Sierra Wireless, Inc.
Q4 2014 Earnings Call Transcript

Published: 6 Feb 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Sierra Wireless Q4 and Year End 2014 Earnings Release Conference Call and webcast. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, Thursday, February 5th, 2015 at 5

[David Climie:]

Thanks, Louisa. Good afternoon, everybody. Thank you for joining today's conference call and webcast. With me on the call today 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 review the highlights of the fourth quarter and fiscal year 2014 results; Dave will provide a more detailed overview of our financial results, as well as our guidance for the first quarter of 2015. Following that Jason will provide a brief summary and then we'll finish with 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 first quarter of 2015 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 other regulatory filings. This presentation should also be viewed in conjunction with our press release and with the supplement information on our website. With that, I’ll now turn the call over to Jason Cohenour for his comments and highlights on the fourth quarter and fiscal year 2014 results.

[Jason Cohenour:]

Thank you, David, and good afternoon, everyone. I’ll begin with some brief highlights on the fourth quarter of 2014. Revenue was strong in the fourth quarter at $149 million, representing year-over-year growth of nearly 26% and record quarterly revenue for the company. Our year-over-year revenue growth was driven by a combination of robust organic growth of close to 21% and solid contribution from acquired businesses. In addition of record revenue in the quarter, the company’s operating leverage and profitability continue to improve. Adjusted EBITDA more than doubled year-over-year to $12.7 million in the fourth quarter and our non-GAAP earnings from operations increased 287% year-over-year to $10 million. Our business also generated solid cash flow during the quarter. Overall, we're very pleased with our Q4 operating results and while delivering on these strong results, the company also completed an agreement in late December to acquire Wireless Maingate, a leading European provider of wireless connectivity and data management services for the Internet of Things. On January 16th, we completed the transaction and Maingate is now part of Sierra Wireless. This acquisition represents a significant step forward for our company, as we expand our business into wireless connectivity services for the Internet of Things, solidify our device to cloud offering and accelerate our mission of capturing more of the IoT value chain. The integration of the Maingate team, with our enterprise business is now well underway. Going forward, we'll continue to pursue strategic acquisitions that enable us to accelerate our growth and enhance our strategic position in the IoT market. Now let’s take a quick look at the fiscal year 2014 results. In our first full year, as an Internet of Things pure play, we delivered very strong results. Revenue in 2014 was $548.5 million, representing year-over-year growth of 24%. Our revenue increase in 2014 was underpinned by robust organic growth of 18% and solid contribution from the acquired AnyData and In Motion technology businesses. As we indicated going into 2014, one of our most important goals for the year was to demonstrate improved operating leverage and profitability, driven by excellent operating leverage in the second half, I believe we accomplished this goal. In 2014, our adjusted EBITDA increased 89% to $35.4 million compared to 2013 and our non-GAAP earnings from operations increased 351% to almost $23 million. The business also generated significantly improved cash flow during the year. Overall, we're very pleased with our operational results in 2014, as well as our improving market position, driven by organic investments in new innovative products and solutions and the addition of acquired businesses. I'll now take a more detailed look at the fourth quarter results for our two business units. Our OEM solutions business experienced strong revenue growth in fourth quarter. OEM revenue increased 27% year-over-year to a record $129.5 million in Q4. Growth in the quarter was broad based and came from key market segments, including automotive, transportation, networking and mobile computing. Growth from our 3G and 4G embedded modules also continued to be a driver. Our clear leadership position in 3G and 4G is proving beneficial as the market continues to migrate to next generation networks. Non-GAAP gross margin in the quarter improved sequentially to 30.5%, an increase of 70 basis points over Q3, driven primarily by continued product cost reductions. Q4 was also another good quarter for design win activity. Our design wins once again came from different regions and segments, including automotive, energy, mobile computing and security. The strength of our product position continues to be a key factor in our design win success. Our next generation smart modules based on our Legato embedded software platform are getting excellent traction in key markets such as automotive. The combination of high powered multi core hardware platforms, together with our Legato embedded software platform is proving to be very beneficial from a time to market standpoint for developers and large OEMs. In addition, our new HL line of essential products continues to help strengthen our position in important segments, such as energy and transportation. We believe that the flexible scalable HL product line is helping us to capture design win market share and will play an important role in our future revenue growth. We now have several design wins for HL products and are commencing initial volume shipments from 3G and 4G HL modules this quarter. Moving to our enterprise solutions business segment. Revenue grew by 16.4% year-over-year to $19.5 million. Revenue contribution from In Motion was the key driver of year-over-year growth. Additionally, we experienced solid sequential growth in our legacy enterprise business, excluding In Motion. Non-GAAP gross margin improved sequentially in the fourth quarter to 54.3%, an increase of 50 basis points over Q3, driven primarily by favorable mix. During the quarter, the regional transit and public safety markets were solid contributors to revenue. We also secured several new customer wins during the quarter in the public safety, utility, power systems and retail segments. New product development activity was high in Q4, resulting in the January release of our next generation AirLink gateways. The new GX450 mobile gateway and the ES450 enterprise gateway provide support for a broad range of LTE frequency bands, so customers can deploy a single gateway solution across many different regional markets. The GX450 is a rugged mobile gateway suitable for deployments and transportation, transit, emergency services, field service and utility applications, enabling high bandwidth connectivity with mobile themes [ph] and assets. The ES450 is an enterprise gateway that provides a secured mobile broadband connection to a node office or retail locations and can also be used as a business continuity solution providing an automatic 4G sell over to the customer’s landline broadband sale. Our enterprise team is also busy integrating the recently acquired Maingate, including the integration of our AirVantage Cloud with Maingate's connectivity platform. Over time this combination will provide our customers and channels with complete device to cloud solutions for many IoT segments and applications. I’ll now turn the call over to Dave, who will provide more detail on the Q4 financial results and Q1, 2015 guidance.

