司亞樂 (SWIR) 2015 Q4 法說會逐字稿

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. (Operator Instructions). Thank you.

Mr. David Climie, Vice President of Investor Relations, you may begin your conference.

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 then 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.

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 ATMs.

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 were also active in strategic M&A. In 2015 we completed three key acquisitions to 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 their machine and sensor 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 continued 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 in enterprise gateway solutions and in our expanding cloud and connectivity line of business. This realignment has matured, and we are 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 underway.

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 team, 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 will see that we are now providing financial information at the revenue and gross margin level for each of these segments.

I will 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 this 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 is 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 are 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 lifetime value. We expect several of these new programs secured in 2015, and others that were acquired in 2014, to begin to contribute to revenue growth this year. We also continued to see solid design win activity in Q4, securing key design wins across a 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 are 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 that 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've recently acquired to work in bolstering our market position. Based on patented technology acquired with MobiquiThings, we are 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 now have a very strong business platform to drive our device-to-cloud vision and strategy. We are now providing and capturing more value on many of the new device deals we secure. 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.

I'm going to take a moment on strategy. Our divestiture of the AirCard business in 2013, our subsequent acquisitions, our organizational realignment, 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 are the clear world leader in intelligent cellular devices for the IoT. And we continue to innovate on 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 customers' machine to their enterprise systems, providing almost everything they need to rapidly and cost-effectively build, deploy, and manage their IoT applications. This enables us to capture a very long-term, sustainable position with our customers, and to capture recurring revenue over many years. I believe we are 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.

I'll take a minute now and tell you how I think we're going to do that. We believe our strategy is sound 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 a gross margin accretive mix shift, as growth from enterprise and cloud and connectivity outpaces growth from our OEM solutions business. Our growth goals and our 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 drive consolidated gross margin exceeding 35%, and an operating margin above 10%. And we believe that achieving this goal will create the clear, sustainable leader in device-to-cloud solutions for the IoT, and drive significant returns.

I will now turn the call over to Dave McLennan, who will provide more detail on the Q4 financial results and guidance.

Great. Thank you, Jason, and good afternoon, everyone. 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.

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 drove 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 used in 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 throughout 2016, as we transition out of this component.

Another factor was the impact from higher early run manufacturing costs associated with a number of new product launches. And we also saw some natural ASP erosion, as some products mature. 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 the result of timing of certain sales, 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 benefited 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 $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 remains 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 a 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 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 have received approval today from the TSX for a normal course issuer bid, commencing February 9. This will allow us to repurchase up to approximately 3.1 million shares for cancellation, 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.

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. And 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 are 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 backed 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 a $20 billion opportunity, on driving sustained revenue growth to $1 billion and beyond, and to driving a 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 Instructions). Daniel Amir, Ladenburg Thalmann.

I guess there's a bigger issue here. In the prepared comments, largely, you -- I'm playing devil's advocate -- you're highlighting that this was a great year for you. But this is the fourth consecutive quarter that you've 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 snapback here, starting in Q2 into the second half, to achieve your mid-range of 7% growth? Thanks.

Sure. Thanks, Daniel. I don't know that 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 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 missed Street expectations. But with respect to guidance, we missed that in the last two quarters.

So what gives us confidence? I shared with you what we think is happening in our business. It 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 a recharged product lineup 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, I think 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 we have not lost share at any of those customers, but rather there's additional caution there; and with respect to the automotive customer, 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 comes 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 are 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.

So 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.

Well, 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 was call out a single automotive customer. And we had 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're not ordering from anybody else. That's not practical, as you know. Once an OEM designs in your embedded module, it takes many months to design you out. So what we think we're seeing there is some softness in demand on the part of their customers, and that's affecting their ordering patterns on us. In enterprise, that played out as we expected. And in cloud and connectivity, that played out as we expected.

Great. Thanks a lot. I'll get back into the queue. Thanks.

Thanos Moschopoulos, BMO Capital Markets.

