Sierra Wireless, Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good afternoon. My name is Cheryl, and I will be a conference operator today. At this time, I would like to welcome everyone to the Sierra Wireless Second Quarter 2017 Financials Result Conference call and Webcast. [Operator Instructions] Thank you. David Climie, Investor Relations. You may begin your conference.

[David Climie:]

Thanks, Cherly, and good afternoon, everybody. Thank you for joining today's conference call and webcast. With me today on the call is Jason Cohenour, our President and CEO, and Dave McLenna, 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. Jason will provide a review of our second quarter results. Dave will then provide a more detailed overview of our quarterly results as well as our guidance for the third quarter 2017. The following that Jason will review our announcement Sierra Wireless is acquiring Numerex Corp and then will finish with the Q&A session. Before we get started, I would reference the company Safe Harbor statement. A summary of our Safe Harbor statement 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. These statements include our financial guidance and commentary regarding the longer-term 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, our forward-looking statements are subject to substantial known and unknown material risks and uncertainties. I draw your attention to a longer discussion of our risk factors in our Annual Information Form and management's discussion and analysis, which can be found on SEDAR and EDGAR, as well as the other regulatory filing. This presentation should also be viewed in conjunction with our press release. With that, I will now turn the call over to Jason Cohenour for his comments.

[Jason Cohenour:]

Thank you, David, and good afternoon, everyone. I'll begin with the summary of our second quarter 2017 results. Overall, Q2 financial results were solid and at the higher end of the guidance range. Consolidated revenue was $173.5 million, up 11% on a year-over-year basis. We saw year-over-year revenue growth in each of our business segments and in each of our 3 regions. Solid revenue and gross margin lead to improved profitability metrics in the second quarter with adjusted EBITDA of $14.8 million, up 23% year-over-year and non-GAAP earnings per share of $0.30, up 50% compared to last year. We also continue to strengthen our overall position in the Internet of Things with technology initiatives, new partnering initiatives and a small but strategic acquisition. With respect to technology initiatives, we introduced our latest LPWA products, a new technology area, where we have secured an essential intellectual property position. And we're now turning our attention to helping define the Emerging 5G specifications. As we did for Cat-1, Cat-M1 LTE technology, our CTO team is actively engaged with the 3GPP and helping to define the 5G standards, particularly, as it relates to IoT use cases. We expect to secure an interesting IP position as a result of our contributions. We also established a joint business relationship with PricewaterhouseCoopers and will focus on leveraging our complimentary capabilities to deliver transformative IoT solutions and new business models to OEMs and enterprises worldwide. With respect to strategic technology acquisitions, we completed the purchase of the technology assets of flow things and hired their small but talented R&D team. Based on Brooklyn, flow things provide a data orchestration platform for rapid application development at the edge and in the cloud. We believe that the flow things platform and team will help strengthen our device to cloud offering and accelerate time-to-market for our customers. Taking a closer look at the business segment performance, I'll start with OEM Solutions. Q2 revenue in our OEM Solutions segment was $144.5 million, up 9%, compared to the first quarter of - pardon me, the second quarter of 2016. Non-GAAP gross margin was solid at 32.1%. As we expected, we saw a solid contributions year-over-year from our established OEM customers and programs across a broad range of segments including automotive, networking, security and mobile computing. Revenue contribution from new OEM customers and programs continue to grow in line with our expectations. Design win activity was strong as we secured a higher than average number of design wins again in Q2. Though design wins were spread widely across the number of segments including automotive transportation, sales and payment and networking. With respect to new products, we announced our new AirPrime double WP 77, which is the industry's first global dual mode LPWA module, this module supports both Cat-M1 and MB1 as well as optional 2G fallback. Allowing customers to deploy the same device with multiple network operators almost anywhere in the world. The WP 77 also contains our market-leading open source Legato application framework, embedded DNS capability for location-based services and is pre-integrated with the AirVantage cloud. We also announced our latest open source IoT development kit, mangOH Red, mangOH Red is the successor to mangOH Green and a design for low power consumption, low cost and small footprint applications. Smaller than a credit card and containing a Sierra Wireless module and an IoT connector slot. mangOH Red includes all of the building blocks that our customers need to rapidly prototype and test new applications with minimal investment. Moving to Enterprise Solutions. In the second quarter, revenue in our enterprise solution business grew 31% year-over-year to $21.7 million. Year-over-year growth in enterprise was driven by strong contribution from our telematics and gateways and tracking devices acquired with Gen X last year. We also had stronger sales of our RV50 gateway and the industrial and energy markets in sales of the new MG router into public safety and transit markets. Non-GAAP gross margin for the Enterprise Solutions BU was 47.5%, down slightly from Q1 as a result of unfavorable product mix, including higher revenue contribution from telematics gateways. During the quarter, we also continue to strength into our go-to-market position adding Ingram Micro as a new distributor for Enterprise Solutions products. We believe the strength and resources of this new channel partner will help to expand our presence in mobile, industrial and distributed enterprise markets. Customer acquisition activity was also strong in Q2 with new wins and regional transit, public safety and security. Now onto cloud and connectivity services. Cloud and connectivity revenue in Q2, which is comprised mainly of recurring services revenue was $7.3 million, up 4.3% on a year-over-year basis. Non-GAAP gross margin in clouding connectivity was 42.6%. Our cloud and connectivity revenue once again face some affects headwinds in Q2 as the sweetest grown and the euro weakened year-over-year against the U.S. dollar. On a constant currency basis, cloud and connectivity revenue was up 8.4% year-over-year. On July 18, we announced that Mark Overton joined the company as Senior Vice President and General Manager of our cloud and connectivity business unit. Mark is over 20 years of executive experience growing businesses in the technology and telecom space with companies such as Cisco Jasper, First Data, EE and orange. We are thrilled to have Mark onboard and believe that his dealership will help us to scale our recurrent revenue from Cloud and Connectivity Services. New customer acquisition activity was solid in Q2 with new customer programs wins in security, distributed enterprise, aftermarket automotive and telematics. We also saw a continued - we also continue to see strong cross business units sales corroboration with more than 50% of our new cloud and connectivity wins, originating in our OEM and Enterprise Solutions be used. We're also very pleased to announce that our AirVantage cloud is now integrated with Google's cloud IoT core, which means that our device-to-cloud solutions now also provide our customers with access to the full suite of Google capabilities, including enhanced data analytics. I'll now turn the call over to Dave, who'll provide more detail on the Q2 financial results and our guidance for Q3.

