司亞樂 (SWIR) 2017 Q3 法說會逐字稿

Good evening. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sierra Wireless Third Quarter 2017 Financial Results Conference Call and Webcast. (Operator Instructions)

David Climie, VP, Investor Relations, you may begin your conference.

Thanks, Chris, 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 third quarter results. Dave will then provide a more detailed overview of our quarterly results as well as our guidance for fourth quarter 2017. 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 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 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. The presentation should also be viewed in conjunction with our press release.

With that, I'll 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 third quarter 2017 results.

Overall, Q3 financial results were solid and at the higher end of our guidance range. Consolidated revenue was $173.2 million, up 12.8% on a year-over-year basis. We saw year-over-year revenue growth in each of our 3 business segments and in each region. Solid revenue led to improved profitability in the third quarter with adjusted EBITDA of $13.1 million, up 35% year-over-year, and non-GAAP earnings per share of $0.23 compared to $0.13 in the same quarter last year.

We also continued to strengthen our leadership position in the IoT market with new technology initiatives, new product launches and solid customer acquisition activity across our lines of business.

In Q3, we made good progress preparing the required securities filings for our share offer for Numerex. These filings are now complete and proxy materials have been sent to Numerex shareholders. The vote by Numerex shareholders is now expected to take place in early December. Dave McLennan will be providing additional detail on the deal time line near the end of our prepared remarks today.

Taking a closer look at the business segment performance, and I'll start with OEM Solutions. Q3 revenue in our OEM Solutions segment was $138.5 million, up 8.4% compared to the same period in 2016. Our non-GAAP gross margin and OEM was 29.8%. As expected, we saw a solid contribution year-over-year from our established OEM customers and programs across a broad range of segments, including automotive, sales and payment, security and mobile computing. Revenue contribution from new OEM customers and programs continue to grow in line with our expectations.

Design win activity was solid in Q3 as we secured new programs across a number of segments, including automotive, transportation and mobile computing. New product activity was high in Q3. We introduced the industry's first global LTE-Advanced Pro modules that enable the world's fastest applications in networking, mobile computing and industrial IoT. The AirPrime EM75 provides global LTE coverage in a single module with uplink speeds that are 2x faster than any other solution currently in the market. The EM75 also supports frequency bands for new dedicated public safety networks planned in both the U.S. and Europe.

We announced our BX Series Wi-Fi and Bluetooth combo modules that have pre-integrated AirVantage cloud services and advanced security features, including secure boot. The new BX Series is built in our CF3 common flexible form factor, which allows our OEM customers to easily migrate between short-range, wireless and cellular technologies.

Our new AirPrime WP77, the LPWA device announced last quarter, has now moved in to pilot programs with leading carriers in North America. The WP77 supports both Cat-M1 and NB1 with optional fallback to 2G, which allows customer to deploy the same device across multiple network operators almost anywhere in the world. The WP77 is shipped with our open source Legato application framework, embedded GNSS for location services and is pre-integrated with our AirVantage cloud.

And finally, we announced that our open source IoT development kit, called mangOH Red, is now available through Digi-Key Electronics on a worldwide basis. We've seen strong demand for mangOH Red since the announcement, as large OEMs as well as small developers are leveraging mangOH to rapidly prototype new IoT solutions.

Moving to Enterprise Solutions. In the third quarter, revenue in our Enterprise Solutions business grew 38.8% year-over-year to $26.3 million. Non-GAAP gross margin in Enterprise Solutions was 48.1% in Q3, up slightly from the prior quarter. Year-over-year revenue growth in Enterprise Solutions was led by strong contribution from AirLink gateways and routers for the public safety and industrial segments as well as telematics devices for local fleets.

In Q3, we announced the latest release of our AirLink Connection Manager, a VPN appliance that is optimized for the MG90 multi-network vehicle router. Our ACM maintains secure VPN tunnels and high-speed connectivity as vehicles roam across wireless networks to ensure that mission-critical applications are never interrupted. This is crucial for police departments and first-responders who rely on AirLink solutions for secure, reliable connectivity from their police cruisers, ambulances and other emergency vehicles.

