司亞樂 (SWIR) 2018 Q1 法說會逐字稿

Good afternoon. My name is Cheryl, 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)

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

Thank you, Cheryl, 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. And then we'll finish with the 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 and 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 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'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 first quarter 2018 results.

Consolidated revenue was $186.9 million, including a full quarter contribution from Numerex, which we acquired in early December of last year. Q1 revenue was up 15.9% year-over-year and in addition to Numerex included organic growth in each of our 3 business segments. Adjusted EBITDA in Q1 was $9 million compared to $12.6 million in the same quarter last year and non-GAAP earnings per share of $0.09 compared to $0.24 in Q1 of 2017. Overall, our Q1 consolidated revenue and non-GAAP EPS were at the high end of our guidance range.

New product activity during Q1 was particularly strong in the LPWA technology category for both embedded modules and gateways. These new products have helped us to expand our market presence into new segments and customers. We also continue to build our program pipeline with solid customer acquisition activity across our 3 business segments, as we continue to drive our leadership position in device-to-cloud solutions for the Internet of Things.

Taking a closer look at the business segment performance, I'll start with OEM Solutions. Q1 revenue in our OEM Solutions segment was $135.2 million, up 2.1% compared to the same period in 2017. Non-GAAP gross margin in OEM was 28.9%. As anticipated and discussed on our last earnings call, Q1 OEM revenue and gross margin were constrained by component supply shortages and related expedite fees. We expect to see some supply relief in Q2, although supply of certain components continues to be tight. Year-over-year revenue growth in OEM came mainly from the automotive segment, which was partially offset by some declines in transportation and energy.

Design win activity was strong in Q1, as the number of design wins increased sequentially and year-over-year. We secured a growing number of new programs across a range of segments, including automotive, enterprise, transportation and energy. We also announced that KDDI in Japan selected our AirPrime HL78 model for its LPWA network applications. KDDI will be the world's first carrier to certify and provide its customers with our HL78 modules. KDDI's first deployment will be with a leading Japanese gas metering company later this year.

Our HL78 supports LTE Cat-M1, NB1 and offers optional fallback to 2G as well. The HL78 has industry-leading power management capabilities and can operate on a single lithium-ion cell for up to 15 years. We've secured additional design wins in other regions and segments with the HL78 module.

Moving to Enterprise Solutions. In the first quarter, revenue in our Enterprise Solutions business grew 35% year-over-year to $29.2 million, with non-GAAP gross margin of 48.2%. Year-over-year revenue growth was led by strong sales in AirLink networking products for the industrial, energy and public safety segments as well as strong contribution from telematics devices for local fleets. Q1 sales of our telematics devices continued to benefit from fleet deployments to comply with the new Federal Motor Carrier Safety Administration regulations in the U.S. We expect to see compliance-driven deployments begin to wind down and for telematics to return to more normalized demand levels in the second half of this year.

Customer wins in the first quarter were solid, particularly in the public safety segment, where we are seeing some early activity related to FirstNet deployments. Overall, our enterprise sales funnel and pipeline remain solid.

Atlas Copco, a leading global industrial equipment manufacturer based in Sweden, selected Sierra for a successor program to help them transform their industrial air compressor business. By deploying our FX30 programmable gateways and cloud platform, Atlas Copco is leveraging machine intelligence on the factory floor to provide preventive maintenance, improve uptime and drive operating efficiencies.

In Q1, we also announced the launch of the industry's first cloud-managed LPWA cellular router for the Internet of Things. The AirLink LX60 with both LTE Cat-4 and Cat-M1 variance is designed for applications such as building automation, digital signage, ATMs and point-of-sale. With the LX60, enterprises can rapidly deploy IoT applications that can scale quickly to thousands of networking devices. The Cat-4 variant is also available with optional Wi-Fi and GNSS capabilities, making it an ideal solution for retail and commercial fleet applications.

