Sierra Wireless, Inc.
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good afternoon. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Wireless First Quarter 2016 Earnings Results 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. I would now like to turn the call over to Mr. David Climie, Vice President of Investor Relations for Sierra Wireless. You may begin.

[David Climie:]

Thanks, Stephanie, 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 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. Jason will provide a review of our first quarter results. Dave will then provide a more detailed overview of our financial results, as well as our guidance for the second quarter of 2016. And following that, Jason will provide a brief summary. We’ll then open it up for a Q&A session. Before we get started, I will reference the company’s 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 for the second quarter and full-year 2016, 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 that 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 our other regulatory filings. This presentation should also be viewed in conjunction with our quarterly 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 start with a summary of our first quarter 2016 results. Revenue in the first quarter was $142.8 million compared to $150.4 million in the same quarter last year. This represents a decrease of 5%. On a year-over-year basis, Q1 OEM sales were softer than in 2015. The OEM decline was partially offset by year-over-year growth in both Enterprise and Cloud and Connectivity. Our Q1 revenue was in line with our expectations and slightly above the midpoint of our quarterly guidance. Adjusted EBITDA in the first quarter was $6.7 million and earnings per share were $0.08. Our Q1 profitability metrics got a lift from a favorable legal settlement with a supplier related to a component quality issue. Excluding this favorable impact, our Q1 EPS of $0.03 was still slightly ahead of our expectations. Customer acquisition activity was also high in the quarter, as each business unit secured new customers and programs across a broad range of market segments and geographical regions. We remain positive on 2016 and expect to see your business gain strength in the second quarter, and to continue to improve over the remainder of the year. As I mentioned last quarter, our growth expectation is based on four key drivers. First, the expected launch and start of production of more than 40 new customer programs and OEM Solutions over the course of the year, some of which we expect to provide a modest contribution starting in the second quarter of this year. Second, we expect a return to growth in Enterprise Solutions, as we continue to launch new market-leading gateway products and related software. Third, we expect to see steady growth in our Cloud and Connectivity business as we expand our offering and gain new customers. And fourth, we expect a benefit out of targeted investments in sales and marketing across your business segments. Now, let’s take a look at the individual business units. Revenue on our OEM Solutions business was $120.9 million in the first quarter of 2016. This compares to $133 million in the same quarter of 2015. As expected in Q1, revenue from one of our large automotive customers was down sequentially and we also saw some demand softness at other select customers. Sequential weakness within this group of customers was mostly offset by modest growth from other segments and customers, including some contribution from recently launched programs. During Q1, we experienced solid design-win success, securing new programs in automotive, mobile computing, energy and security. Included in these design-wins were Sagemcom, who selected our new LTE Cat-1 embedded module for a large smart-metering rollout in The Netherlands, and Parkeon, who selected our HL Series of embedded modules to enable smart parking deployments around the world. Looking forward, we expect our OEM Solutions business to rebound in Q2. And to gain strength for the remainder of the year, underpinning our outlook for growth is an expectation that demand from existing customers and programs normalizes and that revenue contribution from new programs ramps, as new customers or as these customers enter startup production with their solutions. Moving to Enterprise Solutions, revenue in our Enterprise Solutions business was $15 million in the first quarter, an increase of 9% compared to the same quarter last year. The recently launched RV50 industrial gateway experienced good demand and was a key contributor to the year-over-year growth in Enterprise. Enterprise gross margin was exceptionally high in Q1 at 65.1%. A significant contributor to the GM result was the favorable impact to cost of goods of the legal settlement referred to earlier. Net of this favorable impact to COGS, gross margin in Enterprise was 52.5%. During Q1, we had good customer acquisition success in Enterprise, securing significant wins in the public safety, transit and energy segments. The RV50 contributed significantly to our success in energy. Whereas industrial, environmental specs, stingy power management and 4G LTE connectivity are proving to be essential in many applications. In the transit space, we announced that QoS Telecom, a major supplier to this segment, selected our AirLink LTE gateways to enable onboard Wi-Fi for bus passengers. QoS Telecom is also using our AirLink management service to monitor the gateways in real-time and to remotely manage the deployment. In Q1, we also released an advanced fleet management feature for our GX450 mobile gateways that allows fleet operators to easily collect critical vehicle telemetry information, as added functionality enables operators to reduce operating costs and increase fleet efficiency. We expect to launch additional new products and features over the course of 2016 in our Enterprise business unit. These new launches combined with targeted investments in sales and channel development, underpin our expectation for continued revenue growth in Enterprise. Now, moving to our Cloud and Connectivity Services segment, revenue in the Cloud and Connectivity business, which is comprised mainly of recurring service-based contracts, was $6.9 million in Q1. On a sequential basis, revenue was up slightly. Our Cloud and Connectivity team is working closely with our OEM and Enterprise teams to integrate our devices with services to create compelling solutions and to secure new customers. I believe our collaborative model is working and that we’re on a path to significantly grow our subscriber and revenue base over time. During Q1, we had strong customer acquisition success in this segment as well, securing new customer programs in the payment, energy and industrial segments. Our new customer wins were also diverse from a geographical standpoint, coming from Europe, Latin America and the U.S. Several of our wins originated in our OEM or Enterprise business units, including with long-term device customers, which provides an important proof point that device sales can lead directly to services sales. Our Cloud and Connectivity team also made significant progress in creating a truly unique service and platform experience. In Q1, we successfully launched our new Sierra Smart SIM. Based on our patented technology, the Smart SIM automatically selects the appropriate mobile network to connect to anywhere in the world, based on programmable parameters, including quality and cost of service. This enables us to deliver the highest quality of service available, while also closely managing our cost of service. Also during Q1, we commenced an upgrade of our core network to support 4G LTE and to actively expand our roster of operator wholesale agreements. Both of these activities will enable us to continually expand our global coverage footprint and to enhance our service capabilities. Having integrated our Cloud and Connectivity operations into one business unit, we now have a strong team, technology assets and business platform to drive our device-to-cloud vision forward. To capture more of the IoT value chain and to ramp our recurring services revenue. I will now turn the call over to Dave McLennan, who will provide more detail on the Q1 financial results and our guidance for Q2.