[Dave McLennan:]

Thank you, Jason. Please note that we will 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. Focusing on our non-GAAP results compared to our guidance for the quarter; total revenue in the fourth quarter was $149 million. This was slightly above our guidance range of $145 million to $148 million for Q4, driven by slightly better than expected OEM sales and enterprise sales were inline with our expectations. Q4 non-GAAP gross margin was 33.6%, that’s up 70 basis points from Q3 and inline with our expectation of a sequential improvement. This increase primarily reflects the product cost improvements in the OEM solutions segment and favorable product mix in the enterprise solution segment. Non-GAAP operating expenses in the quarter were $40.1 million, inline with our expectations and up sequentially from Q3 by $1.3 million. This increase was R&D related, largely driven by higher product certification cost compared to Q3, partially offset by favorable FX moves. Sales, marketing and G&A expenses were basically flat in Q4 compared with the third quarter. Our non-GAAP earnings from operations were $10 million, that’s at the high end of our guidance range, reflecting the impact of slightly better than expected revenue in the quarter. Reflecting the strong operating results, non-GAAP net earnings were $9.1 million or $0.29 a share, which was slightly above our guidance range. The non-GAAP tax rate in Q4 was a 11.5% consistent with our estimate of 12% going into the quarter. As a reminder, the full reconciliation between our GAAP and non-GAAP results is provided in the press release, as well as in the Investor Relation section of our website. Non-GAAP results, exclude the impact of stock based compensation expense and related social taxes, acquisition and disposition cost, acquisition amortization, asset impairments integration cost, restructuring cost, FX gains or losses on translation of balance sheet accounts, and certain tax adjustments. I'd also draw your attention to the additional disclosure in the press release, reconciling GAAP to non-GAAP for the fourth quarter of 2014. Looking at some of the key Q4 financial metrics on a year-over-year basis, total Q4 revenue of $149 million was up 26% year-over-year. Organic revenue growth in the fourth quarter was 21% compared to Q4, 2013. Revenue from OEM solutions was $129.5 million, represented an increase of 27% year-over-year. During the quarter, we saw solid contributions from the automotive, enterprise, networking, transportation, sales and payment, energy, field service and mobile computing segments and continued to benefit from a steady transition from 2G to more advanced 3G and 4G technologies. Revenue from enterprise solutions was $19.5 million, that’s up 16.4% year-on-year. On an organic basis, enterprise sales were down year-over-year compared to a strong comparable quarter a year ago. However, during the quarter, organic enterprise sales improved sequentially from Q3. Strong revenue growth in Q4 resulted in a significant year-over-year profitability improvement. Q4 adjusted EBITDA more than doubled to $12.7 compared to $6.2 million in the same quarter last year, and Q4 earnings from operations of $10 million were significantly above the $2.6 million realized a year ago. The significant improvement in profitability reflects the leverage in our business model as we grow. Looking at the full year, the transitional mode to what we saw in Q4, revenue grew to $548.5 million, representing year-over-year growth of 24.1% or 18.3% on an organic basis, we exclude the contribution from the acquired AnyData and In Motion businesses. This increase in revenue drove a significant improvement in profitability. EBITDA was doubled in 2014 to $35.4 million, up from $18.7 million in 2013 and earnings from operations grew to $22.8 million in 2014, up from $5 million in 2013. In Q4, we continue to strengthen our balance sheet. Cash flow from operations during the quarter was strong at $11.3 million, driven by improved operating results. After capital expenditures of $3.8 million, free cash flow in Q4 was $7.5 million. Net cash generated from other activities was $3.5 million, resulting in a total increase in cash during the quarter of $11 million and in cash balance of $207.1 million, as of the end of December. On a full year basis, we added $27.2 million of cash and this included purchasing In Motion for a net cash consideration of $23.9 million. I would note that we have used some of our cash subsequent to year end. We closed the acquisition of Wireless Maingate on January 16 for cash consideration of $91.6 million, including working capital. Moving on to guidance for the first quarter of 2015, provided on a non-GAAP basis, included in our guidance number is the expected contribution from Wireless Maingate for the part of the quarter commencing on January 16, the closing, so approximately 2.5 months contribution. For the stub period from the date of the acquisition, we are estimating Maingate revenue of approximately US3.5 million and expect it contribute approximately $1 million to non-GAAP earnings from operations. On a consolidated basis, including Maingate, we expect Q1 revenue to grow on year-over-year basis to between – grow year-over-year to between $145 million – $149 million, let me repeat that, $145 to $149 million. This represents 21% year-on-year growth at the midpoint of our range. We expect gross margin to be lower compared to the fourth quarter of 2014, reflecting normal seasonality in our higher margin enterprise sales, as well as the cost impact of managing current supply issues related to RF components. This is causing us to purchase more expensive parts from the distribution channel, as well as incur additional product cost in the quarter. Excluding the impact of Maingate, we are expecting OpEx in Q1 to be flat compared to Q4. This reflects seasonally higher expenses in Q1 related to higher sales and marketing expenses driven by major trade and sales conferences in Q1, offset by a favorable foreign exchange moves. On a consolidated basis, including Maingate, we expect a modest increase in OpEx in Q1 compared to Q4. These expectation result in non-GAAP consolidated earnings from operations of between $6 million and $7.2 million. This is significantly above the $700,000 in non-GAAP earnings from operations we realized in Q1, 2014. We expect non-GAAP net earnings of between $4.7 million to $5.7 million or earnings per share of approximately to $0.15 to $0.18. This compares to EPS of $0.02 in the first quarter of 2014. We also expect that non-GAAP tax rate in the first quarter to be in the low 20% range. This is up approximately 5% from previous estimates due to several things. Firstly, when we bought Maingate, we unbound an inter company loan to free up cash for the acquisition. This inter company loan had been generating interest expense in our US subsidiary, without this expense we become more taxable in the US. Additionally, we expect some shifts and profits among jurisdictions which will mostly increase our tax rate in 2015. With that, I will now turn over the call to Jason, to provide a brief summary.

