Sierra Wireless, Inc.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good afternoon. My name is Scott and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Wireless Q3 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. David Climie, Vice President, Investor Relations of Sierra Wireless, you may begin your conference.

[David Climie:]

Thanks Scott and 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 Cohenour:]

Thank you, David and good afternoon everyone. Thank you joining today's conference call. I will begin with some brief highlights of the third quarter of 2015. Revenue in the third quarter was $154.6 million representing growth of 6% compared with the same quarter of last year. Year-over-year growth was driven by contribution from acquired businesses as well as organic growth of 4%. For the first nine months of 2015, revenue increased 16% year-over-year to $463 million. Solid revenue growth in Q3 helped to drive year-over-year improvements and the company’s profitability metrics. Non-GAAP earnings from operations in the third quarter increased 13% to $9.5 million and adjusted EBITDA increased 3% to $12.1 million. We continue to stay active in strategic M&A. In early September, we completed the acquisition of MobiquiThings, a deal we originally announced in June. Based in France, MobiquiThings is a highly innovative MVNO providing managed connectivity services for the Internet of Things. MobiquiThings brings a world-class core network platform Pan-European coverage and intelligent SIM card technology that supports multiple mobile network identifiers in each SIM. This enables us to provide our customers with truly unique managed connectivity services that maximize quality of service and flexibility. We are thrilled to have the MobiquiThings team join Sierra Wireless and integration activities are well underway. We also set a company record for quarterly design win life time value or LTV which is the total expected revenue over the life of the programs won during the quarter. This design win LTV record is underpinned by the company’s largest even new program design win, an important strategic accomplishment for our team. Now let’s take a quick look at the third quarter 2015 results in each of our two business segments. Starting with OEM Solutions, revenue in our OEM Solutions business increased 5% year-over-year to $130.7 million. In Q3, we had strong year-over-year growth from the automotive, energy and networking segments. Strong growth in these segments was partially offset by softer than expected demand from certain mobile computing customers who are transitioning their products to the new Intel Skylake processor platform. This transition is taking time and is temporarily impacted sales of 4G enabled enterprise notebooks. Our mobile computing OEM customers are navigating through this platform transition and we expect to see a return to normalize demand levels in the coming months. Design win activity continued at a robust pace during Q3 and total LTV reached a new record as previously mention. This scale of activity contributes significantly to the building of our customer program pipeline to drive future revenue growth. Design win activity was gain broad based but particularly strong in the automotive and energy segments. In automotive, we secure the company’s largest even design win with a larger international OEM. This win represents a key milestone for the company and highlights the strength of our position in this key segment. We expect to see initial revenue contribution from this design win in 2018. We’ve also see a high level of design win activity in the energy segment. We recently announced that Iskraemeco, a smart metering leader and trusted partner of Sierra’s for more than a decade, selected our HL Series modules for its smart electricity and gas meters being deployed in the Netherlands under our multimillion unit five year program. In addition, the HL Series was selected by another of our key partners, Itron for their new line of smart gas meters, which will start rolling out in Europe later this year. This is our design win success with Itron Gas. These design wins as well as others in the security and industrial monitoring segments highlight the accelerating success of our AirPrime HL Series modules. The HL Series is truly unique and that it offers extraordinarily low power consumption as well as form factor and footprint compatibility across product lines in merit network technologies. This allows our customers to quickly and easily interchange multiple versions of 2G, 3G and 4G cellular connectivity within a single platform design. This improved flexibility helps reduce development cost and accelerates time to market for our customers. Moving to our Enterprise Solutions segment, revenue grew by 26% year-over-year to $23.9 million in Q3. Year-over-year growth in Q3 was driven by our managed connectivity acquisitions made during 2015 including Maingate, Accel Networks and a small contribution from MobiquiThings. In total, we delivered Cloud and Connectivity Services revenue of $6.2 million during the quarter. In addition and as expected organic revenue from gateways was up sequentially in the third quarter. In the public safety market, we secured several deals including one of the largest mobile gateway wins in the company’s history. This order, the majority of which was delivered in Q3 positioned us well with emergency responders needing dual cellular connections in a single gateway including LTE Band 14. We also had important gateway wins in the transit and energy markets during the quarter. As I mentioned on the last call, we believe there is strong and growth market opportunity for gateway solutions. We’re committed to driving growth in this line of business. We are planning to launch several new gateway products over the next three quarters including the current quarter and we are also making strategic investments in expanding direct and indirect sales capacity. And our Cloud and Connectivity services line of business, platform and team integration activity is extraordinarily high. We’re pleased to have the MobiquiThings transaction closed are making good progress on creating a single unified user experience for our Cloud and Connectivity Services. Our recently launched IoT acceleration platform is the industry’s first truly integrated platform that combines IoT hardware, managed connectivity and cloud services for world-wide deployments. The IoT acceleration platform is unique and that provides global cellular coverage combining Sierra SIMs and third party network operation SIMs all managed from a single customer portal. The IoT acceleration platform also provides APIs that enable customers to connect their backend systems with remote machine data as well as easily access third party big data analytics engines such as the Google Cloud platform. New customer wins and revenue from Cloud and Connectivity Services also continues to ramp as we integrate teams, add services sales capacity and drive lead sharing with our OEM and gateway sales teams. During Q3, our Cloud and Connectivity team secured a number of wins for services in the energy, transportation and security segments. Deal and lead flow from our OEM and gateway sales teams is robust and validates our strategy to combine our device and services capabilities to create true device to cloud solutions for our customers. I’ll now turn the call over Dave, who’ll provide more detail on the Q3 financial results and Q4 2015 guidance.