[David McLennan:]

Great. Thanks, Jason. Please 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, our definition of non-GAAP and a full reconciliation between our GAAP and non-GAAP results is provided in the press release. Revenue in the first quarter of the year was $142.8 million. Adjusted EBITDA was $6.7 million. Non-GAAP earnings from operations were $3.6 million and non-GAAP earnings were $2.6 million or $0.08 per share. Note that in the first quarter of 2016, we had a $2.3 million legal settlement with the supplier related to a quality issue with the component used in some of our gateway products. Comparing Q1 non-GAAP results to guidance, revenue at $142.8 million was at the high-end of our guidance range of $135 million and $145 million, with each business segment performing largely as expected. And specifically within our OEM Solutions business, our revenue from PC OEMs stabilized as expected, as enterprise users work through the Intel Skylake platform transition. We believe this platform transition impact is now largely behind us. Also as expected, one of our large automotive OEM customers were down sequentially. However, we have visibility to improving revenue from this customer in Q2 as a return to a more normalized demand level. In addition, we saw softness at other select customers compared to Q4. This weakness was mostly offset by growth from other segments and customers, including some contribution from recently launched programs. First quarter gross margin of 32.9%, included a $1.9 million favorable impact from the component supplier settlement. Net of this gross margin was 31.5%, which was up modestly from Q4. Q1 operating expenses of $45.3 million, included a $400,000 contribution from this favorable component supplier settlement. Net of this, operating expenses were $43.7 million and were up compared to Q4, as we continue to make targeted organic investments in sales and marketing. This operating performance resulted in earnings per share of $0.08. Net of the component supplier settlement EPS was $0.03, which was slightly above our guidance expectations. The tax rate during the first quarter of 2016 was 28.5%. Looking at key metrics for the first quarter compared to a year-ago. On a year-over-year basis, total revenue declined 5.1%. This decline was driven by 9% reduction in OEM revenue. First quarter OEM revenue was weaker due to the reasons we’ve already stated. In addition Q1 and Q2 of 2015 were particularly strong periods for OEM revenue, creating a challenging year-over-year comparable. Partially offset in this OEM decline was stronger revenue from both Enterprise Solutions and Cloud & Connectivity Services. Cloud & Connectivity Services had a significant lift in the year - lift year-over-year from acquired businesses. The decline in OEM Solutions revenue combined with higher OpEx resulting from the addition of the acquired businesses, and continued target organic investments resulted in a year-over-year decrease in EBITDA in the first quarter to $6.7 million and non-GAAP operating income to $3.6 million. Excluding the favorable impact from the supplier settlement EBITDA was $4.4 million and non-GAAP operating income was $1.3 million. Our balance sheet remained strong, and we have no debt. During the first quarter, the business generated $7.6 million in cash from operations. CapEx was $3.1 million resulted in free cash flow of $4.5 million. Share purchases in the quarter utilized $10.3 million of cash and this was comprised of the purchase of approximately 550,000 shares for cancellation under our normal course issuer bid for a total of $6.1 million, and the purchase of approximately 306,000 shares for the company’s restricted share unit incentive program for a total of $4.2 million. Our cash disbursement - other cash disbursements totaled $2 million in the quarter. In total, net cash usage for the quarter was $7.8 million, resulting in ending cash balance of $86.1 guidance. Moving onto guidance. For the second quarter of 2016, we expect revenue to be in the range of $150 million to $160 million, and non-GAAP earnings per share to be between $0.09 and $0.17. Our Q2 2016 revenue guidance represents a strong sequential increase over Q1 and reflects expected normalizing demand with existing OEM customers and ramping contribution from new OEM programs, as well as stronger demand in Enterprise Solutions partially driven by new product sales. For the full year 2016, we expect revenue to be in the range of $630 million to $670 million, and non-GAAP earnings per share to be in the range of $0.60 to $0.90, which remains unchanged from the guidance we provided on February 4. With that, I’ll now turn the call over to Jason, who will provide some additional comments in the quarter.

