Sierra Wireless, Inc. (NASDAQ:SWIR) Q4 2019 Earnings Conference Call February 13, 2020 5:30 PM ET
David Climie – Vice President of Investor Relations
Kent Thexton – President & Chief Executive Officer
Dave McLennan – Chief Financial Officer
Conference Call Participants
Mike Walkley – Canaccord Genuity
Thanos Moschopoulos – BMO Capital Markets
Todd Coupland – CIBC Capital
Paul Treiber – RBC Capital Markets
Scott Searle – Roth Capital
David Gearhart – First Analysis
Richard Tse – National Bank Financial
Ladies and gentlemen, thank you for standing by. And welcome to the Sierra Wireless Q4 and Year-end Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the conference over to your speaker today, David Climie, VP of Investor Relations. Thank you. Please go ahead sir.
Thanks, and good afternoon everybody. Thank you for joining today’s conference call and webcast. On the call today is Kent Thexton, 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 is as follows. Dave will provide a detailed overview of our year ended 2019 results, Kent will provide his corporate update and then Dave will review our full year guidance for 2020.
Before we get started, I will reference the company’s cautionary note regarding forward-looking statements. A summary of our cautionary note 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 within the meaning of applicable security laws. These statements include our financial guidance, statements about our strategy, goals, objectives and expectations, and commentary regarding the 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, forward-looking statements are based on our management’s current expectations and we caution investors that forward-looking statements particularly those that relate to longer periods of time are subject to substantial known and unknown material risks and uncertainties that could cause actual events or results to differ significantly from those expressed or implied by our forward-looking statements.
I draw your attention to a longer discussion of our risk factors in our AIF and management’s discussion and analysis which can be found on SEDAR and EDGAR as well as our other regulatory filings. This presentation should also be viewed in conjunction with our quarterly earnings release.
With that, I will now turn the call over to Dave McLennan for his review of the year-end 2019 results.
Thank you, David, and good afternoon, everyone. Note that, we report our financial results in U.S. dollars and on a U.S. GAAP basis. We also present non-GAAP results to provide a better understanding of our operating performance. A full reconciliation between our GAAP and non-GAAP results is available on our website.
Q4 revenue was $174.3 million slightly above expectations and consensus estimates of $171.1 million. Non-GAAP gross margin in Q4 was 29.5% below our expectations, primarily due to two factors. Firstly, the impact of product mix, which resulted in lower sales of higher margin enterprise gateways offset by higher sales of lower margin automotive modules compared to expectations. And secondly, the impact of unusual warranty and inventory expenses in the quarter that were mainly related to defective third-party printed circuit boards. This has now been remedied. These expenses negatively impacted gross margin by approximately $1.7 million or one percentage point.
During the quarter, we continued to manage operating expenses carefully while at the same time investing to grow the business. Adjusted EBITDA in the fourth quarter was $2.3 million and loss per share was $0.08. If we adjust for the unusual warranty and inventory expenses incurred in the quarter, adjusted EBITDA would have been $4 million and non-GAAP loss per share would have been $0.03, slightly better than the Q4 consensus estimates.
Full year 2019 revenue was $713.5 million, slightly above our guidance range of $708 million to $712 million. Full year adjusted EBITDA was $21.1 million and the non-GAAP loss per share was $0.01. Adjusting for the unusual warranty and inventory expenses incurred in Q4, adjusted EBITDA would have been $22.8 million and earnings per share would have been $0.04 in line with our guidance and consensus estimates.
Looking at our segmented results for the full year. Overall, revenue was down 10% year-over-year, with the expected decline in our embedded broadband segment offset in part by modest growth in IoT solutions. Within embedded broadband growth in automotive module sales was offset by lower module sales to PC OEM customers as a result of several design win losses that we reported on this time last year, and lower networking module revenue as well. This resulted in embedded broadband revenue being down 20% year-over-year.
Within IoT solutions we delivered solid recurring and other services revenue growth of 7.4% for the full year excluding iTank, which was sold at the end of 2018. We are very pleased with the momentum building in our services business as we exited the year with Q4 year-over-year recurring and other services revenue growth of 16.3%, again excluding the iTank revenue in 2018. We also experienced strong growth in enterprise gateway sales in 2019, up 12% year-over-year. The growth in these two revenue streams was offset by a decline in 2G, 3G IoT module sales as these technologies are comparing to sunset.
Gross profit dollar declined year-over-year with the decline in revenue. On a percentage basis, gross margin overall was lower by approximately 2.5 percentage points. On a segmented basis, gross margin in our IoT solutions reporting segment, was stable year-over-year at 37.1%.
Gross margin in our embedded broadband reporting segment decreased due to unfavorable product mix, specifically lower sales of higher-margin PC OEM networking modules and higher sales of lower-margin automotive modules. This change in mix negatively impacted gross margin in the embedded broadband segment by six percentage points.
Adjusted EBITDA in 2019, was $21.1 million down year-over-year as the reduction in total revenue and associated lower gross margin dollars was somewhat cushioned by lower operating expenses in 2019.