[David McLennan:]

Great, thank you, Jason. Please note that we report our financial results on a U.S. GAAP basis, however, we also present non-GAAP results turning to provide a better understanding of our operating performance. As a reminder, a full reconciliation between our GAAP and non-GAAP results website. Comparing our second quarter of 2017 non-GAAP results to guidance, results were at the high end of guidance range for both revenue and non-GAAP EPS. Revenue of $173.5 million was at the higher end of our guidance range reflecting a slightly better-than-expected contribution from OEM customers and strong demand for telematics Gateway products originating from the acquisition of Gen X, which we made last year. Our non-GAAP gross margin in Q2 was 34.5%, stable with the Q1 level and represents continued focus on managing product costs. Revenue at the higher end of the guidance and saw a gross margins drove Q2 adjusted EBITDA to $14.8 million and non-GAAP net earnings to $9.7 million or $0.30 per share. Our non-GAAP effective tax rate of approximately 14% was slightly lower than we expected and this is a result of a more favorable mix of income among various legal entities. Looking at our key non-GAAP metrics in the second quarter compared to the same period in 2016. On a year-over-year basis, revenue increased by 11.1%. OEM revenue increased 9% reflecting improved demand from established OEM customer programs across a broad range of segments, including in automotive, networking, security, mobile computing, partially offset by some weakness in payment. Revenue contribution from new OEM customers and programs continued to drive our year-over-year growth. Enterprise Solutions revenue in Q2 was up 30.7% year-over-year. This growth was driven primarily by strong demand for telematics Gateway products. We also saw revenue contribution from our new generation of Gateway products in the industrial, energy, public safety and transit markets. Cloud and Connectivity Services revenue was up 4.3% compared to Q2 of last year, reflecting and improving level of new customer programs coming to market. Looking at adjusted EBITDA and non-GAAP EPS. In Q2, we realized a significant year-over-year improvement in adjusted EBITDA and non-GAAP EPS. This reflects solid top-line growth, improved gross margin and business model leverage. Adjusted EBITDA was $14.8 million, representing an 8.5% margin, compared to $12.1 million or a 7.7% margin a year ago. And non-GAAP EPS of $0.30 in Q2 compares favorably to the $0.20 we reported in the second quarter of '16. We continue to have a strong cash position of $89 million on the balance sheet and the company is debt free. During Q2, we generated $5.5 million of cash from operations. This was dampened by a significant working capital requirements during the quarter, which is primarily driven by increased inventory. This increase in inventory reflex our decision several quarters ago to hold more inventory to support the growth of our business and use our balance sheet to reduce our supply chain costs. CapEx consumes $5.3 million of cash, another item mainly affects related utilize $3.7 million. In total we utilize $3.5 million of cash to end the quarter with a balance of $89 million. Moving on to guidance for the third quarter. We anticipate revenue and non-GAAP EPS in Q3 to be higher on a year-over-year basis, driven by improved demand in each of our 3 business units compared to Q3 last year. In Q3 '17, we expect revenue to be in the range of $167 million to $175 million. We expect gross margin percentage to be lower compared to Q2. This is mixed driven and is aligned with the direction we discussed in May, when we indicated that we expected some gross margin compression in the second half of 2017, resulting from an existing high-volume automotive program transitioning to a next generation platform at a lower gross margin level than the current program is replacing. With the Euro and Canadian dollar are now appreciating relative to the U.S. dollar. We are facing foreign-exchange headwinds in OpEx in Q3. However, by managing other expenses, we expect our Q3 non-GAAP operating expenses to be approximately the same as we incurred in Q2. And we expect non-GAAP earnings per share in a range of $0.17 to $0.25. Our non-GAAP tax rate assumption for Q3 is expected to be approximately 20% and we expect a full year 2017 rate to be between 15% and 20%. I will now turn the call back to Jason for an overview of the Numerex transaction.