[Jason Cohenour:]

Thank you, Dave. So to summarize, our Q1 2016 results were slightly ahead of our guidance expectations. Notwithstanding, the slow start to 2016 in a cautious macro-environment, we expect our business to gain strength in Q2, and over the course of the year. This expectation is backed by visible drivers, including normalized demand trends with key existing customers expected launch and started production of more than 40 new OEM programs, return to growth in Enterprise Solutions and targeted investments in sales and marketing. We are the clear global leader in cellular connectivity solutions for the Internet of Things, and we made significant progress in further expanding and strengthening our strategic position. Completing acquisitions and managed conductivity rapidly expanding our position in the value chain, realigning our team to drive growth and making significant organic investments. Our three business segments now expose us to a much larger and more valuable market opportunity. In the aggregate, industry analysts predict in our three segments will represent a $20 billion market in 2020. We believe, we are now better position than ever before to capture a significant share of this opportunity. As Dave mentioned, we’ve recently been taking advantage of the value creation opportunity on our own stock and a repurchase shares on the open market. Notwithstanding this return of capital, we still expect to say active in M&A to accelerate our strategy and to drive growth. Longer-term are very focused on capturing a significant part of the $20 billion opportunity, driving sustained revenue growth beyond $1 billion, executing our gross margin accretive mix shift and expanding operating margins. We believe that this formula will drive significant shareholder value. Stephanie, this concludes our prepared remarks. You can now open the line for questions.

[Operator:]

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

[Mike Walkley:]

Thank you. Nice to see the OEM Solutions business, the outlook looks for rebound. Can you, Jason, maybe help us bridge the gap just if it’s up $10 million to $15 million sequentially, where you see the opportunities maybe broken down between your auto customer returning to normalized day-rates [ph] in some of these new programs and any new verticals or market that you’re seeing particular strengthen, that would be helpful? Thank you.

[Jason Cohenour:]

Sure, Mike. So I would characterize the expected rebound in Q2 as a pretty broad-based, certainly we expect to get significant part of that $10 million or $12 million lift from our large OEM customer returning to normalized demand pattern. As you heard we had a - I call it a collection of customers in Q1, whose demand was softer, we do expect to see a bit of a rebound there as well. In PC OEM land, probably a little bit of lift, Mike, but not as much as those other two categories. A bigger contributor would be the ramping up some new programs and I don’t think we’re foreseeing the full extent of that in Q2, but we expect to see that step up a bit from Q1. And we also expect to see enterprise contribute to that growth bucket. So it’s pretty broad based. It’s, no one thing.

[Mike Walkley:]

Okay. Thank you. And my follow-up just to build on that as you get to the full year that business should need to return to year over year growth starting in the third calendar quarter. Is it just based on your normal seasonal trend that you’re expecting or do you have visibility, if you look at your bookings or opportunities that gives you that comfort for that continued step up on a quarter to quarter basis. And if so, what markets are you seeing may be some strength coming back into it. Thank you.

[Jason Cohenour:]

Sure. Thanks. So I think the key theme there are the four key drivers I’ve already outlined Mike. But as we head into the second half and your observation of course is right. In the first half, we don’t expect to see any year over year growth. In fact, we expect to see a net year over year declines. Of course, that implies. Our annual guidance implies a significant step up in year over year growth in the second half. And of course that’s against the easier comps as you know. But what gives us comfort there is, I would say a solid base of existing customers and programs to which we’ve got good visibility. And what we believe is a solid forecast from those customers. And we see new programs ramping and new programs, particularly in the second half. We expect to be a significant driver of the expected growth, Mike.

[Mike Walkley:]

Okay. Great. Thanks. Then I’ll ask you one more…

[Jason Cohenour:]

[In terms of] [ph] backlog. Normally, we wouldn’t have backlog going this for in advance of the second half, but with respect to Q2, I would characterize our backlog as strong.

[Mike Walkley:]

Okay. Great. Thanks. And then I’ll ask one more and then close out. For enterprise solution just maybe give a little color on your new products that you gave a little bit on the call, but maybe the timing for new products coming to the market. And how you think you’re faring with new LTE products versus the competition, would it still should be a pretty good market growth segment?

[Jason Cohenour:]

Yes. So RV50, a bit of a contributor to the growth as we said that’s a fairly new product we launched in Q4 of last year. We expect to launch a new mobile, a gateway that we’re pretty excited about this quarter. So you’ll see that hitting the market that’s called the MP 70. And then likely in the sometime in the second half third or fourth quarter, we expect to launch our MG 90 which is our higher-end mobile multi-network mobile router. So we’re excited about both of those products, those were our two major launches between now and the end of the year. And beyond that the pipeline continues to be robust.