Moving to the balance sheet. For the year ending December 31, 2019 cash flow from operations was $6.9 million and capital expenditures were $20.3 million, resulting in negative free cash flow of $13.4 million. This was partially offset by $3.2 million generated from investing and financing activities.
As a result, we had a net decrease in our cash balance of $10.2 million in 2019 ending the year with $79.1 million of cash. Subsequent to year-end, we deployed approximately $20 million for the purchase of the M2M group in Australia.
I will note that 2019 was a heavy year for cash restructuring expenses. With this mostly behind us, we continue to have a strong cash balance and access to additional capital if required through our $30 million committed bank facility. Regarding our cost-saving initiatives in both cost of goods sold and operating expenses, we ended the year with approximately $32 million in total estimated annualized savings once these initiatives have been fully implemented.
In 2020, we will be focusing on additional sales effectiveness initiatives, further optimization initiatives and cost of sales reductions. We remain on track to meet our stated target of reducing our cost of sales and operating expenses by approximately $40 million to $50 million as we exit 2020.
In support of our transformational strategy, we plan to continue to invest the majority of our OpEx cost savings into targeted reinvestments in both R&D and go-to-market programs in order to continue driving growth in recurring revenue, gateways, 5G and LPWA.
With that, I will now turn the call over to Kent to provide a corporate update.
Thanks, Dave. In 2019, we made tremendous progress in transforming Sierra Wireless into the global leader in IoT solutions. We delivered our plan of $99.1 million of recurring and other service revenue in 2019 and we are projecting this to grow by over 25% in 2020 to $125 million, which includes our acquisition of the M2M Group in Australia.
In 2019, we secured valuable design wins with future annual recurring revenue of more than $90 million. The energy that we put into the flywheel of solutions design wins is starting to deliver. And we expect this will continue to accelerate. I’m very pleased with our progress.
Another leading indicator of our IoT solutions transformation is that we increased our net new IoT connected devices in 2019 by over 400,000 devices, growing our base by 13% to end the year with more than 3.6 million in global connections. The key contributor to that growth was a strong uptake in our Smart SIMs, which accelerated during the year and reflected our higher value wins with devices combined with subscription-based recurring revenue.
In 2019, we strengthened our portfolio to support strong solution wins in the market. We successfully launched our Octave all-in-one edge-to-cloud IoT platform with advanced data orchestration and we had our first dozen design wins as customers benefit from the reduced development costs and faster time to market. We rolled out Ready-to-Connect technology with out-of-the-box connectivity and cloud platform across all our HL and WP series embedded modules.
We started to ramp up sales of our LPWA, Low Power Wide Area, modules bundled with our subscription-based connectivity services. We continue to invest in leading edge embedded modules gateways and routers including cellular embedded 5G technology. We secured new ecosystem partners including a preferred partnership with Microsoft Azure to collaborate on IoT solutions. These initiatives are focused on allowing us to win more industrial IoT customers and increase our success in this $10 billion to $20 billion total addressable market.
Industrial IoT customers have found it complex to connect their machines, devices or assets with IoT and our bundles and Octave solutions are solving the problems that cause 75% of IoT projects to fail or get delayed. Forrester reported that our Octave solution help companies get their solutions to market 75% faster and with 40% lower overall costs. Capitalizing on these strengths, we are accelerating our efforts in 2020.
To fund our transformation to achieve our stated goals of doubling our recurring and other service revenue to $200 million by mid 2022 and double again to $400 million by mid 2024, we have been continuing our efficiency efforts to say between $40 million to $50 million of combined OpEx and COGS as previously announced. During 2019, we centralized our R&D groups, closed five development centers, combined our go-to-market teams, outsourced a variety of functions and completed several major restructuring initiatives in the first phase of our planned two-year transformation program.
To give visibility into our recurring revenue and other service design wins, we shared at our June 2019 Investor Day that we expected to secure over $400 million in lifetime value of wins in 2019. With accelerating momentum throughout the year, we achieved this goal on LTV of design wins. While LTV is a useful metric, it lacks the element of a time frame. Following feedback from analysts and shareholders, we are adopting a design win metric which includes time frame known as Long Term Annual Recurring Revenue or LTARR.
LTARR is based on estimated annual recurring revenue in year three from the time a customer’s program is activated. With the wins that we secured last year, our total LTARR was in excess of $90 million, approximately 2.5 times greater than the LTARR of 2018. These wins are the flywheel of future recurring revenue growth and have us on track for our goal of $200 million in annualized recurring and other service revenue by the middle of 2022 and doubling to $400 million by the middle of 2024.
With record recurring revenue wins in 2019 and a strong opportunities pipeline in place, we remained focused on delivering high-margin subscription based service revenue in 2020. To help accomplish this, we’ve been adding new talent to our IoT solutions team driving better regional alignment in our go-to-market teams and investing in tools and processes to boost sales optimization and efficiency.
