司亞樂 (SWIR) 2017 Q1 法說會逐字稿

Good afternoon. My name is Julie, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Sierra Wireless First Quarter Results Conference Call. (Operator Instructions) I would now like to turn the call over to Vice President of Investor Relations, David Climie. You may begin.

Thanks, Julie, 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 our first quarter results. Dave will then provide a more detailed overview of our quarterly results as well as our guidance for the second quarter of 2017.

Following that, Jason will provide a brief summary. And then we'll finish with a Q&A session. Before we get started today, 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 that 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 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 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 begin with a summary of our first quarter 2017 results. Overall, Q1 financial results were above our expectations. Consolidated revenue was $161.8 million, up 13% on a year-over-year basis.

We saw year-over-year revenue growth in each of our business segments and in each of our 3 regions. Our year-over-year revenue growth, combined with strong gross margin and good cost management, led to profitability results that were significantly above our expectations, with adjusted EBITDA of $12.4 million and non-GAAP EPS of $0.24.

During the quarter, we also continued to see good new product and new customer program momentum, including in the emerging LPWA space. I'll also add that we're excited to announce the launch of the world's first cellular IoT devices with pre-integrated global connectivity, operations management and security services.

This launch represents an important milestone for the company as we intend to dramatically simplify the global deployment of IoT solutions by bundling connectivity and cloud services with more and more of our devices. We believe that this will simplify the lives of our customers, while also accelerating our services lines of business.

During the quarter, we also continued to expand our leadership position in OEM Solutions with the acquisition of the assets of GlobalTop Technology's GNSS business. With the acquisition of the GlobalTop assets this quarter and the Blue Creation assets in November of last year, we're now in a position to supply more of the solution elements that our OEM customers need while also expanding our addressable market.

Taking a closer look at the business segment performance, I'll start with OEM Solutions. Q1 revenue in our OEM Solutions segment was $133 million, up 10% compared to the first quarter of 2016. Non-GAAP gross margin was solid at 31.7%. As expected, we saw demand improve on a year-over-year basis with our established base of OEM customers and programs across a broad range of segments, including automotive, energy, networking, payment and mobile computing.

Revenue contribution from new OEM customers and programs also continued to grow in line with our expectations. Q1 design win activity was good as we secured a higher-than-usual number of wins resulting in an aggregate lifetime value roughly in line with our recent quarterly average. Our design wins were spread widely across a number of segments and across our 3 regions.

We continued to gain momentum in the emerging LPWA space as well and are now actively engaged in a number of LTE Cat-M1 trials with carriers and key OEM customers around the world. Our first Cat-M1 product is now certified on Verizon's M1 network, and we're also engaged in a Cat-M1 smart metering trial with Landis+ Gyr and Telstra in Australia.

We're excited about the opportunity to penetrate new segments and use cases with LPWA and expect to be making additional product announcements later this year as we continue to advance our solutions for this expanding technology.

And finally, we're pleased to welcome the top global -- or pardon me, GlobalTop GNSS team to Sierra Wireless and the OEM Solutions business unit. Based in Taiwan, top global (sic) [GlobalTop] brings to the company proven GNSS products and capabilities as well as established sales channels. Integration activities are underway, and we're introducing GlobalTop products to Sierra customers and channels.

Moving to Enterprise Solutions. In the first quarter, revenue in our Enterprise Solutions business grew 45% year-over-year to $21.7 million. Our strong year-over-year revenue growth in Enterprise was driven by a combination of revenue from new products, investments in go-to market capability and contribution from GenX Mobile, which we acquired in Q3 of last year.

Non-GAAP gross margin for the Enterprise Solutions business unit was 48.3%, down a bit from Q4 as a result of higher revenue contribution from the acquired GenX products, which have lower gross margin than the average gross margin for the business unit.

New products introduced in 2016, including the RV50 industrial gateway, the MP70 mobile router and the MG90 mobile networking platform contributed to our year-over-year revenue growth. We also saw significant growth in our subscriber base for AirLink Management Services, a comprehensive suite of tools for operational and device management powered by our AirVantage cloud.

