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spk00: Good day and thank you for standing by. Welcome to the Sierra Wireless Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. David Clymie, Vice President of Investor Relations. Please go ahead.
spk03: Thanks, and good afternoon, everybody. Thank you for joining today's conference call and webcast. On the call today are Phil Brace, President and CEO, 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. Phil will provide his introductory comments, and Sam will provide a detailed review of our second quarter results today. 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 management's current expectations, and we caution investors that forward-looking statements, particularly those that relate to longer periods of time, are subject to substantial known and unknown material risks and uncertainties that could cause actual events or results to differ significantly from those expressed or implied by our forward-looking statements. I draw your attention to our longer discussion of our risk factors in the AIF and MD&A, 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 will now turn the call over to Phil for his corporate update.
spk08: Thanks, David, and thank you for everyone for joining us on the call today. We are pleased to report results for the second quarter of 2021. Total revenue in Q2 was 132.8 million, an increase of 19% compared to the same period of 2020. Revenue from IoT solutions increased by 16% year-over-year to 90.3 million, and revenue from enterprise solutions grew by 25% to 42.5 million. Revenue from connectivity, software, and services increased 31% to 35.2 million, reflecting our continued success with generating recurring revenue. Non-GAAP pop-backs was flat sequentially from Q1 and down 13.6% from Q2 2020. Our adjusted EBITDA improved from negative 8.7 million in Q2 last year to positive 4.3 million in the second quarter. Before I hand the call over to Sam to review the Q2 financials in more detail, I thought it would be helpful to provide some background on why I joined Sierra Wireless and to discuss some of the actions that I'm driving in the short term. For more than 25 years, I've been working in high tech across all areas of hardware, software, and services. Most recently, I was the EVP of field operations at Veritas, a Carlisle-owned private equity company. While at Veritas, I made significant changes, streamlining and improving operations in the integrated appliance business, software-defined storage, and finally, all of the go-to-market activities, leading to significant profitability improvements. Across multiple companies, including Intel, LSI, Seagate, and Veritas, I have an established track record of business performance improvement across a range of industries. When the opportunity of Sierra Wireless was presented to me, it was quickly apparent that there is much potential to be unlocked. The macro trends of IoT and 5G are accelerating, and Sierra is well positioned to capitalize on these trends. Sierra has a broad portfolio of leading wireless modules, gateways routers, and a rapidly growing connectivity and solutions business that leads to strong recurring revenue growth. The worldwide global pandemic has also accelerated the needs for our customers to be able to remotely connect and manage a wide range of devices in the field. And Sierra, as the trusted Western IoT supplier, is seen as a preferred partner with its global reach and coverage. As the new president and CEO, I see myself as the steward of shareholder capital, and I take that responsibility seriously. I recognize that investors have other places they can invest their money. You'll find me to be direct, results-oriented, and with a clear focus on building a profitably growing business. In the past two weeks, I've been spending time meeting with as many customers, suppliers, partners, and employees as possible in both Vancouver and Atlanta. And while I expect to continue to do more of that going forward, my immediate short-term focus is on the operating performance of the business. We are currently facing an unprecedented operating environment with the global impact of COVID-19 and a tight component supply chain. Our Tier 1 contract manufacturer, who builds a significant majority of our cellular modules and gateways, has our facility located in Vietnam, which has been impacted by an increase in COVID-19 cases in the last two months. This has led to widespread disruptions across the country, significantly impacting our ability to manufacture and ship our products. We are taking five immediate actions to mitigate this situation, including, one, Working with our contract manufacturers to subsidize the cost of isolation hotels for their workers with the goal of resuming full production as fast as possible. Number two, ramping up two additional manufacturing sites, including one in Mexico, to diversify our geographic production and increase our manufacturing resiliency. Number three, investing in parts and components to enable us to fulfill our customers' orders as soon as possible. We are using our strong balance sheet to play often. Number four, we are implementing strategic pricing increases to help offset some of the additional costs and investments while balancing the need to remain competitive in the market. And number five, we are controlling our OpEx and CapEx spend in the second half of this year to ensure we are controlling what we can control. I already have Sam and the team working on those initiatives. We do believe that the significant challenges we are experiencing in Q3 are temporary and Our demand remains very strong, and I believe we are taking the right actions and initiatives to navigate through them. Orders that don't ship in Q3, we expect to ship in the fourth quarter, and in some cases in the Q1 of 2022, resulting in a solid recovery, subject to COVID-19 externalities. Going forward, I will be focused on strategy, alignment, and execution, along with prudent allocation of capital. I'm excited and humbled to be working with such a highly qualified and experienced board of directors to unlock the potential of Sierra Wireless. Finally, I would like to thank our employees, our customers, and our suppliers as we collectively work through the COVID-19 interruptions and tightness in the supply chain. Together, we will thrive. With that, I will turn the call over to Sam for his review of the second quarter results.