[Mike Walkley:]

Okay. Thank you.

[Jason Cohenour:]

Welcome.

[Operator:]

Your next question comes from the line of James Kisner with Jefferies LLC. Your line is open.

[James Kisner:]

Hi, thanks very much. I just want to drill your comment on the PC OEMs for a second. I mean, I think you said that you should expect a modest improvement in the PC OEM business in Q2. And perhaps it is mostly from just new programs with customers. I’m just wondering what the customers are assuming for the end market. It seems like the data points for the PC market haven’t really turned in a material way. It seems like it can maybe pretty weak. Just any kind of additional texture, what you’re hearing about, what the PC market backdrop expectation is when your customers encounter Q2 the treasury of your orders.

[Jason Cohenour:]

Sure. Yes. I mean, it’s not at a macro level. Of course, the PC market is not the best market on the planet as we all know. Having said that, with respect to 4G connectivity inside enterprise notebooks and two in ones. Our view on that James is that, it’s a good stable business. We don’t expect on a full year basis for PC OEM to be a growth driver in our business speaking candidly. But we do expect to have a good stable full year contribution from that segment with good gross margins. And we’ve got quite, I would say quite a strong market position. What gives us confidence in kind of the full year outlook is an expectation that we won’t see big changes in the market for enterprise notebooks, two in ones, and in particular those devices with 4G connectivity. Our tax rates are still very, very low in that space. So we don’t think the tax rates go down at all. And in fact there is probably room for tax rates to improve slightly. So that gives us confidence in our piece of the market that there is a solid opportunity there.

[James Kisner:]

Okay. I have a housekeeping question here on the tax rate. It looks like it was little higher this quarter between 9% and even kind of talking about little 20s in the past. Is there any structural change there? Any sort of thoughts on how that tax rate might be progressed to the year?

[David McLennan:]

Sure James. It’s Dave here. Yes. In Q1, we were 28.5% the non-GAAP effective rate. And little bit driven by small loss, small numbers as we kind of hover a little bit above breakeven, a small absolute dollar amount greatly changes the percentage. So a little bit of that’s going on. The other thing that’s happening is we’re seeing some jurisdictional mixed differences in our, where we are earning our income. And that’s been way to jurisdictions, where we have some higher tax rate. So bit of mix going on there. I would expect Q2’s effective tax rate to be similar to Q1. And then, I would expect the second half of this year, it would drop down to the mid-20s.

[James Kisner:]

All right. Thanks very much. I’ll pass it.

[David McLennan:]

Thank you.

[Operator:]

Your next question comes from the line of Thanos Moschopoulos from BMO. Your line is open.

[Thanos Moschopoulos:]

Hi, good afternoon. Turning to the margins. Can you provide some color in terms of how we should think about margins for the OEM business throughout the year. Are you still being affected by the end of life component issue that you highlighted last quarter. And should we think about margins expanding a little as the OEM business picks up or should they remain more consistent with Q1 levels for the year?

[Jason Cohenour:]

Thanos, it’s Jason. I think Dave might want to add to this well. So you may have seen that, so your gross margins of 28.4%, I think it was on OEM was up a little bit sequentially. And that’s largely a mix we are still carrying around the end of life part at a premium tax. And so we’ll be living with that for certainly the balance of the year that affects our 2G revenue, which is 18% of our revenue. So it does have an impact. With respect to our margin - gross margin expectations for the remainder of the year. I think, you should expect them to be roughly stable to potentially up slightly.

[David McLennan:]

That’s right. It’s David. Just to slightly add to that. I think, particularly with the 2G component that put some pressure on margins in the past several quarters, that’s still is with us in 2016. But as time goes by, the supply chain people can grind away at other costs in our cost structure and our product cost structure to help cushion that. So that does help mitigate that pressure point a little bit as we progress through the 2016 quarters. And of course volume helps.

[Thanos Moschopoulos:]

Great. And then Jason, can you update us in terms of where you stand on the technical integration of your Cloud and Connectivity businesses or is that mostly complete at this point or is there more work to do on that front?

[Jason Cohenour:]

I think, that’s going to be the stuff of a lot of continued work, but with respect to the launch of our first version of a unified platform, let’s call it a unified platform. We expect to do that actually this quarter. So I think that’s a big important step. All of the former businesses will be sharing the platform, will be moving legacy customers from acquired businesses over to the new platform. And we’ll be moving customers over to the new billing system as well. So a lot of that - I would say, lot of the technical heavy lifting meets a pretty big milestone this quarter, but as you might expect, that doesn’t mean the job is done and will have at least a couple of more milestones between now and the end of the year. But the progress is good. And we’re on track to launch the first unified platform this quarter in fact.

[Thanos Moschopoulos:]

Great. Thanks. I’ll pass the line.

[Operator:]

Your next question comes from the line of Rajesh Ghai with Macquarie. Your line is open.