On the regional front, I’ve appointed Marc Overton, our Chief Solutions Officer to lead our team in EMEA where our device and network offerings are exceptionally strong and we’re most advanced in offering complete solution bundles. Jim Ryan, our SVP Partnerships and M&A led the acquisition of the M2M Group and will lead our APAC region and will help lead the continued expansion of the strong M2M recurring revenue model in Southeast Asia.
In North America we are very strong in both enterprise with our AirLink Networking Solutions, as well as in our IoT solutions offerings. I’m recruiting a strong new SVP Americas and in the interim I’m enjoying leading this group myself.
For 2020, I’ve set aggressive design win targets for our sales team as we continue to build momentum by adding new customers to our recurring revenue flywheel. We strongly believe this differentiated strategy underpins both successful growth and long-term shareholder value creation.
A good example of this differentiation is a recent customer win on our Octave edge-to-cloud solution that we secured last quarter with a division of a leading international energy company. They needed real-time monitoring for their industrial batteries to increase performance and improve preventative maintenance.
Our winning proposal was to deploy our FX30 programmable IoT gateway using our global smart SIM connectivity and to enable two-way data orchestration between their batteries at the edge of the network and their cloud-based management platform. The customer is currently planning for global deployment and with our MVNO capability and 24/7 network operating center, it makes it easy for them to deploy edge intelligence as they scale their real-time monitoring program.
Another key customer win in Q4 was with the Northern European company providing air quality control and monitoring services. The customer is expanding their presence in Europe and also growing its operations in North America, the Middle East and Japan.
To gain a competitive advantage in their marketplace, the company is deploying their services using our Octave edge-to-cloud solution with our global Smart SIM to reach new geographies quickly. After evaluating a large number of IoT vendors, the data orchestration capability of Octave with our fully integrated solution with the key differentiator in their decision to select Sierra Wireless.
In our Microsoft partnership, we achieved a major launch gate late in 2019. And Octave is now part of the Microsoft as your IT solution set and featured in their marketplace. We are actively engaged with their sales teams and system integration partners and we’ll be participating in various core marketing activities this year including webinars, the Microsoft IoT in action events being held in the U.S. and Germany and various other conferences.
I’m pleased to see that we have a number of joint Octave and Azure customers who are coming to market and that a growing funnel of joint prospects is in development.
As we continue to focus on recurring revenue opportunities, we are also investing in a leading-edge portfolio of cellular embedded modules gateways and routers. As a leader in embedded modules, we have been investing to expand and refresh our portfolio. In LPWA and lower category LTE technologies, we have launched new devices that expand our device-to-cloud offerings and accelerate recurring subscription-based revenue.
In 5G and gigabit 4G LTE, our high-speed solutions are powering next-generation devices for applications in enterprise networking, edge processing, smart factories, robotics, VR, video systems and machine learning.
Our first-to-market 5G embedded modules are now sampling with OEMs and system integrators in mobile computing, enterprise networking, and industrial IoT platforms. And following our discussions with carriers and chipset suppliers, we are fully supporting the 5G new radio standard in both millimeter wave and sub-6 gigahertz frequencies.
In addition, we are focused on expanding our brake to connect series of embedded modules that allow customers to simplify their IoT deployments and accelerate their time to revenue.
Differentiated from competitors, our recently announced RC Series has all of the key elements our customers need in a single integrated bundle. An embedded module with integrated smart SIM that’s pre-connected to global networks, an IoT management platform and an end-to-end integrated security. This fully bundled solution reduces our customers’ total cost of ownership.
So in conclusion, while we are only one-year into our transformation program we’ve made tremendous progress. We are on track with our initiatives and we’re seeing solid improvements in key areas such as our sales opportunities pipeline, customer design wins, net new connections and device plus service bundles.
We are facing some softness in parts of our embedded broadband business as expected, specifically mobile computing. We are offsetting that with our growth in our high-value IoT solutions business as we focus on increasing our subscription based recurring revenue.
With that, I will now hand the call back to Dave for the outlook for 2020.
Thanks, Kent. Moving on to guidance for full year 2020. While 2019 was overall a financially challenging year, we made significant progress in transforming our company as we reorganized the business and reduced costs. We also realized solid growth from recurring and other services revenue as well as in enterprise gateways, both of which represent high value in differentiated parts of our business that underpin long-term value creation.
In 2019, the progress we made in these areas was as expected, offset by pressures in certain areas of our hardware business, particularly embedded modules sold to PC OEM and networking customers and to a lesser extent legacy 2G, 3G, IoT module cells. In 2020, we expect these transitional dynamics to continue. More specifically our recurring and other services revenue, which is comprised of more than 90% recurring revenue is expected to grow approximately 25% year-over-year including the contribution from the recently acquired M2M Group. Excluding the M2M Group, we expect organic services revenue to grow by approximately 15%.
We also expect our high-value enterprise gateways revenue to grow by approximately 12% year-over-year. And as we saw in 2019, we expect the growth in these areas as well as growth in our automotive modules revenue will be offset by continued pressure in certain areas of our embedded module business namely PC OEM and parts of our IoT modules business. Given these factors, we expect 2020 revenue to be between $690 million and $710 million and adjusted EBITDA to be between $10 million and $15 million.
n a reporting segment basis, our expectation is that our IoT Solutions segment revenue will grow 7% to 10% year-over-year. And our embedded broadband segment will decline by 12% to 15% year-over-year, resulting in total revenue being slightly down in 2020 compared with the prior year.