[Dave McLennan:]

Thank you, 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 full reconciliation between our GAAP and non-GAAP results is provided in the press release. Revenue in the third quarter was $154.6 million with solid profitability on both a GAAP and non-GAAP basis. Adjusted EBITDA was $12.1 million, non-GAAP earnings from operations were $9.5 million and non-GAAP net earnings were $7.4 million or $0.23. We closed the acquisition of MobiquiThings on September 2nd, so our consolidate Q3 results include a small revenue contribution of approximately $200,000 and breakeven earnings from MobiquiThings. Our guidance for the third quarter did not include any contribution from MobiquiThings. So for comparative purposes, we’ve excluded MobiquiThings. And on this basis compared to guidance, revenue in the third quarter was $154.4 million. This was below our guidance range of $157 million to $160 million. As Jason mentioned, this was driven primarily by lower than expected sales to certain mobile computing OEM, who are transitioning their products to the new Intel Skylake processor platform. This transition is taking more time than expected and impacted demand for 4G enabled enterprise notebook computers. Q3 non-GAAP gross margin was 31.8% which was lower sequentially by about 60 basis points compared to Q2. This decrease was driven by a customer and product mix shift in both OEM and enterprise solutions to lower margin products and services and the impact of higher cost for a certain end of life component used in some of our legacy OEM products. Non-GAAP operating expenses in the quarter were $39.7 million which was slightly lower than expected and down 1.7% sequentially. The lower than expected OpEx in the quarter was a result of lower admin costs in Q3 and the timing of certain R&D expenses. The combination of lower than expected revenue in gross margin partially offset by lower operating expenses resulted in third quarter profitability at the low end of our guidance expectations with non-GAAP earnings from operations of $9.5 million and non-GAAP net earnings of $7.4 million or $0.23 a share. The non-GAAP tax rate in Q3 was 21.8%. Looking at some of the financial metrics for Q3 on a year-over-year basis, total Q3 revenue of $154.6 million was up 8% year-over-year. And on an organic basis excluding the recent acquisitions of Wireless Maingate, Accel Networks and MobiquiThings revenue was up 3.9% year-over-year compared to Q3 2014. On a year-to-date basis, organic growth was 12.5%. Revenue from OEM Solutions was $130.7 million representing an increase of 5.1% year-over-year. The year-over-year increase was primarily due to growth in automotive, energy and networking segments. On a year-to-date basis, total OEM growth was 15.8%. Revenue from Enterprise Solutions was $23.9 million that’s up 26.3% year-over-year. The year-over-year increase was driven by revenue contributions from Maingate, Accel and a small contribution from MobiquiThings, partially offset by lower sales of gateway products. However as expected, we did experience sequential growth in gateway revenue in the third quarter. On a year-to-date basis, revenue growth in Enterprise Solutions was 16.6%. In Q3, adjusted EBITDA as $12.1 million compared to $11.8 million in the same quarter last year and Q3 earnings from operations were $9.5 million compared to $8.4 million a year ago. We had solid cash flow from operations during the quarter and our balance sheet remains strong. During the third quarter, the business generated $10.4 million of cash from operations. CapEx was $3.6 million resulting in free cash flow of $6.8 million. During the quarter we utilized $14.9 million for the purchase of MobiquiThings. Reflecting this, our cash balance declined by $8.1 million to end the quarter with a cash balance of $88.4 million and the company remains debt free. Moving on to guidance for the fourth quarter of 2015, we expect Q4 2015 revenue to be in the range of $148 million to $151 million. This is below our expectation and down sequentially from Q3. The sequential decline from Q3 is principally a function of the short term effect of order timing from a larger automotive customer. We expect this order timing to normalize in Q1. Relative to our expectations for Q4, this reduced revenue outlook is mainly a function of the situation with the automotive customer I just mentioned as well as the continuation of the impact of the platform transition currently underway with key mobile computing customers. Following this transition, we expect demand from mobile computing customer to normalize in the coming months. Assuming the midpoint of our Q4 revenue guidance, our expected year-over-year revenue growth rate is approximately 12% for 2015. We expect gross margin percentage in the fourth quarter to be slightly lower than Q3. This is principally driven by the higher cost for a certain end of life component used in some of our legacy OEM products which I mentioned earlier. We expect this to be factor through 2016 as we transition out of this component. And we expect Q4 operating expense to increase slightly from Q3 driven by the addition of a full quarter of MobiquiThings OpEx and targeted investments in sales and R&A. Based on this, we expect Q4 non-GAAP consolidated earnings from operations to be between $4 million and $5 million and non-GAAP net earnings to be between $3 million and $3.7 million or earnings per share of $0.09 to $0.11. With that I will now turn the call over to Jason, who will provide some brief summary comments on the quarter.