[Rajesh Ghai:]

Yes, thanks, and congratulations on the numbers. I just wanted to dig a little deeper into the 40 design wins. I was wondering if you could provide me some more color on the trajectory of the ramp of the 40 wins. Do you expect them to kind of all come into play in Q3 or kind of coming slow and gradually ramp into 2017? And what specific verticals are you - are these design wins and are they kind of focused on a couple of verticals or kind of pretty broad-based, if you could provide some more color that would be very helpful.

[Jason Cohenour:]

Sure, sure, and maybe. Hi, Rajesh, this is Jason. So one point of clarification, that’s not brand-new wins, of course, these are 40 customer programs that have been in gestation for a little while, some of them for months, some of them literally for years. So these are programs now coming - these are 40 programs that were won historically that we expect to come to market over the course of 2016. And full disclosure, some of those programs had modest shipments even in 2015 and those we expect to see a ramp profile. With respect to the vertical market representation, it is as you would expect with 40 new programs, it is very broad-based. However, in terms of the largest revenue contributors, we do expect to see growing contribution from at least two significant automotive programs.

[Rajesh Ghai:]

Great. And talking of automotive programs, the auto OEM seems to be coming back to that good news. Just was wondering if you could provide some more details, as what may have happened at the auto OEM, where they were kind of picking your product and what’s changed now that they’re coming back to normal levels?

[Jason Cohenour:]

Well, it’s a great question. So first of all on the - in the one particular customer, who we’ve been talking about, we’ve seen some by demand volatility. And in our read - our read on that is, Rajesh, that’s more about supply chain management and inventory management than quarterly demand. So we’ve been trying to kind of find the - with this customer find the - call the sustainable revenue and demand level, and make sure that our shipments and their demand meet nicely on that landing platform. So we’re kind of working our way through that. Yes, I think we’re zeroing in. I think Q2 will be a good representation of true demand from that customer, from that particular customer.

[Rajesh Ghai:]

Great, last - one last question for David, as far as the guidance is concerned, obviously when you started the year there was lot more uncertainty. Q1 seems to have come into the high-end of the guidance range, but I noticed that you haven’t narrowed your fairly widened guidance for the full year. What kind of risk are you making in terms of kind of keep that range quite broad even after a pretty strong Q1?

[David McLennan:]

Well, I think it’s - I guess, really what we’re seeing here, Rajesh, is that view of the full year is the same as it was in February when we provided that full-year guidance. And you predicated on us stepping through the quarters with increasing revenue driven by many of things we talked about on this call. So our view sitting here today in early May for the full year is that what we told you in February for the full year is intact. And we’ve got a good proof-point of that in Q1 and our Q2 guidance.

[Rajesh Ghai:]

All right. Thank you.

[Operator:]

Your next question comes from the line of Daniel Amir with Ladenburg. Your line is open.

[Daniel Amir:]

Thanks a lot. Congrats on a good quarter. A couple of questions here, first, in terms of housekeeping - I dialed in late, but just understand the - what’s the OpEx guidance for the June quarter? Then I have another follow-up.

[David McLennan:]

Daniel, it’s Dave. We actually haven’t provided specific line item guidance for OpEx. So we’ve guided revenue and EPS.

[Daniel Amir:]

So do we expect - I mean, should we model OpEx increasing into the June quarter and then plateauing or how should we be looking at the OpEx kind of for the remaining of the year?

[David McLennan:]

Yes. I think it’s reasonable to build in some sequential increase from our Q1 guidance and that’s driven by many things including as we talked about continued investment in sales and marketing, and continued investment in product development.

[Daniel Amir:]

Okay. And then, in terms of the guidance here, for the year, $630 million to $670 million, given us a fairly broad range, what - I mean, what product categories will really make the - make it coming to the low-end versus the high-end. I mean, is it really coming around the large already OEMs around the auto business, is it more the Enterprise Solutions, is it more the Cloud business, just to get a little more clarity on, kind of how you look at that range? Thanks.

[Jason Cohenour:]

Yes, Amir, this is Jason, I’ll take that. I think - so our - given our Q2 guidance, that gives you the information you need on what to expect for the first half. And then, given our annual guidance, of course, that implies significant sequential step up in the second half versus the first half. And in aggregate dollars, those numbers are meaningful, so as you might expect, we - most of that we expect to come from OEM Solutions. So we do expect growth in Enterprise. We do expect growth in Cloud and Connectivity, but that’s to a certain degree small numbers, right. So, taking the steps we need to make to be in the range of our annual guidance most of that’s going to come from our OEM Solutions line of business. And it is quite broad-based, I will say that - and it’s driven mainly by these 40 new programs, we expect to come to market/ramp, some of them are small programs, some of them are large programs, and including automotive. So we would expect as we exit the year that that new automotive programs would be significant contributors to the quarterly run rate.

[Daniel Amir:]

Okay. And I guess for me a big picture industry perspective, I mean, how would you describe kind of the in-demand, right now?