Our improved product lineup and targeted investments in direct and indirect sales are leading to new customer wins. In Q1, our Enterprise BU won deals across several of our target segments, including industrial, public safety, energy and transit. I'm pleased to report that we had a strong contribution from the sale of GenX products in Q1. We're also leveraging the telematics knowhow of the GenX team to incorporate enhanced telematics capabilities more broadly in our AirLink product line.

We also took additional steps in the integration of this business, including increasing production capacity and integrating our own embedded modules into our latest telematics and asset tracking device roadmap.

Now on to Cloud and Connectivity Services. Cloud and Connectivity revenue in Q1, which is comprised mainly of recurring services revenue, was $7.1 million, up 2.1% on a year-over-year basis. Our Cloud and Connectivity business continued to face some foreign exchange headwinds in the first quarter as the U.S. dollar strengthened year-over-year against the Swedish krona and the euro, the currencies in which the majority of our Cloud and Connectivity business unit revenue is denominated.

On a constant currency basis, Cloud and Connectivity revenue was up 4.4% year-over-year. Non-GAAP gross margin in Cloud and Connectivity was 43.8% in Q1, up from 39.3% in the fourth quarter of last year, due to favorable business mix and lower nonrecurring expenses.

New customer acquisition activity continued to be strong in the first quarter, expanding our customer program pipeline in several targeted segments, including digital signage, asset tracking, payment and retail. We also continued to see strong cross-business-unit sales collaboration, with more than 50% of our new Cloud and Connectivity wins originating in our OEM and Enterprise Solutions business units.

We're also pleased to see many of our new Cloud and Connectivity customers adopting our patented Smart SIM technology and choosing our integrated device-to-cloud solutions using our edge devices, connectivity services and cloud platform.

As we move forward, the key goal for the company is to continue to enhance our device-to-cloud offer and to dramatically reduce the complexity of IoT deployments, one of the biggest challenges facing the industry today. With this goal in mind, we recently launched our first devices with pre-integrated global connectivity, operational management and security.

This new offer is much more than simply a SIM in a device. We view it as an industry breakthrough that truly simplifies the IoT ecosystem by reducing or eliminating several of the steps and decisions that customers need to make today with their deployments.

With our pre-integrated solutions, customers can focus all of their efforts on transforming their business and rely on us to securely connect, monitor and collect data from their devices at the right time, with the right SLA and at the right cost. We also expect that over time, growth of our recurring revenue from Cloud and Connectivity Services will benefit directly from our pre-integrated device-to-cloud solutions.

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

Great, thanks, Jason, and good afternoon, everyone. Please note that we report our financial results on a U.S. GAAP basis. However, we also present non-GAAP results in order to provide a better understanding of our operating performance. As a reminder, a full reconciliation between our GAAP and non-GAAP results is available on our website.

Comparing our first quarter of 2017 results to guidance, results were ahead of expectations with both revenue and non-GAAP EPS above the top end of our guidance range. Revenue of $161.8 million was a bit above of our guidance range, reflecting a slightly higher than expected contribution from Enterprise mobile computing.

On a GAAP basis, we had a net loss of $200,000, or $0.01 per share. Included in our GAAP results is a $3.7 million impairment charge of an intangible asset related to a Wireless Maingate service offering, which we have now replaced with a more advanced solution that is being developed by our integrated Cloud and Connectivity Services team. On an after-tax basis, this negatively impacted GAAP EPS by about $0.09 per share. This impairment charge has been excluded from our non-GAAP results.

Moving on to those non-GAAP results. On a non-GAAP -- our non-GAAP gross margin in Q1 was 34.5%, up modestly from Q4, reflecting continued focus on managing product costs. The higher-than-expected revenue combined with solid gross margins drove Q1 adjusted EBITDA to $12.4 million and non-GAAP net earnings to $7.7 million, or $0.24 a share.

Our Q1 non-GAAP effective tax rate of approximately 16% was lower than expected. This resulted from a favorable mix of income among our various legal entities, which when consolidated, produced a lower overall effective tax rate. This favorable tax rate improved our Q1 non-GAAP EPS by approximately $0.02 a share relative to our tax rate expectations going into the quarter.

