Sierra Wireless, Inc.
Q3 2018 Earnings Call Transcript

Published: 9 Nov 2018

[Operator:]

Good evening, ladies and gentleman. My name is Denise, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Sierra Wireless, Third Quarter 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] Thank you. David Climie, Vice President of Investor Relations, you may begin your conference.

[David Climie:]

Thanks, Denise, 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 McLennan:]

Great. Thank you, David, and good afternoon, everyone. Note that we report our financial results on a U.S. GAAP basis. However, we also present non-GAAP results in order to provide a better understanding of our operating performance. As a reminder, a full reconciliation between our GAAP and non-GAAP is available on our website. We had strong financial performance in the third quarter. Overall. consolidated revenue in the third quarter was $203.4 million, an increase of 17.9% compared with the same period last year. All three business units realized year-over-year growth and Enterprise Solutions was modestly ahead of our expectations due to some early demand fulfillment ahead of the implementation of U.S. tariffs. Product revenue, which includes all revenues associated with the sale of embedded modules, gateways, routers and other hardware devices was $179.4 million in Q3. That’s up 11.1% on a year-over-year basis in a tight component supply environment. Services and Other revenue which includes revenue associated with our cloud and cellular connectivity services as well as engineering, support and warranty services was $24 million, that’s up a 118% from Q3 2017, driven both by organic subscriber growth and the acquisition of Numerex, which was not in the comparable period a year ago. Services and Other revenue was approximately 12% of the Company’s total revenue. Adjusted EBITDA was $16 million, a strong increase of 21.1% compared to a year ago. And based on financial performance in the third quarter, revenue was slightly above the midpoint of our guidance range; and non-GAAP EPS at $0.29 per share was at the high end of our guidance range. Also worthy of note in Q3, related to gross margin, OEM Solutions gross margin was 27.3% in Q3 compared to 30.4% in the prior quarter due to product and customer mix in the third quarter, including higher automotive volume. Enterprise Solutions gross margin was 54% in Q3, compared to 49.9% in Q2, driven by growth in sales of our higher-margin RV50 and MG90 gateways in the third quarter. And IoT Services gross margin was flat at 41.1% compared to the prior quarter. Overall, the Company’s non-GAAP gross margin was 33.1% compared to a normalized 33.8% in the prior quarter. Just a reminder that are reported gross margin in Q2 was 34.4%, which included approximately 60 basis points of margin associated with two favorable one-time claim settlements in Q2. The cost reduction initiatives which we spoke about in February are having the desired effect. Non-GAAP operating expenses in Q3 were $56.5 million, down $2.5 million sequentially. Included in Q3 non-GAAP G&A expenses was approximately $1.4 million of external consulting fees related to strategy work. And the non-GAAP effective tax rate was 3.2% in Q3, which was lower than our expectations and down slightly from 7.4% in the prior quarter. This tax rate reflects the jurisdictional mix or income across our various legal entities. Looking at non-GAAP metrics in the third quarter compared to a year ago. On a year-over-year basis, consolidated revenue increased by 17.9% with 27% of quarterly revenue coming from our higher growth, higher margin Enterprise Solutions and IoT Services businesses. In Q3 OEM Solutions revenue was $148.3 million, up 7.6% year-over-year, reflecting increased demand in automotive, enterprise networking and energy, partially offset by lower sales in mobile computing and transportation. Enterprise Solutions revenue in Q3 was $32.1 million, up 22% year-over-year. The business continued to show very strong growth driven by AirLink sales into the industrial and mobile markets. Support and services revenue which includes our AirLink Management Services grew 55% year-over-year and continued to add to our recurring base of subscription-based revenue. Revenue in our IoT Services business was $23 million, up 173% year-over-year. This was driven by solid organic subscriber growth as well as the addition of Numerex which we did not yet own in the comparable period a year ago. Numerex revenue is stabilized and we are starting to see a return to growth in parts of the business. Looking at adjusted EBITDA and non-GAAP EPS on a consolidated basis, in Q3, adjusted EBITDA was $16 million, which was up 21.1% compared to $13.2 million a year ago, and non-GAAP EPS in Q3 was $0.29 compared to $0.24 a year ago. Moving onto the balance sheet. During the quarter, we generated $2.6 million of cash from operations. We had CapEx of $5.1 million, primarily related to the purchase of additional factory test equipment that was partially driven by production moves from China to Vietnam to mitigate the impact of tariffs on certain of our gateway products. We also bought network equipment, R&D development tools, and we capitalized certain software and developments. During Q3, we used $3.1 million of cash to repurchase our shares under our buyback program. Overall, our cash position decreased in the third quarter by $5.9 million. We remain well-capitalized with the cash balance of $67.5 million and no debt. Moving on to guidance. For the fourth quarter of 2018, we expect Q4 revenue to be in the range of $200 million to $208 million. Q4 guidance includes two factors that we are seeing in our customer base

