In Q1, we also announced a new LPWA module that supports the 450 MHz spectrum, so it meets the specific requirements of our smart metering and utility customers in Europe. Some countries, such as Germany, the Netherlands, and Austria, are reserving 450 MHz spectrum for LTE-M networks so they can provide connectivity for smart energy and smart grid solutions. Our new embedded module has best-in-class power consumption and advanced firmware over-the-air capabilities. The battery life of smart meters can be extended to more than 10 years, reducing the number of utility truck rolls needed for battery replacements. And lastly, I'm pleased that this week we launched our new XR90 and XR80 multi-network 5G routers. The XR series provides 5G high-speed connectivity for real-time video streaming in mission-critical environments and high-performance business-critical applications. The new routers deliver the full performance of 5G across any network, whether it's being used for mobile applications or primary, temporary, or backup fixed wireless connectivity. Both the XR80 and the XR90 allow customers to maximize 5G data speeds across Wi-Fi 6, and multi-gigabit Ethernet interfaces using quad-core processing and our internal OS architecture that accelerates the data path. So we're excited about taking this high-speed router series to market. In summary, our business transformation to IoT solutions leader is proceeding strongly with growing design wins, strong growth in our higher margin recurring revenue areas, and a strong pipeline of demand and orders throughout 2021. So with that, I will now pass it over to Sam for his review and comments on the first quarter. Thank you, Kent.
spk07: Good afternoon, everyone. Note that we report our financial results in US dollars and on a US GAAP basis. We also present non-GAAP results to provide a better understanding of our operating performance. A full reconciliation between our GAAP and non-GAAP results is available on our website. Total revenue in the first quarter was $108.1 million, up 4.9% compared to Q1 2020. Connectivity, software, and services revenue, which we had previously called recurring and other services revenue, was $33.7 million in Q1, up $7 million or 26% year over year. Our total revenue in the first quarter was constrained by two main factors. Continued constraints in the supply chain for semiconductors and other components. And the impact of the ransomware incident at the end of the quarter, which affected our ability to manufacture products. Non-GAAP gross margin in the first quarter was 35% compared to 34% in the prior quarter. reflecting increased higher margin connectivity software and services revenue. Our non-GAAP operating expenses in Q1 were $46.4 million, down $8.6 million, or 15.6% year over year. This reflects our cost reduction initiatives that we've been undertaking over the last two quarters. Our adjusted EBITDA was negative $4.4 million, compared to an adjusted EBITDA of negative 16.2 million a year ago. The improvement in adjusted EBITDA reflects our growing high margin connectivity software and services offering and the impact from our cost reduction initiatives. Revenue in the IoT solution segments was up 6.2 million or 9.1% year over year. This increase is primarily due to growth in our IoT connectivity business, which was partially offset by lower hardware revenue that was constrained by tightness in the supply chain and the ransomware incident at the end of the quarter. Revenue in the enterprise solution segment was down 1.1 million or negative 3.3% year over year. The decrease was primarily due to tightness in components and manufacturing capacity that constrained our ability to build and ship all the gateways and routers we had on order, and the ransomware incident at the end of the quarter. Looking at non-GAAP gross margin in the first quarter compared to a year ago, total gross margin was 37.8 million or 35% in the first quarter compared to 34.9 million or 34% in Q1 2020. the improvement was primarily due to our growing connectivity software and services offerings. Sequentially, gross margin declined by 1%, primarily due to increased costs associated with the continued tightness in the supply chain. Moving to the balance sheet, we ended the first quarter of 2021 with $112.2 million of cash. In our Q4-20 earnings call on February 23rd, we stated that we expected to consume approximately 20 million in cash in Q1 2021 due to three factors that we had referenced during the call. One, the need to increase capacity and inventory to combat the current global shortage of components. Two, restructuring outflows as we improve our operating efficiency. And three, some one-time working capital adjustments associated with the automotive sale. At the end of Q1 2021, our cash position was approximately $35 million below our original forecast due to three primary factors. One, approximately $12 million in additional working capital to build component supply to support increased demand for Q2 and the second half of the year. And during the quarter, we also paid many of our key component suppliers faster than previously expected to improve our allocations during the industry-wide supply tightness. Two, approximately $5 million of direct costs related to the ransomware incident, and three, approximately $18 million of indirect impact related to the ransomware incident, with