Sierra Wireless, Inc.
Q2 2019 Earnings Call Transcript

Published: 1 Aug 2019

[Operator:]

Good afternoon. My name is Sherril, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Wireless Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]David Climie, you may begin your conference.

[David Climie:]

Thank you and good afternoon, everybody. Thank you for joining today's conference call and webcast. On the call today is Kent Thexton, President and CEO; and Dave McLennan, our Chief Financial Officer.As a reminder, today's presentation is being webcast and will be available on our website following the call. Today's agenda will be as follows, Dave will provide a detailed overview of our second quarter 2019 results. Kent will then provide his corporate update and then Dave will provide comments on full-year guidance 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 2 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 applicable securities laws. These statements include our financial guidance, statements about our strategy, goals, objectives and 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 2 of the webcast presentation, which could prove to be significantly incorrect. Additionally, forward-looking statements are based on our management's current expectation 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 a longer discussion of our risk factors in our Annual Information Form and Managements Discussion and Analysis, which can be found on SEDAR and EDGAR, as well as other regulatory filings. This presentation should also be viewed in conjunction with our quarterly earnings release.With that, I'll now turn the call over to Dave McLennan for his review of the second quarter results.

[David McLennan:]

Thank you, David and good afternoon, everyone. Note that we report our financial results in U.S. dollars and on a U.S. GAAP basis. We also present non-GAAP results to better provide an 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 $191.4 million, up 10.1% sequentially from Q1 2019 and down 5.2% on a year-over-year basis compared to Q2 2018. Overall, this level of revenue was in line with our expectations. Non-GAAP gross margin in Q2 was 30.8% compared to 31.5% in the prior quarter. This was below our expectations, primarily as result of a specific provision we expense related to a quality issue with an Asian automotive customer which was resolved during the quarter.Our non-GAAP operating expense in Q2 was $55.6 million, up $700,000 from Q1 2019. This increase reflects some of the investments we are making as we transform to an IoT solutions company and are partially offset by the realizations of savings from our cost reduction programs. The investments in Q2 were largely focused on go-to-market initiatives in sales and marketing.Our GAAP operating expenses in Q2 included a restructuring expense of $18.2 million associated with cost reduction initiatives. This included $14.9 million severance related to the initiatives we announced in April.Adjusted EBITDA on the second quarter was $7.9 million compared to $4.5 million in Q1 of this year. Our non-GAAP earnings per share was $0.07, which was slightly above our expectations.Looking at second quarter segmented revenue year-over-year, IoT solutions revenue, which includes the former IoT services and enterprise solutions business units as well as our broad-based IoT modules, was up $5.9 million or 6.3% year-over-year to $99.2 million. This reflects growth in AirLink gateways and our managed connectivity business.The IoT Solutions segment was 52% of consolidated revenue in the second quarter. Embedded broadband, which includes higher speed embedded cellular modules for automotive, mobile computing and enterprise networking was $92.2 million, down 15.1% year-over-year. This decline reflects expected weaker demand from a mobile computing and networking customers on a year-over-year basis.In addition, our automotive modules sales were below our expectations reflecting weaker industry-wide global demand, combined with delays in the launch of new programs.The Embedded Broadband segment was 48% of consolidated revenue in Q2. As a result of this pressure in the Embedded Broadband segment, consolidated revenue was down 5.2% year-over-year to $191.4 million.Looking at non-GAAP gross margin in Q2, total gross margin was $59 million or 30.8% in the second quarter, compared to $69.4 million or 34.4% in the prior year. IoT Solutions gross margin was 37.2% in the second quarter, up 40 basis points from Q2 2018, reflecting stronger AirLink gateway margins.Embedded Broadband gross margin was 24% compared to 32.3% a year-ago.This decline in year-over-year margin as driven by product mix, as a result of lower mobile computing and networking module sales, which have higher margins and increased automotive sales, which have lower margins.In Q2, adjusted EBITDA was $7.9 million, compared to $15.6 million a year-ago and non-GAAP earnings per share in Q2 were $0.07 compared to non-GAAP EPS of $0.27 a year-ago.Moving to the balance sheet, our cash balance increased $10.6 million in Q2 to end the quarter with an $85 million cash balance and no debt. To improve the Company's liquidity, as we work through our transformation program and incur substantial restructuring charges, we have entered into a receivable purchase agreement, which allows us to sell certain eligible receivables in order to collect cash sooner.At the end of Q2, we sold $16.5 million of receivables under this program. Including this program, cash flow from operations was $15.8 million. This combined with capital expenditures of $5.2 million resulted in free cash flow of $10.6 million.With that, I will now turn the call over to Kent to provide a corporate update.