[Kent Thexton:]

Thanks, Dave. In the third quarter, we delivered strong results and each of our business units showed year-over-year revenue growth. We demonstrated good OpEx control in the quarter, and as a result, adjusted EBITDA increased 21% compared to a year ago. We experienced strong financial performance in Q3 and had strong design win activity across many verticals including energy, transportation, automotive and networking. I would now like to provide a short update regarding our corporate activities and recent Board announcements. The last time I had the opportunity to speak with you was during the Q2 conference call in August and at that time I was the interim President and CEO of the Company. I’m pleased now to be taking the role on a permanent basis, which the Company publicly announced on October 16th. Over the last several months I’ve worked very closely with our senior management team and gained a more in-depth appreciation of the potential opportunity ahead for Sierra Wireless. There were three factors that really stood to me during this interim period. The first is, the market opportunity for IoT continues to expand globally. Many of our OEM and enterprise customers such as Swiss-based Security Alarms, which we just announced yesterday as a new European conductivity customer are wanting to move faster on their IoT deployments and gather more data from their end points, so they can do advanced analytics and improve their business models. They also said that IoT was complex, often hard to deploy, and difficult to scale globally. They say, having a partner like Sierra who can integrate all disparate pieces together for them is valuable because it decreases their time to market, reduces their deployment risk, and speeds up their time to revenue. Additionally, with our rollout of Low-Power Wide-Area solutions such as battery-operated modules being deployed by KDDI for smart gas metering in Japan, our customers are now looking at new and different way to deploy connected solutions. The second factor that Sierra has a very unique set of capabilities in the IoT value chain that we have world-class capabilities in cellular modules and gateways; two, in IoT cloud performance; and three, our global MVNO conductivity services. Sierra has the building blocks necessary to provide unique, integrated solutions to our customers. And this puts us in a very enviable position in the market. I also believe that our first-mover advantage in the space can be strengthened with more partnerships within the IoT ecosystem. I know that as the leading market share player in modules and gateways, we involve with our customers early in the IoT design phase which affords us a lower customer acquisition costs compared to other providers in the space. And with LPWA, our sales teams will be focused on integrating Cat-M1 embedded modules with conductivity services to improve the lifetime value of the sale beyond just the module. The third factor is that we have a strong management team and a deep talent pool within the Company. I visit many of our operating sites and R&D teams, and we have a strong core expertise in the IoT space. There are skills and abilities that we need to build on as we move into the more bundled IoT solutions, and we started working on this already. So, as CEO, I’m looking forward to driving the Company into its next phase of exceptional growth. And given my unique experience over the last 25 years, which includes running wireless businesses at scale at both Rogers and O2, building an MVNO in the U.S., and managing a technology venture fund, I believe I have the right skill set to accelerate the transformation of the Company to a leading, global, device-to-cloud IoT solutions provider. In my role, I plan to spend a lot of time with the front end of the business with our go-to-market teams, so we are hyperfocused on key verticals and customer segments that can leverage our number one position in modules and gateways into a subscription-based, recurring revenue. We sell more than 17 million devices annually and growing. And as I mentioned, we want to build a much higher rate of service attachment to these devices. And we’re putting together processes internally to do that, to focus on that, so we can improve our selling -- our solution selling. We also announced this past quarter the opening of our new network operating center in Atlanta that provides 24x7 service coverage for our connectivity customers globally. With MVNO assets located in two of the largest IoT markets, namely, the U.S. and Europe, we are now capable of offering our customers global connectivity solutions. And with the knock in Atlanta up and running, we are now moving ahead to the launch of our Ready-to-Connect IoT solutions. In simple terms, our Ready-to-Connect solution provides customers with a device, be it a module or gateway, that already has our global Smart SIM embedded in it, and therefore is pre-connected to the mobile network anywhere in the world. As a result, the customer has greater flexibility on selecting which carrier, which SLA and what price they want to pay while reducing the headache of inventory and logistical costs associated with loading SIMs. The customer also has only one vendor and one contract to deal with for the end-to-end IoT solutions. They can manage their endpoints no matter what network connectivity they use through a single pane of glass using our unified device management platform. So, we are starting to roll out our Ready-to-Connect solution later this quarter. And while it will only be available on select Sierra modules currently, we have a roadmap to expand this to a much broader set of devices over the next 12 months. As I will be spending more of my time at the front end of the business, I’m pleased to announce the appointment of Jason Krause to the position of Chief Operating Officer of the Company. Many of you already know Jason as he has been Senior Vice President of Corporate Development and most recently, Senior Vice President and General Manager of the Enterprise Solutions business. Jason spoke on our last quarterly call. Over the past 12 years with the Company Jason has done a great job in building teams, executing our strategic plans, and growing our business. As he will now be overseeing the engineering operations and products and solutions teams at Sierra, he will be focusing on four key objectives along with the rest of the senior management team as we scale the business. Number one, accelerating our integrated device-to-cloud IoT solutions, both from a portfolio and execution perspective; second, creating a seamless customer experience for all our Sierra Wireless customers; third, building our differentiating capabilities to sustain our growth and right to win; and number four, continuing to find ways to improve our efficiency and effectiveness, so we can fund key strategic initiatives. We are already moving ahead on important programs from private customers with more intelligent edge devices that provide distributed data orchestration. We plan to continue to innovate as we move up the stack in selected areas to continue to differentiate our IoT solutions. Regarding our recent Board of Directors announcement. On October 16th, the Board appointed Robin Abrams to the position of Chair. Robin has served as a Director of Sierra Wireless since 2010 and she has more than 30 years of experience in the global technology industry. And on October 24th, we announced the appointment of Joy Chik to our Board. Joy is Corporate Vice President for the Identity Division at Microsoft’s cloud and artificial intelligence group, and brings great technical insight and industry experience to the Board. We are very pleased to welcome Joy to our Board. These two announcement follow the appointment of Russ Jones, Former Chief Financial Officer of Shopify to the Board of Directors. The addition of Russ and Joy brings great software and recurring revenue expertise to our Board and reflects our focus areas for the future. So, with that, I would now like to open up the call for questions.