Looking at key non-GAAP metrics in the first quarter compared to the same period in 2016. On a year-over-year basis, revenue increased by 13.3%. OEM revenue increased 10% reflecting improved demand from established OEM customer programs across a broad range of segments, including automotive, energy, networking, payment and enterprise mobile computing. Revenue contribution from new OEM customers and programs also contributed to the growth.

Enterprise Solutions revenue was up 44.8% year-over-year. This growth was driven by a combination of revenue from new products, investments in go-to-market capabilities and the contribution from GenX Mobile, which was acquired in Q3 of last year. And Cloud and Connectivity Services revenue was up 2.1% compared to Q1 of last year.

Looking at adjusted EBITDA and non-GAAP EPS. In Q1, we realized a significant year-over-year improvement in adjusted EBITDA and non-GAAP EPS. This reflects a return to top line growth, improved gross margin and business model leverage. Adjusted EBITDA was $12.4 million, representing a 7.7% margin, compared to $6.7 million or a 4.7% margin a year ago. And non-GAAP EPS of $0.24 in Q1 was 3x higher than the non-GAAP EPS of $0.08 reported in the first quarter of 2016.

We continue to have a strong position -- cash position of $92.5 million on the balance sheet, and the company is debt free. In Q1, we consumed a total of $10.3 million of cash. We had significant working capital demands in Q1 of approximately $13.8 million. This was driven by unusually high payables at year-end, which have now been normalized, prepayment for new product components to secure supply and increased inventory to support the growth of our business.

These working capital demands drove our operating cash flow to negative $2.1 million. After CapEX of $3.7 million, our Q1 free cash flow was negative $5.8 million. We utilized a further $3.2 million on the acquisition of GlobalTop Technology GNSS business, which we acquired at the end of March. And we repurchased and canceled $2.8 million worth of stock under our normal course issuer bid program during the quarter, and this program has now expired. Other items provided $1.5 million of cash.

Moving on to guidance for the second quarter. We anticipate an exceptionally strong quarter in Q2 on both a sequential and year-over-year basis, driven by continued solid demand from established customers and programs and contributions from new programs and new products. I also note that this Q2 guidance includes a full quarter contribution from GlobalTop.

In Q2 '17, we're expecting revenue in the range of $165 million to $175 million, gross margin percent to be consistent with the level we just reported in Q1 and non-GAAP earnings per share in the range of $0.24 to $0.32. Our non-GAAP tax rate assumption for Q2 and the balance of the year is between 15% and 20%.

While we are not providing guidance beyond Q2, I note that we do expect some gross margin compression in the second half of 2017 resulting from an existing high-volume automotive program transitioning to a next-generation platform at a lower gross margin level than the current program it is replacing.

With that, I'll now turn it back to Jason for summary comments.

Thank you, Dave. So to summarize, we had a strong first quarter of 2017 with solid year-over-year revenue growth and profitability that was ahead of our expectations. In Q1, we continued to strengthen our customer program pipeline, winning many new programs across our business units and regions.

Additionally, a growing number of our new wins are for our full device-to-cloud suite and are the result of continued strong cross-business-unit sales collaboration. These device-to-cloud wins are critical to our long-term vision and to growing our base of recurring revenue.

We also continued to acquire new technologies and capabilities to fill important gaps and to launch new products and services that strengthen our overall strategic position in the Internet of Things market. We expect that our new products, new services, new customers and acquisitions will be important drivers of future growth. We continue to be excited about the opportunity ahead.

We're the clear global leader in cellular connectivity solutions for the Internet of Things. Our 3 business segments expose us to a large and valuable market opportunity. We believe that we're 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.

Thank you. And Julie, this concludes our prepared remarks. You can now open the line for questions.

(Operator Instructions) Your first question comes from the line of James Kisner with Jefferies.

So I just wanted to dive into enterprise margins. I'm not sure if you commented on that. It looks to me like it was pretty light. What were the drivers there? And just any thoughts on if those drivers would remain in place in the next few quarters.

Hi, James, it's Dave here. One of the things that's going on in Enterprise is as we integrate the GenX products into Enterprise, the GenX margin profile is lower than the average of the other Enterprise products. So that's the principal reason of seeing a blending down of gross margin from Q4 to Q1. As we continue integration, we certainly hope to improve those margins, but that is the main driver of the impact.