the majority of that being the temporary unwinding of our accounts receivable factoring program as we had no access to our systems at the end of the quarter and were unable to factor our receivables. In the second quarter, we continued to invest in working capital to combat the current supply constraints. However, we expect the second quarter ending cash balance to remain flat to Q1 2021 as we recover from the ransomware incident. The impact of the COVID-19 pandemic on our global business continues to remain uncertain. While we continue to evaluate the effects 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 2021 and beyond cannot be reasonably estimated at this time. Due to continued strong demands and the investment in working capital to combat the industry-wide tightness in supply, we expect our revenue in the second quarter of 2021 to be in the range of $118 million to $122 million. Demand remains strong in the second quarter of 2021, and we have secured hardware orders and recurring revenue that is approximately 20% above the midpoint of our Q2 2021 revenue guidance. However, we continue to face a tight global supply chain environment that is constraining our ability to source all the necessary components and fully deliver to this level of demand. With that, I will now turn the call over to questions. Operator, please open the lines.
spk01: Thank you. The floor is now open for questions. I would like to inform everyone. In order to ask a question, you may press star 1 on your telephone keypad. Again, that's star 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mike Walkley. Your line is open. Please go ahead.
spk08: Great, thanks for taking my questions. You know, lots of positive developments, but wanted to focus on the supply area. You know, with a nice up sequential revenue growth and indications demand 20 million above this, any idea if this demand goes away if you can't fill it? Do you see any double ordering going on from your customers given the tight supply? And then how is your ability maybe to, meet that supply improving in the second half of the year? Sure.
spk10: Thanks, Mike. Good question. This is, I think, consuming the executive suites of almost every product manufacturer globally right now. We've been working very closely with our customers overall. So in your first part of the question, will this demand go away? For the most part, no. Most of our customers are single sourced with us. Um, and, um, you know, we take our responsibility to get product to them very seriously. So I'm on frequent, um, customer calls and I'm on frequent supplier calls to make sure that we are getting those parts there. Uh, secondly, in terms of overordering, um, you know, we have, we have strong visibility and I can tell you from the dozens of customer calls, it's, um, it's, it's real, uh, customer need. It's not, uh, it's not building buffers. It's not, uh, It's not the COVID toilet paper shortage. These are real needs for customers. And what we've been doing is we've been pushing out our order lead time to all of our parts suppliers, and we've been requesting enhanced lead time from our customers. And we've been doing that. We have orders into Q1 2022 in some parts of our business as we significantly work to expand our visibility so that we can order more parts earlier. and ensure that we can supply to customers. So it's been a significant amount of work, continues to move along. Our suppliers have been tremendous. We have got a lot of support. We've been able to increase our allocations in many areas. I feel that we're doing well in this difficult environment, but it's going to remain tight for the foreseeable future.
spk08: Great. Thanks, Kent. Yeah, I think it's great that you have the balance sheet to use to your advantage because certainly your competitors certainly might not have that balance sheet to build up as needed for customers. I guess my follow-up question, and I'll pass the line, is thanks for sharing the new monthly recurring revenue data. I think that's pretty straightforward. Just your thoughts longer term as you get off of supply issues. The 27% CAGR, is that sustainable? too low given the initiatives you have you have in place or too high given you're now growing off a larger base and a lot of large numbers just just your thoughts on that and uh before i pass the line just you know best wishes to you in your retirement great thanks mike um well as you know we've been talking about the transformation and we've been talking about lcar to show the design wins that we're getting so i think that we're you know we remain on trajectory towards the
spk10: 200 million recurring revenue by mid 2022 that we've talked about. And we, you know, we see continued growth moving forward. You know, we had 25% growth in Q4. We had in the comps there, you know, we added M2M into our business in the early part of 2020. So this growth, which is even stronger than Q4, you know, there's no, there's no, benefit of that acquisition. It's in the Q1 2020 numbers. So this is organic and it's a very strong number. And we'll continue to drive from here. And I think that the reporting MRR helps give a good view and shape to the CAGR. We do have some seasonality in quarters, but I think the trend data is clear. As we said in that, we had 27%. over the past two years, 30% in the past year. So we are seeing that continue to improve.