Now on to IoT Services. In Q1, IoT Services revenue was $22.5 million, up 218% on a year-over-year basis. Q1 included a full quarter revenue contribution from Numerex of slightly more than $13 million. This revenue contribution was in line with our expectations and approximately flat to Q4 of 2017. Excluding Numerex, Q1 organic revenue grew 28.8% on a year-over-year basis. Organic revenue growth was driven primarily by subscriber additions across the various market segments we serve. IoT Services also benefited slightly from FX tailwinds, as the Swedish krona and the euro both strengthened year-over-year against the U.S. dollar.

Non-GAAP gross margin in IoT Services in the first quarter was 40.9%, down from the prior quarter, primarily due to onetime costs related to a network upgrade and customer migration as well as higher service costs incurred during the quarter.

New customer acquisition activity was solid in Q1, as we secured new program wins in security, asset tracking, transportation and retail, where we announced that the International Vending Alliance selected our Smart SIM connectivity and AirVantage Cloud platform to help them transform their vending business, enabling new services such as targeted advertising, online machine monitoring, loyalty programs and cashless payments. With this deployment, IVA is also improving its product restocking efficiency and preventive maintenance program, both of which are boosting productivity and margins.

Overall, we continued to see strong sales collaboration across our BUs with more than half of our new IoT Services wins originating in our OEM and Enterprise Solutions sales teams.

With that, I'll now turn the call over to Dave for a review of first quarter results and guidance for Q2.

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. A full reconciliation between our GAAP and non-GAAP results is available on our website.

In Q1, which includes a full quarter contribution from Numerex, our revenue and non-GAAP EPS were both at the high end of the guidance range we provided during our February earnings call.

In our financial statements, we are now providing a breakout of our quarterly revenue for product and services. Product revenue includes all revenues associated with the sale of embedded module, gateway router and other hardware devices. Service revenue includes revenue associated with our cloud and cellular connectivity services as well as engineering support and warranty services.

In Q1, product revenue was $162.9 million or 87% of our total revenue, and services revenue was $24 million or 13% of total revenue. Consolidated revenue in the first quarter was $186.9 million. All business units performed generally as expected, which reflects good operational execution as we successfully managed through component shortages, network upgrades and efficiency initiatives during the quarter.

Our non-GAAP gross margin in Q1 at 33.4% was down slightly from the prior quarter. Compared to Q4 2017, gross margin in our Enterprise Solution business was higher in Q1 due to favorable product mix. This was offset by lower gross margin in our OEM Solutions and IoT Services business units.

OEM gross margin was negatively impacted by higher expedite costs related to component shortages as well as unfavorable product mix. IoT Solutions gross margin was negatively impacted by onetime costs associated with the network upgrade and customer migration at Numerex discussed on our February earnings call as well as higher service costs. We expect IoT Services gross margin to trend up in Q2.

Non-GAAP operating expenses in Q1 were up sequentially, primarily due to a full quarter of Numerex operating expenses, seasonally high marketing expenses related to events and higher R&D expenses. However, at $58.6 million, Q1 operating expenses were slightly lower than our expectations.

Adjusted EBITDA was $9 million, and non-GAAP earnings per share were $0.09 in Q1. The non-GAAP effective tax rate was 14.6% in Q1, in line with our expectations of approximately 15%.

A couple of comments on the Numerex performance as it was the first full quarter with Numerex in our results. Q1 revenue contribution was $13.4 million -- of $13.4 million was in line with our expectations and approximately flat to Q4 '17. Numerex made a small positive contribution to EBITDA, but as expected, was slightly dilutive to earnings per share.

Looking at key non-GAAP metrics in the first quarter of 2018 compared to Q1 2017. On a year-over-year basis, consolidated revenue increased by 15.9%, with 28% of revenue coming from our higher-margin Enterprise and IoT Services businesses.

OEM Solutions revenue in Q1 increased 2.1% year-over-year, reflecting stronger demand in automotive. Enterprise Solutions revenue in Q1 was up 34.5% year-over-year. Enterprise growth was driven by strong revenue from AirLink networking solutions for the industrial and mobile markets as well as fleet telematics devices. IoT Services revenue in Q1 was up 218% year-over-year, including the contribution from Numerex. Excluding Numerex, organic IoT Services revenue grew 28.8%.