Yes, our business model for that business unit, James, is to be over 50%.

Okay, great. So you think you could be there, I guess, in 2 quarters? I mean, next quarter maybe? Any thought on how quickly you could resolve it? The...

We're working on it. Yes.

Okay. Similarly, in automotive, I mean, I really appreciate the commentary about margin. Can you help us size that? I mean, are we talking about $50 million in the back half? Also, is it likely to remain at that lower margin through the life of the program or might it get better over time? Just need you to help us understand this automotive impact in the second half.

Sure, I'll provide some color commentary, James, without getting precise on the overall margin impact. Because frankly, rate of transition is a bit of an unknown. I'll start by saying that it's an existing customer, and that existing customer is already in transition from old program to new program. So a little bit of it has been in our results for 3 quarters. We do expect that transition to accelerate in the back half of the year. And it's really focused, for the most part, on a single large automotive OEM customer that's going through this transition. So what's happening in the second half is we think that the new solution will go into more and more of the models that this OEM sells into the market. Now these are long programs, as you know, long life cycle to the program. So over time, we do expect the margin profile to improve as we continue to drive down product costs. But as is pretty typical with large automotive programs, the early margins that you see on these programs are thinner than they are later in life.

And we're experiencing that right now, James, with -- the program that's ending is at higher gross margins, and they haven't always been like that. We've grown into them. And then the transition to the new program is to a lower margin, which we would hope to ramp up over time over the life of the program.

Okay. And just final one related to automotive. I mean, we've all gotten pretty excited about this VW win, these wins that you've announced with them. I'm just wondering if you've got anything in the pipeline that you maybe will end up announcing this calendar year that will be of interest -- interesting like that one?

Well, we certainly hope so. I'd say the VW win was exceptional, James. So those don’t come around every quarter, for sure. But the connected car environment continues to be very, very active. And we are exposed to a number of additional automotive opportunities. And certainly, we plan to be and hope to be successful in securing some of those opportunities.

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

Maybe to summarize, as we look at the upside in the quarter relative to your prior expectations, I think our takeaway should be that it was broad-based across several industry-leading programs. Is that accurate?

So I'll come at that 2 ways, Thanos. Year-over-year -- the year-over-year growth is very broadly based, and we guided for a good quarter based on broadly based growth of both existing customers and programs as well as new programs. And that happened. But also, we exceeded our expectations a little bit on top of that. And that was driven by little bit of overperformance in the Enterprise mobile computing space in Q1.

Oh, sorry, I missed that part. Okay. And how was your outlook for that part of the business, specifically? I think that's probably a segment where visibility is maybe especially challenging. But how would characterize the outlook there?

Yes. We don't guide by segment, Thanos. Yes, it's a good business for us, and we have good continuity there and just leave it at that.

Yes, I'll say, I think our strong Q2 guidance ought to give you some hint there. We expect to see in the quarter continued strong demand on a broad basis across virtually all of our segments and regions in Q2.

Okay. It looks like the tax guidance -- your guidance for the tax rate is for a lower tax rate than previously. What's driving that? And is that something we should expect to sustain longer term?

Yes, you're right. When we spoke earlier in the year, we were looking at more in the low 20s area. Actual Q1 non-GAAP rate was 15.6%, and it's very sensitive to this -- the mix of income in the various jurisdictions or legal entities that we have. So relatively small, minor changes in that mix can really change the percentage ETR. And that's exactly what happened in the quarter. And we do expect the outlook for our tax rate to be in the 15% to 20% for the balance of the year.

Okay. And then on the Cloud and Connectivity business, margins certainly showed some improvements. You mentioned that it was due to favorable mix. Would you expect these levels to be sustainable? Or will they bounce around a little, just given how the mix might evolve?

I think at this level of scale, Thanos, we'll probably bounce around this level a little bit. But as that business scales, there's virtually -- well, there's very small incremental cost as revenue goes, particularly on the cloud side as you might expect. Of course, the connectivity side carries along some variable costs. But our long-term model for that business is to be 50%-plus on gross margin. And clearly, as we grow the business, we expect to close the gap from where we are today to that goal.