Jason, just to be clear, in terms of the OEM customers where you saw weaker demand, are there any specific themes that you can call out, as far as maybe the verticals or the geographies? Or was it a broad assortment of customers?

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

Okay. And in terms of your OEM pipeline, has there been any hints of caution on that front? 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 more consistent with historical trends?

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.

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 the result of design wins significantly earlier, significant investment on the part of the customer to design our solutions in. And those programs go to launch this year. And like I said, that's what gives us optimism for the outlook for the balance of the year.

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

I would expect some modest improvement, Thanos. I cited a couple of drivers of the decline in gross margin. And I think we've got some visibility on some modest improvement in those items.

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

Mike Walkley, Canaccord Genuity.

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?

I think you're referring to a potential technology overhang -- 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.

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

As a result of the macro environment, we don't view that as a factor driving ASPs down anymore. We are seeing some natural ASP erosion as products mature. You've recalled, in past periods, the ASPs in OEM have been remarkably stable as a family, mainly because of a rapid mix shift to higher ASP products for 4G. That mix shift -- our view is that mix shift will slow a bit here, and we'll begin to see more natural ASP erosion in OEM. But our view is 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.

Great. And just one last question for me to help with 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 new 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 off there, or back-half weighted? Just how are you seeing the slope of the year, as you just gave this annual guidance?

Well, I think we want to be careful there, Mike. One of the reasons -- obviously on a short-term -- from a short-term guidance standpoint, we've been bitten here twice in a row. And as you saw, for Q1, we gave a wider range because we want to play it safer. And in order to help people in their modeling, we've given annual guidance. So, beyond that, we're going to be pretty cautious to give you specific information as to the shape of the ramp. Obviously in Q1, we're starting 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.

Okay. Thank you.

James Kisner, Jefferies.

So I just wanted to clarify, I think you said gross margin would be up modestly, sequentially. Is that just driven by mix? That must mean that OEM is going to be down more than enterprise. Is that a fair assumption?

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

Why would that be, though? I'm assuming that's driven by mix. Your revenues are down sequentially and -- so presumably it's not operating leverage. So is it just driven by -- I mean, again, is it segment mix that's driving that, or is there something else that I'm missing?

A couple things. One is certainly mix. That has a factor, particularly among our business units. But I also cited -- yes, we've had an unusual number of new product launches, many of them in OEM. And in the early stages of a new product, from a manufacturing perspective, they aren't necessarily at their target margin level. So as we get some more maturity on those products, we would expect those newer products to see some lift in gross margin.

And 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.

Okay. Including enterprise, I guess?

Yes.

Correct, yes.

So, looking at your outlook again for full-year 2016, what are you assuming in that guidance for that troubled automotive customer, and about the PC market in general?

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 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.

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

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%.

Okay. Thanks very much.

Rajesh Ghai, Macquarie.

I had a question on the PC OEM segment, which has been weak. And you mentioned the Skylake transition causing a [fall] in that segment. Given that the laptop segment is -- and laptops in general are becoming more like tablets -- what is the risk that the PC OEMs do a form factor change that is a move away from wireless modules, such as yours, to maybe something similar to what is used in tablets and cell phones, such as a SIM?

So, by the way, our devices do come with a SIM. So I think what you are probably referring to is an onboard 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 clamshell-based designs. We're also designed into tablets from those manufacturers. And the laptop guys and the mobile computing guys have traditionally thought this way, because they often have a broad lineup of products; they have to be agile. So modularity fits their requirements well.

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.

Okay. And as far as the cloud connectivity business, I appreciate your bringing it out, and also reporting the gross margins on that business. When you made the Wireless Maingate acquisition, I recall you had mentioned that the margins in that business are in the same ballpark as the enterprise solution business. In this press release, I noticed it's around 10 points below the gross margin for the enterprise business. Has this changed from what you had anticipated a year ago? Or you are facing some fresh challenges that have forced you to lower pricing or accept lower gross margins?