[Kent Thexton:]

Thanks, Dave. I'm pleased that we delivered solid earnings results in the second quarter. I'm also pleased to see that our transformation work is taking effect and we're building a strong funnel of customer solutions opportunities worldwide.Our fully integrated IoT Solutions are appreciated by our customers and are differentiating us in the marketplace. As we transform our business to become the global leaders in IoT Solutions, there are several data points underpin our growing success in the marketplace. We have one more new recurring revenue, lifetime value business year-to-date in 2019 than we did for the whole year of 2018, exceeding our targets.Secondly, we have more than doubled our recurring revenue pipeline from the beginning of 2019; and thirdly, we had strong subscriber growth in Q2, led by record activations of our Sierra's smart SIM product. Our embedded smart SIM technologies in integral part of our overall strategy, we offer great benefits to our customers by simplifying SIM logistics.Our embedded SIM connects in over 200 countries and it eliminates the need for multiple carrier SIMs and certifications. We also provide unparalleled end-to-end security by virtue of having the device and connectivity layer and Sierra Wireless is to complete end-to-end partner with proactive device and network management and monitoring.Our Ready-to-Connect offering integrates all of these features into one solution. We've been working to build this out across our IoT Solutions product line. In Q2, we launched three new platforms with Ready-to-Connect capability.We are also making continued progress with our leading edge data orchestration platform called Octave. Octave simplifies the gathering and transmitting of edge sensor data and allows us to build customers per event, instead of per megabyte. Octave solutions are in trials with customers now and we expect to full GA launch in October.We've already signed up our first octave design wins and receiving very positive feedback from the market. These value added IoT Solutions allow us to leverage our strong position in IoT devices and drive a recurring revenue business going forward.We announced at our Investor Day in early June, our new IoT collaboration with Microsoft. Sierra Wireless has been selected as a preferred edge partner with Microsoft Azure. We believe our collaboration creates a category of one IoT Solutions allowing enterprise to monetize IoT deployment in a much simpler and faster way as well as leveraging the strong Microsoft sales team partner network and it's your enterprise penetration.I was at the Microsoft Inspire Partner Conference two weeks ago and was very pleased with the progress that we are making as part of Microsoft's exclusive strategic partner program. Our Octave platform has been built on as your and it integrated with Microsoft's IoT central and our Octave product is the initial focus of the partnership.To help us grow this partnership with Microsoft and other key players in the IoT ecosystem. I've hired Jim Ryan as Senior Vice President of strategic partner growth. Jim has more than 20 years of senior leadership experience building business within large carriers and early stage IoT environments.In order for Sierra to be able to deliver industry-leading IoT solutions, I need somebody with Jim's expertise to develop new partners in the areas of cloud analytics and system integration. Jim has held senior leadership positions with AT&T and Sprint in the U.S. and OTU in Europe. So we're very pleased to have them join our executive team.I'm also pleased to report in the second quarter our recurring attach rate is improving on cellular gateways and routers, which has included in our IoT Solutions Reporting segment. Our Gateway business has been gaining market share compounded annual growth rate or CAGAR of 24% over the last three years, while the market itself has been growing at a rate of approximately 20%. And we expect to see continued successful growth in this business again this year.Our IoT Solutions business is demonstrating strong growth and we expect to see IoT Solutions revenue to grow more than 12% this year and accelerating. This is better than the 10% growth rate that I mentioned in February of this year. The growth in our IoT solutions business along with our growing recurring revenue delivers an improved overall business model.As we presented at Investor Day, we are building towards a long-term business model at 15% adjusted EBITDA with better predictability. We're showing good early progress as we continue our transformation because to become the dominant IoT Solutions company. To invest in our transformation, we continue to make good progress in our companywide program targeting to reduce our cost structure by approximately $40 million to $50 million by the end of 2020.These costs reductions are expected to come from a combination of both cost of goods and OpEx savings and Dave McLennan we'll be talking more about these in a few minutes. Our objective is to build a leading go-to-market team more centralized R&D capabilities and improve our overall efficiency while at the same time invest in the business and advance to these cost savings.We have been investing in strong go-to-market and service capabilities and have brought on some key talent in the last quarter. We're also investing in product, continuing to build our portfolio with Octave, LPWA and 5G. With our 5G cellular module development we see significant near-term opportunities in enterprise related markets, including our own high-performance, gateways and routers, and we've already secured our first 5G design wins in the market.To be the leader in IoT Solutions that we are investing in people, our global MDNO footprint, tools, software training and operational processes. As I mentioned at our Investor Day in early June, our goal is to double our recurring revenue to $200 million within the next three years and then double it again to $400 million in the assuming two years.Overall, we expect to drive consolidated revenue to more than $1 billion in three years time with approximate 60% of that revenue coming from our higher margin IoT Solution segment. This includes the $200 million of recurring revenue I mentioned. And at the IoT Solutions gross margins we'll be north of 40%. As we build our pipeline and customer wins and IoT Solutions, we are focusing on consolidated revenue approximately $1.25 years from now of which 70% will be generated by the IoT Solutions revenue. Again, this will be inclusive of the $400 million recurring revenue that I mentioned.There's a lag time between a customer solution design win and the recurring revenue start and just show up in our P&L. Typically it takes 6 to 12 months before we are shipping product and another year before our customer deployments start to scale in the market. In addition to our strong focus on IoT Solutions designed wind, we're working diligently on shortening up the time to revenue from these design wins.As we grow this part of the business, we expect to be a strong value creator for Sierra with higher gross margins, strong growth and valuable recurring revenue. And I believe we are investing appropriately in the near-term to achieve these goals to be the global leader in the end to end fully integrated IoT Solutions. All the while we are maintaining a strong cost focus to produce ongoing profitability.So with that, I'll turn it back over to Dave McLennan for his comments regarding our cost reduction program and our guidance.