[Jason Cohenour:]

Thank you Dave. So to summarize, we're very pleased with our overall performance in the fourth quarter and fiscal year 2014. Our first full year as an Internet of Things, pure play. Revenue growth is strong and our key profitability metrics have improved and in accelerated pace. Our strong operational results has resulted in a significant ramp in cash generation as well, providing us with capacity for strategic investments, such as acquisitions. Our organic investments inhabited new products and solutions and in sales and marketing have bolstered our leadership position, creating market differentiation and accelerating design win momentum. We fully expect that this momentum will fuel continued growth in value creation. The acquisitions of AnyData and In Motion have been fully integrated and both provided a significant contribution to our strong performance in 2014. We also continued our efforts to acquire great companies that enable us to capture more of the IoT value chain and to evolve our business model. Our recent acquisition of Maingate provides a good example of this, and represents a significant step forward for our company, as we expand our business into wireless connectivity services for the Internet of Things, solidify our device to cloud offering and drive high margin recurring services revenue. Looking forward, we expect 2015 to be another strong year for Sierra Wireless. We remain focused on delivering profitable organic growth and driving innovation and are acquiring great companies that help us to scale, expand in the value chain and to create lasting shareholder value. Most of this concludes our prepared remarks. You can now open the line for questions.

[Operator:]

[Operator Instructions] Your first question is from the line of Dino J Muzzatti's [ph] from BMO Capital Markets. Your line is open.

[Unidentified Analyst:]

Hi, good afternoon. In the past you've talked about a 10% to 15% organic growth rate as being sustainable. You clearly exceeded that significantly this quarter. I think your Q1 guidance suggest an organic growth rate its bit above that range as well. And I know you don’t provide full year guidance, but generally speaking how should we think about guidance looking out beyond, your growth rate looking up beyond Q1, are you seeing signs of accelerating growth in your end markets?

[Jason Cohenour:]

Yes, hi. This is Jason. I'll answer that question. I think in our last call we said, we felt comfortable in the 10% to 15% range, why I think we're going to reiterate that – the comfort in that range. You are correct in your observation, that our Q1 guidance at the mid point contemplates an organic growth rate slightly above that range, not materially slow. So, I think 10% to 15% is a good planning assumption and we're confident that we can meet that.

[Unidentified Analyst:]

Great. Question for Dave, can you clarify the commentary you made around the gross margins and the impacts are from RF components, what exactly are you seeing in the year and how should we think about the impact of might that going forward beyond Q1?

[Dave McLennan:]

Sure. So, we are experiencing some supply issues in with RF components and we are going to evident to the distribution channel and buying those components. And that causes an increase in product cost, as we buy them through the distribution channel. And in addition to that, we're having to – we re-work some factory productions schedules which also cause us to incur some cost. So, it’s a bit of a – as we manage through a situation, it’s a bit of a cost out that go in a quarter.

[Unidentified Analyst:]

Okay. Maybe just the last one for Jason. Can you comment on that what you're seeing as far as geographic trends, is there some sign of Europe starting to come back?

[Jason Cohenour:]

Well, sadly Europe did not come back in Q4. So, we continue to – we saw Q3 by the way in Europe was up sequentially and I would say created some optimism. And I'd also say that our level of design win activity in Europe gives us optimism as well, but I think that’s going to be more mid to long-term. In Q4 Europe was down sequentially. A little bit of that was FX headwinds, but most of it was just kind of the core business was not as strong as we would like to see. So, I think Europe still struggling a bit and with respect to the drivers from a regional standpoint, it’s really about the Americas and Asia.