Looking at adjusted EBITDA and non-GAAP EPS on a consolidated basis. In Q1, adjusted EBITDA was $9 million, which was down compared to $12.6 million a year ago. And non-GAAP EPS was $0.09 compared to $0.24 a year ago.

Note that our first quarter 2018 financial results reflect the adoption of the new revenue recognition standard, ASC 606. The comparative period in 2017 has been adjusted to align with the new standard. These adjustments are not material, and I would refer you to the notes in our financial statements for the details of these adjustments.

Moving on to the balance sheet. We ended Q1 with $70.6 million of cash, and the company is debt-free. During the quarter, we generated $10.9 million of cash from operations. And after capital expenditures of $4.9 million, free cash flow was $6 million. Our capital expenditures in Q1 were primarily related to factory test equipment as we expand our manufacturing capacity, R&D development tools, network equipment and capitalized software development. Overall, our cash position increased $5.6 million during the quarter.

Moving on to guidance for the second quarter of 2018. While the component supply environment has improved compared to the first quarter of this year, we expect that the supply of certain components will continue to be tight in the immediate future. Notwithstanding the supply environment, we expect Q2 revenue to be in the range of $195 million to $203 million. We expect non-GAAP gross margin in Q2 to improve slightly compared to Q1.

Our Q2 non-GAAP tax rate is expected to be approximately 15%. As a result of these sequential changes, we expect our Q2 non-GAAP earnings per share to be in the range of $0.17 to $0.25.

I also note that in -- early in Q2, we experienced a supplier component reliability issue. The affected embedded modules have been quarantined and not integrated into any customer applications. We believe some of the affected modules will not meet our normally high-quality standards. We're currently assessing the commercial viability of the quarantined products as well as the liability of our supplier. At this time, we cannot predict with certainty the outcome of that assessment. Depending on the outcome of the assessment, we estimate this issue could impact EPS in Q2 by between 0 and $0.03 a share. The impact, if any, has not been factored into our guidance.

And one final comment before I hand it back to Jason. On our February earnings call, we discussed various Numerex synergy and overall efficiency and effectiveness initiatives. We're in the midst of implementing those initiatives. And based on our progress to date, we believe we're on track to achieve our target of non-GAAP operating expense run rate of $56.5 million in Q4 of this year.

I'll now turn the call back to Jason for his summary comments.

Thank you, Dave. So to summarize, our Q1 2018 operating results were near the high end of our guidance range. We delivered year-over-year revenue growth in each of our business segments, with strong growth in our high-margin Enterprise and IoT Services lines of business. We continue to strengthen our customer program pipeline, winning new programs across our business units and regions where we operate.

With the addition of Numerex to our IoT Services business, we've significantly scaled and strengthened our recurring subscription-based revenue and are better positioned to expand our differentiated IoT Services globally. We also believe that we're taking the right steps to capture synergies, lower costs and to drive profitable growth going forward.

We're the clear global leader in device-to-cloud solutions for the Internet of Things, and our 3 business segments expose us to a large and valuable market opportunity. Our device-to-cloud strategy, supported by our focus on capturing operating efficiencies, places us in a unique position to lead this market and to drive growth and value creation for shareholders. Thank you.

And Cheryl, we can now open the line for questions.

(Operator Instructions) Our first question comes from the line of Mike Walkley of Cannacord Genuity.

This is Josh for Mike. On the component price and shortage issues, how are you thinking about that for the rest of the year? And then is there going to be any issue with delivering the modules that had the quality issue? Is that adding to the problem? Or how should we think about that?

