司亞樂 (SWIR) 2015 Q1 法說會逐字稿

Good afternoon. My name is Tonya and I will be your conference operator today. At this time I would like to welcome everyone to the Sierra Wireless first-quarter 2015 earnings conference call. (Operator Instructions).

David Climie, VP of Investor Relations, please go ahead.

Thanks and good afternoon, everyone. 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.

The agenda today will be as follows. Jason will review the highlights of the first-quarter 2015 results. Dave will provide a more detailed overview of our financial results as well as our guidance for the second quarter of 2015. And following that, Jason will provide his comments on the acquisition of Accel Networks, which we announced after market today as well as summary comments on the first quarter, and then we will move to a Q&A session.

Before we get started I will reference the Company's Safe Harbor statement. A summary of our Safe Harbor statement can be found on page 2 of the webcast and is now being displayed.

Today's presentation contains certain statements and information that are not based on historical facts and constitute forward-looking statements. These statements include financial guidance for the second quarter of 2015 and commentary regarding the longer term outlook for our business.

Our forward-looking statements are based on a number of material assumptions including those listed on page 2 of the webcast presentation, which could prove to be significantly incorrect. Additionally, our forward-looking statements are subject to substantial known and unknown material risks and uncertainties. I draw your attention to a longer discussion of our risks in our Annual Information Form and Management 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 and with the supplemental information on our website.

With that, I will now turn the call over to Jason Cohenour for his comments and highlights on the first quarter.

Thank you, David, and good afternoon, everyone. I will begin with some brief highlights on the first quarter of 2015.

Revenue was strong in the first quarter at $150.4 million, representing year-over-year growth of 24% and record quarterly revenue for the Company. Our year-over-year revenue growth was driven by a combination of robust organic growth of 19% and solid contribution from acquired businesses.

In addition to strong revenue in the quarter, the Company's operating leverage and profitability continued to improve on a year-over-year basis. Adjusted EBITDA increased 177% to $11.3 million in the first quarter and our non-GAAP earnings from operations increased significantly to $8.8 million or 12 times higher than in Q1 of last year.

Overall, we are very pleased with our first-quarter operating results. We also completed the acquisition of Wireless Maingate in the first quarter and integration is well underway. This acquisition represents a significant step forward for the Company as we expand our device-to-cloud solutions to include wireless connectivity services for the Internet of Things.

Our OEM, enterprise and services sales teams are actively collaborating and sharing leads. We've also secured our first connectivity design wins with existing CRO wireless customers, providing early validation of our expectation for sales synergies.

Our technology teams are also working together to integrate the Maingate Manager platform with AirVantage. When the integration is complete our customers will have a single elegant UI from which they can manage devices, connectivity subscriptions, SIM cards and machine data.

I believe this will put us in a very strong and unique position in the market.

Now let's take a quick look at the first-quarter 2015 results in each of our two business segments. Our OEM Solutions business experienced strong revenue growth in the first quarter. OEM revenue increased 25% year over year to a record $133 million in Q1. Non-GAAP gross margin in the quarter was solid at 30.2%.

Revenue growth in the quarter was once again broad-based and was driven by many key vertical market segments including networking, automotive, sales and payment and transportation. Overall, the market continues to transition from 2G technology to 3G and 4G technologies.

We believe this transition benefits us due to our superior but competitive position in 4G as well as the resulting support for ASPs. We also further enhanced our competitive position in 4G during the quarter with the introduction of four new AirPrime embedded modules for LTE-Advanced networks worldwide.

LTE-Advanced is the latest generation of LTE standards and provides improved network capacity and efficiency, as well as higher data speeds by enabling carrier aggregation. Design win activity was solid in Q1 and we secured wins across several segments and regions.

In networking, we secured design wins in North America, Asia, and Europe. Of particular interest is a design win with a leading European provider of home broadband gateways. This design win provides further validation for our belief that 4G connectivity for home broadband offers a compelling alternative to traditional wire broadband in many regions, including developed markets such as Europe.

We are also active in the energy segment, securing three new smart metering design wins in Europe. We also secured an automotive design win in China and displaced a competitor at a leading North American telematics solution provider.

And recently, we were excited to learn that our customer, Philips Lighting, had been selected by the city of Los Angeles to deploy the Philips CityTouch technology, becoming one of the first cities in the world to control its streetlights using point-to-point cellular technology.

The CityTouch solution from Philips uses a connector node for each streetlamp that is powered by a Sierra HL Series module. Using CityTouch the city of LA will save on energy and maintenance costs while providing their communities with an agile lighting system that can quickly respond to events and emergency situations.