[Unidentified Analyst:]

Great. Thanks, I'll pass the line.

[Jason Cohenour:]

You're welcome.

[Operator:]

Next question is from the line of James Kisner from Jefferies. Your line is open.

[James Kisner:]

Thank you. So I guess, just first, my apologies if I missed it, did you guys talk about the revenue outlook sequentially by segment I guess, sort of organically, ex-this acquisition of Maingate for the segments?

[Jason Cohenour:]

We don’t James. This is Jason speaking. We don’t provide segment guidance, we only provide consolidated guidance. Although we did say that we expect Q1 to be seasonally low in our enterprise business and that’s a typical pattern that we say.

[James Kisner:]

Okay. That’s helpful. So, I guess, I want to touch on Maingate again for a second. You said the stub you're expecting $3.5 million. I think it closed in 2015 [ph] if I do some rough math here, imply like $4.2 million. I am just wondering if I am missing anything there that would be a lower run rate than the $19 million we saw or you expected for last year. I mean, is there a seasonality in this business, am I missing something from an accounting perspective, just comment on that sort of stub number versus the pro forma, four quarter contribution?

[Dave McLennan:]

Hi, James. Its Dave here. So no, your math is pretty correct. In terms of taking that $3.5 from the stub period and negotiating up to a four quarter of around 4.34 for Q1. One of the things that is impacting that, that may appear to be a little less than run rate, that we suggested before is that, you know, currency is moved here. So the Swedish local currency is down relative to US dollar and that does have an impact on the revenue line. It certainly is less of an impact on the profitability line, of course gives your – we've got a natural, somewhat of an offset with local currency expenses and product cost as well.

[James Kisner:]

Okay. So, then I am making sort of tricky for modeling purposes. I mean, just wondering you said 10% or 18% I assume that’s an organic rate I mean, what do you think mainly it might grow this year. I mean, you'd nearly grow similar to last year constant currency and I guess any kind of thoughts today where the constant currency – I can see, look at the currency, movement of the krona. But can you help me, maybe what the currency impact might be to that growth rate, organic rate for Maingate?

[Dave McLennan:]

I think the way we're thinking of it is, the business grew 12.5% last year in 2014 and that’s kind of inline with our overall expectations for the company as well. So I think that’s probably a fairly good reference point. Now that reference point is in local currency. So we'll be affected by currency movements, either up or down, either way.

[James Kisner:]

I though it was going to be flattened out now, like is it 300 bps, is it 100 bps, any idea off hand?

[Dave McLennan:]

In terms of the impact on the currency?

[James Kisner:]

Yes. If you just took the Swedish krona today or the currency impacts today and just sort of held them constant from a current exchange rates. I mean, do you have an idea what the revenue impact would be for the full year?

[Dave McLennan:]

Well, to give you, just a reference in the change from 2014, from Q 2014 the – and then you can back into the math, but the Q4, 2014 FX rate was 0.1349 [ph] and the current rate is about 0.12.

[James Kisner:]

All right. Thank you.

[Dave McLennan:]

And I will iterate that, that’s with the revenue line and obviously their expenses are denominated in local currency as well, right. So, probably the way to think of it is, as you're bringing back the net operating margin number into back in the US dollars.

[James Kisner:]

Okay. Got you. Thank you.

[Operator:]

Next question is from the line of Scott Penner with TD Securities. Your line is open.

[Scott Penner:]

Thanks. Just, maybe first of all on the enterprise solution side, Jason, just the last three quarters have been relatively flat on the overall revenue side. So I just wonder if that – if you think that that still kind of little bit above the overall growth rate, call it, 15% to 20% and whether the inventory wrinkle that you talked about last quarter, whether that’s totally cleared up?

[Jason Cohenour:]

So, hi, Scott. Jason, here. So, its – and obviously we're not going to – we didn’t put that up in Q4, that growth rate up in Q4. And we're going to experience some normal seasonality here. But I think you characterized it right, the organic business is down to, down to flat. So are we going to get to the more accelerated growth rate compared to the overall corporate growth rate in this year, its going to be a challenge. Now we do think that we've got the channel situation now under control and we probably experienced a little bit of new product launch overhang. We just launched those new 450 products, the GX450 and ES450. So that will clear up any overhang as well. So we should be on a – I would say a more normalized demand trajectory, post the Q1 normal seasonality and we do expect growth and whether or not we can exceed the corporate growth rate remains to be seen. But I think its going to be a challenge.

[Scott Penner:]

Is the introduction of the new GX and ES products, does that create any pause or any discontinuity in the revenue for the next – over the next couple of quarters?

[Jason Cohenour:]

Well, I don’t think it will any more, now that the products are out. But we do think it probably was a bit of an overhang in Q4. It might be a little bit of an overhang here in Q1, along with the normal seasonality. But I think after Q1 we should be clear of any overhang because the production is slowing and we're taking orders.