Also during the quarter, we announced that our MP70 LTE-Advanced router now supports a leading-edge set of integrated vehicle telemetry, inertial navigation and driver behavior features to improve fleet operations and vehicle maintenance. The new features are also fully integrated with our AirLink Mobility Manager platform to enable network insight and control for remote management, monitoring and configuration.

Enterprise customer acquisition activity was also solid in Q3 with wins in regional transit, public safety and industrial markets.

Now on to Cloud and Connectivity Services. Cloud and Connectivity revenue in Q3, which is comprised mainly of recurring services revenue, was $8.4 million, up 23% on a year-over-year basis. Our Cloud and Connectivity revenue benefited slightly from FX tailwinds as the Swedish krona and the euro strengthened year-over-year against the U.S. dollar. On a constant-currency basis, Cloud and Connectivity revenue was up 20% year-over-year. Cloud and Connectivity non-GAAP gross margin in the third quarter was 47.3%.

New-customer acquisition activity was solid in Q3 as we secured new customer program wins in the payment, transportation and industrial markets. Once again, we experienced strong cross-BU sales collaboration in Q3, with more than 40% of our new Cloud and Connectivity wins originating in our OEM and enterprise business units.

During Q3, we're also very pleased to highlight one of our customers using the full Sierra Wireless device-to-cloud solution plus Microsoft Azure to accelerate their time-to-market with an innovative IoT solution for transforming the management and delivery of consumer liquid petroleum gas. Based in Boulder, our customer, Nube, has now launched their solution in Mexico and has plans to expand further in the Americas.

I'll now turn the call over to Dave McLennan, who will provide more detail on the Q3 financial results and our guidance for Q4.

Great. Thanks, Jason. 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 third quarter non-GAAP results to guidance, both revenue and non-GAAP EPS were at the high end of our guidance range. During the quarter, revenue from our enterprise business unit benefited from solid performance from our refreshed gateway products, and Cloud and Connectivity revenue benefited from solid subscriber growth, and our OEM business unit performed as expected. Combined, this drove third quarter revenue to $173.2 million, which, as I said earlier, was at the high end of our guidance range.

Our non-GAAP gross margin in Q3 was 33.4% compared to 34.5% in the prior quarter. As we indicated in our previous quarterly earnings call, we expected some gross margin compression in the third quarter, primarily resulting from the existing high-volume automotive program transitioning to a next-gen platform, which is currently at a lower gross margin than the program it is replacing.

Operating expenses in Q3 came in as expected and were flat with the second quarter of this year. Adjusted EBITDA was at $13.1 million, and non-GAAP net earnings were $7.6 million or $0.23 a share in Q3, and that's at the high end of our guidance range as well. The non-GAAP effective tax rate in Q3 of 19.1% was in line with our guidance assumption of approximately 20%.

Looking at key non-GAAP metrics in the third quarter compared to the same period in 2016, on a year-over-year basis, revenue increased by 12.8%. OEM revenue increased 8.4%, reflecting improved demand from established OEM customer programs across a broad range of segments as well as contribution from new customers and programs. Enterprise Solutions revenue in Q3 was up 38.8% year-over-year. This growth was driven by strong contribution from AirLink gateways and routers for the public safety and industrial segments as well as telematics devices for local fleets. Cloud and Connectivity Services revenue was up 23% or 20% on a constant-currency basis compared to Q3 of last year, reflecting solid subscriber growth.

Looking at adjusted EBITDA and non-GAAP EPS. In Q3, we realized strong year-over-year improvement in adjusted EBITDA and non-GAAP EPS. Adjusted EBITDA was $13.1 million, representing a 7.5% margin, compared to $9.7 million or 6.3% margin a year ago. And non-GAAP EPS of $0.23 in Q3 compares favorably to the $0.13 reported in the third quarter of 2016.