spk08: Great, thank you.
spk01: Your next question comes from the line of Thanos Machopoulos from BMO Capital Market. Your line is open.
spk09: Hi, good afternoon. How should we think about margins for the next little while, I mean, in light of the supply constraints? And obviously there was some noise in Q1 with the ransomware attack. But I mean, should we think about margins kind of going back to kind of Q4 levels or what would your expectation be?
spk10: Hi, Thanos. Thanks for that. And I'll ask Sam to jump in here in a second. But, you know, we're getting benefits of mix. So we're seeing increasing recurring revenue and our enterprise revenue, which is high margin, was held back by supply and late quarter issues with ransomware where we had a lot of our enterprise build planned for the last part of the quarter. So those mixed elements help us, but there are headwinds with some extra costs from supply chain. So Sam, do you want to talk to that?
spk07: Yeah, thank you. So in the enterprise business specifically, we had some increased costs due to some parts that we had to procure in the gray markets. So that's going to be a headwind for the next little while. We're not giving guidance on margins, but with better mix and growing high margin recurring revenue in the connectivity software and services space. And then the headwinds from the component parts constrained environment going away in the future, you're going to see improvement. In the short term, it's going to be about where it is.
spk09: Okay. And then as far as OpEx, was there anything meaningful associated with the ransomware talk from an OpEx perspective? And then should we think about Q1 being indicative of the run rate or what's the dynamic there?
spk07: So the cyber event, if you look into the financials, I believe there was about 500K of net costs. And that was about the insurance deductible. So, and that was disclosed in other expenses. So not in the run rate of OpEx. The OpEx reflects the cost initiatives that we put in place. So again, about at the level we expected.
spk09: Okay. On the flip side though, is there, I mean, I guess things like maybe travel expenses coming back or I don't think you had much benefit from COVID wage subsidies, did you?
spk07: Not much. But again, if you look at the non-GAAP rec, it's in there. I think it was about $2 million for the quarter, but we non-gap it out. Okay.
spk09: Okay. And then finally, Kent, in terms of, I guess you mentioned some of the applications driving 5G. And sorry, I don't think I caught it as far as geographic areas. Is that primarily a North American dynamic, or were you seeing that?
spk10: No, we're seeing 5G... interest and demand globally. So we have significant activity going on in Europe with the demand for our 5G products. We're selling to many routing customers globally that are looking to deliver, take our 5G modules and deliver 5G connectivity. We have a number of customers in Asia, particularly in Japan with interest. And then of course, North America is very strong with the significant activity that you've seen from the carriers. And we've made announcements with work with T-Mobile and with AT&T and with Verizon, who are all very active in the 5G space.
spk09: And that should be, I mean, given the rapid 5G, that should be a positive for margins, although SQL, should it not? I mean, appreciating that you have some other constraints and headwinds going on, but although SQL, higher 5G mixed drive margins, right?
spk10: Well, 5G products are still quite expensive. And so our margins are good on a dollar basis. You won't see a big impact on a percentage basis because it's a bigger ticket item. And those prices will come down over time. And I think we will give us more opportunities. But we're still in the very, very early innings of 5G. As I said in my comments, we're off to a good start. We have I couldn't be happy with our design wind space in terms of the number of people that are relying on us for their 5G products. But they're just in the early stages of those rollouts. So we'll see that growth throughout the year. And we think that 2022 and as we get to further maturity of the standard, we'll see a significant growth.