[Jason Cohenour:]

Thank you, Dave. I'll now cover the acquisition of new Macs, which we also press released earlier today. The following presentation is subject to a specific Safe Harbor statement that is now being shown on the webcast. So we're excited to announce that we singed a merger agreement today with Numerex, the acquisition of Numerex expands our position as a global leading IoT peer play and accelerates our device to could strategy by adding established customers, proven solutions, significant sales capacity and recurring subscription-based revenue. We believe that the combination of Sierra Wireless and Numerex result in a powerful business and technology platform that would enable us to drive a global leadership position in IoT services and solutions. We're offering Numerex stockholders $0.18 common shares of Sierra Wireless for each common share Numerex. This share exchange ratio applies an offer price for Numerex of $5.34 per share, which represents a 17.5% premium to Numerex is to 20-day volume weighted average price. This makes the total equity value of the offer approximately $107 million for Numerex. Our offer is subject to approval by Numerex stockholders and other normal regulatory and government approvals. As we indicated in our press release, both the Sierra Wireless and Numerex boards have unanimously approved that - of the merger agreement. Assuming the transaction is approved by the Numerex stockholders, approximately 10% of the common shares of Sierra Wireless will be held by Numerex stockholders. As both companies have to make certain filings with the securities commissions, which may take several months to complete. We're expecting the transaction to close in January 2018. So for those who don't about Numerex, I'll share with you a bit more. The company has been in the business for 25 years, making it a grandfather of IoT. The company is headquartered in Atlanta and has a 143 employees. Numerex has an established IoT peer play and a single source provider of integrated solutions for the Internet of things including devices, network services, platform services and application services. Today, approximately 95% of Numerex is revenue the generated in the U.S. where they have a strong incumbency position in key IoT market segments such as security, asset and vehicle tracking and tank monitoring. Numerou's has annualize revenue based on the first quarter of 2017 actual revenue is approximately $66 million. Approximately 80% of this base is recurring subscription-based revenue and 20% come from hardware sales. Operationally, Numerex approaches the market via 3 lines of business, network services, security services and asset - to asset tracking and tank monitoring. I'll now cover each of these in a little more detail. Started with network services. This business provides ready-to-deploy managed IoT solutions, this service includes pre-integrated devices, Numerex is x fast cloud platform, data information services and application enablement services. This business has a diversified customer base and is similar in many respects to our own Cloud and Connectivity Services business. The second is Numerex Security Services, which provides cellular alarm communications and interactive services for residential and commercial security. Also in Numerex security business is electronic offender Monitoring Services for state and local governments. In addition, the Numerex security line of business provides loan worker and eldercare monitoring and personal emergency response services. All of these security services have location monitoring, alerts, notifications and reporting capabilities. Lastly, the asset tracking and tank monitoring business includes wireless tracking and monitoring devices for fixed and mobile assets that includes two primary service bundles, the first is, I managed, which is a solution that helps businesses optimize manufacturing and production by wirelessly tracking managing and analyzing assets, while also providing supply chain alerts. And the other is I tank, which is a turnkey solution for the petroleum industry that provides wireless tank level readings as well as delivery route optimization to improve distribution efficiency. So on the strategic rationale. We believe that Numerex represents an excellent strategic fit for Sierra Wireless. We're both wireless IoT peer plays with complimentary positions in the IoT value change. As you know, with state and strategic goal for Sierra is to rapidly scale our revenue from recurring IoT services, connected to the devices we make. Numerex enables us to do just that. While also being fully aligned with our stated device to cloud strategy. With respect to scaling our services revenue, Numerex will bring approximately $54 million in annual recurring solution and services revenue from a diversified base of U.S. customers across a range of market segments. Numerex will also help us to bolster our overall IoT market position with a strong customer base and proven managed IoT solutions. Numerex helps us to significantly expand our IoT services sales capacity particularly in the critical U.S. market by bringing an experienced direct and indirect solution selling team to the combination. And we believe that adding Numerex will significantly enhance our operating model by nearly tripling our base of high margin recurring services revenue and significantly improving our overall