So Josh, this is Jason. So a couple of things. We think that in Q2, we'll have some relief on the overall component supply issue that we experienced in Q1. If you remember Q1, we had significant revenue constraints. And also, the shortages led to us paying pretty large expedite fees to secure allocation of the components that we could get our hands on and manufacture products and get them out to customers. So Q2, a little bit of relief, still remains tight, particularly around memory, capacitors and PCBs with memory at the top of that list. Our view beyond Q2, we want to be a little bit careful. But our view beyond Q2 is that it will continue to improve, although we have to manage the situation day-to-day. With respect to the component reliability issue that's led to us quarantining some of our products, stay tuned. So the good news is we caught that problem early. We were able to make sure none of those products got designed into customer applications. So none of our customers are exposed to that reliability issue. We do have finished goods fully manufactured with that suspect component, and we have to go through an extensive screening exercise on each of those components, and in addition to that -- but to see if any of those are commercially -- any or all of them are commercially viable, sellable that is. And also in parallel, assess the liability of the supplier who shipped us the unreliable component. So stay tuned on that. That is excluded from our guidance. So that situation will not impact revenue.

Josh, just -- it's Dave here. Just to add a little bit more to that. We were able to quickly backfill customer orders that those quarantined products were destined for. So it has not affected customers as well.

Okay, great. And then just one more from me. Now that you've had Numerex for a quarter and been able to digest the acquisition a little bit, how do you see the opportunity set for the rest of this year and beyond now that you have the company?

Yes. I think -- well, we're still learning, but I think the headline, Josh, is that things are as expected. We made good progress on the integration. We've had some early unexpected victories, like a much faster path to upgrading our 4G capability in the U.S. So we'll be in the U.S. market with 4G services ahead of the time that we thought we would be. We've got a very high-quality, experienced, fully engaged team in Numerex. And for us, we think about that as just a much stronger business platform, to tell you the truth, that's basically double the size of our IoT Services team. So a lot more capability, a lot of experience, a strong customer base. And as we said when we acquired Numerex, we've got work to do as well, right? So everything was not perfect, and our aim is to clearly stabilize the areas of the business that were in transition. And I think we're well on our way to doing that and return those businesses to growth. So as expected.

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

Regarding the component shortages, would you be able to provide a rough ballpark estimate at to how much higher OEM revenues might have been if not for that?

In Q1? Yes, in Q1, I think, Thanos, we did size that at about $5 million to $6 million.

Okay. And given your commentary that you're looking for some improvement, how should we think about OEM margins in the near term? I mean, I know that as the automotive deal ramps later this year, there'll be some pressure. But just over the next couple of quarters, would you expect OEM margins to pick up a little as some of those issues alleviate or more consistent with Q1 levels?

Yes. I'd say -- be careful to not guide for gross margin in each of our business segments on that. But you have the general direction correct. You characterized it correctly. We do expect to see a higher mix of over -- this is over time. We expect to see a significantly higher mix of automotive and industrial IoT and a lower mix of contribution from markets like PC OEM. I think that, that general mix shift will probably be within OEM, probably be slightly dilutive to gross margin percentage. But remember, going the other way, we're working very hard to drive the growth in our IoT -- higher-margin IoT Services and Enterprise businesses at a faster rate than the overall company, and that's a positive mix shift with respect to gross margin. So I think we've got some good directional trends there and levers and dials to manage. Of course, our longer-term consolidated gross margin remains to be 35%. And if we do our work and continue to accelerate the growth of the higher-margin businesses faster than the overall business, I think we're on a path to get there.

And certainly IoT Services had some good growth again this quarter. And so ex Numerex and taking into account the currency benefit you mentioned, would you see the growth being sustainable? Are there any kind of near-term factors that may have helped it? Or just given the traction you're getting on cross-selling, would you expect that kind of growth to be sustainable?

Well, we're focused on driving that kind of growth, Thanos. So nothing unusual happened in this quarter or the quarter before or the quarter before that, right? So we've been kind of locked in, in this mid- to upper 20s growth rate for the past 3 quarters on an organic basis. So certainly, our aim is to continue to deliver that and hopefully expand it as well, taking advantage of our bigger, larger business platform with Numerex inside now.

Your next question comes from the line of Scott Searle of ROTH Capital.