[Jason Cohenour:]

Thanks Dave. So to summarizes, we delivered solid year-over-year growth in revenue and earnings from operations in Q3, despite lower than expected revenue from select mobile computing customers for navigating the technology platform transition we discussed. We also saw a strong and new customer win activity across all lines of business, including the largest OEM design win in company history. I believe this provides sound evidence of the strength of our market position will also setting the company up for future revenue growth. We are executing towards stated strategy to more up the IoT value chain to expand our Cloud and Connectivity Services offering and recurring revenue base and to position the company as an end-to-end device to cloud solution provider. Our strategy is working. Service is ramping, our IoT acceleration platform brings powerful differentiation and deal flow is on the rise. Looking forward to Q4, our short term business outlook is disappointing. As the few key OEM customers work through technology and order cycle transitions, we believe this situation is temporary that demand will normalize in the coming months and that our top line will return to solid year-over-year growth rates in 2016. Furthermore, we believe that the long term growth and value creation opportunity in the IoT is compelling. We are the clear market leader, we are well positioned and we will continue to make careful organic investments in order to capture the IoT opportunity. While we execute on our organic growth and expansion in the value chain, we will seek to further enhance our market position and business model with strategic acquisition. We firmly believe that this combination will create long term shareholder value. Scott, this concludes our prepared remarks, you can now open the line for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Daniel Amir from Ladenburg Thalmann. Your line is open.

[Daniel Amir:]

Great, thanks a lot for taking my question. Couple of questions here, first of all, I mean can you give a little more clarity around the design win activity on the automotive segment which clearly seems like to highlight here, but also in the same tone, what is exactly happening here in terms of the guidance, is it really related to substantially to automotive or that much more related to the weakness in mobile computing? And then I have another follow-up. Thanks.