spk04: Thank you, Phil. 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 second quarter was $132.8 million, up $21.1 million, or 18.9% compared to Q2 2020. We were able to achieve higher than expected revenue in Q2 despite the tight supply chain as we secured additional parts during the quarter. Connectivity software and services revenue was 35.2 million in Q2, up 8.3 million or 30.8% year over year. Non-GAAP gross margin in the second quarter was 34.9%, similar to the prior quarter, as higher component costs were offset by our higher margin gateway sales, as well as connectivity software and services revenue. Our non-GAAP operating expenses in Q2 were $46.4 million, down $7.3 million, or 13.6% year-over-year. This reflects cost efficiency initiatives that we've been undertaking over the last 12 months. Sequentially, OpEx remained flat with the prior quarter. Our adjusted EBITDA was positive $4.3 million compared to an adjusted EBITDA of negative $8.7 million a year ago. The improvement in adjusted EBITDA reflects the year-over-year growth in gateway revenue and the increase in our higher margin connectivity software and service offerings as well as tight OpEx control. Revenue in the IoT solution segment was up $12.7 million, or 16.3% year over year. This increase is primarily due to growth in our hardware revenue and IoT connectivity business. As mentioned, we were able to purchase additional parts and components in the quarter that allowed us to build and ship products to our customers. Revenue in the enterprise solution segment increased 8.4 million or 24.6% year-over-year. The increase was primarily due to improved sales and delivery of our gateways and routers despite tightness in manufacturing capacity and components. Looking at non-GAAP gross profit in the second quarter compared to a year ago, total gross profit was 46.3 million or 34.9% in the second quarter compared to $41 million or 36.7% in Q2 2020. The improvement in gross profit dollars is primarily due to our growing connectivity software and services revenue and improved gateway sales. Moving to the balance sheet, the end of the second quarter of 2021 with $118.5 million of cash. Cash flow from operations in Q2 was $15.3 million which included approximately $20 million in factoring of receivables during the quarter. CapEx in the second quarter was $6.5 million, which included purchases of 5G new test equipment and software licenses. As a result, free cash flow in Q2 was $8.8 million. During the quarter, we continued our strategy of investing in inventory to secure the supply of components. we purchased 3.5 million worth of shares in the open market under our RSU program. As a result, our cash balance at the end of the second quarter was 118.5 million, an increase of 6.3 million sequentially. In Q3, our manufacturing capacity has been significantly reduced due to the COVID-19 related production interruptions in Vietnam. In turn, is expected to have a significant impact on revenue, gross margin dollars, gross margin percentage, profits, and cash. The impact of gross margin percentage is due to having less absorption of fixed costs spread across lower expected unit volumes as a result of the factory interruptions in Vietnam. The expected reduction in cash in the quarter is approximately $60 million due to our strategic investment in inventory to ensure a strong recovery from the production interruption and reduced AR factoring program arising from reduced sales. We expect this to be a one-time impact to Q3 related to the production interruptions in Vietnam, and we expect to recover over the coming quarter as working capital normalizes as we increase production. To minimize the impact on cash and profits, the company has delayed or canceled non-critical capital expenditures, significantly reduced travel expenses, delayed or canceled non-critical operating expenses, implemented a hiring freeze, and reduced its marketing spend. The impact of the COVID-19 pandemic on our global business continues to remain uncertain. While we continue to experience and 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. Demand for our products remains very strong. However, as we mentioned, we are experiencing production eruptions due to COVID-19 cases at a contract manufacturing facility in Vietnam. This is impacting our ability to build and ship cellular embedded modules and gateways to our customers. in the third quarter of 2021. While limited production has resumed at the Vietnam facility and we are currently building our resiliency by ramping up multiple locations, including our New Mexico site for gateways and routers, the ongoing