Please note there is significant uncertainty around the impact of the Coronavirus on the industry supply chain and potentially certain operational activities. We are actively monitoring the situation at this time have not factored in the potential impact on our operations or for financial performance in our 2020 guidance.
This concludes our formal remarks. Thank you very much. Operator, we can now open the call for questions.
[Operator Instructions] Your first question comes from the line of Mike Walkley with Canaccord Genuity. Your line is open.
Great. Thank you for taking my questions. Dave just following up on the 2020 guidance. Can you just help us think about gross margin trends by the segments as you have a stronger mix of recurring revenue and the gateway business. And it sounds like in your guidance should we see margins trend up in IoT solutions? And then on the embedded broadband side should it continue to fall or even stay at these low 20 levels given the heavier mix likely to automotive in the short-term?
Yeah. Hi, Mike, it’s Dave. Thanks. So on a consolidated basis yes, I think, you’re thinking is correct. We are expecting a modest uptick on a consolidated basis in gross margin percentage and it’s exactly as you described driven by mix growth in our IoT solutions which is higher margin and decline in our embedded broadband gross margins as well. So those are the dynamics within IoT solutions as we continue to get scale, the gross margin that we saw coming out of 2019 of 37.1% should continue to blend up as we improve our recurring revenue mix and our gateway mix both of which are higher margin.
Hi, Mike, it’s Kent. I just might add to that that the mix within embedded broadband also is reflective of our PC OEM business being down. As we mentioned before we had large programs with Lenovo and Dell have completed so we’ll have about $55 million less revenue in our PC OEM segment partially offset by automotive which is a much lower gross margin business overall. However, that’s the really bottoming of the embedded broadband segment. As we move forward, we don’t have another event like the decline in those two design win losses in the PC OEM segment. So I think that from a go-forward basis I think that can help with the modeling.
Great. Thanks. And just building on that how do you feel about your 5G development relative to competitors. And with 5G help you get back in the PC OEMs maybe just timing and what that might do to the mix and the margins? Also is it to get back design wins in 2021 and we start to see it more in the model in 2022? Or just kind of hit the model even later in 2021 for 5G? Thank you.
Thanks, Mike. Yes. We’re very active in 5G. I think we’re at the forefront of the 5G module deliveries lots of dependencies on chip suppliers and others to complete those programs. We have samples with customers. We’re running test calls. And on current schedules we would expect to have 5G products launched this year. I think the early segment movers are going to be more in the gateway router parts of the market, a number of customer commitments in that part of the market where they’re looking to take advantage of what 5G has to offer.
On the PC side, we will see some programs, but the — I think that as you model into 2021 and 2022 5G is going to be very important in our Airlink gateway business and do other companies that are working in that part of the market working fairly closely with carriers on their programs and designs. We don’t have that. So in 2020 the impact of 5G is quite small. And we’ll provide an update as we get closer to 2021 on the longer-term impacts of that program.
Okay. I will pass the lines and thanks for sharing the new LTARR metrics.
Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Your line is open.
Hi. Good afternoon. Apologies if you already mentioned this — the $1.7 million warranty charge did that come out of IoT gross margins or embedded gross margins?
That was — it was a bit of a mix, Thanos. That was spread across automotive customers as well as to a lesser degree some IoT module customers.
Okay. And Kent, I think, I heard you say that PC OEM will be a $50 million revenue headwind in 2020. And so if that’s the case does that imply that embedded broadband revenues are expected to be relatively flat to up a little excluding that impact?
Hi, Thanos, it’s Dave here. Yes I think actually PC OEM will be down by about $55 million in 2020 over 2019. And yes, we are expecting overall that segment to be down between 12% and 15% compared to 2019 overall.
Okay. And can you comment on how we should think about linearity throughout the course of the year. Should we think about the year being second half weighted as you see ramps in a number of your businesses? Or is any other dynamic that we should think about from a quarterly perspective?
Well let me — it’s Kent I’ll start here and Dave might add some color. I think that there’s a few things going on here Thanos. One is as I mentioned our over $90 million of new design wins and the ongoing focus on our recurring revenue that’s been increasing and as the wins we have in the flywheel start to deliver you’ll see our recurring revenue continue to increase each quarter. And overall 25% increase as Dave mentioned this year will play through the year. I think that from the other business trends the PC OEM part we talked about is out for the whole period. And then we’re sort of more into standard seasonality. Q1 is typically our lightest quarter. And then we’ll continue to build as the year moves on.
Thanos, this is Dave. The only thing I’d add to that is that, we are expecting some lift in the back half of this year from 3G sunsetting in the United States. So that should give a little bit of a boost relative to the first half particularly in gateways as we work through that technology replacement.
Okay that’s great. Last question for me, can you just comment on the performance of gateways in the quarter and anything to call out there?
