Sierra Wireless, Inc.
Q3 2020 Earnings Call Transcript

Published: 13 Nov 2020

[Operator:]

Good afternoon, ladies and gentlemen. thank you for standing by and welcome to the Sierra Wireless Third Quarter Conference Call. I would now turn the call over to David Climie, VP of Investor Relations and you may begin.

[David Climie:]

Thanks and good afternoon, everybody. Thank you for joining today’s conference call and webcast. On the call today are Kent Thexton, President and CEO; and Sam Cochrane, 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 third quarter 2020 results, followed by Q&A.

[Kent Thexton:]

Thanks, David. I will start my prepared remarks today with an update on the divestiture of our automotive product line, followed by some comments and highlights from our third quarter. Regarding the sale of our automotive product line for $165 million, which we announced in July, things continued to remain on track and we expect it to close in the coming weeks. The purchaser Rolling Wireless has received the regulatory approvals, it requires to proceed and the Tier 1 automotive customers have also provided their approval and are moving ahead with the transition. Given this progress, we are not expecting any impediment to completing the transaction. The divestiture of the automotive business enabled us to accelerate our efforts in our device-to-cloud IoT solutions to generate higher value recurring revenue. It also allows our R&D teams to focus on market-leading 5G programs, including new embedded modules for mobile broadband and new 5G gateways for our enterprise networking customers. With the transaction on track, we are reporting continuing operations in the third quarter, with automotive product line under discontinued operations in the income statement. And in our earnings release and during our webcast today, we will be providing GAAP and non-GAAP financial information on the continuing business on a standalone basis, as well as combined with a discontinued automotive product line. Sam will review that in more detail in his summary of the third quarter.

[Sam Cochrane:]

Thank you, Kent. Good afternoon, everyone. As a reminder, our third quarter financial results report in U.S. dollars and on a U.S. GAAP basis. we also report non-GAAP results to provide a better understanding of our operating performance. a full reconciliation between our GAAP and non-GAAP results is available on the IR page of our website. Before I begin with a review of the quarterly results, I’d like to point out the sale of our automotive product line is near completion as Kent described in his comments. given the transaction is expected to close in the next few weeks, we have prepared our third quarter financial statements in compliance with U.S. GAAP and segregated the automotive product line from continuing operations. The assets and liabilities that are associated with the automotive business are held for sale on the balance sheet. We are also providing some GAAP and non-GAAP information regarding the discontinued automotive business in the notes to the third quarter financial statements and in our webcast presentation today. Total revenue for continuing operations in Q3 excluding the automotive product line was $113.4 million, a decrease of 17.1%, compared to the same period last year. In Q3, revenue from continuing operations grew sequentially, which was in line with our expectations as we saw some business improvements compared to Q2, which was a challenging environment due to the pandemic. Non-GAAP gross margin in the third quarter, excluding the automotive business was 34.7% compared to 36.3% in the third quarter last year. in Q3, we initiated some actions to begin right-sizing the business and as a result, OpEx was down $2.6 million or 4.8% sequentially.

[Operator:]

Our first question comes from the line of Mike Walkley from Canaccord.

[Mike Walkley:]

Great. Thanks for taking my question. Hope everybody’s doing well and staying healthy on the call. I guess Kent; first question for me is just on the enterprise gateway sales, just wanting to maybe get your thoughts on the weakness in that business. There are certain end markets or verticals doing poorly as some of your competitors in that business have seen some better year-over-year trends. So, I’m just curious maybe, where you’re seeing some areas of weakness and is it more some clients may be waiting for the new 5G products. And then lastly, within that area, just what are your thoughts on the CradlePoint sale to Ericsson? How might that change the competitive environment and also how can that maybe show that this business of yours might be undervalued, locked into your stock price? Thank you.

