司亞樂 (SWIR) 2016 Q2 法說會逐字稿

Good afternoon, my name is Kelly and I will be your conference operator today. At this time I would like to welcome everyone to the Sierra Wireless second-quarter 2016 earnings results conference call. (Operator Instructions). Thank you. And I will now turn the call over to David Climie, Vice President of Investor Relations. Please begin, sir.

Thanks, Kelly, and good afternoon, everybody. Thank you for joining today's conference call and webcast. With me on the call today 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 our second-quarter results; Dave will then provide a more detailed overview of our financial results as well as our guidance for the third quarter of 2016; and following that Jason will provide a brief summary, then we'll finish with a Q&A session.

Before we get started I will reference the Company's Safe Harbor statement. The 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 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 attention to a longer discussion of 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 will start with a summary of our second-quarter 2016 results. Revenue in the second quarter was $156.2 million, up 9.4% sequentially. Compared to the same quarter last year revenue was lower by 1.1%. On a year-over-year basis, slightly softer OEM sales were largely offset by growth in both Enterprise and Cloud and Connectivity.

Our Q2 revenue was in line with our expectations and slightly above the midpoint of our quarterly guidance. Adjusted EBITDA in the second quarter was $12.1 million and non-GAAP earnings per share were $0.20. Our Q2 profitability metrics benefited from a recovery of legal expenses in the quarter. Excluding this favorable impact, our Q2 non-GAAP EPS was $0.14, which is slightly ahead of the midpoint of our guidance.

Customer acquisition activity was solid during the quarter as each of our business units won new programs and customers across a broad range of market segments and geographical regions.

I'm also pleased to announce that we closed the acquisition of GenX Mobile yesterday, significantly strengthening our strategic position in the important fleet management and asset tracking segments. And I will provide more detail on this acquisition a little later in the call.

For now we are going to move and take a closer look at the business segments starting with OEM revenue. And our OEM solutions business was $132.6 million in the second quarter compared to $138.2 million in the same quarter of 2015.

As expected OEM revenue was up 10% sequentially as we saw stronger demand from established customers and programs as well as growing contribution from new programs. Market segment drivers of the sequential growth included automotive, sales and payment, energy and mobile computing.

OEM non-GAAP gross margin was 31% in Q2, up from 28.4% in Q1. Q2 OEM gross margin was favorably impacted by one-time legal -- recovery of legal costs. And net of this favorable impact non-GAAP gross margin in the OEM solutions business was 29.7%.

During Q2 we experienced solid design win success including two new wins in the growing China automotive market, as well as key wins in the transportation, smart metering, networking and industrial segments. Our pipeline of new customer programs continues to expand, supporting our expectation of long-term growth in OEM solutions.

In the short term, however, our view of growth in OEM solutions has become more cautious as our demand outlook for established customers and programs has weakened and we see signs of customers managing inventory more tightly. This weaker outlook for established customers and programs is partially offset by expected continued growth from new programs.

Moving to Enterprise Solutions. Revenue in our Enterprise Solutions business was $16.6 million in the second quarter, an increase of 10% compared to the same quarter last year. For the first half of 2016 Enterprise Solutions is up approximately 9.5% as this line of business continues to show healthy signs of a return to growth.

Enterprise gross margin in Q2 was 53.9%. Excluding the favorable legal cost recovery referred to earlier, Enterprise gross margin was 52.8%, which is in line with what we saw in Q1.

In addition to targeted investments in sales and indirect channels, the launch of new market-leading products is critical to driving continued growth in this line of business. In the second quarter the recently launched RV50 industrial gateway was a key contributor to revenue growth.

During Q2 we also launched our next new product, the MP70 rugged mobile router, that delivers high-speed LTE Advance connectivity as well as gigabit Wi-Fi and gigabit Ethernet for mission-critical applications in the public safety, transit and field services markets.

We are very excited about this new product and early market traction has been strong. The launch of additional new Enterprise products is expected in the second half of 2016.

New customer acquisition activity was also strong in Q2 with significant wins in the public safety and transit segments. And we are also adding some scale and key capabilities to this line of business with the acquisition of GenX Mobile.

So a bit more detail on the GenX acquisition. GenX mobile is an established provider of in vehicle cellular devices for the fleet management, asset tracking and transportation markets and is based in San Jose.

