司亞樂 (SWIR) 2015 Q3 法說會逐字稿

Good evening. My name is Scott and I will be your conference operator today. At this time I would like to welcome everyone to the Sierra Wireless Q3 2015 earnings conference call. (Operator Instructions).

David Climie, Vice President Investor Relations, Sierra Wireless, you may begin your conference.

Thanks, Scott, and thank you for joining today's conference call and webcast. With me today on the call is Jason Cohenour, our President and CEO, and Dave McLennann, our Chief Financial Officer. As a reminder, today's presentation is being webcast. It will be available on our website following the call.

Today's agenda will be as follows. Jason will review the highlights of the third quarter 2015 results; Dave will provide a more detailed overview of our financial results as well as our guidance for the fourth quarter of 2015. Following that, Jason will provide a brief summary and then we will finish with a Q&A session.

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

Today's presentation contains certain statements and information that are not based on historical facts and constitute forward-looking statements. These statements include our financial guidance for the fourth quarter of 2015 and commentary regarding the longer-term outlook for our business. Our forward-looking statements are based on a number of material assumptions including those listed on page 2 of the webcast presentation which could prove to be significantly incorrect.

Additionally, our forward-looking statements are subject to substantial known and unknown material risks and uncertainties.

I draw your attention to a longer discussion of our risk factors in our annual information form and management's discussion and analysis which can be found on SEDAR and EDGAR as well as our other regulatory filings. This presentation should be viewed in conjunction with our press release.

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

Thank you, David, and good afternoon, everyone. Thank you for joining today's conference call.

I will begin with some brief highlights of the third quarter of 2015. Revenue in the third quarter was $154.6 million representing growth of 8% compared with the same quarter of last year. Year-over-year growth was driven by contribution from acquired businesses as well as organic growth of 4%.

For the first nine months of 2015, revenue increased 16% year-over-year to $463 million. Solid revenue growth in Q3 helped to drive year-over-year improvements in the Company's profitability metrics. Non-GAAP earnings from operations in the third quarter increased 13% to $9.5 million and adjusted EBITDA increased 3% to $12.1 million.

We continue to stay active in strategic M&A. In early September, we completed the acquisition of MobiquiThings, a deal we originally announced in June. Based in France, MobiquiThings is a highly innovative MVNO providing managed connectivity services for the Internet of Things.

MobiquiThings brings a world-class core network platform, Pan-European coverage and intelligent SIM-card technology that supports multiple mobile network identifiers in each SIM. This enables us to provide our customers with truly unique managed connectivity services that maximize quality of service and flexibility. We are thrilled to have the MobiquiThings team join Sierra Wireless and integration activities are well underway.

We also set a Company record for quarterly design win lifetime value, or LTV, which is the total expected revenue over the life of the programs won during the quarter. This design win LTV record is underpinned by the Company's largest ever new program design win, an important strategic accomplishment for our team.

Now let's take a quick look at the third quarter 2015 results in each of our two business segments. Starting with OEM solutions, revenue in our OEM solutions business increased 5% year-over-year to $130.7 million. In Q3 we had strong year-over-year growth from the automotive, energy, and networking segments. Strong growth in these segments was partially offset by softer than expected demand from certain mobile computing customers who are transitioning their products to the new Intel Skylake processor platform. This transition is taking time and has temporarily impacted sales of 4G enabled enterprise notebooks.

Our mobile computing OEM customers are navigating through this platform transition and we expect to see a return to normalized demand levels in the coming months.

Design win activity continued at a robust pace during Q3 and total LTV reached a new record as previously mentioned. This scale of activity contributed significantly to the building of our customer program pipeline to drive future revenue growth.

Design win activity was again broad-based but particularly strong in the automotive and energy segments. In automotive, we secured the Company's largest ever design win with a large international OEM. This win represents a key milestone for the Company and highlights the strength of our position in this key segment. We expect to see initial revenue contribution from this design win in 2018.

We have also seen a high level of design win activity in the energy segment. We recently announced that Iskraemeco, a smart metering leader and trusted partner of Sierra's for more than a decade, selected our HL Series modules for its smart electricity and gas meters being deployed in the Netherlands under a multi-million unit five-year program.

In addition, the HL Series was selected by another of our key partners, Itron, for their new line of smart gas meters which will start rolling out in Europe later this year. This is our first design win success with Itron Gas.

These design wins as well as others in the security and industrial monitoring segments highlight the accelerating success of our AirPrime HL Series modules. The HL Series is truly unique in that it offers extraordinarily low power consumption as well as form factor and footprint compatibility across product lines and myriad network technologies.

