Sierra Wireless, Inc.
Q4 2015 Earnings Call Transcript

Published: 5 Feb 2016

[Operator:]

Good afternoon. My name is Tracy and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Wireless Q4 2015 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. David Climie, Vice President of Investor Relations, you may begin your conference.

[David Climie:]

Thanks, Tracy and good afternoon, everybody. Thank you for joining today's conference call and webcast. With me today on the call is Jason Cohenour, our President and CEO; and Dave McLennan, our Chief Financial Officer. As a reminder, today's presentation is being webcast and will be available on our website following the call. Today's agenda will be as follows. Jason will provide a review of full year 2015 and fourth quarter results; Dave will provide a more detailed overview of our financial results, as well as a review of our guidance for the first quarter of 2016. And following that, Jason will provide a brief summary and then we'll finish with a Q&A session. Before we get started, I will reference the company's Safe Harbor statement. A summary of the 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 and full year 2016 and commentary regarding the longer term outlook for our business. Our forward-looking statements are based on a number of material assumptions, including those listed on Page 2 of the webcast presentation, 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 our other regulatory filings. This presentation should also be viewed in conjunction with our press release. With that, I will now turn the call over to Jason Cohenour for his comments.

[Jason Cohenour:]

Thank you, David and good afternoon, everyone. I'll speak first about highlights for the full year 2015 and then move to the fourth quarter results. In 2015 we achieved record revenue of $608 million, an increase of 10.8% compared to 2014. Our OEM Solutions segment was the key driver of 2015 organic growth with strong contribution from the automotive segment as connected cars continue to gain momentum. Energy as utilities continue to focus on capturing operating and capital efficiencies from smart metering and smart grid deployments. And enterprise as 4G LTE is enabling a migration away from traditional wired broadband connections for distributed locations such as retail stores and ATM's. In addition to solid organic growth from OEM we had significant revenue contribution from acquired companies over the course of the year. Our operating leverage also improved last year as adjusted EBITDA increased 21% compared to 2014 and our non-GAAP earnings from operations increased 42% to $32.4 million. In 2015, we had very strong OEM design win activity securing just over $1 billion in new design wins significantly higher than we achieved in 2014. This indicates a growing number of IoT applications across different market segments and provides strong support to our expectation for future revenue growth. While delivering solid full year operational results, we are also active in strategic M&A. In 2015 we completed three key acquisitions that scale our Cloud and Connectivity line of business. These acquired companies provided an integral part of our device to cloud strategy significantly strengthening our ability to provide fully integrated solutions that enable our customers to easily connect the machine and send their data to the cloud and to analyze and manage their deployments. We believe that our device to cloud approach to the market is unique. That it enables us to bring more value to our customers, to capture more and higher value revenue and to create long-term value for shareholders. Moving to the fourth quarter of 2015, revenue in the fourth quarter was $144.8 million compared to $149 million in the same quarter last year. Q4 revenue was below our expectations mainly as a result of unexpected demand softness at some of our OEM customers. Lower revenue drove lower profitability in the quarter as well. Non-GAAP earnings from operations were $3.3 million in Q4 compared to $10 million in Q4 of 2014 and adjusted EBITDA was $6.3 million compared to $12.7 million in Q4 of 2014. Despite the disappointing operational results in the quarter, we continue to see good new customer acquisition success across all our business segments. And on the subject of business segments, back in August you may recall that we announced an organizational realignment to drive focus and growth at Enterprise Gateways solutions and in our expanding Cloud and Connectivity line of business. This realignment has matured and we're now operating these lines of business as business units under dedicated leadership. Accordingly, as of October 1, 2015, we commenced operating our business in three reportable segments as opposed to the previous two. I'm now going to provide some more clarity around the new business segmentation. A key driver of our move to three reportable segments was the rapid scaling of our Cloud and Connectivity business, mainly as a result of the three managed connectivity acquisitions made during 2015. These three acquired companies Maingate, Accel Networks and MobiquiThings have been combined with our legacy AirVantage cloud and team under the leadership of Emmanuel Walckenaer. Active integration of the teams and platforms is well under way. From a product standpoint the mission of this business segment is to bring to our customers a fully unified Cloud and Connectivity experience for connecting and managing Internet of Things devices and building Internet of Things applications. To drive growth, this business will leverage its own dedicated Cloud and Connectivity sales teams as well as the sales teams of our OEM and Enterprise business units who also have significant exposure to Cloud and Connectivity opportunities. In previous periods, the revenue from Cloud and Connectivity was reported under the Enterprise Solutions segment. The new Enterprise Solutions segment and business is led by Jason Krause. This line of business is focused on developing and selling market leading intelligent gateways and related application solutions to the mobility, industrial and enterprise markets. Our OEM business segment is unchanged and is led by Dan Schieler. This line of business is focused on developing and selling market leading embedded wireless modules and related software tools to global OEMs. In our earnings release and also in our securities filings you'll see that we're now providing financial information at the revenue and gross margin level for each of these segments. I'll now talk briefly about the fourth quarter in each of the segments. Revenue in our OEM Solutions business was $121.5 million in Q4, lower by 6% compared to the same period last year. OEM revenue also declined sequentially from Q3. Some of the sequential decline was expected and some was not. As expected the large automotive customer we referred to in our Q4 guidance was lower sequentially. Also as expected revenue improved sequentially from mobile computing, but it's still on its way back to normalized levels as we continue to navigate the PC industry's transition to the new Intel Skylake platform. In addition to these items we experienced some unexpected demand softness from a small group of OEM customers across different segments. We do not believe that this softness represents any share shift. However we do believe it's likely reflective of some caution on