[Operator:]

[Operator Instructions] Your first question comes from Mike Walkley with Canaccord Genuity. Your line is open.

[Mike Walkley:]

Great. Thank you very much. Kent, congratulations to the CEO position and to Jason Krause as the new COO. Building on some of your comments just about building on your module leadership to drive more recurring subscription revenue. What are some of the verticals, Kent, that you think are most prime for that strategy to start taking hold for Sierra Wireless?

[Kent Thexton:]

Thanks, Mike. Broadly, in the industrial IoT markets, so, there, what we’re seeing is people are trying to connect their assets and their devices more broadly. So, we talked last call about Girbau, the industrial washing machine maker. Across all sorts of industries, we’re seeing companies wanting to connect their devices. And the complexity of having to select the device, different networks globally with all the settings to get their data securely to the cloud has slowed the market down. When we’ve been able to speak to customers, and being one solution for that end-to-end, they’ve been very receptive to that. So, we’re seeing strong early wins in industrial IoT. We also think that the growth in LPWA is going to enhance this part of our strategy as well. LPWA with lower cost modules, 5 to 10-year battery life, and the optimized connection, so less data usage required, means that the elasticity of demand for IoT solutions should be significant. We’re early, early in that cycle having just deployed our first customer. But for a customer to be able to provide that connectivity, we are reaching deeper into the market, the IoT market than has happened to-date, and providing a complete solution to later adopters to the market is seen as very favorable.