[Kent Thexton:]

Yes. Thanks, Mike. Thanks for that question. So, in the enterprise gateway market, we have a couple areas that we lead in public safety in ruggedized mobile commercial environments. In the commercial side, markets like oil and gas have traditionally been large for us and other markets like that have been more disrupted by COVID, oil and gas is weak and other areas, where there needs to be a lot of human involvement for installations. We’ve seen some slowness there. Public safety has kept along pretty well in areas like transport that whole sector is being impacted. So, in buses and trains and other markets, where our gateways get installed, they’re either slowing their plans or they’re not doing implementations right now. But I’m quite bullish about where things are going with our enterprise businesses. As I mentioned in my remarks, we put quite a focus on this rebuilt that team. We’ve grown our pipeline of deals that we’re working on by 50% so far this year. And so I expect to see as we work through and everyone gets more even without an end to COVID, but working through the challenges to see that progress we’re seeing that through our distribution partners, where their businesses are picking up. And I mentioned also some important new relationships working strongly with Motorola. They’re a strong leader in public safety and we enable a number of things that they do such as their body worn cameras and other aspects of public safety and Synnex is a large, large distributor. So, we’ve had some areas, where things have slowed forward-looking for us as tracking pipeline and the strength that we have there and the deal activity in flight I think is encouraging. And the second part of your question with regards to CradlePoint, I think we’ve seen a few transactions in this space. Now, the CradlePoint acquisition was at about six times revenue and other transactions have been around three times revenue. So clearly, our enterprise business is not being valued at those multiples within their space, I think what Ericsson talked about is driving their acquisition was strong overall growth in the enterprise sector. We believe in that as well and we think that it’s going to be an important part of growth. We compete well in that sector. We – our products are highly valued, I don’t think the market is waiting overly for 5G. We have launched our high-end 5G gateways with more product coming in Q1, our 5G products, not only connect to 5G, but they support the highest fastest speed 4G LTE called Cat-20. And so as companies start to future-proof, I think that’s a good upgrade cycle, but that is coming and we’re launching entirely new cloud management stack during 2021 as well. So, lots going on in the enterprise sector and we expect that to be a good growth area for us in 2021 and certainly, I think that we’re not getting recognized in our share price yet the strong position we have in enterprise.

[Mike Walkley:]

Great. Thanks. That’s very helpful. Second question for me, and I’ll pass the line, just on the $25 million to $30 million in cost savings. Any help you guys could give us just in terms of how much of that comes out right away in Q4 with the divestiture, or maybe, you can help us with maybe a non-GAAP run rate for the business post the divestiture, and then how much more of that $25 million, $30 million comes out over the course of time. Is it maybe, a year or so to take out that $25 million to $30 million, just trying to help us build out our models? Thanks.

[Kent Thexton:]

Yes, sure. Mike, let me make a few comments and I’ll ask Sam to provide some more data as well. So, we’ve – we’re really looking at our continuing operation without auto. So they – we expect the auto transaction to close in the next few weeks, obviously that creates a very strong balance sheet for us. You’ll see, in the current results that we put out there, the split between continuing operations and auto – the accounting rules are that any sort of shared resources get allocated to the main business. So, I would say it flatters the profitability from auto and equally, is it’s less flattering to the ongoing business profitability. We’ve been making a number of changes already. So, we’ve produced an R&D center. We will have an entire R&D center going as part of the transaction, and we’re doing both auto and other work. So, those are some of the activities that are happening and will occur over Q4. So, I think you can see a lot of the run rate will have occurred, so that we have a cleaner year in 2021, but Sam, if I could ask you to comment as well.

[Sam Cochrane:]

Yes. Thank you, Kent and thanks for the question. So, as you look into Q4 for revenue, the majority of the decrease from the automotive divesture closing and right-sizing the business, most of that will show up in 2021. You’ll start to see it earlier in the first half of 2021. So, a big chunk of it’s not going to be late in the year, if that helps. Also in Q4, we have some lumpiness in spend on certification. So, to help you on the model building, thinking of OpEx is sort of flattish to down a bit from the quarter Q3 is probably the right way to think about it.