impact of these interruptions is highly uncertain. This is expected to have a material negative impact on our financial condition and results of operations, including production capacity, revenue, gross margin percentage, gross margin dollars, profit, and cash in the third quarter of 2021. Given these uncertain conditions, we will not be providing guidance for the third quarter of 2021. We believe we are taking appropriate steps to navigate through the impact of COVID-19 this quarter. We are benefiting from very strong customer demand and backlog for our products and solutions, and believe the macro trends of IoT and 5G are accelerating. We are also using our strong balance sheet to strategically invest now to secure components and capacity to ensure a strong Q4 recovery coming out of the COVID-19-related production eruptions in Vietnam. With that, I will now turn the call over to questions. Operator, please open the line.
spk00: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. We have our first question from the line of Mike Walkley from Canaccord Genuity. Your line is now open.
spk06: Great. Congratulations on the strong results given the tough supply environment. And Phil, congratulations on taking over as CEO. I've heard good things about you from my industry friends.
spk08: Thank you.
spk06: But Phil, most importantly, best wishes to your partners in Vietnam dealing with the COVID surge. While this is impacting your ability to meet the growing demand, the entire industry is struggling to meet demand. But can you help us just think at all the impact to Q3? While it's obviously tough to predict given the awful pandemic and what's going on each week, but can you help us just think about the impact to Q3?
spk08: Yeah, thanks for the opening remarks and thanks for the question. The impact of COVID-19 disruptions in Vietnam will be significant for us in Q3. The primary reason we can't provide guidance is really related to the uncertainty around the pandemic and the continued potential disruptions. Our revenue in Q3 is really going to be highly dependent on our manufacturing capacity output, how many products we can actually build, the availability of the components to get them in and out of the country, and then the ability to mix of the products. To give you a little more color, The disruptions started in early July, and as a result, there's been very little, you know, minimal output from the manufacturing side that produces the substantial majority of our products. The facility is located in Ho Chi Minh City, where along with other companies and other industries that are affected there, and it's important to note that in addition to the manufacturing disruptions, we've also seen disruptions in things like logistics, shipping, and customs. So that gives you a little bit of color. We're working very closely with our contract manufacturer to ramp up their production as soon as we can, and we're aiming to get normal production levels back as soon as possible, obviously subject to further COVID-19 outbreaks and component availability. Our plan, our five-point plan we're talking about, is working with our contract manufacturer to bring production back up as fast as we can, including isolating our workers as possible, ramping two additional facilities to increase our geographic resilience, continuing to invest in component supply to make sure that we can build the products when we can start manufacturing them again, implementing strategic price increases to help make sure we can absorb and, where possible, pass along some of the cost increases we're experiencing, and we're controlling our expenses, including allocating every dollar we can to helping solve some of these production-related issues and manufacturing constraints. And I think, as David talked about, the thing we feel great about is demand remains incredibly strong. We are anticipating many of the orders to be able to be fulfilled in the next quarter and certainly in the subsequent quarters after that. And, you know, I do think it's important to note we are still seeing a fairly tight component supply chain that we have in front of us as well. So hopefully that gives a little color in terms of where we are.
spk06: Yeah, that's very helpful. And maybe just a follow-up. It sounds like you think the disruption is you could be under control by Q4. I know it's hard to predict, but do you think you're at any risk of losing share? I know the whole industry is supply constrained, but any risk from your customers having to go to other areas or any feedback you've had from your customers if they're willing to wait for the issue to resolve?