[Mike Walkley:]

And just building on that, with LPWA, how do you see that impacting the OEM Solutions business? Do you see it just as opening new doors for opportunities or somewhat dilutive to ASPs over time as the customers migrate from older 2G or other technologies?

[Kent Thexton:]

Very good question. The dilutive impact, I will talk to that first. So, with many LPWA applications today replacing 2G, it’s not that dilutive on ASPs. But the 2G is being sunsetted in some geographies, and the LPWA is much more optimized technology for IoT than 2G ever was. So, it’s a better solution at an effective cost point. We’ve been in industry where ASPs have continued to decline and LPWA will be part of that. However, on the other end with 5G, that’s a complex device, it’s going to be at much higher ASP. So, we have somewhat of a bifurcation in the marketplace between high-end and low-end. And the penetration in those two markets will have a somewhat balancing position on overall ASPs. But in the LPWA market, our strategy of adding services more broadly means that we go from dealing with a lower ASP, one-time gross margin business to a much stronger lifetime value. And we’re seeing good early examples of both sorts of deployments. And that’s where I’m focused on building our go-to-market capability for solution selling. And Jason, on the execution side, to have a focus on that end-to-end device, plus connectivity, plus cloud in a seamless fashion. So, that’s the -- with the advent of LPWA, we’re ahead of the curve on preparing for that and being able to actually see stronger lifetime value for instance than we have in our past.

[Mike Walkley:]

Last question for me, and I will pass the line. Dave, just on the gross margins, Enterprise Solutions, very strong in the quarter. Obviously, it sounds like it’s going to be impacted because the tariffs issue in Q4. But, as we just think kind of longer, puts and takes, where do you think is kind of a good run rate to think about modeling Enterprise Solutions gross margin on a longer term basis. 54 was I think the highest in quite a long time.

[Dave McLennan:]

Mike, I think as we -- you have to think of it as a portfolio of products. So, we’ve really enjoyed a nice uptick in gross margin here as we’re selling more of the higher value, higher gross margin RB50s and MP products MG products. And I think you should expect that trend to continue relative to our lower margin telematics offering. So, I think there is some continued blending upside of gross margin. I wouldn’t overheat that, but I think there’s some continued pleasure there on the enterprise side.

[Kent Thexton:]

And just adding to that, Dave, when Jason Krause spoke last quarter, we also talked about FirstNet as a new and growing opportunity within our Enterprise segment. So, that again is a positive trend.

[Operator:]

Your next question comes from Paul Steep with Scotia Capital. Your line is open.

[Paul Steep:]

Dave, could you maybe talk just -- you touched briefly on the comments on the tariffs. But, for the OEM business, can you maybe comment around what you’ve seen in the market in terms of how it’s impacting you in that segment as well as competitors? And then, maybe talk a little bit about the gross margin there. We’ve seen it I guess blending down somewhat. Is it mainly tariff-related or should we think more about recovery over time?

[Dave McLennan:]

Firstly, on the tariffs, Paul. From an OEM module perspective, really just negligible, if any impact. I mean, very few of our modules are imported directly to the United States. They tend to go to other countries where they are built into other products. And so, we are really not seeing any demonstrable impact of tariffs on the specific segment OEM segment. Where we do see -- where we have seen impact has been on the gateways where we are importing finished goods into United States, and that’s the 1.25 million impact that I spoke about earlier in the quarter. I would like to stress though that we have moved quickly to move production from China to Vietnam with those gateways. And so, we expect to have very little impact, a small amount of impact in Q1, but nowhere near what we are seeing in Q4 on that side of our business. With respect to gross margin in OEM, it’s really all about mix. This quarter, we saw some increase in automotive sequentially from Q3, and that blends down gross margin, and we also saw some decrease in our mobile computing business, which is running above average, our OEM gross margin average, and that blends it down as well as those volumes decrease a little bit. So, it’s really all about product mix within OEM.