Moving to our enterprise solutions business, revenue grew by 16% year over year to $17.4 million, which includes a partial quarter contribution from Wireless Maingate of $3.4 million. Revenue from Maingate and In Motion represented the year-over-year growth in enterprise.

Non-GAAP gross margin in our enterprise business was solid at 51.3%. Overall our enterprise segment was seasonally weaker as expected. However, seasonality aside, this segment is currently performing below our expectations.

The market opportunity in enterprise solutions for the Internet of Things is vast, and we are committed to achieving significantly higher growth, and we expect to see improving sequential trends over the course of the year.

In addition to these expected short-term improvements, we're executing on a product portfolio refresh and making targeted investments and expanding our sales capacity in order to drive stronger long-term growth as well.

During the first quarter, we secured several new customer wins in the public safety utility and industrial automation segments. We also strengthened our distribution capacity, including executing an AirVantage reseller agreement with an existing North American VAR, who currently resells both AirPrime modules and AirLink gateways.

Additionally, a European industrial and building automation supplier selected our AirVantage cloud for application enablement as well as connectivity services from the recently acquired Maingate. These examples help validate our expected growth synergies from combining our devices, cloud and now connectivity services for the Internet of Things.

As mentioned earlier, our integration of Maingate is proceeding according to plan and has already helped to strengthen our overall device-to-cloud offering and market position.

I will now turn the call over to Dave, who will provide more detail on the Q1 financial results and Q2 2015 guidance.

Thank you, Jason. Please note that we report our financial results on a US GAAP basis. However, we also present non-GAAP results in order to provide a better understanding of our operating performance.

As a reminder, the full reconciliation between our GAAP and non-GAAP results is provided in the press release. Non-GAAP results exclude the impact of stock-based compensation expense and the latest social taxes, acquisition and disposition costs, acquisition amortization, asset impairments, integration costs, restructuring costs, foreign-exchange gains or losses on the translation of balance sheet accounts and certain tax adjustments.

With that, let's focus on our non-GAAP results compared to our guidance for the first quarter. Total revenue in the first quarter was $150.4 million. This was above the high end of our guidance range of $145 million to $149 million and was driven by better-than-expected sales in our OEM segment with upside realized from certain automotive, networking and transportation customers.

During the quarter, the Wireless Maingate business, which was acquired on January 16, contributed $3.4 million in revenue which was in line with our expectations.

Q1 non-GAAP gross margin was 32.6%, in line with our expectations. Non-GAAP operating expenses in the quarter were $40.2 million, modestly lower than we had expected, primarily as a result of timing associated with certain R&D expenses that have been moved into the second quarter.

With better-than-expected revenue in Q1, combined with lower-than-expected operating expenses, our profitability in the first quarter was above our guidance range. Non-GAAP earnings from operations in Q1 were $8.8 million and non-GAAP net earnings were $7.2 million or $0.22 a share. The non-GAAP tax rate in Q1 was 19.8%, again in line with our expectations.

Looking at some of the key Q1 financial metrics on a year-over-year basis, total Q1 revenue of $150.4 million was up 24.1% year over year. Q1 organic revenue, excluding Wireless Maingate and In Motion Technology, was up 19.4% compared to Q1 2014.

Revenue from OEM Solutions was $133 million, representing an increase of 25.3% year over year. This year-over-year growth was broadly based, including from networking, automotive, sales and payment and the transportation segments.

Revenue from enterprise solutions was $17.4 million, up 15.8% year over year. The year-over-year increase was driven by revenue contribution from the acquired Maingate and In Motion businesses, partially offset by lower demand for legacy enterprise products.

We are expecting sequential improvement in our legacy products in Q2, as well as for the remainder of the year. We continued to benefit from improving business model leverage, strong Q1 revenue growth resulted in significant year-over-year profitability improvement.

Q1 adjusted EBITDA increased 177% to $11.3 million compared to $4.1 million in the same quarter last year, and Q1 earnings from operations increased more than 12 times to $8.8 million compared to $0.7 million a year ago.

In the past 12 months, there has been a considerable appreciation in the US dollar relative to other currencies. On a year-over-year basis, we estimate the foreign-exchange changes impacted our Q1 2015 non-GAAP operating results compared to Q1 2014 as follows. FX negatively impacted revenue by $1.4 million and FX improved our non-GAAP earnings from operations by $2.5 million.

During the first quarter, we consumed $107.5 million of cash. However, our balance sheet remains strong with $99.6 million of cash and no debt at the end of the first quarter.