Okay. And then maybe finally on that part of the business, you've certainly been expanding your offering -- the scope of your offering. How have you seen the pipeline evolve as you've been introducing these new offerings to the market?

Well, I think -- so I'll answer that kind of in -- from a couple of different directions. First of all, on the day-to-day meat and potato sales activity, it's going quite well. The rate of new customer wins is going up, and the cross-BU collaboration continues to be strong. So I think we're building a very nice pipeline there of programs. And by the way, they have a gestation period similar to OEM programs, because many of them are OEM programs. So they take a while before you ultimately launch the programs, and then they take a while, of course, to ramp. So I think we're building a nice pipeline, much like we've built our OEM pipeline. And so that aside, we're optimistic that that's going to drive future revenue growth. And then on new services that we're launching, such as pre-integrated connectivity and cloud services within our devices, over time, we clearly see that as an opportunity to accelerate the growth of our recurring services revenue even further. So I think you kind of need to look at both what we're doing today, which I think is building a nice pipeline, and the new services we're launching today we believe over time will accelerate our results in that area of the business.

Your next question comes from the line of Mike Latimore with Northland Capital.

In terms of the [side] segments or verticals that you highlighted, what percent of revenue do they represent? And then, separately, can you go into a little more detail on energy and payments? What applications there are kind of driving demand there? Or what bigger customers are driving demand there?

Yes, I'll take that, Mike. So we -- as you -- as I'm sure you might know, we don't disclose, beyond our business segments, which we run as business units, we don't disclose any financial metrics. What we do try to do is point out those segments that are driving either growth above our expectations or year-over-year growth, and we've named those. Now with respect to what we're seeing in those specific verticals you mentioned, energy, still largely dominated by smart metering, and we are very actively engaged in smart metering deployments in both Europe and the U.S., which are pretty key drivers. Beyond that, we're seeing a pretty nice start with more smart grid applications. So those tend to be lower volume, but higher value implementations. So those are the, I would say, the 2 key drivers around energy. And then with respect to diversification within energy, we see a growing level of activity in water and gas, whereas today's business is predominantly driven by electricity. And on payment, the principal driver in payment is handheld payment terminals. Ingenico is a large customer of ours. They're the -- and they're the largest payment terminal manufacturer in the world. Beyond that, we see a smattering of other payment applications such as vending and connected retail. But predominantly, it's handheld payment terminals today.

Great. And then just on the tax rate. I know you've guided sort of for this year. Is there any clear direction, say, longer term? Is it more likely to go down or up longer term?

I would apply the range of 15% to 20% into 2018 as well, Mike.

Your next question comes from the line of Paul Treiber with RBC Capital Markets.

I just wanted to go back to the discussion around gross margins and automotive, again. I mean, if you look out a couple of years, automotive should ramp significantly. How do you see that having an impact or not on your -- the OEM gross margins if automotive becomes a bigger percent of that business?

So Paul, it's Jason. It would tend to be within the OEM family, I would predict, that a growing percentage contribution from automotive would be gross margin percentage dilutive, based on what we see today. And in particular, as I said earlier, as new programs launch, they almost invariably come in at lower gross margin. And then we work over the 5-year-plus life span of the program to drive costs out and to improve gross margin over the life of the program. But I'd say on balance, if automotive grows as a percentage of contribution in OEM, that would be dilutive to gross margin percentage, accretive to gross margin dollars. Now on a consolidated basis, of course, we're working very hard to drive the overall mix of the business to favor higher growth in both Enterprise and Cloud and Connectivity. So with respect to consolidated gross margin percentage, well into the future, when these big automotive programs ramp, it's a bit difficult to predict and give you good guidance on that right now, because the company is pushing very hard both organically and through acquired assets to shift the mix of our business to favor the higher gross margin areas of our business.

Is there any way you can be a little bit more precise in terms of magnitude? And then maybe talking historically about the automotive business, could it conceivably, some of these products be close to 0 margin at the onset and, I don't know, how quickly it would ramp up towards that typical 30%?

Yes. No, we can't give any more precision on that, Paul.

Okay, fair enough. The -- just moving to noncellular for a moment. You've added some products like Bluetooth and navigation. Could you break out noncellular versus cellular in terms of OEM revenue at the moment? And then how do you see that, the opportunity for noncellular, ramping over time?