Jason, just to follow up on the Enterprise front, you've been having exceptional growth over the past couple of quarters and you talked about normal for the second half of this year. Do you mean -- from an absolute dollar standpoint, will Enterprise be flattish and continue to grow a little bit into when you see normal -- more normalized growth rates? Or that will return into a more base level of revenues before we start to see a growth inflection there again?

Yes, there's -- good question. So 2 things going on in Enterprise. There were 2 significant contributors to the year-over-year growth in Q1. One was kind of the core AirLink networking products, up strongly to all of our legacy markets, industrial, mobility, et cetera. But I would say, we had an unusually high contribution from telematics. And that unusual level of growth, helped significantly by the HOS and ELD regulatory requirements in the U.S. So that part, the telematics part of the growth, we think -- we see that returning to more normalized revenue contribution, more normalized demand levels in the second half. And of course, our expectation is that the core AirLink networking products will continue to grow as they are. So a couple of moving pieces there. I mean, clearly, as the telematics demand starts to trend down, that will be a headwind to overall Enterprise growth. But clearly, in my view, we've got that line of business heading in the right direction. And by the way, as telematics revenue trends down, that will tend to boost gross margins coming from Enterprise as well.

Got you. And maybe, Jason, a follow-up on that. FirstNet, you've mentioned it a couple of times that it's an opportunity out there and there's -- sounds like at least there's some customer dialogue. When does that actually start to filter into the numbers?

It's already starting to filter into the numbers. We'll -- we expect to see a small revenue contribution starting here in Q2, and we expect that to build over time. I think -- we view that as a secular growth opportunity. So don't expect it to kind of jump up and reset to a new steady state level. I think we're going to walk into this market opportunity. And -- but we think it's a very interesting and quite large opportunity as many, many of the public safety agencies in the U.S. will move to an upgrade cycle in order to be FirstNet-compliant.

Got you. And just on Numerex, onetime charge in there. Could you quantify that for us? And in terms of the Numerex revenue stream, was it stable from the fourth quarter, sequentially flattish, down? Can you give us some direction in terms of how that looked?

Sure. Scott, it's Dave here. From a sequential revenue perspective, we're 13.4% in Q1. So that's slightly up from Q4. And contribution was slightly positive to EBITDA, but dilutive on an EPS basis. So kind of as expected.

Okay. And lastly just on OEM Solutions front, you've been facing some headwinds from a component standpoint. It's alleviating a little bit. Sounds like it gets better over the course of this year. What's your overall prognosis and outlook for OEM Solutions this year? Is it a growth segment for you? Should we be seeing some modest growth this year? And we'll start to see, I guess, some of the initial larger auto contracts starting to filter into the back half of this year.

Yes, thanks, Scott. So yes, that's our view. I mean, automotive is a key growth driver for us. As you know, we've got a lot of big programs that we expect to start shipping in the back half of this year, including VW. The rate of those rollouts is a bit TBD, but we expect to start seeing contribution from those programs and for those automotive programs to ramp through '19 and '20. We expect that will be a key driver of growth inside OEM. We also think IoT -- industrial IoT is going to be a key growth driver as well. I think we're backing that up with the right number of design wins. So we're optimistic to see continued growth in that area. And on the headwind side, we think that we'll see PC OEM trends down a bit. But overall, we're inclined for growth in OEM. So some good tailwinds and one headwind, I would say.

Your next question comes from the line of Howard Smith of First Analysis.

I just want to follow up actually on both the questions from the prior questioner. One, as it relates to automotive, one of your competitors has uncertainty regarding its automotive division, and just from a competitive standpoint in discussions for new design wins, are there any changes or opportunities you're seeing competitively? I'm specifically focused on automotive. But broadly in OEM, feel free to comment.

Sure. Yes. I think in automotive, we all know the competitor you're talking about. So they have announced a potential sale of that part of their business. So I think for all intents and purposes on new design wins, Howard, that effectively takes a competitor out of the running. And that's good for us, right? So where a strong Tier 2 module applier -- supplier is going to play a role, I think competition just weakened a bit. So in general, I would view that as favorable to us. And with respect to the overall competitive environment, a bit status quo. We've got a couple of small Chinese competitors who have kind of emerged into the mix over the last few years and they're nibbling away at some market share. I think that's affecting mainly the guys who have -- who are a bit weaker and have issues to deal with and maybe some uncertainty with respect to M&A. As you know, one of our other competitors is being acquired. And yes, so I think really no meaningful change, other than in automotive, I think it just got a little bit less competitive.