behalf of customers given the current uncertain economic environment. Notwithstanding current weakness in this line of business and an uncertain economic environment, we're very optimistic about the mid and long term outlook for OEM Solutions. During 2015 as I mentioned we secured just over $1 billion in new design win life time value. We expect several of these new programs secured in 2015 and others that were acquired in 2014 to begin the contribute to revenue growth this year. We also continue to see solid design win activity in Q4, securing key design wins across the number of segments including an important win at Dell, for our latest LTE advanced modules and our first announced LTE Category 1 device win with Maestro, a long time OEM customer. Moving to our new Enterprise Solutions segment, which once again excludes Cloud and Connectivity now. Revenue in our Enterprise Solutions business was $16.5 million in Q4 and gross margin was solid at 53.6%. While Q4 revenue was lower year-over-year our enterprise business continued to improve compared to the first half of 2015. Enterprise revenue in the second half of 2015 was up 19% compared to the first half. Second half drivers included large deployments with new public safety customers as well as the launch and sales of our new AirLink RV50 gateway for industrial applications. The RV50 is our latest 4G gateway and supports industry-leading power management, dual SIM capability and is cloud managed using our AirLink management application hosted in our AirVantage cloud. New customer acquisition activity also continued to be strong in Q4 as we secured new deployments in the public safety, transit and energy segments. We're heartened by our second half progress in enterprise and expect to see a return to year-over-year growth in this line of business as we continue to launch new market-leading products and make targeted investments in sales and channel capability. Moving to the new Cloud and Connectivity Services segment, revenue in our Cloud and Connectivity business was $6.8 million in Q4 with blended gross margin of 41.4%. Note that revenue from our AirVantage cloud just recently achieved gross margin breakeven. So as we scale this business we expect gross margin to improve. On a sequential basis this revenue which is comprised mainly of recurring service based contracts benefited from a full quarter of revenue contribution from MobiquiThings, which we closed in September of 2015. We now have a fully integrated team comprised of Maingate, MobiquiThings, Accel and AirVantage team members and there's a lot of work to do. The team is fully engaged in implementing a single unified platform, so that our customers can manage their devices, global cellular subscriptions and machine data through a single portal, enabling them to deploy Internet of Things applications faster and more cost-effectively than ever before. We expect to launch the first release of our unified platform in the coming months. Meanwhile we're continuing to expand our Cloud and Connectivity customer base and have secured several new customers across many segments. I'm also pleased to report the collaboration amongst our business unit sales teams is working well, with many of our new Cloud and Connectivity opportunities originating in our OEM and Enterprise business units. We're also putting some of the unique assets and technology we recently acquired to work in bolstering our market position. Based on patented technology acquired with MobiquiThings, we're soon to launch the Sierra Smart SIM. Our Sierra Smart SIM supports multiple mobile networks and can automatically select the appropriate network to connect to anywhere in the world, based on configurable parameters including quality of service. Our Smart SIM enables a truly differentiated offering that provides our customers with improved flexibility and management for their connected devices from a single platform. I believe we've now a very strong business platform to drive our device to cloud vision and strategy. We're now providing and capturing more value on many of the new device deals we secured. I'm confident that this trend will accelerate and lead us to a favored market position while also enabling us to drive more recurring revenue and shareholder value over time. Let's take a moment on strategy. Our divestiture of the AirCard business in 2013, our subsequent acquisitions, our organizational realignments and our organic investments are all aligned with the execution of our strategy to lead in device to cloud solutions for the IoT. As we begin 2016, we are now better positioned than ever before to pursue and secure this vision. We're the clear world leader in intelligent cellular devices for the IoT and we continue to innovate our new Air interface protocols, embedded application frameworks and segment driven features. Our devices are pre-integrated with our AirVantage cloud, enabling deep device analytics, monitoring, alerts and over the air upgrades, as well as providing a secure pipe and warehouse for customer machine information that enables them to make better decisions to be more efficient and to compete more effectively. And now we've added differentiated global connectivity, enabling us to provide the highest available quality of connectivity service almost anywhere in the world, while also giving us the tools to manage our underlying cost. Together these critical elements form an elegant secure chain from our customer's machine to their enterprise systems, providing almost everything they need to rapidly and cost-effectively build, deploy and manage their IoT applications. This enabled us to capture a very long term sustainable position with our customers and to capture recurring revenue over many years. I believe were uniquely positioned. We have the pieces, the capital, the talent and the will to lead this market. I also believe that we're on the path to significant value creation for our investors. Let's take a minute now and tell you how I think we are going to do that. We believe our strategy is sounding and compelling. Notwithstanding the current softness in our business we know that the execution of our strategy needs to drive sustainable revenue growth and expanding profitability to create shareholder value. We intend to do just that. Our goals are simple, over the next several years we intend to grow our business to over $1 billion in revenue and beyond. We intend to accomplish this through a combination of solid organic growth in each business segment and M&A. As we grow our business we also intend to drive our gross margin accretive mix shift as growth from Enterprise and Cloud and Connectivity outpaces growth from our OEM Solutions business. Our growth goals and mix shift goals will drive our organic and inorganic investments and when we achieve $1 billion in top line, we expect revenue from higher margin Enterprise Solutions and recurring Cloud and Connectivity services to expand from 14% of consolidated revenue today to approximately 30% of consolidated revenue. We believe this will enable us to derive consolidated gross margin exceeding 35% and an operating margin above 10%. And we believe that achieving this goal will create a clear sustainable leader in device to cloud solutions for the IoT and drive significant returns. I'll now turn the call over Dave McLennan, who'll provide more detail on the Q4 financial results and guidance.