This allows our customers to quickly and easily interchange multiple versions of 2G, 3G and 4G cellular connectivity within a single platform design. This improved flexibility helps reduce development costs and accelerates time to market for our customers.

Moving to our enterprise solution segment, revenue grew by 26% year-over-year to $23.9 million in Q3. Year-over-year growth in Q3 was driven by our managed connectivity acquisitions made during 2015 including Maingate, Accel Networks and a small contribution from MobiquiThings. In total we delivered cloud and connectivity services revenue of $6.2 million during the quarter. In addition, and as expected, organic revenue from gateways was up sequentially in the third quarter.

In the public safety market, we secured several deals including one of the largest mobile gateway wins in the Company's history. This order, the majority of which was delivered in Q3, positions us well with emergency responders needing dual cellular connections in a single gateway including LTE band 14. We also had important gateway wins in the transit and energy markets during the quarter.

As I mentioned on the last call, we believe there is strong and growing market opportunity for gateway solutions. We are committed to driving growth in this line of business.

We are planning to launch several new gateway products over the next three quarters including the current quarter and we are also making strategic investments in expanding direct and indirect sales capacity.

In our cloud and connectivity services line of business, platform and team integration activity is extraordinarily high. We are pleased to have the MobiquiThings transaction closed and we are making good progress on creating a single unified user experience for our cloud and connectivity services. Our recently launched IOT acceleration platform is the industry's first truly integrated platform that combines IOT hardware, managed connectivity and cloud services for worldwide deployments.

The IOT acceleration platform is unique in that it provides global cellular coverage combining Sierra SIMs and third-party network operator SIMs all managed from a single customer portal. The IOT acceleration platform also provides simple APIs that enable customers to connect their backend systems with remote machine data as well as easily access third-party big data analytics engines such as the Google cloud platform.

New customer wins and revenue from cloud and connectivity services also continues to ramp as we integrate teams, add services sales capacity and drive lead sharing with our OEM and gateway sales teams.

During Q3, our cloud and connectivity teams secured a number of wins for services in the energy, transportation and security segments. Deal and lead flow from our OEM and gateway sales teams is robust and validates our strategy to combine our device and services capabilities to create true device to cloud solutions for our customers.

I will now turn the call over to Dave who will provide more detail on the Q3 financial results and Q4 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, our definition of non-GAAP and a full reconciliation between our GAAP and non-GAAP results is provided in the press release.

Revenue in the third quarter was $154.6 million with solid profitability on both a GAAP and non-GAAP basis. Adjusted EBITDA was $12.1 million, non-GAAP earnings from operations were $9.5 million and non-GAAP net earnings were $7.4 million or $0.23 a share.

We closed the acquisition of MobiquiThings on September 2 so our consolidated Q3 results include a small revenue contribution of approximately $200,000 and breakeven earnings from MobiquiThings.

Our guidance for the third quarter did not include any contribution from MobiquiThings so for comparative purposes, we have excluded MobiquiThings and on this basis compared to guidance, revenue in the third quarter was $154.4 million. This was below our guidance range of $157 million to $160 million. As Jason mentioned, this was driven primarily by lower than expected sales to certain mobile computing OEMs who are transitioning their products to the new Intel Skylake processor platform. This transition is taking more time than expected and impacted demand for 4G enabled enterprise notebook computers.

Q3 non-GAAP gross margin was 31.8% which was lower sequentially by about 60 basis points compared to Q2. This decrease was driven by a customer and product mix shift in both OEM and enterprise solutions to lower margin products and services and the impact of higher costs for a certain end-of-life component used in some of our legacy OEM products.

Non-GAAP operating expenses in the quarter were $39.7 million which was slightly lower than expected and down 1.7% sequentially. The lower than expected OpEx in the quarter was a result of lower admin costs in Q3 and the timing of certain R&D expenses.

The combination of lower than expected revenue and gross margin partially offset by lower operating expenses resulted in third-quarter profitability at the low-end of our guidance expectations with non-GAAP earnings from operations of $9.5 million and non-GAAP net earnings of $7.4 million or $0.23 a share. The non-GAAP tax rate in Q3 was 21.8%.

Looking at some of the financial metrics for Q3 on a year-over-year basis, total Q3 revenue of $154.6 million was up 8% year-over-year and on an organic basis excluding the recent acquisitions of Wireless Maingate, Accel Networks and MobiquiThings, revenue was up 3.9% year-over-year compared to Q3 2014. On a year-to-date basis, organic growth was 12.5%.