There were two main drivers of cash consumption during the quarter. Firstly, working capital utilized $25.9 million, mainly driven by a $22 million increase in accounts receivable as a results of sales being pushed to the latter part of the quarter, due to the impact component shortages had on the timing of manufacturing and shipping a product during the quarter.

Changes in inventory and accounts payable also added to the working capital requirements in the quarter. And, secondly, we purchased Wireless Maingate for a net cash amount of $88.4 million.

Moving on to guidance for the second quarter of 2015, the following guidance does not include any contribution from the acquisition of Accel Networks, which we announced today and we expect to close in June.

We expect Q2 2015 revenue to be in the range of $153 million to $156 million, reflecting solid demand modestly constrained by continued tight supply environment for various RF components. This guidance includes an expectation of $4.1 million of revenue from Wireless Maingate.

This revenue range anticipates sequential growth relative to Q1 in both our OEM and enterprise segments and, at the midpoint of the range, represents year-over-year growth of 14.4%.

We expect gross margin to be similar to the Q1 level. And we expect Q2 operating expenditures to increase modestly from Q1, primarily driven by high R&D expense related -- higher R&D expense related to development parts, certification costs and redesign costs related to component shortages.

Based on this, we expect Q2 non-GAAP consolidated earnings from operations to be between $8.5 million and $10 million and non-GAAP net earnings of between $6.7 million and $7.9 million or earnings-per-share of approximately $0.21 to $0.24. This compares to EPS of $0.08 in the second quarter of 2014.

Q2 net earnings and EPS guidance assume a non-GAAP tax rate of 21%, consistent with our expectations of the low 20s for the full year.

With that, I will now turn the call over to Jason ,who will provide a brief summary of the Q1 results as well as the Accel Networks acquisition which we announced earlier today.

Thanks, Dave. I will speak briefly now about the acquisition we announced earlier today.

As you have likely read, we have entered into a definitive agreement to purchase Accel Networks, a leading US provider of secure 4G manage connectivity services for distributed enterprises.

The company serves more than 300 enterprise customers in over 5,000 locations across the US. Accel is a proven managed service provider to a diversified customer base in segments such as retail, hospitality, finance and energy, including customers such as Dunkin' Donuts, O'Reilly Auto Parts and Sunoco.

Accel provides an end-to-end solution combining 4G LTE gateways with the iMaestro cloud RF optimization platform and Smart Antenna, and combining that with high-speed LTE connectivity from AT&T, Verizon and Sprint. The Accel managed connectivity solution can be used as a primary or backup network connection for distributed enterprises such as retail outlets and meets the payment industry's requirements for PCI security compliance.

Accel enables rapid deployment of new locations, and also offers a range of SLAs depending on customer requirements Accel Seltzer Solution direct to enterprises and through channel partners such as Trextel Solutions. The company has 28 employees based primarily in Florida and Georgia, and we look forward to welcoming all of them to the CR team at closing.

Moving to some transaction details, we are purchasing substantially all of the assets of Accel Networks for $9.3 million in cash with the potential for an additional $1.5 million consideration under a performance-based earnout formula. We expect the transaction to close in June of 2015.

Accel's full-year 2014 revenue was $8.5 million, about 80% of which was subscription-based and recurring. During the 12 months following the closing, we expect revenue to be approximately $10 million and we expect the business to be breakeven on an adjusted EBITDA basis.

We believe Accel has a strong fit with our Company's broader device-to-cloud strategy and specifically our interest in scaling managed connectivity services. Accel also represents a strong segment fit as we have been focused on the backup and primary connectivity opportunity for some time, providing embedded modules to gateway and router players, such as Cisco and Cradlepoint, as well as supplying our own AirLink gateways into these applications and launching our AirLink Enterprise Connect solution in Europe last year.

Accel helps us to scale our position in this key segment, which we believe represents a very interesting secular growth opportunity as 4G speeds now rival those provided over T1 circuits. For many distributed locations, 4G can be much faster and less expensive to deploy without sacrificing performance, reliability or security.

Furthermore, beyond the distributed enterprise opportunity we believe that Accel managed network connectivity and support infrastructure can be leveraged to provide device-to-cloud solutions for additional segments currently served by Sierra Wireless.

This acquisition also enhances our business model, adding a significant base of high ARPU recurring revenue and gross margins of approximately 40%. The acquisition also brings some important expertise in distributed networking and we anticipate an excellent cultural fit as well.

As longtime partners, our teams know each other well and we expect a smooth closing and integration.