[David McLennan:]

Thanks Kent. Before I review our guidance, I would like to provide a few comments regarding the progress we are making on the cost reduction issues we discussed last quarter. We continue to design in new programs and are on track to meet our target of reducing costs of sales and operating expenses by approximately $40 million to $50 million as we exit 2020.In addition to the initiatives we announced last quarter covering consolidation of R&D and the associated reduction sites as well as the transition of positions to lower cost regions including our new R&D site in Taiwan. The reorganization of our go-to-market approach by unifying the sales and support teams into one organization and the outsourcing of certain finance IT and HR activities, we are making further progress with additional initiatives in Q3, including the renegotiation of agreements with our contract manufacturing partners and additional cost savings from purchasing initiatives.This activity in Q3 is expected to Bruce additional annual run rate savings once fully implemented of approximately $4 million. This is in addition to the $19 million we identified last quarter, bringing the total annualized savings once fully implemented to approximately $23 million.We're making good progress on our cost reduction program and as Kent mentioned, we are reinvesting a portion of these savings to drive growth of our high value solutions, product technologies and capabilities. In 2019 we are expecting to invest approximately $10 million and go-to-market technology and systems initiatives.Moving onto our full-year of 2019 guidance. During the first half of 2019 overall revenue was in line with our expectations. This included declines in our lower margin Embedded Broadband segment including the PC OEM and automotive product lines compared to the second half of last year. This was slightly offset by growth in our higher margin IoT Solutions segment.In the second half of this year we expect this trend to continue. More specifically, we expect our higher margin IoT Solutions business to accelerate and grow by 15% to 20% in the second half of 2019 as compared to the first half of 2019. And this is driven by broad-based growth in our Enterprise Solutions Gateway business continue growth in our IoT Services business and improvement in Embedded IoT Solutions.We expect the stronger revenue performance and IoT solutions to be dampened by continued headwinds in our lower margin Embedded Broadband segment resulting in 5% to 10% lower revenue in this segment in the second half of this year as compared to the first half. This reduced outlook for the Embedded Broadband segment is driven primarily by a weaker industry-wide global demand trend and automotive combined with delays and the launch of some new high volume programs including Volkswagen platforms.Based on this revised outlook for the second half, internally, we are modeling third quarter consolidated revenue to be approximately flat sequentially from Q2 followed by an expected sequential improvement in Q4 as momentum continues to accelerate in IoT Solutions.In terms of the overall business health, the much stronger margins earned in the faster growing IoT Solutions business allows us to still deliver our full-year 2019 EBITDA and EPS guidance of approximately $35 million and $0.30 to $0.35 of earnings per share respectively. The increasing growth rate of our IoT solutions business along with the strong design win and funnel metrics that can outlined show that we are executing on our corporate transformation and are delivering a much improved longer-term business model.With that operator, we can now open the call for the Q&A session. Thank you.