Yes gateways, I mean the first — the second half was definitely lighter than the first half in terms of performance. I mean, we had modest year-over-year growth in gateways. For the full year, we grew approximately 12% but that was more driven by first half performance.
Your next question comes from the line of Todd Coupland with CIBC Capital.
Good evening. I wanted to talk to you about the recurring revenue. I had a few questions there. Did you think about sort of the biggest types of projects that you added in 2019? Can you just give us an idea on some of the larger applications?
Sure. It’s Kent here. So one of our primary focus has been industrial IoT. We’ve shared a number of customer examples where we are providing that complete platform solution. So when we look at our LTARR a lot of programs come there. In our LTARR number there was almost 2,000 customer additions about 100 of them in the larger snack bracket and those would be weighted towards industrial IoT.
We have other — a variety of programs in there. We have programs like our managed connectivity service which will fit in those programs and those may be more in a retail backup or other sorts of applications like that that would be a more minority type position.
And then as we grow our enterprise business, we’re also adding software platform revenue or connectivity revenue that fits into that. So I would put it in those sorts of orders from where the weighting is.
Okay. And would that be similar to the growth that you’re expecting in 2020 in recurring revenue of 15% more or less in these categories?
Well, I think that on the big design wins and when I reflect on our LTARR, our LTARR is reflecting of what the recurring revenue will be in year three of a design win. And that’s not a static point. That number continues to increase as customers add more products to their network.
So that’s — what’s happening is I call it the energy we’ve loaded into the flywheel. And as more of those products get to market with our customers as more devices get deployed then that recurring revenue increases.
So I have targets internally for a good increase in LTARR wins in 2020 over 2019. I really started focusing on this program as I took over as CEO about a year ago. In Q1 we were rolling out the program to our sales force. Q2 we were training, we saw LTARR increases every quarter of the year as we continue to focus on that.
So we’re in a pretty good state of pipeline on those wins, but the activity that we win in 2020 really starts to show up in revenue in 2021, 2022 and 2023. So what you’ll see in 2020 is design wins from 2018 and 2019 that are coming to fruition plus some things like our MCS, Managed Connectivity Services that are rapid time to revenue they start producing revenue very shortly after the design win.
So you’ll see – we’re getting better and better visibility into our recurring revenue growth. I reiterate our view that we’ll be at $200 million of annual recurring revenue by the middle of 2022 and as you continue to deliver from these design wins to $400 million by the middle of 2024.
So yes, it’s continuing to get an increasing number of design wins to market and live. These are typically products that are shipping with our embedded smart SIM capability or our full suite Octave solution. And so as those products shift to market they start delivering data and our bundle includes data, software and security platforms that we monetize on a monthly basis.
Okay. And I think you said $99 million at the end of the year. So would that be comparable to — I thought you said it was roughly 95% last quarter. So was it up roughly $4 million quarter-on-quarter the recurring revenue?
Dave, it’s Todd here. From a pure recurring perspective, we did $26.5 million of service revenue in Q4 that was up from $24.6 million in Q3.
Sorry. Dave could you repeat those numbers please?
Services revenue recurring and other service revenue was $26.5 million in Q4. And 20 — and it was $24.6 million in Q3.
Okay. And then the LTM at the end of 2019 that’s the $99 million that you’re referring to?
Yes $99.1 million.
$99 million right. And then that’s the baseline for the growth targets that you called out for 2020 the $99.1 million?
Correct. Correct. So, we’re looking at a 15-ish percent on organic, and then layering in the acquired M2M Group taking that category revenue up by about 25% for the year.
And the M2M revenue is that all — is that essentially all of that business that’s going into this group as well?
They also — they’re a hardware distributor. So, it is weighted. More than half of the revenue is recurring services revenue but there are some gateway and module sales as well that they do.
Because I thought that that was in the $16 million range if numbers are right. So, there’s a bit of hardware in that that you’re axing out when you add the piece to the recurring revenue here?
Correct. When I speak to recurring revenue, that’s just pure services, yes.
Okay. Appreciate the color, guys. Thanks a lot.
Your next question comes from the line of Paul Treiber with RBC Capital Markets. Your line is open.
Thanks very much and good afternoon. Just hoping that you could elaborate on your comment about the coronavirus. Are you seeing any tightness in your supply chain yet either upstream or maybe among downstream buyers?
Well, on the — I think it’s just very early Paul to make a lot of calls. Factories started to reopen this week. There was an extended shutdown as you know from the Chinese New Year that the government imposed and getting workers back to the factory has been somewhat slow. So, it’s hard to tell yet exactly what the impact we have to contract manufacturing locations one in China and one in Vietnam.
The Chinese one will be slower to get up to speed. Our Vietnam factory will have potential implications from components like PCBs, et cetera. They come from China. So, the impacts of how things start to move during this time, is very fluid. We’ve talked to many other companies that are experiencing the same thing.
So, it’s a bit hard to predict at this point in time. The things are starting to move. The factories in China are back open but it’s not like after a typical Chinese New year, you get back to full production within a day. That’s not the case this year.