spk09: Great. Thanks, Kent. Best wishes for your retirement. I'll pass the line.
spk10: Thanks, Thanos. Cheers.
spk01: Your next question comes from the line of Josh Nichols from B. Riley. Your line is open.
spk03: Yeah, thanks for taking my question. I'm really good to see the demand outlook for 2Q, given some of the headwinds that the company faced in the first quarter. Could you provide a little bit more color on what the expectation is? I know gross margins were impacted by around 100 bps quarter over quarter. Do you think you're able to maintain the current level or the expectations going forward with the supply chain?
spk07: Yeah, like I said earlier with Thanos' question, as we have better mix and growing high margin connectivity software and services revenue, that mixed with the improvement in the supply environment, we'll get more gateways and routers out, which are higher margins. So that mix will improve our margin. And then also, you know, having to buy more expensive parts in the gray market and extra engineering costs to rework products will improve. So in the short term, I think it's a good level where we're at in Q1 here, but a lot of tailwinds for the future.
spk03: Thanks. And then just kind of tangentially on that point that you just made, I know you mentioned before that the company's enterprise pipeline had kind of doubled last year. I know it was down a little bit in the first quarter, you know, because of this ransomware attack. But how's that pipeline looking as we kind of move into like the back half of this year? It's obviously higher margin and fairly accretive to the business. And what are your expectations on that front?
spk10: Sure. You know, our Q1 was strong from an orders perspective. And our orders for the first half of the year are up over 50% from our orders in the first half of 2020. So the demand continues to be robust. Challenge to ship all of that product. So it's not about demand side. So the work we've been doing with customers, products, partners, has been going very well. And, you know, we see that continuing as we move forward. We think we're going to be able to catch up on a lot of product in Q2. One particular supply shortage part in Q1, we were able to alleviate a lot of that late in the quarter, but then with the ransomware, we weren't able to get those products shipped. So, you know, hence the slight down year over year, which is disappointing because it's not reflective of where our orders were at. And we're working tirelessly right now to get more product into the hands of our customers that definitely need it.
spk03: And then last question for me. I don't know if you could or how easy to be able to do, but if you could try and quantify the revenue impact regarding like the cyber attack and also some of the component shortages, I'm just trying to get a, ballpark figure for how much of an impact that had to the revenue for this quarter as I think about longer-term opportunities.
spk10: Well, I think that as you look at our release that we put out, we said that we had talked before that we thought that the impact of supply chain shortages was going to mean that there'd be 15% orders above what we had in revenue and said now in Q1 that looks like 20% above orders that we weren't able to ship. And then Sam added in his guidance that our midpoint in guidance is 120 for Q2, but we have orders 20% higher than that number that we'll have to work through the supply chain and get those shipped as soon as possible, but mostly sliding into Q3. So that's sort of the nature of the world right now where We're working to get orders with as much lead time as possible. Anything that comes in a short lead time is likely going to be unable to get shipped as we work to get the component parts to be able to build those products.
spk02: Thanks.
spk10: Go ahead, Sam.
spk07: I was going to just mention that for the ransomware incident, we recovered quite quickly from that As you can tell from the, you know, the discovery to when we resumed production. So, you know, you can kind of estimate from that brief period what the impact would have been from the quarter. And I think a few analysts did.
spk02: Does that answer your questions, Josh? Yep. Thanks for the clarification. Appreciate it. That's it. Great. Thanks.
spk01: Your next question comes from the line of Scott Searle from Roth Capital. Your line is open.
spk00: Hey, good afternoon. Thanks for taking my questions. In the enterprise end markets, Ken, I was wondering if you could provide a little bit of color in terms of where you're seeing the demand from an end market perspective if things like CBREX are starting to play in. And then also the opportunity for recurring services in and around the enterprise router opportunity, kind of like Cradle Point, like type of services, if you're seeing that opportunity out there, and if that would stay within that business segment when you're reporting enterprise going forward.