spk08: You know, we've had, I think everybody in the industry is dealing with these things. In fact, many of them, all of the customers I've talked to, Of course, they've been anxious to get as many parts as we can. We've been working to try and make sure we are satisfying their most critical needs as possible to make sure they don't go into any sort of supply continuity problem of their own. And many of them have been very understanding as they've been dealing with their own supply situations, not just from us but other vendors as well. I think to the extent that we don't see anything moving away, but obviously if customers have multiple sources of supply, they're going to look to that. But in general, the feedback I've had from customers is they've been very understanding. They're working with us collaboratively. We're trying to do so in a transparent, straightforward manner and really trying to work collaboratively with customers. Many customers we've had for a long time, we're hard to replace. So we're not seeing any movement along that area right now, but you know, we're just something we're just continuing to do day in and day out of working with the customers.
spk06: Right. Last question for me, I'll pass it on. Just as you look at the competitive environment, the cellular router gateway business, you know, Sarah's been a leader in this business for a while. A lot of, a lot of change, you know, your new CEO cradle point is now part of big, big operation within Ericsson and Gigi on their last earnings call. They just announced that they've hired a new industry veteran to try to change the the leadership within their cellular router and gateway business. So how do you look at Sierra's position in that business? And, you know, once you get through supply issues, maybe the longer term growth drivers.
spk08: Yeah, that's a great question. Obviously, you know, whatever it's three weeks or three weeks, you know, not even quite the full three weeks yet. So I think it's still early days for me, but I've been really impressed with that particular portion of the business. I think it's, It's got a great, very attractive market to be in that's going to continue to grow. I'm encouraged by some of the focus on the sub-segments, public safety and the like. I like the private radio bands that are happening there. It tends to have higher software attach rates. So I generally like the business and, you know, going to be continued to focus on that. You know, of course, we have the 5G drivers there as well. We've got very strong product reviews for our 5G product, and I think the customer reception of that has been great. So, you know, I'm initially very positively inclined with that. Great.
spk06: I'll pass the line and best wishes to your partners in Vietnam. Thank you.
spk00: We have our next question from Anthony Stokes from Craig Hallam. Your line is now open.
spk11: Thank you. Phil, welcome aboard also. A couple of questions for you. I know you're saying that the majority of our large portion of your production is done in the Vietnam facility. Can you give us a more approximation? Is it 75% or higher? And also, if you're trying to bring up Mexico in another facility, have these facilities ever produced parts for you before? How long before they're live? And then add a couple of follow-ups after that.
spk08: Yeah, we're not giving specific numbers out on what it are, but suffice to say the significant majority of our parts were built out of there. In answer to your question, the move to diversify our geographic base, manufacturing base, actually was started before We've seen some of the latest disruptions. So some of this transition is well underway. One of the facilities has, in fact, built products for us before. And the second one, the new one, we are undergoing a call now and have been working on that for quite some time, which is why we're able to bring it up faster than you might think.
spk11: Okay. Hypothetically, if you're – I'm just going to make up a number. You have $50 million of revenues getting impacted in Q3. How much of that impact would probably hit or you'd be able to ship a Q4 and, you know, additive or maybe give us a sense of kind of Q3 and Q4 combined, if you could?
spk08: You know, that's a good question. It's probably early for us to do that. I mean, and the reason is it's just difficult to predict when we're going to get back up to full capacity. I think our goal really is to be back up as close to we can in the fourth quarter and and then start burning through some of the snowplow, if you will, of our orders. And then I think, frankly, we're probably going to be back in a situation where we're capacity constrained by component supply again. So it's a whack-a-mole situation right now. We're just trying to deal with one situation at a time and try and fulfill as many orders as we can. OK.
spk11: I'm curious, in terms of the inventory you do have in hand, how much of that we'll be able for you guys to use in Q3? Or are you still missing some raw materials? you're not going to be able to turn it into finished goods in Q3?