Moving on to the balance sheet. We utilized approximately $15 million of cash during the quarter, driven by significant working capital requirements. Working capital utilized $21.3 million of cash during the quarter. Cash flow from operations before this working capital -- these working capital items was positive $9.3 million. And after the working capital, our net cash flow was -- from operations was negative $12 million. We expect working capital to improve in Q4 and that we will return to positive cash generation from operations. We continue to have a solid cash position with 72.4 -- $74.2 million on the balance sheet at the end of September, and we have no debt.

Moving on to guidance for the fourth quarter. We expect revenue to be in the range of $172 million to $180 million, based on expected year-over-year growth in each of our business units. We expect non-GAAP gross margin percentage to be approximately flat compared to Q3. We expect non-GAAP operating expenses to increase saving in Q4 compared to Q3, and we expect non-GAAP earnings per share in the range of $0.21 to $0.29. Also, we expect our non-GAAP tax rate in Q4 to be between 15% and 20%. Please note that this guidance excludes any contribution from Numerex.

Prior to updating you on our planned acquisition of Numerex, I'd refer to the additional legal disclaimer statement that is now being displayed.

We announced in early August that we signed a merger agreement with Numerex. Under the merger agreement, we are offering 0.18 of a Sierra Wireless share for each common share of Numerex. In addition to offering shares for the equity of Numerex, we will be using, at closing, approximately $24 million of cash to retire Numerex' debt and certain other Numerex obligations. I'll note, we expect to remain in a strong position -- strong cash position following these payments.

The SEC has completed its review of the Form-4 registration statement, and it became effective on October 30. Proxy materials were mailed to Numerex shareholders on October 31, and the Numerex special share -- stockholder meeting to vote on the transaction is scheduled for December 6.

The Board of Directors of Numerex have unanimously recommended that shareholders vote in favor of the merger, and we have voting agreements in place with shareholders who own approximately 27.2% of the Numerex shares outstanding. If the offer is approved by Numerex shareholders on December 6, we would expect the transaction to close within several days following the vote.

We're excited about this acquisition and believe it will accelerate our device-to-cloud strategy by scaling our subscription-based IoT services revenue, by expanding our sales capacity and channels in the United States and by bolstering our overall market position in the global IT market.

We also believe that Numerex fits well with Sierra's organizational structure and is supportive to achieving our operating model goals. Post-closing, we'll be focused on capturing operating expense, cost of goods sold and growth synergies.

As we've stated previously, we believe that it will take a little time to capture these synergies, and therefore, we expect the acquisition to be accretive to non-GAAP EPS about 12 months after closing. However, we do expect Numerex to be a positive contributor to consolidated adjusted EBITDA in 2018.

Chris, that concludes our remarks. Please open the line for questions. Thank you.

(Operator Instructions) Your first question comes from the line of Mike Walkley with Canaccord Genuity.

Great. Congrats on the very strong results in the Enterprise Solutions business. Can you walk us through what drove such a nice sequential growth? And implied in your guidance for Q4, does this business come back a little bit or you're kind of sustaining these new higher sales level?

Mike, thanks for that. So in Enterprise Solutions, we had quite strong contribution from, I'll call them, legacy AirLink products -- well, I should say the legacy AirLink business, which is benefiting from a refreshed product line, we've commented on that earlier, and also benefiting from targeted investments in go-to-market capability and quite a few changes in our go-to-market approach as well. So think about the legacy gateway and router business growing faster than it has in the past. We believe that, that is sustainable. And in addition to that, the acquired telematics device business from GenX is performing ahead of our expectations. So we're kind of firing on both cylinders there in Enterprise Solutions, and our expectation is that we can continue to drive strong growth in that area of the business.

Okay. And then in the OEM Solutions, can you just walk us through kind of seasonal trend you expect in the year-end and might -- was maybe just a little soft sequentially but certainly in line with kind of your guidance?