Revenue from OEM solutions was $130.7 million representing an increase of 5.1% year-over-year. The year-over-year increase was primarily due to growth in automotive, energy and networking segments. On a year-to-date basis, total OEM growth was 15.8%.

Revenue from enterprise solutions was $23.9 million. That is up 26.3% year-over-year. The year-over-year increase was driven by revenue contributions from Maingate, Accel and a small contribution from MobiquiThings partially offset by lower sales of gateway products. However, as expected, we did experience sequential growth in gateway revenue in the third quarter.

On a year-to-date basis, revenue growth in enterprise solutions was 16.6%. In Q3, adjusted EBITDA was $12.1 million compared to $11.8 million in the same quarter last year and Q3 earnings from operations were $9.5 million compared to $8.4 million a year ago.

We had solid cash flow from operations during the quarter and our balance sheet remains strong. During the third quarter the business generated $10.4 million of cash from operations. CapEx was $3.6 million resulting in free cash flow of $6.8 million.

During the quarter we utilized $14.9 million for the purchase of MobiquiThings. Reflecting this, our cash balance declined by $8.1 million to end the quarter with a cash balance of $88.4 million and the Company remains debt-free.

Moving on to guidance for the fourth quarter of 2015, we expect Q4 2015 revenue to be in the range of $148 million to $151 million. This is below our expectations and down sequentially from Q3. The sequential decline from Q3 is principally a function of the short-term effect of order timing from a large automotive customer. We expect this order timing to normalize in Q1.

Relative to our expectations for Q4, this reduced revenue outlook is mainly a function of the situation with the automotive customer I just mentioned as well as a continuation of the impact of the platform transition currently underway with key mobile computing customers. Following this transition, we expect demand from mobile computing customers to normalize in the coming months.

Assuming the midpoint of our Q4 revenue guidance, our expected year-over-year revenue growth rate is approximately 12% for 2015.

We expect gross margin percentage in the fourth quarter to be slightly lower than Q3. This is principally driven by the higher cost for a certain end-of-life component used in some of our legacy OEM products which I mentioned earlier. We expect this to be a factor throughout 2016 as we transition out of this component. We expect Q4 operating expenses to increase slightly from Q3 driven by the addition of a full quarter of MobiquiThings OpEx and targeted investments in sales and R&D. Based on this, we expect Q4 non-GAAP consolidated earnings from operations to be between $4 million and $5 million and non-GAAP net earnings to be between $3 million and $3.7 million or earnings per share of $0.09 to $0.11.

With that, I will now turn the call over to Jason who will provide some brief summary comments on the quarter.

Thanks, Dave. So to summarize, we delivered solid year-over-year growth in revenue and earnings from operations in Q3 despite lower than expected revenue from select mobile computing customers who are navigating the technology platform transition we discussed. We also saw strong new customer win activity across all lines of business including the largest OEM design win in Company history.

I believe this provide sound evidence of the strength of our market position while also setting the Company up for future revenue growth.

We are executing to our stated strategy to move up the IOT value chain, to expand our cloud and connectivity services offering and recurring revenue base and to position the Company as an end to end device to cloud solution provider. Our strategy is working.

Services revenue is ramping, our IOT acceleration platform brings powerful differentiation and deal flow is on the rise.

Looking forward to Q4, our short-term business outlook is disappointing as a few key OEM customers worked through technology and order cycle transitions. We believe this situation is temporary, that demand will normalize in the coming months and that our topline will return to solid year-over-year growth rates in 2016.

Furthermore, we believe that the long-term growth and value creation opportunity in the IOT is compelling. We are the clear market leader, we are well positioned and we will continue to make careful organic investments in order to capture the IOT opportunity.

While we execute on our organic growth and expansion in the value chain, we will seek to further enhance our market position and business model with strategic acquisitions. We firmly believe that this combination will create long-term shareholder value.

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

(Operator Instructions). Daniel Amir, Ladenburg Thalmann.

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

Hi, Daniel. This is Jason. Let me take your second question first. So guidance, so two factors as we look to guidance. We are trying to explain two things as we put out the guidance. One is that we expect revenue to be down sequentially from Q3. The primary driver of that is this single automotive customer who is adjusting their ordering cycle so that their orders more accurately reflect end demand. That particular customer took I would say more inventory than needed to meet demand in Q3 and part of that was probably driven by some of our supply constraints earlier in the year so perhaps an overcorrection from that customer. So they need less supply in Q4. That is what is creating the sequential change and we expect their ordering pattern to be aligned with actual demand starting in Q1.