[Dave McLennan:]

Great. Thank you, Jason. And good afternoon everyone. Please note that we report our financial results on a U.S. GAAP basis. However, we also present non-GAAP results in order to provide a better understanding of our operating performance. As a reminder, our definition of non-GAAP and a full reconciliation between our GAAP and non-GAAP results is provided in the press release. Moving on to a summary of the key financial metrics for the year and the quarter, Q4. Revenue in the fourth quarter was $144.8 million, adjusted EBITDA was $6.3 million, non-GAAP earnings from operations were $3.3 million and non-GAAP net earnings were $2.5 million or $0.08 per share. Note that we closed the acquisition of MobiquiThings in early September, so our consolidated Q4 results include a full quarter of revenue contribution and operating expenses from this business. Comparing our Q4 results to guidance, revenue in the fourth quarter was $144.8 million below our guidance range of $148 million to $151 million. As Jason mentioned and as expected OEM sales to a large automotive customer were down in Q4 and sales to PC OEM customers were slightly up relative to Q3. Additionally results from our Enterprise Solutions and Cloud and Connectivity Services segments were in line with expectations. What was not contemplated in our guidance and consequently drilled the lower than expected revenue in the quarter was demand softness from a small group of OEM customers across different segments. We do not believe this represents a share shift but rather is reflective of some caution on behalf of customers given the uncertainty in the economic environment. Q4 non-GAAP gross margin was 31.2% which was as expected and was lower sequentially by approximately 60 basis points compared to Q3. This decrease was driven by a full quarter impact of higher costs for an end of life component using some of our legacy OEM products and that's something we talked about on the previous Q3 earnings call. We expect this to be a factor through 2016 as we transition out of this component. Another factor was the impact from highly -- from higher early run manufacturing costs associated with a number of new product launches. And we also saw some natural ASP aversion as some products matured. This was partially offset by associated product cost reductions. Non-GAAP operating expenses in the quarter including a full quarter of MobiquiThings expenses were $41.9 million. This was up sequentially from Q3, however slightly lower than expected. The lower than expected OpEx in the quarter was a result of timing of certain sales and marketing and R&D expenses. The combination of lower than expected revenue, partially offset by lower operating expenses resulted in fourth quarter profitability that was below the low end of our guidance expectations, with non-GAAP earnings from operations of $3.3 million and non-GAAP net earnings of $2.5 million or $0.08 a share. Looking at some of the year-over-year full year results. At $607.8 million 2015 revenue was up $59.3 million or 10.8% compared to last year. This was led by growth in our OEM Solutions segment which grew by 10% year-over-year. Growth in this segment was driven by automotive, networking and energy markets. In addition to growth in our OEM segment we also benefitted from $20.1 million of revenue from acquired businesses during the year as we put our capital to work adding managed Connectivity Services businesses. Profitability was also improved in 2015 compared to 2014. Adjusted EBITDA increased by 21% to $42.9 million or a margin of 7.1% and non-GAAP operating income increased by 42% to $32.4 million or a margin of 5.3%. Looking at the same metrics for the fourth quarter compared to a year ago, total Q4 revenue of a $144.8 million was lower by 2.8% year-over-year. The primary driver of this decline is the weaker quarter we experienced in our OEM Solutions segment, which was lower by 6% year-over-year, partially offset by revenue from acquired businesses in our Cloud and Connectivity Services segment. Lower top line revenue combined with thinner gross margins resulted in reduced EBITDA and operating income in Q4 compared to a year ago. Clearly we had a weaker than expected quarter, however in the context of the full 2015 year, we had a solid year in which consolidated growth was 10.8% and OEM Solutions growth was 10%. We had solid cash flow from operations during the quarter and our balance sheet remained strong. During the fourth quarter the business generated $13.1 million in cash from operations. CapEx was $5 million, resulting in free cash flow of $8.1 million in the quarter. We utilized the net $2.6 million for other items such as the final working capital true-up for the Accel and MobiquiThings acquisitions and the purchase of shares for our RSU program. In total this resulted in a $5.5 million increase in our cash balance to end the quarter at $93.9 million and the company remains debt free. Moving on to guidance for Q1 and for the full year 2016, we're moving to a new guidance format whereby we will provide full year guidance in addition to commentary on the coming quarter. For the first quarter of 2016, we expect revenue to be in the range of $135 million to $145 million. This revenue outlook is flat to lower sequentially because of timing of orders from a large automotive customer, the impact from our mobile computing customers continuing to navigate the Skylake processor transition and some demand softness in the OEM Solutions at select customers, which we believe reflects caution on behalf of customers given the uncertain economic environment. In the first quarter we expect non-GAAP EPS to be slightly positive to slightly negative. For the full year of 2016 we expect revenue to be in the range of $630 million to $670 million. And despite a slow start in Q1 we expect our business to gain strength in Q2 and over the course of the year driven by contribution from new OEM customer programs launching throughout the year, the favorable impact of new product launches and targeted sales investments in our Enterprise Solutions segments and steady growth in our Cloud and Connectivity Services segment. In 2016, we expect non-GAAP EPS to be in the range of $0.60 to $0.90 per share. We also received approval today from the TSX for a normal course issuer bid commencing February 9th. This will allow us to repurchase up to approximately 3.1 million shares for cancelation, representing up to 10% of our public float over the coming 12 months. And we certainly see this as an interesting value creation opportunity. With that I'll turn the call over to Jason to sum up.