Yes, OEM performed in line, Mike, is the way I think about it. And we were coming off an exceptional second quarter, and still we're able to put up pretty strong year-over-year growth in the quarter, although it was down sequentially. So I think our view on that business, Mike, is that our contribution from existing OEM customers and programs is sort of delivering in line with our expectations right now, and we've got a pretty strong pipeline of new customers and programs that continue to come to market. And as we look forward to next year, as we've indicated in the past, we've got a couple of quite large programs that we expect to start contributing in the second half of 2018. And that's specifically VW and other automotive programs.

Great. Last question for me and I'll pass on. Just on this new auto program that you highlighted last quarter that's driving some lower gross margin, is this -- does the gross margin tick down again as this program continues to ramp or they're kind of stable now that you're starting that program for the OEM Solutions business?

Mike, it's Dave. It's still with us in Q4, but as I indicated, we expect overall gross margin on a consolidated basis to be fairly stable sequentially from Q3. So you have these other moving pieces there that offset that.

And that program transition will be complete...

In Q4. That's right. (inaudible)

In Q4 as well. So old program will be retired and new program will be the only contributor from that customer.

Your next question comes from the line of Milovan Pejic from BMO Capital Markets.

Just to follow up on the last question. So am I to understand that we should start seeing improvements in margins beginning of next year in -- within the OEM segment as a result of the automotive program condition?

Well, we're not providing any guidance beyond Q4 on gross margin. What we did say is that we expect gross margin percentage in Q4 to be in line with what you saw in Q3. And adding a little bit more color, that automotive program that we've referred to in the past has now -- will have fully transitioned in Q4. So you're seeing the full impact of that transition in the Q4 guidance.

Great. And also, can you perhaps provide a little bit more color on the improving margins within Cloud and Connectivity, and how we should think about those going forward?

Yes. I think that business seems to be delivering now on the kind of growth we expect. That subscription-based business benefits significantly from scale -- I should say gross margin percentage benefits significantly from scale. So as we continue to add to the subscriber base, we would expect to see gross margin beyond an upward trajectory. That may not be perfect each quarter and in sequence, but we would expect to see that continue to improve over the long term. And we'd expect to see that business operate at a 50% gross margin when it hit the kind of scale we expect out of that business. So we've got a -- I'd say, a pretty healthy pipeline now of won customer deals which are now coming to market, and we're seeing the benefit of that in subscriber and revenue growth.

And finally maybe on the R&D expense. It's up a little bit this quarter. Can you provide a little more information on the increase and thinking about it going forward?

Yes, it's Dave here. We have our fluctuations in R&D expense pretty much every quarter in terms of timing of certification costs and development parts and things like that. So I think the expenses were certainly within the range we expected and just reflect the normal ebb and flow in that line item.

Your next question comes from the line of Todd Coupland with CIBC.

Just on Numerex. So I guess we'll see a guide for that when you close and -- when you close or when you report -- I guess, when you report the fourth quarter. So will -- first guide will be Q1, is that the right way to think about that?

Yes, that's right, Todd. So we'll be reporting our Q4 results in early February, and at that time, we will be commenting on Numerex as part of our go-forward guidance.

Okay. And are you going to provide any color now like in terms of overall? Does it sit with your prior target model and can be layered in over time? Is that the way to think about it?

Yes, I mean, I think, operationally, it's a good fit and helps us achieve our goals with respect to our target model. At this stage, though, we can't comment on any specific financial metrics until we close.

I'll -- maybe a good starting point, Todd, is the Numerex Q2 actuals. So if you're starting to contemplate a model, the Q2 actuals from Numerex, if I'm recalling correctly, was $14 million on the top line, gross margin of approximately 50% and an EBITDA margin of about 10%. I think that's probably a good place to start.

Right. All right, that sounds good. And then just -- I wanted to ask, like there -- if we think about some of your larger programs over the last couple of years, you've had good quarters and then there's been some air pockets where inventory gets absorbed, what have you, or needs to get absorbed. And so that has had to happen. As you think about some of these larger ramps that are happening now or coming up, or -- are you seeing any of those kind of historical dynamics where it's possible you get some volatility with these large programs? How are you thinking about that as you anticipate coming into the mix?