Now the other thing we are explaining in guidance is why we think -- we didn't expect to have a flat quarter so we feel like we have to add additional explanation for why overall guidance is below our expectation. So in addition to the automotive move which we believe is temporary, we are navigating this mobile computing transition to the new Skylight platform as well. Our view is that two is a temporary situation. That transition will be ending in the coming months and that demand for mobile computing customers will normalize after that.

That is the pretty detailed color around what is happening in the Q4 guidance.

With respect to design win activity yes, I think two big highlights on design wins in the quarter. One is largest design win in Company history, it is with an international automotive OEM. I alluded earlier that we are chasing some big deals, some elephant deals. We have bagged one in the quarter and we expect that design win will result in a shipment of several million units over the life of that program and we expect to commence initial shipments on that program in 2018 with significant volume in 2019.

You already heard the additional activity in the metering segments and those two are what we would consider to be large design wins that we will be rolling out in the coming years.

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

Daniel, it is still our expectation so certainly we didn't expect this softness we are experiencing in the second half. So yes, on a full-year basis it kind of dilutes down our full-year year-over-year organic growth rate to about 8%. And I will remind you that last year we saw organic growth of about 18% and/or 18.5%. So as we look forward to 2016, our expectation, admittedly off of a new lower base here, but our expectation is to see 10% to 15% organic growth. So excluding the contribution from acquisitions.

I think we are more comfortable at this stage at the lower end of that range in terms of year-over-year growth.

Okay, great. Thanks a lot.

Thanos Moschopoulos, BMO Capital Markets.

Good afternoon. Maybe just a follow-up on the PC markets. You said you expect demand to return in the coming months so should our takeaway be that this should be just a one or two quarter phenomenon or is it hard to time it that specifically?

That is the way we see it now, Thanos.

Okay, great. Maybe if you could elaborate on the outlook for the gateway business. You said you saw sequential improvements which is certainly good to hear. How far away are we from that business returning to year-over-year organic growth?

Sadly we will have easier comps next year. So I think we still have work to do there but very encouraging now we have seen two quarters in a row of sequential growth. We don't expect that it is going to be a perfect straight line up into the right on that business but we do expect -- well, to answer your question directly, I would certainly expect to see year-over-year growth in the first half of 2016 but again against pretty easy comps.

But in terms of really returning that business to the kind of growth we expect, it is going to take these new product launches so we are going to have I would say a pretty fully recharged product line by the end of the first half. And we are going to have an expanded and strengthened sales team and so our view is we are doing the right things to make sure that that business returns to the kind of growth we expect. But again on a year-over-year basis, we've got some fairly easy comps as we head into 2016.

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

Yes, I think same trend line is the way to think of it. Kind of top of the line numbers, 2G revenue was 16% so that was down significantly year-over-year. 3G revenue was 38% of the total, that was down a little bit year-over-year. 4G revenue was 38% of revenue so that is the first time 4G has been at the top and that was up 42% year-over-year. I know that doesn't add to 100% because there is some other stuff in there too.

But in terms of technology evolution, that certainly that trend line is certainly continuing and obviously 4G is starting to next quarter we would expect it to be the biggest technology category.

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

James Kisner, Jefferies.

Thanks, guys. I guess a couple of things. I am just wondering if you could maybe quantify a little bit here what the automotive impact was? I mean it seems like -- are you expecting in Q4 it just seems like a pretty big guide down. I could see more PC weakness just given how diversified your business is, is it $5 million, anything you can do to help us on that? And I guess I'm also wondering I am kind of surprised to hear you say that you are more comfortable with the low-end of organic 10% to 15% given that these issues that you are talking about in Q3 and Q4 appear to be somewhat temporary or could be temporary. So could you explain that? Is that just being more conservative after a couple of negative surprises or is there something else going on?

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

Okay, so for next year you are saying you'd kind of be comfortable with the lower side I mean I think there some potential here for this -- and I know you are not going to guide 2017 today but I am just wondering just given these elephants you are bagging I mean are saying this long-term rate is 10% now or are you just saying just 2016 is there some potential for re-acceleration as we get into 2017?