GenX devices are generally deployed in location aware and/or driver behavior aware applications principally in the US and Canada. The Company's products are complementary to our existing Enterprise Solutions product line and occupy the lower end of the mobile device range.

GenX devices support 2G and 3G cellular technologies and the Company has 4G products on the roadmap. We see GenX as an excellent strategic fit for our Enterprise BU as it strengthens our position in the important fleet management and asset tracking markets and bolsters our telematics and location capabilities. The combined mobile product portfolio or represent the broadest in the industry, enabling us to address the needs of nearly any fleet type.

We also see a natural bundling opportunity for GenX devices with our Cloud and Connectivity Services. Furthermore, we believe that over time there are opportunities to capture significant cost of goods and channel synergies.

The acquisition of GenX was completed yesterday for $7.8 million in cash or, $6 million net of cash acquired. The Company has 22 employees, all of whom have joined our Enterprise business unit team. In the first half of 2016, first half, GenX recorded revenue of $6.7 million and was roughly breakeven on a non-GAAP earnings from operations basis.

Now moving to our Cloud and Connectivity Services segment. Cloud and Connectivity revenue, which is comprised mainly of recurring service based contracts, was $7 million in Q2 with non-GAAP gross margin of 40.7%.

New customer acquisition activity was strong in Q2 as we secured new programs in the automotive, industrial, security and digital signage segments. We are also very encouraged to see that approximately 50% of these new customer wins were the result of inter BU lead sharing and collaboration.

This supports our key strategic thesis that device sales can lead directly to Cloud and Connectivity wins and that combining CR devices with CR Cloud and Connectivity Services results in a differentiated device to cloud solution.

We are also very encouraged to see that the vast majority of new Cloud and Connectivity customers are adopting our patented Smart SIM technology that we launched last quarter. Our Smart SIM technology enables us to deliver the highest quality of connectivity service available while also closely managing our cost of service.

Additionally, our core network platform is now fully upgraded to support LTE services and we are continuing to expand our wholesale agreements with mobile network operators as we seek to expand our connectivity services globally.

The demonstrated lead flow from existing and new device customers, differentiated cloud and connectivity capabilities and global footprint expansion give us confidence in our ability to drive strong long-term growth in our recurring Cloud and Connectivity Services revenue.

I will not turn the call over to Dave who will provide more detail on the Q2 financial results and our guidance for Q3.

Thanks, Jason, and good afternoon, everyone. Please note that we report our financial results on a US GAAP basis. However, we also present our 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 for your reference.

Moving on to some summary key metrics for Q2. Q2 2016 was slightly better than our expectations. Revenue was $156.2 million. Adjusted EBITDA was $12.1 million. Non-GAAP earnings from operations were $8.4 million and non-GAAP net earnings were $6.4 million or $0.20 a share.

Note that in Q2 2016 we received reimbursement of certain legal costs pursuant to a favorable arbitration decision on a contract dispute with an intellectual property licensor. The reimbursement resulted in a favorable impact of $1.9 million in cost of goods sold. $1.7 million of this was booked in our OEM business unit and $200,000 was booked in our Enterprise business unit.

Comparing our Q2 non-GAAP results to guidance, revenue at $156.2 million was slightly above the midpoint of our guidance range of $150 million to $160 million with each business segment performing largely as expected.

Q2 gross margin of 33.8% included the previously mentioned legal cost recovery of $1.9 million. Net of this recovery in Q2 and net of the separate legal settlement reported in Q1, gross margin increased sequentially by 1.1 percentage points to 32.6 in Q2.

Q2 non-GAAP operating expenses were $44.4 million, in line with our expectations and up $1.1 million compared to Q1. This sequential increase relates to the favorable legal settlement we booked in Q1 which reduced our OpEx in that quarter by $400,000. The remainder of the sequential increase in Q2 OpEx relates to sales and marketing investments as well as costs associated with office consolidation in France.

This operating performance resulted in non-GAAP earnings per share of $0.20 in Q2. Net of the previously mentioned legal cost recovery, non-GAAP EPS was $0.14, which was slightly above the midpoint of our guidance.

Looking at key metrics for the second quarter compared to the same period in 2015 and for the first quarter of this year, on a year-over-year basis total revenue declined by 1.1%. This decline was driven by a 4% decrease in OEM revenue reflecting some demand softness from certain established OEM customers and programs partially offset by contribution from new programs.

I would also note that we experienced a particularly strong quarter in Q2 a year ago making Q2 a tough year-over-year comparable.