So we think -- so a couple of things. First off, to answer your first question, it's de minimis today. So it's a very, very small percentage. Blue Creation was a small company, and GlobalTop's a small company. And in the press release, we gave the trailing revenue. It was $5 million. So it's a very, very small portion of overall OEM revenue today. Of course, we expect that will grow. With respect to the size of the market opportunity, we think it's very, very interesting on a volume basis, larger than the cellular module market on a revenue basis, in the same snack bracket as the cellular module market. So we're significantly growing our serviceable market with the addition of these assets. And I think we've got a lot of channel leverage, right? So we get a lot of customer and channel leverage as we bring those products in. Of course, it's going to take us time, by the way, to make these products very nicely and elegantly integrated with our overall product roadmap lineup. But even today, we're introducing those products to existing customers and channels, and we expect to see traction there. And certainly, we expect to accelerate the growth of those products when compared to the previous owners of those products simply because we have a lot of customer and channel synergies. And by the way, many of our customers put all of those technologies into their end products, right? Many of our customers have not just cellular connectivity in a single product, but also Wi-Fi and Bluetooth and GNSS. So we can service a lot more of the waterfront that our customers require for their OEM solutions.

And is the go-to-market strategy for noncellular, is that predominantly a cross-sell within the existing customer base as opposed to going out and looking for new customers -- new noncellular customers?

Well, it's a bit of both, Paul. It's a bit of both. And I will say, obviously, the early -- so we're going to get early traction in 2 places, the acquired company's channels, right, and customers, which sometimes are not traditionally cellular customers, and Sierra Wireless's channels and customers, many of whom require these local area technologies as well. Now I will say our emerging LPWA activity within cellular is also going to take us into new segments, new channels, new kinds of customers, and I would expect, I predict, that we'll see a lot of customer overlap there between the acquired local area customer base and the new LPWA customer base. I think we'll see a lot of overlap there and leverage.

Your next question comes from the line of Steven Li with Raymond James.

Jason, one more margin question. So the compression in the second half, if I understood correctly, this is not a onetime event? As you said, recent design wins also have this similar lower gross margin profile.

Yes, exactly. It's very typical, particularly in long-lived projects like automotive to start the life cycle of that product at low gross margin and then over time to improve the gross margin as you drive costs out. And as Dave alluded to, this particular program we're talking about that's in transition that we do believe will put some gross margin compression into the business in the second half followed that exact cycle. So the products that we're shipping today on that program are at significantly higher gross margin than when we started the program 4 or 5 years ago. So we certainly expect that this new program with the same customer will follow a similar gross margin cycle.

So then, in -- let's say, next year, in 2018, you wouldn't expect to be back to today's level, gross margin?

I don't recall Dave allowing me to give gross margin guidance for 2018.

Okay. All right. Then I'll ask another question. You made a comment, so 50% of connectivity originates from your OEM and Enterprise business units. The other 50% that's not tied to your OEM and Enterprise business units, do you see a higher level of churn there -- customer churn? Or is it about the same?

Yes, I don’t -- it's an interesting question. I must confess, I don't know the answer. But I would expect to the extent that the customer is a device-to-cloud customer, and this is just a prediction, I don't have data to back this up, I would predict that, that would be a stickier customer than a customer who is only buying connectivity.

Your next question comes from the line of Richard Tse with National Bank Financial.

It's actually Steven in for Richard. You made some comments earlier about M&A, in your prepared remarks. I was wondering if you could provide any more color. Maybe the types of targets you'd be interested or the size?

Sure, this is Jason, Steven. We've been pretty consistent on this. We have -- our top priority on M&A is to target services companies, so companies that help us to accelerate our recurring revenue business. In 2015, we were successful in acquiring 3 such assets. In 2016, we were not. But certainly, we continue to spend most of our time and place the highest priority on those services targets. And typically in the connectivity space.

In the connectivity, okay.

Now I want to quickly add to that. I want to -- just to add, that doesn't mean we stop M&A activity in the other areas of our business such as industrial and mobility gateways. So we continue to have activity there. And as you saw with GlobalTop, we've also done some smaller transactions within our OEM Solutions business unit. So as you look at our priorities, that's kind of in #1, #2 and #3 priority from an M&A standpoint.