spk08: You know, I'll let Sam go into the specific details, but I would suggest with respect to inventory, I mean, most of the inventory you're going to see on the balance sheet that we're accumulating, most of it is raw materials in terms of component supply. That's the vast majority of it. We, you know, obviously we are in production in Vietnam, so we are continuing to run through it, but the vast majority of the inventory build will be components supply.
spk04: Hey Tony, it's Sam here. Thanks for the question. So yeah, we'll build up some inventory because our capacity is reduced because of the COVID-19 related shutdown and interruption, but that will normalize that working capital over the coming quarters and bring that down. So that will be converted to cash over the next two or three quarters. And it's all new purchases, et cetera. So, you know, ready to go to fulfill products for our customers.
spk11: Got it. Good to hear your voice. I guess the last question for me, probably for both you guys, your order book or your visibility into 2022, I know this is a tough period. You're reaching out to customers. Do you have a sense of guys are giving you more visibility because of this into 2022? I'm curious your thoughts on your ability to produce everything that you get orders for in 2022.
spk08: Yeah, that's a good question. I would say in general we have seen increased lead times. Our customers are giving us orders farther out in time. So we have seen increased backlog for the outer quarters more than we've seen before. So I would say customers are recognizing that and they're starting to give us longer lead time orders. So I would say the answer to your question is yes, we're starting to see more of that. Okay.
spk11: Thanks for all the color. I'll jump back in line. Thanks.
spk08: Thank you.
spk00: We have our next question from Sanos Machopoulos from BMO Capital Markets. Your line is now open.
spk09: Hi, good afternoon. Phil, welcome as well. So when the recovery does happen, would you expect gross margins to, I guess, recover kind of in line with revenues as revenues pick up? Or might there be some kind of a lag there associated with some of the issues ramping up in your facilities and so forth?
spk08: Yeah, that's a good question. I mean, I think as Sam mentioned, you know, we are going to see a gross margin impact as a result of fixed cost amortization offers of smaller unit volume. I do expect to see that we would have a recovery in gross margins as we do ramp up. So I think the short answer to your question is yes. You know, whether there's particular timing of that, it's, you know, probably too early to tell. But I think the general answer to your question is yes. And furthermore, I commented that we are pursuing strategic price increases to help offset some of the incremental costs we are seeing. We should see some benefit of that in the Q4 period.
spk09: And as far as the Q3 disruption, if we look at modules versus gateways, should the impact be sort of similar, or is there some dynamic there, recognizing that modules go into gateways, but prioritizing gateway shipments? Or was it dynamic?
spk08: No, I think, you know, we're not – right now we are just trying to build every product we can. And, you know, certainly we have some strategic module customers who have been with us for a long time that we need to supply. We're trying to build our own some of the gateways as well. So there's no additional color we're going to provide on that. I think it's – I would say that the supply disruptions have been uniform across our product line.
spk09: Okay. Okay. And then on the components, I mean, I guess maybe less relevant for Q3 since that's not as much of the constraint, but over the past quarter, how has the situation evolved? Would you say is it relatively consistent or has the component constraints gotten any better or worse?
spk08: Well, you know, I don't have the benefit of history, but I do have the benefit of lots of experience in the space. So it's hard for me to say whether it's worse than prior. I would probably say it would be relatively consistent from what I've seen. I haven't seen anything dramatically worse or otherwise. I mean, I think as you go through, I mean, we are seeing tightness of supply across a wide range of, you know, components. And even when you go down even into the subcomponents, wafer supply, 40 nanometer, 65 nanometer wafer supply, substrates are tight, packages are tight, memory is tight. You know, just across the board we're seeing tightness. You know, there's spot changes here and there, right? Sometimes we'll pick up some more availability on certain parts or others. And, you know, right now, you know, we're certainly planning on a tight material supply chain until probably mid-2022 is our current planning horizon right now.
spk04: And one thing to remember, you know, we made that big investment in Q1 in parts, and that helped us generate a very strong Q2 and to really improve on Q1 into Q2. We're doing that same thing in Q3 now with the COVID-related interruption and making that some investment and plan on converting that to a stronger quarter as well. So the supply constraints are consistent, but we're getting ahead of it the best we can to get products to our customers.