revenue mix. Overall, we believe that combining with Numerex, strengthens and accelerates our device-to-cloud and will help us to build a powerful business and technology platform that would enable us to drive global expansion of our IoT services and to secure our market leadership position. In addition to excellent strategic alignment. Numerex also fixed very well with our organizational structure and operating model. Our plan is to combine Numerex with our cloud and connectivity business unit once the transaction has closed. The combined business unit will be led by Mark Overton, our new Senior Vice President and General Manager of Cloud and Connectivity Services. As mentioned earlier, Mark has more than 20 years of senior leadership experience in the IoT and wireless industries. These clearly has the experience and track record of growth to lead the combined business unit and to take our IoT services business to new levels. Overall, the combination will bring together complementary strengths and result in significant IoT scale. Total combined annualized revenue will exceed $710 million dollars. Combined recurring Services revenue will be more than $80 million annually or about 12% of consolidated revenue. Combined gross margin from recurring services revenue will be about 54%, which will enhance the overall gross margin profile of the company. The 2 companies are very complimentary with respect to geographical concentration of their respective IoT services business. Sierra IoT services revenue is concentrated in Europe, while Numerex is revenue based is largely in the U.S. Together, we'll have a strong position in both Europe and the U.S. and a platform that we can leverage for global expansion. And together, we'll also have significant sales capacity, essentially doubling the size of our IoT services sales team. This puts us in a strong position relative to competition and will help us to accelerate growth. I'll also note that our U.S. operational center for Cloud and Connectivity Services is located in the Atlantic area, approximately 10 miles from the Numerex headquarters. In addition to strong strategic rationale and organizational fit, the acquisition of Numerex is supportive of our stated midterm corporate objectives, which is to number 1, drive our revenue above $1 billion annually, with respect to this objective, we believe that the combination will provide an excellent business and technology platform for driving revenue growth and geographical expansion. Number 2, we also have a stated goal of shifting our mix of revenue such that more than 10% comes from recurring IoT services. On this, by adding Numerex, our consolidated IoT services revenue goes from 4% of total revenue to approximately 12% of consolidated revenue based on Q1 actuals for both companies. And final - finally, number 3, we have an objective to drive our operating margin to above 10% of revenue. And relative to this objective, we expect that the acquisition of Numerex will strength and consolidated gross margin and will provide us with good operating leverage opportunities as we grow the business. So to summarize, we're excited about our planned acquisition of Numerex and believe it will accelerate our device-to-cloud strategy by scaling our subscription based IoT services revenue, bolstering our market position in the global IoT market and expanding our sales capacity in channels. I'll add that Numerex stood very well with the Sierra Wireless organizational structure and is supportive to achieving our operational model goals. Of course, we will be focused on capturing operating expense and cost of goods synergies as well as growth synergies that result in the combination. We believe that this will take a little time to capture these synergies and therefore expect the acquisition to be accretive to non-GAAP EPS about 12 months after closing. And finally, we believe that this combination represent a great value creation opportunity for both Sierra Wireless and Numerex shareholders. Together, we will be a clear leader in device-to-cloud solutions for the Internet of Things and believe that the growth opportunity ahead is compelling. So with that, Cheryl, you can now open the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from Thanos Moschopoulos from BMO Capital Markets. Your line is open.

[Thanos Moschopoulos:]

Hi, good afternoon. Maybe starting off on Numerex. To clarify, Jason, is all the revenue is staying or is there any portion of revenue that should trial off, because maybe non-core.

[Jason Cohenour:]

I think your question, are we planning on divesting any part of Numerex or turning down any of the Numerex businesses and the answer to that question is, no. So we expect to incorporate the full revenue base into the combination.

[Thanos Moschopoulos:]

And all data in the cloud line end of the need enterprise volume for example?

[Jason Cohenour:]

I'm sorry, can you repeat that Thanos?

[Thanos Moschopoulos:]

Yes, all of the revenue would be in the cloud and connectivity line and none of within the enterprise line?

[Jason Cohenour:]

That's correct.

[Thanos Moschopoulos:]

Okay. And then just maybe to clarify, on OpEx, I think your comment was that we should see some operating leverage longer term as of synergies overtime, so out of the gate bench, we look at Numerex historical OpEx profile and being kind of indicative of the OpEx resending on day one?