So, to summarize, we are very pleased with our performance in the first quarter of 2015. Year-over-year revenue growth was strong once again, underpinned by robust organic growth and solid contribution from acquired businesses. Year-over-year profitability metrics also continued to improve, highlighting our commitment to profitable growth and strengthening operating leverage.

On the strategic side, we continue to commit capital in ways that will strengthen our strategic position and create value for shareholders. We closed the Wireless Maingate acquisition in January and integration is well underway. Maingate has quickly become a central component of our device-to-cloud solutions for the Internet of Things, and we have seen early validation of growth synergies already securing connectivity wins with existing Sierra customers.

We expect to see similar results when we complete the acquisition of Accel Networks. Both of these entities bring recurring revenue scale, a solid customer and subscriber base, proven networks and solutions, and the capabilities we need to accelerate growth in our device-to-cloud solutions business.

We remain confident that continued profitable growth, combined with acquisitions that enhance our strategic position and business model, will lead to further value creation for shareholders.

Tonya, this concludes our prepared remarks. You can now open the line for questions.

(Operator Instructions). James Kisner, Jefferies LLC.

Thanks for taking my question. So, just from the start on the component shortages that you mentioned, perhaps update us on the risks over the next couple of quarters from that. Maybe you could potentially quantify, if possible, to impact you are seeing in your guidance. Did you see any impact in Q1? And I guess that question for both revenue and gross margin. Thanks.

Hi, James. You are a little bit faint. This is Jason. I will answer at a high level and Dave, you might want to chime in as well.

So, I think starting at the top line, James, the component shortages, which are principally around RF components and perhaps more specifically filters and duplexers, that did have -- I would characterize it as a modest constraint on Q1. Size it at perhaps $1 million to $2 million, and we are expecting a similar constraint in Q2 on the top line.

With respect to the impact on the cost side for Q1, you might recall we guided that we expected an impact of about $0.5 million mainly at cost of goods sold. And what we actually saw was about $400,000 in terms of added cost related to the component shortages in Q1.

For Q2 we expect to experience a similar cost impact, although most of that cost will come in OpEx as we design out the parts that are in short supply and design in replacement components. So, we're still working through this. We think Q2 gets us through the worst of this. We think it gets a bit easier in the second half and we think by the end of the year we should be through it.

That's very helpful. So, can we drill down on enterprise for a minute? You said it was worse than expected, and you are taking some actions. So, could you again just highlight what you are doing here to try to improve the performance of enterprise, and I guess relatedly here the gross margin was a bit lower than we were modeling it [51 and change] here. Is that purely leverage or is there any mix issues and just wondering if you could give us any color there as well? Thank you.

Yes, sure. So, maybe I will take the gross margin question first. Yes, it was a little bit down sequentially, but not terribly out of line with our expectations of the low 50s. That sequential reduction, I would characterize, as two -- being driven by two factors. One is a bit lower volume. The other is unfavorable mix within the business segment, so fewer, higher margin devices sold during the quarter.

And with respect to what we are doing, part of our underperformance is driven by I would characterize it as a softer-than-desired product lineup, so we are busy at work recharging the product portfolio. We launched a couple of new products in January. We expect to launch one or two more products in the second half, and more products in the first half of 2016.

And in addition to that, we also believe we need to scale sales resources. So, we are making targeted investments there.

So, again, I think overall we have got confidence in the market opportunity, and believe that we are missing a part of the market opportunity that we should be capturing. And with this product portfolio refresh and targeted investments I'm very confident that we will get the business back to where we want it to be.

Okay, and just last follow-up on that. So, you have talked about a 10% to 15% growth rate for the Company. Enterprise underperforming right now; OEM is outperforming.

I assume -- should we assume that that growth rate for the overall Company is still the same and perhaps enterprise will just lag that this year? Is that a fair assumption for modeling (multiple speakers).

I think that's a fair assumption.

All right, thank you very much. I will pass it.

Daniel Amir, Ladenburg.

Thank you for taking my call. So, on the OEM side can you highlight a bit some of the growth drivers there that is leading to the outperformance here this quarter? And it sounds like that business will remain here strong for the next quarter as well. And then I have a follow-up, thanks.

Sure, I will take that Daniel, and I will abstract it somewhat to segment drivers that are currently driving the outperformance or I should say the year-over-year revenue growth. And those key drivers are networking up significantly, so those are embedded modules for players like Cisco, Cradlepoint, et cetera, AVM.