[Jason Cohenour:]

So again - this is Jason, so I’ll take that. Let me take your second question first. So guidance - so two factors as we look to guidance. We’re trying to explain two things as we put up the guidance. One is revenue; we expect revenue to be down sequentially from Q3. The primary driven of that is this single automotive customer who is adjusting their ordering cycle, so that their orders more accurately reflect in demand. That particular customer took I would say more inventory than needed to meet demand in Q3 and part of that was probably driven by some of our supply constraints earlier in the year, so perhaps an overcorrection from that customer, so they need less supply in Q4, that’s what’s creating the sequential change. And we expect their ordering pattern to be aligned with actual demand starting in Q1. Now the other thing we are explaining in guidance is why we think - we didn’t expect to have a flat quarter, so we feel like we have to add additional explanation why overall guidance is below our expectation. So in addition to the automotive move which we believe in temporary, we are navigating this mobile computing transition to the new Skylake platform as well. Our view is that too is a temporary situation, transition will be ending in the coming months and that demand for mobile computing customers will normalize after that. So that’s kind of you know pretty detailed color around what’s happening in the Q4 guidance. With respect to design win activity, yeah I think you know two big highlights on design wins in the quarter. One is, largest design win in company history, it is with an international automotive OEM. I’ve alluded earlier that we are chasing some big deals, some elephant deals, we have bag one in the quarter. And we expect that design win will result in the shipment of several million units over the life of that program and we expect to commence initial shipments on that program in 2018 with significant volume in 2019. And you already heard the additional activity in the metering segments and those two are what we will consider to be a larger design wins that will be rolling out in the coming years.

[Daniel Amir:]

Great, thanks for the detailed answer here. So just a follow-up here, in terms of revenue I guess industry growth, in the past I guess you’ve talked about 10% to 15%, this year it seems like on an organic basis, you’ll be a bit lower than that range. How should we look at going forward, I mean is that still the right number to be looking at in terms of how you benchmark yourselves in terms of the industry?

[Jason Cohenour:]

You know Daniel, it’s still our expectation. So you know certain we didn’t expect this softness we’re experiencing in the second half. So yeah on a full year basis, it kind of dilutes down our full year, year-over-year organic growth rate to about 8%. You know I’ll remind you that last year, we saw organic growth of about 18% and or 18.5%. So as we look forward to ‘16, our expectation admittedly off a new lower base here, but our expectation is to see 10% to 15% organic growth, so excluding the contribution from acquisitions. And I think we’re more comfortable at this stage at the lower end of that range in terms of year-over-year growth.

[Daniel Amir:]

Okay, great, thanks a lot.

[Operator:]

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

[Thanos Moschopoulos:]

Hi good afternoon. Maybe just a follow-up on the PC markets, you said you expect to manage return in the coming months, so should I think will be that this should be just one or two quarter phenomenon or is it hard to time that specifically?

[Jason Cohenour:]

That’s the way we see it now Thanos.

[Thanos Moschopoulos:]

Okay, great. And then maybe if you would elaborate on the outlook for the gateway business, you said you saw sequential improvement which is really good to hear, how far away are we from that business are turning to year-over-year organic growth?

[Jason Cohenour:]

Well certainly we’ll have easier comps next year, but - so I think you know we still have work to do there, Thanos, but very encouraging now we’ve seen two quarters in a row of sequential growth. You know we don’t expect that it’s going to be you know perfect straight line up into the right on that business but we do expect - well I mean to answer your question directly, I would certainly expect to see year-over-year growth in the second - I the first half of 2016, but again against pretty easy comps. But in term of really I think returning that business to the kind of growth we expect you know it’s going to take these new product launches, so you know we’re going to have I would say a pretty fully recharged product line by the end of the first half. And we’re going to have an expanded and strengthened sales team and so our view is we’re doing the right things to make sure that that business returns to the kind of growth we expect. But again on a year-over-year basis, we got fairly easy comps as we head into ‘16.

[Thanos Moschopoulos:]

Okay. And just last one for me, any significant changes as far as the mix between 2G, 3G and 4G relative to last quarter or does that just continue the gradual evolution towards 3G and 4G?