Okay. And then in terms...

By the way, I wouldn't take that to mean that there is a huge shift in pricing power, but...

No, I wouldn't think that. Just maybe you can win a couple more. And then as relates to Numerex, it was a declining revenue stream when you took it over. You were -- hopefully, you could stabilize it. You did slight growth. It starts to get integrated with the core operations, won't be broken out as much. But do you think we're -- we've kind of hit a trough and you expect kind of steady growth sequentially in that business from here? Or is it too early to tell?

I think it's bit early to tell, Howard. I mean, that's certainly our goal. I think, as you know, when we announced the transaction with Numerex, we indicated that we thought most of their transition issues were behind them. Hopefully, the Q1 result is an indication of that, but we're not drawing a firm conclusion on that just yet. Still work to do. But I mean, obviously, Q1 is encouraging, right, because it implies stability in a business that was heading in the wrong direction. So we still have work to do there, but I'm very optimistic. It's -- we've got the good raw materials to build a strong business platform as we combine the 2. One watch item for us, and this is well known, is -- they've got a significant 2G subscriber base. So we are very focused on moving through a technology -- moving those subscribers through a technology migration program. We're being very proactive on that, because over time, that will become risk. So we're going to push that proactively, and that will imply a hardware transition as well. And what better company to help the team manage a hardware transition than us, right?

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

It's actually Steven instead of Richard. You mentioned your IoT Services gross margin was hit by some onetime costs, the customer migration and network upgrade. I was wondering if you could quantify exactly how much that hit gross margin.

It's Dave here. No, we haven't broken that out. But -- I mean, the contributing factors were related to the migration. And then we also had some overage charges on the network side. So those 2 factors had some pressure on it.

Okay. And now that you are well through the integration of Numerex, have you identified any incremental synergies with respect to either revenue or cost?

Yes. I mean, we're working through that now. We've -- we're focused both on cost of goods sold synergies, top line opportunities, as you put the sales team together. And then, of course, in the middle of the P&L, there's opportunity to take costs out as we put the 2 organizations together. So yes, we are working through that right now. And that's part of the driver of getting our OpEx down to a target of $56.5 million run rate in Q4.

Yes. In fact, in Q1, we started to implement specific synergy initiatives around operating expenses as we put the 2 teams together. So those initiatives have already been implemented or are being implemented now. And you saw, of course, that we took a restructuring charge in the quarter. So that was part of that program.

Right. Maybe one last one from me. I saw that you adopted new revenue recognition standards as of January 1. So I was just wondering if there was any material impact maybe relating to revenue or anything else in your income statement?

Yes. It's not huge, Steven. And when you see our financial statements, you'll see the notes in it. Have a look at Note 2. And effectively, what it means is we go and adjust backwards the comparable quarters in 2017 to present them on the same standard going forward. But on a quarter basis, the 2017 Q1 number, revenue, went down by about $0.5 million and then some other things in the P&L went up. So net-net, I think it adds about $0.01 a share to 2017 EPS on an adjusted basis to align with the new standard.

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

Dave, in regards to the large automotive deals that you have ramping in the second half of the year, what do you need to put in place operationally to get ready for those deals? And then related to that, what's the degree of risk in your outlook for that business, is everything basically locked and loaded? Or is there still a lot of work to do that? Or is there a lot of variability in the potential revenue that may come from those?