[Jason Cohenour:]

It up to make some adjustments to that, kind of [indiscernible] they've got some debt outstanding that we intend to takeout at closing time, so there would be interest cost coming out of their cost structure. And overall, with respect to synergies, I think, the company has done a good job taking significant costs out of its structure in the last 12 months or so and so of course, we think there synergies and those would include things like public costs of the company costs, cost of goods sale, supply chain synergies, sales and growth synergies. So for sure, there are synergies there. And then having said that, go in the other way, we expect to be invested in certain area of the business as well. So yes, there will be synergies and as Jason said, we think that it would be accretive to our EPS, approximately 12 months out.

[Thanos Moschopoulos:]

And then just to clarify from that capabilities prospective, clearly there is new areas that you'll be entering on a security service and asset tracking and monitoring side. Our network services side, are there new capabilities activities to bring to you or is it more about scale?

[Jason Cohenour:]

Thanos, that's really more about scale. As you know, our cloud and connectivity business focused in Europe, primarily, although we do have a footprint in the U.S., but it's largely Europe-based, is growing and we're growing the subscriber base, but the U.S. market is a tougher nut to crack and I think that by adding immediate scale with Numerex and bringing those channels into the combination and mobile network operator relationships that would enable us to take that combined scale and accelerate growth post transaction.

[Thanos Moschopoulos:]

Great. Congrats for the acquisition and I'll pass the line. Thank you.

[Jason Cohenour:]

Thank you.

[Operator:]

Your next question comes from the line of Mike Walkley of Canaccord Genuity. Your line is open.

[Mike Walkley:]

Thank you and congratulations on the Numerex acquisition. When we're considering just the impact may be to your OEM Solutions business. Is there much overall that all was kind of Numerex in target markets like tank monitoring, asset tracking et cetera that compete with some of your in cuts or OEM Solutions. Is there any kind of this energy you might consider on that just as we try to think about the combined companies?

[Jason Cohenour:]

I think, like there is some of that and so we need to carefully finance that. We do sale OEM modules into some Numerex competitors and those are situations that we need to handle very carefully. We do that effectively, as you know already in our business. We managed that with key customers like Cisco and greater point, who are dear customers to us, but who also compete against our Enterprise Solutions products. So we'll have a similar situation, with the - over the small set of our current OEM customers, who do compete against Numerex. So we will have to carefully managed those situation and assure those customers that the walls between our business units do indeed exist and our OEM Solutions customers while they may compete against our cloud and connectivity business unit are still very dear OEM customers and we need to keep that kept separation between the business units.

[Mike Walkley:]

Okay, thanks. And Numerex has been in the midst of pretty big restructuring programs. So should we assume that they continue to cut cost into the acquisition and then while it's not EPS accretive given their losing money on EPS lined out, they are making positive EBIT, so would you expected it to be adjusted EBITDA accretive from day 1?

[David McLennan:]

Yes, we would Mike.

[Mike Walkley:]

Okay, great. And you think it will continue with their ongoing restructuring programs into the deals that part of the belief there.

[David McLennan:]

It's hard for us to comment on them and what they may do, but it feels to us, that it's - that's largely behind them.

[Mike Walkley:]

Okay, great. Just to the current business, just, can you keep discuss maybe the enterprise solution business, just strong year-over-year, but low flat with Q1 and you - how do you see maybe business trending to the back half of the year, so guidance kind of flattish sequential and your talking about adverse mix, just - is that business kind of softening in the back half of the year and what have you seen on a competitive front there?

[Jason Cohenour:]

No, I think that we are - without giving slipping into that providing guidance for specific business units. We see interest in growth opportunities ahead for the enterprise business unit this is a way outputted, Mike. We think that, that is a very interesting long term profitable growth opportunity or making some investments in sales and marketing, as you know, we have also completely refreshed the product line. So we've added channel strength with ingrim. So we're inclined to believe that, that business is a growth story, in the - in both the short term and long term. In the short term, particularly, Q2 and then maybe even to Q3 will be seeing some maybe unusually strong contribution from telematics gateways and that as you can see, a damping gross margin, but I think overall, we view that business as a growth business.

[Mike Walkley:]

Okay, great. So it's more the mix shift within product categories and lower gross margin and OEM Solutions from some of the automotive stuff, not a mix shift between the divisions? In terms of...

[David McLennan:]

Correct, I mean it's a - if you at consolidated gross margin, the biggest impact, of course, this automotive transition that we've already refer to about today and the past. But I think, we're - we also in addition to that have a call it in quarter unfavorable mix. And that's largely the automotive customer there for 2 and plus some probably some added revenue from telematics gateways, about the average.