[Jason Cohenour:]

Yeah, I think as same trend line, Thanos is the way to think a bit you know kind of top of the line numbers, 2G revenue was 16%, so that was down significantly year-over-year. 3G revenue was 38% of the total, that was down a little bit year-over-year. 4G revenue was 38% of revenue so that’s the first time 4G has been at the top and that was up 42%, 42% year-over-year. I know that doesn’t add to 100% because there is other stuff in there too. But in terms of technology evolution that certainly that trend line is certainly continuing and you know obviously 4G is staring to next quarter we would expect it to the biggest technology category.

[Thanos Moschopoulos:]

Great, thanks Jason.

[Operator:]

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

[James Kisner:]

Thanks guys. I guess a couple of thing, I mean I am just wondering if you could maybe quantify a little bit here what the automotive impact was, I mean it seems like and so are they expecting in Q4, just seems like kind of a pretty big guide down, you know what PC weakness is given out of risk by your businesses, I mean is it $5 million or like anything you would help us on that. And I guess I am also wondering, you know I am kind of surprised to hear you say that you are more comfortable with the low end of organic 10% to 15% given that these issues you are talking about in Q3 and Q4 appear to be somewhat temporary, to be temporary, so could you explain that as just being more conservative after a couple of negative surprises or is it’s just something else going on?

[Jason Cohenour:]

Sure. So we’re not going to size with precision the automotive impact, so we’ll disappoint you there, on that one James. But you know it’s significant, it’s less than 10 million if that helps you but it was a significant factor in the guidance. And why are we more comfortable at the lower end of the range, you know I think we are just getting more précised on our view of how 2016 is shaping up, so you know this is the second half year color or view a little bit, well maybe but we’re just kind of telling you as we see it at this moment in time. So you know looking forward at our own internal forecast that’s what we’re seeing and we think that the best information we have at the most recent moment is the information we should be providing you guys and that’s what we’re doing, is just the way we see it.

[James Kisner:]

Okay, so for next year, you are saying kind of lower side, I mean some potential here for this and I know you are not going to guide ‘17 today but I am just wondering just giving these elephants you are bagging and you know might - I mean are you saying this long term rate is 10 now or you just saying just 16, if there is some potential free acceleration in ‘17?

[Jason Cohenour:]

You know when we see that it’s the way we see it in the short to mid-term, for you let’s call it 2016. Getting beyond 2016, I think it’s just getting now way out over our skies. And these our success in the connected car space, our success in energy that - those are good positive signs. Big automotive design wins have a long gestation period and try to make that pretty clear on the call as well. So this largest design win in company history, we’re not going to see revenue on until 2018, so there is a bit of a lag here. So when we talk about the way we see, what we see the range on growth rates I should put it, it’s really around our - it’s really around our short term view and think of that in the next 12 months.

[James Kisner:]

Okay. Just one last clarification on PCs, I think you said that you thought it would get better in the next few months, I mean is that based on what your customers are telling you or your own estimation of the end market, just clarify it a little bit and I’ll pass it. Thanks.

[Jason Cohenour:]

Sure. Yeah now that’s - it’s really it’s based on combination of factors, but the heaviest factor we take in when we do our internal forecast our inputs in the customer, it’s closest to the point of demand and the demand view that they see is returning back to normalize levels. So we don’t see - just to be clear, we don’t see a lot of growth out of that segment, but we do see a return to what we’ll call it normalized demand levels in the PC OEM segment.

[James Kisner:]

Great, thanks a lot.

[Jason Cohenour:]

You bet.

[Operator:]

Your next question comes from the line of Tim Quillin from Stephens. Your line is open.

[Tim Quillin:]

Hey good afternoon. Could you help us size up the mobile computing business as a percent of revenue?

[Jason Cohenour:]

Sorry Tim, we cannot. I’ll just - I won’t leave it hanging like that, but I’ll add, we’ve been very careful not to give precise visibility into revenue from each one of our segment, so we’re not going to start doing that today.

[Tim Quillin:]

Okay. And then in terms of the higher costs end of life component, can you just expand on exactly what that component is, why the - what that has changed recently or what that’s impacting margins more recently, why it’s going to persist through 2016? And what the gross margins, you talked about it quarter-over-quarter decline in gross margins, how significant of a decline, how of that did we already see in 3Q?