Todd, there's always ebbs and flows in the business is the way I would characterize it. Even as these large programs ramp, the business won't be entirely immune from those. I do think, as we kind of step into VW and other large programs in the back half of next year, those -- we certainly anticipate those programs to be steady growers for a number of years. But outside of those programs, we're always going to have ebbs and flows. There's going to be programs that sunset. There's going to be new programs starting. There's going to be customers that sometimes over-order in one quarter and have the supply they need for the following quarter. And then -- so we'll still some of that. I'd love to tell you we're going to be perfect up and to the right, but that's just not the way the business works.

Right. And can you just remind us of the platform that you're on at VW and roughly how long it'll take to sort of ramp to targeted volumes?

So I'll provide some directional commentary on that and some news, also. So as we've stated in the past, we have won -- we won 2 programs with Volkswagen, one, call it, high-end 4G; and one, call it, little bit lower-end 4G. Our expectations around those 2 programs is that they will be addressing the meat of the VW product line. So think of that as most VW models and in every region in the world. So it's most models and it's most countries where the VW operates. So I would say it's a very broad exposure to Volkswagen. I will add that the automotive program win that we referred to in our prepared remarks was also Volkswagen, so we have now won a third program with Volkswagen. That third program is smaller than the previous 2, but pretty important in that it is targeted at the next-generation Volkswagen electric vehicle platforms.

Okay. And when you say across the VW platforms, so you're saying every vehicle will have your module in it? Or is it an option that people can take?

I would think of it as an option kind of thing, and it really depends on the tier of infotainment system that the driver buys. So at the -- if you buy the high-end infotainment system for the Volkswagen, there will be 100% attach rate of a Sierra Wireless device. If you buy the VW at the low-end infotainment system, then connectivity will likely be an option in most markets. Although I'll remind you, in Europe, it will be a requirement that there be a cellular connection in every car sold.

Okay. And so I mean, I -- to model this, we should just like look at production for VW and split it and then make the assumptions along those lines? Or are you actually going to call out specific numbers in high end where you'll be on all those?

Yes, I think you're going to have a large modeling challenge on your hands if you try to do that, speaking candidly. So I think you're just going to have to stay close with us as we continue to report progress on those programs. And I think you'll probably find it'll just melt into your model as opposed to being able to build a discrete model by -- spreadsheet model by car model, by production year, by market launch, et cetera. I think that's just too many variables for you to try to manage and for us to communicate.

Yes, fair enough. Sorry, just one last point on this and I'll let it go. So it's clearly broad and deep into the VW product line. How long will it take to ramp to volume across these various areas -- ramp to peak, I guess?

So we start in second half of '18, like I said. I would think of it -- I would think of the 2018 contribution as small in the overall scheme of the program size. '19 will be a very important ramp year, and we're probably at peak -- it's a bit of estimating here, but we're probably at peak in 2020.

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

Great. Yes, I guess just a little bit more on VW. So should we assume there's one module per car there? And also, would the margin profile be similar to the big program you have going on now?

So yes. I would think of it as one module per car, although I don't try to match that to the VW sales volume, because like I said earlier, it won't be 100% attach rate for every model in every region. But yes, each car will only have one module, or the cars that have the module will have one, not multiple, is the way to think about it. And then, in terms of gross margin profile, I think that's going to evolve over time, Mike, is the way to think about it. It will be on a gross margin percentage basis, clearly dilutive to our current OEM gross margin. On a gross margin dollar basis, it will clearly be accretive. And I know that, that puts you in a pretty wide range of gross margin percentage expectations, but that's the way we need to leave it at this point.

Are there services -- cloud services attached to it?

At this point in time, there are no Sierra cloud or connectivity services involved in this program -- in these programs.

Okay. And then on Numerex, do you see those services being kind of completely complementary and incremental to your current services? Or would they replace some of your current services?