It's Jason. So what do we need to do operational to prepare? Well, you've seen -- already seen the impact of some of that in our P&L. So it did impact R&D investment. These programs are big. They're complex. So we need to do some work on the engineering side, and we need to do some additional work on the customer program management side that's -- so that will show up in sales. So you see the impact of those added expenses related to these big programs. And then on the back end, as we prepare for manufacturing, you've seen that CapEx is kind of is significant, and part of our CapEx is increasing capacity in the factory, so that's test equipment and systems. So while we don't own the pick-and-place equipment, we do own the test equipment. So you see CapEx creeping up a little bit here in the last couple of quarters, that's to prepare for the volume ramp related to these programs. And then your question with respect to risk, I mean, there's -- these programs are pretty locked and loaded. They're very complicated. They're -- but they're locked and loaded. The customers are very focused on meeting their SOP dates. So I wouldn't expect any material change there. I mean, things can shift. If there is an issue in development, a firmware issue or an integration issue with the Tier 1 or an integration issue with the OEM or if the customer has a change in their model launch schedule, we don't have visibility to any of that right now, but those things are always kind of looming and can have some impact on the program. But so far so good. And I'd say, car companies rarely vary from their SOP plans. So they're very, very focused on staying pretty close to those.

And just looking at your automotive business at a high level. Are there any more like either metrics or comments that you can provide to help us better understand that, just in terms of the magnitude of it right now or potential market share or market share of design wins or backlog? Anything that can help us sort of better understand that business would be helpful.

Okay. We've nothing to share with you at this point in time, Paul. And we are -- I'd say we're unlikely to provide segmented revenue information. So you'll see the impact in contribution from automotive, of course, in the top line, but it will be somewhat abstracted, because we won't be breaking out that specific segment. Of course, we'll report to you when we get new design wins and try to roughly give you directional size with respect to those design wins. But we're going to be careful out of respect for our customers, and some of that's competitively sensitive information. I will say, the activity level continues to be super-high, and we've -- we're already receiving 5G RFIs from some of the OEMs, and we expect to see RFQ requests coming late in the year for 5G deployments.

Maybe not getting into the specific metrics. But just at a high level, that business, how would you qualify your competitive position in that business?

Well, we do quite a bit of bottoms-up information. It's the -- all of the programs that go on in automotive, Paul, are highly visible. Basically, we get a look at them all, as do our competitors, I'm sure, because there's really -- there's only 10 OEMs that really drive the global market for cars. So when it comes to a connected car interest or RFP, we almost get -- we get a look at almost all of them. So we know who wins the programs. Of course, we know when we win programs and we do bottoms-up estimates, which I think are reasonably accurate, plus or minus 5%, with respect to our share compared to the share of others. And our assessment is we've got a strong leading position in the market.

Our last question comes from the line of Todd Coupland of CIBC.

I just wanted to ask on the automotive question as well. I think you might have told this -- talked about this a while ago, but if you could just refresh. So the context around take-up of, let's say, this big automotive win, is that an option? Or is it designed into full production of this OEM across the world? Is there any way for you to put some ranges on the possibilities there over time and how long it will take to get up to a, sort of a steady state?

Sure. So that's a -- it's a complex answer to that question, because every OEM is different. In some models that we've been designed into, it's automatic. There is a Sierra Wireless device in every one of those models. And in other models, it's a consumer option. And in other models, it's -- it depends on the level of infotainment system you as the car buyer opt for. So one of our large programs that we are in the midst of getting ready for launch, as an example, the cellular modular attach rate will be driven by the level of infotainment system that the customer chooses when they buy the car. So if they buy the high-end one, well, they get a module and they get a high-end module. If they buy the mid-tier, that will have a module in it as well, but it will be a lower-tier module -- lower-tier 4G module. If they buy the base model, might not be connected. And that's how they're planning to go to market. Now in certain markets, by the way, it's required. So again, it kind of varies by geography. So the cars that are launched in Europe, as an example, that's a 100% attach rate for all new models, because that's mandated by the EU for safety reasons. By the way, so this all leads to, of course, what we believe is an increase in attach rate from today's roughly 15%. And our view is that attach rate marches steadily up until ultimately, when you get to autonomous vehicles, 100%.

So just as a rule of thumb, if you land an OEM, given all those dynamics, you'd say it's roughly in the zone of 15% and you see that moving up over time? Is that what you're saying?