And related to that Mobile World Congress is cancelled, do you anticipate any cost recovery related to that? And also if — would it have — I wouldn’t think it would. Would it have any impact on near-term design win momentum?
Yes. So, it is obviously a big event for us in the industry. It’s — I think for all the right reasons, it’s been canceled. It is a very significant event for us in terms of meeting customers and suppliers and a chance to bring the industry together. We’re working to make a number of those meetings happen. Everyone seems to have free calendar time that week. So we’ll be busy in that regard.
From a cost recovery basis, marginal things like we have a large display booth there that’s already built and our exact fees with Mobile World Congress are not yet clear. So, we’re obviously working on that. I was on a call with the teams at 6:00 a.m. this morning on figuring out some of those logistics. But I don’t have firm answers for you yet.
So, I’m just going to say on design win activity, no, it won’t have any impact on design win activity but we’re constantly meeting with customers and suppliers. And so, all those are relationship and information sharing. So, we’ll have to work somewhat harder. We had a lot of people interested in coming by our booth this year. It was probably going to be the busiest we’ve ever been at Mobile World Congress. So, we’re working on that.
With our new regional alignment a lot of European customer activities, so Marc Overton and the team are following up to make sure that we can take advantage of the meetings that were planned and we’ll continue on driving forward on that. We’re having tremendous interest in our bundled solutions. And so the chance of Mobile World Congress to demo and display more of that will be missed, but it’s not something that we can’t replicate at customer sites and we’ll be working hard to do that.
And then, I just want to shift to automotive. You mentioned that automotive was stronger than expected this past quarter. That comes in a relatively soft environment for automotive. What was the reason for the upside that you saw in automotive this quarter? And how do you see that spilling through at least into the first couple of quarters of this year?
Well, I think that one of the things we’ve been working on Paul is to — and I mentioned this before, re-vectoring all of our forecasting approach to make sure we’re having a more balanced viewpoint. And so, as that comes through across all of our results, I would expect to have a more equal balance of upside and downside, and I think that that’s reflective here.
As we look at automotive, we have major programs starting to ship like Volkswagen that we talked about previously and some of those programs have looked for more product than we had at our median case in our forecast. And so, we’ve been working to ship to those customers. So we have a pretty balanced view in our overall forecasting approach. And I don’t think there’s any macro event. It’s just that they’ve executed on their product launches and required product from us for that.
Okay. Thanks for taking my questions.
Okay. [Operator Instructions] Your next question comes from the line of Scott Searle with Roth Capital. Your line is open.
Hey. Good afternoon. Thanks for taking my questions. First a quick clarification. On the enterprise gateway business, was that down sequentially in the December quarter? And I had a couple of additional questions.
Scott, it’s Dave. Yes, it was down a little bit sequentially from Q3, but year-over-year.
Up year-over-year in the quarter and also up 12% for the full year year-over-year.
Okay. And then Kent, looking at the embedded business out over the next couple of years, what is the target gross margin? What’s going to be a potable number? I know there are a lot of moving parts there in terms of, not only some end market segments, whether it’s PC, OEM or auto, but 5G coming in is 5G going to be positive or negative? How does LPWA impacted as well? And what are you guys going to be happy with looking out to 2021 2022?
Sure. So I’m going to start by not answering your question but I will come back to it I promise. Our real focus here is in driving our IoT solutions business. And we have two big and growing streams there in our recurring revenue bucket and in our enterprise bucket. Both of those with high gross margin streams and both growing. And really as we look at the IoT market in totality our opportunity to win our differentiation than our growth, vectors are going to be driven by a continued acceleration in our overall IoT solutions.
So that’s going to be – when we’ve talked at our Investor Day that we see being able to improve the profitability model of this business quite substantially. And so out in the 2024 period in a very strong EBITDA position overall with this business. And that’s all coming from IoT solutions.
So back to the embedded broadband side in your question, the PC OEM business that is declined is not something that’s long term strategic. It’s not a growth segment. And – but it has hurt margins in that business. As I said, this will be that decline is concluded in our 2020 numbers. And so the margin from automotive is lower and that’s what’s going to drive the margin lower in that segment this year.
We have decent margins in our networking business and we have some Tier 2 PC customers that we continue to support big brands and we do quite a broad range of things for that we have good relationships with.
As 5G comes in, and I said I think it’s going to be more in the gateway router part of that market. They’re going to be very expensive modules. So the gross margin dollars will be strong. The gross margin percent won’t be large. But it’s too early yet to peg a number on that. So I’m not going to put a guess out there of what those will be.
We’re working through on a number of programs with customers and exactly how all of the Qualcomm programs because we’re on Qualcomm chipsets here for 5G. That’s going to evolve over time. So I think from a gross margin perspective in the embedded broadband side I think that we we’re in that revenue decline and margin decline we sort of bought them.
In 2020 and we expect that to be relatively steady to slight improvement from 5G moving forward. But the real story here is the increased proportion of our business that comes from IoT solutions. And the stronger gross margins from both our recurring revenue and enterprise.