[Mike Walkley:]

Great. Thanks for taking my questions. I hope everybody stays healthy.

[Kent Thexton:]

Thanks, Mike.

[Operator:]

Our next question comes from the line of Thanos Moschopoulos from BMO Capital.

[Thanos Moschopoulos:]

Looking at the services revenue, there was a nice uptick from the June quarter, if we had looked at the preceding quarters prior, that was kind of in the $26 million range for three quarters, then it kind of had a nice $3 million bump up sequentially. Any dynamic there was there may be a backlog of things that we’re deploying during the lockdowns or with their – some other dynamics that drove that uptick just in the June quarter.

[Kent Thexton:]

Thanks, Thanos. Good to hear from you. So, we’re expecting just a continued growth in our services revenue. We’ve talked about the leading indicators with our design wins. We’re starting to see more of those play through. And so I think that’s just an ongoing trend. Q2 was held back, I think hurt the curve just because of a number of our customers that had pay per use sort of activity that were much lower in revenue in Q2. So, while we still showed sequential growth in Q2, it wasn’t as strong as it has the underlying trends. And so there was some of that catch up in Q3. We’ve had – we did $93 million of LTARR in 2019, we’re already at $95 million this year. That’s all future revenue value is working through the system right now. So, as those design wins go into production, that will continue to tick up on a quarterly basis. So, this is just what I’ve been talking about now for almost two years, just in terms of in Q1 of 2019, we started to vector our business and our resources to be able to drive full IoT solutions with both with both devices and connectivity. The – what I’m excited about Thanos is you’re seeing a continued growth is turning of the corner from winning new business. So, while it’s been a competitive market and some low cost competitors out there, our overall design wins both on services and on hardware have ticked up nicely year-to-date and so our offers out there to the market are being well received, where we’re winning more business, we’ve seen our win rates increase and so that will drive through. On the hardware side, you have some things like LPWA, which are lower ASPs. So, those don’t help the overall revenue growth, but when they – when they carry service activity with them, then you can see that come in our higher margin and more predictable recurring revenue kicks in. And I think that the design wins that I talked about the three examples here are reflective of what we see going on in the market. So, lots of good value being created by delivering a complete solution for customers, it helps with their speed to market. It’s helping customers get their IoT solutions and getting the value that they need from that edge data. And it’s certainly a positive business model for us. So yes, a good quarter and more to come.

[Thanos Moschopoulos:]

Great. Looking at the embedded broadband gross margins, I know they’re down versus last year, because of mobile computing. But if I look at the last couple of quarters, there’s been some volatility there. There was a spike in margins in Q2. Just to clarify what drove that Q2 spike. And then as far as the run rate, you could think about Q3 as being more representative for what the gross margin trajectory looks like there with the current mix?

[Kent Thexton:]

Sure. Sam will – I’ll key up for that one. I just only got to say; in Q2, auto was low; Q3, auto was high, stripping out auto, I think you’d see some more stability, but Sam, over to you.

[Sam Cochrane:]

Yes. Exactly right, Kent. And also in Q2, our automotive margins were particularly high, because of the low volumes; we were able to take advantage of some better pricing at the lower volumes. So, automotive was lower plus at better margins in Q2. Now, Q3 since embedded broadband only has the remaining business in there and autos carved out, that’s more indicative of margins going forward.

[Thanos Moschopoulos:]

Sorry, I was looking at the – we segmented, so the 35% margin ex-auto and embedded broadband in Q2.

[Sam Cochrane:]

Yes. So, to clarify the question, you’re saying, you’re looking at just the embedded broadband margin without auto in Q2.

[Thanos Moschopoulos:]

Exactly, the restated number, there has been a spike in Q2? Yes.