[Jason Cohenour:]

Thank you, David. So to summarize, we are the clear leader in cellular connectivity for the Internet of Things. And during 2015 we made significant progress in further expanding and strengthening our position; completing three strategic acquisitions in cellular connectivity, rapidly expanding our position in the value chain, realigning our team to drive focus and growth and making significant organic investments. Our three business segments now expose us to a much larger and growing market opportunity. In the aggregate industry analysts predict that our three segments will represent a $20 billion market in the year 2020. We are better positioned now than ever before to capture a significant share of this opportunity. Operationally we delivered solid year-over-year growth in revenue and earnings from operations in 2015. And while the second half of the year did not play out as we wanted or expected, we're still very optimistic about our mid to long-term outlook. Notwithstanding a slow start to 2016 and an uncertain macro environment, we expect our business to gain strength in Q2 and over the course of the year. Our optimism is back by key visible drivers including those mentioned by Dave, the expected launch of many new OEM programs, a return to year-over-year growth in Enterprise Solutions, steady growth in Cloud and Connectivity and targeted investments in sales and marketing capacity. As Dave mentioned, we plan to be in the market soon, repurchasing our shares as we see a very interesting value creation opportunity at this time. Notwithstanding our planned return of capital, we still expect to stay active in M&A to accelerate our strategy and to drive growth. Longer term, we are very focused on capturing a big part of the $20 billion opportunity, on driving sustain revenue growth to $1 billion and beyond and to driving our gross margin accretive mix shift and expanded operating earnings. We believe that this formula will drive significant value and a strong return for shareholders. Tracy that 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 with Ladenburg Thalmann. Your line is now open.

[Daniel Amir:]

Thanks a lot and thank you for taking my call. I guess, there is a bigger issue here. I guess, in the prepared comments largely -- I am playing devil's advocate, you're highlighting that this was a great year for you but this is the fourth consecutive quarter that you have actually missed and guided lower. So, the question is really is there something bigger going on here that is not necessarily market related but more that you are losing share in the market? And then follow-up on that, what gives you the confidence that given the Q1 here on the lower base you're looking at a pretty big snap back here starting in Q2 into the second half to achieve your mid-range of 7% growth?