[Scott Penner:]

Okay. When we look at the Maingate business, call it a little bit of growth versus last year, what is the, I know you only business for a little while, but what do you expect to be the timing until some of the real revenue synergies materialize, taken some of those solutions outside of the core markets?

[Jason Cohenour:]

I think its still a little early to tell Scott, I mean, clearly we're going to move fast on this. But it’s too early to really begin getting any meaningful input on expected, the speed of expected growth synergies. But clearly we've got lots of channel synergies here to mind. There is endless products. There is product synergies as well. So its quickly as we can, we're going to get our respective platforms fully integrated and we're going to get our respective teams fully on selling the combined connectivity in cloud services. So, we're going to move as quickly as we can. We fully expect significant growth synergy is going to take a little time to develop and its going to take us a little time to give you some precision on that or at least some meaningful color.

[Scott Penner:]

One last question would be, any anecdotes or any initial learning’s from that Enterprise Connect bundle, it was launched I think at the end of September?

[Jason Cohenour:]

I would say no specific, no, I mean, no or shattering learning’s there. Its taking a bit longer to ramp than we had hoped, but we see good interest. We signed up a couple of new channel partners during the quarter in Europe. I think it’s a – in general it’s a market opportunity that’s right to service. We've seen success with similar models in the US. I think with the deployment now of 4G in Europe, the needs are going to be similar for branch offices and retail outlet. So I am bullish, can take a little while to get that going in a strong way. But its - I think we're catching the market at the right time, with the right solution and ahead of competition.

[Scott Penner:]

Okay. Thanks, Jason, Dave. Appreciate it.

[Jason Cohenour:]

You bet.

[Dave McLennan:]

Thank you.

[Operator:]

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

[Michael Walkley:]

Okay, thanks. Congratulations on another strong quarter with leverage in the model. Jason, I just wanted to touch base, you've talked a lot about the mix shift to 3G to 4G given your technology leadership helping you. Could you maybe share with us where you think that market is in terms of transition and do you think that will continue to be a benefit in 2015? I know you're still talking about 10% to 15% growth, but could that mix shift maybe making more towards the high end of that 10% to 15% organic range?

[Jason Cohenour:]

Right. So I definitely think we're going to continue to see the mix shift, Mike. We saw it in stage during 2014 and just for reference now, at the end of 2014, 3G revenue now exceeds 2G revenue and 4G revenue is not far behind. 2G revenue year-over-year was actually down, but I think it’s going to have a long tail. 3G revenue was up almost 30% and 4G revenue was up over 80%. So the trend is definitely occurring in our business. Now whether or not that will enable us to drive growth rates over the stated 10% to 15% range, I am not willing to go there yet. But I will say that support to ASPs has been remarkable. If you look at our consolidated ASPs 13 to 14, they are absolutely flat. So no change in consolidated ASPs and really the mix shifts supports that.

[Michael Walkley:]

Okay. Got that. That’s helpful. And Jason when you look at the market dynamics, I know in 2015 are you seeing any change in competitive behavior from uBLOX [indiscernible] and maybe as you look at the year in retrospect, how do you think you're value share, your dollar share compared?

[Jason Cohenour:]

So first question, I don’t see any significant changes in the ecosystem. uBLOX is been a good competitor. They probably improved a little bit over 2014. I am pretty sure looking at our peer growth numbers that we – our direct peer growth numbers that we grew a little faster or at least kept the pace, in terms of revenue growth. And I will say anecdotally based on the design wins that we track, we believe that we are gaining design win market share, that we do kind of win loss. Of course, we track our design wins pretty closely and as we look at the design wins we compete forward. We're willing – we're winning far more than our market share would imply.

[Michael Walkley:]

Okay. Great. And then, just a question on your acquisition strategy, you have made quite a few over the last year, so and then you have Maingate which took a big chunk of your cash. But I know you are still looking new references on the call. So would you be willing to change your capital structure all to make it in larger acquisitions that’s something do we consider like we can gather something like that or do you think its more continue to use your cash flow from operations and the cash off the balance sheet is your preference?

[Dave McLennan:]

Mike, its Dave here. Yes, I think we would, depending on, it’s going to be situation of dependent. But depending on the cash flow profile of the target, I think with $35 million of EBITDA, clearly in 12 months from Sierra Wireless, Maingate EBITDA and possibly the current EBITDA from another acquisition, I think that forms the basis to, we could introduce that into the capital structure if we wanted to.

[Michael Walkley:]

Okay. That’s helpful. Last question from me Dave, and I'll pass it on. Just on the tax rate can you explain why it was little higher in Q1, is this kind of how we should expect enough for the full year, closer to 20% to low 20%, I think the last guidance was potentially 15% to 20% for 2015?

[Dave McLennan:]

Yes. Your recon are exactly right, Mike. So I think low 20s for 2015 is a good price to be in and yes, that’s year up from, if you think of mid point 17.5 where we indicated later and I take it through the moving pieces that get us to the low 20s there.

[Michael Walkley:]

Okay. Great. Thank you very much.