[Operator:]

[Operator Instructions] The first question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead. Your line is open.

[Thanos Moschopoulos:]

Hi, good afternoon. Kent, if you could expand on the auto program delays? In terms of the weakness auto, I mean, help us understand how much it was slower demand broadly versus the delayed program ramp. And then do you currently have visibility in terms of when that program ramp should happen? Should that get back on track leader this year or really next or what's the outlook there?

[Kent Thexton:]

Sure Thanos, we have greetings, Kent here. So in the automotive you will have read a number of industry stats. Nissan laying off 12,000 employees reducing product lines by 10%, Ford laying off 12,000, in an overall industry decline. So those less cars being produced mean overall, there's less demand for our product.But in particular with regards to Volkswagen, they have delayed rolling out some of their new product updates and part of it is the – we're seeing the complexities electronics and new auto platforms are causing some launch delays more universally for us with our big program with Volkswagen. That's pushed some of that revenue out that will – we had expect to be ramping in the back half of 2019 and that's pushing into early 2020 at this point in time. So that's from an overall value of the program, it's still intact where our expectations of the significant volume from that program remain, but the timing has changed somewhat.

[Thanos Moschopoulos:]

Okay. That's helpful. And for Dave, could you quantify the impact of the one-time provision that you mentioned with the Asian automotive customer?

[David McLennan:]

Yes. It was approximately a $1 million Thanos and that was rectified during the quarter.

[Thanos Moschopoulos:]

Okay. And then finally for Kent. Can you update us in terms of the salesforce reorg, your consolidation of the three salesforces into one, where you stand on that, how that range is progressing, and what’s the timeframe for wrapping that up?

[Kent Thexton:]

Yes. Well, we have completed all the consolidation and I’ve just come from one of our sales conferences in Atlanta, I’m back in Vancouver now. And yes, I'm very pleased with what's going on with the front-end of our business. As I mentioned, we've more than doubled our pipeline of service design wins. We've rolled out training to all of our salesforce on our bundle solutions offerings. We've updated compensation plans, everyone's compensated on both hardware and recurring revenue. And our salesforce is excited about it. They're seeing – they're getting great response from customers and they're seeing that they can provide more value to customers by providing a complete bundled solution.So that part is actively happening. I mentioned also the Microsoft partnership, which I think is key and we talk about what's going on in the distribution side of the business as the largest enterprise cloud provider and being the preferred edge solution for that. We think that is going to be significant. They're focused on the Octave product. So that's our – bundling of our modules seamlessly with connectivity so that we can build per event versus per megabyte, and that allows Microsoft to get more data individually or by most effectively, efficiently and quickly helping their customers to capture edge data. And so that's another part that is a key part of our distribution program and we'll be seeing more of that activity in 2020 as we launch with general availability of our Octave product is in October of this year.

[Thanos Moschopoulos:]

Great. I'll pass the line. Thanks.

[Kent Thexton:]

Thank you.

[Operator:]

Your next question comes from the line of Todd Coupland of CIBC. Please go ahead. Your line is open.

[Todd Coupland:]

Yes, good evening. I was wondering if you have a view on how long it'll take work through the automotive headwinds, is it a quarter or two or could it extend into 2020?

[David McLennan:]

Hi, Todd. It's Dave here. Definitely we'll be working through that in the second half of this year. And that's why we provided that directional guidance for second half versus first half for that particular segment and that is driven by the automotive softness there. We do expect that the ramp will start in 2020 or will accelerate in 2020, as Kent said some of the platforms are delayed. They're not canceled. So a bit of a shift to the right and we would expect that ramp to occur in, starting in early 2020.

[Kent Thexton:]

And Todd, it’s Kent here. Just to add to that, I would re-emphasize that we've been seeing acceleration in our IoT solutions business. So I had mentioned in February that we'd expected embedded broadband to decline this year and IoT solutions to grow by about 10%, and now calling that greater than 12% this year. And as Dave mentioned, the acceleration in the back half and that'll continue into 2020. So while auto has shifted out, the key, what we see is the value driving part of our business is growing strongly ahead of schedule. And so as the auto part – as those programs rollout and adds to our picture, we're pretty happy with the shape of things.