Great. That's helpful. Maybe one last one. I was wondering if you could provide any color on your pipeline in general. I know you mentioned -- you had some comments on your pipeline in the various different businesses, maybe how its trended over the past couple of quarters? And maybe even how long you'd expect some of those bookings to take to convert to revenue?

Sure. I can't give you any specifics on the size of the customer pipeline. Directionally, we do comment on number of design wins, and we comment directionally on lifetime value of those. We've had positive trends, is what I would -- is how I would characterize it, over the past few quarters. Our view is that our program pipeline across all of our business units is healthy and growing, and we expect that to contribute to future growth.

Your next question comes from the line of Paul Steep with Scotia Capital.

Jason, can you maybe talk a little bit, it looks like in the back end of last year, auto was sort of a consistent acceleration throughout the year. What changed or what's changed in terms of your market position or your go-to-market position internally in terms of the team that's led to this? And it certainly looks like a positive trend.

Yes, good question. I -- we've -- I would point to the fact that we've built a -- inside a bit of a virtual business unit around automotive. So we have a dedicated segment marketing, dedicated product line management, dedicated sales, even dedicated R&D and dedicated operations people around automotive. So it is quite a very focused almost end-to-end business unit built around automotive. Now we have a lot of leverage across the rest of our business -- OEM business, as you might expect. But I think that managing our -- managing that business in that way has led to a lot of our success. And I'll also say, our execution with big OEMs has cost -- it took some scar tissue. But our execution with big OEMs, the things we've done in our factory with respect to quality programs in automation, leads directly to wins. And so I guess, to put it plainly, Paul, it really is -- has been about focus, focus on that market.

Okay. And then just one last quick one for me. On Enterprise Solutions, like, if I look at the organic numbers there as we calculate them, apart from maybe Q3 of last year where there was a little bit of a hiccup, a really nice trend setting in there. Has anything -- obviously, you've made the acquisitions, you've added those in. What's different with that team? Because it would certainly seem like their execution is dramatically improved. And based on your guidance, it sounds like it's continuing.

Yes. No, we believe that execution in that business unit has improved -- has indeed improved dramatically. And there, too, we made some significant organizational changes, Paul. We have -- in fact, we broke it off as a separate business unit. It used to be combined with our AirVantage Cloud. We broke it off as a separate business unit under dedicated leadership. We have made significant changes in our go-to-market strategy, organization and personnel. And in addition, have ramped that. So a combination of, I would say, an already healthy product pipeline, which was coming to market, plus dedicated focused leadership, plus significant changes and further investments around go-to market has led to a strong recovery in that business.

I'll sneak one last one in. With Cloud and Connectivity, have you approached your auto OEMs to determine whether or not you have the scale and sort of offering that they'd be interested in, even on a regional basis?

We have, yes. And we've had several conversations with our existing automotive customers, and we've had several conversations with automotive customers who -- or automotive players who are not currently our customers. And I think, to date, Paul, it's been a -- it's been largely a learning exercise. There's definitely interest on the part of OEMs. They like what we're doing. They like the differentiation we have. And I think, over time, we will be in a much stronger position to meet their requirements on a global basis. I don't think we're quite there yet. Although the customer interest is there, we're spending a lot of time with automotive customers, I think we've got work to do before we can really support the needs of a large OEM on a global basis. But I'm confident we're going to get there.

Even regionally, Jason? Like would you see that you'd need to put money into infrastructure, people, or it's just -- you need time to sort of groom it up?

I think that's an interesting point. Clearly, there are certain regions in the world, such as Europe. So if there was a single regional play like Europe, we would be in a much better position today to tackle that.

(Operator Instructions) Your next question comes from the line of Scott Searle with Benchmark.

The last couple of quarters, on the OEM front, business has been very strong. Are we entering a sustained period of where you could see double-digit growth on this front? I know the comps get a little bit more difficult. But I'd love to just kind of hear your thoughts as you're thinking out further on that time horizon. And as well, you had some comments as it related to M1 starting to roll out. I was wondering how you expect that to kind of filter into the result. I would assume it's mostly geared towards 2018. And also, if you could just comment on other LPWA solutions. Are you -- Jason, are you getting involved in some of the other RF protocols that are out there? Or is it mostly centered around LTE at the current time?