[Jason Cohenour:]

Well, I think - so a lot of activity is what I would say, there’s a tremendous amount of activity in particular in automotive, I would say Energy is also a quite active in particular in Europe. We are seeing in our business, I would say more rapid recovery and growth in Europe than in other regions, which is quite interesting. So I think, overall is solid, and I - if you hear hesitation, my voice is only because I think, it’s probably also clear, if you look at the broader macro situation there - there is some uncertainty. So and - so we have to see how that plays out, whether or not that has a dampening effect, I think, we did see that actually in Q1. Remember, we called out this small group of customers whose demand softened up a little bit and our read on that was, that was driven by caution. Now, notwithstanding that, I think, in our business, we can hopefully power through that, because we’re adding customers, we’re adding programs, of course at the end of the day, our customers have to have market success with their solutions as well to drive revenue growth and that is the way we see it today. We do have an expectation that these customers will be successful, I think we’ve gotten up visibility. The timing of the programs, to get the timing on the program launches, right, and based on the forecast we’ve seen from our customers and discussions we’ve had. We feel confident that they’ve got visibility to end customer demand for their solutions.

[Daniel Amir:]

Thanks.

[Operator:]

Your next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open.

[Mike Latimore:]

Yes. Thank you, a nice start to the year here. In terms of these sorts of select areas of softness that you talked about in the first quarter, any more insight into like, what caused that, whether it’s really just kind of concern over some broad macro topic or were there specific verticals that were being influenced here? Just a little more detail on that would be great?

[Jason Cohenour:]

Yes Mike. I’ll probably be able to satisfy you on that. It was, I would say a small pocket of customers that represented different segments. And even different geographies. So the best explanation I can give you on that is a bit of caution. And there is no real specific theme. I can put my finger on now, as we head here into Q2, we see that recovering from this group of customers. We see that recovering a bit and I would say normalizing to a net positive step up from where we were in Q1 with this group of customers. Some of them kind of flat, some of them up, but on balance, we see them normalizing to a net positive step up in Q2.

[Mike Latimore:]

Yes. And then you talk about this 40 new programs launching. I think that comparative the number of launches they lost there. Is it tomorrow materially any color on that?

[Jason Cohenour:]

I would say that the number, I can’t be precise with you on this, but I would say that the number of new program launches this year would exceed the number of new program launches that we saw last year.

[Mike Latimore:]

And then just the last one. The booking in the first quarter, do they grow year over year?

[Jason Cohenour:]

I will characterize bookings in a different way. If you don’t mind Mike, we don’t report on metrics like book-to-bill. But I would say, with respect to our backlog supporting our Q2 outlook, it’s quite strong. And I would say, stronger than it was at the same time before we started Q1.

[Mike Latimore:]

Okay. Great. Thanks a lot and good luck.

[Jason Cohenour:]

You’re welcome.

[Operator:]

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

[Todd Coupland:]

Good evening everyone. Just a clarification on the tax rate, if I could to start out. So you’re basically guiding the 25 for the rest of the year. Should we think about 25 is the right number to model looking out past 16?

[David McLennan:]

Hey Todd. It’s Dave. Just a clarification. So I would expect that the Q2 tax rate would be similar to Q1. So we were at 28.5% in Q1. And so think of something similar in Q2 and then for the second half of the year Q3 and Q4, we expect to be in the mid-20s area.

[Todd Coupland:]

Okay. And thanks for the correction. And that mid-20s, is that the right way to think about the tax rate looking out past 16?

[David McLennan:]

Yes. I think, there might be some pressure on that as we get into the early years, but we would hope to be able to manage that between there and 30%.

[Todd Coupland:]

I see. Okay. So fundamentally, we should just be thinking about it higher than we’ve been. I think most - I think models have been carrying around 20% with the point that was made earlier. So I take these adjustments here. Okay. Second question if I could. So last quarter you talked about economic softness as a contributor beyond the specific areas that you highlighted in the shifts and all of that. And then, I think in the prior question, you talked about Europe coming back in the rest of the market, maybe not as much. So has there been a decent change in sort of the economic point you made last quarter to this quarter. It’s also giving you some confidence in building the year from here.

[Jason Cohenour:]

Well, I thought. This is Jason. So I would say, I think so. As we headed into Q1 as you know, we had the couple of significant moving pieces, including the big automotive OEM customer. But then we had this collection of other customers, small group of other customers whose demand was softer than it had been historically. And our read on that was the softness was driven by caution, as a result of the macroeconomic environment. Now, as we head into Q2, our view is with that same group of customers, using them as the benchmark if you will, we believe that has improved sequentially based on things like backlog, actual orders and forecast from these customers. And not everybody is up, not all of those customers are up, but we got a - I would say a net increase - net revenue increase outlook in Q2 for this group of customers. And so that gives us confidence, at least in Q2 and for the balance of the year. And I don’t know that that - I don’t know that that signals a big step-up in GDP or things like that, the GDP growth. But with respect to our business it gives us confidence in the short-term outlook and for the annual guidance that we’ve already given.