[Sam Cochrane:]

Yes. Understood. Yes. I think in that case, if you’re looking at just that number, a blend of the two would be – a blend of those two margins will be a better one going forward.

[Thanos Moschopoulos:]

Okay.

[Sam Cochrane:]

Sort of looking at Q2 and Q3 and blend them, and that would be more indicative of going forward. But yes, we can chat more about it later, but that would be a good way to model it.

[Thanos Moschopoulos:]

Okay, great. And last question from me is just on the supply constraints. Can you comment on, I guess, the – are you seeing some improvement as time’s progressing and any way to quantify the impact around this quarter?

[Kent Thexton:]

Well, no crystal ball, so we’re working with our suppliers and we’ve worked very well with some of our suppliers solves a lot of the problems, not all of them. And then you get new pinch points that that come up. So, it’s a – it’s constant work, I would say in the current environment, some of the big impacts in Q2, where shutdown as in some areas affected components more clearly, those are less of the case today. But whenever you cause a disruption, a system, there’s still some ongoing activity. So, we’re still working through it, we’re working with our suppliers and we’re working with our customers as well to increase lead times to ensure that we can get the components that are required. So, we’re solving the problems in many ways, but it remains tight.

[Thanos Moschopoulos:]

All right. Thanks. I’ll pass the line.

[Operator:]

Our next question comes from the line of Paul Treiber from RBC Capital Markets.

[Paul Treiber:]

Thanks for watching. Good evening. You mentioned your services’ win rate has been strong and favorable. Can you elaborate on how your services win rate or attach rate has been trending this year? Have you seen any meaningful change versus previous years?

[Kent Thexton:]

Thanks, Paul. Good to hear from you. So, I think in terms of our tax rate, yes, we are – we are seeing that trend up, we – up 61% on our design wins of services, I think is reflective of that. So, we – I think the other piece is we really – we’re building out our capability to sell full solutions. in 2019, we’ve we built – brought in more talent on a solutions basis to our sales force. That’s had time to embed in the existing salespeople that we’ve had involved in the services side are now able to sell. So, we have our full global sales force, able to offer both hardware and full solutions. And so that’s definitely helping our overall win rate. So, yes, I’m very happy with that. We had our LTARR wins in Q2 with COVID. We’re down, we’ve bounced back and at $95 million year-to-date, despite COVID of being ahead of our entire design wind from 2019, I think is very positive and I expect to end the year strong.

[Paul Treiber:]

Could you delve a bit further into the competitive dynamics for services? Like when you look at your competitive advantages is the biggest one the fact that you’re an integrated or end-to-end provider, or maybe, looking at it another way is, how successful is your services business or how’s the attach rate – or the win rate without leads coming from your hardware business, so on top of third-party or competitor hardware?

[Kent Thexton:]

Sure. Yes. insightful question. So first of all, it’s a big competitive advantage for a customer that’s looking to get out into global markets and I talked about some of my examples in my script. We’re able to provide that complete solution. So, with embedded connectivity in our devices as they’re shipping their charging stations or their medical solutions to multiple countries, they’re not having to worry about the logistics of different SIM cards in different countries, different partners, if they have connectivity issues, different people to call, we handle that globally. We manage all issues proactively through our through our global knock and our – with multiple carriers per country, it means that we’re able to offer a better overall quality of service. So, when we’re selling into an industrial IoT and you’re in a factory when we have multiple carriers and can choose the strongest signal when you’re in a constraint or an environment that’s not going to have great coverage, because you’re indoors that’s a big advantage for customers. So, I think that’s our competitive advantage. And then on your question of – is it just come about from having hardware leading to connectivity. Well, it’s a big advantage for us, because most customers start designing their hardware before they get around to thinking about the – how they’re going to attach that. So, when we’re in there working on the hardware design and we can build in our services, it gives us earlier in the customer’s design cycle, the ability to share what we can do for them on connectivity site. However, we also win deals where their customers are just looking to take advantage of our global connectivity, being able to have our smart SIM that works seamlessly across 200 countries globally, and able to have that multiple carrier access. And then that often leads to us then working with them on winning the hardware, so we can come out from hardware to services, but we also have quite a number of positive examples are going from services to hardware. So, it’s good for our salespeople to able to solve those solutions in both directions and we’re seeing progress on both fronts.