[Jason Cohenour:]

I don't know if we said it was a great year, I think what we said was we had a solid year and it didn't end the way we wanted it to. We had a -- we clearly stated that we had a weak second half. And with respect to misses yes, we have missed our own guidance in the last two quarters and it probably goes without saying we misread expectations. But with respect to guidance we missed that in the last two quarters. So, what gives us confidence? I -- Dan and I shared with you what we think is happening. Our business is clear by the way in 2015, that we lost share in Enterprise Gateways I think we've been very consistent on that. We've made significant changes around that line of business, including new sales leadership and new business unit leadership and additional investments. So, we are confident based on our recharged product line up there, new sales leadership plus additional sales capacity that that business returns to year-over-year growth. And yes that does reverse share loss that occurred in 2015. And in OEM our position continues to be strong. We have conviction that we have not witnessed share loss in this weaker second half, but rather a couple of big customer, individual situations combined with some weakness from a broader set of OEM customers. Our view is that that we have not loss share at any of those customers but rather there's additional caution there and with respect to the automotive customers some order timing patterns that are causing lower orders at this point in time. So, we believe that comes back to normalized levels. We believe PC OEM and automotive come back to normalized levels. The channels that are displaying some softness and weakness now, we'll have to see how that plays out, but on top of what we see today in our business we believe we're going to launch 40 plus new programs over the course of the year in OEM. And we believe that's the stuff of driving growth starting in Q2 and beyond.

[Daniel Amir:]

Just a clarification, so the macro weakness that you're seeing right now is largely in some of these specific OEM Solution customers, it's not really in the automotive or mobile or in the Enterprise Solutions area?

[Jason Cohenour:]

Well when I say -- remember when I say OEM that's quite a fragmented area of our business and it serves many segments. So, what we were careful to do is call out a single automotive customer right, and then we had a weaker -- two weak quarters now with this single automotive customer as they adjust their ordering patterns is our read on the situation. We've got this PC OEM transition, which we saw improve in Q4 and we think that returns to normalized demand levels starting in Q2. And then we have a group of smaller customers who were just more cautious, Daniel, and our view is they are not ordering from anybody else. That's not practical as you know. Once an OEM design is in your embedded module it takes many months to design you out. What we think we're seeing there is some softness in demand on part of their customers and that's affecting their ordering patterns on us. And Enterprise that played out as we expected and in Cloud and Connectivity that played out as we expected.

[Daniel Amir:]

Great thanks a lot. I will get back into the queue, thanks.

[Operator:]

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

[Thanos Moschopoulos:]

Jason, just to be clear, in terms of the OEM customers we saw weaker demand. Are there any specific themes that you can call out as far as [B2C] verticals or the geographies or was it sort of a broad assortment of customers?

[Jason Cohenour:]

It was a small group, Thanos, but obviously they're a group that has impact to our top line. And with respect to the segments there was no theme. They were spread across the few segments and with respect to geography they were spread across different geographies as well. So, there was no theme to point to that's as a certain segment in a certain region was weak. It was a little bit broader than that.

[Thanos Moschopoulos:]

In terms of your OEM pipeline has there been any hints of caution on that front? I know you mentioned that you had a good quarter for design wins. As you look at the current pipeline has that at all been affected by macro caution or is that sort of more consistent with historical trends?

[Jason Cohenour:]

That's been consistent. Design win activity has been very consistent and that's what gives us optimism for the balance of the year. We've got -- we've been talking about the strength of our design win momentum for several quarters now and we believe that in 2016, we've got about 40 programs poised to launch over the course of the year. That's all new business, right. And now at the end of the day those 40 new programs have to have success in the market of course for us to get additional orders. But our view is that's a result of design wins significant earlier -- significantly earlier, significant investment on the part of the customer to design our solution then and those programs go to launch this year. And I might as well say that's what gives us optimism for the outlook for the balance of the year.

[Thanos Moschopoulos:]

Great. One last one for Dave. On the OEM business, there is lot of moving parts in the gross margin this quarter. Is it to assume that gross margins will creep up a little bit in Q1 given some of the organics you mentioned or will it would be more consistent with Q4 levels? Thanks.

[Dave McLennan:]

Yes. I would expect some modest improvement, Thanos. You are right, I said a couple of drivers of the declining gross margin and I think we've got some visibility on some modest improvement in those items.

[Thanos Moschopoulos:]

Perfect. I'll pass the line. Thank you.

[Operator:]

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

[Mike Walkley:]

Hey, thanks. Jason have you seen any delays from your customers with your LTE Cat 1 coming out and how is Sierra Wireless positioned for this new technology?

[Jason Cohenour:]

I think you are referring to a potential technology over hang, is that putting the brakes on current buys and our view on that is probably not Mike. If our customers have demand to satisfy they've got to satisfy it. They typically can't wait for another technology [rev]. However we do see a lot of activity of course in LTE Cat 1 and beyond, LTE-M is starting to gain some momentum now as well. So we have one announced LTE Category 1 design win with a long time customer Maestro. We have secured others that we haven’t announced and we do expect to see some of our customers begin to transition to the newer Air interface protocols including Cat 1.

[Mike Walkley:]

Great. And then just with the tougher macro to start the year are you seeing any change in pricing pressure and giving your mix how do you see maybe ASP trends for the OEM Solutions business in 2016?