[Todd Coupland:]

And the shifting in the platforms on automotive, is there a change in terms of use cases and how the OEMs are thinking about deploying connectivity?

[Kent Thexton:]

No, not at all. I mean, in the case of Volkswagen, they have updated product lines that they've delayed the launch timing of those for many reasons that they have. But when they launched their new Passat and other product brand lines, those come in with Sierra modules in them and that's been somewhat delayed.

[David McLennan:]

And I just want to be clear, Todd on that. But the delays are nothing to do with the products that we're putting into those vehicles. The reality is that these vehicles are becoming more and more complex with many other different electronics and that is causing some launched delays. But those are not, those are not driven by the products that we're supplying.

[Todd Coupland:]

Just one more question on the detail. So when you actually start to see it in the VW line, whether it's Passat or whatever. Is that an option that the consumer needs to opt in for and pay for or will it be issued as a standard and then be on all those modest [indiscernible]?

[Kent Thexton:]

Yes. It's comprehensive across the product line. So cars are being hooked into the network these days for predictive maintenance, for being able to update systems within the car. They leverage our software system on the module to be able to manage upgrades within the vehicle.So instead of having to do a recall, often they can do a software upload. And so we are fundamental to those processes. So it goes across the whole product line. The question, in our modeling is how many cars do they sell, but not – but it is in every car.

[Todd Coupland:]

Okay, and then just the headwinds in mobile and networking. Can you just talk about how you think that gets worked out and what your thoughts are on that? Thanks.

[Kent Thexton:]

Well, we talked previously about in the PC OEM business, some of the activity that gone on and we've actually – there's been no changes, sense are with the expectations, we said at that point in time. So we've seen some, improvements in the Intel, PC, shipments to some of our PC customers.So that's slowly starting to alleviate. We had mentioned we had a couple of design win cycles that we wrote in the PC OEM business. So that's – but are areas where at with PC, including some new 5G, design wins are all moving along well, so no change in our expectation there.And the networking side has also been it's been performing consistently. The only chain versus our overall view we had is at auto is going to be weaker in the second half than we projected. IoT Solutions is stronger than we had projected. And offsetting some of that auto weakness, IoT Solutions coming in at a high gross margin in auto is quite low.So that's why we're still giving guidance on our approximately $35 million in EBITDA is because we're seeing that greater production from our IoT Solutions part of the business. The auto volume will follow in 2020 until that will add to our growing IoT Solutions at that point in time.

[Todd Coupland:]

Great. I appreciate the color. Thanks a lot.

[Operator:]

[Operator Instructions] The next question comes from Paul Treiber of RBC Capital Markets. Please go ahead. Your line is open.

[Paul Treiber:]

Thanks very much. Just in regards to one of your competitors is specifically Huawei.Have you seen just given the global push back against the company? Have you seen more OEMs looking to domestic providers like yourself, when they're doing RFPs for design wins?

[Kent Thexton:]

Hi, Paul. It's Kent here. So we don't particularly compete against Huawei. They have been in some Chinese auto players, but not mainstream. So we haven't – that hasn't changed that sort of competitive dynamic in the, embedded module business in other areas, we've started to see some questions. But I wouldn't say we've seen any change in behavior at this point in time.There is quite a bit of volume coming out of Chinese module makers these days, and so certainly an area of interest. I would say some of our more critical applications like the gateways we sell into, U.S. Public Safety, Police, Fire Truck, Ambulance, we had – it is more a domestic competition into modules that might go into smart meters or PCs. I would say that there – we haven't seen as much concern at this point in time as to the country of origin of those products.

[Paul Treiber:]

Okay. In regards to IoT Solutions specifically in terms of the services business last quarter, you did break out generally product versus services; I think you're no longer doing that. How should we think about the recurring services growth relative – year-over-year growth relative to last quarter?

[David McLennan:]

Hi, Paul. It’s Dave here. And we will be putting that disclosure in our MD&A or in our financial statements when we file them. But if you cut the revenue on a product versus service basis, the subscription services component in Q2 was $25 million. And if you compare that to Q2 a year ago, it was up about 11.9% and that's adjusting for the high tech revenue a year ago that we sold that business at the end of 2018. So we're seeing year-over-year growth in subscription services revenue of about 12% and also some very solid sequential growth as well.

[Paul Treiber:]

That's helpful to provide that. What's driving that big increase on both the year-over-year and the sequential?