When we see that, it is the way we see it in the short to midterm so call it 2016. Getting beyond 2016 I think is just getting way out over our skis and our success in the connected car space, our success in energy those are good positive signs. Big automotive design wins have a long gestation period and tried to make that pretty clear on the call as well. So this largest design win in Company history we are not going to see revenue on it until 2018 so there is a bit of a lag here.

So when we talk about the way we see, what we see, the range on growth rates I should put it, it is really around our short-term view and think of that as the next 12 months.

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

It is based on a combination of factors but the heaviest factor we take in when we do our internal forecast, are input from the customer. It is closest to the point of demand and the demand view that they see is returning back to normalized levels.

So we don't see -- just to be clear -- we don't see a lot of growth out of that segment but we do see a return to we will call it normalized demand levels in the PC OEM segment.

Thanks a lot.

Tim Quillin, Stephens.

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

Sorry, Tim, we cannot. I won't leave it hanging like that but I will add we have been very careful not to give precise visibility into revenue from each one of our segments so we are not going to start doing that today.

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

I will take the kind of the way we see our use of this component and why it happened, I will let Dave comment further on the cost impact. But so don't want to get to precise on what component it is, it is an important component in some of our legacy products that is things like the baseband processor as an example would be a significant component. And why are we seeing higher cost there? Well, basically the price on that component has gone up because the component itself is going end of life and our view is the supplier isn't terribly interested in staying in that line of business so unfortunately we are suffering a significant premium on that end of life component. It is designed into a number of our legacy products. What we are doing in response is designing that component out but that doesn't happen overnight and so it is going to take us a little while to get to a new redesigned platform, reset the cost of those affected products and take the new redesigned products into market.

So we're going to have to live with the tax here for a little while until we get those new redesigned products into the market. So Dave, do want to comment on impact?

Sure, Tim, it is Dave here. In the fourth quarter we began to see this impact, it wasn't a full quarter impact because we still have some inventory of pre-end of life components Q3. So we will see the full impact of that in Q4. And in terms of size of our impact on gross margin, it was certainly less than half of the reduction in gross margin we saw sequentially from Q2 to Q3.

And Dave, while I have you, do you have the numbers in front of you to quantify the impact of currency moves particularly the rise of the US dollar on revenue, gross profit and earnings?

Sure. So maybe I will do that on a year-over-year basis, Tim. So on a year-over-year basis, Q3 2015 compared to Q3 2014 had about $1.2 million negative impact on revenue and about a $700,000 negative impact on gross margin and then at the operating income line, it had about a $3.3 million positive impact on earnings from operations.

Great. Do you have that year to date? I'm sorry to ask for that but if you have at year-to-date that would be great.

I have that on a year-over-year basis. I don't have it on the --

It is no problem. I will get it off-line. Thank you.

Todd Coupland, CIBC.

Thanks. Good evening, everyone. Firstly on the expenses, what should the operating expenses be in Q4?

They are certainly going to go up, Todd, from Q3. We had some timing issues on the R&D side. We have a full quarter of MobiquiThings, OpEx and Accel add into the quarter as well. I would say with a fully loaded cost structure we are around $42 million.

Okay, $42 million?

Correct.

Okay, thank you. And just conceptually if this automotive headwind clears as you would expect, would that allow for sequential growth into Q1 or will you still suffer seasonality from this over revenue level?

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

Okay. And for that to happen the auto issue would need to clear out?

Yes, it would.

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

It is going into a box that would commonly be called a TCU, a telematics control unit. It is a 4G implementation for that telematics control unit and the OEM is quite large and they sell products all over the world and at this point in time, we expect the scope of our project to include most markets that the OEM operates in.

And just for understanding of a design win, I think you said 2018 when it starts to contribute. I got the automotive design cycle is a longer cycle but I have the impression that in electronics that might be shorter. Is that incorrect or should we anticipate that auto wins will generally take a couple of years to get going?

Yes, they generally take a couple of years to get going. It is standard fare in automotive land.

Okay, that is great. Thanks so much.

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

Okay, thanks very much.

Mike Latimore, Northland Capital Markets.

Thanks. You said you had your largest design win ever. I guess in terms of all the design wins in the quarter, was the total value of that at a record level as well?

Yes, it was, Mike.

Okay. And then on the auto business, as the auto continue their order cycles, are there other auto companies that are on the sort of maybe older order patterns and move to just in time as well to reflect actual demand or could other car companies make the shift?