[Mike Walkley:]

Okay. Probably that's clarification I was looking for. Thanks for answering my questions and I'll pass the line.

[David McLennan:]

Okay. Thanks, Mike.

[Operator:]

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

[Paul Steep:]

Great, thanks, Jason, could you talk to the little bit about OEM. What you have seen in terms of mix, in terms of a shift towards Cat-M1 and NB-IOT. Chipsets, in terms of where we are in that transition, in terms of what customers have been sort of been ordering and what does volumes now look like or are we still sort of back at generation?

[Jason Cohenour:]

Yes, Paul, it's very early days in terms of revenue contribution on LPWA products, is the way to think about it. Obviously, some Cat-1 stuff shipping, but with the respective to Cat-M1 and NB-IOT, it's a very low percentage of our revenue mix today, however, we have secured design wins for those new products, but we're not yet shipping commercially at any meaningful level on those products, that's really yet to come. With respect to chipsets, kind of the usual suspects, I guess are working on chipsets, of course, QUALCOMM will be a key player there and also the smaller challengers, we believe will key players are including all TIER, now part of Sony and seek 1.

[Paul Steep:]

Great, and then just one quick follow-up on Numerex. Could you talk a little bit about they are go-to-market seems to be heavily channel focused and seems like there - we based on some of the quick reading here, heavily security focused. How does that sort of fit with your go-to-market in the U.S., particularly around the carrier relationships that they have and what you have?

[Jason Cohenour:]

Yes, as you look at some of the specific protocol markets set, Numerex addresses, they are for the most part specialist sales force and channels sales forces and our salespeople and channels, is the way to think about it and then of course, network services as much more they - much more the horizontal connectivity and platform play, much more a keen to our cloud and connectivity - our existing Cloud and Connectivity Services business. I do expect, there is still going to be leverage between those different sales efforts, but with respect to the vertical markets you would see vertical applications specialists selling those specific services into security asset tracking tank monitoring and the like.

[Paul Steep:]

Great. Thanks.

[Operator:]

Your next question comes from the line of Steven Li of Raymond James. Your line is open.

[Steven Li:]

Thank you. Jason, few questions on Numerex. So you already paying the debt. Is there any cash coming over?

[David McLennan:]

Steven, its Dave here. Yes, they will have some amount of cash on the balance sheet, but that would be really for working capital purposes going forward.

[Steven Li:]

Okay. And Jason the fee segments you outlined, are they more or less equal in size?

[Jason Cohenour:]

They are not, Steven. And right now, Numerex does not segment that externally, but they are of different sizes.

[Steven Li:]

Which one would be the largest?

[Jason Cohenour:]

I think, we're going to respect Numerex disclosure box on this Steven and allow them to provide that information if they choose to.

[Steven Li:]

Okay, that's it. And is the Jason - the recurring revenues for Numerex has declined the last 2 years. Any color, you can provide there.

[Jason Cohenour:]

Yes, it's a great question. Obviously, we had to do spend a lot of time and due diligence looking at that. Clearly Numerex has been managing a difficult transition in their business, largely driven by the 2G transition. They've been managing that pretty effectively, more recently, I would say and our read of the situation, Steven is, is that the biggest part of that transition challenges behind them. We see signs of the business stabilizing, but let's be realistic here, once we own the business, we're going to have some work to do to return those businesses to healthy growth trajectory and I think that challenges reflected in the price we paid.

[Steven Li:]

That's great. Thank, Jason.

[Jason Cohenour:]

Thank you.

[Operator:]

Your next question comes from the line of James Kisner of Jeffries. Your line is open.

[Unidentified Analyst:]

Hi, guys, David Listner is for James. How are you?

[Jason Cohenour:]

Hi, David. How are you?

[Unidentified Analyst:]

Good. Just on Numerex, obviously, there is a geographic differentiation between your core business and Numerex, is there any specific customer overlap that you guys have concerned about, potentially catalyzing some of the revenue potential going forward?

[Jason Cohenour:]

We see very little customer overlap, David. Michael Walkley asked a question earlier about potential - our customers potentially as competitors to Numerex, there is some of that and we need to carefully manage, of course. But with respect to cannibalizing ourselves, we don't see really any of that. If some of that exists, it would be minimal.

[Unidentified Analyst:]

Okay, great. And you guys have mentioned in Numerex some of the transition issues from [indiscernible] team moving forward and some of that heading recurrent revenue in the past. What - How do we think about the lifetime of these contracts on the recurrent revenue side? Do you guys see a good past for the next 3 to 4 years, what's already in place with the Numerex or will there be spending involved to kind of get things updated to the next level?