spk10: Sure. Thanks, Scott. Thanks for your questions. Good to hear from you. So, you know, we're seeing enterprise demand in a number of areas. So, yes, CBRS, to specifically your question, that is driving demand. We're seeing quite a few, quite a bit of interest in those deployments. working with a number of partners like Motorola and others on CBRS deployments. And so that's a nice growth area. Public safety remains very strong. And so we're winning a lot of business as needs in public safety happen. We're also in our commercial area and with utility and smart grid applications. seeing good growth in those areas. So the areas that we focus on are all performing well, and we're focusing on delivering product into that and continuing to build our strong pipeline as we move through that. On the recurring revenue side, yes, we do attach our software solutions and support to our gateways. with our new 5G launch, and we've rolled out, I think I mentioned previously, but a couple years in development, a complete new support cloud service to Attach, so we think that we have opportunities to continue to grow that area of Attach and more sophisticated cloud support for our gateways to our customers. So we continue to drive recurring revenue there. Also, in some instances, we will attach connectivity to our gateways, But for the most part, it's around our cloud and support with our gateways.
spk00: Great. Thank you. Very helpful. And lastly, if I could, I know you're not providing guidance in terms of the immediate gross margin outlook, but backing into the numbers in terms of the new revenue lines that you've provided, it seems like the module side still remains challenged, a little bit under 20% gross margin's. I'm wondering how you're thinking about that business longer term. Is this going to be a 25% gross margin business in 22, assuming a normalized component environment, or is this something where you could get the 30% plus? And Ken, best of luck in your retirement. Thanks so much.
spk10: Okay. Thanks, Scott. So I think that if we work to pivot to solutions, so we're not just selling a module we built in our ready-to-connect built-in SIM technology into our module so that we can drive the connectivity. And so sometimes the gross margin on the module may be very low, but we're adding a high margin recurring revenue stream to that. So there's a slight timing difference as you'll sell the module and recognize that low 20 gross margin, but then you're seeing 40% to 50% recurring revenue gross margin that extends for the length of that asset. So I think that the overall... value that we see from each one of our deployments is increasing as we increase our attach rates. The competitive environment remains very tight on the module side. And that's why we came up with our strategy of being the complete and trusted IoT solution leader, as being able to provide that complete device to cloud solution to customers. And so as we've described with our design wins, with our LTAR wins, and you can see it now coming in our recurring revenue growth, We're winning out in the marketplace with that offer, and we expect the competitive environment on the module-only space will remain tight, but we have the opportunity to grow significant revenue and gross margin from being that complete solution provider.
spk02: Great. Thank you. Cheers.
spk01: Your next question comes from the line of Paul Treiber from RBC Capital Markets. Your line is open.
spk06: Oh, thanks very much. Good afternoon. Just on cash flow, I was hoping you can delve into your comments on next quarter in terms of cash flow being flat, although you mentioned you said you'd recover from the ransomware attack. I was just hoping you could just outline for next quarter what are some of the moving parts of cash flow. Sure. Hi, Paul. I'll let Sam jump into that one.
spk07: Thanks, Kent. Thanks for the question, Paul. You know, you're going to see revenue improve. You're going to see OpEx, you know, we've already seen that big improvement, you know, in 2021 versus 2020 from our cost reduction initiative. So you'll start to see, you know, kind of better cash from operations. You're going to see a little bit of continued investment in working capital as we are combating an unprecedented environment in supply. And you'll see some recovery from the ransomware incident in terms of insurance recovery, plus being able to do our AR factoring program, which we do at a pretty low cost, around 1%. So those are the big moving pieces for the quarter.
spk06: So is it right to characterize it that the factoring, the benefit from factoring coming back and maybe that recovery, the insurance recovery a little bit there, would be offset by the investment on the supply side?