[David McLennan:]

It's accumulation of a lot of the activity that we've been focused on to really focus on driving subscription based revenue. So it's many of the things that Kent talked about with respect to go-to-market initiatives and product initiatives.

[Kent Thexton:]

Yes. Paul, as I said in my comments, we had a record Smart SIM additions during Q2. We've had strong net subscriber growth over the year. And I would say, those trends are really at the – are building momentum as we've just during Q2 rolled out training and compensation to all of our salesforce around the comprehensive set of solutions that we have. Also during Q2, we're working to build into our product are ready to connect, so that when our module is shipped, it has embedded in it the Sierra global network technology and capability. And so we rolled three new product lines out with that in Q2, so we have a more pre-integrated products that help us sell services overall. And that trend will continue throughout the year.

[Paul Treiber:]

Okay. Thanks for taking my questions.

[Kent Thexton:]

Thank you.

[Operator:]

Your next question comes from the line of Richard Tse of National Bank Financial. Please go ahead. Your line is open.

[Richard Tse:]

Yes. Thank you. Next to automotive, what verticals would you say that you're seeing the most momentum, and I guess it actually would apply to both the embedded and the IoT business, kind of curious to see what your thoughts on that are?

[Kent Thexton:]

Sure. Well, I think that – it’s Kent here and good to talk to you Richard. In Embedded Broadband areas like automotive and PC OEM, I mean those product categories are not growing overall. The overall PC market is not expanding the number of automobiles. We may have reached peak auto. So auto is expanding because we have some big design wins that are coming to market. The area where we see a significant market opportunity and starting to see increasing growth is what we would broadly call industrial IoT.So that is the connecting of all industrial equipment so that it's offering data, its sensor data can be captured and reported through to the cloud for companies to be able to make money or save money. We've talked previously about Girbau, the industrial laundry machine; Atlas Copco, industrial air compressors who are into pumps, refrigeration systems, air conditioning systems. All of those products are all going to be connected to the cloud and we are at the forefront of enabling that. And that is a total addressable market that we look at of about $10 billion, including devices and services. So that's an area of a significant focus for us.In the second segment, I would talk to within the enterprise space. As I mentioned, we see the enterprise market growing at about a 20% CAGR. We're growing faster than that, about a 25% CAGR and we're seeing continued opportunities both in public sector, we have – we were the launch leader in the AT&T, FirstNet products.But also we enter the enterprise, so in smart grid applications, and many other more robust enterprise requirements with our more sophisticated gateway products and recurring software revenue and recurring solutions revenue. So those are the key areas of growth that we're seeing strongly happen.

[Richard Tse:]

All right. And then going back to sort of the embedded business, clearly based on your comments, it doesn't seem like there's a huge opportunity going forward. When you came in and when you assessed the business overall was one of the considerations is sort of a pairing off that segment because it doesn't really seem like it ties into this a strategy that you have on the IoT side going forward here?

[Kent Thexton:]

Yep. Insightful question, took a hard look at all the businesses we were in. And I think that we have a lot of synergies between the hardware we build for Embedded Broadband and the hardware that enables our solutions and our recurring revenue on IoT Solutions.So keeping both products and having that scale is important, we still see strong contribution margins going forward from our Embedded Broadband business and that allows us to continue to invest and grow our differentiated approach to IoT Solutions are our market leading global MVNO capability and embedding that technology and investing in our go-to-market activities both for their own sales force and partnerships like Microsoft.So the Embedded Broadband side is not, a dramatically different from a hardware perspective, where leveraging the similar technology stacks and capabilities, certification and network, et cetera that we do. And so having that overall strong volume across both of our sectors is helpful.

[Richard Tse:]

Okay. That's great. Thank you.

[Kent Thexton:]

Thank you.

[Operator:]

There are no further questions at this time. I will turn the call back over to Kent Thexton, CEO for closing remarks.

[Kent Thexton:]

Well, thank you everybody for our summer update call. I would just reiterate from my comments that we're – since I've come on board, I talked about our transformation to drive stronger recurring revenue. We talked to our investor day about growing our IoT Solutions and recurring revenue substantially.I think our Q2 results showed a lot of positive progress towards that. And we will continue to update accordingly on that. Thanks for your attention. We look forward to follow-up questions and conversations with many of you. And with that, we'll close the call. Thank you.

[David McLennan:]

Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.