Automotive, also a key growth driver. As you probably know a couple large customers, Toyota, Chrysler -- both of whom I would say most of the growth is coming from existing programs, so expansion of existing programs and transportation. So, this is the aftermarket version of automotive, so applications like UBI insurance and telematics.

Those are the key year-over-year growth drivers. Sales and payment was also up significantly.

And, so what's driving that? We have got some favorable market factors driving that. I would say that our product position is very strong, particularly in 4G technologies and my expectation is that we are going to see more of the same. I think our product line has continued to improve and I think that's reflected in today's design wins which will be revenue 12 to 24 months from today.

So, my belief is that we are outperforming the market right now in terms of revenue, and my expectation is that we will continue to do that based on our design win momentum.

Great, the other question is just on the -- your 2G/3G, 4G commentary. So 4G clearly benefits you from in terms of movement to higher ASPs. So, can you comment a bit where are we in that transition and what the pricing looks like on the 2G/3G? Thanks.

Yes, Daniel, this is Jason. I will take that question as well and I'm not going to get into specifics on ASP -- ASPs per technology platform. But I can share with you that ASPs continue to be extraordinarily stable, and part of the stability we are seeing is the support from with the transition from 2G to 3G/4G technologies.

Off the top of my head, I believe revenue from 2G products was down year over year by about 9% while revenue from 3G products was up 15% and revenue from 4G products was up 63%. And you may recall, we saw similar results in the previous quarter.

And I will also add that 3G products from a revenue perspective comprised most of the revenue in the OEM Solutions business segment.

Great, thanks a lot.

Thanos Moschopoulos, BMO Capital Markets.

Jason, maybe just to clarify on the Accel acquisition, basically at a high level this is essentially like a Wireless Maingate for North America except more focused on 4G? Are there any specific nuances we should be aware of between the two assets or does that essentially cover it in a nutshell?

I would actually characterize it as a little bit different. Wireless Maingate -- if you strip back and you look at them both as managed service providers you're going to definitely see similarities. Remember Wireless Maingate, in addition to being a managed service provider, is also a true MVNO, meaning they have their own cellular core network including HLR GGSN and they're actually a licensed MNO and have their own SIM cards.

So, Accel is not that. Accel is a managed service provider. They buy and resell 4G service from AT&T, Verizon and Sprint and, beyond that, they take that -- another layer up in terms of solution. I would say, a very targeted solution, and actually provide I would say a true end-to-end managed service in that they are monitoring the link to the distributed enterprise for the customer. So it's not a self-serve implementation. They're actually managing -- monitoring and managing the link for the customer.

So, they are getting paid, not only for the wireless connectivity but for this managed service on top.

Got it. Thanks for clarifying. And then, what would the time frame be for the -- any technical integration that you require into the AirVantage platform?

You know, that's not an urgency, I would say. I think the key focus for us when we close in June is to really focus on helping Accel to grow, and that's going to be with us leveraging our corporate marketing activities, lead referrals and probably bolstering the sales effort there as well.

I would say longer term we will take a look at integrating platforms and seeing what product differentiation synergies we can capture. But that we don't view today as an urgent integration topic.

Okay, and then finally, can you elaborate a bit about the traction you are seeing with Maingate? You alluded to the fact that you've had some wins and you are seeing a pipeline there. Maybe talk a little bit about the reception you're getting on that front.

Yes, I think -- I am very encouraged at the early signs. Now you may recall that even before Wireless Maingate, we had started to form our own dedicated services sales team around AirVantage, so that sales team we are continuing to add to that. That sales team is now collaborating very closely with the Wireless Maingate sales team, and we are doing lots of lead referral.

So, we have had a number of sales strategy sessions with our OEM guys who are selling modules to thousands of customers, our enterprise sales guys and the Maingate services sales team together, identifying what I will call low-hanging fruit, existing Sierra customers who require connectivity services. And since January 16, we have already signed up two or three of those customers to Maingate connectivity services.

So, I am encouraged. To me, that is validation that the sales synergies are there to capture and, with the proper focus and the proper resources, we should be able to drive significant growth synergies.

Great, thanks, Jason. I will pass the line.

Mike Walkley, Canaccord Genuity.

Thanks. Well, first of all, congratulations on a strong execution given the component issues during the quarter. Jason, just jumping maybe into the Accel acquisition.

Could you talk maybe how could -- tie in with your enterprise hardware business and maybe also some of the new products coming out in that business, what areas do you feel like you need to refresh? And what end markets do you think you have potential to grow as the year plays out?

Sure, sure. I think one thing on -- so, Accel today as part of their solution sales gateways, as part of the solution to the distributed enterprise. Sometimes that is an AirLink gateway. Sometimes it is a Cisco router. Sometimes it is a Cradlepoint router.