[Paul Treiber:]

Last one from me, you mentioned in the prepared remarks, you were seeing impact from low price competitors as being the case for a number of years or a long time in this industry, has he – I don’t think the tariff environment would have had any impact, but the global move away from Huawei, has that had any impact in the module space at all?

[Kent Thexton:]

So, I wouldn’t say it then have a substantive impact at this point yet, although it is starting to drive more awareness and it has been quite a first the U.S. moved on Huawei activity and now a number of European countries from a 5G network infrastructure basis. And I think that there, really what we provide is both high quality and high security. And I think those are very important, what we do when we sell complete solutions that are both hardware and connectivity, our trust becomes a very major factor and I think that’s a great brand strength and position that we have. We’ve seen a couple of examples, where customers want to ensure that they’re having that high degree of security with their solution. It is becoming more prevalent, but there – it’s not a tariff issue, because modules when they’re built into a product, tariffs are built on – are based on the whole product entity, not where the module comes from. So, it’s not tariff impact part of the business, but it’s more a business decision for customers. We are seeing increasing strategic alignment with tier 1 industrial IoT companies, where they’re trying to digitize all of their assets. I’ve talked with a number of Chief Product Officers, CEOs of multi-billion dollar companies that this is becoming strategic for them now, and they want to digitize their assets in the marketplace. And in those cases, I think that our 26-year history in the market and our strong position on security and dependability give us a big advantage. And do you think – do you think that the move away from Huawei and maybe some other China-based vendors. do you think that alleviate the pricing pressure at least marginally, or do you think it’s pretty much a fact of life in this industry?

[Kent Thexton:]

So, I think that on some of the first IOT use cases that came out and as we moved to LPWA, I think there can be a lot of price pressure and that can be relatively low margin hardware-only business, but when we bundle it and a couple of quarters ago, I gave an example of a design wave and industrial lighting customer. and so that was about $1 million worth of hardware, but growing to $1.8 million of recurring revenue per year. And so from the margin produced from a design win, the vast majority of the gross margin comes from our recurring revenue versus from the hardware. So, offering the whole solution allows us to be as competitive as we need to be upfront to win the total package. And our overall recurring revenue business is very healthy. So, we think that we provide great value to our customers, but also get to – get recurring revenue at higher gross margin. So, the low price LPWA market, elasticity of demand will drive a lot greater growth in the total IoT market. All those devices need to be connected. And so we’re in a good part of the value chain for this significant growth in LPWA projects that we’re seeing out there right now.

[Paul Treiber:]

Okay. Thanks for taking my questions.

[Operator:]

Our next question comes from the line of Todd Coupland from CIBC.

[Todd Coupland:]

Yes. Good evening, everyone. Good afternoon, everyone. I had a couple of cleanup questions and then some business questions. What will the pro forma cash fee post a sale?

[Kent Thexton:]

Sam, do you want to take that?

[Sam Cochrane:]

So, are you asking like what the year-end balance of cash will be or what the….

[Todd Coupland:]

Yes, more or less. Yes.

[Sam Cochrane:]

Yes. I mean, so we’ll close the sale, there’ll be a small amount of taxes and fees, but the vast majority of that will be on our balance sheet and we don’t expect to burn a lot of cash in Q4 and moving forward, Q4 we have some CapEx going in to upgrade the networks. So maybe, approximately about $5 million of cash to burn in Q4, but we expect the rest to remain on our balance sheet.

[Todd Coupland:]

Okay. And when you say minimal taxes, what like 2%, 10%. So is it like….