spk07: That's basically the right way to think about it. The other big investment in the quarter, not huge numbers, but we're investing in next-gen 5G. So we're a big believer in 5G, and we're putting some investment in CapEx dollars there. So that will be another sort of smaller piece. But yeah, that's a good way to think about it.
spk06: Okay, that's helpful. And then, Kent, good luck in your retirement. You mentioned this would be your last conference call. Is there an update on the CEO search? I noticed some costs in the core. How is that going? When do you expect that to be completed?
spk10: Sure. Thanks for your good wishes. The CEO search is going well, and the board's run a strong process, seen many good candidates. They've converged on a candidate at this point and expect that you'll see us make an announcement early in Q3. So I'm likely going to be around a little bit longer than my June 30th target that I had put out there, but expect we'll make that transition. So my goal is to deliver a very strong Q2 and then help a very successful transformation building up the momentum that we have. And so you'll hear from us in Q3 in that regard.
spk06: Okay, great. Best of luck.
spk02: Thanks.
spk01: Again, if you would like to ask a question, you may press star 1 on your telephone keypad. The next question comes from the line of Derek Soderberg from Collier Securities. Your line is open.
spk05: Hi, everyone. Thanks for taking my questions. Kent, I want to start with 5G and sort of the competitive environment there. As it relates to the hardware piece alone and then the entire solution, how do you feel about your product differentiation versus what's out there? And do you guys expect to take share of the market as this 5G rollout accelerates?
spk10: Sure. Good to talk to you, Derek. Thanks for the question. So we've done very well on 5G and serial wireless has great history and depth of bringing new air interfaces to market. So we're really the trusted partner in the industry as 3G came, as 4G came, and now with 5G. So we've been able to deliver this product and very complex, a lot of antenna challenges and obviously the most complex product ever brought to market. So we have picked up share and slots with many players in the router industry and working to deliver to them. And then the second part is our modules into our own gateways. We've launched and just made a press release this week on our two new 5G gateways. that we've brought to market, our XR80 and XR90. And we're very proud of those. One of the leading global carriers in their analysis told us that we were by far the best gateway that they had seen from an overall performance and management perspective. So we're proud on both aspects of that, what we're doing with the 5G technology to provide the high bandwidth and low latency connectivity link. and then being able to leverage that into our gateways for customers that are looking to take advantage of that. So this is where we're at our best and I'm very proud of our team in terms of what they've delivered here in the 5G space.
spk05: Great. And then just a quick question on the two new segments as it relates to recurring revenue. I'm wondering how much of that recurring revenue that you report is coming from the separate IoT
spk07: uh and enterprise solutions if you can kind of split that out what that looks like sam do you want to talk to to that yeah yeah sure i mean we're not we're not sort of providing um that level of of detail but more of the recurring revenue of the connectivity software and services piece is in the iot solution segment um But there is a decent chunk in the enterprise solutions piece as well. So I think 60-40-ish would be fine to think about.
spk05: That's helpful. Thanks, guys. Thank you.
spk01: The floor is now closed for questions. There are no questions in the queue. I would now like to turn the call back to Ken Texton. Please go ahead, sir.
spk10: Thank you. Well, thank you, everybody, for participating in our Q1 earnings call and good questions. I set out the vision in 2018-2019 to transform Sierra Wireless to the leading IoT solutions player with complete device-to-cloud offers. And so, as you can see, we've innovated in our solutions offers and rebuilt our go-to-market to help customers quickly get their IoT deployments, delivering valuable edge data and control. We've been winning valuable design wins over the past two years, and the hard work is showing with our strongly growing connectivity, software, and service revenue, our new definition for our recurring revenue. I'd like to thank the dedicated and hardworking team at Sierra Wireless for driving this successful transformation. So thanks to all. I'll be speaking to many of you in the coming days. Meanwhile, I'll focus on delivering a strong Q2. All the best. Cheers.
spk01: This concludes today's conference call. Thank you all for joining.
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