Now, of course, all three of those have Sierra Wireless modules inside, and so even today we benefit via the hardware sale. We're going to be careful to make sure that Accel maintains a hardware-agnostic stance, Mike. It is a pure services play for us.

But, clearly it is an opportunity for us to do a better job on making segment-specific products for the distributed enterprise. And I think Accel's experience is going to be valuable in making sure we capture the right requirements and design the right products.

Okay, that's helpful. And maybe just a separate question then. You talked about some new product launches, and are there any certain end markets that you feel like there is opportunities to gain share on the enterprise solution side?

Yes, we are really focused on, if you look at our enterprise business we look at it in three large segments. One is mobility, so we have got developments underway improving our mobility line, and that is mainly around public safety, emergency services, utility field service and transit. And, so, we have got products currently under development to bolster our position there.

The other is industrial, and that's all about connecting high-value assets, whether they be air compressors, as an example, or water purifiers. So, we have got new product coming out in Q3 for the industrial segment.

And the other is enterprise, and enterprise is really what Accel is all about this distributed enterprise. And that's about a companion 4G connection for an existing router that is in a retail outlet, as an example. And I would say right now our product position is a little soft there, and as we have got a good opportunity to do I would say a better product tailor fit for that segment.

Okay, that's helpful. And then, Skyworks, that cover on their earnings release they highlighted a design win with Sierra Wireless, so is this -- I am assuming this is alleviating some of this RF component pressure. Can you maybe talk about how this might impact, say, gross margin and overall visibility in the back half of the year? Do you see some gross margin recovery once you get through the work on this redesign?

I think that, with respect to gross margin recovery, related to the design out of current components and design in of new components, Mike, would be modest. Now the parts have matured -- the duplexers and filters have matured for 4G and, by the way, older 3G technologies, and there are definitely parts that are lower cost than the parts we are currently buying.

But overall, these are not terribly expensive parts either. Right?

So, I think we will see some modest pick-up in cost of goods. Hard to tell right now whether or not that is going to move the needle with respect to gross margin.

Okay, thanks. And the last question for me, and I will pass it on, Dave, can you just update us on the tax rate outlook for the year? I think it was slightly below what you had for the full year, but just wanted to make sure I had the right tax rate going through the model. Thanks.

Sure, Mike. So, Q1, we are 19.8, so call that 20 in line with our expectations of low 20s for the full year. The assumption, the guidance assumption is 21% for Q2, so I would use that low 20s rate for the balance of the year.

Okay, great, thank you.

Howard Smith, First Analysis.

Thank you for taking my question. I just want to follow up on the integration plan for Accel vis-a-vis Wireless Maingate. So, there probably is some overlapping core software functionality there.

So, did I hear you will maintain both platforms near term and then longer -term think about how Accel might get -- folded into the core product?

Yes, I think that's fair. First of all, at high level, Howard, on integration it will be part of our enterprise solutions business unit. And as I mentioned earlier, we don't see an urgent requirement right now to focus a lot of time and effort on integrating platforms. I think that maybe 12 months from now we will turn our attention to doing more heavy lifting on the platform integration.

Our first focus will be on growth. We think that the Accel platform is sufficient to support growth and what the business really needs is a focus on sales.

Okay. And then just a quick clarification. You mentioned the R&D lumpiness of some things moving from Q1 two Q2. That's largely a headcount. I know there's certification expenses may be that can be lumpy and you hinted at that.

Just maybe a little more color on the causes there?

Sure, Howard. It is Dave speaking. Most of the increase is in R&D sequentially or we expect it to be in R&D sequentially. And I think you got it right. Some certification costs were -- the timing of them were moved from Q1 to Q2 and we also have some redesign costs expected in Q2 to redesign some of the components that are in short supply.

So, those are the two big things as well as some development parts that are bumping up Q2 a little bit in R&D, relative to Q1.

Okay, but then there is a little bump in Q2, but from a run rate smooth maybe the two of them as far as we think about the rest of the year and going forward?

Yes, I think that's right. Certification costs will always be an item that causes some lumpiness in the quarter-to-quarter trajectory, and that's just because those are big lumpy costs during -- towards the end of the product development cycle and that can happen in one quarter and then not happen in the next quarter as an example.

Right. Okay, thank you much.

Richard Tse, Cormark Securities.

I was just wondering who the other big players are in this market that Accel would compete in and maybe give us a sense of the relative market share?