spk09: Great. Thanks, guys. I'll pass it away.
spk00: We have our next question from the line of Scott Searle from Roth Capital. Your line is now open.
spk05: Hey, good afternoon. Thanks for taking my questions. Phil, congratulations and welcome aboard. Nothing like starting a new role in the middle of a pandemic. Hey, I think you've answered this a couple of ways, but it sounds like the Vietnam disruption is uniform. It's across the board. It sounds like it's modules. It sounds like it's gateways. I assume that extends as well in being able to feed the recurring revenue engine of growth, if you will, in terms of being able to supply modules into that and grow the cloud business going forward, at least in the near term?
spk08: Yeah, that's correct. I mean, clearly, as we ship less units, there's less stuff to attach to. So I think it's a fair assumption that we'll have a corresponding effect on the recurring revenue growth.
spk05: Gotcha. Okay. And to follow up quickly, the loss of share in terms of the competitive landscape, are you seeing any loss of share during this environment in terms of not being able to supply product to some of your key customers in your firm?
spk08: I don't think we're seeing. We're not seeing it. Every conversation I have with the customer is we're trying to work to fulfill their bare minimum demand, and they've been very supportive of working through that. Obviously, however, if they have multiple sources of supply, they're going to exercise that. We haven't seen that yet to date. and we're just working with our customers to make sure that we try our best to do everything we can to share with them where we are, to get their help where necessary, and to give them as much supply as possible.
spk05: Gotcha. And it sounds like you're expecting normalization at some point, maybe by the end of this year as we kind of work through this process. But I just want to clarify what normalization means. The second quarter results were a lot better than expected. In fact, when the first quarter results were reported – the expectation was that there was some demand being left on the table because of an inability to supply, I think, 15% plus upside. You guys have done a good job being able to service that in the second quarter, and demand, I think, throughout the industry has really been off the charts and unprecedented at this point. Is that the base level in the June quarter that we should be thinking about, both from a module and a gateway standpoint, and to build on that going forward as kind of a normalized number? Or are there some one-time events in there, end-of-life sales or something like that?
spk08: No, I mean, I'll let Sam comment specifically. What you saw in Q2, I think, was a reflection of strong demand across all of our product lines, and we were constrained by our component supply at that point. So I would expect that trend to continue. There wasn't any last-time buys, one-time purchases, any of that kind of stuff that I'm aware of that happened in that time. So I would, you know, we're trying to carefully balance. Obviously, we're bringing up as much manufacturing capacity as we can. But, again, we'll probably end up getting back into a component shorter situation, right? We'll be tight on the component side probably through the first half of 2022. Okay.
spk05: And lastly, if I could, and this is probably an unfair question given you're about three weeks in, but looking at the gross margin profile, You kind of back into whether it was embedded or the historic module business. It looks like gross margins are somewhere in the mid-teens, certainly being impacted by incremental supply chain costs. Similarly, on the recurring side of the business, gross margins in the 40% range. I wonder if you gave us some high-level thoughts in terms of where you think that could be as we look out in a more normalized environment, 18 months. What are the targets? What are the goals? Again, I understand it's probably not a fair question, but I figured I'd throw it out there. Thank you.
spk08: No, I appreciate you asking the question, and you probably appreciate my answer better. You know, I'm not going to give you a specific, and I say it's probably too premature for me to say that, what it may be. But suffice to say that I think there's lots of room for improvement with respect to our overall business model performance, whether it comes to cost efficacy, OPEC spending, pricing. There's a lot of things that we're going to be looking at to improve the business performance. I didn't come here to keep this the same. Great. Thanks so much, and welcome aboard. Thank you.
spk00: Next question is from the line of Josh Nichols from B. Riley. Your line is now open.