[Dave McLennan:]

Thank you.

[Operator:]

The next question is from the line of Richard Tse from Cormark. Your line is open.

[Richard Tse:]

Yes, thank you. Jason, on the design wins, I was just wondering if you guys will ever be in a position that you may go provide some metrics on that. Like it sounds like you guys are getting momentum there, but like on a quarter-over-quarter or year-over-year basis along with the metric would be the number of wins or I think it’s probably tough to peg down a value. But is that something that you would consider, maybe you can talk a bit about that?

[Jason Cohenour:]

It is something we would consider. I think the metric internally is as gotten a lot more reliable over the past year and the metric we track is the absolute – the metrics we track are of course absolute number, as well as the life time value of the design wins. So I would say we're getting better. We're not quite ready for public disclosure on that, because we don’t think it will be helpful, frankly. But I personally I'd like to see us get there. So we get very high confidence in that and sharing that metric and having that metric represent a trajectory in our business. If we kind of create those linkages, then I think we will, we're open to it. It’s just not ready to do it yet.

[Richard Tse:]

All right. Will it be safe to say, that given the competition in the grounds you guys are making up with the growth rates from a design win perspective what other metric that maybe is stronger than your 10% to 15% sustainable growth rate on the revenue side?

[Jason Cohenour:]

Longer term you mean?

[Richard Tse:]

Yes.

[Jason Cohenour:]

Well, it could be, I want to be careful not to get too far ahead of ourselves, like I said looking at the next year we're comfortable 10% to 15%...

[Richard Tse:]

It just sound like its falling on the design win, stronger than the revenue?

[Dave McLennan:]

Yes, I think stay tuned, I think we're going to have to get confidence, more confidence in a longer term view driven by the life time value of those new design wins and successful design wins before we start talking beyond 2015 in terms of growth rates.

[Richard Tse:]

Okay. And then, that’s an earlier question, the gross margins and the impact of RF components, I don’t think you have made clear whether it was sort of one quarter of events or is it something that’s going to be in your numbers for a couple of quarters here for the year?

[Jason Cohenour:]

So its, this is Jason, speaking, Dave may want to add to this as well. So it’s a situation is definitely creating tightness. And so we think we’ve got well we’re pretty sure we’ve got our arms around Q1 and it’s costing us some money as Dave indicated. So that’s a hit to Cox [ph] in Q1. And we think we get a bit more relief in Q2, but it’s still a watch item. So we’re – and it’s causing some work here too. So you know there are certain parts we’ll have to design out and qualify, qualify new part simply because the supply chain capacity is not going to meet our needs. But, you know as far as we can see the situation looks manageable, but we need to, we’re working it not just every day but several hours a day.

[Richard Tse:]

Okay, and then one last one for me. I think about a year you guys had a big sales offsite to get guys excited on AirVantage and those are big portions of that, just kind of wondering what the status of that product or platform is and where you stand there today?

[Jason Cohenour:]

Oh we did it again this year by the way. They had – yeah no its – so status is, the product is mature, revenues not ramping fast enough, but the funnel looks good. We’ve got – we created a new dedicated services sales team by the way. And so we are putting the pedal to the medal on that and I think as we integrate with connectivity platforms such as Maingate that I think it really adds, I would adds a lot more value to the offering. It’s a much more comprehensive device to cloud offering and I think that will enable us to get more traction. So, I’m bullish, taking a little time, but I’m bullish and I’ll also say that our hit rate and our enterprise be it our hit rate of connecting services with gateway sales took a nice step up over the course of 2014 and we see a nice trajectory on what we are referring to as attach rate. So with each new gateway sold, attaching cloud services and soon connectivity services that attach rate is going up. So, can take a little time, but I’m definitely bullish.

[Richard Tse:]

Great. Thank you.

[Jason Cohenour:]

Sure. Operator Next in line of Mike Latimore from Northland Capital, your line is open.

[Mike Latimore:]

Yeah thanks, great quarter and a year there.

[Jason Cohenour:]

Thank you.

[Mike Latimore:]

David, if you quantify the impact of the product component cost on gross margins or is it just something to highlight?

[David McLennan:]

No, I didn’t, but sitting here today, we think it’s going to be at least $500,000 in Q1 in additional Cogs.

[Mike Latimore:]

Okay. Thanks and then you highlighted, I think it was four categories that were strong in the OEM business in the quarter, although transportation and in fact now we are doing mobile computing, roughly what percent of revenue would see those four categories contribute, they represent in total?

[David McLennan:]

I’ve to do a little work on that. We don’t disclose that Mike with precision, but we’re looking at those categories for 2014 as an example. It’s a big chunk of the revenue, it’s the majority of the revenue.

[Mike Latimore:]

For those categories?

[Jason Cohenour:]

Is that for you, so we have that Dave?

[David McLennan:]

Those four categories are going to be you know 50%, 60% of the OEM revenue. So it’s going to be…

[Mike Latimore:]

Got it. Okay. Thanks. Then in terms of the guidance for the first quarter, is there any sort of quantifiable effect from FX overall, you talked about your Maingate certainly, but average is overall in the company, the sequential area of your business?