[Jason Cohenour:]

I’ll take the kind of the way we see it, our use of this component and why it happen, I’ll let Dave comment further on the cost impact. But - so what component, I don’t want to get too précised on what component it is, it’s an important component in some of our legacy products that usually you know that’s - things like that baseband processor as an example would be a significant component. And why are we seeing higher cost there. Well basically it’s - the price on that component has gone up because the component itself is going end of life and our view is the supplier isn’t terribly interesting in staying in that line of business. So unfortunately we are suffering a significant premium on that end of life component, it is designed into a number of our legacy products. What we do in response is designing that component out, but that doesn’t happen overnight. And so it’s going to take us a little while to get to a new redesign platform reset the cost of these affected products and take the new redesign products into market. So we’re going to have to live with the tax here for little while until we get those redesign products into the market. So Dave you want to comment on impact?

[Dave McLennan:]

Sure, Tim, it’s Dave here. So you know in the four quarter we began to see this impact. It’s wasn’t a full quarter impact, because we still have some inventory of the pre end of life components Q3, so we’ll see the full impact of that in Q4. And we have in terms of size of the color impact on gross margin, it was certainly less than half of the reduction in the gross margin we saw sequentially from Q2 to Q3.

[Tim Quillin:]

Okay, Dave will I have you, do you have the numbers in front of you to quantify the impact of currency moves particularly the rise of the U.S. dollar on revenue, gross profit and earnings?

[Dave McLennan:]

Sure. So maybe I’ll do that on a year-over-year basis, Tim. So, on a year-over-year basis, Q3 ‘15 compared to Q3 ‘14 had about a $1.2 million negative impact on revenue and about a $700,000 negative impact on gross margin. And then at the operating income line, it had about a $3.3 million positive impact on earnings from operations.

[Tim Quillin:]

Great, do you have that year-to-date I am sorry to ask that, but if you have that year-to-date that would be great?

[Dave McLennan:]

You know I have that on a year-over-year basis, I don’t have it on the -

[Tim Quillin:]

Dave, it’s no problem, I’ll get it offline. Thank you.

[Operator:]

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

[Todd Coupland:]

Yeah, thanks, good evening, everyone. First thing on the expenses, what should the operating expenses be in Q4?

[Dave McLennan:]

Well that certainly get a clop thought from Q3, we had some timing issues on the R&D side, we have full quarter of MobiquiThings OpEx and Accel adding to the quarter as well. You know I would say with a fully loaded cost structure were around $42 million.

[Todd Coupland:]

You say 42 million?

[Dave McLennan:]

Correct.

[Todd Coupland:]

Okay. Thank you. And just conceptually, if this automotive headwind clears as you expect, would that allow for sequential growth into Q1 or you still suffered seasonality from this more record level?

[Jason Cohenour:]

Sure Todd, I’ll take that. I could be careful not to kind of open our guidance window here another quarter. But I will say looking forward to 2016 full year; we expect to return to year-over-year growth. And I also point out that well our Q4 guidance represents a pretty weak quarter. So I would certainly expect an uptick into Q1.

[Todd Coupland:]

Okay. And put that half and the auto issue would need to clear out?

[Jason Cohenour:]

Yeah, it will.

[Todd Coupland:]

Okay. And stepping back bigger picture, for the large automotive OEM the largest that you won, can you talk about either geography or application that that’s being primarily useful?

[Jason Cohenour:]

Well it’s a - it is - it’s going into a box that would common maybe call the TCU, Telematics Control Unit, it is a 4G implementation for that Telematics Control Unit. And the OEM is quite large and they sell products all over the world. And [Technical Difficulty]

[Todd Coupland:]

I think you said 2018, when it starts to contribute. I want to guess with automotive design cycle is a longer cycle, but I have been impressed that in electronics that might be shorter, is that incorrect or should we anticipate that auto wins will generally take a couple of years to get going?

[Jason Cohenour:]

Yeah, they generally take couple of years to get going, that’s kind of - its stander fair in automotive land.