Partially offsetting the OEM decline were stronger revenues from both Enterprise Solutions, which was up 10% year-over-year, and Cloud and Connectivity Services. Cloud and Connectivity Services had a significant lift year-over-year from acquired businesses.

On a sequential basis compared to Q1 total revenue improved by 9.4%. This increase was driven primarily by a 9.8% increase in OEM revenue with notable increases in automotive, energy, payment and mobile computing. Enterprise Solutions was also up sequentially by 10.6% as new products continue to ramp.

Similar to the revenue profile, Q2 adjusted EBITDA and non-GAAP earnings from operations were both down year over year and up sequentially from Q1. Adjusted EBITDA increased sequentially to $12.1 million in Q2 of 2016 compared to $6.7 million in Q1. Net of the previously mentioned legal cost recovery in Q2 and the separate legal settlement in Q1, EBITDA was $10.2 million in Q2 compared to $4.4 million in Q1.

Non-GAAP operating income increased sequentially to $8.4 million in Q2 compared to $3.6 million in Q1. Net of the previously mentioned legal cost recovery in Q2 and the separate legal settlement in Q1, non-GAAP operating income was $6.5 million in Q2 compared to $1.3 million in Q1.

Looking at our balance sheet. Our balance sheet remains strong and we have no debt. During the second quarter the business generated a very healthy $16.5 million in cash from operations. CapEx was fairly high at $5.7 million during the quarter, which included an investment in new factory test equipment, R&D and IT equipment, software licenses and some office leasehold improvements.

Free cash flow net of CapEx was $10.8 million. Other activities generated a net $1.5 million cash in the quarter. And in total our cash balance increased by $12.3 million to end the quarter at $98.4 million.

Moving on to guidance. Our short-term outlook for the business is cautious. While we expect to see continued solid revenue contributions from new OEM programs, we are seeing signs of softer short-term demand and tighter inventory management with some established OEM customers and programs.

[Quarterly] for the third quarter of 2016 we expect revenue to be in the range of $145 million to $155 million and non-GAAP earnings per share to be in the range of $0.09 to $0.13 (sic-see presentation slide-13 "$0.06 to $0.13"). In the fourth quarter of 2016 we expect to see both sequential and year-over-year growth, although not to the levels previously anticipated.

Given this softer short-term outlook we now expect full-year 2016 revenue and non-GAAP EPS to be below the low end of our previously stated annual guidance range of $630 million to $670 million in revenue and non-GAAP EPS of $0.60 to $0.90. And this guidance -- this non-GAAP guidance excludes any contribution from the recently acquired GenX Mobile business.

With that I would like to turn the call back to Jason.

Thank you, Dave. So, to summarize, we delivered a solid second quarter of 2016 with results that were slightly better than we expected. Our customer acquisition activity was once again strong across all business units and geographical regions and wins came from multiple market segments.

In addition, we saw excellent continued collaboration across our business units resulting in a significant expansion of our Cloud and Connectivity customer base. After delivering another quarter of year-over-year growth, our Enterprise business has added scale, expanded their product line and established a stronger strategic position in the important fleet management market with the acquisition of GenX Mobile.

Looking forward, as Dave said, our short-term outlook for the business is cautious. While we expect to see continued revenue growth from new OEM programs and Enterprise Solutions and a continued expansion of our Cloud and Connectivity customer base, we are seeing signs of softer short-term demand and tighter inventory management with some of our established OEM customers and programs. This has led us to lower our revenue and earnings expectations for the second half of this year.

Longer term we continue to be excited about the growth opportunity ahead. We are the global leader in cellular connectivity solutions for the Internet of Things and we've made significant progress in further strengthening our strategic position, rapidly expanding our position in the value chain, firmly establishing ourselves as a differentiated provider of device to cloud solutions and investing in new product innovation and sales capacity.

Our three business segments now expose us to a much larger and more valuable market opportunity. In the aggregate industry analysts predict that our three segments will represent a $20 billion market in 2020. And we believe that we are better positioned now than ever before to capture a significant share of this opportunity.

We also plan to stay active in M&A that supports our device to cloud strategy and that helps us to accelerate long-term growth and value creation for shareholders.

That concludes our prepared remarks and, Kelly, you can now open the line for questions.

(Operator Instructions). Thanos Moschopoulos, BMO Capital Markets.