[Sam Cochrane:]

$3 million to $5 million?

[Todd Coupland:]

Okay. So, you’ll basically be adding post the sale over $155 million in cash to the – $72 million – $72 million.

[Sam Cochrane:]

Yes. You have to read that the $19 million of cash is staying with the buyer on the deal.

[Todd Coupland:]

$19 million out of the $165 million?

[Sam Cochrane:]

Yes.

[Todd Coupland:]

Yes. and working capital…

[Sam Cochrane:]

So $165 million minus $19 million, minus some fees for the bank or minus the tax and the rest of cash, then we’ll burn about $5 million of CapEx in the quarter – in Q4, so – and then you’ll get your – any balance or a good approximation of it.

[Todd Coupland:]

Okay. Okay. Thank you for that. And then in terms of the OpEx, if I did my math right, in Q4 without sort of like non-recurring items, it’s in the $49 million range or something like that, in your basic around saying…

[Sam Cochrane:]

It’s around $51 million, I think.

[Todd Coupland:]

$51 million. Okay. So, $51 million and you’re basically saying that, that in Q4, that’s sort of flat to down with restructuring to-date. and then that’ll sort of trend down over 2021 or is that going to go up modestly, because you’re making other investments?

[Sam Cochrane:]

No, no. it will definitely go down in 2021. That’s the $25 million to $30 million on an annualized basis and those actions we’re taking in Q4, the vast majority of them. So, in Q1 and moving forward, you’ll see a much lower run rate of OpEx.

[Todd Coupland:]

Okay. I just – I mean, you can correct me on this point as well. Sierra Wireless has had a number of restructurings and often the savings have been reinvested in the business, which is fine. But you’re basically saying you’re going to get $8-ish million, near $8 million off the $51 million. So, you’ll bring it into the mid-40s at the very least in Q1 and then bring it down a little bit below that over the course of the year. Is that the messaging?

[Sam Cochrane:]

I think that’s the right way to think about it. You’re close, right. I mean, it’s a bit high, we said $25 million to $30 million, so $6 million or $7 million and we’re not reinvesting those at this time, we’re committed to growing the business. Like Kent said, we’ve been growing sequentially over the last few quarters and we continue to grow the business and we’re going to do it profitably. So, we’ll have key investments in areas that we need to where we see strong growth and that have a strong ROI case. But overall, you’ll see our OpEx run rate come down to lower levels in 2025.

[Kent Thexton:]

Hey, Todd. if I can just comment a bit further on that. So, when we made some first moves on expense reduction to it, to get the company leaner, we were investing in the move to selling services on our network side. So, there was some out into name, but an example that I mentioned before is we reduced our R&D that was based in Paris about 100 R&D staff there that were at circa 165,000 a year cost. And we’ve been focusing on new operating centers, like Taipei, Taiwan, where we’re at average cost per head of just over 50,000. So, there was some big savings out of getting to lower cost centers. With this move, we – with selling of our auto business, we sell a fairly large center that’s based in Shenzhen. And we’ve also announced that we are moving out of doing R&D in Hong Kong and so again, reinforcing our major centers in Richmond and in Taipei. So, we no longer need to make any further reinvestment in the services side. That part of our strategy is complete and producing results as I outlined here. So – and also a big part of selling our auto business was being able to get a real focus on the key parts of our business. So, driving our industrial IoT business and driving our enterprise business and with that focus, and the number of centers that we produced from an R&D perspective, I look for us to be much more efficient going forward, and you’ll see that show up in our OpEx in 2021.

[Todd Coupland:]

Okay, perfect. One sort of last cleanup, and then I want to ask you about the business. So, the gross margin is more or less 35%. I mean, is that the right way to sort of think about the gross margin? Is it like, I mean, you talked about some puts and takes before, but it’s out of like a reasonable base says with modest sales growth?

[Kent Thexton:]

Sam, do you want to jump in there?