[Jason Cohenour:]

I don’t -- as a result of the macro environments, we don’t view that as a factor driving ASPs down anymore. We are seeing some natural ASP erosion as products mature. You recall in past periods the ASPs and OEM have been remarkably stable as a family, mainly because of a rapid mix shift to higher ASP products for 4G and that mix shift -- our view is that mix shift will slow a bit here and will begin to see more natural ASP erosion in OEM. But our view is that that the pricing environment is not any more intense than it has been in the past and we don’t believe that the macro environment is putting additional pressure on ASPs.

[Mike Walkley:]

Great. And just one last question for me to help with the modeling. It seems like to get to your guidance you need 10% plus sequential growth throughout the year. Is it relatively linear based on these programs and your visibility of things getting back to normal in Q2 kind of a natural step up or is it more of a recovery in Q2 and slow growth [soft] there or back half weighted? How do you see kind of the slope of the year as you just gave this annual guidance?

[Jason Cohenour:]

Well. I think we want to be careful there, Mike. As one of the reasons -- obviously on a short term -- from a short term guidance standpoint we have been bitten here twice in a row and as you saw for Q1 we gave a wider range because we're -- we want to play it safer. And in order to help people in their modeling we've given annual guidance. So beyond that we are going to be pretty cautious to give you a specific information as to the shape of the ramp. Obviously in Q1 we are starting to slow. So you can -- all that growth is going to be layered across three quarters. And beyond that we can't provide any additional help there Mike.

[Mike Walkley:]

Okay, thank you.

[Operator:]

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

[James Kisner:]

Thanks. So I just wanted to clarify I think you said gross margin would be up modestly sequentially. Is that just driven by mix then [bless me] then OEM is going to be down with Enterprise or is that kind of a fair assumption?

[Dave McLennan:]

James, this is Dave here. No what I said was that we do expect to see some modest improvements relative to Q4 in gross margin as we step into 2016 here.

[James Kisner:]

Why would that be though, I mean, I'm assuming that this is driven by mix? I mean your revenues are down sequentially and so presumably it's not operating leverage there. Is it just driven by -- and again is it so your OEM mix is [struggling] out or is there something else that I am missing?

[Dave McLennan:]

A couple of things. One is certainly mix that has a factor particularly among our business units. But I also said that we had an usual number of new product launches, many of them in OEM and in the early stages of a new product out from a manufacturing perspective, they don’t necessarily hit their target margin levels. So as we get some more maturity on those products we would expect those newer products to see some lifting gross margin.

[Jason Cohenour:]

I would also say we do expect to see our higher margin businesses over the course of 2016. We expect to see our higher margin businesses grow faster than the OEM business.

[James Kisner:]

Okay. Including Enterprise, I guess?

[Jason Cohenour:]

Yes, correct.

[James Kisner:]

So, again -- so looking at geography again for full year '16, what are you assuming in that guidance for that sort of troubled automotive customer and about the PC market in general?

[Jason Cohenour:]

We expect PC OEM to get back to normalized demand levels, reasonably soon. And we expect the large automotive customer that we've been referring to get back to normalized levels as well. Although we have risk adjusted that a little bit given the last two quarters with that customer.

[James Kisner:]

Okay. And just one kind of just housekeeping, you guys have given 2G, 3G, 4G and mix in the past, so I was hoping you might do that for us again.

[Dave McLennan:]

Sure, so it's Dave, James. In the fourth quarter we were -- 18% of our revenue mix was 2G, 33% was 3G, 4G was 40% and other was 9%.

[James Kisner:]

Okay. Thanks very much.

[Operator:]

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

[Rajesh Ghai:]

Yes, thanks. I had a question on the PC OEM segment, which has been weak and you mentioned Skylake transition kind of [carving] the ball in that segment. Given that the laptop segment and the laptops in general are becoming more like tablets, what is the risk that the PC OEMs do a form factor change that will move away from wireless modules onto just yours to maybe something similar to what you have used in tablets and cell phone such as the SIM?

[Jason Cohenour:]

So by the way, our devices do come with a SIM. So I think what you are probably referring to is an board implementation. And Rajesh from our customer standpoint, the customers we serve, they think modular. I honestly don't think that -- we don't view that -- we don't see that changing in a material way and we're not only designed into traditional clam shell based designs. We're also designed into tablets from those manufacturers. And the laptop guys have -- the mobile computing guys have traditionally thought this way because they often have a broad line of products. They have to the agile. So modulary fits their requirements well. And so our read is even if there is a meaningful form factor migration, which we haven't seen yet by the way because our business is mainly Enterprise oriented, but even if there is we don't see that having a meaningful impact on our business in that segment.

[Rajesh Ghai:]

And as far as the Cloud and Connectivity business -- I appreciate you reading it out and also reporting the gross margins on that business. When you made the [largest] Maingate acquisition, I recall, you mentioned that the margins in that business are you saying ballpark on your Enterprise Solutions business. In this press release I notice it's kind of 10 points below the gross margin for the Enterprise business there. Has this changed from what you had anticipated a year ago or you're facing some fresh challenges that have forced you to cut to lower pricing rather -- expect lower gross margins?