Jason, can you provide any color in terms of the OEM weakness that you are seeing? Are there any themes there as far as end markets or geographies? Or would you characterize it as somewhat broad-based across a number of areas?

Well, I would characterize it this way, Thanos. It is a short list of customers. However, these customers represent a number of different segments. From a geographical standpoint -- and by the way, these are established customers, so these are customers and programs that were in existence last year is the way to think about that.

And from a geographical standpoint it is -- these customers or the driver of the revenue for these customers is largely the US, Europe and a little bit of Brazil. So, I wish I could share with you one theme there, Thanos, there isn't. Like I said, it's a short list of established customers and programs across a few different regions and segments.

And then in terms of the 40 programs that you'd previously talked about ramping in the second half. Are those still on track and have your expectations changed at all in terms of the revenue you might see from those programs?

They are on track. In fact, they have been contributing in the first half. They contributed a little bit in Q1 and, to our expectations, the same thing happened in Q2. So our expectation is that is going to continue, Thanos. I mean there is 40 programs. So as you can imagine, there is always pluses and minuses.

But I would say it is well distributed across geographies and segments. And so far those new programs are contributing in line with our expectations and we expect that to continue through the balance of the year.

Okay. Let me get one for Dave. How should we think about OEM margins near-term given the revenue pressure?

Yes, I mean -- Thanos, it is Dave here. We saw a nice little tick up sequentially from Q1 to Q2. I would -- and this is just for the OEM, I would think we would see stability in that area off of the -- relative to the Q2 number.

Okay. Okay. And maybe one last one for me. You mentioned it sounds like bookings may have been good in the quarter. Can you provide some are color in terms of how bookings shaped up?

Sure. Bookings were fine. And what I really referred to were customer wins. So that is -- sometimes a customer win is a design win that doesn't necessarily immediately come with purchase orders, Thanos, especially in the OEM business. So those are design wins.

Generally an enterprise that is anchored by a PO and new customer acquisition activity was good in the second quarter. And you have seen now a couple of good quarters of year-over-year growth out of Enterprise, so that is -- we are bullish that that business is back to a sustained year-over-year growth.

And customer acquisition and Cloud and Connectivity is generally anchored by a services contract. And of course over time the subscribers related to those customers and contracts roll out and I would characterize the new customer acquisition activity in that business unit as quite strong.

Great, thanks, guys. I'll pass the line.

Mike Walkley, Canaccord Genuity.

Dave just a clarification. On the last question when you talked about gross margin stability, is that ex the one-time legal recovery or consistent with legal? And then on the Enterprise Solutions with GenX can you help us think maybe about gross margin trends once that closes since it sounds like it is a lower gross margin product than that overall group of products there? Thank you.

Mike, it is Dave. My comment was excluding the legal recovery in Q2 and the legal settlement in Q1. So, the 29.7% as an example in OEM gross margin in Q2, that is what I was referring to as stability going forward.

With respect to GenX and the gross margin profile there -- look, it is a smaller business. It will be below the average of gross margin in our Enterprise business.

Okay, thank you. And my follow-up question for Jason. Just on the cautious OEM solutions outlook. As you look at that list of customers is there any second sourcing going on there? Maybe they are switching programs to diversify. Or is there anything -- any color you can give us that maybe you feel good about these customers longer-term? And what gives you confidence maybe for that recovery in Q4 in your visibility? Thank you.

Yes, sure, thanks, Mike. So, yes, I think the theme here is weaker demand as opposed to share shift, Mike, is the way to think about it. I mean, in our business, as you can appreciate, we always have some share gains and always have a little bit of share loss in any quarter. So that is I would say playing out as expected. And with respect to the second half weakness we are seeing from these customers the theme is not share shift; the theme is really about tighter management of inventory and softer demand from our customers' customers.

Okay, thank you.

James Kisner, Jefferies.

This is (inaudible) speaking for James Kisner today. We had a couple of questions. So, regarding your existing OEM accounts versus the new accounts, I don't know if you could help us judge the relative size? I am assuming that new accounts are relatively small. So, their growth -- I mean when will it offset the decline in the existing accounts? If you could give us any information about that that would be great.

Sure, sure, so I will give you some directional commentary on that, Tim. So the -- as you can appreciate, the headwinds we are seeing from a small list of existing customers and programs, they tend to be larger customers, as you can appreciate. And then the new programs, there is 40 of them, some of them are small and some of them are quite large. These are not all new customers by the way; they are new programs. So some of them are existing customers rolling out new programs.