[Paul Steep:]

Is there anything -- just to finish on that Dave, is there anything you are going to do in terms of cost action or it’s solely mix and there is really not much in a way of levers you can pull to sort o drive it north of 30% again?

[Dave McLennan:]

No. We are very, very focused on managing our cost of goods sold. We’ve got programs underway to focus on building materials, manufacturing cost, the entire supply chain. You first talked in the past about having some advisors into help us work through some of these things, and that’s really a focus on driving cost down. So, we’re not standing still. And I think we have done a good job and reducing, taking costs out and we just need to continue to focus on that very carefully.

[Paul Steep:]

One quick wrap-up one. Kent, congratulations. The question I guess for you would be, how should investors think about what you’re going to do with the capital that’s on the balance sheet? You’ve got a strong balance sheet. You’ve talked about accelerating the move and the strategy. Should we think of that as more aggressive M&A stance, or is it a stronger investment tracking to the core of the business? Thank you.

[Kent Thexton:]

Thanks, Paul. I mentioned last quarter that we are not looking to acquire more MVNO assets that we feel we have a global scale in that regard, and that our growth of recurring device to cloud revenue is mostly going to happen organically. And that’s a significant opportunity as we’ve shipped over 17 million modules and gateways in the past year, and then, that is a growing number. So, the recurring revenue growth, and on the previous question about OEM, we are growing our Enterprise and our Services segments most quickly and we will continue to focus on that. The cash and our balance sheet, we feel is at a good level right now. We are going to be focusing on driving our efficiency, so that we can fund our activities into new key segments and that drive our product capabilities as we described and do that with self funded activity. So, that’s an efficiency focus. Jason’s new role where we are providing centralization of number of our R&D and delivery functions, of course there are some opportunities in that regard. So, as we continue to push deeper into recurring revenue sides. We could find some opportunities with M&A, but currently right now it’s too drive our solutions capability and to drive the organic growth of our recurring revenue as the main near-term focus is.

[Operator:]

Your next question comes from Thanos Moschopoulos from BMO Capital Markets. Your line is open.

[Thanos Moschopoulos:]

Could you extend little on what you’re seeing in the auto space? You mentioned there has been some slow in that market. Does that seem to be short-term inventory rebalancing or is something that should persist into early next year. And could you comment on the ramp of your large auto program and how that’s proceeding? Thanks.

[Dave McLennan:]

What we’re seeing as we go into Q4 is a slowing of demand from our existing automotive customers. I think that’s consistent with some of the industry reports you may have seen as we got into the early fall period, you saw some of the automotive OEMs reporting some slowdown in their numbers. So, I think that’s a phenomena we’re seeing right now. Interest rates is clearly a factor there. As interest rates go up, consumers do change their buying patterns accordingly. So, I think that is a factor here in the near term. Sorry. What was your second question?

[Thanos Moschopoulos:]

The ramp of your large auto program.

[Dave McLennan:]

So, yes, we have good news, we’ve commenced shipping there. So, that’s good news. I would stress though the volume ramp is really a 2019 phenomena and you should expect us to see ramping later in the first half of the year on that program. But we have commenced shipments, and we are very pleased with the progress we’ve made there.

[Thanos Moschopoulos:]

And then, on the OpEx side, there was a fair bit of a step down in R&D versus last quarter. Was that just reflective of wrapping up the integration o Numerex or just some other dynamic?

[Dave McLennan:]

There is a lot of moving pieces there, Thanos. So, yes, we’ve been active on the integration side. There is some timing of expenses that move from quarter to quarter with things like certification. But really the one of the big drivers was, we spoke to you in February about some cost down initiatives. And we implemented [indiscernible] for one of those right at the end of June. So, we had the benefits of a full quarter of that impact and that was mainly in R&D related to our facility we had in Asia.