[Sam Cochrane:]

Yes, sure. Well, I do think 35% is a good way to think about the business. Kent just mentioned to you the LTARR that we have been winning, those design wins are going to – are indicating that in the future as these turn on. we will get a good ramp up there. You start to see a real improvement of that in 2022. So, I think 35% as you’re looking into 2021 and Q4 is a good way to think about the business with some small improvements on that number. And in 2022, you start to see even more improvements as you kind of ramp up connected devices. You get better pricing from scale and the business continues to grow, but in the near-term, that’s a good way to think about margins for the consolidated business.

[Todd Coupland:]

Okay. Sorry, one follow-up on that. So, have you guys talked about what the sort of post 2022 LTARR or recurring revenue gross margin might look like? I mean, is that like typical SaaS margins, 50%, 60%, 70%?

[Kent Thexton:]

We talked about Todd previously is that our overall services revenue was around 40% gross margin. It’s not like SaaS and that it’s not all software. We have direct COGS associated with the wholesale deals we have with carriers. We do get scale advantage on the network part that we own in our MVNO and as we can get more scale, we get better leverage on our total costs with the carriers overall. But I think that that’s more of a modeling point on gross margin on services. We have some software aspects that could be a higher gross margin, particularly in our cloud management of enterprise products, but the services part is very good for the industry, but not to SaaS levels yet.

[Todd Coupland:]

Okay. Okay. That’s certainly fair. Very good. And then just on the recurring piece, you’re starting to break out details on that, which is certainly good to see. What about retention and churn? Is that something you’re wanting to talk about at this point? Is it above 100%? Is it like, sometimes people look at that group of programs you win and they just wonder whether the enterprises will actually move forward on them? So, what’s your thinking on that?

[Kent Thexton:]

Yes. I think it’s a bit of a complicated formula, but let me try to break out a couple of big blocks for you, I think on the new business that we win, we’re not connecting global machine makers, so pumps, compressors, HVAC, lighting the terms very low. We get into a product there, and for the life of that product, we’re shifting data. There is almost never a truck roll to go and change the network settings on that. And as we provide our global network operating support to customers, that’s a very positive low churn metric. We acquired businesses to get in scale. And so those were less attached to some sort of the global machine activity. So, our acquisition of Maingate in Scandinavia and Numerex in the U.S. had some parts of those businesses that do have some attrition with them. So, we have been growing overall despite some attrition on those legacy acquired businesses. Now, I would note that the – what were the assets from Numerex, our team’s been doing a very good job of managing those customers that part of the portfolio we’ve returned to growth and it’s going to continue to grow as we move forward into 2021 and growing at very healthy margins. So, there is some churn from legacy programs, but our overall growth of new connected devices is far running that and in some areas of legacy, we’ve also turned that to turn that back around to growth as well. So in our plans, we’ve talked about for overall recurring revenue growth we’re – we have a strong view on customer retention. All those devices need to continue to be connected unless the machine is taken out of service. And so we’ve worked to provide that continuously for our customers.

[Todd Coupland:]

Okay, good. Okay. My last question is on 5G. I was interested to hear you talk about millimeter wave. My impression in the U.S. was that wasn’t available in too many places and it’s sound airports and sports stadiums, which aren’t really getting used in pandemic or much. So, what’s sort of the path to millimeter wave is it like a decent chunk of the LTARR at this point and how significant is that technology that you called out? Is this a material growth driver for the company? Thanks a lot.