No. No, it's the same. So if you looked -- and we're not -- we're going to be careful, because we're 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 pure managed connectivity plays for the IoT -- those gross margins are indeed consistent with what we see from enterprise solutions. But we've 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 have some fixed operations cost there. And, 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 are 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.

Okay. That's very helpful. Obviously you are doing pretty well on the cellular side with -- you have one Cat 1 design win. And I believe you are working on the Cat 0 for LTE. As far as the [sparcities] market is concerned, obviously it would suggest that a lot of them are looking at protocols, such as low-power LAN and lower. 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?

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 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, both of those protocols are squarely focused on the wide-area low-power opportunity that players like Sigfox and LoRa are focused on.

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

Yes. I think we'll start to see -- well, we'll 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 will probably be modest.

Okay.

So it's probably a bigger event in 2018.

Thank you.

Todd Coupland, CIBC.

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?

Well, as you might expect, Todd, 40 programs -- that's going to be very broad-based. So that's spread across many different market segments and geographies. A 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's going to be a meaningful contribution from automotive, energy, and enterprise, as well as industrial. I think if there's more significant drivers, Todd, to focus on, it would be automotive and energy, which would represent, I would say, the bigger deals that we expect to start launching.

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

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

Okay. Thank you. And my next question would be -- maybe you 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?

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

Thanks very much.

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.

Right.

We are making offensive investments, particularly in sales and marketing.

Richard Tse, Cormark Securities.

Jason, you talk about the strength in the design win momentum, and I'm trying to reconcile that against revenue. Can you give us maybe some perspective on -- I don't know what metrics you want to use -- the growth in your design wins, whether it be on a year-over-year or a trailing 12-month basis, to the growth in your revenue?

It's our favorite topic, Richard. Trying to connect (multiple speakers).

I know it's tough to pin that, because I know the value of those design wins obviously change over time. But I'm just trying to sort of reconcile that.

Yes, yes. Of course, every design win is not created equal. So, I guess we're stepping out here with a little more disclosure around our design wins, in part to demonstrate why we're confident in our expectations of growth in OEM.

As I mentioned on the call, last year, we secured a little over $1 billion in lifetime value in design wins, in our OEM segment. And that was up considerably from 2014. So that's a -- 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 took another step on disclosure, and referred to the 40 new programs that we expect to launch this year.

Okay.

So I think we're 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 lifetime value, but we're taking a couple of steps in that direction.

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

It's a great question; and, by the way, pretty interesting valuation, as well, on the Cisco acquisition of Jasper. 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, 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'd challenge you to point to any other player in the market who gets exposed to 15 million opportunities a year to sell services. 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.

Beyond that, I think we could point to many things in the platform and in our connectivity service -- which, as 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.

Okay, great. Thank you.

Ross DeMont, Midwood Capital.

Just looking back over the last year, I think there's been -- over the last four quarters, the stock had a pretty negative reaction to earnings. Tomorrow, that will happen again. So I only point that out because that's the backdrop against which people will judge the likelihood of you guys making guidance. 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 do in the next three quarters -- if you take, again, the midpoint of the annual range. So, we go from $140 million to having to average $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're setting yourself up with guidance which is just very, very difficult to make.

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 the year.

Sure, sure. Well, Ross, my answer to that is we quite candidly tried 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've been there before -- that's no guarantee that we'll get there again -- but we've 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 put up. And I would say we tried to be very careful in the range we put up, as well.

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're having a -- we're stepping down for a quarter here meaningfully, and that's happened for a few quarters now. But the guidance you're giving us suggests record quarters, right around the corner. It just doesn't -- I guess it just seems like -- it makes me nervous that we're setting up for challenges again.

Right. No, I understand your point. And like I said, we've 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.

If we have a macro situation that rapidly moves 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.

Okay. Well, thanks for taking my question, and glad to see you guys will be in the market pretty soon buying shares. Thanks for that.

There are no further --.

We'll take one more question.

There are no further questions at this time.

I turn the call back over to the presenters.

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.

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