[Todd Coupland:]

Okay, that’s great, thanks so much.

[Jason Cohenour:]

In fact, this would be considered a very aggressive schedule.

[Todd Coupland:]

Okay, thanks very much.

[Jason Cohenour:]

Sure.

[Operator:]

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

[Mike Latimore:]

Great, thanks. Yeah, so you said your largest design win, I guess in terms of sort of all the design wins in the quarter was total value of that at the record level as well?

[Jason Cohenour:]

Yes, it was, Mike.

[Mike Latimore:]

Okay, great. And then on the auto business, the auto continue their orders like, or there other auto companies that are on the sort of maybe older order pattern and will move just in time as well or to reflect actual demand or I guess how to take it other car companies make the shift?

[Jason Cohenour:]

No, I think you know - I think we’re looking at a fairly unique situation here, Mike, and again I’ll kind of turn back the clock and recall, we had some component supply issues in the early part of the year. And I think I spoke to few of our few of our key customers this one include and nobody - and automotive going line down as its taboo. And so given the channels we had with that particular component and thus our module supply to this customer are read now and hindsight is that they overcorrected a bit and you know wanted to make sure that they had ample supply that including upside supply. So I believe this is what we’re seeing I think now. After a lot of work, we got a pretty good view of what normalized demand is normalized demand from the auto OEM and so we got a pretty good idea of what you know how the order cycle patterns going to change to meet that demand and how do size it. So anyway pretty unique to these customers are read and getting back to normal in Q1 is our read.

[Mike Latimore:]

Okay. And then I guess last lastly, did you think the enterprise gateway growth sequentially again in the fourth quarter?

[Jason Cohenour:]

You know we’re not ready to say that at this point in time. I think we had a pretty nice popup in Q3 in enterprise gateways had help from a pretty large deal by the way most of which shipped in Q3, so maybe a little higher than normalized. I think if you drew kind of a diagonal line from you know Q1 through Q4, you have a better trend line. So we’re not ready to say that we expect gateway revenue to be up again sequentially. But new product launch, one new product launch in this quarter new sales guys starting this quarter, new sales leadership starting this quarter, so I think the trajectory is good, the activity is good and I think we’re putting the resources around it and the products around it that will require to drive sustained growth in that category.

[Mike Latimore:]

Okay. Thanks.

[Jason Cohenour:]

Sure.

[Operator:]

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

[Steven Li:]

Great, thank you. Jason, a couple of things, on Iskraemeco, their press release says most of their leaders would be on CDMA networks, so could you clarify, so your AirPrime HL Series also cover CDMA and not just GSM?

[Jason Cohenour:]

That is correct. It’s kind of a special situation. This is - it’s actually a CDMA 450 network that’s being deployed by the utility Alliander sort of unique. And interestingly, we’ve had - we’ve got the capability to spin an existing product to meet the 450 requirements and that’s what we’re doing. So it is a CDMA version of the HL that we’re going to be shipping to Iskraemeco.

[Steven Li:]

Alright, great. And then on the guidance, what do your FX, you think just coming spot rate, so is it the average quarter when you said your guidance? Thanks.

[Dave McLennan:]

Steve, it’s Dave here. Yeah, we haven’t done there, we’re using current stop rates as a proxy for the quarter.

[Steven Li:]

Alright, great, thanks.

[Operator:]

[Operator Instructions] Your next question comes from the line Richard Tse from Cormark Securities. Your line is open.

[Unidentified Analyst:]

Hi guys, it’s actually Andrew in place of Richard. Thanks for taking my question. I just wanted to build on the Enterprise segment, I know you guys made the management changes and you talked about building in sales capacity. When do you expect that sales capacity to be finished and is it possibly done by now?

[Jason Cohenour:]

I’ll take that Andrew. So we have added already and we are finished. So our view is that’s a line of business that it’s going to require more sales capacity, so we’re going to continue to make targeted sales capacity investments both around gateways and Cloud and Connectivity Services.

[Unidentified Analyst:]

Okay. And then my last question here, most have been asked. Is around M&A, you guys have acquired string of acquisitions throughout the year and I can imagine that you integrating those. So how aggressively do you expect to pursue your M&A pipeline over the next quarter or two or is it more of a full year guidance that you’ll continue to look for acquisitions?