[Thanos Moschopoulos:]

Okay. That makes sense. And then, finally, on the IoT Services side, help us think about operating leverage as that business grows into next year. I mean, on a short-term basis, so the margins were in kind of the levels or should it be quite significant ramp as volumes increase for the services line?

[Dave McLennan:]

Yes. Certainly, scale matters there. And we do have decent scale in our operating jurisdictions. But we’re also being competitive with ASPs as we bid on design wins. So, think about business as an area of investment for us where we are focused on the financials, but we are growing that business and investing in that side of the business as well.

[Operator:]

Your next question comes from Todd Coupland with CIBC. Your line is open.

[Todd Coupland:]

On the mobile side, with the Intel shortage, what’s your view of how long that’s a drag on results?

[Dave McLennan:]

Yes. I have to check with Intel on that Todd. Certainly, they are building capacity to try and relieve the shortage. But, I think it’s for the foreseeable future, that’s going to be a factor.

[Todd Coupland:]

And as we think about the Company under your leadership, Kent, does the target model for the Company in terms of aspirational targets, double-digit growth, 10% EBIT margins over time, is that still something that is a keen focus? And maybe talk to what you think are the key leverage to get there and any other thoughts you have on the matter?

[Kent Thexton:]

We think that the IoT market is an exceptional long-term growth market. We’ve done quite a bit of a strategic work in that and the market segments that we think will grow most rapidly. So, we see large opportunities ahead. I think, overall, global IoT growth has been somewhat slower than marketed. And we think we are solving some of those problems by being a complete solutions provider. The disparate parts and putting it together has been somewhat of a challenge. So, our revenue growth is going to be driven by a couple of factors. I think that the continued deployment of IoT systems, some of that’s going to be driven with deeper penetration with lower cost LPWA modules and also greater capabilities that are happening with 5G. But, more particularly, we’re looking with our strategy of providing a complete solution and will be targeting on particular statements that are -- that we are best positioned to provide that solution. At that point in time, when we are selling a module, an LPWA modules is typically fairly low cost, but we’re adding a monthly recurring revenue that goes with that, you see that revenue build like a SaaS company over time. When we’re shipping a module into a machining and device hardware, that’s a nice long-term recurring revenue stream, not like the consumer cellular market where a customer might change their mind. When you have a piece of an equipment that you are providing important data for, you are there for the life of that equipment. So, that’s where we see -- as we grow our service side, we’re going to see that part of the business driving up our growth rates. So, as we said, today, we’re at 12% of our revenues recurring and we’re going to be focusing on growing that percent and we believe that increases the value of our business.

[Operator:]

Your next question comes from Paul Treiber with RBC Capital Markets. Your line is open.

[Paul Treiber:]

I just want to follow up on your last comment that you made in terms of the growth of recurring revenue in LPWA. Do you see an opportunity for new or perhaps more aggressive business models, perhaps like in the consumer telecom world where you could subsidize the module with multiyear subscriptions?

[Kent Thexton:]

That is certainly something that may occur in some instances. Our focus so far in the customers we’re speaking with is to have them recognize the value of our hardware and then have them recognize the benefit that we can provide with a bundle of connectivity, security cloud services. And we look to make margins on both parts of that business. As you get to lower cost modules, the outer year view of LPWA modules could be in a $5 to $10 range in significant volume, then you can quite rapidly be making up lost margin on the front-end with the recurring revenue stream. I think that it’s an important shift in business model as this market grows strongly into the future. So, we’re not going to try take this market down of many years of experience with subsidies in the cellular marketplace. And while I can spur growth, it becomes bit of a headache. But these are becoming fairly low cost modules. I think that the other part of this is, there is some activity for the customer to design their systems. We are involved in that, and where we can provide advice, support, professional services, we will monetize that as well. So, we see many opportunities for monetization for large customers. We’ll be working with them on are they looking for CapEx or OpEx type solution to suit their business needs and we’ll have some flexibility. But in general, we’ll have a price list in our modules and priceless on our connectivity. On connectivity, we can be very creative because customers don’t really think in megabytes. They think about events. And by owning the device layer and the network layer, we can do leading edge things like bill customers per vent which suits their business model but also can be strong margin business for us.