Got you. And if I could just follow-up in on the IoT solutions and the recurring side of the equation. I’m not sure if you could remind us your thoughts in terms of long-term value of the subscriber. How you’re kind of thinking about it? Or what that number could possibly be? This year with 25% growth getting to $125 million is that business becoming a positive EBITDA contributor?
And lastly the competitive landscape there, there are a lot of guys who are popping up that offer, different types of platforms and various eSIM implementations to accomplish some form of connectivity. So I’m kind of wondering if you could just give us a quick overview of what’s going on in the competitive landscape and who you’re seeing on the short list for a lot of your industrial IoT implementations? Thanks.
Okay. Yes good question. So I think I’m going to start by talking about – we mentioned in our press release that we added over 400,000 net new connections on the year. And so that’s the fundamental part of driving the recurring revenue and we call it net new because we acquired some legacy bases that have some declines Maingate and some of the Numerex aspects. And so our smart SIM, our embedded technology is growing very strongly.
And you’ll see that we anticipate that that number of net new connections in 2020 will accelerate very nicely from 2019 and 2019 is up dramatically from 2018. So we’re seeing – that’s a good leading indicator and net new connection is added in December is going to add 12 months of revenue in 2020 when it just added one month in 2019.
In terms of competitively in winning these deals, there’s other people doing eSIMs there’s nobody else with a complete solution. What our customers’ choices are and I talked about in my script a couple of industrial IoT customers, one in industrial batteries. So their option was to integrate someone else’s hardware. They would have had to have embedded systems engineers to be looking at how to pull all the sensor data that they wanted. And then they would have used different carrier SIM cards around the world to be able to get the connectivity they wanted overall.
And so that – then they would even need a software platform to manage the devices and they need to be responsible for their own security. So when we put that all together for the customer, our bundle wherever that industrial battery has shipped in the world, it starts working on the CRO wireless global network immediately. There’s no separate logistics required for different SIM cards in different regions. It automatically connects to our cloud platform for managing the device. They can change what events frequency of events, duration of events from their cloud instance of our service.
We’ve embedded security software both in the device and in our connectivity link and we manage every one of those connections 24/7 in our Atlanta Global Network Operating center. So we’re highly differentiated in that regard.
The Forrester study that I mentioned showed that we reduced time to market by 75% reduced total cost of ownership by 40%. So it’s really a customer that is working to put the whole solution together by piece parts. And we still see in the market some customers will RFP their hardware and their connectivity separately.
We go to them with the benefits of a bundle and we many times turn around how they’re acquiring IoT technology because they see the benefits of that. And that’s – we’re at the early stages of that especially new industrial IOT greenfield customers that as people move more and more to the cloud they need to be getting that edge data, that’s why Microsoft partnered with us to be the preferred edge partner as to more and more of this data can be collected.
And with our ready to connect solutions with our Octave solutions, we simplify that whole journey. So we are not seeing any other competitive solution stack when we’re out there talking to customers. It’s the paradigm change that we have of being a completed solution versus, let’s call, the traditional way of the customer buying all the parts and putting it together themselves.
Great. Thank you.
Your next question comes from the line of David Gearhart with First Analysis. Your line is open.
Hi. Good afternoon. Thank you for taking my questions. First question, out of the 400,000 or so net new connections or if you want to talk about it on a gross basis, can you give us some sort of sense for your attach rates on your IoT solution module business? I know you’ve talked about it before some theoretical rates that if you take that number of devices shipped then it’s this percent could be really a powerful recurring revenue model as you go forward. I just want to get a sense of what the attach rates are if you can help with that.
Yeah. It’s not a number that we published yet and it’s still quite early in the game for us to have sort of stabilized focus. We have very different attach rates by product category. So embedded broadband is zero in Octave it’s 100%. As we are rolling out and we launched the new class of products called our RC Series this week that are all optimized for ready to connect in connectivity.
So we’re seeing increased activity, but it’s early for us to report on that. In our focus on growing the industrial IoT side, we’re seeing stronger and stronger full solution stack opportunities. When we’re into some legacy customers that have already have carrier agreements in place then it’s more difficult to get that attached. So we will work to share more data on it as we have a bigger data set to produce results and forecast on, but we’re just not at that stage yet.
Okay. And then lastly for me if you could go back to the competitive environment? I know you talked about the recurring solutions side, but I wanted to focus a little bit on the IoT Solutions side. I’ve been hearing a lot about a very aggressive Chinese module provider and with them getting into relationships especially in the U.S. where customers are either moving over from a single source to them or dual sourcing. Just wondering if you’re seeing a major impact with your business on the solutions side on the modules for that reason?
Well, I think that we’ve talked about that previously as definitely is impactful. The whole reason that we as a company invested in acquiring global MVNO assets is so that we could be differentiated and not play only in a commoditizing hardware space.