With respect to when the new program revenue contribution fully offsets the weakness from existing customers and programs, directionally what we have shared here is as far as we are going to go. And that is we expect to Q4 to be up sequentially from Q3 and to be up year over year.

So, of course the year-over-year comparison is not a tough one given Q4 of 2015. But up sequentially is a key takeaway there. So definitely we expect some growing strength, if you will, with respect to contribution from the new programs. Like I said, we have seen that in the first half and we have got good visibility to that in Q3 and we expect more of that in Q4.

Okay. And then a follow-up question about the OEMs. So for the [PC] market OEMs, so in Q2 PC market actually did better than expected. And so is one of those customers in the PC area, are you seeing lower demand there?

So Q2 revenue from PC OEMs in Q2 was as expected is the way I would characterize it. So, yes, up from Q1, but as expected in Q2. So it didn't outperform our expectations, that is maybe a clarification there.

As we look forward short-term here Q3, Q4 with respect to the existing customers and programs and the demand weakness we see there, unfortunately there is representation from a number of segments, Tim. So it is not a PC OEM theme. There are names on that list from networking, automotive, energy and mobile computing.

Okay. Okay and then one last question for Dave then. About OpEx in general, do you expect OpEx to be flattish quarter over quarter for Q3?

Tim, I think we'll see -- in Q3 I think we will see it tick up a little bit off of the $44.4 million that we saw in Q2. And that is going to be largely driven I expect by some R&D activity that we have going on currently in the quarter that we will sequentially see a little bit of a bump in OpEx.

All right, thanks, Jason and Dave.

(Operator Instructions). Paul Treiber, RBC Capital Markets.

I was wanting to hone in a little bit more into the automotive vertical. Just as you think about the second half of the year, I'm sure there is a couple of new program launches coming. Do you expect automotive revenue in the second half of the year to be stronger than the first half of the year when you combine the existing and new programs? And then do you anticipate that any weakness in existing programs will be offset by the new program launches?

So, specifically with respect to automotive, Paul, I am going to avoid talking about just the second half. So, we do expect revenue from automotive for the full year to be up full-year 2016 compared to full-year 2015. That is all new program driven is the way to think about that. So we are seeing I would say some demand headwinds from some of our existing automotive programs.

So, the growth that we are seeing in automotive -- and some of that is coming from new programs in the second half, by the way. But our view now is that growth in automotive is new program driven and key existing automotive programs we do not see growth in and in fact think some headwinds -- demand headwinds at some accounts.

And is that -- do you think that is timing related or is it end demand -- more end demand related, those headwinds?

I don't know that we have perfect visibility to that yet, Paul. Certainly inventory -- tightening of inventory management is a theme. We have seen some very recent July numbers come out from some larger car OEMs that would imply a little bit of weakness in car sales coming in. So, some have theorized maybe car sales have peaked.

So, I think there is a bit of a combination there. And I can't give you the perfect answer, but it clearly -- what we clearly see is a tightening of inventory management and a softening of demand. And I mean if I had to make a call on that now you would have to say that that was a little bit softer end-user demand.

Okay. Still in automotive, as you look at longer-term the next-generation design wins that you are seeing, are you seeing incremental more a shift from the Tier 1 automotive suppliers wanting to use or trying to delve into doing their own onboard chip solutions as opposed to using modules? Are you sort of seeing a shift in those suppliers?

What I would call vertically integrated solutions from Tier 1 OEMs has always been a competitive factor that we deal with, Paul. So that has always been in our automotive business and it is -- candidly it is a battle we fight every day.

Have we seen an acceleration of vertical integration? I can't conclude that. It is always a competitive factor and I think it is always going to be a competitive factor. So I don't think -- I wouldn't point to that as a secular trend in the market causing a huge disintermediation threat to us.

In fact, we've seen some favorable shifts in buying process by the car OEMs themselves that actually could favor us where car OEMs are actually making the module decision ahead of selecting a Tier 1 supplier.

So, there is ebbs and flows, yes, some guys are going to go -- some Tier 1s will go vertically integrated and going the other way the car OEMs themselves want to -- some of them want to control more of the value chain and supply chain. And that movement actually favors us.

Just one last one for me. Just looking at the Cloud and Connectivity business, it seems like your comments around the new customer wins are very bullish. But then it is taking you a little bit longer to translate into revenue just looking at it from a sequential basis.