spk07: Yeah, thanks for taking my question. Sorry if I touch on something that was asked before. My line connection has been that great. But what percentage is the facility in Vietnam currently operating at, and how long until you're able to spool back up at that facility and these two new ones until you're at least, say, at where you were in like the 2Q quarter before the COVID impact?
spk08: Well, we're not, you know, it's somewhat variable. I mean, we have improved our output since earlier in July. So I was saying we're making good progress on that front. And our current expectation is we'll kind of be back to what I call normal manufacturing output in the fourth quarter sometime. And that includes ramping up new facilities, the new facilities I talked about.
spk07: And then the cash impact that you're expecting in the third quarter for these like five initiatives, right, to help get things back up to speed on the manufacturing front, if you could kind of help frame that.
spk08: Yeah, I think what Sam mentioned is, you know, we expect the cash impact in Q3 to be, about, you know, about $60 million, I think is what you said, Sam. And I think that some of that is really due to, you know, our inability to factor the accounts receivables due to less product being shipped. And then some of it is, you know, continued purchase of component inventory and things like that. We do expect that to normalize as obviously we turn that inventory into finished goods and sell it. So.
spk07: Thanks. And then last question for me. I'm just curious about, you've been, introduce some 5g products right that typically are higher margin what are you seeing as far as the demand is that being pushed out a little bit more where people are just focused on getting anything whether that be legacy products or not or or how we should think about the the 5g product cycle uh given the current supply constraints that we have uh you know i i it's um
spk08: I don't know whether we know enough to give you real good data on that particular question because we've got strong demand for all of our products, frankly, including some of the legacy products that people have in stuff that they're not redesigning. But I would say that the 5G demand, from what we can see, continues to be very strong. We're getting very strong feedback from our customers on the competitive positioning of our products and where we sit relative to that. You know, that continues to be good, both in the gateway router side as well as the module side. So I don't see any sort of delay in the 5G ramp. And I think, you know, you're still probably in the 22, 23 timeframe before you really start to see, you know, some major deployments there. But that's kind of where we are.
spk07: Thanks. I'll hop back in the queue. Thank you.
spk00: Next question is from the line of Derek Soderberg from Collier Securities. Your line is now open.
spk02: Hey, guys. Thanks for taking my questions. My congrats as well on the good quarter and to you, Phil, for joining the team. You know, it looks like MRR is kind of flat quarter over quarter. Can you quantify it all or provide any color on, you know, attach rates of software, connectivity, or both? You know, how are those trending? And in the supply environment, Phil, are you guys prioritizing shipments, you know, I suppose in the areas that you can based on, you know, wins with services attached? Just how are you planning on allocating that hardware that you have?
spk08: Yeah, so the first question I think you had was on kind of the monthly recurring revenue and kind of what's happening with that. It's a little bit lumpy, really having to do with timing of when the product gets get sold and shipped and stuff like that. We've actually grown it really nicely year over year, and I expect that growth to continue from that side. So I'm not particularly, you know, there's no particular thing in there that I'm very worried about it. You know, I do think that our connectivity is obviously attached mostly to our devices. So the less devices you ship, the less attach you're going to get. So I think there's some factor there. But with respect to what was reported in Q2, it's just a little bit lumpy. It grew really nicely year over year, so. That was fine. And then your other question is on prioritization of what we're making and what we're selling, and are we biasing some stuff? You know, really, we are just trying our best to – we have an algorithm. We certainly have customers that need our modules that we're designed in that they can't design them out of. And we have a responsibility, I think, as a trusted supplier to help make sure that we do everything we can to get them there regardless of whether they're higher or lower in our own margin profile. And so I think we are just trying to take a very customer-oriented view about this and really trying to work through situations where we're balancing. And so I don't think we're taking a particularly, you know, a lens on it that goes, okay, right, if we apply more here or not. And I think, frankly, we're just in such an unusual situation. We're trying to take a customer-oriented view, going back to the share perspective, and we're just trying to work through everything we can on a customer-by-customer basis.
spk02: Got it. And then your electric vehicle charging customer, they've got this infrastructure bill here in the U.S. It looks like the charging stations are sort of part of that, moving forward pretty quick. How are your conversations going with your EV customer? Any worry that you might lose share at all if this opportunity moves pretty quick? Any thoughts on that would be great.