So think of the Numerex business in sort of 2 buckets, right? One is horizontal cloud and connectivity services that look a lot like the Cloud and Connectivity Services that we offer. And then, the second bucket is full-stack applications that serve very specific use cases in very specific vertical markets. So the second bucket is clearly complementary to what we do, not a lot of overlap, whereas the first bucket has quite a bit of overlap. So those horizontal cloud and connectivity services from Numerex will be fully integrated with ours, is the way to think about it. There's good geographical complementarity, where our Cloud and Connectivity business is kind of heavy in Europe and Numerex is 100% North America. So good from a geographical complementarity standpoint, not a lot of overlap. But as you might expect, with respect to sales and infrastructure and platform integration, there's quite a bit of work to do there because there's overlap as you get deep into network elements and platforms and the like.

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

Just in terms of cloud and connectivity, I mean, the growth has picked up quite nicely there. Is there anything onetime that we should be aware of? And then how do you see the growth trajectory from here?

So Paul, most of these -- so we had a couple of small, nonrecurring items in the quarter for Cloud and Connectivity. But most of the uptick you saw was driven by new subscriber adds and the accompanying revenue. So we would certainly expect that business to be -- to continue on a similar trajectory ex these small nonrecurring items we saw in Q3.

Okay. Looking -- I mean, one of your competitors is interested in taking quite an extensive business review and may rationalize some of its operations. Have you seen any benefit in the market from that or in terms of like design win momentum that you can perhaps attribute to that?

Well, I'll have to say, at this moment in time, no. It's not as though we've had an exodus of that competitor's customers come our way and flee them as a supplier. As you might expect, that situation has provided some interesting input into our sales tools, which we will fully utilize. And as you saw, some of the news flow around the internal process they're going through was specifically around the automotive segments. And I'll stand by my previous statement, we haven't seen a mass exodus. But I will tell you that if there's a -- automotive companies are extremely sensitive to your level of commitment to the business because they need to -- they need you to be there for years. So I'm sure that news was not digested evenly by automotive customers, but so far we've seen no immediate action, Paul, but certainly it creates an opportunity.

Okay, the -- one more one. Just, I mean, what's your thoughts in terms of going to 2018 with the low-power solutions like LPM and NB-IOT? And have you broken out how much of revenue that is right now and where should we think about that mix going forward?

Well, it's very small now is the way to think of it, de minimis, right now. I think, in 2018, we'll see more contribution, of course, but will still be relatively small in the overall business. So I think it's going to take time to ramp. And as I've said in the past, I expect to see LPWA adoption kind of happen in waves. And the first wave is existing use cases and segments. So think of electricity metering moving from -- to LPWA from 2G, as an example. It's a natural progression. Second wave, I would view as adjacent spaces, and that's where things like water metering, as an example, can take real advantage of the feature set and capabilities in LPWA. We're seeing a little bit of that happening now in terms of design wins. And then, the third wave is all of the other big use cases in new segments that we haven't yet penetrated. So that's the promise of the tipping point, if you will, for cellular IoT. And that third wave, I think, is going to take quite a bit of time to develop.

Your next question comes from the line of David Gearhart with First Analysis.

My first question, it's been about 3 months since you announced the acquisition of Numerex, and just wondered if you've got any feedback from some of your customers, Sierra customers, in verticals where there might be some conflict and what the feedback has been. I just wanted to gate -- to see what your comments would be on what you think the feedback or issue could be, if any.

Yes, yes. Good question, David. Well, the answer is yes. And whenever we step into acquisitions like a Numerex, there's a risk-balance decision, because it may come with some channel or customer conflict. And so Numerex is not an exception to that. So we have heard -- we have spoken to customers who are affected by that conflict. And it's -- creates a situation that we have to carefully manage. And I've got confidence we can do that. We operate in 3 business units for a variety of reasons, and one of the key reasons is to keep those business lines separated and to keep walls of communication quite robust so that competing business lines are not providing information to the -- to our business lines that are supplying those customers. So structurally, I think we've got the right -- structurally and culturally, I think we've got the right controls in place to be able to strike this balance. But clearly, it creates some sensitivities and conflict that needs management.