[Todd Coupland:]

And so, that’s helpful. And then, just one last point in this area, so you had the automotive air-pocket, now it’s coming back. You’re also expecting automotive to be a driver in the stronger second-half quarters. Do you think the automotive customers have learned in terms of this inventory point, and so we shouldn’t have to face that kind of volatility from automotive customers as we look forward and grow as a percentage of your business?

[Jason Cohenour:]

Well, I would hope so, Todd. But customers don’t always do what you want them to do with precision. So I don’t - I don’t think we can ever completely eliminate volatility. That’s kind of utopia land. But I will tell you, on our side, we are very consciously in a focused way up-ing our game with respect to forecasting confidence. And that goes to doing deep analysis on actual, with respect automotive, taking that as an example, deep analysis on actual car sales. You get good car information, of course, from big OEMs every month. We know how many cars FCA sells, as an example. We understand the approximate attach rates of conductivity in each of those cars. We’re talking to the tier 1 factories on a regular basis and getting a much clearer view of factory inventory and, of course, working hard to get our hands around sell-through. So I would say, we are very consciously and in a focused way spending a lot more time trying to understand actual end-customer demand for connected cars.

[David McLennan:]

Yes, okay, yes.

[Todd Coupland:]

Certainly that data is available. So I’m not surprised that you’re putting up to use now. That’s good to hear. Thanks very much.

[Operator:]

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

[Paul Treiber:]

Thanks. I’m just trying to get better understanding of the underlying programs in OEM, not just 40 new ones, but all of them. It seems like the individual program size has increased over the last couple of years. How do you think about managing launch execution risk around these deals?

[Jason Cohenour:]

It’s a great question. That is a shared responsibility, of course, right, because we have part of this solution. The customer normally has the whole solution. Oftentimes, our customer doesn’t even have the whole solution. Automobile is a good example, right? We have part of the solution for TCU. The tier 1 has responsible for the TCU. Of course, the automotive OEM then has to build the car with the TCU, right. So there are lots of the interdependencies I would say in the chain normally. So how do we manage it? We manage it by putting teams on it, Paul. I mean, we have a team of customer program managers, field application engineers, who are helping our customers, typically the tier 1 and automotive, and the solution provider and other segments. And we’re working very closely with them to make sure if there’s any exposure on schedule, launch risk, that we make sure it’s not us quite candidly. Now, of course, we don’t have total control over the solution like I said, usually, so we can’t - we can’t reduce execution and launch risk to zero. But I can tell you that we manage our part of that very, very carefully. And we do our best to get quite deep into the customer solution as well, so that we can help them wherever possible; make sure that their overall solution is done on time and that the customer makes their market window.

[Paul Treiber:]

And why do you looking back at the deals in the past. What do you think your execution rate from a - I don’t know if there is metrics you can share on that. What do you think your hit rate so to say has been. And then when you look at the potential risk, is it like timing in terms of slippage or other financial penalties and does that dynamic change with some of these larger deals?

[Jason Cohenour:]

I think our track record is pretty good. And yes, with respect to, by the way our brand has trusted partners. So we take that very seriously and that takes a lot of focus investment programs process. With respect to some of these bigger programs, there are indeed often, penalties for being late, whether it’s on the delivery side or on the program side. So in addition to wanting to support our brand. There is often a financial incentive to be on time with our work as well.

[Paul Treiber:]

Okay. Good to know. Just wanted to shift to, you mentioned that the launch of the unified Cloud and Connectivity platform. Does that set the ground for the global rollout of the Smart SIM and the global MVNO services product?

[Jason Cohenour:]

It’s not a gating factor, Paul, as the way to think about it. The unified platform is very important from our customer experience standpoint, no doubt. But that doesn’t stop us from launching our global SIM and related Connectivity services. So I would think about those two things as well. There is - they’re related, they are not completely interdependent. In other words, we can go to market hard with our global Smart SIM without having a nice bow tied on the unified platform experience. We have existing platforms, right. We get the Maingate platform, the MobiquiThings platforms, those platforms are still up in operating. We can on board customers. It shows that when we get to the unified platform that will have a more elegant experience.

[Paul Treiber:]

And then specifically on the Smart SIM and the global MVNO. How is your pipeline working and what’s the customer interest in those products?

[Jason Cohenour:]

I’d say it’s good. We’re very encouraged. If we had more financial capacity, we probably be hiring a lot more Cloud and Conductivity sales people, to tell you truthfully. A couple of - I would say, interesting points. We of course, as you might expect, new deal goals and subscriber goals and new annual recurring revenue goals on kind of a per contract basis. Is with the KPIs we’re tracking and in Q1, we beat our goal for a number of new deals signed, which is very encouraging, and the other encouraging sign is that our Cloud and Connectivity sales team received 60% of their leads, their access to customers, from their brothers and sisters in our other business units. And I think, that’s very encouraging and something that is very important to our strategy, as you might expect, because over time, Paul, we are viewing our very important devices as also service delivery vehicles, it was absolutely critical that we get that channel leverages, the way to think about it. So even while the Cloud and Connectivity team is selling independently on their own, it is absolutely critical that we keep that collaboration going and get that kind of lead flow and deal flow coming from our OEM and Enterprise business units. And in fact, during the quarter one of the customers we won was a long time metering customer, so we’ve got a one of the leaders in building smart meters, now working with us on Connectivity Services as well, that’s exactly what we want to see and what we want to have more of.