[Jason Cohenour:]

Mike, sorry relative to what period were you referring to?

[Mike Latimore:]

To see influence of FX for all this.

[Jason Cohenour:]

Sure. We are learning about FX exposure with the Swedish currency. With respect to the euro you know there is somewhat of a natural hedge there because we have euro denominated sales, but we also have euro OpEx. So at an operating level there is – its not perfect but it’s a fairly natural hedge there, where we do have exposure, net exposure is on the Kenyan dollar relative to the U.S. dollar and you know the metric there is for every one penny change in FX up or down you know our OpEx, our quarterly OpEx will change by about $100,000, $125,000.

[Mike Latimore:]

And then I guess just last question. With the price of oil dropping here, has that had any influence on any of your energy sectors, if we manage anything like that?

[Jason Cohenour:]

As far as we can tell no impact, positive or negative. So there might be some modest to positive and transportation and automotive but it’s hard to say. Both of those markets are growing for us but it’s hard to say if it’s oil price driven.

[David McLennan:]

The oil price is certainly having a currency effect on the Kenyan dollar, so there’s a indirect influence there.

[Mike Latimore:]

Right, right. Great, thanks a lot.

[Jason Cohenour:]

Thank you.

[Operator:]

Question is from the line of Todd Coupland from CIBC, your line is open.

[Todd Coupland:]

Well, good evening everyone.

[Jason Cohenour:]

Hi, Todd.

[Todd Coupland:]

I wanted to just clarify on Maingate, what the margin might look like. So if we think about the guide I guess its sort of 27%, 28% so that’s at the pretax level, right?

[Jason Cohenour:]

That will be yes, that’s operating margin pretax, that’s right. Now recognizing that you have a significant shelter that for the next several years. So you know that directly goes to turn that as well.

[Todd Coupland:]

I see, but okay for modeling purposes, we still should model, come up with a total pretax which is still you’ve taken that into account when you guided two tax rates at 20% for the company, right?

[Jason Cohenour:]

That’s right. On a consolidated basis that metric does capture shelter in the various jurisdictions we have including Sweden.

[Todd Coupland:]

And is it fair to assume that 27%, 28% number with whatever gross rate we want to assume for ’15 or will that number actually improve with the shift, I guess with the fall of the Kroner?

[Jason Cohenour:]

In terms of the growth rate, Todd.

[Todd Coupland:]

No in terms of the operating margin.

[Jason Cohenour:]

In terms of the operating margin, contribution because I guess you would have lower OpEx in that market rate.

[David McLennan:]

So yeah I think the margin, pick of the margin is pretty stable.

[Todd Coupland:]

Okay and just pick whatever growth rate, constant currency or whatever, okay. So that’s great.

[Jason Cohenour:]

Cost of service and operating expenses are in the same currency as revenue.

[Todd Coupland:]

Okay. And then if I just think about the rhythm of the quarters for 2015, do you I guess seasonality in Q1 I mean what does a consolidated business look like at this point for 2015, would you expect sequential growth as we go through the year?

[Jason Cohenour:]

Yes, very much so. I mean here there is seasonality of this in Q1 and we’ve seen that patterned in previous years but very much expecting year-over-year growth as we step through the quarters.

[Todd Coupland:]

Okay. That’s all I had. Thanks guys.

[Jason Cohenour:]

Yeah, thanks.

[Operator:]

The next question is from the line of [Indiscernible] your line is open

[Unidentified Analyst:]

Hey good afternoon and I hate to be that guy but I did get on the call a little bit late and I’m sure you’ve answered some of this, but the first quarter guidance implies a little sequential decline even with the revenue from Maingate is that drop off a quarter-to-quarter is that primarily an enterprise or is that spread across both the OEM and enterprise business?

[Jason Cohenour:]

So just for context, the guidance range is the same as the guidance range we gave in Q4, but it does include Maingate, you’re right. And in terms of the change what we are seeing Tim [ph] is I would say a normal seasonal pattern in Q1. And that normal seasonal pattern is impacts enterprise more than it impact OEM.

[Unidentified Analyst:]

Right. And you had last year I think a little better than abnormal sequential growth in the OEM Solutions business and the 1Q versus 4Q but more typically would you expect that to be flattish or down a little bit?

[Jason Cohenour:]

Yeah more typically we would expect it to be flat to down.

[Unidentified Analyst:]

Right. And then just kind of generally and you have alluded to expectations for 10% to 15% growth, is if that indeed is the case for 2015 versus higher especially the modules business much higher organic growth in 2014, is the assumption that that favorable mix that you’ve had doesn’t persist into 2015 if you do have that deceleration?

[Jason Cohenour:]

The favorable mix on technology…

[Unidentified Analyst:]

On modules 2G, 3G, 4G.

[Jason Cohenour:]

Well I can’t give you a precise numbers on whether or not the pace of the transition is the same in 2015 as it is in 2014. I think with respect to our growth rate just to abstract it a little bit, 10% to 15% I mean this is where we started last year also. And I think your porosities, I think it’s the right cheerful place to be at this point in time and as we did last year as soon as we have confidence enough to directionally change that as we did in 2014 we’ll do it. But I think you know the 10 to 15 at this point in time based on our current visibility the right safe place to be and I wouldn’t pin it on any one specific thing, technology transition pay served or anything else.