I think we are looking at a fairly unique situation here, Mike. And again I will kind of turn back the clock. You will recall that we had some component supply issues in the early part of the year and I think that spooked a few of our key customers, this one included and nobody -- and automotive going line down is taboo and so given the challenges we had with that particular component and thus our module supply to this customer, our read now in hindsight is that they overcorrected a bit and wanted to make sure that they had ample supply including upside supply.

So I believe this is what we are seeing. I think now after a lot of work we have got a pretty good view of what normalized demand is, normalized demand from the auto OEM and so we've got a pretty good idea of how the order cycle pattern is going to change to meet that demand and how it is sized. Anyway, pretty unique to this customer is our read and getting back to normal in Q1 is our read.

And then I guess just lastly did you think the enterprise delayed business grows sequentially again in the fourth quarter?

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

Okay. Thanks.

Steven Li, Raymond James

Great. Thank you. Jason, a couple of things. On Iskraemeco, their press release says most of their meters would be on CDMA networks so just wanted to clarify, so your (inaudible) also covers [CDMO] and not just GSM?

That is correct. It is kind of a special situation. This is actually a CDMA 450 network that is being deployed by the utility, Liander. Sort of unique and interestingly we have got the capability to spin an existing product to meet the 450 requirements. That is what we are doing so it is a CDMA version of the HL that we are going to be shipping to Iskraemeco.

All right, great. And then on the guidance, what do you factor for FX? Is it just current spot rates or is it the average quarter to date when you set your guidance? Thanks.

Steven, it is Dave here. We haven't done anything fancy there. We are using current spot rates as a proxy for the quarter.

All right, great. Thanks.

(Operator Instructions). Richard Tse, Cormark Securities.

It is actually Andrew in place of Richard. Thanks for taking my question. I just wanted to build on the enterprise segment. I know you guys have made some management changes and you've talked about a building in sales capacity. When do you expect that sales capacity to be finished and is it possibly already done by now?

I will take that, Andrew. So we have added already and we are not finished. So our view is that is a line of business that is going to require more sales capacity so we are going to continue to make targeted sales capacity investments both around gateways and cloud and connectivity services.

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

I would say we are still active and you are right, we are busy on integration by the way, very busy on integration and pretty complicated integrations with teams and platforms mainly around our cloud and connectivity services of course. So that has taken significant bandwidth.

Having said that, there are some interesting opportunities that we have seen so we have got an active funnel, maybe it is not quite as active as it was a year ago but the funnel is still active. We are still engaged in evaluating opportunities and meeting with management teams. So you know, we've got to be careful obviously with manpower capacity and financial capacity on some of these opportunities but we have to take a hard look and if they fit strategically, if they are accretive to earnings and enhance our market position, we are going to take a hard look.

That is great. Just lastly, is service still the focus when it comes to M&A?

Yes, as we have said it is really around what we now call enterprise solutions so there is both a services focus. I would say we are most proactive around services, we are also proactive around high-margin gateways. Both of those areas are interesting and we see opportunities in both of those areas and in the OEM business where we have got a big footprint, strong leadership position I would say we are being more reactive.

I appreciate you guys taking my questions.

Paul Treiber, RBC Capital Markets.

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

That is a great question. First of all, largely depends on the volume, Paul, and as we have said with these large volume deals, such as the one we won in Q3, you win it at a gross margin percent -- well, we won this on a gross margin percentage that certainly is below the corporate average, below our OEM solutions business unit average. That is the tough news.

The good news is we have three years to figure out how to drive cost out before launch and then another four to five years to continue to mine cost out of the platform and expand gross margin. That is normally how these big volume deals work. That is how they have worked in the past by the way. Our automotive deals that we are shipping on in volume today started the same way with significantly lower gross margin at the start of production and now we have driven gross margin up to significantly higher levels. So I would say it is normalized pattern.

Paul, it is Dave here, the only other thing I would add is that as you get more of these you also benefit from scale as well which gives a little helping hand to gross margins.

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

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

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

It is a lot of moving pieces, Paul, but I would say right now our view on blended ASPs should be fairly stable and I say that because 4G is growing as a percentage of our revenue and pretty early in 2016 a lot of our -- well, there is a chance that a lot of our 2G business will be replaced with LTE Cat 1, which is a lower end 4G but still higher ASP than 2G.

So there is a lot of moving pieces with respect to the blending on AESs so right now our view is we expect a certain degree of stability.

Okay, thank you. I will leave it at that.

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

Great, thanks, Scott. With that I will just thank everybody for joining today's call and as usual if there is follow-up questions, management is available here in our Richmond headquarters.

Scott, thank you. You can now terminate the call.

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