[Jason Cohenour:]

Yes, there is going to be a few moving pieces there. For our assessments, David, is that their sales funnel is improving, it's getting larger, it appears to be healthier than it, then it has been in the previous X number of months, so that us very encouraged. And however, again, being realistic, there are still some technology transition ahead them, they done a really good job in particular with a large part of their 2G, subscriber base and moving that over to a different carrier, who has committed to keeping the 2G network on for a significantly longer period of time. But that just delays that challenge, right? So we'll still have to confront that challenge, help them with the technology transition and I can't really believe that we're probably one of the best positioned companies to help with the technology transition like that, given our experience and knowledge of where carrier technologies are going and require devices to affect that technology transition.

[Unidentified Analyst:]

Okay, perfect. And one last question, just switching back to the OEM business. Are you guys seeing, obviously, the CW contract someone unique? What you guys think about potential for another large automotive contract seem awarded at some points this calendar year? Is that a potential or thing slipping a little bit?

[Jason Cohenour:]

No, that's definitely - that possibility is definitely is there. And as you might expect, we are actively pursuing large design wins in - new large design wins in the automotive space and I fully expect that we will win some of them.

[Unidentified Analyst:]

Okay, great. Good to hear. Thanks for your time.

[Jason Cohenour:]

You're welcome.

[Operator:]

[Operator Instructions] Our next question come from the line of Richard Tse of National Bank Financial. Your line is open.

[Unidentified Analyst:]

This is Steven in for Rich. You had another question about the acquisition. How do we think about synergies, I know, you talked in briefly. I was wondering more in terms of timing, when we can expect to see those and maybe if you can magnitude as well, any indication or size?

[David McLennan:]

Richard, I think, that's - pardon me, Steven. As you might expect, you done a lot of work on modeling synergies. And we're not ready to disclose what our expected synergies are with the specificity today. But there is - we believe there are low hanging fruit synergies and Dave referred to some of those earlier, there is cost to debt - significant cost of debt in that business that will come out. There is significant public company costs and we only need one of those enough for on go forward basis, so that cost will come out. We think - and I think those are the things that will happen fairly quickly. Other cost synergies, such as reducing cost of goods sold, that will take time, because certainly on the hardware side, that will take some redesign, so that doesn't happen overnight. We also believe that there are very interesting sales and growth synergies given the combined sales team and combined capabilities and those will take some time to have impact as well. So we're bullish on the menu of synergies. The directional - the direction will give you is that those synergies plus the power the combination gets us to immediately to an EBITDA accretive situation and in about a years' time, accretive on adjusted EPS. So hope that gives you enough information to plug the values into your model.

[Unidentified Analyst:]

Okay, thank you. So Q2 was a pretty solid quarter and we've seen a pickup in the past few quarters here, I was wondering, how your design pipeline is looking?

[David McLennan:]

Good. I'm very encouraged at the high level and as I say this, I'm really - I'm speaking about the whole business, but may be a bit more about OEM. The number of opportunities we're seeing and the number of design wins were securing is very encouraging. Our business, that business is to a certain degree an elephant hunting business. So if we secure 170 design wins in a quarter, but no elephants, while we might need a little disappointed on the LTV we bring into the pipeline, going into another way, if we secure a 150 designer and 2 of those are elephants, and we'll far exceed our LTV goals. So you kind of need a mix, you need quantity plus elephants and like I said, to earlier caller, I think that certainly we see that we have elephants in our sites and believe that some of those will come into our new customer program pipeline. I'll also say the CCBU activity and the enterprise business unit activity is strengthening in general. Number of new wins, climbings, funnel metrics growing, so I feel - overall I feel pretty good about new customer acquisition activity.

[Unidentified Analyst:]

Great, one last one for me. Are you seeing any new used cases for your modules?

[David McLennan:]

Every day. It's clear on the OEM side, I mean, it's clear that market segments that of course, are driving today's revenue and expected short-term revenue, we talk about them all the time. Automotive and networking and mobile computing and payments and the like. But flying a bit below the radar and candidly today, lower volume deals, there is a tremendous set of new and unusual applications popping up every day from tank tracking to goods tracking to smart saves, I mean, you name it. There is something new and different every day, lighting.

[Unidentified Analyst:]

That's helpful. Thank you very much. And I'll pass the line.

[Operator:]

Your next question come from the line of David Gearhart [ph] of First Analysis. Your line is open.

[Unidentified Analyst:]

Hey, good afternoon. My first question, I just wanted to ask if you could disclose the acquired revenue for Gen X and the other businesses. If you have that handy.

[Jason Cohenour:]

On Gen X, we disclosed the annualized revenue run rate, when we acquired the company last August, I believe it was and I believe we set at that time that the Gen X revenue run rate was $14 million as annualized revenue run rate and we're doing a little bit better than that right now but we won't disclose the contribution from Gen X and any specific quarter at this point in time.