[Unidentified Analyst:]

Okay. And you alluded to a long tail in 2G and I’ve always thought that the clock is ticking there towards the sunset phase out of 2G networks. You know what did you mean in terms of the long tail and what are you seeing in terms of that particular mix?

[Jason Cohenour:]

Well yeah so we’re definitely seeing, so I don’t know if you missed this part of my call, but 2G revenue in 2014 full year 2014 was down compared to 2013. 3G was well up, 4G was way up. So we see the transition quite clearly in our business. 2G not – doesn’t have welcome home in North America, but in other regions we think there is going to be a pretty long tail, like I don’t think we're going to see networks 2G networks in Europe getting turned of in the next five years as an example.

[Unidentified Analyst:]

Okay.

[Jason Cohenour:]

That’s fun like what we see here in North America of course. So I think the long tail is going to be in specific geographies.

[Unidentified Analyst:]

Right. And then just lastly on, you still have a great balance sheet, what type acquisitions are you looking for to do other MVNOs make sense, to fill end gaps in Europe or what other businesses do you think look attractive right now? Thank you.

[Jason Cohenour:]

Yes. So, as we said, we like via [ph] services model and we love services model that fit well with what we're trying to do with our device to cloud visions. So Maingate is I think a perfect example of that. So more MVNOs in the funnel, yes, and that would be a complementary network elements, technology elements, as well as geographies, so that we can stitch together a – I would say a very solid footprint across Europe is our fist goal. So, l think that certainly a priority target and there are other services oriented companies in that – in those – in that priority bucket as well. But certainly a hit on one class that is getting a lot of attention from us.

[Unidentified Analyst:]

Thank you.

[Jason Cohenour:]

Sure.

[Operator:]

Your next question is from the line of Paul Treiber from RBC. Your line is open.

[Paul Treiber:]

Thanks very much. I was hoping at a high level, could you help us explain the divergence in organic growth between OEM and enterprise over the last year or last couple of quarters. Is that due to the end market demand or is it the ASP benefit you're seeing it on the OEM side, any help that will be helpful?

[Jason Cohenour:]

Yes. Paul, this is Jason. So it’s certainly enterprise organic, enterprise growth rate has not been what we would like to see. It is lagging, it is lagging our OEM growth rate as you said. I think it’s a collection of factors and we had a channel issue with new products coming into market last, I should say, in late 2013 which I would say gave us a signal that the growth rate was going to be considerably higher than it is. So in a very strong Q3 and Q4 as an example of 2013, creating some tough comparables and ended up that, channels ended up with some of that product, so they've gotten it out. And then we've been more recently a bit of product overhang. So it sounds like dog ate my homework, so to think, but I think bottom line for us that, there is, I don’t think its market issue, I think we as a company have to got to do better and accelerate the growth rate and we're focused on doing that and putting – investing in additional product developments and feet on the street. So, I think the market opportunity skewed. I think that we have not performed to our expectations in that area and we need to get back to our expectations.

[Paul Treiber:]

Okay. That’s helpful. I just want to shift gears to OEM, you mentioned that mobile computing was a driver of that OEM growth in Q4. Could you just elaborate on the reasons for mobile computing strength and at this quarter I think for your expectation was genuinely flat market, so any reasons for the up tick or strong up tick in Q4?

[Jason Cohenour:]

It was one of several key segments that were good year-over-year growth drivers in Q4, and I would say mobile computing was strong full year as well. And that ramp compares to – well compares to a weaker 2013. So its almost, Q4 to Q4 is a, I think it also reflects the full year 2013 to 2014 and as we said before, the story there is really two fold, share gain, has been an important driver and we believe we've seen signs of a better tax rates, but 4G in notebook, computers, particularly in North America where its been weak. So while the overall market is obviously flat to down, any movement in tax rate should benefit us in a significant way. So, that doesn’t mean we're going to see a massive tick up in our tax rate this year necessarily, but that was one of the key drivers in 2014, share gain and improved tax rate in North America.

[Paul Treiber:]

And when should we think about you lapping the share gain benefits, when would all the share gains benefits to be reflected in those numbers?

[Jason Cohenour:]

I think were they Paul. I think we've seen the benefit of our share gain and at least in terms of the customers that we think are really important to have on board, might be one or two that would be good to have on board. But we've got a very good roster of customers now. So I think the favorable impact of share gain is mainly baked in, might take another tick up, like I said one or two other targets, but I'd say its mainly baked in and its really mainly now about a tax rate.

[Paul Treiber:]

Okay, thank you. I'll pass it on.

[Operator:]

No further questions at this time.

[Jason Cohenour:]

Okay, great. While, with that, Melissa, I will encourage, I will thank everybody for joining the call and as usual if there are any follow up questions management is available to have a discussion. So, Melissa you can now terminate the line.

[Operator:]

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