Okay. And in terms of the telematics piece, the GenX offering, the strength there. Just I know that business is mainly provided to a few customers. Just wondering if you've opened that up to go after some additional customers or that growth is just with the set that was acquired with GenX.

I'm sorry, you're referring to GenX or...

GenX.

GenX?

Telematics. GenX, the -- yes.

GenX. Yes, so a couple vectors there that I would point to. I mean, clearly, they supply a couple of the big fleet guys, as I think you know. But there's -- in addition to them, there's a number of other smaller customers. Certainly, we want to broaden that customer base. I think there's a natural opportunity there longer term to combine connectivity services with those devices. So I think -- I do think there's additional new customer opportunity there for sure. And in addition to that, we're taking a lot of that telematics and fleet management DNA and bringing that into our legacy AirLink mobility platforms and more at the higher end. Because some of these higher-end fleets, police cars and utility vans and emergency vehicles and the like also now are looking for that telematics capability, driver behavior, fuel consumption, that kind of stuff. So we're really taking the knowledge and DNA and capability from the GenX products and team and now incorporating that more broadly in our product lines.

So just to recap. You are offering it right now to some of the smaller customers? Or you're still working with just the large customers right now but there is a plan to...

Oh, yes -- no, no. We -- well, even prior to the acquisition, GenX was supplying a number of smaller customers as well, and that certainly has continued, and we'd like to broaden it.

Sounds good. And then last question, you mentioned the long-term outlook for the gross margin contribution from Cloud and Connectivity. Just wanted a reminder on the Enterprise business, just given the new product offerings and then layering in telematics, which is lower margin, just kind of where you see that settling out, whether it's back above 50%, give or take.

Yes, I think -- great question. So you see, we're -- last few quarters, we're kind of mid- to high 40s, and that is in part because, well, GenX has been performing quite well and a little ahead of expectations. So it's blended overall gross margin down a little bit. But I think, as we look forward, David, I would expect that, that business line will blend back up to 50% plus.

(Operator Instructions) Your next question comes from the line of Richard Tse with National Bank.

It's actually Andrew in place of Richard. A lot of questions have been asked. I'm just more curious on your thoughts on the market more broadly, and particularly the pocket of strength that you're seeing in your bidding activity, and maybe even what geographies that you're most excited about.

I'm sorry, Andrew, can you ask that question again? You cut out momentarily.

Yes, no problem. I was just referring to the market more broadly, and just in particular, what pockets of strength that you're seeing in the bidding activity, and then also what geographies that you are most excited about.

Oh, gosh. Well, so we always have a very -- I mean, we talk a lot about the key segments who are driving the bus here, right? But -- energy and automotive and mobile computing and networking, but -- sales and payment. But every day, there's kind of a new wave of interesting new IoT applications. And if I had a -- long, long term, I would say health care is a -- should be a very interesting secular growth opportunity, and it's very, very nascent today. From a geography standpoint, I'll have to say that the U.S. and Europe continue to be the, if not the largest, certainly the most important profit pools in the IoT business. And I don't think that's going to -- that's not going to change anytime soon. And notwithstanding that, of course, you've got a nice business footprint in Asia. But in terms of profit generation, clearly, Europe and the U.S. are center stage.

Okay. And then, a number that you provided in your past, the collective lifetime value of your design wins, I'm not sure if you have that number on hand. But just even if you don't have it, just anecdotally, how are you seeing that design win pipeline as maybe today versus a year ago or 2 years ago?

Yes, I think -- so yes, we have very infrequently talked about lifetime value. We did -- we've done that once or twice in terms of annual lifetime value of new design wins secured. Of course, it's a very important internal metric that we track monthly. And design, I would say -- so in terms of number of design wins, that -- the number of design wins is growing from a year ago and lifetime value is also growing.

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

That's great. Thank you, Chris. Thank you, everybody, for joining today's call. As is usual, should you have any follow-up questions, management is available to take your call. With that, Chris, you can wrap the call up and terminate the line. Thank you.

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