[Jason Cohenour:]

No, it's the same. So if you look and we're not going to -- we are going to be careful because we are not going to segment out the different components of this business. But for the purposes of today, I'll share with you Maingate and MobiquiThings who are kind of peer managed productivity plays for the IoT, those gross margins are indeed consistent with what we see from Enterprise Solutions. But we got a broader mix now under Cloud and Connectivity. So including our AirVantage cloud and you may have noticed in my comments, AirVantage cloud at scale is extraordinarily high margin, but we had some fixed operations costs there. In fact Q4 was the first quarter where we achieved gross margin breakeven on AirVantage cloud. So that's part of the mix, that's part of the blend. And Accel Networks operates at a little bit lower gross margin than Maingate and MobiquiThings as well. So what you're seeing is the impact of blending of those four different businesses and our view is as those businesses scale as a group that gross margin of 50 plus, is what the business model should be.

[Rajesh Ghai:]

That's very helpful. Obviously you're doing pretty well on the cellular side with -- you have one Cat 1 design win and now you believe, you are looking on the Cat 0 for LTE. As far as the Smart Cities market is concerned, obviously it suggests that a lot of them are looking at protocols which has a low-power RAM and LoRa. Is that something that you would be focused on as the market evolves and would that be something that you could work on besides cellular?

[Jason Cohenour:]

It could be, it could be. So things like LoRa, SIGFOX, NB-IoT which is the next generation of LTE-M, those are all things on our radar. We have no active development programs underway for LoRa or any of the proprietary guys like SIGFOX, but we're kind of watching that space closely. In our view LTE-M is the wide-area low-power answer for the cellular ecosystem to those challengers and we are all-in on LTE-M. So we've done our first Cat 1 device, we will skip Cat 0 and go directly to LTE-M. We have active programs around that currently underway and as a quick successor to that will be NB-IoT. And like I said those -- both of those protocols are squarely focused on the wide-area low-power opportunity that players like SIGFOX and LoRa are focused on.

[Rajesh Ghai:]

And my last question when do you think LTE-M could become significant, will that be 2017 or beyond?

[Jason Cohenour:]

I think we'll start to see -- well be showing things this year but not in any meaningful commercial way. We'll be demonstrating show of technology capability but in terms of commercial contribution that's a 2017 event and even then we'll probably be modest. So, it's a probably a bigger event in 2018.

[Operator:]

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

[Todd Coupland:]

Two questions if I could. Firstly you cited 40 new programs. Could you maybe give us some color in what areas those are and what are some of the first areas that will start to move into your results in Q2?

[Jason Cohenour:]

Well as you might Todd there -- the 40 programs that's going to be very broad based, right, so that's spread across many different market segments and geographies. The theme here internally is that we do expect to see significantly better activity and growth in Europe, so maybe that's a geographical theme. And we expect in those 40 new programs there is going to be meaningful contribution from automotive, energy and enterprise as well as industrial. But I think if there's a more significant drivers, Todd, to focus on it would be automotive and energy, which would represent the, I would say, the bigger deals that we expect to start launching.

[Todd Coupland:]

And for Q2 is it -- to give you these kinds I guess -- to get this type of confidence, are you actually seeing purchase orders for Q2 at this point, or does that still have to play out?

[Jason Cohenour:]

We're seeing -- at a minimum Todd, we are seeing forecasts at this point, right, and then within a certain window customers will secure that forecast with firm purchase orders.

[Todd Coupland:]

And my next question would be maybe you've said this, but I'm not sure if I heard it, are you providing gross margin and OpEx ranges within the annual guidance envelope that you put out there?

[Dave McLennan:]

We are not Todd. We're just focusing on top line and EPS for the annual guidance.

[Todd Coupland:]

Thanks very much.

[Jason Cohenour:]

I'd say directionally and this might sound counterintuitive given the current softness, but directionally I would tell you to expect OpEx to trend up a little bit. We are making offensive investments in particularly in sales and marketing.

[Operator:]

Your next question comes from the line of Richard Tse with Cormark Securities. Your line is now open.

[Richard Tse:]

Jason, can you talk about the strength in the design win momentum and I am trying to reconcile that against revenue? Can you give us maybe some perspective on what metrics you want to use, like growth in your design wins, whether it will be on a year-over-year or trailing 12 month basis to the growth in your revenue?

[Jason Cohenour:]

It's our favorite topic Richard, trying to connect to…

[Richard Tse:]

I know it's [indiscernible] saying that because I know the valuable design wins obviously kind of change over time but I was just trying to reconcile that.