Are there any metrics you can provide just to help quantify the growth and momentum in the customers? And then how do we think about the timeframe in terms of new customer wins translating into higher cloud and connectivity revenue?

(Inaudible) take time for sure. So, that new customer -- so I'm not going to give you the -- I'm not going to satisfy you with great metrics here with respect to number of new customer wins or expected recurring revenue. We are tracking that internally and I think when that gets cooked and we are comfortable sharing that externally as a metric we are definitely going to do that.

But in Q2 and in Q1 new customer acquisition, which is -- frankly it is the key thing we are focused on now, Paul, because subscribers of revenue follow the new customer acquisitions so the key focus is there. We have exceeded our expectations and plan in the first half with respect to new customer acquisition, so that is good.

But, yes, these programs do take time. They are generally linked with some kind of technology program much like our OEM programs because a lot of those are -- a lot of those programs do originate with our OEM sales team. So there is an integration phase and then there is a ramp phase. And it is in many ways very similar to what we see in our OEM business.

So, after you secure a customer win you start to ramp revenue several months or perhaps even a year later. And like I said, going forward with respect to key performance indicators, I am sure we will be looking at things like number of wins, average annual recurring revenue is a key metric and subscriber count. These are things that we track internally, we are just not comfortable with sharing that with external stakeholders just yet.

Okay and thank you. I will pass the line.

Todd Coupland, CIBC.

Dave, I just wanted to understand the magnitude of the OpEx increase that you are anticipating in Q3 roughly.

Yes, I am not going to give you a specific number, Todd. But a modest increase over the $44.4 million.

Okay.

Not a huge number, but it will be a modest tick up from that $44.4 million.

Okay. Just -- with just $1 million or so up it was hard to get to the guide if you are holding gross -- EPS guide if you are holding gross margins flat. So I was just kind of wondering what was happening in the mix there.

Yeah, maybe there is some noise in those assumptions you have made, but that also suggests that the OpEx uptake is not huge.

Right, okay.

Yes, I think if you finely tune those variables, Todd, you will get right at the midpoint of guidance.

Yes.

Okay.

And not talking about big -- a lot of tuning there, fine-tuning.

Yes, okay. Fair enough. Sorry the second question I had is just wondering, like you had a couple of OEM hits this year. And I'm just wondering if beyond the economy is there any questioning going on in terms of some of the use cases for M2M. And is that actually starting to play out here at all?

That is not our read, Todd. I think what -- I will reiterate, we are very excited about the long-term. Customer activity is definitely high. We are securing new customers. You mentioned economy and is that a factor in the lower-than-expected demand from existing OEM customers and programs?

Well, we are not economists here at Sierra Wireless, but we kind of think that the macro situation is a factor. And we don't think it is a call on the expected business benefits from deploying IoT applications, nor is it a share shift theme. Our view is there is a little softer demand and that the macroeconomic situation is probably a contributor.

And I don't think you have given any kind of duration color at this point. Do you have a view that you are willing to share on that in terms of this headwind?

We are not. Because 90 days ago we reaffirmed our annual guidance, right, so -- and that has obviously changed. So we are confident that we have got the Q3 outlook right. Directionally we are confident in our commentary around Q4. But let's face it, I mean there has been some uncertainty and softness that has come into the business that we didn't see 90 days ago.

So, I think we have got to sail through this chop and see what the water is like on the other side before we make a call on midterm, and by midterm I mean 2017. We committed ourselves to pursue this 10% to 15% annual growth rate. Today we don't have clear visibility to that. Mid-term 2017 is the lower end of the range, a crazy expectation. Probably not, but there is also some uncertainty around that.

So, like I said, we've got to get through this chop before we make a call with conviction on the mid-term. And longer-term, yes, we are bullish and we stand by our expectation of 10% to 15%. But we have got to get through this short-term chop before we can get more specific in a responsible way.

That is very helpful, thanks a lot.

Paul Steep, Scotia Capital.

Great, thanks. One quick one. Could you just, Jason, talk about new design activity. Obviously demand is very, very opaque at this point. But new design activity and sort of bidding activity for auto and PC, thanks.

Sure, it's -- Paul, it is active, it is very active. And I would say, and talking specifically around OEM for a moment, automotive continues to be where we spend a lot of time and a lot of focus. It seems even before new programs go to start a production the car OEMs are talking about the next generation after that.