[Jason Cohenour:]

Yeah, we’re still - I would say we’re still active. And you are right, we’re busy on integration by the way, very buys on integration and these are pretty complicated integrations with teams and platforms mainly around our Cloud and Connectivity Services of course. So that’s taken significant bandwidth. Having said that you know there is some interesting opportunities that we’ve seen so we’ve got an active funnel, maybe it’s quite as active as it was a year ago, but the funnel is still active, we’re still engaged in evaluating opportunities and meeting with manage team. So you know we’ve got to be careful obviously with manpower capacity and financial capacity on some of these opportunities, but we have to take a hard look if they fit strategically, if they are accretive to earnings and enhance our market position, we’re going to take a hard look.

[Unidentified Analyst:]

That’s great. And just lastly, is services still the focus when it comes to M&A?

[Jason Cohenour:]

Yeah, as we’ve said, it’s really around what we now call Enterprise Solution, so there is both services focus, I would we’re most proactive around services, we’re also proactive around high margin gateways. Both of those areas are interesting and we see opportunities in both of those areas. And in the OEM business, where we’ve got a big footprint, strong leadership position, I’d say we’re being more reactive.

[Unidentified Analyst:]

Great, I appreciate guys to taking my question.

[Jason Cohenour:]

Sure.

[Operator:]

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

[Paul Treiber:]

Thanks very much and good afternoon. Just in regards to the larger design wins that you are seeing and that once it go it you know 2018, 2019, you generally speaking when you look at forecasting them, how are the expected gross margins, how do they compare to the current gross margins in your OEM business?

[Jason Cohenour:]

That’s great question. So, well first of all, largely depends on the volume Paul, and as we’ve said with these large volume deals such as the one we won in Q3, we weighted at a gross margin percent, well we’ve won this at a gross margin percentage that’s certainly is below the corporate average, below our OEM solutions business unit average, that’s the tough news. The good news is we have three years to figure out how to drive cost out and before launch and then another four to five years to continue to mind cost out of the platform and expand gross margin. So that’s normally how these big volume deals work, so how they’ve worked in the past by the way and our automotive deals that we’re shipping on in volume today started the same way with significantly lower gross margin at the start of production and now we’ve driven gross margin up to significant higher level. So it’s - I would say it’s normalized pattern.

[Dave McLennan:]

And Paul, it’s Dave. The only think I would add is, as you get more of these, you also benefit from you know scale as well which gives a little helping into gross margins.

[Paul Treiber:]

So when you are bidding on these and you are definitely taking in a relatively - your track record on cost reductions into account?

[Jason Cohenour:]

Well, definitely, definitely.

[Paul Treiber:]

Okay.

[Jason Cohenour:]

You know some critical components you have to have an anchor points right. In other words, you know the critical component supplier has to be right next to you with respect to price on year one and then price over the life of the program and there is a bunch of other components that we need to basically work every day, right.

[Paul Treiber:]

Okay, good to understand. Just moving on to ASPs in 2016, so with 4G coming up in 2015 and I know that was definitely help to ASPs, how do we think about ASPs in 2016 blended ASPs?

[Jason Cohenour:]

You know the lot of moving pieces Paul, but I’d say right now our view on blended ASP should be fairly, fairly stable. And I say that before you know 4G is growing as a percentage of our revenue and you know pretty early in ‘16, a lot of our - well there is a change that a lot of our 2G business will be replaced with LTE Cat 1 which is it’s a lower end 4G but still higher ASP than 2G. So there is a lot of moving pieces with respect to the blending on ASP. So right now our view is we expect certain degree of stability.

[Paul Treiber:]

Okay, thank you, I’ll leave it then.

[Jason Cohenour:]

Sure.

[Operator:]

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

[Jason Cohenour:]

Great, thanks Scott. And with that I’ll just thank everybody for joining today’s call. And as usual, if there is follow-up questions management is available here in our Richmond Headquarters. Scott, thank you. You can now terminate the call.

[Operator:]

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