spk08: Yeah, I think, look, that infrastructure bill that was passed, you know, I think it has a number of areas that are really, you know, benefit us long term. I mean, you noted the EV charging. I think there was some in the electric grid there as well. A lot of the segments that we play in do really, really well. So, you know, again, I don't, with respect to share loss, we're working with every customer we can, and we're just trying to ship all the products we can. We're not aware of any share loss we have, but, you know, obviously that's dependent on their own particular supply situation. Great, thanks.
spk00: We have our next question from the line of Paul Cheiber from RBC Capital Markets. Your line is now open.
spk10: Thanks very much and good afternoon. Welcome aboard, Phil. In terms of the disruption in production, when you look at demand, what portion of demand is perishable? In other words, do you expect to make up the production shortfall in subsequent quarters that you can fill that demand in subsequent quarters?
spk08: Yeah, we're not seeing any of the demand being perishable. We haven't seen any order cancellations. We've been working to reschedule as much as we can from that side. So we don't believe it's perishable at this point. And we've been working to try and reschedule it and work with our customers to figure out their absolute critical needs and what we do. And frankly, I think they're working through their own Every customer that I've talked to that has their own, you know, we are but one person they're talking to in terms of other supply situations, right? We are certainly not the only one that have supply situations even in our own customer base, right? So I think they are playing the whack-a-mole game with their suppliers just like we're playing with our suppliers. So the short of it is we don't see it being perishable at this point, and our customers are giving us longer and longer lead time orders to help compensate for that, to help give us visibility on what they expect. That's a good point.
spk10: On the cash impact of $60 million, you mentioned that should normalize. Should we expect all of that to normalize? Do you see the cash impact as a change in the timing, or is there some of that that's permanently lost?
spk04: Hey, it's Sam here. Let me give a bit of detail on that. A part of it is AR factory and unwinding. I said we did about $20 million this quarter. We're going to have trouble maintaining that with less unit volume, especially in the geographies where we can factor the U.S. mainly. Part of that's going to be the strategic investment in inventory for a strong recovery, which we've talked about. Those two things will reverse and normalize over time. Now, the decrease in operating performance, that will be a one-time hit to the cash balance, but the majority of it is working capital and will normalize over time.
spk10: So should we think about it two-thirds, one-third?
spk04: I'm not going to get too exact, but, you know, 60-40, two-thirds, one-third. It's a fluid situation, and it's an estimate, but I think you have enough information to get your model going.
spk10: That's helpful. And then just the last one, Phil, you mentioned, you know, when you're looking at the operations that you said you didn't join, at least things I think you said unchanged. At a high-level view, what's your view on the company's strategy with the product lines the company has, the services business? What's your thought on the synergies between them and maybe areas where there may not be synergies between them?
spk08: Yeah, early days on that. So I would say, look, what am I excited about? I think that the macro trends of 5G and IoT, and I particularly like the position in cellular, I think those are all very good things. modules, enterprise, and the services that go above that, I think are also powerful drivers for us. Obviously, we have some other businesses. I mean, frankly, right now, I'm focused on the major situation right in front of me. Obviously, we have some other smaller businesses that I'll take a look from time to time and see. I mean, right now, they're not an area where I'm spending a lot of time on, just to be honest with you. And so I think that I'm just focused on kind of the main business at hand. But As it goes forward, I think we've got lots of different strategic options, and we'll be looking at how we grow shareholder value with all elements of what we have. Okay, great. Thanks for taking my question.
spk00: No further questions at this time. I turn the call back over to you, presenters.
spk03: Thank you, May, and thank everybody for coming and joining us on the second quarter earnings conference call. Certainly check our website for all our additional materials, our PowerPoint, our presentation, our earnings release, and we're available. Please email or call us at any time. So thank you, and operator, you can now terminate the call. Thanks.
spk00: This concludes today's conference call. You may now disconnect.
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