So activity continues to be high, we won two new programs, automotive programs in China this past quarter. Now this isn't the stuff of $100 million design wins, but these are two design wins in a single quarter in a key market that is growing. And we are in the fight to win more in the second half.

So the activity level has not come down. You mentioned PC OEM. PC OEM tends to be on a kind of a natural 12- to 18-month cycle and we see that cadence persisting and it typically aligns pretty well with the release of the next generation Intel platforms. And then outside of those two key markets there continues to be a lot of activity around energy and around security as well.

So, I am not concerned about activity level, design wins and win rates are consistent with what we have seen in the past. And we continue to build a pretty strong pipeline of new customer programs that will roll out in the coming months and years.

I will also say [ESBU] in the enterprise side of the business activity is very high as well. Part of that is I would say Company specific. We have been product poor in that business unit for the past couple of years. And now we are turning that to be a little more product rich and that is helping us. New product launches are key. We have invested a bit more in sales, we have changed sales leadership in that business unit.

So, activity levels are high and we are winning more than our fair share of deals there. And I have already commented on Cloud and Connectivity activity. So, anyway, hopefully that is helpful. I know it is quite general in nature, but activity levels continue to be high despite the softer than expected demand out of existing or established OEM customers and programs.

And just one very, very fast wrap up here. New enterprise products, do you expect those to lunch in second half? Is it really -- what should our expectation be in terms of uptake and sort of any sort of meaningful contribution from these products? Are they significant products or are they just line extensions? Thanks.

Yes, I think you should view those new products as successors to existing products. So, let's turn the clock back to earlier in the year. So, first product, new product launch in quite a while, the RV 50 is doing well and contributing nicely.

Second new product launch, the MP70 launched in the second quarter and that is a successor to an existing product, but with updated features and capabilities and application support. We are very bullish on that for key markets. We believe it is a share gain opportunity. And the product launches we expect to see in the second half -- again, think of those as successor products. But it is also the stuff of continued momentum.

So, now revenue contribution in the second half from the second half new product launches, probably modest. The two new products and the existing product line -- two new products we have launched so far plus contribution from the existing products are probably going to be the key product drivers for us with respect to revenue in the enterprise business unit. But the product launches later this year of course set us up nicely for continued growth into 2017 is the way to think about it.

Great, thank you.

Michael Latimore, Northland Capital.

Thanks. I apologize if I missed this, but do you have the breakout of 2G, 3G, 4G either units or revenue?

Yes, I do. Just bear with me for a minute.

And then I guess related to that, any just general comments on pricing in each of those three buckets?

So just in terms of revenue, and these are Q2 statistics. So 2G was 17% of revenue, 3G was 35%, 4G was 40% and other was 8%. In terms of ASPs, generally over the entire portfolio we have seen -- we saw stability in Q2 versus Q1.

And then on the enterprise product segment, Enterprise Solutions, do you feel like there will be growth from the 2Q levels or a little hard to predict at this point -- in the second half?

Yes, we are inclined to expected sequential growth in the second half, Mike. I will point out that Q3 of last year was a pretty strong quarter, we had a single big customer deal. So Q3 of last year in enterprise was a pretty strong quarter. So, it creates a tough comp -- year-over-year comp in the quarter. But sequentially our expectation is for continued growth.

And then just on a regional basis, were customers in any particular region showing the most signs of weakness?

Well, no. I mean it -- the list I have referred to of established OEM customers and programs is largely US, Europe and also some contribution from Brazil. So, no real theme to get a hand hold on.

I will say with Brexit some people might be questioning -- have questions around that. We have with respect to the UK market we have very small exposure. I think percentage of revenue coming from the UK -- from UK customers is something like 2.5%.

However, with respect to Europe, 30% of the -- 30% of where the business originates for us, not necessarily shipped to, but where the business originates, 30% is coming from Europe. And Europe has been on a pretty nice growth trajectory for us here.

So, we are watching that closely. So far we don't see any specific signs of nervousness around Brexit, at least we don't think we see it. And no customers have raised that as a concern.

Thank you.

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

Thank you, Kelly. So with that I will thank everybody for joining today's call. And as usual, Sierra Wireless' management is available should you have any follow-up questions. And that concludes today's call. Kelly, you can terminate the line.

Thank you. That concludes today's conference call. Everyone may now disconnect.