So if it’s a hardware only module that is — that’s a tougher business segment for everybody competing in that space. So we’re — when we sell our bundled solution then we’re in a strong position to win. If it’s a module only we still have leading technology, but we may or may not want to price at what the market level is. So there is — I think as Dave went through the numbers and the module side you can see a slight decline there. That’s a combination of ASPs as lower cost products like LPWA come in and some hardware only module accounts that would have been lost in a design win cycle.
But those are being replaced by more bundled solutions as we move forward. We’ve gone to market in Europe with some very attractive offers for customers where we bundle our modules together with a year of prepaid connectivity, and so we have no problem competing on price with low-cost module-only player for customers who want to get the whole solution.
So I’m very happy with how that is unfolding for us and we’ll continue to push and grow there. What you’ll see is more and more of our design wins are in the solution category, which is ultimately a much, much higher lifetime value for Sierra Wireless than a hardware only piece of business. And so I think it’s going to hurt others category more than us because of how we’ve created our differentiation around solutions.
Thank you so much. That’s it for me.
Your next question comes from the line of Richard Tse with National Bank Financial. Your line is open.
Yes. Thanks. Hi, guys. So just kind of curious just sort of related to the prior two questions, like how important or how does embedded help IoT? And I only ask that, because it seems like the embedded business to me is a bit of a drag from a number of different angles. You’ve seen the margins compress notwithstanding PC OEM and automotive, but even though over past years it’s been under compression. So like why do you guys have that? And I have asked this before, but are there any recent discussions that would have you considering divesting that piece and sort of reinvesting in the growth engine of this company which is IoT?
Well, let me take that in three bites, Richard. So in our — part of our embedded broadband in our gateway router supply, we are big in the gateway business. So we’re building that connectivity for our products anyways. And then we get some scale and leverage by selling it into other customers. So Cisco and others are big customers of our modules to be able to provide connectivity into their routers. So that’s very synergistic. We get more return on our R&D as we proceed there.
On the PC OEM business, I think you heard from my answer that it’s not an area that we are investing aggressively to win and replace previous design cycle losses for exactly the reasons that you mentioned. Our focus is on IoT solutions. We have lots of value with customer relations that they trust us and we’ve been a dependable supplier to them for years and we continue to leverage the products that we have in our portfolio to serve those customers.
In the automotive side, those were previous management decisions and they were quite heavy R&D investment programs. And now we’re starting to get the benefit of — the return on those investments as those programs start to go to scale. So, I think on an increment our investment dollars are going into IoT Solutions, not just on the product side, but quite significantly on the go-to-market side.
We added — while we had cost reduction programs, we reduced the number of sites. We talked about reducing 100 R&D headcount in Paris. We rebuilt capability in Taipei. We went from $165,000 per engineer in Paris to sub-50 in Taipei which saved us about $11 million a year in R&D. But then we reinvested a lot of money into go-to-market capability solutions experts and both presales engineers and delivery as we’re bringing those solutions services to market.
So, that is where our investment has been going. But the volume and the scale and the leverage off of our R&D into embedded broadband provides a benefit. It’s a bit noisy because of the over two years $110 million reduction of fairly decent margin PC OEM business that makes the overall topline and gross margin picture for Sierra Wireless look clouded.
If you can look at the whole picture, without that, you see the transformation to IoT solutions. A lot of the value that we’ve created and the reason I talk about LTARR in 2019 is that significant value that has been loaded into our flywheel that will be released over the coming three years that will drive substantially increased recurring revenue, substantially increased margins. So, that investment that we had to make in go-to-market and products will be realized over the next three years.
But the first derivative has changed the value of the customers that we’re bringing on is substantially higher and it’s been a focus shift away from embedded broadband to IoT solutions. But that is historic business that we have and we’re continually working to optimize it and deliver scale, revenue, and gross margin to help our transformation as we move to strong IoT Solutions leader globally.
So, as we look ahead over the next few years like the base plan for the embedded business is that like a $250 million business going ahead here?
Richard its Dave here. You can expect it to be somewhat flattish going forward I think it’s the right way to look at it.
Right. Okay, appreciate that. Thank you.
There are no further questions at this time. I will turn the call back over to Kent Thexton.
Well, thank you very much. A lot of good questions today. And I think that as we work to transform our business from a hardware focused company to a solutions and recurring revenue business the nature of — the analysis of our results I think has to change as well.
We have Russ Jones on our Board from Shopify and as a pure recurring revenue company and I think I looked up today $63 billion market cap, it shows the value creation that happens from driving strong margin recurring revenue business.
So, thank you for the questions on that nature. I hope that we’ve been able to share the significant progress we made with our IoT solutions and recurring revenue business in 2019. A lot of that value that we create is as I said in the flywheel and gets released over the coming years. So, we’re very pleased with the progress that we made on that front and the long-term value creation that we have from Sierra Wireless.
And as you follow through the growth trends that we’re talking about in the $200 million and $400 million recurring revenue, we’re creating a very valuable business overall. So, we’re going to keep focused on driving that and we’ll be updating at everybody on a quarterly basis as we continue to make progress on that mission.
So, thank you very much for your questions and we’ll be talking to a number of you as follow-ups.
Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.