[Paul Treiber:]

Earlier you mentioned that there’s an opportunity to increase the attach rate on services. When you look at what the strategy has been to date or the execution to date on attach rates or driving higher attach rates, why do you think it has been less than ideal to-date? And then what do you think the strategy would be to increase it?

[Kent Thexton:]

Sure. And we’ll try not to get to deep into the plumbing to answer that question. But, in the past, we’ve shipped all our modules and gateways with an empty SIM slot. And while for the last short while we’ve had standard Sierra SIMs that you can put in versus carrier SIM, there wasn’t much change in process, and the expertise of our sales force was strongly around hardware. The Ready-to-Connect program that I mentioned is important because actually getting a global SIM to have one SIM card that can work anywhere in the world is a pretty significant technical achievement. Our customers previously would use different SIM cards for deployments in different parts of the worlds, gives them a logistics and cost hassle. So, we’ve move to our global Smart SIM that can light up anywhere in the world and provide connectivity. The Ready-to-Connect program then builds that capability and directly into our module or a gateway, so as that product is shipped and it shows up in various parts of the world that lights up to the global Sierra Wireless network and start supporting data to the cloud. So, those two developments with our Smart SIM technology and then our integration into our module or a gateway, makes it a much easier deployment for the customer. And we’ve been working on training our sales force to be able to share the advantages of that with the customer. So, we will be deploying that Ready-to-Connect across our footprint during 2019, so that the attach rate of our services is a very straightforward activity. From our Smart SIM we can move that. If a customer wants to be on a specific carrier, we can put them on that carrier. But, to provide one global solution, we can put them on the Sierra Wireless solution. So, we’re providing a great service for our customers and it’s simple and easy to use. We have many reasons why we think we have a much greater benefit to the customer going with Sierra Wireless end-to-end and especially get into these LPWA and market expansion, used cases, not having to go through a module selection process, getting to understand and know all of the SIM solutions globally along with how to manage the cloud part of the process, we can bring that altogether for the customer. That complete solution really has just been coming together over the last short while and that is something that we’re focused on in 2019 to have it deployed across all of our selling capability to be upping our solutions capability in the field with training and with talent, and be focusing on customer segments where we see this need.

[Operator:]

[Operator Instructions] Your next question comes from Richard Tse with National Bank Financial. Your line is open.

[Richard Tse:]

If you go back to Todd’s question earlier, I’m just kind of curious, you can maybe give us a bit more color in terms of whether there is sort of specific aspirational target on services as a proportion of the base, sort of roughly trying to get the quarter of the base, or third, and also what would the rough timeline be on that?

[Kent Thexton:]

Thanks, Richard. You realize that I didn’t provide you with a specific number. I will make a couple of comments and ask Dave to comment as well. My official first day as CEO was November 1st. We sit here on November 8th, and I don’t crisped up targets to give at this point in time. We are focused on growing our recurring revenue and we see lots of opportunity there. We will get to the point where we can provide better targeting for you in that regard but it’s too early in the game to get specific.

[Dave McLennan:]

Hi, Rich. It’s David. I would emphasize though that we are at 12% right now in terms of recurring revenue and we’ve made some pretty good progress in that over the past several years where we were virtually 0% in 2014. So, we are making progress through both organic growth and acquisition growth. And we’ve really focused on how to accelerate our growth in services, and that’s part of the advisory work that’s going on right now within the company is to help us identify opportunities to drive harder and faster the growth in services. So, not sticking at any target there. But were very, very focused on growing that as a business.

[Kent Thexton:]

I would go back to one other part, Richard, is that we talked at the beginning that our higher margin, higher value segments in enterprise and services continue to grow rapidly. So, that is an area that we will broadly have a focus on. So, 27% of our revenue from those two higher margin segments and OEM sub segments, like automotive, they have gone to scale way down gross margins, and we’re counteracting that with growth in services and growth in enterprise. And we’ll continue to do that over time. The services attach rate will drive significant growth in margin from that part of the business and an OEM sale that may look lower gross margin up front will actually have a high life time value.