[Unidentified Analyst:]

And the other 2 pieces, the global top and Blue Creation the numinous for the acquired revenue piece?

[Jason Cohenour:]

Pretty small David, is the way to think about that. Those are going to be - to have a meaningful impact, that's going to take a bit longer. I mean, three is revenue contribution, of course, but pretty small in the context of the overall OEM business.

[Unidentified Analyst:]

Okay, and then back to Gen X. I know that their business, they were focused on a few large customers. Wondering if you had a good ability attraction of going outside your existing customer base to expand your sales targets there?

[Jason Cohenour:]

I'll say yes, although far and away still the largest contributors to revenue on telematics Gateways from the acquired Gen X, are the large customers you are referring to.

[Unidentified Analyst:]

Okay. And one on Numerex and I'm not sure if you'll be able to answer this. Numerex is a pretty legacy network conductivity business, almost like an MVNL and as you mentioned, they have been suffering from 2G migration. Is there any way you can give us some idea what the complexion of their current businesses from core and the end solutions versus high value end solutions versus the lower value connectivity piece, if you can kind of break that up a little bit, is that 60-40, 70-30, any color you can provide would be helpful.

[Jason Cohenour:]

Well, again, I'll be careful with the disclosure box, because it's not really ours right now, but our understanding is that more revenue comes from application services. So vertical market application services than from the legacy horizontal more connectivity oriented services.

[Unidentified Analyst:]

That's it's from me. I'll pass the line.

[Operator:]

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

[Todd Coupland:]

Good evening, everyone. The question is the mix impact you talked about in Q3, is that something that results in a quarter or would you see that mix and drag carrying onto the fourth quarter?

[David McLennan:]

Todd, its Dave here. We would expect and it's - you are getting little beyond our guidance here. We would expect mix to improve a little bit in the fourth quarter that would allow for some measured improvement.

[Jason Cohenour:]

I'll quickly point out though that this specific Automotive program..

[David McLennan:]

That transition will still be going ..

[Jason Cohenour:]

We've been talking about, that transition will continue for years, right? So that will ultimately fully transition what David referring to on a consolidated basis that the mix we expect to

[David McLennan:]

Other things.

[Jason Cohenour:]

A little bit better, but this Automotive customer transition will be with us for a while.

[Todd Coupland:]

Okay. But the system drag, which you called out that will alleviate somewhat and you'll have other products offsetting auto and Q4 sounds like ...

[David McLennan:]

That certainly our right now Todd.

[Todd Coupland:]

And if I could just ask about, thinking about Numerex a little bit longer term. Do you have any idea, what growth might like if your investment plan is successful? Though, it's been trending down a little bit, even you've given us a baseline. How do you - how are you thinking about it 2 or 3 years down the road in terms of its possibilities?

[Jason Cohenour:]

I mean, we're very bullish. I mean, 2 to 3 years down the road, without putting a specific number on it, Todd. It's a combine entity, that's the way we should think about it. Numerex combines with our Cloud and Connectivity Services business unit and the scale to represent from a customer base standpoint and a subscriber base standpoint and a sale team standpoint and technology elements. I mean, all of that results in a business platform and a technology platform that we can leverage to drive growth. So we're going to be playing offence on that. On day 1, we'll have very strong presence in Europe and the U.S. And we're going to leverage that power plant as a lever that platform to take those services global and provide our large OEMs and enterprises, who Sierra Wireless has excellent access to and provide them with a global connectivity and Cloud Services and maybe even some of the application services that Numerex brings along. So we're inclined to grow.

[Todd Coupland:]

And is this the double-digit grower in that sort of environment? Or is it steady single-digit with the good margins and cash flow?

[Jason Cohenour:]

Oh gosh, well. My recommendation on that, before we tried vector in on any specific growth rate. Let's get to close and that's kind of take us to January 18 and then we'll be able to get some more clarity around growth rates, certainly for the consolidated company and of course, will be reporting business unit results on a regular quarterly basis. So I think, the blurred out and expected growth rate for the combined cloud and connectivity services business unit at this point in time takes us 5 months before we actually even own Numerex would be premature.

[Todd Coupland:]

I appreciate the color gentlemen. Thanks very much.

[Jason Cohenour:]

Sure.

[Operator:]

There are no further questions at this time. I will turn the call back over to the presenters.

[Jason Cohenour:]

Great, thank you so much Cheryl. That you, everybody, for joining today's call. As usual, management will be available, if you have any follow-up questions. Cheryl, with that you can terminate the call.

[Operator:]

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