[Jason Cohenour:]

Yes, Richard, every design win is not created equal. So, we're -- I guess we're stepping out here with a little more disclosure around our design wins in part to demonstrate why we are confident in our expectations of growth in OEM. As I mentioned on the call last year, we secured a little over a $1 billion in life time value in design wins in our OEM segment and that was up considerably from 2014. So that's -- directionally that's really good in our view. And we do believe that there's going to be significant new launch activity this year and that's again why we kind of took another step on disclosure and refer to the 40 new programs that we expect to launch this year. We are not quite where you would like to see us with respect to making a nice bold line between revenue expectations and number of design wins and life time value but we are taking a couple of steps in that direction.

[Richard Tse:]

Okay, thanks that's helpful. Just for switching gears to AirVantage, obviously you guys have made a lot of progress there. I'm kind of curious to see how you plan on differentiating against some of the bigger players? You seem to be making more aggressive moves in the market and I saw that you had this big acquisition with Cisco today and it seems like you are also making overtures. So how do you plan on kind of differentiating Sierra against some of those players in the market?

[Jason Cohenour:]

It's a great question and by the way pretty interesting valuation as well on the Cisco acquisition of Jasper. And what makes us really different Richard in that space is we have the whole chain. We have the whole chain from the device to connectivity to the cloud and that enables us -- when you control both ends of that, that enables us to do some very interesting things with respect to security, with respect to cost of service, with respect to quality of service. And by the way we -- it gives us a distribution differentiation as well. So the way we look at our strategy and our model and that's why I reviewed it again on the call, we get exposed to 15 million device sales every year and I challenge you to point to any other player on the market who gets exposed to 15 million opportunities a year to sell services. And so as we turn on that leverage, that distribution leverage and the product differentiation because we own the end-to-end chain, I think that puts us in a very differentiated position. Now beyond that I think we can point to many things in the platform and in our Connectivity Service which is well is differentiated and that's why we believe Cloud and Connectivity will be very successful even on its own, without leveraging the power of our devices distribution platform.

[Richard Tse:]

Okay, great. Thank you.

[Operator:]

Your next question comes from the line of Ross DeMont with Midwood Capital. Your line is now open.

[Ross DeMont:]

Thanks for taking a couple of questions. Just sort of looking back over the last year, I think there has been over the last four quarters the stocks had a pretty negative reaction to earnings, tomorrow that will happen again. So I only point that out because that's a backdrop against which people will judge the likelihood of you guys making guidance. So I wanted to talk a little bit about your guidance. If you take the midpoint of your range for the first quarter of $140 million that would leave $510 million to deal with in the next three quarters, if you take again the midpoint of the annual range. So we go from a $140 million to having to average a $170 million, I think the math is per quarter for the rest of the year. That seems like a really hard step up and it seems like again you are setting yourself up with guidance which is just very, very difficult for me. And I wondered, if you could help me understand how you have confidence that we can go from $140 million up to $170 million on average for the rest of year?

[Jason Cohenour:]

Sure. Well Ross, my answer to that is we [predicate] and try to be very careful and more careful in setting guidance this quarter, given our previous two misses. And we certainly acknowledge that it requires a step up starting in Q2 and that's what we see in our business for the reasons previously stated. And I'll also say, the middle of that range -- the middle of the $135 million to $145 million range is lower than we've seen historically. So getting back to something considerably higher than that is territory we've seen before. It's not as though we've never seen it before. So given the drivers we've already highlighted in our business, given the fact that we have been there before, that's no guarantee that we will get there again, but we have been there before and we think we understand the very specific things that are causing today's softness. That gives us confidence in the range we have put up and I would say we tried to be very careful in the range we put up as well.

[Ross DeMont:]

But that would imply some quarters pretty soon that are better than any quarter we've ever had before. So I guess it's just hard to imagine that we are having a stepping down for a quarter here meaningfully and that's happened for a few quarters now. But the guidance you are giving us suggests record quarters right around the corner. I guess it just seems like -- it makes me nervous that we are setting up for challenges again.

[Jason Cohenour:]

Right. Now Andrew, I understand your point and like I said we have tried to risk adjust our view. By the way we also have acquired businesses now that we didn’t have in the second quarter of last year. So don’t forget that contribution. And we believe we've set the guidance, so that we don’t have another miss. We have a macro situation that rapidly moved sideways on us from here then we might have a different set of challenges. But this is the way we see it and we believe that we have risk adjusted it properly and risk adjusted it more aggressively than certainly the last two quarters.

[Ross DeMont:]

Okay. Thanks for taking the question and glad to see you guys will be in the market pretty soon [nine cheers]. Thanks for that.

[David Climie:]

We will take one more question.

[Operator:]

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

[Jason Cohenour:]

Okay, great. Well everybody, thank you very much for joining today's call. And as usual, if you have follow-up questions management is available here in our Richmond headquarters. Tracy, this ends the call. You can now disconnect the line.

[Operator:]

And thank you for joining. This now concludes today's conference call. You may now disconnect.