[Richard Tse:]

Great. That’s helpful. Thank you. Last question for me, one of your big competitors has some high profile challenges over the course of the last year. Are you seeing any sort of change in your business and pipeline because of those challenges?

[Kent Thexton:]

We see many competitors in the industry. And so that I would say from the reference to Telit is they continue to be hungry in certain market segments, we are seeing as a high-quality provider and our win rate continues to be high. When we look down the curve or around the corner in terms of where the market goes, I think it will be a different sets of competitors that are important to us in time as this market goes to scale, and that’s where we see our position as a solutions provider being unique in the marketplace today. Nobody has assembled complete set of assets that we have. And we’re working to execute so that we continue to lead with our work with Jason Krause and his COO position and driving the centralization of our R&D functions and product management. It gives us more capability and cycles to drive greater innovation into this part of our business as well a combination of hardware and services to provide a differentiated solutions to customer. So, we’re excited about that opportunity.

[Dave McLennan:]

I’ll just add one thing. It is a design-win-driven business, right. So, things don’t -- when a competitor hits those kinds of bumps, it’s not necessarily an immediate share opportunity. But, as we bid on new design wins, I think we have a very strong credible story to tell to potential new customers, from a competitors’ perspective relative to Telit.

[Operator:]

Your next question comes from Howard Smith with First Analysis. Your line is open.

[Howard Smith:]

My question has to do with the OEM gross margin. You talked a little bit about enterprise, the trends there being positive with mix sustainably so, once the tariffs are done perhaps. On the OEM side, it sounds like some of the trends with auto and then ramping up your new auto customer, which has lower margin in its initial phase and until you get to scale with that and get a little more experience, and the mobile. It sounds like the margins there could be under pressure, we shouldn’t expect any material pick up here in the near-term due to mix, or am I reading the tea leaves wrong?

[Dave McLennan:]

I think, directionally, those comments are correct. I mean, we are very focused on managing gross margin from a build materials and cost of manufacturing, supply chain perspective. So, we are taking cost out of the products every day. But, the mix, you should expect as we see those trends will put pressure on OEM gross margins. And that’s why we have a business with many other customers and different profiles. We’ve talked about services and gateways, which is now 27% of our revenue mix and much higher gross margin and growing faster as a mitigating factor to a pressure on OEM margins.

[Howard Smith:]

And just a follow-up, slightly different line. The GenX asset, you had some things that were going really well and you thought they would tail off in terms of demand for that. I know you talked about the main drivers are some of these higher end enterprise products. But in that line, did that fall -- did that actually stay up better than you expected as the year has gone on here?

[Dave McLennan:]

Yes. I mean, we’ve seen, the trend we saw with our, I’ll call it, our mid tier telematics products where we had tremendous ramp in Q3, Q4, into Q1 of this year on the backs of the hours of service legislation in United States, that was a nice bump to the business. And not surprisingly, that’s tailed off as that regulations run its course. But, in parallel to that, as we brought new higher end AirLink gateways to market, they have really hit their stride here, and we’ve seen strong growth that has been able to offset and more the change, the reduction in our telematics, our mid tier telematics business. That’s a good trade, because -- the gross margin on those higher end product is much higher than what we were seeing on the mid tier telematics product. So, that’s a good equation for us.

[Howard Smith:]

And then enterprise business sounds like really strong right now. Okay. That’s it for me for now. Thank you much.

[Dave McLennan:]

Thanks, Howard.

[Operator:]

There are no more further questions queued up at this time. I’ll turn the call back over to the presenters.

[Kent Thexton:]

Okay. Thank you very much for a good questions and paying attention to our presentation. We will wrap the call at this point in time and are open for follow-up discussions and any interaction, and excited about the opportunities ahead of us. Thank you.

[Operator:]

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