[Paul Treiber:]

Okay. Great to hear. Thanks for taking my questions.

[Jason Cohenour:]

You’re welcome.

[Operator:]

Your next question comes from the line of Jonathan Lo with Raymond James. Your line is open.

[Jonathan Lo:]

Hi, thanks. Just one quick one, what was the breakdown from revenues for the 2G, 3G and 4G? Thanks.

[Jason Cohenour:]

Jonathan, I have that, give me just one moment. 2G revenue was 18% of total. 3G was 35% of total. 4G was 38% of total. And the balance was the other bunch of dogs and cats, software services, that kind of stuff.

[Jonathan Lo:]

Great. Thanks.

[Operator:]

You last question comes from the line of Andrew McGee with Cormark Securities. Your line is open.

[Richard Tse:]

Hi, it’s actually Richard Tse here. I had a question on the cloud.

[Jason Cohenour:]

Hi, Richard.

[Richard Tse:]

Hi, how are you? Cloud and Connectivity business, if you look at that pipeline; and it sounds like it’s certainly building here; would you say the vertical split is consistent with your OEM Solutions group, meaning that it would be automotive, energy; certainly sounds like energy is a big part of it; but are there any other new verticals that we should think about there?

[Jason Cohenour:]

I’d say there’s pretty good overlap, although with the exception of kind of, at least today, Richard, two key segments. So we haven’t yet cracked automotive with Cloud and Connectivity. By the way, we’ve been invited to RFQs and have participated pretty deeply in a couple of sales processes, but we haven’t yet landed a big automotive OEM for Cloud and Connectivity. As you might expect, those are elephants and require - some of them requiring significant upfront investment. But we’re competing for some of those deals. And the other is PC OEM, so PC OEM - we don’t - we haven’t really actually spent a lot of time pursuing that segment with respect to Cloud and Connectivity. So other than those two segments, you will see a lot of overlap with the other segments we’re servicing. Payments, clearly a theme on the OEM side of the house and the Cloud and Connectivity side of the house. Energy, clearly a big theme on both sides of the house, so - industrial, also a theme on both sides of the house. So lot of overlap with the exception I would say of - at least today with the exception of those two verticals.

[Richard Tse:]

Okay. That’s great.

[Jason Cohenour:]

And when I say today, I mean, on actual contracts and agreements we won, so stay tuned, that doesn’t mean we’re not going to go pursue automotive. We certainly are, but today we haven’t won - we haven’t won one of those big elephants yet, for Cloud and Connectivity.

[Richard Tse:]

And when it comes to the revenue-base from Cloud and Connectivity issue, we assume the bulk of that, if not, all as recurring or how should we think about that?

[Jason Cohenour:]

Yes, you should. Yes, it is not all, but clearly the vast majority of that revenue is recurring.

[Richard Tse:]

And what would the average term of those contracts be, like 3 years, 5 years, 10 years?

[Jason Cohenour:]

Between two and five years.

[Richard Tse:]

Okay.

[Jason Cohenour:]

And it’s largely customer dependent.

[Richard Tse:]

Okay. And then, one last question on acquisitions. So clearly you just have a lot of cash in the bank here. If you were to sort of pursue acquisitions, would the Cloud and Connectivity piece be one area that you’re more focused on than the OEM side?

[Jason Cohenour:]

Yes, it continues to be a theme in our funnel, Richard. So I’m not going to say there are no ideas on the OEM side. But clearly we have a strategic focus on scaling Cloud and Connectivity both organically and through acquisition. I would also say, maybe a bit of a more color on that is, now that we’ve got the platform and the technology that we’re really excited about within Cloud and Connectivity, our goals are a little bit different in that. It’s more about scale, so capturing customers, capturing subscribers, capturing geographies and sales capacity. So those are the drivers for us in scaling that business through M&A.

[David McLennan:]

Rich, it is Dave here. I’d also add, similar to past behavior there is gateway opportunities that we’d look at as well.

[Richard Tse:]

Okay. All right, that’s helpful. Thank you very much.

[Jason Cohenour:]

You’re welcome. Stephanie, are there any more questions?

[Operator:]

There are no further questions.

[Jason Cohenour:]

Okay. Well, with that, I’ll thank everybody for joining today’s call. And as usual, management is available here on our headquarters, should you have any follow-up questions. Stephanie, we’re done here, you can terminate the line when you’re ready.

[Operator:]

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