[Kent Thexton:]

Sure. So, thinking about 5G, most of our early revenue from 5G is always all going to be equipment revenue. We’re not – we’re not working to connect many 5G devices yet that sort of higher-end higher bandwidth. We work with our carrier partners on that connectivity in the main. What we’re seeing is a sale of 5G modules. So, we have, I mentioned the previous quarter, our number of design wins that we’ve had in 5G. So, we’ve done a very strong job of winning 5G module business to connect other network providers’ equipment. We’re working to get that certified with carriers around the world and starting to ship product. And the other side is in our network gateway business. We launched our first high-end MG90 5G gateway and providing that in both, where you’d call the lower speed 5G or sub-six, and then the higher capacity, low latency, millimeter wave, our products do both varieties of that. I think that a lot of times when you’re acquiring the equipment you want to future-proof it. So, the split between sub six and millimeter wave, I think it will be years before we know exactly how that goes for the industry to get true massive capacity increase. It’s going to be a millimeter wave that those are new frequencies that bring more capacity, the nature of high-frequency means you need smaller cells, but smaller cells gives you much more capacity and it also has the benefits of a low latency. So, I think a lot of applications that are going to rely on the high speed, low latency, are still in the invention process. But like 4G brought the advent of many products. It wouldn’t have worked without speed of 4G. 5G will do the same. So right now, for 2020 – for Q4, 5G revenue is going to be small. There’s a lot of proof-of-concepts going on. In 2021, there’s still some variability in terms of how rapid the roll-outs, customers are working to make sure they get product out there. 5G is still significantly more expensive as a product than equivalent of 4G devices or gateways. I think that price premium will fall over time and the benefit to need for that speed will increase. So, we’ll see ever increasing 5G is time to move forward. A similar adoption cycle we saw and the move from 3G to 4G. This is just a bigger one in terms of the price gap is higher, but the performance potential of 5G is also significantly higher.

[Todd Coupland:]

Very good. Okay. I appreciate that color. And I agree with you with that on the 5G. Thanks a lot.

[Kent Thexton:]

Thank you. Operator, any more questions?

[Operator:]

Our last question comes from the line of Richard Tse from National Bank.

[Amir Geva:]

Hi guys. Congrats on the win this quarter, this is Amir calling in for Richard. Just not a quick question for you, regarding the rolling lockdowns they’re starting in Europe and possibly, coming in North America. Just wondering if you guys are seeing an impact on the business and how you’re thinking about that going into 2021?

[Kent Thexton:]

Yes. Good question. Thank you. Well, we are sure. We all would like to be able to get back to normal and sit in customers’ offices and be able to spend more face-to-face time, but we have gotten pretty used to selling through video calls and dialogue, our field engineers able to practice safety protocols when required to help with dealer aspects. So, the lockdowns that we’ve seen that come in across Europe; it’s not been an impact to the same degree as we saw in Q2 and people have figured out how to do business more. So, it’s not ideal, but it’s not – it’s not of that, it’s not of that nature overall. We – our sales teams, I think have done a great job. Our product marketing people have been able to get information out. And I think that overall, the need for digitization is becoming more impairment with the new world that we live in now. So, people want to have their assets digitize, being able to get that information without needing to have humans to go out to the machines as the speed at which that happens is somewhat constrained by COVID, but we have lots of lots of strong progress going on. So, I’d just sort of reiterate some of the key points. we’ve seen a very strong growth in our design wins for services. So, I think that despite the COVID activity being up 61%. We’ve grown on our design wins on hardware by over 20% and this has all been done in this non-face-to-face selling world. And we’ve grown our enterprise pipeline for projects we’re working on in the enterprise business by over 50%. So, we’re working through this and maybe, a little slower to get all those deals, papered and launched, but the velocity of what’s coming in has been increasing very nicely.

[Amir Geva:]

Okay. Thanks for that color. I’ll pass the line.

[Operator:]

Thank you. There are no more questions on the phone line.

[Kent Thexton:]

Okay, great. Well, I thank everybody for their attention. I’m very pleased to share what’s going on with the Sierra Wireless business and we’ll be speaking to too many people as follow-up and sharing activity. As we close the auto business, we’ll be putting out an announcement about that as well and we will wish everyone the best of health and safety in these challenging times, and we will come back with updates on our progress. So, many thanks.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.