No. What I'm saying is worldwide, automotive today is roughly 15% connected. So when we win an automotive customer, we would expect the attach rate to be higher than that, because they're making a commitment to their product lines to make them connected.

Right. But do you see that -- with that commitment, does it get up to 50% over the next year-or-so? Or is it just going to trend up over time?

I think the way to think about it generally is it's going to trend up over time. Without being specific on that, because it's a very complex algorithm to run through depending on models, level of infotainment systems, geographical markets launched, it's a multidimensional exercise to try to get to that number. So the way we think about it is, with each OEM program, of course, we have customer forecasts and an expectation of attach rate, which we can't disclose for confidentiality reasons. But overall in the market, we would expect to see attach rates march up significantly in the coming years, ultimately getting to 100%.

Yes -- No, no, that makes sense, over time. And when you think about the major OEMs that you're launching in the second half of the year to sort of get to a -- not fully mature, but at least starting to reflect some of these geographic or tier of vehicle, et cetera, how long will it take to sort of leg into that opportunity? Is that a quarter or 2? Or is that a year or 2?

Well, in Europe, it happens day 1, right? So in Europe, as long as it's a new model car, these car OEMs have to build in the connection.

Okay. So that's starting in Q3 and then ramping from there with all the other...

Yes, quite small in Q3, but kind of more starting Q4 and then ramping. China is a highly -- China will be deeply penetrated, and China is a key market for the customers we want. And of course, the U.S. market is pretty key as well.

Yes, okay. Yes. I mean, I don't think anybody disputes infotainment in a vehicle and the argument you make for attach rate. It's just trying to triangulate sort of where you sit in those dynamics. So that...

I know, it's very difficult. And of course, we have that internally. It's highly confidential information for each of the OEMs we have wins for. But we just can't -- we've got to protect their confidentiality.

Oh, no, understand that completely. I just wanted to step back a moment and just get your sort of view of the 5G milestones, I guess, that you're thinking about over the next couple of years. So there aren't really handsets available yet. You've got pilots planned with a couple of carriers in the U.S. So how should we think about sort of pilot to commercial uptake in 5G? And what are you planning for in that?

Sure. 5G is a complicated topic for the market and for customers. I think one key thing to bear in mind that there's 2 tracks for 5G. One is 5G LTE, which is more of a, I'd call it, an evolutionary step off of the current LTE network. So 5G LTE will actually run on LTE core network infrastructure. I would say, 5G LTE brings a lot of very interesting IoT features, brings much higher speeds, starts to bring in some of the vehicle-to-vehicle and vehicle-to-infrastructure features that the automotive guys are looking at. But I think in our segments, Todd, 5G LTE, a, going to happen first and probably an important entry point for us, because our customers will adopt that technology. The other track is 5G NR, which is a more fundamental change. NR stands for New Radio. So that's when you start to deal with the millimeter wave spectrum. So it opens up new spectrum. It's a new module architecture. And our view there is, there's going to be a lot of headlines and news around 5G NR. It's the -- it's really the mobile networks' -- network operators' opportunity to capture a big chunk of the video market, because it's multi-gigabit speeds to the home. And I think you'll see a lot of the major operators very focused on the deployment of NR specifically for those high-speed video applications, and I think that will be very targeted. So we're stepping into it. It's on our roadmap. We already see demand from automotive and that will step into IoT. And this 5G NR will be coming off the backs of that, is our view.

And do you view that as a '19 or 2020 event?

Yes. Exactly. It's a '19 or '20 event for us -- commercial event for us. And if it's '19, it's late '19.

And it's -- when you say late '19, you're talking about your initial opportunity in 5G LTE, not -- NR seems like it's going to take longer than that. Is that a fair assessment?

Yes. That's our view. It might take a little longer than that. So I think we have a shorter path. For us, we have a shorter path to 5G LTE. We can't ignore NR. It's going to be key as well, but we've got a shorter path to 5G LTE.

Cheryl, if that's the last call, I think we can wrap up the call, and you can terminate the line.

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