Sure, Richard. This is Jason. So, at a high level, think of Accel as providing I mentioned it in the script both backup connectivity as well as primary connectivity for distributed enterprises, managed primary connectivity. With respect to backup connectivity, there are lots of options I would say. There is -- an inexpensive way is to buy a modem, plug it into your router and simply have a rate plan from Verizon or AT&T. So, I would say there is significant competition there.

With respect to managed primary connectivity, which is the real high ARPU driver, these guys are pretty unique. In fact, as we look around, there is maybe only one or two other players who do this kind of thing. So, we think it's very interesting.

We think, without drilling into very deep, deep detail on precisely how big that market is today and what their precise share is, our view is while they are a small company they're certainly one of the leaders in the space, and perhaps significantly larger than anybody else doing this time primary managed 4G connectivity for distributed enterprises.

I guess, on the primary side, what would you figure the penetration rate in that market and maybe an addressable market size?

The penetration rate is very, very, very low today.

Okay.

And, so, I mean you heard the stats on -- so, we are in the process of acquiring a player who we believe is the clear leader in the space. Maybe. They have got about 300 customers and about 5,000 locations, and, well, how many T1 circuits are there in the United States, 1 million?

Yes.

About 1 million. So, I think it's a very underpenetrated market from a wireless connectivity standpoint. Much of that is served with ADSL and T1 circuits, and if you come in with 4G as primary connectivity, it is cheaper, better, faster.

So, I think it's really a -- for the right situation is quite a compelling return on investment proposition for the customer.

Okay. And, so, on the design wins -- I really appreciate that color this quarter. It was really helpful. I was just wondering if you could maybe talk about the cadence of design wins in the quarter versus this time last year and I guess, related, you guys talked about China. Could you elaborate on that design win and whether there would be other opportunities in that market for you here? That's it. Thank you.

Sure, sure. So, maybe I'll take the China question first.

We have already secured a couple of design wins with domestic Chinese companies for automotive deployments, so this is -- I believe it is our third; I would view it as a nice design win, not blowout volume. And we believe we are well-positioned to get more in the future as well.

So, that's China. With respect to design win activity in general, a bit of color commentary. It was -- I would call the quarter solid. Approximately the same number of design wins that we had in Q4. Lifetime value, probably a bit lower than what we saw in Q4, and that is really just a factor -- that is really just a matter of volume mix. Just in Q1 we had fewer large volume design wins and large volume design wins are, I would say, pretty lumpy and usually come along with the big international automotive players.

And, also, I would say that we have had a significantly more success -- design winssuccess in Europe than we have had in probably over a year, and that's very encouraging. I mentioned we had three smart meter deals that we secured in Europe, one of which will be a pretty large deployment in the Netherlands and for us a year ago, year and a half ago, Europe was sleepy and we have had real design win momentum there more recently. So, it's an encouraging sign.

Great, thank you.

Todd Copeland, CIBC.

I wanted to start out with OpEx, if I could, for a second. Could you maybe frame roughly how much you are anticipating OpEx to trend up in Q2?

I will frame it up as a little over $1 million, but under $2 million.

Okay. And is that a number plus or minus $1 million or so, that you think you can hold as you go through the year?

Yes, I think certainly one of the big drivers of the Q2 number is the fact that we have got some redesign costs in the R&D number for Q2. So, I wouldn't expect to be adding that kind of sequential ramp all the time.

Okay. Thank you. And then I just want to go back to the organic growth rate for a moment. I know you have been asked about it a couple of times tonight. So if I think about the last three quarters -- your organic growth rate, if I'm not mistaken, has been around 19% and again you printed that this quarter, which is certainly great to see.

So, help me square up that rate with the commentary you have made qualitatively about business just generally giving you better visibility. So, it seems to me if we are -- if you are seeing that kind of higher organic growth rate than what you are anticipating and you have better visibility, you seem to be fairly optimistic about the outlook. Why does that organic growth rate decelerate so much, looking forward over the next few quarters? Maybe just see if you could square those two up, please?

Sure, sure, so this is Jason. So, we are not talking beyond 2015, let's be clear on that. And what we have said for 2015 is that we are comfortable with our many times in the past stated growth rate, expected growth rate of between 10% to 15%. And you are right, we do have good visibility and that's why we are comfortable with that range. If customers have higher demand for their solutions, then, clearly could go up from there. But we are comfortable in this 10% to 15% range.

You are right. We have been beating that more recently. We beat it again here in Q1 in our implied guidance. However, the growth rate gets closer to that 10% to 15% predicted range.