So maybe I'll start with that, Scott. We are very focused on the 3GPP standards for LPWA at this time. We've looked at LoRa. We've looked at Sigfox. We're probably going to continue to look at those guys. But right now, in the interest of focus and execution, we're really dedicating our resources today to LPWA -- pardon me, to the 3GPP standards around LPWA. That includes Cat-M1 and NB-IOT and ECGSM, right? So there's really 3 different protocols in the 3GPP world. And we are focused on supporting all of those in a significant way, I would say, today. And we'll watch the other ones. We'll continue to watch the other ones. Cat-M1, how do we see it coming into the business? Well, we're engaged now, right? So we're engaged with real live customers like Landis+ Gyr and big carriers like Verizon and Telstra, who are going to roll out the service. We think that the kind of the natural transition, Scott, is for existing 2G or Cat-1 customers to move into Cat-M1 and NB-IoT and that's exactly what we're seeing. And so that would be like smart metering is a good place to start. And we're seeing a lot of interest around the LPWA technologies in smart metering. So we think it's going to start there. And then over time, there's a belief that we're going to able to expand into new segments as well that previously had not been served by cellular. And I think that's going to take some time. So from a -- in terms of significant commercial contribution for us, it's really a 2018 and beyond event for Cat-M1 and the other 3GPP technologies. On your question about OEM momentum, you are absolutely right that we are performing well today against easy comps. And what we saw last year, early last year, in particular, was some of our big OEM customers, we just saw demand slow down. And those customers didn't go way. They were just buying less. And we've seen stability return to those big existing OEM customers and programs. So we are cautiously optimistic. So there is still some caution in our outlook, but we're cautiously optimistic that we've found sustained stability with those customers, and we have continued to see good contribution from new programs as they launch and ramp. So there's still a dose of caution as we look into the future, Scott. But certainly, it feels a lot better today than it did a year ago.

And one last question if I could. Jason, on the SIM front, just hoping I could get a little bit more color in terms of differentiation versus some of the other players out there. The time line of when this starts to become a little bit more prevalent and gross margin impact.

Sure, sure. So I think -- so with respect to, let's call it, SIM and Connectivity, I think we're unique in that we own the devices, we own the back-end cloud, and we own our own network. We are a true MVNO. We have our own core network. We have our own SIMs. We have our own intellectual property riding on those SIMs, including multi-IMSI capability. So we're not simply reselling a big MNO SIM. We're selling our own SIM. And we have multiple IMSIs riding on that SIM so that the SIM itself can make a decision which network is best to connect to. Or, from our cloud, we can make a decision which network our SIM should connect to. And that gives us very interesting and unique capabilities to assure the highest quality of service, if that's what a customer requires, or to optimize cost of service if that's what our customer requires. And of course, we have to be very tuned into cost of service. So I think we have -- and because we have both ends, I think we're in a very unique position to bundle that capability with devices as they go into the market. And we fully expect that's going to enable us to grow that business over time, and as we put SIMs in more and more of our devices, to accelerate our growth there.

Your next question comes from the line of Steven Li with Raymond James.

Jason, just your last comment. So Cat-1 into M1, would that not erode ASP?

Cat-1 into M1, will that erode ASP? Well, I think Cat-M1 will, over time, bring lower ASPs compared to Cat-1, although Cat-1 is pretty low ASP today. And I think Cat-M1, I would think of it, Steven, as more analogous to 2G from an ASP standpoint. And that is the most natural replacement opportunity, if you will. So in terms of the concern of a potential dilutive effect to ASP, we don't see that in the short term. It's something that we need to manage longer term for sure, depending on what the mix of our business is between LPWA technologies and the ever-increasing speeds going up in categories. So longer term, we just don't know what that impact is going to be. But I think, overall, it gives us, clearly, a very interesting opportunity to sell more volume into more segments.

(Operator Instructions)

As there are no more questions, I'll thank everybody for joining today's call. And as usual, management will be available if you have any follow-up questions. Julie, you can now wrap up and terminate the call.

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