And another reason why we are comfortable in that range, Todd, is we're going to get into the back half of the year here where we have got a couple of tough comps. Q3 and Q4 were very strong in Q3 and while we're bullish on our outlook in the back half of 2015 we have to consider that we're going to compare our business there against some tough comps where we had blowout results.

Okay. That's helpful. Dig into one segment on the OEM side and then that's it for me. You talked about how you saw upside in the automotive space and just qualitatively that makes sense from what I would be seeing in the market. Is that a market that even accelerates from here? Do adoption rates start to pick up and that could be an area that surprises you for a while?

Well, I think it has surprised us. I think it is -- in the past year it has grown a bit faster than we anticipated. It has been one of the key growth drivers in the year-over-year performance. And maybe I will extend the window a little more than I think you have implied in your question. Long term, there is no question in our mind that's a very big market. The Connected Car is a very big market, and today it is a market that is penetrated at an extraordinarily low rate, well below 10%.

And we are seeing unprecedented activity around RFPs and design in activity. So, longer term and these have long gestation periods, longer term we see that as a very, very big market opportunity and we think we're in a pretty interesting position.

Great, that's helpful. Thanks, guys.

(Operator Instructions). Mike Latimore, Northland Capital Markets.

Just curious if the 4G revenue is bigger than 2G yet?

The 4G revenue is bigger than 2G.

Okay. Thanks. And then on the UBI vertical, can you talk a little bit about what's driving that? Is it a couple of big customers or is it pretty diverse and maybe what regions as well are driving it?

Sure, well, again, I will abstract. One of our key drivers was transportation and underneath transportation, yes, the UBI was a contributor as was fleet management in general.

But UBI is one of those key markets, and so, we have seen growth with our UBI customers, both in North America and in Europe. UBI, I would say, is well-established in the US, but still pretty underpenetrated, and appears to be -- it appears to be a trend for all big insurers and it is now, I would say, getting some momentum, getting some momentum in Europe.

And beyond the revenue drivers for us today in Europe in UBI, we have also secured a new UBI design win in Europe. So, I think European insurers are waking up, and for many of the same reasons that the US insurers have created this space, and our view is it is going to continue to be a very interesting secular growth opportunity.

Okay. And then on -- just on AirVantage cloud, what kind of percent attachment rates are you having now and are there any particular verticals where the attachment rate is higher?

Well, AirVantage cloud is -- it's pretty broad-based, but from an attachment rate standpoint we are not publishing that yet. But attach rate to an AirLink box sold continues to grow, and I would say that most of the segments consuming our AirLink devices today are public safety and utilities. And within those two segments, the hit rate for AirVantage Management Services is good and increasing.

Okay, thank you. Thanks a lot.

Aaron Fogle, Stephens Inc.

Thanks for taking my question. I just wanted to get a sense for how currency has impacted both the top and bottom line this quarter and then how much of the FX has been considered within the guidance?

Aaron, so relative to what period are you thinking of in terms of sensitivity for FX?

I guess just the impact that you all saw this quarter, relative to last year?

So, on a year-over-year basis if you look at some of the key metrics, so revenue would have had a negative impact of about $1.4 million on a year-over-year basis. At the gross margin basis that would be a negative impact of about $800,000.

Going the other way, OpEx would have been favorably impacted, meaning reduced by about $3.3 million, and if you roll that all up to the operating line, the negative -- the net impact of currency year over year would be about a positive $2.5 million at the earnings from operations level year over year.

That's Q1 to Q1.

Q1 to Q1, that's right.

And then, I guess to go a bit further, are you seeing any weakness, I guess, with your sales as far as being dollar-denominated in other currencies in other regions?

It hasn't been a big pressure point, candidly, for us, so we haven't seen that.

And I would say the vast majority of the players in this space have their cost of goods in US dollars (multiple speakers) and price in US dollars, so it is not that we are different from competitors on that. And then from an adoption standpoint we haven't seen it put the brakes on adoption either.

In fact, like I said, Europe has been a bit of a comeback story for us.

All right.

And then just to finish the FX question, on a relative to Q1 expectation, so relative to our guidance currency, really wasn't a factor. It played out the way we had expected in our guidance assumption, so the performance in Q -- the over performance in Q1 was not driven by FX. That was neutral, but certainly on a year-over-year basis, there was an impact.

All right, thank you.

Tonya, we will take one more question.

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

Boy, that's perfect timing. Okay, well, thank you, callers, for joining today's call. As usual, the management team is available here at our headquarters to answer any follow-up questions you may have and look forward to talking to you again soon.

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